National Mortgage Association Research Articles

Selected Issues In The Taxation Of Swaps, Structured Finance and Other Financial Products

This article is based on a paper presented by the author to the Tax Review of New York City on November 16, 1992.The last decade has seen an explosive growth in the use of swaps and other derivative products as part of the asset and liability management strategies of corporations and other institutional investors. Beginning with interest rate and currency swaps, the menu of swap products has expanded to include commodity swaps, equity index swaps, equity swaps, total return swaps, basis swaps, and interest rate caps, floors and collars. According to industry sources, the market for interest rate swaps has grown in notional principal amount from an estimated $3 billion in 1982 to over $3.065 trillion by the end of 1991 (the most recent figures available). Similarly, the outstanding aggregate notional principal amount of currency swaps has grown from $182 billion in 1987 to $807 billion by the end of 1991.At the same time as the swap market has been expanding, the structured finance market, including mortgage and asset securitization, has seen similar growth. Beginning in the 1970s, U.S. government-backed enterprises such as the Government National Mortgage Association ("Ginnie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") sponsored transactions in which pools of residential first mortgages were bundled into pass-through certificates that were then sold to thrifts, banks and other institutional investors. In 1983, Freddie Mac introduced collateralized mortgage obligations ("CMOs"). CMOs, which divided up the cashflows from an underlying pool of mortgages into separate debt securities having different maturity, interest rate and credit characteristics, dramatically broadened the market for mortgage-backed securities. With the enactment of the "Real Estate Mortgage Investment Conduit" ("REMIC") provisions as part of the 1986 Tax Reform Act, the taxation of mortgage pass-through and pay-through securities became subject to a new, self-contained set of rules. Moreover, since the mid-1980s, structured finance techniques originally employed in securitizing mortgages have been applied to a broad range of other financial assets, including stocks, credit card receivables, auto loans, lease receivables, home equity loans, commercial and industrial loans and trade receivables.

Option Pricing, Zero Lower Bound, and COVID-19

This paper provides a quantitative assessment of equity options priced at the Zero Lower Bound, i.e., when interest rates are set essentially to zero. We obtain closed form formulas for American options when the Zero Lower Bound policy holds. We perform numerical implementation of American put options written on the stock Federal National Mortgage Association (FNMA) and of related bounds for the optimal exercise. The results show similarities with the corresponding European options priced at the Zero Lower Bound during the COVID-19 crisis.

Book Reviews

Sumit Agarwal of National University of Singapore reviews “Last Resort: The Financial Crisis and the Future of Bailouts,” by Eric A. Posner. The Econlit abstract of this book begins: “Argues that, in responding to the financial crisis that began in 2007, the US government violated the law and was able to gain control over AIG, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac) early in the critical stage of the crisis—but it did so in the public interest.”

Increasing Capital & Liquidity for GNMA Mortgage Servicing Rights

This paper reviews the research literature concerning mortgage servicing rights (MSR) and mortgage finance more generally. We then review the history of financing the acquisition of MSRs in the market for loans guaranteed by the Federal Housing Administration (FHA) and securities guaranteed by the Government National Mortgage Association (GNMA). The paper then focuses on the credit relationship between GNMA and the issuers operating in that market, with particular emphasis on separating the loan servicing function from the investment in the MSR. The paper notes that state law regulation seems to be suppressing competition for GNMA MSRs by limiting participation by smaller investors. The paper makes several proposals as to amendments to the GNMA Acknowledgement Agreement (AA) governing the credit relationship between the FHA, GNMA and the issuer to support the goal of increasing the liquidity of the GNMA MSR market.

Leadership in Sustainability a Case Study: Green Globe Certification and Financing and the Impact on a Multifamily Property's Rate of Return

Environmental sustainability in real estate continues to be of interest, and various government incentives have emerged to encourage investment in sustainability efforts. In this detailed case study, we examine one incentive, the Federal National Mortgage Association's (Fannie Mae) Green Initiative and Green Globes certification, as applied to a newly constructed multifamily complex. Using a discounted cash flow model with several scenarios, the after-tax returns for the multifamily project are examined. In this case study, we analyze the initiative's impact on the project, showing the effects of the lower financing costs. The conclusion is that in addition to societal benefits, lower operating costs, and higher rents, the rate of return can be higher for properties that utilize Green Globe's special financing.

Government-Backed Mortgage Insurance Promoted a Speedier Recovery from the Great Recession

The United Sates government has a long history of involvement in mortgage finance. During the 1930s, the government created the Federal Home Loan Banks (FHLB), the Federal Housing Administration (FHA), and the Federal National Mortgage Association (Fannie Mae). In this note, we estimate how the intensity of GSE, FHA, PLS, and portfolio exposures influence the state of the real economy across counties.

