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99-455: On September 7, 2008, Federal Housing Finance Agency (FHFA) director James B. Lockhart III announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA (see Federal takeover of Fannie Mae and Freddie Mac ). The action has been described as "one of the most sweeping government interventions in private financial markets in decades". As of the start of the conservatorship,

198-716: A mortgage-backed security . In 1983, Freddie Mac issued the first collateralized mortgage obligation . In 1960 the government enacted the Real Estate Investment Trust Act to allow the creation of the real estate investment trust (REIT) to encourage real estate investment, and in 1977 Bank of America issued the first private label pass-through. In 1983 the Federal Reserve Board amended Regulation T to allow broker-dealers to use pass-throughs as margin collateral , equivalent to over-the-counter non- convertible bonds . In 1984

297-407: A position need not deal with the difficulties of theoretical pricing described below; the price of any bond is essentially quoted at fair value, with a very narrow bid/offer spread . Reasons (other than investment or speculation ) for entering the market include the desire to hedge against a drop in prepayment rates (a critical business risk for any company specializing in refinancing). As of

396-407: A stochastic function with an IR correlation . Practitioners typically use specialised Monte Carlo methods or modified Binomial Tree numerical solutions. Theoretical pricing models must take into account the link between interest rates and loan prepayment speed. Mortgage prepayments are usually made because a home is sold or because the homeowner is refinancing to a new mortgage, presumably with

495-573: A "vanilla" corporate bond is based on two sources of uncertainty: default risk (credit risk) and interest rate (IR) exposure. The MBS adds a third risk: early redemption ( prepayment ). The number of homeowners in residential MBS securitizations who prepay increases when interest rates decrease. One reason for this phenomenon is that homeowners can refinance at a lower fixed interest rate . Commercial MBS often mitigate this risk using call protection . Since these two sources of risk (IR and prepayment) are linked, solving mathematical models of MBS value

594-775: A central role in the US housing finance system". The U.S. Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels. Each week Freddie Mac publishes

693-608: A fair-value basis using guidelines set forth by the Financial Accounting Standards Board . The changes made by the bill would mean that Fannie Mae and Freddie Mac were counted on the budget instead of considered separately and would mean that the debt of those two programs would be included in the national debt. These programs themselves would not be changed, but how they are accounted for in the United States federal budget would be. The goal of

792-461: A group of individuals (a government agency or investment bank) that securitizes , or packages, the loans together into a security that investors can buy. Bonds securitizing mortgages are usually treated as a separate class, termed residential ; another class is commercial , depending on whether the underlying asset is mortgages owned by borrowers or assets for commercial purposes ranging from office space to multi-dwelling buildings. The structure of

891-582: A lower rate or shorter term. Prepayment is classified as a risk for the MBS investor despite the fact that they receive the money, because it tends to occur when floating rates drop and the fixed income of the bond would be more valuable (negative convexity ). In other words, the proceeds received would need to be reinvested at a lower interest rate. Hence the term prepayment risk . Professional investors generally use arbitrage-pricing models to value MBS. These models deploy interest rate scenarios consistent with

990-417: A major issue in the subprime mortgage crisis of 2006–2008. The total face value of an MBS decreases over time, because like mortgages, and unlike bonds , and most other fixed-income securities, the principal in an MBS is not paid back as a single payment to the bond holder at maturity but rather is paid along with the interest in each periodic payment (monthly, quarterly, etc.). This decrease in face value

1089-486: A majority of investors believe that the government would prevent a disastrous default. Vernon L. Smith, 2002 Nobel Laureate in economics, has called FHLMC and FNMA "implicitly taxpayer-backed agencies". The Economist has referred to "the implicit government guarantee" of FHLMC and FNMA. The then director of the Congressional Budget Office , Dan L. Crippen, testified before Congress in 2001, that

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1188-542: A mortgage is considered a jumbo loan . The conforming loan limit is 50 percent higher in such high-cost areas as Alaska , Hawaii , Guam and the US Virgin Islands , and is also higher for 2–4 unit properties on a graduating scale. Modifications to these limits were made temporarily to respond to the housing crisis, see jumbo loan for recent events. The FHLMC states, "securities, including any interest, are not guaranteed by, and are not debts or obligations of,

1287-486: A mortgage, it no longer had a stake in whether the borrower could make his or her payments." Among the early examples of mortgage-backed securities in the United States were the slave mortgage bonds of the early 18th century and the farm railroad mortgage bonds of the mid-19th century which may have contributed to the panic of 1857. There was also an extensive commercial MBS market in the 1920s. In June 1933,

1386-557: A national average of mortgage rates called the Primary Mortgage Market Survey (PMMS). The PMMS tracks a constant borrower profile of conventional, conforming fully-amortizing home purchase loans with 20% down and excellent credit borrowers. Rates are published for the most popular mortgage products, the 30-year and 15-year fixed-rate. Rates are released each week on Thursdays. The PMMS began in April 1971 with

