mortgage market 2

8/20/2019 Mortgage Market 2

1/31

The Mortgage MarketPresented by:

Brady Anderson

Chad Atkinson

Charles Jones

McLeod Robinson

Laura Rogers


2/31

What Is a Mortgage?

A ortgage is a ethod o! using"ro"erty as security !or the"er!orance o! an obligation#

usually the "ayent o! a debt$Arranging a ortgage is seen as the

standard ethod by %hichindi&iduals and businesses can

"urchase residential and coercialreal estate %ithout the need to "aythe !ull &alue iediately$


3/31

T%o Markets

Primary market: %here ortgageorigination takes "lace$ Lenders creatingortgages in this arket include banks andother 'nancial institutions$

Secondary market: %here ortgages areresold$ Mortgages in this arket are o!tengrou"ed together into tranches based on

risk# si(e# and structure and are then sold asa collaterali(ed debt obligation# ortgage)backed security# or other ty"e o! deri&ati&e$


4/31

*o% the Mortgage Market+"eratesWhat does the Primary Mortgage

Market Mean?

Who sets the interest rates that

%e "ay on our ortgages?


5/31

What is the ,econdary MortgageMarket?

*o% does it %ork?Who are the ain "artici"ants in

this section o! the ortgage

arket?


6/31

What role do -annieMae and -reddie Mac"lay in our MortgageMarket?-annie Mae

A$.$A)-ederal /ationalMortgage Association

-reddie Mac

A$.$A)-ederal *oe loanMortgage Cor"oration


7/31

The Main o"eration o!

the Mortgage Market

To "ro&ide "eo"le or!ailies %ith the oney to"urchase a hoe


8/31

Mortgage I"acts

Banks◦ MB,)Mortgage Backed ,ecurities

◦ MB, "ro&ide ca"ital to banks !ro

their resale in the arket◦ As a result o! the recent ortgage

crisis banks credit lines ha&e shrunkdraatically due to loss o! &alue inMB,$


9/31

Mortgage I"acts

In the -all o! 0112 key 'nancial'rs !ailed due "riarily tosub"rie lending causing any

"eo"le to %ithdra% !ro theoney arket

As a result any banks and

general businesses lost theirain su""ly o! credit and lendersabru"tly sto""ed lending due to

increased credit risk


10/31

Mortgage I"acts

Personal %ealth can also bedirectly associated %ith theortgage arket$

A do%n%ard s"iraling housingarket has "ut a strain on any"eo"les %allets causing o&erall

consu"tion to slo% do%n This has had an ad&erse e3ect on

any businesses# "articularly

the auto industry$


11/31

The *istory o! the MortgageMarket: -annie MaeCreated in 4562 as "art o! -ranklin 7$

Roose&elt8s /e% 7eal$

9stablished in order to "ro&ide local banks %ith!ederal oney to 'nance hoe ortgages$

Initially# it o"erated like a national sa&ings andloan# allo%ing banks to charge lo% interest rateson ortgages %hich led to the secondaryortgage arket$

In 452# Lyndon Johnson "ri&ati(ed -annie Maein order to reo&e it !ro the national budget$

At this "oint# -annie Mae began o"erating as a;,9$


12/31

The *istory o! the MortgageMarket: -reddie Mac

Created in 45


13/31

The Mortgage Market Today2008: -annie Mae and -reddie Mac had

"urchased about 21> o! all ne% hoeortgages in the $,$

By June 30th, 2008# -annie Mae and -reddie

Mac held @4$ trillion in ortgages and MB,$2008: $ illion hoeo%ners alost 40>

or ortgage)holdersD %ere in de!ault or!oreclosure$

2008: 46$ illion hoeo%ners o%ed orethan their hoes %ere %orth$

ne"loyent and ortgage delinEuency$


14/31

The Mortgage Market Today July 30th, 2008: -ederal *ousing

-inance Agency -*-AD created toregulate -annie Mae and -reddie Mac$

The 9conoic Reco&ery ActSeptember 7, 2008: -*-A becoes

conser&ator !or -annie Mae and-reddie Mac$

;o&ernent 'nancing agreeent$

The *oe A3ordable "rogra


15/31

The -uture o! the

Mortgage MarketPresented by:

Brady Anderson

Chad Atkinson

Charles Jones

MCleod Robinson

Laura Rogers


16/31

Making *oe A3ordableProgra

The Home Aordable !e"nance Pro#ram$e%i#ned to make re"nancin# a&ailableto borro'er% 'ith loan% #uaranteed by#o&ernment %pon%ored enterpri%e%(

)*annie +ae and *reddie +acThe Home Aordable +odi"cationPro#ram

$e%i#ned to pro&ide aid to borro'er%

%peci"cally -acin# or under#oin#-oreclo%ure by pro&idin# incenti&e% tolender%, borro'er%, in&e%tor% and%er&icer%(


17/31

Increased su""ort to;,98s This "rogra signi'cantly increases

go&ernent coitent to -annieMae and -reddie Mac# doubling itsin&estent !ro 411 to 011 billion !oreach entity$ As a result this signi'cantlyraises the dollar aount o! ortgage&alue each ;,9 can aintain$

It is ho"e!ul that this "rogra ayhel"


18/31

Is it 9nough?

