CREATING THE NATIONAL
MORTGAGE MARKET
History and Players
By Melissa McMurphy and Trent Striplin
OVERVIEW OF THE MORTGAGE MARKET
Early developments of the first mortgages.
 Mortgages before the World War I and Great
Depression.
 The effect of FDR’s New Deal on mortgages.
 World War II.
 Government supported lending agencies.

Fannie Mae
 Freddie Mac
 Ginnie Mae


The present state of the mortgage market.
MEDIEVAL MORTGAGES
Began in the 1100’s in England under common
law.
 Based on conditions between lender and borrower
 Early lenders controlled the borrower’s land
 Sale of livestock and crops used for repayment
 Lender could end the agreement at anytime and
retain the land.
 Laws were passed giving full rights to the
borrower – equity redemption.
 Law changed again giving lender ownership of
land, but borrower rights to sell the land to pay
mortgage.

PRE-WORLD WAR
Immigrants to the United States brought the
ideas of mortgages.
 Had to put %50 down on a 5 year mortgage
 Non-amortizing loans with a balloon payment
due when the term was up.
 If remaining %50 could not be paid, borrowers
forced to refinance.
 Lasted until the Great Depression.

GREAT DEPRESSION
Mortgages collapsed with no money to repay
loans.
 Mortgage companies lacked funds to lend out.
 Homes foreclosed as system collapsed
 Led to FDR’s solution of the New Deal.

NEW DEAL

Home Owners Loan Corporation – 1933
Replaced existing mortgages of homeowners who
defaulted on their mortgages
 15 year loans, fully amortized


Federal Housing Administration – 1934
Insured lending agencies against borrower defaults.
 As a result, more loans were awarded
 Started 30 year fixed rate loan.
 Smaller payments and more stability


Problems Arise
Limited amount of funds to loan to borrowers
 Varying interest rates across the United States

FEDERAL NATIONAL MORTGAGE
ASSOCIATION – FANNIE MAE
Developed in 1938 by FDR and Congress to fix
problems of earlier mortgage markets.
 Brought more money to the mortgage market.
 Bought FHA mortgages and sold them as
securities in financial markets.
 Created the secondary mortgage market.
 Standardized loan terms, interest rates, and
underwriting regulations.
 Lenders had to follow the regulations if they
wanted to participate in the secondary market.
 Converted into private shareholder owned
corporation.

WORLD WAR II
In the mid 1940s, veterans were returning home
to the US, entering the workforce, and needing
homes.
 In 1944, the Veterans Administration was given
the ability to insure low-interest, no down
payment mortgages by private lenders to
veterans.
 Economy boomed, as did the demand for
mortgages.

BABY BOOMERS

When baby boomers began entering the
workforce, there was a shift in social norms that
created greater demand for mortgages.
Double income family became very common, and they
began to demand bigger and more expensive homes.
 It was possible that it was cheaper to buy than rent.
 Senior citizens began to live alone.
 Increase in divorce rate created new households.

GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION - GINNIE MAE
Developed in 1968 under the Department of
Housing and Urban Development.
 Only federally guaranteed mortgage security.
 Provides a computer platform that pools
mortgages into bonds
 Guarantees timely payment of principle and
interest; government will pay investors.
 Holds the same zero risk weight as government
backed bonds and securities.

GINNIE MAE CONTINUED



1. GNMA I securities. A GNMA I (Ginnie Mae one)
represents a pool of mortgages all issued by one issuer, all
with the same interest rate, and all issued within a three
month period. This is a basic pass-through security.
2. GNMA II securities. A GNMA II (Ginnie Mae two) is also
a pass-through security, except that the collateral can have
a range of interest rates and can include mortgages issued
by more than one issuer. In this case, the service fees (see
below) vary, so that the new interest rate being paid to the
investor from each mortgage is the same.
3. GNMA "REMIC" securities. A REMIC (Real Estate
Mortgage Investment Conduit), also known as a CMO, is
an additional level of securitization. The collateral pool for
a REMIC consists not of mortgages, but of mortgagebacked securities (such as GNMA I, GNMA II, or
previously issued REMICs).
FEDERAL HOME LOAN MORTGAGE
CORPORATION - FREDDIE MAC
Developed as a competitor to Fannie Mae by
congress under the Emergency Home Finance
Act of 1970.
 Created to increase the supply of mortgage funds
available to commercial banks, savings and loan
institutions, credit unions and other mortgage
lenders.
 Buys mortgages on the secondary mortgage
market, pools them and sells them as securities.
 Had a high rating, but were not government
backed, so subject to default risk.

MORTGAGE RATES
CONCLUSION
Came from England
 Changed During the:

Great Depression
 World Wars
 Baby Boom


Government Sponsored Securities
Fannie Mae
 Freddie Mac


Government Backed Securities

Ginnie Mae
QUESTIONS?