1485-460: A pass-through MBS as a $ 3 billion pass-through with 6% pass-through rate, a 6.5% WAC, and 340-month WAM. The pass-through rate is different from the WAC; it is the rate that the investor would receive if he/she held this pass-through MBS, and the pass-through rate is almost always less than the WAC. The difference goes to servicing costs (i.e., costs incurred in collecting the loan payments and transferring

1584-480: A precipitous increase in home foreclosures. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play

1683-412: A private-label issuer is the real estate mortgage investment conduit (REMIC), a tax-structure entity usually used for CMOs; among other things, a REMIC structure avoids so-called double taxation. The securitization of mortgages in the 1970s had the advantage of providing more capital for housing at a time when the demographic bulge of baby boomers created a housing shortage and inflation was undermining

1782-575: A shift toward riskier mortgages and private label MBS distribution. Earnings depended on volume, so maintaining elevated earnings levels necessitated expanding the borrower pool using lower underwriting standards and new products that the GSEs would not (initially) securitize. Thus, the shift away from GSE securitization to private-label securitization (PLS) also corresponded with a shift in mortgage product type, from traditional, amortizing, fixed-rate mortgages (FRMs) to nontraditional, structurally riskier, nonamortizing, adjustable-rate mortgages (ARMs), and in

1881-507: A traditional source of housing funding, the savings and loan associations (or thrifts), which were limited to providing uncompetitive 5.75% interest rates on savings accounts and consequently losing savers' money to money market funds . Unlike the traditional localized, inefficient mortgage market where there might be a shortage or surplus of funds at any one time, MBSs were national and international in scope and regionally diversified. Mortgage-backed securities helped move interest rates out of

1980-592: A traditional survey approach, Freddie Mac transitioned to replacing lender survey responses with actual loan application data submitted by lenders to Freddie Mac's automated underwriting system . Data is collected from the previous Thursday until the Wednesday before the publication date. Changes in PMMS rates are widely reported in national media. * Interim As of March 2024. In 2003, Freddie Mac revealed that it had understated earnings by almost $ 5 billion, one of

2079-486: A trust and allocate the cash flows from the underlying pool to the securities holders on a pro rata basis. A trust that issues pass-through certificates is taxed under the grantor trust rules of the Internal Revenue Code. Under these rules, the holder of a pass-through certificate is taxed as a direct owner of the portion of the trust allocatable to the certificate. In order for the issuer to be recognized as

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2178-400: A trust for tax purposes, there can be no significant power under the trust agreement to change the composition of the asset pool or otherwise to reinvest payments received, and the trust must have, with limited exceptions, only a single class of ownership interests. A collateralized mortgage obligation , or "pay-through bond", is a debt obligation of a legal entity that is collateralized by

2277-559: A variety of violations of federal securities law and common law and paint "a damning portrait of the excesses of the housing bubble." The suits seek a variety of damages and civil penalties. UBS Agrees to Pay $ 1.435 Billion to Resolve Claims That It Made Misrepresentations in the Sale of Residential Mortgage-Backed Securities The Federal Housing Finance Agency initiated litigation against 18 financial institutions involving allegations of securities law violations and, in some instances, fraud in

2376-461: Is a difficult problem in finance . The level of difficulty rises with the complexity of the IR model and the sophistication of the prepayment IR dependence, to the point that no closed-form solution (i.e., one that could be written down) is widely known. In models of this type, numerical methods provide approximate theoretical prices. These are also required in most models that specify the credit risk as

2475-410: Is an average across mortgages, as distinct from concepts such as weighted-average life and duration , which are averages across payments of a single loan. The weightings are computed by dividing each outstanding loan amount by total amount outstanding in the mortgage pool (i.e., $ 900,000). These amounts are the outstanding amounts at the issuance or initiation of the MBS. The WAM for the above example

2574-513: Is commonly credited to Mike Vranos . The shares of subprime MBSs issued by various structures, such as CMOs, are not identical but rather issued as tranches (French for "slices"), each with a different level of priority in the debt repayment stream, giving them different levels of risk and reward. Tranches of an MBS—especially the lower-priority, higher-interest tranches—are/were often further repackaged and resold as collateralized debt obligations. These subprime MBSs issued by investment banks were

2673-606: Is computed as follows: WAM = (22.2 2 % × 300) + (44.4 4 % × 260) + (33.3 3 % × 280) = 66.6 6 + 115.5 5 + 93.3 3 = 275.5 5 months Another measure often used is the Weighted-average loan age . The weighted-average coupon (WAC) of a pass-through MBS is the average of the coupons of the mortgages in the pool, weighted by their original balances at the issuance of the MBS. For the above example this is: WAC = (22.2 2 % × 6.00%) + (44.4 4 % × 6.25%) + (33.3 3 % × 6.50%) = 1.3 3 % + 2.7 7 % + 2.16 6 % = 6.27 7 % Pricing

