real estate finance - full book (500 pgs)

Freddie mac and fannie mae have accomplished this by

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: obtain additional funds to use to make new loans, and the Florida savings bank would be investing surplus funds. Another method to move funds from one source to another is called participation. Participation occurs when one institution sells a part interest in a block of loans to another institution. For example, assume the California savings bank wanted to sell $10,000,000 in loans to the Florida savings bank. Rather than sell the entire block of loans, it could sell a 90% interest, or $9,000,000. The other 10% share, $1,000,000, would be retained by the lender. The California bank would continue to service the loans and pass on 90% of the mortgage payments to the Florida bank. FNMA and FHLMC are also actively involved with participation’s in 5% increments, purchasing 90 or 95% of a loan. This enables the loan seller to leverage its funds. However, FNMA and FHLMC are more often involved in the sale of “whole” loans. MORTGAGE–BACKED SECURITIES Today the most common method used to move funds is by the use of mortgage–backed securities, which are backed by a pool of mortgages. They were created to make investing in mortgages as simple as buying stocks or bonds. Before then, lending institutions sold and purchased loans among themselves. This was not an efficient method–it was time consuming and involved a lot of paperwork. In addition, each lender had its own property and borrower standards, which further complicated transactions. More importantly, there was no system to obtain money from the capital markets. Lenders had to depend on deposits, which had proven to be volatile. The invention of the mortgage–backed security revolutionized the operation of the secondary market. COLLATERALIZED MORTGAGE OBLIGATIONS Fannie Mae issues mortgage–backed securities called collateralized mortgage obligations (CMO). They were designed to limit prepayment risk to investors. Prior to this time, mortgage–backed securities were “passthroughs”, which means that all the 7-12 Licensing School for Appraisal, CPA, Contractors, Insurance, Real...
View Full Document

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.

Ask a homework question - tutors are online