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Unformatted text preview: Estate, Notary, Nurse, Food Handlers, Tax and Securities 7: LOAN PAYMENTS & SECONDARY MARKETS
principal and interest collected were passed on to the investor. The investor had no protection from the early prepayment of principal. When investors calculate yield, they make assumptions regarding the repayment of principal. When mortgages are paid early, the yield will change. Therefore investors are looking for a security that can provide some protection against early prepayment. A CMO is divided into classes. For example, the first CMO had three classes. Each class paid interest on the outstanding balance. However, all collections of principal from the pool were first applied to class one. After that class had been paid in full, all principal collections went to class two. After class two had been paid in full, the remaining principal payments went to class three. The CMO gives investors opportunities to choose classes that offer different rates and maturities. The creation of the CMO attracted investors that were not normally mortgage investors. STANDARDIZATION OF FORMS
One major benefit brought about by the creation of mortgage–backed securities by Freddie Mac and Fannie Mae is the standardization of conventional loan forms and property and borrower standards. FHA and DVA loans have been readily sold in the secondary market for years. One of the reasons is that their forms are standardized. As an investor you could buy an FHA or DVA loan anywhere in the United States and know the exact loan provisions. Previously this could not be done with a conventional loan. To have a functional secondary market for conventional loans, you must also have standardization. Freddie Mac and Fannie Mae have accomplished this by using the same forms and by having basically the same property and borrower standards. Almost all lenders today use the standard forms, and many adhere to the property and borrower standards set forth by the agencies. This gives the lenders great flexibility in ensuring that their loans can be sold in the secondary market...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10