Chapter 3 Primary and Secondary Markets

Securitizing loans mortgage backed securities reasons

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Securitizing loans
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Mortgage-backed Securities Reasons investors prefer buying MBSs to buying actual mortgage loans include: I convenience I greater liquidity I can be purchased in relatively small denominations Advantages for investors
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Functions of the Secondary Market Secondary market serves two important functions for the real estate industry: 1. Moderates adverse effects of real estate cycles, providing some stability. 2. Makes funds available for mortgage loans, promoting home ownership.
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Functions of the Secondary Market Availability of funds in the primary market depends on the secondary market. Mortgage funds flow between the two markets. Flow of mortgage funds
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Functions of the Secondary Market 1. Lender loans funds to home buyer in primary market. Flow of mortgage funds
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Functions of the Secondary Market 1. Lender loans funds to home buyer in primary market. 2. Lender sells mortgage to secondary market agency. Flow of mortgage funds
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Functions of the Secondary Market 1. Lender loans funds to home buyer in primary market. 2. Lender sells mortgage to secondary market agency. 3. Agency pools mortgage with others and sells MBSs to investors, which frees agency funds to buy more mortgages. Flow of mortgage funds
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Functions of the Secondary Market 1. Lender loans funds to home buyer in primary market. 2. Lender sells mortgage to secondary market agency. 3. Agency pools mortgage with others and sells MBSs to investors, which frees agency funds to buy more mortgages. 4. As agency buys more mortgages, more funds are available for primary market lenders to make more loans. Flow of mortgage funds
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Functions of the Secondary Market If a lender doesn’t sell a loan on the secondary market, the loan is kept in portfolio . Only a small percentage of loans are kept in portfolio today. Portfolio loans
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Summary Secondary Market i Secondary market i Secondary market agency i Loan servicing i Mortgage-backed securities i Securitizing i Private-label securities i Portfolio loan
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Secondary Market Agencies Fannie Mae r 1938 – Created by federal government in response to Depression-era credit problems. Authorized to buy FHA loans. I 1948 – Also authorized to buy VA loans. I 1968 – Reorganized as a government- sponsored enterprise. Historical background
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Secondary Market Agencies Government-sponsored enterprise (GSE) r Created and supervised by the federal government. I Owned by private stockholders. Historical background
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Secondary Market Agencies Ginnie Mae r 1968 – Created as an agency within HUD when Fannie Mae became a private corporation. Wholly owned government corporation. Managed and liquidated mortgages bought by Fannie Mae before the change-over. Now buys FHA and VA loans, helps finance urban renewal and housing projects.
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  • Spring '10
  • N/A
  • Mortgage loan, Subprime mortgage crisis

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