20.3 - Mortgage Underwriting & Institutions Flashcards
(21 cards)
What does “GSE” stand for in housing finance?
Government-Sponsored Enterprise — a privately-owned firm with a federal charter that serves public housing-finance objectives.
What are the two largest mortgage GSEs & their creation years?
Fannie Mae (FNMA) – 1938; Freddie Mac (FHLMC) – 1970.
What is the core mission of Fannie Mae & Freddie Mac?
Buy mortgages from originators, pool them, and fund holdings by issuing debt or securitizing the pools.
What is a conforming mortgage?
A loan that meets GSE underwriting & size limits, making it eligible for purchase by Fannie or Freddie.
Define a jumbo mortgage.
A loan whose balance exceeds local conforming limits; deemed non-conforming and ineligible for GSE purchase.
What is the organizational evolution of Fannie/Freddie?
Started as government agencies → privatized into GSEs with shareholder ownership but federal charters.
What happened during the 2008 conservatorship?
Facing insolvency, both GSEs were placed under government conservatorship (still ongoing) to protect the mortgage market.
What are the key public-policy obligations in a GSE charter?
Promote liquidity, stability & affordability in housing finance while adhering to safety-and-soundness standards.
What is mortgage securitization?
Pooling many mortgages and issuing a mortgage-backed security (MBS) whose cash flows come from the underlying loans.
Why can MBS cash-flows be “unsteady”?
Defaults, payment delays, borrower prepayments, and foreclosures disrupt the timing/amount of cash received.
What is the primary concern for investors comparing MBS to U.S. Treasuries?
Cash-flow volatility (timing & credit risk) makes MBS less predictable than Treasury debt.
What is the purpose & year of creation of Ginnie Mae (GNMA)?
Formed in 1968 to guarantee timely payment of principal & interest on qualifying MBS, enhancing their safety and liquidity.
How does a GNMA guarantee affect MBS attractiveness?
Eliminates payment-timing risk, making MBS more stable/safe → broader investor demand → greater mortgage-market liquidity.
Do Ginnie-guaranteed MBS follow standards?
Yes. GNMA, like Fannie/Freddie, sets eligibility criteria for the mortgages it will guarantee.
What is the founding year & purpose of the Federal Home Loan Bank (FHLB) System?
Created in 1932 to supply low-cost advances (loans) to thrifts and mortgage lenders, acting as a lender of last resort.
How does the FHLB System support today’s lenders?
Provides funding to ~7,300 mainly smaller/regional institutions, stabilizing their liquidity for mortgage lending.
Why were FHLBs conceived as a counterpart to the Federal Reserve?
To serve mortgage-oriented lenders (thrifts) much like the Fed backs commercial banks—ensuring system-wide liquidity.
What is the link between GSE purchases and conforming loan rates?
By buying conforming loans & securitizing them, GSEs lower funding costs → borrowers get lower interest rates versus jumbo loans.
Describe “pooling and selling” in one sentence.
Originators sell loans to a GSE, which pools thousands of similar mortgages and either issues agency debt or creates an MBS.
What is the big-picture goal of all three support structures (GSEs, GNMA, FHLB)?
Increase liquidity, reduce risk, and make mortgage credit more accessible & affordable across the U.S.
