FinancialMarketsChap24

FinancialMarketsChap24 - Chapter 24 Mortgage Pass-Through...

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Chapter 24 - Mortgage Pass-Through Security: A security created when one or more holders of mortgages form a collection (pool) of mortgages and sell shares or participation certificates in the pool Key Points #1: The securitization of a mortgage loan to create mortgage pass-through securities was the key factor in the development of a strong secondary mortgage market Securitization of mortgage loans is one form of asset securitzation Three government agencies were created to promote the secondary mortgage market: Ginnie Mae, Fannie Mae, and Freddie Mac: Fannie Mae was the first one charged with the responsibility of creating a liquid secondary market by buying mortgages and received funding from a credit line with the treasury. Ginnie Mae was created in 1968, when Fannie hadn’t really created a liquid secondary market – Ginnie was to use the full faith and credit of the U.S. government to support the mortgage market. Freddie Mac (1970) was to provide support for government insured and conventional mortgages - Securitized: A mortgage included in a pool or mortgages that is used as collateral for a mortgage backed security - Agency Pass-Through Securities: a mortgage pass-through security issued or guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. - Non-Agency Pass-Through Securities: Privately issued mortgage securities (not guaranteed by an agency) - Participation Certificate: A pass-through security issued by Freddie Mac. - Jumbo Loan: A mortgage loan that is non-conforming because the amount of the loan is greater than the amount allowed by the loan agency - Secondary Mortgage Market Enhancement Act of 1984: Legislation that allowed MBS earning a high rating (double ‘A’ or better) from a credit agency as legal investments for federally chartered banks and entities - Prepayment Risk: Uncertainty of cash-slows arising from prepayments - Contraction Risk: A form of prepayment risk that occurs when a decline in rates will shorten the life of a mortgage or MBS - Extension Risk: A form of prepayment risk when a rise in mortgage rates will lengthen the life of a MBS (investor wants prepayment now, but it won’t happen) - Conditional Prepayment Rate (CPR): Assumes that some fraction of the remaining principal is prepaid each year for the remaining term of the mortgage o Single Monthly Mortality Rate (SMM)
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This note was uploaded on 01/27/2010 for the course ECON 252 taught by Professor Robertshiller during the Spring '08 term at Yale.

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FinancialMarketsChap24 - Chapter 24 Mortgage Pass-Through...

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