How Do American Mortgages Work? Part 9: The Financial Crisis

What caused the Housing Bubble in the United States during the early 200s? Experts’ continuous debate on what the root of the cause is but Fannie Mae and Freddie Mac have less to do with it than you think. Fannie and Freddie backed about half of all the home-loan originations in 2002 but a new market for mortgage-backed securities were arising. Loan originators backed by Wall Street were straying away from selling the loans to Fannie and Freddie but creating their own mortgage backed securities with high-risk subprime mortgages. These would include something called a hybrid adjustable-rate mortgages with balloon payments which are nearly impossible to sustain without refinancing. It left Fannie and Freddie only backing up around 30% of the loans in 2005 and 2006.

The big players of Wall Street like Lehman Brothers and Bear Stearns would package the subprime loans into securities. The credit-rating agency would then rate them falsely-high so they can sell to investors who were unaware of the actual health of the security. Everyone saw how the housing prices were rising and didn’t see …

Read More

How Do American Mortgages Work? Part 8: Investors

The end of the line for the secondary mortgage market process is the investors themselves. Investors can be anyone but typically are foreign governments, pension funds, insurance companies, banks, GSEs and hedge funds. What kind of return are they looking for depends on what credit ranking of MBS, CMOs, or CDOs they acquire. Typically, more safe investors such as governments, pension funds, insurance companies, or banks are looking for a high credit investment. These investments have low predicted default rate. Investors looking for higher returns will more than likely look towards a low credit rating investment because the interest rate will have a higher return yield, hedge funds are usually investors of this type.

While America’s secondary market is massive, after a mortgage is closed it can end up in many different channels by the end of the month, whether it be a CMO or a CDO deal. Borrowers have little knowledge of the extent of what happens with their mortgage after closing and how much it has been split up, traded, and merged with other mortgages. With the start …

Read More

How Do American Mortgages Work? Part 7: Securities Dealers

After a mortgage backed security (MBS) is formed, it needs to be sold to the investor. To do that, the MBS needs to go through a securities dealer. This dealer is more than likely located on Wall Street along with MBS trading desks. To better cater to the investor, a securities dealer has to go through creative and innovative channels to make the MBS look attractive to an investor. There is many different structures a MBS can go through such as Collateralized Mortgage Obligation or a Collateralized Debt Obligation.

Collateralized Mortgage Obligation (CMO) are the typical bundle of mortgages that is sold as an investment that was first issued in 1983. They are categorized from maturity and level of risk, and as the repayments of the loan comes in as a cash flow they are distributed to the investors in the set guidelines of the investment. These investments, since of the differences of the mortgages included within type or risk, interest rates, and principal balances, they can be quite sensitive to the change in the housing economic conditions and interest …

Read More

How Do American Mortgages Work? Part 6: The Federal Agencies

Since the housing market is so massive in the United States the government had to be regulating the market in some way. With some agencies created in the midst of the Great Depression and some after the housing bubble burst. These three primary agencies are there to help the consumer and the lender whether it’s regulating the market or insuring less risk onto the lenders, they are there to provide an efficient mortgage market in America.

After the housing bubble burst, the United States government wanted to make sure nothing of this severity ever happened again. President Obama and the Congress signed in the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 that created the Consumer Financial Protection Bureau (CFPB). The goal of the organisation is to watch out for American consumers in the market for consumer financial products and services. Since this agency was only focused on the consumer rather than on monetary policy or bank safety, it puts all the agencies focus on protecting the consumer from unfair processes and illegal activity from products and …

Read More

How Do American Mortgages Work? Part 5: Fannie Mae and Freddie Mac

The main goal of Fannie Mae and Freddie Mac is to give the national mortgage market some liquidity. They purchase the loans from the mortgage firms (only under strict standards with size, credit score, and underwriting). For the next step, they package up the loans into Mortgage-backed securities, which they guarantee the payments on the securities to the investors even if a mortgage defaults.

These standards led to a more reliable ad sustainable mortgage products with longer terms and fixed-rate mortgages. On top of that investors knew that even if a mortgage defaults in their invested security, Fannie and Freddie will supplement the payments to them. Which made mortgage securities seem like a safe and sustainable investment.

Fannie Mae was created in 1938 in part of the New Deal Legislation to help with the housing crisis during the Great Depression. The goal was to buy all the FHA-insured loans to help recover the lenders’ money supply. It was originally apart of the Federal Housing Administration (FHA).

