The Primary and Secondary Markets PDF

The Primary and 3 Secondary Markets Learning Objectives After completing this lesson, students should be able to... Describe how lending takes place in the primary market Discuss the effect of real estate cycles on real estate mark...

The Primary and 3 Secondary Markets Learning Objectives After completing this lesson, students should be able to... Describe how lending takes place in the primary market Discuss the effect of real estate cycles on real estate markets Explain the relationship between the primary and secondary markets, including how mort- gage funds flow from investors to lenders to home buyers List the major secondary market entities and explain the concept of a government-sponsored enterprise (GSE) Explain mortgage-backed securities and their function in the secondary market Discuss the importance of underwriting guidelines established by GSEs Give examples of the benefits of GSEs and their efforts to increase the availability of mort- gage funds Summarize the most recent developments with the GSEs in the wake of the 2007 mortgage and financial crisis Suggested Lesson Plan 1. Give students Exercise 3.1 to review the previous chapter, “Federal Fiscal and Monetary Policy.” © 2018 Rockwell Publishing  Financing Residential Real Estate Instructor Materials 2. Provide a brief overview of Chapter 3, “The Primary and Secondary Markets,” and re- view the learning objectives for the chapter. 3. Present lesson content: The Two Mortgage Markets Primary Market – Local financing – Real estate cycles – Addressing the problem of cycles EXERCISE 3.2 The primary market and real estate cycles Secondary Market – Buying and selling loans – Mortgage-backed securities – Effects of the secondary market EXERCISE 3.3 Selling loans on the secondary market Fannie Mae and Freddie Mac – Creation of the entities – GSE status – Standardized documents and underwriting – The GSEs and the economic crisis 4. End lesson with Chapter 3 Quiz. Chapter 3 Outline: The Primary and Secondary Markets I. The Two Mortgage Markets A. Primary market: financial arena in which home buyers apply for loans and lenders originate them 1. Traditionally a local market, made up of lending institutions 2. Problem: Local market is subject to real estate cycles a. When business is booming, local community’s demand for mortgage funds may exceed local lenders’ supply b. In an economic slump, local lenders’ supply of mortgage funds may exceed local demand c. Secondary market eases problem of real estate cycles EXERCISE 3.2 The primary market and real estate cycles 2  Chapter 3: The Primary and Secondary Markets B. Secondary market: national market in which mortgage loans are bought and sold 1. Mortgage loans can be sold like other types of investments a. Present value of loan based on yield currently available on investments of similar quality (same degree of risk) b. Lender may sell loans to other lenders or investors in another part of the country, or to a secondary market entity 2. Mortgage-backed securities a. Government-sponsored entity buys many mortgages and pools them together; pool is pledged as collateral for the securities b. Investors who buy mortgage-backed securities receive monthly payments of principal and interest from entity as pooled loans are repaid 3. Effects of the secondary market a. Makes funds available for mortgage loans nationwide b. Promotes home ownership and real estate investment c. Moderates adverse effects of local real estate cycles d. Increases flow of mortgage funds i. GSE uses funds from sale of securities to buy more mortgage loans from primary market ii. Primary market lender uses funds from sale of loans to make more loans to borrowers EXERCISE 3.3 Selling loans on the secondary market II. Fannie Mae and Freddie Mac A. Creation of the entities 1. Fannie Mae (Federal National Mortgage Association) a. U.S. government created Fannie Mae in 1938 b. Original purpose: buying FHA-insured loans from lenders c. Reorganized as a private corporation in 1968, but remains a GSE now super- vised by the Federal Housing Finance Agency (FHFA) d. When FNMA became a private corporation, Congress created a new wholly owned government corporation, the Government National Mortgage Associa- tion, or Ginnie Mae i. Ginnie Mae is an agency within HUD ii. Ginnie Mae guarantees securities backed by FHA and VA loans, but does not purchase loans or sell MBSs 2. Freddie Mac (Federal Home Loan Mortgage Corporation): GSE created in 1970 to help savings and loans by buying conventional loans 3  Financing Residential Real Estate Instructor Materials B. GSE Status 1. Fannie Mae and Freddie Mac limited to residential mortgages and mortgage- backed securities 2. Required to meet annual affordable housing goals 3. Supervised by the