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- Title: Fannie_and_Freddie
- Type: Notes
- School: SUNY Albany
- Course: BD 445
- Term: Fall
Coursehero >> New York >> SUNY Albany >> BD 445
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
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Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
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Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
Path: SUNY Albany >> BD >> 445 Fall, 2009
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and Money Banking Fannie and Freddie Mortgage Pass-Throughs Securitization refers to the conversion of a loan into a marketable security. Home mortgages are securitized via mortgage pass-throughs. For example, 250 mortgages of $100,000 each might be combined into a single $25.000,000 pool of mortgages. Then one thousand equal shares in this pool would be sold to investors. 1 Money and Banking Fannie and Freddie Each month, each investor receives his share of the total cash in ow from the mortgages the regular monthly payment on each mortgage, plus the repayments from any mortgages paid off in full. These payments are passed through to the investors. The cash ow resembles a long-term bond, except that the exact timing of the payments is somewhat uncertain. A surge in repayment raises the cash ow now, at the expense of a lower future cash ow. 2 Money and Banking Fannie and Freddie National Market Securitization creates a national market for home mortgages. After making a mortgage loan to a local customer, a bank can sell the mortgage via a mortgage pass-through. Each month the bank collects the monthly payment from the customer and then turns it over to the new owners of the mortgage; the bank receives a fee for this service. Investors in a slow-growing part of the country are able to provide home mortgage nancing in fast-growing areas elsewhere. 3 Money and Banking Fannie and Freddie Fannie and Freddie Fannie Mae ( Federal National Mortgage Association ) and Freddie Mac ( Federal Home Loan Mortgage Corporation ) are government-chartered and government-backed private companies set up to provide home mortgage nancing. 4 Money and Banking Fannie and Freddie Activities They carry out two primary activities. First, they create mortgage pass-throughs by buying home mortgages and reselling them to investors. They guarantee to the investors that the mortgage payments will be made. For this service they receive some pro t. Second, they sell bonds and use the proceeds to buy home mortgages. They then hold these mortgages, using the payments to pay off the bonds, and the surplus is their pro t. 5 Money and Banking Fannie and Freddie Unfair Advantage The second activity is very controversial. The complaint is that Fannie and Freddie have an unfair advantage over competitors. Because Fannie and Freddie are government-backed, they can borrow at a lower interest rate than any other private borrower. Investing these funds in home mortgages, which pay higher interest, they t pro from the interest rate spread. 6 Money and Banking Fannie and Freddie The pro t is almost automatic. The spread is perhaps one-half per cent, so the more they borrow and invest, the more pro t they make. Since 1990, they have aggressively expanded this activity enormously, now buying perhaps half the home mortgages in the country. For each company, the total assets now rival the largest bank in the country. The pro t is immense, because they can borrow at a lower rate. 7 Money and Banking Fannie and Freddie Who Gains? If Fannie and Freddie were competitive, they would pass on their lower borrowing costs to the home mortgage borrowers, who would gain from the low cost of funds. The interest rate spread between borrowing and lending for Fannie and Freddie would disappear, along with their huge pro t. However they are only slightly competitive. The spread remains, so the low cost of borrowing bene ts the stockholders of Fannie and Freddie, rather than the home mortgage borrowers. 8 Money and Banking Fannie and Freddie Fall in the Interest Rate A danger is that a sudden fall in the market interest rate might hurt Fannie and Freddie badly. The home mortgages that they hold would be re nanced, so Fannie and Freddie would receive the repayment quickly. This money could be reinvested at the new lower market rate, but the interest received might not be enough to pay off the bonds issued originally to buy the mortgages. Fannie and Freddie could be bankrupt, and the taxpayers would bail them out. 9 Money and Banking Fannie and Freddie Derivatives Fannie and Freddie attempt to insure against this possibility by going to the derivatives market. If the market interest rate falls, the derivative will pay them money. However this insurance is imprecise, and risk remains. Furthermore, in a great crisis, would the other parties to the derivative contracts be able to come through with the money promised, since their losses would be gigantic? 10 Money and Banking Fannie and Freddie Constrained Monetary Policy A central mission of the Federal Reserve is to protect the nancial markets, especially for debt rather than equity. Since Fannie and Freddie are now so large, in the future the Fed may be constrained in its monetary policy, because a monetary policy that bankrupted Fannie and Freddie would undermine the nancial system. In particular, at some point the Fed might want to lower the interest rate to counter recession, but would not do so for fear of harming Fannie and Freddie. 11
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Description: Math 367 1. Suppose that Exam 3 Solutions Fall 99 f (z) = 1 (2 z)2 is the generating function for a random variable X. Find a) P(X > 0) b) P(X > 1) c) E(X) d) Var(X) Solution: We have f (z) = a0 + a1 z + a2 z 2 + + ai z i + , where ai = P...
units.pdfPath: SUNY Albany >> MATH >> 326 Fall, 2009
Description: Supplement on units in Zpr Mark Steinberger 1. Odd primes Here, we assume p is an odd prime and study the unit group of Zpr . 1.1. Units congruent to 1 mod p. We assume in this subsection that r > 1. Since p|pr there is a ring homomorphism : Zpr Zp...
abstract.pdfPath: SUNY Albany >> ME >> 07 Fall, 2009
Description: GRAVITY FROM A PROBABILISTIC POINT OF VIEW P. Martin Spatial Information Research Centre, Department of Information Science University of Otago, Dunedin, New Zealand (pmartin@infoscience.otago.ac.nz) Abstract In the investigation of entropy dynamics,...