The Rescue of Fannie Mae and Freddie Mac

The imposition of federal conservatorships on September 6, 2008, at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation—commonly known as Fannie Mae and Freddie Mac—was one of the most dramatic events of the financial crisis. These two government-sponsored enterprises play a central role in the US housing finance system, and at the start of their conservatorships held or guaranteed about $5.2 trillion of home mortgage debt. The two firms were often cited as shining examples of public-private partnerships—that is, the harnessing of private capital to advance the social goal of expanding homeownership. But in reality, the hybrid structures of Fannie Mae and Freddie Mac were destined to fail at some point, owing to their singular exposure to residential real estate and moral hazard incentives emanating from the implicit guarantee of their liabilities. We describe the financial distress experienced by the two firms, the events that led the federal government to take dramatic action in an effort to stabilize housing and financial markets, and the various resolution options available to US policymakers at the time; and we evaluate the success of the choice of conservatorship in terms of its effects on financial markets and financial stability, on mortgage supply, and on the financial position of the two firms themselves. Conservatorship achieved its key short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship was intended to be a temporary fix, not a long-term solution, and more than six years later, Fannie Mae and Freddie Mac still remain in conservatorship.

There Is No Accounting For Fannie Mae

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"><span style="font-size: 10pt;"><span style="font-family: Times New Roman;">The Federal National Mortgage Association (FNMA, Fannie Mae), was created in 1938, as a part of the New Deal.<span style="mso-spacerun: yes;">  </span>In 2003, regulators discovered serious accounting problems that may cost Fannie Mae several billion dollars in losses. In 2003, the Office of Federal Housing Enterprises Oversight (OFHEO) investigated Fannie Mae and found a culture of corruption, arrogance, and pervasive accounting violations in the company.<span style="mso-spacerun: yes;">   </span>Executives at Fannie Mae cooked books to pocket an extra twenty-seven million dollars in bonuses.<span style="mso-spacerun: yes;">  </span>This paper presents the accounting improprieties at Fannie Mae and the consequences that followed its investigation.</span></span></p>

The Fall and Rise of Fannie and Freddie: Securitization after the Meltdown

This article analyzes the rise and fall of the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Owners Loan Corporation (“Freddie Mac”). It explains why they should be revived, and suggests regulatory measures under which they can go forward on a sound basis.During the New Deal, the Administration and Congress perceived a need for a secondary market for mortgages, which had existed during the 1920s but collapsed with the 1929 crash. The market enabled mortgage originators to sell their mortgages, sometimes packaged into mortgage-backed securities, providing them with cash to lend to new borrowers. Congress attempted to fill this niche in housing finance by creating Fannie Mae in 1938.In 1966 Fannie Mae reinvented mortgage-backed securities to help finance the Vietnam War. These mortgage-backed certificates were so successful that Fannie Mae was divided in 1968 into the Government National Mortgage Association (“Ginnie Mae”), which remained a government agency, and the continuing Fannie Mae, which was privatized. In 1970, Freddie Mac was created, and also engaged in buying mortgages and packaging them into mortgage-backed securities.Both enterprises lacked meaningful regulation. They were not required to register with the SEC until after accounting scandals in 2002 showed that they needed oversight. They lacked even internal supervision until the Office of Federal Housing Enterprise Oversight (“OFHEO”) was established in 1992-but OFHEO was understaffed and weak. Outside auditors also failed to draw attention to major accounting problems.The lack of regulation was compounded by political pressures on both organizations to lower their standards to make housing more accessible. Originally, they would accept mortgages only with at least 20% down payments, but this fell to 3% by 2000. After the 2000, standards fell further as the associations began to purchase “subprime” loans with little prospect of repayment. When these loans began to default, both were unable to continue business as usual, and were forced into conservatorship.Conservatorship raises the question of whether Fannie and Freddie are necessary, or should be liquidated. This article argues that they are necessary. Experience has shown that purely private secondary mortgage markets are more sensitive than other securities markets to economic downturns-just when they are most needed to keep mortgage originating institutions lending. Moreover, the sheer volume of mortgages securitized by Fannie and Freddie-more than half the market after 2000-indicates that private securitization alone is insufficient.This leaves the question of how Fannie and Freddie should be regulated to keep them from relapsing after they leave conservatorship. The answer is effective regulation. This should have several key elements: (1) It must take into account the special characteristics of mortgage-backed securities; (2) it must provide minimum standards for capitalization of Fannie and Freddie, the characteristics of the mortgages they are permitted to buy; (3) there must be an outside financial regulator such as the Federal Reserve to enforce the regulatory rules; and there must be transparency both at the institutional level and in connection with the mortgage-backed securities to be sold, that can best be provided by the SEC.

