It is the way to the small regional bank to lend the mortgage to the customers without having the tension that whether the borrower will be able to repay the loan or not. There is a role of bank to act as an intermediary between the investment markets and the homebuyer. This type of security is used to give the principal payments and interest from the pool of mortgage to the shareholders. These types of securities are issues and guaranteed by Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (GNMA), etc. (http://www.sec.gov, 2014). Mortgage Securities are traded in terms of average life rather than the maturity dates like other kind of securities.
Creation of Mortgage Backed Security
The steps involved in creating the mortgage-backed security are as follows. In the first step, the lender of the mortgage extends the loan to the homebuyer. The mortgage is then sold by the lender to the government sponsored enterprises like Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (GNMA), etc. or the private home agency or a bank. The lender services the mortgage as it has to do, and this process is unknown to the homebuyer. The private entity to the bank takes few numbers of loans and put them into a pool (http://www.sec.gov, 2014). There can by any number of loans in a pool, i.e. from few loans to the thousands of loans. The loans pooled in a pool should have same characteristics. When there is a payment of the loan from the homebuyer, there is the generation of cash flow, which is regular. From the regular cash flow, the private agency or bank sells claims to the investors in the form of securities like bonds. When there is initial sale, there is the trade of the securities in the open market (http://www.sec.gov, 2014). With this process, there is the transfer of interest and principal received from the mortgage from the servicer to the bondholder. This is the type of security, which is very much regulated by the government. This is the functioning of the mortgage securities market. Regulation of Mortgage Backed Securities Market The home loan sponsored securities issues by the legislature-supported ventures are highly rate AAA. Ginnie Mae is the part of U.S. HUD (U.S. Department of Housing and Urban Development), and it is operated and owned by the U.S. government (http://www.freddiemac.com, 2014). The capital and the interest of the mortgage-backed security are supported by the credit and full confidence of the US government and there is the high quality of these bonds, which are as same as that of treasure securities. FNMA and Freddie Mac have come in September 2008, in the government conservatorship; the government has pledged to support the shortfall in the balance sheet of these agencies. It has created the high quality of the bonds issued by them. These agencies are operated by the federal housing finance agency. The US government has ensured that both the entities will fulfill their all the obligation and will have a positive net worth. This has prompted the high credit nature of home loan upheld securities issued by FNMA and Freddie Mac (http://www.freddiemac.com, 2014). Previously FNMA and Freddie Mac were not guaranteed by the US, then the people of the nation has a belief that the government would not let FNMA and Freddie Mac to fall because there is much importance to the mortgage origination in US. It has gained proper response from then nation, and it was proved also, when the government fell, but it did not allow FNMA and Freddie Mac to fall (http://www.freddiemac.com, 2014). This created the interest in the mind of people regarding the …show more content…
The ownership was increased to highest peak of 69.2 % in 2004 from 64 % in 1994. There was a rise in the consumer spending and the rise of pricing of houses, which has created the increase in the value of home by 124 % between the period 1997 and 2006 (http://www.stat.unc.edu, 2014). Some of the homeowners took the advantage of higher value of property of their home by refinancing the home with the lower interest rates, and took the advantage of second mortgage by the benefit to the use of consumer
Creation of Mortgage Backed Security
The steps involved in creating the mortgage-backed security are as follows. In the first step, the lender of the mortgage extends the loan to the homebuyer. The mortgage is then sold by the lender to the government sponsored enterprises like Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (GNMA), etc. or the private home agency or a bank. The lender services the mortgage as it has to do, and this process is unknown to the homebuyer. The private entity to the bank takes few numbers of loans and put them into a pool (http://www.sec.gov, 2014). There can by any number of loans in a pool, i.e. from few loans to the thousands of loans. The loans pooled in a pool should have same characteristics. When there is a payment of the loan from the homebuyer, there is the generation of cash flow, which is regular. From the regular cash flow, the private agency or bank sells claims to the investors in the form of securities like bonds. When there is initial sale, there is the trade of the securities in the open market (http://www.sec.gov, 2014). With this process, there is the transfer of interest and principal received from the mortgage from the servicer to the bondholder. This is the type of security, which is very much regulated by the government. This is the functioning of the mortgage securities market. Regulation of Mortgage Backed Securities Market The home loan sponsored securities issues by the legislature-supported ventures are highly rate AAA. Ginnie Mae is the part of U.S. HUD (U.S. Department of Housing and Urban Development), and it is operated and owned by the U.S. government (http://www.freddiemac.com, 2014). The capital and the interest of the mortgage-backed security are supported by the credit and full confidence of the US government and there is the high quality of these bonds, which are as same as that of treasure securities. FNMA and Freddie Mac have come in September 2008, in the government conservatorship; the government has pledged to support the shortfall in the balance sheet of these agencies. It has created the high quality of the bonds issued by them. These agencies are operated by the federal housing finance agency. The US government has ensured that both the entities will fulfill their all the obligation and will have a positive net worth. This has prompted the high credit nature of home loan upheld securities issued by FNMA and Freddie Mac (http://www.freddiemac.com, 2014). Previously FNMA and Freddie Mac were not guaranteed by the US, then the people of the nation has a belief that the government would not let FNMA and Freddie Mac to fall because there is much importance to the mortgage origination in US. It has gained proper response from then nation, and it was proved also, when the government fell, but it did not allow FNMA and Freddie Mac to fall (http://www.freddiemac.com, 2014). This created the interest in the mind of people regarding the …show more content…
The ownership was increased to highest peak of 69.2 % in 2004 from 64 % in 1994. There was a rise in the consumer spending and the rise of pricing of houses, which has created the increase in the value of home by 124 % between the period 1997 and 2006 (http://www.stat.unc.edu, 2014). Some of the homeowners took the advantage of higher value of property of their home by refinancing the home with the lower interest rates, and took the advantage of second mortgage by the benefit to the use of consumer