Financing
Sources...
Secondary market
mortgages provide a way for a
lender to sell a
home loan. It also
permits investment
in real estate loans
without the need for
loan origination and
servicing
facilities.
Although
apparently remote to
real estate buyers,
sellers, and agents
alike, the secondary
mortgage market
plays an important
role in getting
money from those who
want to lend to
those who want to
borrow. In other
words think of the
secondary mortgage
market as a pipeline
for home loan money.
Federal
National Mortgage
Association
The best known
secondary mortgage
market operation in
the United States is
run by the Federal
National Mortgage
Association (FNMA),
fondly known in the
real estate business
as Fannie
Mae.
Originally organized
by the federal
government and later
converted to a part
public, part private
corporation, Fannie
Mae buys and sells
FHA, VA, and
conventional
mortgage home loans.
Purchases are made,
usually every 2
weeks, by inviting
mortgage holders to
offer their loans
for sale to the
FNMA. Funds for FNMA
purchases come from
the issue of
corporate stock
(which is currently
traded on the New
York Stock Exchange)
and the sale of FNMA
bonds and notes.
Funds are also
generated by selling
FNMA loan holdings
to insurance
companies, pension
funds, savings
associations, and
other mortgage
investors on a
competitive basis.
Whether FNMA holds a
loan or resells it,
the actual
month-to-month
servicing remains
with the home loan originator.
FNMA currently
holds in excess of
$49 billion of FHA
and VA home loans and
$45
billion of
conventional home loans.
This is about 5% of
the total
residential mortgage
debt in the nation.
By purchasing
mortgage home loans from
lenders, FNMA
provides lenders
with more money to
make more home loans.
This is an
invaluable aid to
the real estate
industry, especially
during periods of
tight money.
In 1980, FNMA
added two important
financing programs:
a home-seller loan
program and a home
refinance program.
The home-seller
program is actually
a purchase money
first mortgage
accepted by a home
seller. The loan is
originated by an
FNMA-approved lender
using standard FNMA
loan qualification
procedures. The
mortgage may then be
kept by the home
seller as an
investment, or it
may be sold to the
FNMA-approved lender
for possible resale
to FNMA. The home
refinance program
permits any
creditworthy buyer
or owner of any home
on which FNMA holds
the mortgage to
obtain a new
conventional FNMA
loan that reflects
the property's
current value.
Existing FHA, VA,
and conventional
mortgages held by
FNMA are eligible
for the
program.
Government
National Mortgage
Association
Known as Ginnie
Mae, the
Government National
Mortgage Association
(GNMA) was split off
from FNMA in 1968
and established as a
part of the U.S.
Department of
Housing and Urban
Development (HUD).
GNMA is known for
its Tandem Plan and
mortgage-backed
securities program.
Both of these are
secondary market
operations.
The Tandem Plan
is a United States
Government subsidy
program whereby GNMA
is authorized to
purchase both
federally insured
and conventional
mortgages at
below-market
interest rates in
order to stimulate
housing production
in areas with
special housing
needs. These
mortgages are then
resold at current
market prices with
the government
absorbing the loss
as a subsidy. For
example, a real
estate home loan made at
an interest rate two
percent below the
market is attractive
to a borrower but is
not attractive to a
lender. But, under
the Tandem Plan,
GNMA agrees to buy
such a mortgage from
the lender at full
value, then resell
it on the open
market at a price
low enough to be
attractive to
investors. The
discount on the sale
is absorbed by GNMA.
Because of its cost
the Tandem Plan is
being phased out and
only previously made
commitments are
being honored.
Under its
mortgage backed
securities program,
Ginnie Mae
guarantees the
timely payment of
principal and
interest to holders
of securities issued
by private lenders
and backed by pools
of HUD-insured and
VA-guaranteed
mortgages. The
guarantee is backed
by the full faith
and credit of the
United States
Government. The
mortgage pools are
for similar types of
property (for
example, all
single-family houses
or all apartment
buildings) at
similar interest
rates. Investors in
these pools receive
the monthly payments
of principal and
interest due on the
mortgage loans in
the pool regardless
of whether or not
they are collected
from the borrowers.