The Likely Impact of the U.S. Recession on Negotiations with North Korea

IntroductionThe last six-party talk in Beijing ended on December 11, 2008, when negotiators were unable to reach an agreement on the issue of verification over the accuracy of the nuclear inventory given by North Korea in June 2008. The sticking point was North Korea's refusal to let international inspectors take samples from soil and waste at its nuclear facilities, which the United States had maintained was critical to reach an agreement. Complicating the issue, however, is the rapidly declining U.S. economy, as indicated by the real gross domestic product (GDP) that fell rapidly beginning in the fourth quarter of 2008. This paper reviews the state of the U.S. economy, measuring how serious the economic recession is, and then speculates on how the state of the U.S. economy may affect the future of negotiations with North Korea. The paper concludes with some suggestions on the direction North Korea and the United States might consider taking in the middle of the U.S. economic recession.History of the Credit Crunch of 2008Although there is no consensus on its exact duration, the beginning of the is believed to be in the early 1980s. The good times of the Great Moderation are characterized by significant reduction in fluctuations and improvements in aggregate output, employment, and inflation. for the Great Moderation include (a) improved monetary policy, (b) financial innovation, (c) increased global integration, (d) better inventory controls, and (e) good luck in the form of smaller exogenous shocks. As Federal Reserve Chair Ben S. Bernanke opined during his discussion of the Great Moderation at the 2004 meetings of the Eastern Economic Association, Explanations of complicated phenomena are rarely clear cut and simple, and each ... probably contains elements of truth.1 It may be premature to give credit to any or all of these explanations. It is yet to be known whether the latest Great Moderation is in a temporary halt or is over until the next Great Moderation appears on the horizon many years from now. The end of the Great Moderation did not begin with subprime mortgages. The end started long before the Great Moderation even began.Securitizing mortgages in the United States has a long history. 1968, the Government National Mortgage Association (Ginny Mae) was allowed to securitize FHA/VA mortgages backed by the U.S. government for resale in a secondary market. 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) started selling government-backed mortgage-backed securities (MBS). One writer noted, In 1981, the Federal National Mortgage Association (Fannie Mae) began issuing MBS, and soon after 'private-label' securitized products emerged for prime loans without the backing of the government.2 1982, the Alternative Mortgage Transaction Parity Act allowed variable-rate mortgages as an alternative to fixed-rate mortgages. 1986, the Tax Reform Act ended tax deduction for interest on loans with the exception of mortgage loans. All these changes played a role in leading to the 2008 credit crunch. It is important to note that these changes, standing alone, are nothing wrong. But they were abused during the early years leading to the 2008 credit crunch.During the Great Moderation of the 1990s and the early part of the 2000s, the rate of inflation was low and the economy grew steadily. During the same period, countries in Asia and the Middle East started to save an enormous amount of money. From 1996 to 2007, industrialized countries went from a current account surplus of $14 billion to a current account deficit of almost $500 billion. At the same time, noted a White House report, developing countries went from a current account deficit of $82 billion to a surplus of $760 billion.3 The influx of this capital lowered interest rates. These new wealthy were not satisfied with low interest earnings, and they searched for high-yielding assets. …

The Evolving Paradigm of Laws on Lead-Based Paint: From Code Violation to Environmental Hazard