2772-418: Is measured by the MBS's "factor", the percentage of the original "face" that remains to be repaid. In the United States, MBSs may be issued by structures set up by government-sponsored enterprises like Fannie Mae or Freddie Mac , or they can be "private-label", issued by structures set up by investment banks. The process of securitization is complex and depends greatly on the jurisdiction within which

2871-922: Is partly used to pay down the loan's principal and partly used to pay the interest on it. These two components can be separated to create SMBS's, of which there are two subtypes: There are a variety of underlying mortgage classifications in the pool: Prime mortgages are conforming mortgages with prime borrowers, full documentation (such as verification of income and assets), strong credit scores , etc. Alt-A mortgages are an ill-defined category, generally prime borrowers but non-conforming in some way, often lower documentation (or in some other way: vacation home, etc.) Alt-A mortgages tend to be larger in There are many reasons for mortgage originators to finance their activities by issuing mortgage-backed securities. Mortgage-backed securities: The high liquidity of most mortgage-backed securities means that an investor wishing to take

2970-455: Is usually structured as a different type of security than an RMBS. These securitization trusts may be structured by government-sponsored enterprises as well as by private entities that may offer credit enhancement features to mitigate the risk of prepayment and default associated with these mortgages. Since residential mortgage holders in the United States have the option to pay more than the required monthly payment (curtailment) or to pay off

3069-538: The Budget and Accounting Transparency Act of 2014 (H.R. 1872; 113th Congress) into the United States House of Representatives during the 113th United States Congress . The bill, if it were passed, would modify the budgetary treatment of federal credit programs, such as Fannie Mae and Freddie Mac. The bill would require that the cost of direct loans or loan guarantees be recognized in the federal budget on

Freddie Mac - Misplaced Pages Continue

3168-576: The Consumer Financial Protection Bureau , that the inability for the President to terminate the FHFA director beyond "for cause" was unconstitutional, but otherwise left the agency's power as is. President Biden replaced Calabria with Sandra L. Thompson as Acting Director, who is expected to end Calabria's policy of phasing out the conservatorship. Brian M. Tomney was nominated by President Joe Biden and confirmed by

3267-539: The Democratic National Convention have not yet submitted their filings on how much they received from Freddie Mac and Fannie Mae. On September 7, 2008, Federal Housing Finance Agency (FHFA) Director James B. Lockhart III announced pursuant to the financial analysis, assessments and statutory authority of the FHFA, he had placed Fannie Mae and Freddie Mac under the conservatorship of the FHFA. FHFA has stated that there are no plans to liquidate

3366-557: The Federal National Mortgage Association (Fannie Mae) was the sole institution that bought mortgages from depository institutions, principally savings and loan associations, which encouraged more mortgage lending and effectively insured the value of mortgages by the US government. In 1968, Fannie Mae split into a private corporation and a publicly financed institution. The private corporation was still called Fannie Mae and its charter continued to support

3465-584: The Glass–Steagall Act was signed into law by President Franklin D. Roosevelt . This legislative initiative separated commercial banking from investment banking , providing safeguards against possible corruption with many types of investment securities (like the MBS). Even though the fixed-rate mortgage did not yet exist at this time, the law deemed it illegal for a banking institution to both sponsor debts and design investment vehicles or market-making tools as

3564-541: The Housing and Urban Development Act of 1968 , Fannie Mae was split into the current Fannie Mae and Ginnie Mae to support the FHA-insured mortgages, as well as Veterans Administration (VA) and Farmers Home Administration (FmHA) insured mortgages, with the full faith and credit of the US government. In 1970, the federal government authorized Fannie Mae to purchase conventional mortgages—that is, those not insured by

3663-574: The Office of Federal Housing Enterprise Oversight , issued the results of a 27-month-long investigation. On May 25, 2006, Senator McCain joined as a co-sponsor to the Federal Housing Enterprise Regulatory Reform Act of 2005 (first put forward by Sen. Chuck Hagel) where he pointed out that Fannie Mae and Freddie Mac's regulator reported that profits were "illusions deliberately and systematically created by

3762-639: The United States Department of the Treasury had contracted to acquire US$ 1 billion in Freddie Mac senior preferred stock, paying at a rate of 10% per year, and the total investment may subsequently rise to as much as US$ 100 billion. Shares of Freddie Mac stock, however, plummeted to about one U.S. dollar on September 8, 2008, and dropped a further 50% on June 16, 2010, when the stocks delisted due to falling below minimum share prices for

3861-406: The fixed-rate mortgage as an alternative to the balloon payment mortgage by insuring them, and helped the mortgage design garner usage. In 1938, the government also created the government-sponsored corporation Fannie Mae to create a liquid secondary market in these mortgages and thereby free up the loan originators to originate more loans, primarily by buying FHA-insured mortgages. As part of

