Question

Explain how the Mortgage Secondary Market (Securitization) Works. Make sure to include the major plays and size of the secondary market, the pros and cons, Mortgage characteristics, and 3 types of Mortgage Backed Securities. Should we continue to have Frannie and Freddie? What should the role of our government be in securing them?

Answer 1

The current size of the secondary mortgage market is some where near to $13.1 trillion, major part of which account for home mortgage.The popular secondary mortgages market plays a crucial role in developing a healthy housing and mortgage financial market.

Securitization process by combing different mortgages in a pool to find the value of security .In actual a bond is created which value derived from back securities. one of the simplest form of MBS is known as  “passthrough.” . Investors purchase the rights to a share of the proceeds from the mortgages in the pool Over the life . the investors get their payments from the payments of borrower as their share of the pool.

Good about : create big secondary market for mortgage

High return

Secured with asset

Generally Fixed income security

Bad About : Risk of repayment

Complex structure

Types of MBS: pass-throughs or participation certificates (PCs), Collateralized mortgage obligation , and Bond Obligatrions

No, we shouldn't continue to have Frannie and Freddie. as the primary function of one of the oldest financial institution of country Fannie Mae and Freddie Mac is to generate liquidity to the nation’s mortgage finance system.

In 1992 Congress established the “affordable housing goals,” which had created a big problem for the company. The government should support in bringing private capital back into the country for stable  mortgage market in long run.