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The Secondary Market in Residential Mortgages

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The Secondary Market in Residential Mortgages 'I'BE SECONDARY IN RESIDENTIAL MORTGAGES . , • i' _,j : _, INTRODUCTION his book on the secondary marlcet in resi~ntial its functions, the organizations that are the major par­ T mortgages was prepared by the Federal Home ticipants, and the marlcet's historical development. Loan Mortgage Corporation as a resource for its The secona, "Mortgage Sales and Purchases," employees and as an information guide for members illustrates the process by which mortgage originators of the housing industry and related industries. The sell mortgages and the process by which investors contents cover secondary mortgage operations, buy mortgages. including those of the private secondary marlcet, the The third, "Operations of Freddie Mac," high­ Federal Home Loan Mortgage Corporation (Freddie lights the functions, purchases, sales, and related Mac), the Federal National Mortgage Association activities of Freddie Mac since its creation in 1970. (Fannie Mae), and the Government National Mort­ An appendix includes a list of Freddie Mac's home gage Association (GNMA). Emphasis is on the sec­ office and regional offices. ondary market for conventional mortgages and the The text and illustrations in this book have been operations of Freddie Mac. simplifred for easy referral and to encourage discus­ The book has three sections. sion. They are not intended to be comprehensive The fJrst, "Definition of the Secondary Mortgage explanations. The book will be updated annually. Market," defines the secondary marlcet and describes 2 TABLE OF CONIENTS DEFINITION OF THE SECONDARY Conversion of Mortgages to Guaranteed MORTGAGE MARKET Mortgage-Backed Securities (Fannie Mae's Program) .................................................. 33 Secondary Market ,Activity in One-to-Four Family (Non-Farm) and Multifamily Mortgage Markets Sales of Mortgage-Backed Bonds .................... 35 Since 1970 ......... ... .... ...... .... .... ... .. .. .. .. 6 Comparison of Mortgage Pass-Through Private Secondary Market Entities.................... 8 Securities. 36 Private Mortgage Insurance Companies Sales of PCslGMCs, GNMAs, MBSs, and (MICs) .................................................. 8 Private Pass-Through Securities .......... -" .. ..... .. .. 38 Government-Related Secondary Market Entities ... 9 Mortgage Sales by Major Types of Lenders Federal Home Loan Mortgage Corporation (1970-1982)............................................... 39 (Freddie Mac) ......................................... 9 Mortgage Purchases by Major Types of Investors Federal National Mortgage Association (1970-1982) ............................................... 40 (Fannie Mae) .......................................... 10 Reasons Lenders and Investors Participate in the Government National Mortgage Association Secondary Market....................................... 41 (GNMA) ............................................... 11 Historical Highlights of the Development of the Secondary Market ....................................... 12 OPERATIONS OF FREDDIE MAC Freddie Mac's Mortgage Purchasing Process....... 44 MORTGAGE SALES AND PURCHASES Freddie Mac's Mortgage Selling Process............ 45 The Secondary Market Process ....................... 20 Freddie Mac Commitments (1971-1982) ............ 46 Sales of Whole Loans or Participations Via a Freddie Mac Commitments by Types of Sellers Conduit or Directly to Investors ...................... 22 (1980 and 1982) ......................................... 47 Sales of Whole Loans or Participations to Freddie Mac's Financing Tools ....................... 48 Freddie Mac.............................................. 23 Sources of Freddie Mac Funds as a Percent of Sales of Whole Loans or Participations to Total Portfolio (1971-1982) ............................ 49 Fannie Mae............................................... 26 PC/CMO/GMC Comparison........................... 50 Conversion of Mortgages to Pass-Through PC Investor Profile (as of August 1982) ............ 51 Securities as GNMAs ................. ..... .... ..... .... 29 Conversion of Mortgages to Pass-Through Securities as Private Issues ............................ 30 APPENDIX Conversion of Mortgages to Pass-Through Freddie Mac Home Office and Regional Offices.. 52 Securities as Mortgage Participation Certificates (PCs) (Freddie Mac's Guarantor Program) ......... 