3960-588: The interest rate , such as: The credit risk of mortgage-backed securities depends on the likelihood of the borrower paying the promised cash flows (principal and interest) on time. The credit rating of MBS is fairly high because: If the MBS was not underwritten by the original real estate and the issuer's guarantee, the rating of the bonds would be much lower. Part of the reason is the expected adverse selection against borrowers with improving credit (from MBSs pooled by initial credit quality) who would have an incentive to refinance (ultimately joining an MBS pool with

4059-456: The "debt and mortgage-backed securities of GSEs are more valuable to investors than similar private securities because of the perception of a government guarantee." The FHLMC receives no direct federal government aid. However, the corporation and the securities it issues are thought to benefit from government subsidies. The Congressional Budget Office writes, "There have been no federal appropriations for cash payments or guarantee subsidies. But in

Freddie Mac - Misplaced Pages Continue

4158-603: The 11 Federal Home Loan Banks (FHLBanks, or FHLBank System). It is wholly separate from the Federal Housing Administration , which largely provides mortgage insurance . In September 2019, the Fifth Circuit Court of Appeals , in an en banc opinion, ruled that the structure of the FHFA violated constitutional separation of powers because its director could not be removed by the president. The U.S. Supreme Court affirmed that part of

4257-525: The 1989 to 2008 time period include five Republicans and five Democrats. Top recipients of PAC money from these organizations include Roy Blunt (R-MO) $ 78,500 (total including individuals' contributions $ 96,950), Robert Bennett (R-UT) $ 71,499 (total $ 107,999), Spencer Bachus (R-AL) $ 70,500 (total $ 103,300), and Kit Bond (R-MO) $ 95,400 (total $ 64,000). The following Democrats received mostly individual contributions from employees, rather than PAC money: Christopher Dodd , (D-CT) $ 116,900 (but also $ 48,000 from

4356-466: The 30-year fixed-rate average and the 1-year ARM and 15-year fixed-rate products were added in 1984 and 1991 respectively. In January 2005, the 5/1 hybrid ARM was added and it was discontinued in November 2022. In January 2016, the 1-year ARM was discontinued. Prior to November 2022, the PMMS collected data by surveying lenders across a proportional mix of lending institutions. Following challenges using

4455-510: The FHA, VA, or FmHA, and created Freddie Mac to perform a role similar to that of Fannie Mae. Ginnie Mae does not invest in conventional mortgages. Ginnie Mae guaranteed the first mortgage pass-through security of an approved lender in 1968. In 1971, Freddie Mac issued its first mortgage pass-through, called a participation certificate , composed primarily of conventional mortgages. In 1981, Fannie Mae issued its first mortgage pass-through, called

4554-399: The FHFA. The action was "one of the most sweeping government interventions in private financial markets in decades". U.S. Treasury Secretary Henry M. Paulson , appearing at the same press conference, stated that placing the two GSEs into conservatorship was a decision he fully supported, and said that he advised "that conservatorship was the only form in which I would commit taxpayer money to

4653-624: The Federal Housing Enterprise Regulatory Reform Act of 2005. The bill was sponsored and introduced in the Senate on January 26, 2005 by Senator Chuck Hagel (R–NE) and co-sponsored by Senators Elizabeth Dole (R–NC) and John Sununu (R–NH). The S. 190 bill was reported out of the Senate Banking Committee on July 28, 2005, but never voted on by the full Senate.   On May 23, 2006, the Fannie Mae and Freddie Mac regulator,

4752-500: The Finance Board remain in effect until modified or superseded. On the day of the law's signing, former Director James Lockhart stated: For more than two years as Director of OFHEO I have worked to help create FHFA so that this new GSE regulator has far greater authorities than its predecessors. As Director of FHFA, I commit that we will use these authorities to ensure that the housing GSEs provide stability and liquidity to

4851-625: The GSEs guaranteed the performance of their MBS, private securitizers generally did not, and might only retain a thin slice of risk. Additionally, Freddie Mac was bound by underwriting guidelines, limiting them to only purchasing conforming loans that required certain debt-to-income and loan-to-value ratios, in addition to other metrics. From 2001 to 2003, financial institutions experienced high earnings due to an unprecedented re-financing boom brought about by historically low interest rates. When interest rates eventually rose, financial institutions sought to maintain their elevated earnings levels with

4950-640: The GSEs." He further said that "I attribute the need for today's action primarily to the inherent conflict and flawed business model embedded in the GSE structure, and to the ongoing housing correction." In the announcement, Lockhart indicated the following items in the plan of action for the conservatorship: The FHFA in 2011 filed suit first against UBS then against 17 other financial institutions accusing them of misrepresenting about $ 200 billion in mortgage-backed securities sold to Fannie Mae and Freddie Mac. The suits, some of which name individual defendants, allege