FHFA C. MBS programs 1. First mortgage-backed securities program started by Ginnie Mae in 1970, backed by pools of FHA and VA loans 2. Fannie Mae and Freddie Mac soon followed, issuing MBSs backed by pools of conventional mortgages 3. Attractive to investors because MBSs were guaranteed by secondary market en- tity that issued them D. Standardized documents and underwriting 1. Loans sold to GSEs must meet their underwriting guidelines, which are standard- ized across the country 2. GSEs’ rules give MBS investors confidence in loan quality 3. Lenders are more willing to make specific types of loans once Fannie Mae and Freddie Mac have decided to purchase them 4. GSEs and subprime loans a. GSEs previously purchased only prime loans b. GSEs began to loosen underwriting standards and to purchase A-minus loans to compete in the market and meet affordable housing goals E. The GSEs and the Economic Crisis 1. Federal conservatorship a. In 2008, Congress put GSEs under regulation of the FHFA as part of a plan to address fallout from the subprime mortgage crisis b. Later that year, the FHFA took control of both GSEs and put them under fed- eral conservatorship 2. Federal guaranty a. Previously, GSEs had guaranteed their MBSs, but the federal government had no legal obligation to back up those guaranties b. Under conservancy, the federal government now guarantees mortgage-backed securities issued by Fannie Mae and Freddie Mac 4  Chapter 3: The Primary and Secondary Markets Exercises EXERCISE 3.1 Review exercise To review Chapter 2, “Federal Fiscal and Monetary Policy,” have students indicate whether the following terms relate to monetary policy or to fiscal policy. 1. Open market operations 4. Federal deficit 2. Federal funds rate 5. Reserve requirements 3. Mortgage interest deductions Answers: 1. MONETARY POLICY. Through open market operations (buying and selling govern- ment securities), the Federal Reserve can directly affect the money supply by either putting money into circulation or taking it out. 2. MONETARY POLICY. The federal funds rate is one of two interest rates that the Federal Reserve influences as part of its monetary policy. 3. FISCAL POLICY. Tax deductions, such as the one for home mortgage interest, af- fect the government’s revenues. 4. FISCAL POLICY. Raising revenue, spending money, and managing debt (the federal deficit) are all part of the government’s fiscal policy. 5. MONETARY POLICY. Reserve requirements limit the amount of money in circula- tion by forcing banks to keep a certain percentage of deposits on hand. EXERCISE 3.2 The primary market and real estate cycles Read the following True/False questions aloud to students and have them jot their an- swers down on a piece of paper; discuss the answers together. 1. The primary market is where mortgage lenders make loans to home buyers. 2. At one time, the primary market was a national market, but that’s no longer the case. 3. Before the primary market was established, secondary market lenders were often severely affected by local real estate cycles. 5  Financing Residential Real Estate Instructor Materials 4. When depositors withdraw their funds from savings accounts and put them into competing investments that offer higher returns, it’s called disintermediation. 5. Real estate cycles result from changes in the supply of and the demand for mort- gage loan funds. Answers: 1. TRUE. Someone who wants to borrow money to finance the purchase of a home applies to a lender in the primary market. 2. FALSE. The primary market was originally strictly local, consisting of local lenders that used the savings deposits of members of the community to fund mortgage loans for the purchase of property in the community. Now there are many nation- wide, regional, and online mortgage lenders. 3. FALSE. It was primary market lenders that were severely affected by local real estate cycles, a problem that development of the secondary market significantly alleviated. 4. TRUE. Disintermediation can reduce the supply of funds that local financial institu- tions have available for mortgage lending. 5. TRUE. Imbalances in the supply of and the demand for mortgage funds cause a local real estate market to go through active periods followed by slumps. These changes are called real estate cycles. EXERCISE 3.3 Selling loans on the secondary market Discussion Prompt: A home buyer obtains an adjustable-rate mortgage to finance her purchase. What factors will affect whether the lender can sell this mortgage on the secondary market? Once a loan is purchased by a GSE, what does the GSE do with it? What does a GSE usually do with money it earns from the sale of mortgage-backed securities? What does a primary market lender generally do with money it earns by selling loans on the secondary market? Analysis: It will be easiest to sell the loan if the borrower, the property, and the loan terms meet the underwriting guidelines set by the GSEs, Fannie Mae and Freddie Mac. (Fannie Mae and Freddie Mac may be willing to buy a loan that doesn’t follow the standard guidelines, but the lender will have to negotiate to arrange the sale.) If a loan is purchased by Fannie Mae or Freddie Mac, it will add it to a pool of other mortgage loans that meet the underwriting guidelines, issue mortgage- backed securities based on that pool, and then sell the securities to investors. 