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CREATING THE NATIONAL MORTGAGE MARKET History and Players By Melissa McMurphy and Trent Striplin OVERVIEW OF THE MORTGAGE MARKET Early developments of the first mortgages. Mortgages before the World War I and Great Depression. The effect of FDR’s New Deal on mortgages. World War II. Government supported lending agencies. Fannie Mae Freddie Mac Ginnie Mae The present state of the mortgage market. MEDIEVAL MORTGAGES Began in the 1100’s in England under common law. Based on conditions between lender and borrower Early lenders controlled the borrower’s land Sale of livestock and crops used for repayment Lender could end the agreement at anytime and retain the land. Laws were passed giving full rights to the borrower – equity redemption. Law changed again giving lender ownership of land, but borrower rights to sell the land to pay mortgage. PRE-WORLD WAR Immigrants to the United States brought the ideas of mortgages. Had to put %50 down on a 5 year mortgage Non-amortizing loans with a balloon payment due when the term was up. If remaining %50 could not be paid, borrowers forced to refinance. Lasted until the Great Depression. GREAT DEPRESSION Mortgages collapsed with no money to repay loans. Mortgage companies lacked funds to lend out. Homes foreclosed as system collapsed Led to FDR’s solution of the New Deal. NEW DEAL Home Owners Loan Corporation – 1933 Replaced existing mortgages of homeowners who defaulted on their mortgages 15 year loans, fully amortized Federal Housing Administration – 1934 Insured lending agencies against borrower defaults. As a result, more loans were awarded Started 30 year fixed rate loan. Smaller payments and more stability Problems Arise Limited amount of funds to loan to borrowers Varying interest rates across the United States FEDERAL NATIONAL MORTGAGE ASSOCIATION – FANNIE MAE Developed in 1938 by FDR and Congress to fix problems of earlier mortgage markets. Brought more money to the mortgage market. Bought FHA mortgages and sold them as securities in financial markets. Created the secondary mortgage market. Standardized loan terms, interest rates, and underwriting regulations. Lenders had to follow the regulations if they wanted to participate in the secondary market. Converted into private shareholder owned corporation. WORLD WAR II In the mid 1940s, veterans were returning home to the US, entering the workforce, and needing homes. In 1944, the Veterans Administration was given the ability to insure low-interest, no down payment mortgages by private lenders to veterans. Economy boomed, as did the demand for mortgages. BABY BOOMERS When baby boomers began entering the workforce, there was a shift in social norms that created greater demand for mortgages. Double income family became very common, and they began to demand bigger and more expensive homes. It was possible that it was cheaper to buy than rent. Senior citizens began to live alone. Increase in divorce rate created new households. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - GINNIE MAE Developed in 1968 under the Department of Housing and Urban Development. Only federally guaranteed mortgage security. Provides a computer platform that pools mortgages into bonds Guarantees timely payment of principle and interest; government will pay investors. Holds the same zero risk weight as government backed bonds and securities. GINNIE MAE CONTINUED 1. GNMA I securities. A GNMA I (Ginnie Mae one) represents a pool of mortgages all issued by one issuer, all with the same interest rate, and all issued within a three month period. This is a basic pass-through security. 2. GNMA II securities. A GNMA II (Ginnie Mae two) is also a pass-through security, except that the collateral can have a range of interest rates and can include mortgages issued by more than one issuer. In this case, the service fees (see below) vary, so that the new interest rate being paid to the investor from each mortgage is the same. 3. GNMA "REMIC" securities. A REMIC (Real Estate Mortgage Investment Conduit), also known as a CMO, is an additional level of securitization. The collateral pool for a REMIC consists not of mortgages, but of mortgagebacked securities (such as GNMA I, GNMA II, or previously issued REMICs). FEDERAL HOME LOAN MORTGAGE CORPORATION - FREDDIE MAC Developed as a competitor to Fannie Mae by congress under the Emergency Home Finance Act of 1970. Created to increase the supply of mortgage funds available to commercial banks, savings and loan institutions, credit unions and other mortgage lenders. Buys mortgages on the secondary mortgage market, pools them and sells them as securities. Had a high rating, but were not government backed, so subject to default risk. MORTGAGE RATES CONCLUSION Came from England Changed During the: Great Depression World Wars Baby Boom Government Sponsored Securities Fannie Mae Freddie Mac Government Backed Securities Ginnie Mae QUESTIONS?