5049-450: The MBS market has more than $ 11 trillion in outstanding securities and almost $ 300 billion in average daily trading volume. A mortgage bond is a bond backed by a pool of mortgages on a real estate asset such as a house . More generally, bonds which are secured by the pledge of specific assets are called mortgage bonds. Mortgage bonds can pay interest in either monthly, quarterly or semiannual periods. The prevalence of mortgage bonds

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5148-404: The MBS may be known as "pass-through" , where the interest and principal payments from the borrower or homebuyer pass through it to the MBS holder, or it may be more complex, made up of a pool of other MBSs. Other types of MBS include collateralized mortgage obligations (CMOs, often structured as real estate mortgage investment conduits) and collateralized debt obligations (CDOs). In the U.S.

5247-453: The NYSE. In 2008, the yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt. The housing market and economy eventually recovered, making Freddie Mac profitable once again. Freddie Mac is ranked No. 45 on the 2023 Fortune 500 list of the largest United States corporations by total revenue, and has $ 3.208 trillion in assets under management. From 1938 to 1968,

5346-712: The Obama presidential campaign have been determined to be false; James Johnson, former aide to Democratic Vice-President Walter Mondale and ex-head of Obama's Vice-Presidential Selection Committee, CEO from 1991 to 1998; and Jamie Gorelick , former Deputy Attorney General to President Clinton, and Vice-Chairman from 1998 to 2003. In his position, Johnson earned an estimated $ 21 million; Raines earned an estimated $ 90 million; and Gorelick earned an estimated $ 26 million. Three of these four top executives were also involved in mortgage-related financial scandals. The top 10 recipients of campaign contributions from Freddie Mac and Fannie Mae during

5445-518: The PACs), John Kerry , (D-MA) $ 109,000 ($ 2,000 from PACs), Barack Obama , (D-IL) $ 120,349 (only $ 6,000 from the PACs), Hillary Clinton , (D-NY) $ 68,050 (only $ 8,000 from PACs). John McCain received $ 21,550 from these GSEs during this time, mostly individual money. Freddie Mac also contributed $ 250,000 to the 2008 Republican National Convention in St. Paul, Minnesota according to FEC filings. The organizers of

5544-441: The Treasury Department to own stock. This event also renewed calls for stronger regulation of GSEs by the government. President Bush recommended a significant regulatory overhaul of the housing finance industry in 2003, but many Democrats opposed his plan, fearing that tighter regulation could greatly reduce financing for low-income housing, both low- and high-risk. Bush opposed two other acts of legislation:[1][2] Senate Bill S. 190,

5643-403: The U.S. Department of Housing and Urban Development government-sponsored enterprise mission team, absorbing the powers and regulatory authority of both entities, with expanded legal and regulatory authority, including the ability to place government-sponsored enterprises (GSEs) into receivership or conservatorship . In its role as regulator, it regulates Fannie Mae , Freddie Mac , and

5742-513: The U.S. Senate to serve as Inspector General for the Federal Housing Finance Agency. Sworn into office on March 14, 2022, Tomney is the third Senate confirmed Inspector General for FHFA. Laura S. Wertheimer was nominated as Inspector General of the Federal Housing Finance Agency by President Barack Obama and confirmed by the U.S. Senate on September 17, 2015. On June 29, 2021, Wertheimer announced she would be leaving

5841-616: The U.S.'s $ 12 trillion mortgage market. This made both corporations highly susceptible to the subprime mortgage crisis of that year. Ultimately, in July 2008, the speculation was made reality, when the US government took action to prevent the collapse of both corporations. The US Treasury Department and the Federal Reserve took several steps to bolster confidence in the corporations, including extending credit limits, granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks), and potentially allowing

5940-402: The US government, guarantees that its investors receive timely payments but buys limited numbers of mortgage notes. Some private institutions also securitize mortgages, known as "private-label" mortgage securities. Issuances of private-label mortgage-backed securities increased dramatically from 2001 to 2007 and then ended abruptly in 2008, when real estate markets began to falter. An example of

6039-609: The United States has surpassed 12 trillion U.S. dollars, marking a significant growth in the market size. This expansion reflects the increasing role of MBS in the financing of residential real estate, demonstrating the importance of these securities in the overall financial system and housing market. According to the Bond Market Association, gross US issuance of agency MBS was: 2005: USD 0.967 trillion 2004: USD 1.019 trillion 2003: USD 2.131 trillion 2002: USD 1.444 trillion 2001: USD 1.093 trillion This data underscores

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6138-605: The United States or any agency or instrumentality of the United States other than Freddie Mac." The FHLMC and FHLMC securities are not funded or protected by the US Government. FHLMC securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in public communications issued by the FHLMC. There is a widespread belief that FHLMC securities are backed by some sort of implied federal guarantee and

