The Mortgage Market

Presented by:
Brady Anderson
Chad Atkinson
Charles Jones
McLeod Robinson
Laura Rogers

What Is a Mortgage?
A

mortgage is a method of using

property as security for the
performance of an obligation,
usually the payment of a debt.
Arranging a mortgage is seen as the
standard method by which
individuals and businesses can
purchase residential and commercial
real estate without the need to pay
the full value immediately.

Two Markets
Primary

market: where mortgage

origination takes place. Lenders creating
mortgages in this market include banks and
other financial institutions.

Secondary

market: where mortgages are

resold. Mortgages in this market are often
grouped together into tranches based on
risk, size, and structure and are then sold as
a collateralized debt obligation, mortgagebacked security, or other type of derivative.

How the Mortgage Market

Operates
What

does the Primary Mortgage

Market Mean?
Who sets the interest rates that
we pay on our mortgages?

What is the Secondary Mortgage

Market?
How

does it work?
Who are the main participants in
this section of the mortgage
market?

What role do Fannie

Mae and Freddie Mac
play in our Mortgage
Market?

Fannie

Mae
A.K.A-Federal National
Mortgage Association
Freddie Mac
A.K.A-Federal Home loan
Mortgage Corporation

The Main operation of

the Mortgage Market
To

provide people or
families with the money to
purchase a home

Mortgage Impacts
Banks

MBS-Mortgage Backed Securities

MBS provide capital to banks from
their resale in the market
As a result of the recent mortgage
crisis banks credit lines have shrunk
dramatically due to loss of value in
MBS.

Mortgage Impacts
In

the Fall of 2008 key financial

firms failed due primarily to
subprime lending causing many
people to withdraw from the
money market
As a result many banks and
general businesses lost their
main supply of credit and lenders
abruptly stopped lending due to
increased credit risk

Mortgage Impacts
Personal

wealth can also be

directly associated with the
mortgage market.
A downward spiraling housing
market has put a strain on many
peoples wallets causing overall
consumption to slow down
This has had an adverse effect on
many businesses, particularly
the auto industry.

The History of the Mortgage

Market: Fannie Mae
Created

in 1938 as part of Franklin D.

Roosevelts New Deal.
Established in order to provide local banks with
federal money to finance home mortgages.
Initially, it operated like a national savings and
loan, allowing banks to charge low interest rates
on mortgages which led to the secondary
mortgage market.
In 1968, Lyndon Johnson privatized Fannie Mae
in order to remove it from the national budget.
At this point, Fannie Mae began operating as a
GSE.

The History of the Mortgage

Market: Freddie Mac
Created

in 1970.
Was formed to prevent any
further monopolization by Fannie
Mae in the market and to expand
the secondary market for
mortgages.
Was established as a private
corporation through the
Emergency Home Finance Act of
1970.

The Mortgage Market

Today
2008:

Fannie Mae and Freddie Mac had

purchased about 80% of all new home
mortgages in the U.S.
By June 30th, 2008, Fannie Mae and Freddie
Mac held $1.5 trillion in mortgages and MBS.
2008: 5.4 million homeowners (almost 12%
or mortgage-holders) were in default or
foreclosure.
2008: 13.6 million homeowners owed more
than their homes were worth.
Unemployment and mortgage delinquency.

The Mortgage Market

Today
July

30th, 2008: Federal Housing

Finance Agency (FHFA) created to
regulate Fannie Mae and Freddie Mac.
The Economic Recovery Act
September 7, 2008: FHFA becomes
conservator for Fannie Mae and
Freddie Mac.
Government financing agreement.
The Home Affordable program

The Future of the

Mortgage Market
Presented by:
Brady Anderson
Chad Atkinson
Charles Jones
MCleod Robinson
Laura Rogers

Making Home Affordable

Program
The Home Affordable Refinance Program
Designed to make refinancing available
to borrowers with loans guaranteed by
government sponsored enterprises.
(Fannie Mae and Freddie Mac)
The Home Affordable Modification
Program
Designed to provide aid to borrowers
specifically facing or undergoing
foreclosure by providing incentives to
lenders, borrowers, investors and
servicers.