All prepayments and
claims settlements
are also passed
through to the
investors. This GNMA
program has been
very successful
(currently over $150
billion in 70,000
pools) in attracting
pension funds, trust
funds, and
individual investors
to real estate
lending.
Federal Home
Loan Mortgage
Corporation
The Federal Home
Loan Mortgage
Corporation (FHLMC),
known as Freddie
Mac, was
established by an
act of Congress in
1970 to provide a
secondary market
facility for savings
and loan
associations and
other approved
lenders. Freddie Mac
has the authority to
buy and sell FHA,
VA, and conventional
loans, enter into
mortgage
participations, and
issue its own
mortgage investment
certificates. Under
its loan purchase
program (the whole
loan program), the
FHLMC will buy individual
mortgages from banks
and from savings and
loan associations
that meet FHLMC
requirements as to
loan application,
appraisal methods,
promissory note, and
mortgage format.
These loans are in
turn packaged into
lots of several
million dollars each
and resold to
investors.
The FHLMC also
markets
participation
certificates wherein
an investor can
purchase an
undivided interest
in a pool of
mortgages rather
than in individual
loans. Designed to
attract pension and
trust fund money
into home mortgages,
these certificates
are backed by
residential
mortgages held by
Freddie Mac.
Principal and
interest are paid
monthly. This
program has been
very successful in
moving money from
investors to
borrowers. From
time-to-time the
FHLMC also markets a
guaranteed mortgage
certificate that
pays interest
semiannually to
investors.
During the 1970
decade, the Federal
Home Loan Mortgage
Corporation focused
on finding buyers
for fixed-rate
loans. However, by
1980, rapidly rising
interest rates made
fixed-rate loans
increasingly
unpopular with
lenders and
investors. In
response, a pilot
program was
introduced in 1982
wherein Freddie Mac
would buy adjustable
rate mortgages and
resell them to
investors as whole
loans or as
participation
certificates. This
program, if
successful, will go
a long way toward
keeping money
flowing from
investors to home
buyers.
A by-product of
buying and selling
loans has been the
tremendously
influential role of
the FHLMC in
standardizing loan
documents. Prior to
1970, nearly every
bank and savings and
loan association in
the country used a
slightly different
loan application
form, appraisal
form, mortgage form,
promissory note, and
loan approval
procedure for its
conventional
mortgage loans. Part
of the task of
creating a
nationwide secondary
market for
conventional loans
was to develop
standardized forms.
Today, when you walk
into a bank or
savings and loan or
mortgage company and
apply for a home
loan, the loan
application that you
fill out will be the
same FHLMC form
wherever you go.
Similarly, the
appraisal form will
be the same FHLMC
form as will be the
mortgage form, the
promissory note, and
the loan approval
procedure.
MGIC
Investment
Corporation
In 1972, the MGIC
Investment
Corporation,
originators of the
Mortgage Guaranty
Insurance
Corporation, formed
a buying and selling
unit to provide the
first nonfederal
secondary market for
conventional
mortgages. Promptly
nicknamed Maggie
Mae, it
provides an outlet
where a lender can
sell MGIC-insured
mortgages to other
investors. Maggie
Mae accepts loans on
consignment from
sellers and turns
them into a single
mortgage-backed
security. MGIC has
also developed
mortgage
certificates whereby
a number of
different investors
can participate in
the same pool of
mortgages. MGIC
provides the
standard mortgage
guaranty coverage
plus a policy on the
mortgage pool itself
that guarantees the
monthly pass-through
of principal and
interest to the
investor. As with
FNMA, GNMA, and
FHLMC, the purpose
is to attract
investors who might
not otherwise invest
in mortgage
loans.
Secondary
Market To Mortgage
Money
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