Chapter 10

The Secondary
Mortgage Market
10-1 Chapter 10
Learning Objectives
Understand the workings of the
secondary mortgage market
Understand why the secondary
mortgage market is important for a
more efficient allocation of funds in the
real estate market, and what the major
secondary mortgage market agencies
are
10-2
Secondary Mortgage
Market

Market where existing mortgages are

bought and sold
Mortgages are used as collateral for
mortgage related securities
Reduces reliance on deposits
10-3
Secondary Mortgage
Market Participants
FANNIE MAE, GINNIE MAE, FREDDIE
MAC
Securitization of Mortgages
Mortgage Related Securities
Pass-throughs
Mortgage-backed bonds
Collateralized mortgage obligations
(CMO’s) and Remics
 COMMERCIAL MORTGAGE
BACKED SECURTIES (CMBS)
Started with S&L crisis of 1980s when
RTC packaged commercial loans of
failed thrifts and sold CMBSs
Senior tranche received all principal
payments including prepayments
Subordinated tranche bore all losses
from defaults
 CMBS (cont.)
Securitization process is same as for
CMOs with different tranches
May be backed up by many mortgages
on many properties, a single loan on a
very large property, or a single loan on
many properties
Loans are credit rated and contributed
to a REMIC
10-4
Secondary Mortgage
Market

FEDERAL NATIONAL MORTGAGE

ASSOCIATION (FANNIE MAE)
Established in 1938 to buy FHA loans
Re-chartered in 1954 and became a private
corporation
As of 1970, allowed to buy FHA,VA, and
conventional mortgages
10-5
Secondary Mortgage
Market

GOVERNMENT NATIONAL MORTGAGE

ASSOCIATION (GINNIE MAE)
Created in 1968 within HUD
Does not purchase mortgages or issue
securities
Market focus is to guarantee FHA and VA
pass-through securities
10-6
Secondary Mortgage
Market

FEDERAL HOME LOAN MORTGAGE

CORPORATION (FREDDIE MAC)
Established in 1970 to create a secondary
mortgage market for conventional
mortgages
Operates as a private corporation
Currently buys FHA, VA, and conventional
mortgages
Secondary Mortgage Market
Freddie Mac purchases both newly
issued and seasoned (those with some
expired term) mortgages
Freddie Mac will also purchase
construction/permanent loans that are
FRMs, ARMs, or balloon/reset. These
must be new dwellings and not rehabs.
Secondary Mortgage Market
Freddie Mac issues a wide variety of
securities:
Discount Notes and Debentures
Mortgage Participation Certificates (Pass-
throughs) on FRMs, ARMs, and multifamily
Collateralized Mortgage Obligations in
several classes or tranches
Guaranteed Mortgage Certificates – not
sold since 1979
Secondary Mortgage Market
Federal credit agencies that support the
primary and secondary mortgage
markets:
Farm Credit System consolidated three
agricultural agencies to make direct loans
for agricultural purposes
Federal Agricultural Mortgage Corporation
(Farmer Mac) to underwrite pools of farm
mortgages through pass-throughs
Secondary Mortgage Market
Federal credit agencies that support the
primary and secondary mortgage
markets:
Rural Housing Service extends loans to
rural areas for farms, houses, and
community facilities
Financing Corporation formed in 1987 to
recapitalize the FSLIC
Regulation of Government-
Sponsored Enterprises
GSEs are not officially part of the
federal government
They appear to enjoy the backing of the
federal government
Federal government does not guarantee
these agency’s obligations but Congress
has implied that federal funds might be
expended to pay off investors
Regulation of Government-
Sponsored Enterprises
GSEs operate similarly to thrifts in
purchasing long-term mortgages
They face interest rate risk, default risk,
and management/operating risk
Office of Federal Housing Enterprise
and Oversight (OFHEO) oversees the
operations of the GSEs