1Managerial Economics (ARE) 144 University of California, Davis Instructor: John H. Constantine KEY—Handout: Chapter 19, The Secondary Mortgage Market: Pass-Through Securities(1) What is the secondary mortgage market? List three reasons why it is important. The secondary mortgage market is the “after” market in which mortgages are sold and resold. The secondary mortgage market is important for the following: (1) it enables mortgage banking companies to sell existing mortgages and thereby replenish funds with which new loans can be originated, (2) it facilitates the geographic flow of funds, and (3) it increases the investing options available to individuals and institutions. (2) What were the three principal activities of FNMA under its 1954 charter? What is its principal function now? In 1954, Congress rechartered FNMA, assigning it three separate and distinct activities: (1) enhancement of secondary market operations in federally insured and guaranteed mortgages, (2) management of direct loans previously made and, where necessary, liquidation of properties and mortgages acquired by default, and (3) management of special assistance programs, including support for subsidized mortgage loan programs. Eventually, the investment by life insurance companies in common stocks and bonds grew at the expense of mortgages. Mortgage companies and other originators became concerned because their traditional source of funds from secondary mortgage sales diminished. Industry related associations advocated that FNMA’s secondary market operations be expanded to include its principal function today: namely, holding mortgages. (3) Name two ways that FNMA currently finances its secondary mortgage operations. To provide a financial base to operate FNMA, the Charter Act also authorized issuance of nonvoting preferred and common stock for the financing of secondary market operations. Additional funding came from FNMA’s issuance of notes and debt instruments.
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