Freddie Mac was established in 1970 to keep the supply of money moving for …

Read More

How Do American Mortgages Work? Part 4: Aggregator

The next step into the Secondary Mortgage Market process in the aggregator. The aggregator buys the mortgages from banks and other originators. It then packages them up as mortgage-backed securities and sells it to securities dealers.

These mortgage-backed securities are investment opportunities that are bundled up mortgages. The aggregators send them off to a rating agency to be rated on their risk of money loss. They securitise the mortgages to either form a private label mortgage-backed security (think of Wall Street) or form agency mortgage-backed security (think of Fannie Mae and Freddie Mac). They then sell it to large institutional investors, insurance companies, hedge funds, and wealthy clients.

This is a complicated process because they have to make sure they receive a profit so before a security is sold a process called hedging a mortgage pipeline is involved. They make profit by the gap between the sales tag on the mortgages they obtain and the price the mortgage-backed securities sell for.

http://budgeting.thenest.com/definition-mortgage-aggregator-34152.html

http://www.investopedia.com/articles/pf/07/secondary_mortgage.asp

Read More

How Do American Mortgages Work? Part 3: Mortgage Origination

The first part of the Secondary Mortgage Market is the banks, mortgage broker, or mortgage lender. This is the only time borrower will interact with the Secondary Market without possibly even knowing it. The lender will go through all the requirements with you of what you need in order to obtain the mortgage- credit score, income requirement, length of the mortgage, etc. These requirements are decided by the government identities, Fannie Mae and Freddie Mac. This allows the mortgage to be sold to the government identities if they follow their guidelines. So chances are the lending company a person obtains their mortgage from will not be the same one their making payments to for the life of the loan.

To initially make the loan they need money to close the mortgage before they sell it off to the government entities. Bankers typically use their own capital to fund the closing of the loans. Mortgage bankers use a warehouse line of credit to initially fund these loans. A mortgage broker will search to find you the best mortgage option throughout all …

Read More

How Do American Mortgages Work? Part 2: How the Secondary Mortgage Market was Created

Like the housing bubble in 2008, there was a growing popularity in the residential housing market which therefore created a housing bubble throughout the 1920’s. Before the crash, there were four common financial institutions to obtain a mortgage from: commercial banks, life insurance companies, mutual savings banks, and thrifts. These would typically have 5 year balloon loans or 10 year amortization loans with families having a hybrid of the two loans.

The Great Depression started by a stock market crash in 1929, there was a huge economic downfall that lasts for 10 years spread throughout the Western world filled with great disparity and no work. By 1933, the economy fell 27%, unemployment reached 25%, and wages fell 42%. The Great Depression was not just affecting Americans but the banks as well. Laws preventing banks to invest their client’s deposits were not in existent yet so a majority of the banks’ money were in investments. When the stock market crashed the banks’ money went along with it. With the Economic downfall left little to no income for most of the families, …

Read More

How Do American Mortgages Work? Part 1

Looking at an American mortgage from the outside can seem identical as a mortgage you would obtain in Ireland. You sign a contract, you’re given the keys to your new home in exchange for monthly payments for a set amount of years. But behind the scenes is where things get a little more complicated. The United States has created a secondary mortgage market after the Great Depression in the 1930’s. Since then, the secondary mortgage market is a multi-billion dollar corporation that has the single biggest taxpayer corporation in the US.

In simple terms, the secondary mortgage market includes Government-Sponsored Enterprises that act as the middle man between the mortgage lenders and the investors. They will buy residential loans off of lenders then securitise and trade them to investors. When the Government-Sponsored Enterprises buy a loan off a mortgage lender it returns the loan amount so the lender can turn around and lend to a new family. This allows more capital to be freed to help more families reach their goals of becoming a homeowner and invest in their future.

Read More

Can car owners make money off of their car by not even driving it?

A new emerging Wicklow-based company might make that possible. Fleet, frequently referred to the Airbnb for cars, just secured AXA car insurance company to offer drivers coverage for only £7-£10 a day. The insurance deal is separate and does not affect the car owner’s own coverage.With this new deal, the business is going to hit the ground running. The brains of it all, Maurice Sheehy, is offering car owners a chance to make a profit off their car while they are not using it. This gives opportunity to car owners who don’t use their cars on their daily commute to make money by renting them out. If used two days a week, one can make £3,500 a year, according to Sheehy.

This new business may change the game for the car rental services, hopefully comparable to Airbnb in accommodations and Uber in taxis. With the reviewing process similar to Airbnb, the online reviews can be used by renters and users to ensure a good experience.

The new company was created because how frustrated they were with the large amounts of …

Read More