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The industry is divided into two markets that supply the funds for mortgages, what are they?
- -primary; where lenders make loans to home buyers
- -secondary; where lenders sell loans to investors
In the primary mortgage market, home buyers apply for mortgage loans and residential mortgage lenders originate them. What does originate mean?
- -process application
- -approve decision
- -funding the loan
Primary market was originally a _______ market, made up of local lending institutions.
-local; now it is more spread out due to the internet, interstate banking and other developments
A bank's main source of income is what?
interest on loans
How are local mortgage financing systems affected by real estate cycles?
-local real estate markets can be affected by economic, political, or social factors, such as employment factors, development, tax policy, etc. These local factors can cause people to spend more and banks run out of money to lend, or people save, not making loans. Affects interest rate on mortgage loans.
National forces can affect local cycles, such as economic, political, and social tends. Disintermediation can reduce the supply of funds that local financial institutions have available for mortgage lending. What is disintermediation?
- -when depository institutions lose funds to higher-yielding investments.
- -people pull money out of their savings to invest money into stocks.
How did local financial institutions address the problem of cycles?
-they created the secondary mortgage market to help source additional funds when demand exceeded supply, and a place to invest their surplus funds when supply exceed demand.
How are loans valued?
by current market interest value
Who buys loans?
- -the Federal National Mortgage Association (FNMA or Fannie Mae)
- -the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Nac)
- -the Government National Mortgage Association (GNMA or Ginnie Mae)
- -other investors
How are loans sold to secondary market entities?
- -a lender can "package" a group of similar loans together fro sale to one of the secondary market entities. To be accepted the loans must meet the standards of the entity that is going to buy them.
- -after loans are sold, the lender who originated them or another person, does loan servicing to them; includes tasks such as processing borrowers' payments, dealing with collections, and preventing borrower default.
What is Mortgage-backed security (MBS)? How is it created?
- -an investment instrument that has mortgages as collateral; it's a type of bond
- -is created by securitizing loans; pooling a large number of mortgage loans together.
How do MBS investors get a return?
How do banks make funds it needs by selling loans to the secondary market?
Availability of funds in primary market depends on secondary market.
- -The Federal National Mortgage Association (FNMA)
- -created to fix unpercedented credit problems during the Great Depression.
- -Original purpose was to provide a secondary market for FHA-insured loans; loans the helped make home financing affordable again.
- -Also buys VA-guaranteed loan programs
- -recognized as a government-sponsored enterprise (GSE)
Government-sponsored enterprise (GSE)
- -created and supervised by the federal government
- -but owned by private stockholders.
- -the Government National Mortgage Association (GNMA)
- -guarantees securities backed by FHA and VA loans.
- -finance urban renewal and housing projects
- -the Federal Home Loan Mortgage Corporation (FHLMC)
- -originally to assist savings and loan associations; enabled S&L (savings and loans) to acquire additional funds for lending.
- -S&L is mostly conventional loans--loans that aren't insured or guaranteed by the government; make up a large portion of the residential mortgage market.
Which two Secondary Market Entities have a greater impact on the mortgage market?
- -Fannie Mae and Freddie Mac; buy conventional loans
- -Ginnie Mae ONLY handles FHA and VA loans
- -government-sponsored enterprises
- -Fannie Mae and Freddie Mac limited to residential Mortgages and mortgage-backed securities
- -Required to meet annual affordable housing goals.
- -mortgage-backed securities programs
- -started by Ginnie Mae in 1970
- -an investment instrument that has a pool of mortgage loans as collateral; usually issued by one of the secondary market entities
The secondary market is the ______ market for loans
- -Federal Housing Administration
- -In 1934 changed the requirements on getting a loan; made it easier
- -Problem: banks were running out of money to lend; this is where the secondary market came in.
- -The FHA insured the loans by having employment checked, property appraised by third party, and title search (shows history of ownership)
The FHA was primary created to provide
Insurance for home loans made by approved lenders
-rules lenders apply when they're qualifying loan applicants and deciding whether or not to make particular loans.
Conventional loans sold to Fannie Mae or Freddie Mac must comply with the entity's ______________, not just the lender's own rules.
What is the difference between prime loans and subprime loans
- -prime loans; loans made to borrowers with the highest credit rating (an A rating)
- -subprime loans; loans made to less creditworthy buyers.
The Federal Housing Finance Agency (FHFA) regulates...
Fannie Mae and Freddie Mac
The GSEs promise to pay the MBS purchasers even if the borrowers default.
Investors who buy mortgage-backed securities receive _____ payments of principal and interest from secondary market entities as pooled loans are required
______ encouraged looser underwriting standards and the purchase of A-minus subprime loans to meet affordable housing.
The federal government created the secondary market entities in order to
help moderate the adverse effects of real estate cycles
Taking a home buyer's loan application is a step in the
loan origination process
Most residential mortgage loans are:
a. kept in portfolio
b. sold on the secondary market
c. sold on the primary market
As government-sponsored enterprises, Fannie Mae and Freddie Mac are private corporations owned by stockholders and are regulated by the ____________
Federal Housing Finance Agency (FHFA)