The Mortgage Market Today

The Mortgage MarketPresented by:

Brady AndersonChad AtkinsonCharles JonesMcLeod RobinsonLaura Rogers1What 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.

2Two MarketsPrimary 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, mortgage-backed security, or other type of derivative.

3How the Mortgage Market OperatesWhat does the Primary Mortgage Market Mean?Who sets the interest rates that we pay on our mortgages? 4What is the Secondary Mortgage Market?How does it work?Who are the main participants in this section of the mortgage market?5What role do Fannie Mae and Freddie Mac play in our Mortgage Market?Fannie Mae A.K.A-Federal National Mortgage AssociationFreddie MacA.K.A-Federal Home loan Mortgage Corporation6The Main operation of the Mortgage MarketTo provide people or families with the money to purchase a home7Mortgage ImpactsBanksMBS-Mortgage Backed Securities MBS provide capital to banks from their resale in the marketAs a result of the recent mortgage crisis banks credit lines have shrunk dramatically due to loss of value in MBS.

8Mortgage ImpactsIn the Fall of 2008 key financial firms failed due primarily to subprime lending causing many people to withdraw from the money marketAs a result many banks and general businesses lost their main supply of credit and lenders abruptly stopped lending due to increased credit risk

9Mortgage ImpactsPersonal 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.10The History of the Mortgage Market: Fannie MaeCreated 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.

11The History of the Mortgage Market: Freddie MacCreated 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 1970.12The Mortgage Market Today2008: 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.As of 2008, Fannie Mae and Freddie Mac had purchased about 80% of all new home mortgages in the U.S.

By June 30th, 2008, they held a combined $1.5 trillion in mortgages and mortgage-backed securities.

13The Mortgage Market TodayJuly 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

On July 30, 2008, the Federal Housing Finance Agency (FHFA) was created by the Housing and Economic Recovery Act of 2008 to regulate Fannie Mae and Freddie Mac.

The Economic Recovery Act also gives temporary permission for the Treasury to purchase an unlimited amount of debt or equity securities from the GSEs.

On September 7, 2008, the FHFA became a conservator for Fannie Mae and Freddie Mac.

The government has also agreed to provide financing to Fannie Mae and Freddie Mac through the purchase of preferred stock and mortgage-backed securities and MBS-collateralized short-term loans.

14The Future of the Mortgage MarketPresented by:

Brady AndersonChad AtkinsonCharles JonesMCleod RobinsonLaura RogersMaking Home Affordable ProgramThe Home Affordable Refinance ProgramDesigned to make refinancing available to borrowers with loans guaranteed by government sponsored enterprises. (Fannie Mae and Freddie Mac)The Home Affordable Modification ProgramDesigned to provide aid to borrowers specifically facing or undergoing foreclosure by providing incentives to lenders, borrowers, investors and servicers.16Increased support to GSEsThis 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.

17Is it Enough?Irresponsible financial institutions have bared much of the blame in the collapse of the mortgage marketThe 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.18Will GSEs work?Some believe these support programs could end up working well resulting in lower expenses for borrowers and more money for businessesOthers 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.

19The 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 MacAnother 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 or protection. The Long-Term Future of Fannie Mae and Freddie MacThey 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 MaeIn 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.

23The Immediate Future of Ginnie MaeGinnie 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 returns24The Long-Term Future of Ginnie MaeEven 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.25The future market for Mortgage-Backed SecuritiesThe current market conditionsShort-term or intermediate market Long-term perspectives Current Market ConditionsSecuritizationStrengthsGovernment intervention

WeaknessesAmount of defaultsBanks stabilityCreditworthiness

Short-term perspectivesWhat needs to happen?The 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 perspectivesEventually, 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 RatesWhat affects mortgage rates?The default rateEarly loan payoffLoan fraudForeclosuresLender marginsInflationEconomic newsSupply and demand of mortgage-backed securities.Current Events and Future Mortgage RatesToday, 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.