6  Chapter 3: The Primary and Secondary Markets A GSE usually takes the money it receives from the sale of mortgage-backed securities and uses it to buy more loans from primary market lenders. A primary market lender usually takes the money it receives from the sale of loans on the secondary market and uses it to make more loans to home buyers. 7  Financing Residential Real Estate Instructor Materials Chapter 3 Quiz 6. The return on a mortgage-backed security usu- 1. Periodic changes in the level of activity in a ally takes the form of: local real estate market are called: A. annual dividend payments A. disintermediation B. monthly interest payments B. capital turnover C. annual guaranty fees C. real estate cycles D. monthly principal and interest payments D. appreciation 7. The rules lenders apply when qualifying loan 2. A GSE usually subtracts which of the following applicants are called: from a loan payment, before passing it along to the investor? A. secondary market rules B. underwriting guidelines A. Guaranty fee C. diversification B. Origination fee D. uniform market standards C. Discount point D. Buydown 8. Which of the following is true of the secondary market? 3. Mortgage-backed securities: A. It promotes home ownership and invest- A. are issued by lenders ment B. help provide funds for mortgage lending B. It provides funds for home loans C. raise the cash that finances the federal C. It stabilizes the primary market deficit D. All of the above D. All of the above 9. The underwriting guidelines established by the 4. All of the following statements are true except: GSEs: A. GSEs were created by the federal govern- A. have a minimal impact on lending standards ment in the primary market B. GSEs are owned by private stockholders B. have a significant impact on lending stan- C. GSEs are supervised by HUD dards in the primary market D. GSEs are supervised by the FHFA C. provide lenders with sample forms and standards 5. The only secondary market entity that does not D. None of the above purchase conventional loans is: A. FNMA 10. When a lender keeps its own mortgage loan B. Freddie Mac investment rather than selling it on the second- C. GNMA ary market, this is known as a: D. Federal National Mortgage Association A. mortgage guaranty B. portfolio loan C. security D. conventional loan 8  Chapter 3: The Primary and Secondary Markets 11. Mortgage-backed securities are attractive to 15. Freddie Mac’s original purpose was to: investors because they: A. aid banks that were failing as a result of the A. are more liquid than mortgages Depression B. can be purchased in comparatively small B. buy FHA and VA loans denominations C. issue mortgage-backed securities based on C. Both A) and B) non-conventional loans D. Neither A) nor B) D. assist savings and loan associations that were hit by the 1969 recession 12. Fannie Mae and Freddie Mac do all of the fol- lowing except: A. issue mortgage-backed securities B. issue private-label securities C. help increase the availability of mortgage funds nationwide D. pool loans together for resale on the second- ary market 13. All of the following statements are true, except: A. Fannie Mae and Freddie Mac are only allowed to invest in residential mortgage assets B. Ginnie Mae is a government-owned corpo- ration C. Fannie Mae and Ginnie Mae purchase FHA and VA loans D. Ginnie Mae has a greater impact on the mortgage industry than Fannie Mae and Freddie Mac 14. In response to the mortgage and foreclosure crisis, the government: A. placed both GSEs into conservatorship B. created a new regulator for the GSEs C. assumed guaranty responsibility for MBSs issued by the GSEs D. All of the above 9  Financing Residential Real Estate Instructor Materials Answer Key 1. C. Ups and downs in the level of activ- 8. D. The secondary market promotes home ity in a local real estate market, where ownership and investment in real a boom is followed by a slump, are estate by making funds available for called real estate cycles. These can mortgage loans. It also moderates the have a significant impact on the avail- adverse effects of real estate cycles, ability of funds for lending. making the primary market more stable. 