This article explores the significance of an ongoing paradigm shift for the legal approach to lead-based paint in privately owned residential properties from a housing paradigm to an environmental paradigm. The housing paradigm, still prevalent in most state and local law, has resulted in general silence on the lead-based paint issue in the community and, consequently, to little actual abatement of the hazard. The shift to an environmental paradigm for addressing hazards of lead-based paint in private housing is reflected in some state and federal legislation. Because of its focus on the discovery of health hazards, on the handling of hazardous material, and on long-term planning, an environmental lens offers a paradigm more likely to lead to actual abatement of lead hazards. This article first explores the existing framework of laws on lead hazards. Lead poisoning seriously affects the health of children and pregnant women and disproportionately affects ethnic minorities. Federal legislation separate from the major environmental laws addresses the issue of lead-based paint in federally owned or subsidized housing, but that law has not been extended to privately owned housing. Participants in the housing system - owners, rental property managers, lenders - have resisted accepting responsibility for reduction of the environmental hazard of lead-based paint in part due to the expense of abatement and the uncertainty of safe abatement techniques and standards. State and local health, housing, criminal, and property transfer laws have been generally ineffective in bringing about change in the housing stock and in protecting the health of occupants from poisoning. Examples of stalemates that arise when seeking legal relief from lead hazards are drawn from Maryland law. The article next distinguishes the housing paradigm, under which tenant - landlord disputes have provided the context for the development of the law, from an emerging environmental paradigm, which calls for discovery and response to hazards when occupants, workers, or the community around the dwelling may be affected. The article explores elements of this paradigm in Massachusetts law, in 1992 federal legislation, and in voluntary private market response of requiring an environmental assessment of residential property by the Federal National Mortgage Association (FNMA), a secondary mortgage market entity. By requiring disclosure of this hazard in housing to potential buyers and tenants, the federal government may force the residential real estate market to take the hazard into account in setting the rental amount and sales price. Market aversion to risks of liability and to loss of investment is likely to bring about voluntary compliance with hazard abatement laws. The interdisciplinary approach endorsed in the 1992 legislation is particularly appropriate for an area in which public knowledge and technology are changing. The article concludes with recommendations about how state and federal law on lead hazards might further develop as the paradigm takes hold. At the federal level, the government should set uniform standards for lead dust levels and safe abatement, and should provide a funding mechanism for hazard abatement. At the state level, the law should require both testing and disclosure before the sale of real property, testing and hazard abatement before rental, and provisions for relocation of tenants at landlord expense during hazard abatement. Local registration laws for rental property could trigger the testing process. In addition, states should establish and enforce sanctions for knowing endangerment of persons by lead hazards.

The Sociology and Geography of Mortgage Markets: Reflections on the Financial Crisis

The article presents a symposium discussion assessing the role the sociological and geographical aspects of the mortgage market played in the 2008 financial crisis. Combinations of interrelated causes of the global financial crisis include deregulation and re-regulation, financialization and globalization, and bubbles and wrong incentives. The various ways the mortgage market is shaped and reshaped by both mortgage lenders and state institutions is examined. It is stressed that mortgage loan securitization is largely an invention of government and government erected institutions such as Fannie Mae and Freddie Mac.

Proposals Concerning the Current Financial Crisis

A basic cause of the current financial crisis was the mandate from the U.S. Congress to the Federal National Mortgage Association (Fannie Mae) to increase its support of low-income housing. This mandate led to a lowering of lending standards, which encouraged home buyers to spend beyond their means. The problem was aggravated by novel, obscure, highly leveraged financial instruments that were not well understood by either lenders or borrowers. At least two steps are required for the solution to this crisis: (1) Congress should instruct Fannie Mae that the safety of the financial system must take priority over the objective of providing low-income housing, and (2) this article’s “modest” proposal for bringing transparency to the tangle of financial instruments should be implemented.

From Wall Street to High Street: Going for a Free Lunch?

Opinions are now divided on whether the the Federal National Mortgage Association (or ‘Fannie’) and the Federal Home Loan Mortgage Corporation (or ‘Freddie’) should remain in their present form, putting a lot of taxpayers’money at risk. The bailing–out role now played by the Federal Reserve has been sternly criticised and it has been questioned whether this should be allowed to go on and on in the foreseeable future, transforming US capitalism into social capitalism. The event has also affected the UK capital market, with serious erosion of market capitalisation. But, is the UK home market an innocent bystander in the whole scheme of things? That is is the subject of this article.

Rescuing Failure or Failing to Rescue: Which is the Better Consequence?

This article looks at the origins and future of the US Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, previously believed to be probably as safe as US treasuries given both their previous ties with the State, and how their activities have come to haunt the US economy; the UK capital market, with serious erosion of market capitalisation; and the global financial system.

Government-Sponsored Entities

The U.S. Government9s influence is large in many areas and the financial sector is no exception. This article provides a brief overview of two Government Sponsored Entities (GSEs) that dominate the market for mortgages in the United States: The Federal National Mortgage Association, better known as Fannie Mae (or just Fannie), and the Federal Home Loan Mortgage Corporation, or Freddie Mac (Freddie). Fannie and Freddie are among the largest issuers of any stripe—government or private— and among the most highly visible. To carry out their stated mission to support the housing market, they issue debt to buy mortgages, which they hold in their own portfolios, and they buy mortgages from originators to bundle for sale as mortgage-backed securities (MBS). Together they securitize about half of all mortgages in the United States. <b>TOPICS:</b>MBS and residential mortgage loans, legal and regulatory issues for structured finance

Freddie Mac

AbstractCredit &amp; Lending (MIC: 8.6 SIC: 6111 NAIC: 522292)Freddie Mac is a stockholder‐owned, government‐sponsored enterprise established by Congress to provide a continuous flow of funds for residential mortgages. Co.'s participation in the secondary mortgage market includes providing its credit guarantee for residential mortgages originated by mortgage lenders and investing in mortgage loans and mortgage‐related securities held in its retained portfolio. Through its credit guarantee activities, Co. securitizes mortgage loans by issuing Mortgage Participation Certificates to third‐party investors. Co. also resecuritizes mortgage‐related securities issued by it, or the Government National Mortgage Association, as well as non‐agency entities.