6237-421: The ability to monitor and control mortgage originators. Competition between the GSEs and private securitizers for loans further undermined GSEs power and strengthened mortgage originators. This contributed to a decline in underwriting standards and was a major cause of the financial crisis. Investment bank securitizers were more willing to securitize risky loans because they generally retained minimal risk. Whereas

6336-549: The assets it owns. Pay-through bonds are typically divided into classes that have different maturities and different priorities for the receipt of principal and in some cases of interest. They often contain a sequential pay security structure, with at least two classes of mortgage-backed securities issued, with one class receiving scheduled principal payments and prepayments before any other class. Pay-through securities are classified as debt for income tax purposes. A stripped mortgage-backed security (SMBS) where each mortgage payment

6435-407: The banking sector and facilitated greater specialization among financial institutions. However, mortgage-backed securities may have "led inexorably to the rise of the subprime industry" and "created hidden, systemic risks". They also "undid the connection between borrowers and lenders". Historically, "less than 2% of people lost their homes to foreclosure", but with securitization, "once a lender sold

6534-483: The bill is to improve the accuracy of how some programs are accounted for in the federal budget. Federal Housing Finance Agency The Federal Housing Finance Agency ( FHFA ) is an independent federal agency in the United States created as the successor regulatory agency of the Federal Housing Finance Board (FHFB), the Office of Federal Housing Enterprise Oversight (OFHEO), and

6633-448: The company was lagging behind and should "do more". Freddie Mac was put under a conservatorship of the U.S. federal government on Sunday, September 7, 2008. Freddie Mac's primary method of making money is by charging a guarantee fee on loans that it has purchased and securitized into mortgage-backed security (MBS) bonds. Investors, or purchasers of Freddie Mac MBS, are willing to let Freddie Mac keep this fee in exchange for assuming

6732-577: The company's senior management". However, this regulation too met with opposition from both Democrats and Republicans. Several executives of Fannie Mae or Freddie Mac include Kenneth Duberstein , former Chief of Staff to President Reagan, advisor to John McCain 's Presidential Campaign in 2000 , and President George W. Bush's transition team leader (Fannie Mae board member 1998–2007); Franklin Raines , former Budget Director for President Clinton, CEO from 1999 to 2004—statements about his role as an advisor to

6831-568: The company. The announcement followed reports two days earlier that the Federal government was planning to take over Fannie Mae and Freddie Mac and had met with their CEOs on short notice. The authority of the U.S. Treasury to advance funds for the purpose of stabilizing Fannie Mae or Freddie Mac is limited only by the amount of debt that the entire federal government is permitted by law to commit to. The July 30, 2008, law enabling expanded regulatory authority over Fannie Mae and Freddie Mac increased

6930-570: The creation of the tax-exempt real estate mortgage investment conduit (REMIC) special purpose vehicle for the express purpose of issuing pass-throughs. The Tax Reform Act may have contributed to the savings and loan crisis of the 1980s and 1990s that resulted in the Financial Institutions Reform, Recovery and Enforcement Act of 1989 , which dramatically changed the savings and loan industry and its federal regulation, encouraging loan origination. Nevertheless, probably

7029-544: The credit risk. That is, Freddie Mac guarantees that the principal and interest on the underlying loan will be paid back regardless of whether the borrower actually repays. Owing to Freddie Mac's financial guarantee, these MBS are particularly attractive to investors and, like other Agency MBS, are eligible to be traded in the "to-be-announced", or "TBA" market. The GSEs are allowed to buy only conforming loans , which limits secondary market demand for non-conforming loans. The relationship between supply and demand typically renders

7128-404: The current yield curve as drivers of the econometric prepayment models that models homeowner behavior as a function of projected mortgage rates. Given the market price, the model produces an option-adjusted spread , a valuation metric that takes into account the risks inherent in these complex securities. There are other drivers of the prepayment function (or prepayment risk), independent of

7227-441: The fluctuating nature of the MBS market over time, influenced by varying economic conditions, interest rates, and housing market dynamics. The weighted-average maturity (WAM) and weighted average coupon (WAC) are used for valuation of a pass-through MBS, and they form the basis for computing cash flows from that mortgage pass-through. Just as this article describes a bond as a 30-year bond with 6% coupon rate , this article describes

7326-798: The government passed the Secondary Mortgage Market Enhancement Act to improve the marketability of private label pass-throughs, which declared nationally recognized statistical rating organization AA- rated mortgage-backed securities to be legal investments equivalent to Treasury securities and other federal government bonds for federally chartered banks (such as federal savings banks and federal savings associations ), state-chartered financial institutions (such as depository banks and insurance companies) unless overridden by state law before October 1991 (which 21 states did ), and Department of Labor –regulated pension funds . The Tax Reform Act of 1986 allowed