2. A. In exchange for the guaranty on a mortgage-backed security, the issuing 9. B. The underwriting guidelines set by the GSE subtracts a guaranty fee before GSEs have had a tremendous impact passing payments along to the investor. on the primary market. Since the GSEs will not buy loans that do not follow 3. B. The GSEs issue MBSs, as do some the guidelines, lenders are motivated private companies; lenders do not. to make loans according to these stan- Treasury securities are sold to finance dards. the deficit. 10. B. If a lender keeps a mortgage as part of 4. C. Although the GSEs were originally su- its own investments until the loan is pervised by HUD, in 2008 the federal repaid, the loan is known as a portfolio government created a new regulatory loan. agency to supervise them, the Federal Housing Finance Agency or FHFA. 11. C. Mortgage-backed securities are con- siderably more liquid than mortgages 5. C. Both Fannie Mae and Freddie Mac are and investors can purchase securities authorized to purchase FHA, VA, and in comparatively small denominations. conventional loans. Ginnie Mae is not. 12. B. Mortgage-backed securities are is- 6. D. An MBS investor receives monthly sued by Fannie Mae and Freddie Mac. payments of principal and interest as Private-label securities are issued by borrowers repay the loans in the pool. private firms that buy and pool mort- gage loans. 7. B. Underwriting guidelines are the rules applied when a loan applicant is being 13. D. Because Fannie Mae and Freddie Mac qualified by a lender. The GSEs have can buy conventional loans in addi- established their own underwriting tion to FHA and VA loans, they have a guidelines. greater impact on the mortgage indus- try than Ginnie Mae. 10  Chapter 3: The Primary and Secondary Markets 14. D. In 2008, the federal government imple- mented all of the activities listed, in an effort to stabilize the GSEs and pre- vent their failure. 15. D. The Federal Home Loan Mortgage Corporation was created to assist sav- ings and loan associations that were hit hard by a recession in 1969 and 1970. 11  Financing Residential Real Estate Instructor Materials PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. Financing Residential Real Estate Lesson 3: The Primary and Secondary Markets © 2018 Rockwell Publishing Introduction This lesson will cover: ⚫ primary vs. secondary mortgage markets ⚫ primary market lenders and funding of mortgage loans ⚫ sale of loans on secondary market ⚫ mortgage-backed securities ⚫ government-sponsored enterprises and their role in the mortgage industry © 2018 Rockwell Publishing Introduction Residential mortgage industry made up of: ⚫ financial institutions ⚫ private companies ⚫ government-sponsored enterprises ⚫ other investors © 2018 Rockwell Publishing 12  Chapter 3: The Primary and Secondary Markets Two Mortgage Markets Industry is divided into two “markets” that supply funds for mortgage loans. Primary market: market where lenders make loans to home buyers. Secondary market: market where lenders sell their loans to investors. © 2018 Rockwell Publishing Primary Market In primary market, home buyers apply for mortgage loans and lenders originate them. Loan origination involves: ⚫ processing application ⚫ approval decision ⚫ funding loan © 2018 Rockwell Publishing Primary Market Primary market was originally local, made up of community financial institutions. More complicated now, due to developments such as: ⚫ interstate banking ⚫ online lenders Local model still useful in understanding primary and secondary markets. © 2018 Rockwell Publishing 13  Financing Residential Real Estate Instructor Materials Primary Market Real estate cycles Local market is subject to real estate cycles. Real estate cycles: periodic shifts in level of real estate activity (sales, loans). ⚫ Caused by changes in supply of and demand for: ⚫ real estate for sale ⚫ funds for mortgage lending © 2018 Rockwell Publishing Primary Market Factors affecting real estate cycles Local real estate cycles are affected by many factors, including: ⚫ economic forces ⚫ political events ⚫ social trends These factors may be either local or national. © 2018 Rockwell Publishing Primary Market Dealing with real estate cycles At one time, local lenders couldn’t do much about real estate cycles in their communities. © 2018 Rockwell Publishing 14  Chapter 3: The Primary and Secondary Markets Primary Market Dealing with real estate cycles They needed: ⚫ a source of extra funds to lend when demand exceeded supply; and ⚫ a place to invest surplus funds when supply exceeded demand. Secondary market helped meet both needs. © 2018 Rockwell Publishing Summary Primary Market Primary market Loan origination Real estate cycles © 2018 Rockwell Publishing Secondary Market Solution to primary market problems was secondary market, where mortgages