31 3 DEFINITION OF THE SECONDARY MORTGAGE he secondary market in _T redistributed the available residential mortgages is mortgage money by transfer­ T a network of mortgage ring funds from capital surplus originators who lend money to home buyers and inves­ to capital deficit areas. tors who buy mortgage loans. Primary mortgage lend­ Today, in addition to redistributing funds, the sec­ ers make loans to propeny buyers and underwrite and ondary mortgage market links the capital and mortgage service the loans, which can be held in lenders' own markets more closely through its sales of mortgages portfolios or sold to investors. By selling the loans in forms that have attracted investment from outside they originate, lenders obtain funds that they can use the traditional mortgage investment community. The to make new mortgages. Investors who buy mortgage need for new sources of investment in residential mort­ loans after they have been closed by primary mortgage gages has increased in recent years as the demand for lenders usually consider the loans as investments, and mortgage credit nationwide has grown more rapidly than usually pay the lender a fee to continue servicing the the deposit bases of traditional lending institutions. loans. The chan on the following pages illustrates secondary In the past, the role of the secondary mongage mar­ market activity in one-to-four family (non-farm) and ket was primarily to help solve regional differences in multifamily mortgage markets since 1970. the cost and availability of mortgage credit. Much of this activity occurs among individual finan­ Thrift institutions have traditionally been the pri­ cial institutions. The roles and operations of private mary originators of conventional mortgages; thus, the secondary market entities are described beginning on availability of mortgage money depended heavily on page 8. their deposit flows. In the 1960s and 1970s, thrifts Three entities were created by Congress to develop originated as much as two-thirds of conventional mort­ the residential secondary mortgage market. They have gages. become important elements in its continuing growth. There was a regional mismatch between these depos­ They are the Federal Home Loan Mortgage Corpo­ it flows and the demand for mortgage credit, however. ration (Freddie Mac), the Federal National Mortgage In older, slower growing areas Association (Fannie Mae), and of the country, the supply of the Government National Mort­ mortgage credit available for gage Association (GNMA). lending by thrifts exceeded the Synopses of these government- demand for it by homebuyers. related entities begin on page At the same time, thrifts in the 9. newer, faster growing regions Highlights of the faced great demand for new creation and devel­ housing but had relatively few opment of the sec­ deposits to lend. ondary market appear Through its purchases of chronologically mortgages in the faster growing beginning on page 12. regions and sales of mortgages in the slower growing regions, the secondary mortgage market SECONDARY MARKET ACTIVITY IN ONE-TO-FOUR FAMILY (NON-FARM) AND MlTLTIFAMILY MORTGAGE MARKETS SINCE 1970 Millions Lenders'Sales! of dollars FHAlVA Conventional 'Net of federal c:mIit agencies and mort­ sage pools and of sales of seasoned mortgages made UDder swap pro­ gnms. 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 6 Originationsl Millions ofdoUars .FHA/VA Conventional 200,000 175,000 150,000 125,000 100,000 ~Includes COIIIIDefCiai 75,000 banD, muwaI sav­ inllS banks, savings and loaD instillllions. life insurance c0mpa­ nies, priva/e l'I0II­ insured pensioa funds, mongage com­ 50,000 panies, real cswe. illveslmellt tnISU, stale and local retire­ mem funds, federal c:rcdit agencies. mon­ gage pools. and stale and local c:rcdit agen­ 25,000 cies. Columns may DOt sum 10 row due 10 roundinll· SOURCE: HUD "Survey of Mongage 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Lendinll Activily" 7 PRIVATE SECONDARY MARKET ENTITIES FUNCTIONS iaries it provides financing for first and second mort­ Private secondary market entities increase the avail­ gages, homebuilder construction, manufactured ability of financing for residential mortgage loans; housing, and commercial real estate loans. they provide credit for innovative as well as tradi­ GECC has been positioning to move fully into the tional types of mortgages, and they serve homebuy­ private secondary mortgage market over the past ers through their purchases of loans above the three years. Through its subsidiaries it buys and statutory loan limits of Freddie Mac and Fannie Mae. underwrites mortgages and provides mortgage and title insurance. GECC has successfully marketed its OPERATIONS mortgage pass-through securities, which carry a AAA A brief description of a few of the major participants rating by Standard & Poor's. in the private secondary market follows: The Home Mortgage Access Corporation The Residential Funding Corporation (RFC) was (HOMAC) was established in 1982 as a subsidiary of established in 1982 as a subsidiary of Banco Mort­ the National Association of Home Builders. gage Company. now Norwest Mortgage, ,?ne of the HOMAC provides
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