7425-610: The holding. The law establishing the FHFA is the Federal Housing Finance Regulatory Reform Act of 2008, which is Division A of the larger Housing and Economic Recovery Act of 2008 , Public Law 110-289, signed on July 30, 2008 by President George W. Bush . One year after the law was signed, the OFHEO and the FHFB went out of existence. All existing regulations, orders and decisions of OFHEO and

7524-555: The illegal fund raising benefited members of the House Financial Services Committee , a panel whose decisions can affect Freddie Mac. Notably, Freddie Mac held more than 40 fundraisers for House Financial Services Chairman Michael Oxley (R-OH). Both Fannie Mae and Freddie Mac often benefited from an implied guarantee of fitness equivalent to truly federally backed financial groups. As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about half of

7623-583: The largest corporate restatements in U.S. history. As a result, in November, it was fined $ 125 million—an amount called "peanuts" by Forbes magazine. On April 18, 2006, Freddie Mac was fined $ 3.8 million, by far the largest amount ever assessed by the Federal Election Commission, as a result of illegal campaign contributions. Freddie Mac was accused of illegally using corporate resources between 2000 and 2003 for 85 fundraisers that collected about $ 1.7 million for federal candidates. Much of

7722-420: The loan in its entirety usually without financial penalty ( prepayment ), the monthly cash flow of an MBS is not known in advance, and an MBS therefore presents a risk to investors. In the United States, the most common securitization trusts are sponsored by Fannie Mae and Freddie Mac , US government-sponsored enterprises. Ginnie Mae , a US government-sponsored enterprise backed by the full faith and credit of

7821-479: The mortgage market, support affordable housing and operate safely and soundly. FHFA director Lockhart transmitted a "notice of establishment," for publication in the Federal Register on September 4, 2008. The notice formally announced the agency's existence and authority to act. On September 7, 2008, FHFA director Lockhart announced he had put Fannie Mae and Freddie Mac under the conservatorship of

7920-637: The most influential action that encouraged the subprime mortgage crisis of 2008 (other than the neglectful actions of banking institutions) was the Financial Services Moderation Act (also called the Gramm–Leach–Bliley Act ). It was signed into law in 1999 by President Clinton , and allowed sole, in-house creation (by solitary banking institutions) of Mortgage-Backed Securities as investment and derivatives instruments. This legislative decision did not just tweak or finesse

8019-602: The national debt ceiling by US$ 800 billion, to a total of US$ 10.7 trillion in anticipation of the potential need for the Treasury to have the flexibility to support the federal home loan banks. On September 7, 2008, the U.S. government took control of both Fannie Mae and Freddie Mac. Daniel Mudd (CEO of Fannie Mae) and Richard Syron (CEO of Freddie Mac) were replaced. Herbert M. Allison , former vice chairman of Merrill Lynch , took over Fannie Mae, and David M. Moffett , former vice chairman of US Bancorp, took over Freddie Mac. On May 8, 2013, Representative Scott Garrett introduced

8118-736: The newly private Fannie Mae and to further increase the availability of funds to finance mortgages and home ownership, Congress then established the Federal Home Loan Mortgage Corporation (Freddie Mac) as a private corporation through the Emergency Home Finance Act of 1970 . The charter of Freddie Mac was essentially the same as Fannie Mae's newly private charter: to expand the secondary market for mortgages and mortgage-backed securities by buying mortgages made by savings and loan associations and other depository institutions. Initially, Freddie Mac

8217-403: The next FHFA head. After Democrats eliminated rules allowing filibusters on executive branch nominations , the U.S. Senate confirmed Watt on December 10, 2013. On December 21, 2018, President Donald Trump designated Comptroller of the currency Joseph Otting to be Acting Director of FHFA upon completion of Director Watt's term, effective January 7, 2019. In April 2019, Mark A. Calabria

8316-457: The non-conforming loan harder to sell (fewer competing buyers); thus it would cost the consumer more (typically 1/4 to 1/2 of a percentage point, and sometimes more, depending on credit market conditions). OFHEO , now merged into the new FHFA , annually sets the limit of the size of a conforming loan in response to the October to October change in mean home price. Above the conforming loan limit,

8415-416: The payments to the investors). To illustrate these concepts, consider a mortgage pool with just three mortgage loans that have the following outstanding mortgage balances, mortgage rates, and months remaining to maturity: The weighted-average maturity (WAM) of a pass-through MBS is the average of the maturities of the mortgages in the pool, weighted by their balances at the issue of the MBS. Note that this

8514-415: The place of federal funds the government provides considerable unpriced benefits to the enterprises. Government-sponsored enterprises are costly to the government and taxpayers. The benefit is currently worth $ 6.5 billion annually." As mortgage originators began to distribute more and more of their loans through private label mortgage-backed securities (MBSs), government-sponsored enterprises (GSEs) lost