secured by real estate all over U.S. are bought and sold. © 2018 Rockwell Publishing 15  Financing Residential Real Estate Instructor Materials Secondary Market Secondary market activities: ⚫ buying and selling loans ⚫ buying and selling mortgage-backed securities © 2018 Rockwell Publishing Secondary Market Activities Buying and selling loans Like other investments, loans can be bought and sold. ⚫ Loan purchaser pays present value of right to receive payments from borrower. ⚫ Rate of return on loan compared with rate of return on other investments to determine present value. © 2018 Rockwell Publishing Buying and Selling Loans Who buys loans? Mortgage lenders may sell their loans to: ⚫ other lenders ⚫ government-sponsored enterprises: ⚫ created by federal government to establish strong secondary market for mortgage loans ⚫ often referred to as GSEs © 2018 Rockwell Publishing 16  Chapter 3: The Primary and Secondary Markets Buying and Selling Loans Government-sponsored enterprises ⚫ Federal National Mortgage Association (FNMA or “Fannie Mae”) ⚫ Federal Home Loan Mortgage Corporation (FHMLC or “Freddie Mac”) © 2018 Rockwell Publishing Buying and Selling Loans Government-sponsored enterprises Lenders “package” similar loans together for sale to government-sponsored enterprise. After sale, loans may be serviced by original lender or by another servicer. ⚫ Loan servicing: payment processing, collections, working with borrowers to prevent default. © 2018 Rockwell Publishing Secondary Market Activities Mortgage-backed securities GSEs also issue mortgage-backed securities (MBS): investment instrument with mortgage loans as collateral; a type of bond. ⚫ Investor returns are monthly payments from secondary market entity. ⚫ GSE passes borrowers’ payments on to investors. © 2018 Rockwell Publishing 17  Financing Residential Real Estate Instructor Materials Mortgage-backed Securities Securitizing loans Securitizing: buying mortgages, pooling them together, pledging pool as collateral, issuing securities. Private-label mortgage-backed securities: securities issued by private firm rather than GSE. © 2018 Rockwell Publishing Mortgage-backed Securities Advantages for investors Reasons investors prefer buying MBSs to buying actual mortgage loans include: ⚫ convenience ⚫ greater liquidity ⚫ can be purchased in relatively small denominations © 2018 Rockwell Publishing Functions of Secondary Market Secondary market serves two important functions for real estate industry:  moderates adverse effects of real estate cycles, providing some stability  makes funds available for mortgage loans, promoting home ownership © 2018 Rockwell Publishing 18  Chapter 3: The Primary and Secondary Markets Functions of Secondary Market Flow of mortgage funds Availability of funds in primary market depends on secondary market. ⚫ Mortgage funds flow between the two markets. © 2018 Rockwell Publishing Functions of Secondary Market Flow of mortgage funds ⚫ Lender loans funds to buyer in primary market. ⚫ Lender sells mortgage to GSE ⚫ GSE pools mortgages and sells MBSs, freeing entity’s funds to buy more mortgages. ⚫ As GSE buys mortgages, more funds available for more loans in primary market. © 2018 Rockwell Publishing Functions of Secondary Market Portfolio loans If lender doesn’t sell loan on secondary market, loan is kept in portfolio. ⚫ Only small percentage of loans are kept in portfolio today. © 2018 Rockwell Publishing 19  Financing Residential Real Estate Instructor Materials Summary Secondary Market Secondary market Government-sponsored enterprise Loan servicing Mortgage-backed securities Securitizing Portfolio loan © 2018 Rockwell Publishing Secondary Market Entities Historical background Government-sponsored enterprise (GSE): ⚫ created and supervised by federal government ⚫ owned by private stockholders © 2018 Rockwell Publishing Historical Background Fannie Mae 1938 – Created by federal government in response to Depression-era credit problems. Authorized to buy FHA loans. ⚫ 1948 – Also authorized to buy VA loans. ⚫ 1968 – Reorganized as government- sponsored enterprise. © 2018 Rockwell Publishing 20  Chapter 3: The Primary and Secondary Markets Historical Background Ginnie Mae 1968 – Created as agency within HUD when Fannie Mae was privatized. ⚫ Wholly-owned government corporation. ⚫ Now securitizes FHA and VA loans. © 2018 Rockwell Publishing Historical Background Freddie Mac 1970 – Created by Emergency Home Finance Act as government-sponsored enterprise. ⚫ Original purpose: to assist savings and loans hit hard in 1969 recession. ⚫ 1970 act authorized both Freddie Mac and Fannie Mae to buy conventional loans. © 2018 Rockwell Publishing Government-sponsored Enterprises As GSEs, Fannie Mae and Freddie Mac were given some advantages over ordinary private