Irres"onsible 'nancial institutionsha&e bared uch o! the blae in thecolla"se o! the ortgage arket

The , go&ernent has issued billionsu"on billions o! dollars to kee" theselarge 'nancial entities aFoat$

It is hard to tell i! all o! these su""ort

"rogras %ill %ork or i! they are Gust acolossal %aste o! ta="ayers oney$


19/31

Will ;,98s %ork?

,oe belie&e these su""ort "rograscould end u" %orking %ell resulting inlo%er e="enses !or borro%ers and oreoney !or businesses

+thers belie&e a total nationali(ation o!unhealthy 'nancial institutions is thebest o"tion in order to clean u" the

banking syste and then Euickly resellthese instutions once their bad debtand anageent ha&e been cleanedu"$


20/31

-annie Mae and -reddie

Mac• -orer Treasury ,ecretary *enry Paulson8s"ro"osal ade on January


21/31

The Iediate -uture o!

-annie Mae and -reddie MacAnother o"tion being considered %ould

be to reo&e all direct and indirect

go&ernent su""ort and "ri&ati(e theco"anies by breaking the u" andselling the$

But dra%backs to that a""roach includes

that it %ould likely o3er a lo% rate o!return to "otential in&estors$

This o"tion could "ro&e to be de&astating

%ithout soe sort o! go&ernent su""ort


22/31

The Long)Ter -uture o! -annieMae and -reddie Mac

They %ill likely reEuire !ederal cashin!usions# by buying their ortgage)backedsecurities# or other in&estents# !or at leasta decade# "robably longer$

+nce -annie Mae and -reddie Mac becoe"ro'table the go&ernent %ill ho"e torecou" their in&estent by selling o3 stockto the "ublic$

-annie Mae and -reddie Mac ha&e long beenconsidered Htoo big to !ail$ ,o as long asthey continue to be backed by the !ederalgo&ernent they %ill ost likely reain inbusiness$


23/31

The Iediate -uture o! ;innieMae

In the "ast t%o years ;innie Maehas gro%n e="onentially$

;innie Mae %ill continue to gro%

and "ros"er as long as thearket stays do%n$

This is because ;innie Mae acts

like a utility# and has the onlyMB,8s that are backed by the !ull!aith and credit o! the ,

go&ernent$


24/31

The Iediate -uture o! ;innieMae

;innie Mae could also gain ore"o%er i! international in&estorsbecoe ore in&ol&ed

I! -annie Mae and -reddie Macreco&er# ;innie Mae could

"ossibly start to decline becauseo! lo%er returns


25/31

The Long)Ter -uture o! ;innieMae

9&en i! -annie Mae and -reddieMac reco&er# there %ill still"robably be roo !or ;innie Mae$

This is because o! the tiely"ayents o! ;innie Mae that areguaranteed by the ,

go&ernent$


26/31

The !uture arket !or Mortgage)Backed ,ecurities

4D The current arket

conditions0D ,hort)ter or

interediate arket

6D Long)ter "ers"ecti&es


27/31

Current Market Conditions,ecuriti(ation

Strengths ;o&ernent

inter&ention

Weaknesses

Aount o!de!aults

Banks stability

Credit%orthiness


28/31

,hort)ter "ers"ecti&es

What needs to happen? The rules and regulations need

to be tightened$

ntil banks are studied closer!or these lo% do%n "ayentsand the credit%orthiness o!borro%ers# the arket !or MB,%ill continue to de"lete$


29/31

Long)ter "ers"ecti&es

9&entually# the arket %ill get back on track$Mortgages %ill increase# and de!aults %illdecrease$

But in the long)run in&estors %ill be scared o!

MB,8s because o! %hat has ha""enedrecently in the arket$

The MB, arket ay ne&er again be %hereit once %as because in&estors and borro%ers

see ho% uch it can inFuence the o&eralleconoy$


30/31

The -uture o! MortgageRatesWhat a3ects ortgage rates?

The de!ault rate

9arly loan "ayo3

Loan !raud-oreclosures

Lender argins

InFation

9conoic ne%s

,u""ly and deand o! ortgage)backed securities$


31/31

Current 9&ents and -utureMortgage Rates

Today# there are any di3erent s"eculationsabout the !uture o! ortgage rates$

Current econoic e&ents and the actions o!the -ed and other entities %ill be "i&otal in

deterining !uture rates$-uture un!olding o! the housing crisis %ill

also inFuence !uture ortgage rates$

ltiately# the actions o! the -ed today and

o&er the ne=t !e% years could ake thedi3erence bet%een another ;reat InFation#de"ression# or a noral econoy !or our!uture$

mortgage market 2

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