8613-445: The position on July 30, 2021. This followed calls from Republican Senators Chuck Grassley and Ron Johnson for her removal in the preceding weeks, and a critical CIGIE report released on April 29, 2021. Mortgage-backed security A mortgage-backed security ( MBS ) is a type of asset-backed security (an " instrument ") which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to

8712-482: The preexisting law, it effectively repealed the Glass-Steagall Act of 1933, the only remaining statutory safeguard poised against the ensuing disaster. Low-quality mortgage-backed securities backed by subprime mortgages in the United States caused a crisis that played a major role in the 2007–08 global financial crisis . By 2012 the market for high-quality mortgage-backed securities had recovered and

8811-517: The process is conducted. Among other things, securitization distributes risk and permits investors to choose different levels of investment and risk. The basics are: While a residential mortgage-backed security (RMBS) is secured by single-family, one- to four-unit real estate, a commercial mortgage-backed security (CMBS) is secured by commercial and multi-family properties, such as apartment buildings, retail or office properties, hotels, schools, industrial properties, and other commercial sites. A CMBS

8910-615: The purchase of mortgages from savings and loan associations and other depository institutions, but without an explicit insurance policy that guaranteed the value of the mortgages. The publicly financed institution was named the Government National Mortgage Association (Ginnie Mae) and it explicitly guaranteed the repayments of securities backed by mortgages made to government employees or veterans (the mortgages themselves were also guaranteed by other government organizations). To provide competition for

9009-412: The sale of private-label securities (PLS) to Fannie Mae and Freddie Mac. Below is a list of the cases, with amounts of any settlements reached in 2013 and 2014. Non-Litigation PLS Settlements Wells Fargo Bank, N.A. $ 335.23 million Upon Lockhart's departure, Edward DeMarco was appointed Acting Director of FHFA on August 25, 2009. On May 1, 2013, President Barack Obama nominated Mel Watt as

9108-437: The second quarter of 2011, there was about $ 13.7 trillion in total outstanding US mortgage debt. There were about $ 8.5 trillion in total US mortgage-related securities, with about $ 7 trillion of that securitized or guaranteed by government-sponsored enterprises or government agencies, and the remaining $ 1.5 trillion being pooled by private mortgage conduits. As of 2021, the volume of mortgage-backed securities (MBS) outstanding in

9207-730: The selfsame entity. In other words, the Mortgage-Backed Security could probably not have existed at this time (without a little tweaking of the laws). As part of the New Deal following the Great Depression , the US federal government created the Federal Housing Administration (FHA) with the National Housing Act of 1934 to assist in the construction, acquisition, and rehabilitation of residential properties. The FHA helped develop and standardize

9306-420: The start of a sharp deterioration in mortgage underwriting standards. The growth of PLS, however, forced the GSEs to lower their underwriting standards in an attempt to reclaim lost market share to please their private shareholders. Shareholder pressure pushed the GSEs into competition with PLS for market share, and the GSEs loosened their guarantee business underwriting standards in order to compete. In contrast,

9405-436: The wholly public FHA/Ginnie Mae maintained their underwriting standards and instead ceded market share. The growth of private-label securitization and lack of regulation in this part of the market resulted in the oversupply of underpriced housing finance that led, in 2006, to an increasing number of borrowers, often with poor credit, who were unable to pay their mortgages—particularly with adjustable rate mortgages (ARM) —caused

9504-463: Was a profit center for US banks. Most bonds backed by mortgages are classified as an MBS. This can be confusing because a security derived from an MBS is also called an MBS. To distinguish the basic MBS bond from other mortgage-backed instruments, the qualifier pass-through is used, in the same way that "vanilla" designates an option with no special features. Subtypes of mortgage-backed security include: Pass-through securities are issued by

9603-532: Was confirmed to a five year term as director. At the time of his confirmation, the chair of the Senate Banking Committee said that Calabria had committed to working with the Senate toward ending the conservatorship over Fannie Mae and Freddie Mac. In the Supreme Court case Collins v. Yellen , the Supreme Court ruled that, as they had in Seila Law LLC v. Consumer Financial Protection Bureau for

9702-473: Was formed, and subjected to oversight by the U.S. Department of Housing and Urban Development (HUD). Separately, The Federal Housing Finance Board (FHFB) was created as an independent agency to take the place of the FHLBB, to oversee the 12 Federal Home Loan Banks (also called district banks). In 1995, Freddie Mac began receiving affordable housing credit for buying subprime securities, and by 2004, HUD suggested

9801-659: Was owned by the twelve Federal Home Loan Banks and governed by the Federal Home Loan Bank Board . In 1989, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") revised and standardized the regulation of Fannie Mae and Freddie Mac. It also severed Freddie Mac's ties to the Federal Home Loan Bank System. The Federal Home Loan Bank Board (FHLBB) was abolished and replaced by different and separate entities. An 18-member board of directors for Freddie Mac

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