corporations. ⚫ Exempted from certain types of taxes. ⚫ Not subject to certain SEC registration and disclosure requirements. © 2018 Rockwell Publishing 21  Financing Residential Real Estate Instructor Materials Government-sponsored Enterprises GSE status GSEs were also given special responsibilities and limitations. ⚫ Restricted by charter to investment in residential mortgage assets (mortgages and mortgage-backed securities). ⚫ Required to meet annual affordable housing goals. © 2018 Rockwell Publishing Government-sponsored Enterprises MBS programs Ginnie Mae started first MBS program in 1970, but now only guarantees loans. Fannie Mae and Freddie Mac followed with securities backed by conventional loans. © 2018 Rockwell Publishing Government-sponsored Enterprises MBS programs 1980s: Congress removed certain restrictions on mortgage-backed securities. ⚫ Made them more competitive with corporate bonds. ⚫ Fueled expansion of secondary market. © 2018 Rockwell Publishing 22  Chapter 3: The Primary and Secondary Markets Government-sponsored Enterprises MBS programs Investors can buy MBSs: ⚫ directly from issuing entity ⚫ on Wall Street, through securities dealers Direct purchases typically made by large investors such as insurance companies or pension funds. © 2018 Rockwell Publishing Government-sponsored Enterprises MBS programs MBS issued by GSE is guaranteed by entity. ⚫ Investor receives full payment from GSE even if borrowers default on some loans in pool. ⚫ Guaranty fees and servicing fees subtracted before payments passed on to investors. © 2018 Rockwell Publishing Government-sponsored Enterprises Standardized underwriting Lender who wants to sell loan to Fannie Mae or Freddie Mac must: ⚫ comply with GSE’s underwriting rules when qualifying loan applicant ⚫ use uniform loan documents If lender violates GSE’s rules, may be required to buy loan back from entity. © 2018 Rockwell Publishing 23  Financing Residential Real Estate Instructor Materials Government-sponsored Enterprises Standardized underwriting Underwriting guidelines and uniform documents serve as quality control to ensure loans purchased by GSEs meet minimum standards. ⚫ Inspires investor confidence. ⚫ Strongly influences primary market lenders. © 2018 Rockwell Publishing Government-sponsored Enterprises GSEs and subprime loans Prime loan: loan made to borrower with A credit rating. Subprime loan: loan made to less creditworthy borrower. ⚫ At one time, Fannie Mae and Freddie Mac bought only prime loans. ⚫ Subprime loans didn’t meet their standards. © 2018 Rockwell Publishing Government-sponsored Enterprises GSEs and subprime loans In 2005 Fannie Mae and Freddie Mac began buying subprime loans. ⚫ Primarily A-minus loans: top layer of subprime market. Encouraged by government, to help meet affordable housing goals. © 2018 Rockwell Publishing 24  Chapter 3: The Primary and Secondary Markets Government-sponsored Enterprises GSEs and the economic crisis Before most recent crisis, analysts credited Fannie Mae and Freddie Mac with: ⚫ increasing home ownership rates ⚫ reducing mortgage interest rates ⚫ improving underwriting practices ⚫ providing mortgage lenders with access to global capital markets © 2018 Rockwell Publishing GSEs and the Economic Crisis Criticism before crisis began Before crisis, critics argued: ⚫ claims of GSEs’ benefit to public exaggerated ⚫ GSEs too large, with too much power over mortgage industry ⚫ GSEs limited opportunities for other investors and enterprises ⚫ GSEs not run well (2003/04 accounting scandals) © 2018 Rockwell Publishing GSEs and the Economic Crisis On the brink of insolvency ⚫ By 2007, 1/3 of Fannie Mae and Freddie Mac’s new purchases and guaranties involved riskier loans. ⚫ As subprime crisis unfolded, house prices dropped and foreclosure rates rose sharply. ⚫ Caused GSEs’ stock prices to plunge, further undermining their financial stability. © 2018 Rockwell Publishing 25  Financing Residential Real Estate Instructor Materials GSEs and the Economic Crisis Conservatorship ⚫ Housing and Economic Recovery Act of 2008 (HERA) created new independent regulatory agency to oversee GSEs. ⚫ Federal Housing Finance Agency (FHFA) ⚫ September 2008: to prevent economic consequences of GSE failure, FHFA placed both entities in conservatorship. © 2018 Rockwell Publishing GSEs and the Economic Crisis Conservatorship Terms of GSE conservatorship: ⚫ top management replaced ⚫ voting power of shareholders and directors terminated ⚫ to maintain solvency of GSEs, government would: ⚫ buy securities from GSEs ⚫ buy billions of dollars of stock in each GSE © 2018 Rockwell Publishing Summary Government-sponsored Enterprises Fannie Mae Freddie Mac Guaranties Subprime loan / A-minus loan Federal Housing Finance Agency Conservatorship © 2018 Rockwell Publishing 26