Increased support to
GSEs
This

program significantly increases

government commitment to Fannie
Mae and Freddie Mac, doubling its
investment from 100 to 200 billion for
each entity. As a result this significantly
raises the dollar amount of mortgage
value each GSE can maintain.
It is hopeful that this program may
help 7-9 million American families
avoid foreclosure.

Is it Enough?
Irresponsible

financial institutions
have bared much of the blame in the
collapse of the mortgage market
The US government has issued billions
upon billions of dollars to keep these
large financial entities afloat.
It is hard to tell if all of these support
programs will work or if they are just a
colossal waste of taxpayers money.

Will GSEs work?

Some

believe these support programs

could end up working well resulting in
lower expenses for borrowers and more
money for businesses
Others believe a total nationalization of
unhealthy financial institutions is the
best option in order to clean up the
banking system and then quickly resell
these instutions once their bad debt
and management have been cleaned
up.

The Immediate Future of

Fannie Mae and Freddie
Mac
Former Treasury Secretary Henry Paulsons
proposal made on January 7,2009 calls for Fannie
Mae and Freddie Mac to be run like public
utilities.
Congress would replace Fannie and Freddie with
one or two private sector entities that would
purchase and securitize mortgages with a credit
guarantee backed by the federal government.
The new companies would be privately owned
but governed by a rate-setting commission that
would establish a targeted rate of return.

The Immediate Future of

Fannie Mae and Freddie Mac
Another

option being considered would

be to remove all direct and indirect
government support and privatize the
companies by breaking them up and
selling them.
But drawbacks to that approach includes
that it would likely offer a low rate of
return to potential investors.
This option could prove to be devastating
without some sort of government support

The Long-Term Future of Fannie

Mae and Freddie Mac
They

will likely require federal cash

infusions, by buying their mortgage-backed
securities, or other investments, for at least
a decade, probably longer.
Once Fannie Mae and Freddie Mac become
profitable the government will hope to
recoup their investment by selling off stock
to the public.
Fannie Mae and Freddie Mac have long been
considered too big to fail. So as long as
they continue to be backed by the federal
government they will most likely remain in
business.

The Immediate Future of Ginnie

Mae
In

the past two years Ginnie Mae

has grown exponentially.
Ginnie Mae will continue to grow
and prosper as long as the
market stays down.
This is because Ginnie Mae acts
like a utility, and has the only
MBSs that are backed by the full
faith and credit of the US
government.

The Immediate Future of Ginnie

Mae
Ginnie

Mae could also gain more

power if international investors
become more involved

If

Fannie Mae and Freddie Mac

recover, Ginnie Mae could
possibly start to decline because
of lower returns

The Long-Term Future of Ginnie

Mae
Even

if Fannie Mae and Freddie

Mac recover, there will still
probably be room for Ginnie Mae.
This is because of the timely
payments of Ginnie Mae that are
guaranteed by the US
government.

The future market for MortgageBacked Securities

The current market

conditions
2) Short-term or
intermediate market
3) Long-term perspectives
1)

Current Market Conditions

Securitization

Strengths

Government
intervention

Weaknesse
s

Amount of
defaults
Banks stability
Creditworthiness

Short-term perspectives
What
The

needs to happen?

rules and regulations need

to be tightened.
Until banks are studied closer
for these low down payments
and the creditworthiness of
borrowers, the market for MBS
will continue to deplete.

Long-term perspectives
Eventually,

the market will get back on track.

Mortgages will increase, and defaults will
decrease.
But in the long-run investors will be scared of
MBSs because of what has happened
recently in the market.
The MBS market may never again be where
it once was because investors and borrowers
see how much it can influence the overall
economy.

The Future of Mortgage

Rates
What

affects mortgage rates?

The default rate
Early loan payoff
Loan fraud
Foreclosures
Lender margins
Inflation
Economic news
Supply and demand of mortgagebacked securities.

Current Events and Future

Mortgage Rates
Today,

there are many different speculations

about the future of mortgage rates.
Current economic events and the actions of
the Fed and other entities will be pivotal in
determining future rates.
Future unfolding of the housing crisis will
also influence future mortgage rates.
Ultimately, the actions of the Fed today and
over the next few years could make the
difference between another Great Inflation,
depression, or a normal economy for our
future.