The Federal Reserve System (the Fed) is a key player in financial markets you’ll need to know about for the Real Estate License Exam that affect the availability of money for real estate mortgage loans. The system is regulated by two factors that have direct effects on the money that’s available for mortgage loans. They are
The reserve requirement for banks, which is the requirement that the Fed imposes on banks to maintain a specified amount of their assets as reserve funds in cash. The reserve funds may not be used for loans. By increasing or decreasing the amount of money needed for reserves, the Fed can control the levels of money that are made available for mortgage loans.
The discount rate, which is how the Fed controls the flow of money. It sets and adjusts the discount rate, which is the rate of interest that member banks charge each other for loans between banks. Whenever the discount rate is high, interest rates on consumer loans increase and vice versa.
The rate charged to the consumer impacts the way many people choose to borrow money for real estate purchases or refinancing and how much they can afford to borrow.
Banks and savings and loan associations get their money from their depositors, insurance companies get it from the premiums consumers pay, and investments groups get it from investors. Although that probably sounds pretty obvious, think about what happens when banks run out of money, or to be more precise, when their loans exceed their deposits.
The secondary mortgage market, which buys loans from banks and other primary lending institutions, was created to prevent such a problem from happening. Although details of these transactions are fairly complicated, the essence really is pretty simple. A primary lending institution collects, packages, or pools (they all mean the same thing) its mortgage loans.
These loans have value because the notes on which they’re based are promises to repay specific amounts of principal and interest, plus they’re backed up by a mortgage that enables the lenders to sell the properties if the debts are not repaid. The secondary market lenders pay the primary market lenders for these mortgage loans, which provide new money for the bank to lend to another group of home buyers.
After the loans are acquired by the secondary market, the payments of the borrowers go to the secondary market institutions; however, the primary mortgage market institutions frequently retain a fee for servicing the loan, or collecting the monthly payments and sending them on to the secondary institutions.
The three major (and one minor) players in the secondary mortgage market are organizations that either are directly or indirectly associated with the federal government. The following list explains some of the major characteristics with which you need to be familiar when being tested on information about the secondary mortgage market.
Fannie Mae: The Federal National Mortgage Association, or Fannie Mae, is a privately owned corporation chartered by Congress. Fannie Mae sells stocks and bonds to raise money to buy conventional bank mortgage loans. Although Veterans’ Administration (VA) and Federal Housing Administration (FHA) loan programs are mortgage insurance programs that insure mortgage loans made by lenders, Fannie Mae does deal in these types of mortgages in the secondary market.
Fannie Mae is the leading purchaser of mortgages in the secondary market. It generally sets limits on the specific amounts of the mortgage loans that it buys. Any loan above those limits is referred to as a jumbo loan.
Ginnie Mae: The Government National Mortgage Association, or Ginnie Mae, is a government agency administered by the U.S. Department of Housing and Urban Development. Ginnie Mae provides investors with an opportunity to invest in mortgages by selling pass-through certificates to investors.
With these certificates, principal and interest payments are paid to investors as a return on their investments in the program. Ginnie Mae works primarily with Fannie Mae in secondary mortgage market activities. Don’t be thrown on an exam if you see the words “tandem” or “piggyback” associated with these two agencies. It means they’re working together.
Freddie Mac: The Federal Home Loan Mortgage Corporation, or Freddie Mac, is a privately owned corporation that also provides a secondary market for mortgages. It sells bonds to raise funds to purchase mostly conventional mortgages.
Farmer Mac: The Federal Agricultural Mortgage Corporation, or Farmer Mac, serves as a secondary mortgage market for farm loans.
You may want to remember the names of the agencies in the previous list by associating female names, Fannie and Ginnie, mostly with FHA and VA loans and male names Freddie and Mac with conventional loans.
