Securitization of Subprime Home Mortgages in United States [mortgageloans-protection.blogspot.com]
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Securitization, also known as structured finance is a financing technique which allows capital markets to support direct income pooling resources and then resell them to investors. In countries where the legislation would encourage structured finance, almost all income-producing asset can be securitized.
In USA, securitization of funding can be done for nearly everything including medical and hospital records, oil exploration, lawsuit settlement proceedings in projects across the enterprise, royalties to music, or even a baseball stadium. But often the most securitized assets, both globally and in the US are consumer loans, especially home mortgages. The business structure of the US mortgage securitization has developed into a complex web of relationships between the various business units that offer wide range of loans and investment services.
These companies Fannie Mae and Freddie Mac buy mortgages that meet relatively strict underwriting guidelines for private mortgage lenders. The status of Fannie Mae and Freddie Mac is a little vague, because Congress has not enacted a law which explicitly guarantees the payment of bonds or securities issued by GSEs. Still the capital markets usually regard both of these companies as too big to fail and treating their debt as virtually guaranteed by the U.S. government, believing that the Congress will not allow these companies to collapse.
Fannie Mae and Freddie Mac keep some mortgages in their own portfolios, the securities, but many others, they share investment instruments and are sold to investors. A huge amount of loans securitized by Fannie and Freddie give businesses economies of scale and risk diversification benefits that most private companies cannot match. In addition. Because of the implicit federal guarantees of Fannie and Freddie, GSEs can locate investors for their securities, without raising any transaction costs from credit rating agencies or credit enhancements.
Moreover, GSEs hesitate to offer high loans-to-value (LTV) loans and are reluctant to buy loans to borrowers with questionable credit histories. Loans sold to these sources of public capital are usually fifteen or thirty year mortgages, often at fixed interest rates and no prepayment penalties. Fannie Mae and Freddie Mac refuse to buy loans from private mortgage raisers, unless they use standardized contracts which contain terms considered generally fair to both parties. The two GSEs have strict automated underwriting standards and generally accepted financial models, require standardized documentation, and pay the same price for all loans they purchase.
Therefore, in general, Fannie and Freddie acts as a stabilization force in the prime mortgage lending market, guards against and eliminates the conditions of predatory lending or underwriting risk. Some commentators also argue that mortgage pools of the GSEs' merge lower and some moderate-risk borrowers with same loan pricing, which also provides modest support for some moderate-risk borrowers. Packaged mortgages by Fannie Mae and Freddie Mac are in a rather good position through the recent problems in the mortgage market in the United States. Related Securitization of Subprime Home Mortgages in United States Issues
