Bhutta, Neil, and Daniel Ringo (2016). “Changing FHA Mortgage Insurance Premiums and the Effects on Lending,” FEDS Notes 2016-09-29. Board of Governors of the Federal Reserve System
Dechario, Tori, Patricia Mosser, Joseph Tracy, James Vickery and Joshua Wright (2010) “A Private Lender Cooperative Model for Residential Mortgage Finance”, New York Federal Reserve Staff Report 466
Frame, Scott, Andreas Fuster, Joseph Tracy and James Vickrey (2015) “The Rescue of Fannie Mae and Freddie Mac”, New York Federal Reserve Staff Report 719
Goodman, Laurie (2017) “Quantifying the Tightness of Mortgage Credit and Assessing Policy Actions”, Urban Institute Working Paper
Kaul, Karan and Lori Goodman (2016) “Nonbank Servicer Regulation: New Capital and Liquidity Requirements Don’t Offer Enough Loss Protection”, Urban Institute
McCue, Daniel and Christopher Herbert (2016) “Updated Household Projections, 2015-2035”, Harvard Joint Center for Housing Studies
IMF and Johns Hopkins University. All opinions expressed here are those of the author and are not those of the IMF and are not IMF policy. The author would like to thank Ulric Eriksson von Allman, Heedon Kang and Prakash Loungani for helpful comments. Please contact the author at firstname.lastname@example.org.
See Frame, Fuster, Tracy and Vickrey, “The Rescue of Fannie Mae and Freddie Mac”, New York Federal Reserve Staff Report 719, March 2015. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr719.pdf
GSE’s are corporations created by the Federal government. There are several such institutions in the U.S. but for purposes of this paper the term denotes shorthand for Fannie Mae and Freddie Mac.
The Federal Housing Administration is a government agency that sets standards for mortgage underwriting in a manner like the GSE’s. Unlike the GSE’s, FHA does not securitize mortgages, this function is carried out by Ginnie Mae. Another key distinction is that Ginnie Mae securities carry the full faith and credit of the U.S. Government, unlike the securities issued by the GSE’s.
Beginning in 2013 the GSE’s began to issue securities that share credit risk with investors, see section IV below.
A mortgage-backed security is a form of an asset-backed security that is collateralized by a pool of mortgages.
The new development is known as the Common Securitization Platform (CSP). It is envisioned that many financial institutions will eventually be able to utilize the platform to securitize mortgages, but for now the primary focus is on the GSEs. See https://www.fhfa.gov/PolicyProgramsResearch/Policy/Pages/Single-Security.aspx
See various reports at http://www.finra.org/industry/trace/structured-product-activity-reports-and-tables
See, for example, http://www.nationalmortgagenews.com/news/origination/small-lenders-worry-gse-moves-will-leave-them-behind-1088772-1.html and http://www.aei.org/publication/the-troublesome-competition-among-fannie-mae-freddie-mac-and-fha/
A loan level price adjustment is an adjustment made to the g-fee that can be based on borrower characteristics such as FICO score and down payment, but can also be lender-dependent based on variables such as prepayment speeds.
A pool of loans that are delivered to a GSE can have various note rates. These pools are then swapped for securities with coupons that reflect the average note rates, minus the g-fee (including llpa’s). MBS securities are issued only in half-percent increments (such as 3.5% or 4.0%), so the g-fee is adjusted according to which coupon is chosen, in exchange for a one-time cash payment. For example, if a pool is delivered with average loan notes of 4.25% and the g-fee is 50 bps, then the lender has to decide whether to receive an MBS with a 3.5% or a 4.0% coupon. In the first case, the g-fee is “bought up” to 75 bps in exchange for a cash payment from the GSE. In the latter case the g-fee is “bought down” to 25 bps, in exchange for making a payment to the GSE. The “buy-up buy-down” grids determine the size of the payment in either direction, and are a key source of price competition between the two entities.
SIFMA has background on the structured market for mortgages at: http://www.investinginbonds.com/learnmore.asp?catid=11&subcatid=56&id=3103
This was the so-called Private Label Security (PLS) market, which was the core of the mortgage market problems that triggered the global financial crisis.
A mortgage is either Government i.e. FHA, Veterans’ Administration (VA) or Farm Service Agency (FSA) or Conventional. A conventional mortgage is “Conforming” if it meets the standards required to be guaranteed by a GSE. Most conventional non-conforming mortgages are so-called “Jumbos” that exceed the GSE caps. Most of these are held on bank balance sheets. For purposes of this note we look primarily at the conventional conforming market, and FHA.
The gap between the FHA share of near 18% of mortgages and the 33% Ginnie share of securitization reflects many factors. Of most importance are two: First, about 25% of mortgages are not securitized, and most of these are conventional mortgages. Second, Ginnie Mae securitizes other mortgages besides FHA, notably Veterans Administration (VA) and Rural Housing Service (RHS). FHA comprises about 2/3 of nonconventional mortgage originations.
Mortgage banks are monoline institutions that do not take deposits and are funded through wholesale markets or other sources of private capital. They are state-licensed and also subject to the qualified mortgage (QM) and consumer protection regulations issued by the CFPB.
https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/08042016_cfpb_Mortgage_Servicing_Executive_Summary.pdf Note the rule was proposed in 2012 and lenders immediately began work to implement it.
A mortgage servicing right is a contractural obligation to service a mortgage in exchange for a fee. MSR’s face both prepayment risk and credit risk as the cost of servicing mortgages rises sharply if the borrower becomes delinquent
For basic background on mortgage securitization see: https://www.fhfa.gov/SupervisionRegulation/Documents/Securitizations_Module_Final_Version_1.0_508.pdf
A summary of various legislative proposals can be found here: http://www.housingwire.com/ext/resources/files/Editorial/GSELegislativeProposalsComparison.pdf A recent proposal released by the Mortgage Bankers Association also calls on the formation of new entities to insure and issue MBS: https://www.mba.org/2017-press-releases/april/mba-offers-detailed-gse-reform-proposal See also https://www.imf.org/external/pubs/cat/longres.aspx?sk=43057.0 and https://www.imf.org/external/pubs/ft/scr/2015/cr15169.pdf for the IMF’s suggestions regarding the role of mortgage finance in the area of systemic risk oversight
Not every segment of society has been successful in attaining homeownership. According to the HMDA dae share of home purchase mortgages for Non-Hispanic Whites rose from 57.1% in 2004 to 68.1% in 2015, while that for Hispanics edged up from 7.6% to 8.3%. Over the same period, the share going to African American households declined from 7.1% to 5.5%.