Federal Credit and Insurance Programs: Housing

This paper reviews the evolution of the major credit and insurance programs undertaken by the U.S. government in support of urban housing. As the review makes clear, the Federal Housing Administration (FHA), Veterans Administration, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation have played major roles in the development of liberal and efficient primary and secondary mortgage markets in the United States. The development of capacity in mortgage lending and securitization in the private sector does suggest, however, that federally subsidizing mortgage market activities can be restrained with little effect on homeownership- the principal goal of this federal activity. In particular, the orderly reduction in the mortgage investment activities of the government-sponsored enterprises (GSEs) and the imposition of guarantee fees on mortgage-backed securities insured by the GSEs are first steps in restraining federal activity. More generally, a concentration of FHA and GSE activity on first-time homebuyers would reduce federal risk exposure while preserving the economic rationale for government activity.

Freddie Mac

AbstractCredit &amp; Lending (MIC: 8.6 SIC: 6111 NAIC: 522292)Freddie Mac is a stockholder‐owned, government‐sponsored enterprise established by Congress to provide a continuous flow of funds for residential mortgages. Co.'s participation in the secondary mortgage market includes providing its credit guarantee for residential mortgages originated by mortgage lenders and investing in mortgage loans and mortgage‐related securities held in its retained portfolio. Through its credit guarantee activities, Co. securitizes mortgage loans by issuing Mortgage Participation Certificates to third‐party investors. Co. also resecuritizes mortgage‐related securities issued by it, or the Government National Mortgage Association, as well as non‐agency entities.

Fussing and Fuming over Fannie and Freddie: How Much Smoke, How Much Fire?

Abstract: The roles of Fannie Mae and Freddie Mac have become increasingly controversial in the modern world of residential mortgage finance. The authors describe the special features of these two companies and their roles in the mortgage markets and then discuss the controversies that surround the companies and offer recommendations for improvements in public policy. JEL classification: G21, G28. Key words: Fannie Mae, Freddie Mac, government-sponsored enterprises, residential mortgages, securitization, regulation The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation--commonly known as Fannie Mae and Freddie Mac, respectively (1)--have led the way in dramatic changes that have taken place in the structure of the U.S. residential mortgage markets since the 1970s. Fannie Mae and Freddie Mac are quasi-private/quasi-public: for example, they have federal charters that confer unique regulatory provisions; but their shares are publicly traded on the New York Stock Exchange. The biggest advantage of Fannie Mae's and Freddie Mac's anomalous legal status arises because financial markets treat their obligations as if those obligations are backed by the federal government--even though the federal government explicitly does not do so. With the benefit of this special status, Fannie Mae and Freddie Mac have grown into enormous financial institutions, with combined total assets of over $1.8 trillion in 2003. One critic, Richard Carnell (2004), a former Assistant Secretary of the Treasury, has suggested that the two companies' growth is at least partially a consequence of a double game that they play: [They] tell Congress and the news media, 'Don't worry, the government is not on the hook'--and then turn around and tell Wall Street, 'Don't worry, the government really is on the hook.' The preferential legal status of Fannie Mae and Freddie Mac serves as one of a number of mechanisms by which the federal government encourages the consumption (and, arguably, the over-consumption) of housing in the U.S. economy--this one with an on-budget cost of zero. But economists are congenitally suspicious of programs that seem to offer something for nothing. After all, a federal of the deposits in savings and loans cost nothing for many decades--until the early 1990s, when it cost taxpayers about $150 billion (U.S. Federal Deposit Insurance Corporation, 1997). Furthermore, Federal Reserve Chairman Alan Greenspan (2004), among others, has suggested that the anomalous situation of Fannie Mae and Freddie Mac may even pose systemic risks to the financial sector. This article will offer a generalist's guide to the functions that Fannie Mae and Freddie Mac perform in the residential mortgage financial markets and the controversies that swirl around them. Along the way we will highlight some important--and perhaps under-appreciated--changes that are occurring in the structure of U.S. residential mortgage markets. Some Background What Do Fannie Mae and Freddie Mac Do? Fannie Mae and Freddie Mac participate in the secondary mortgage market: Mortgage originators come to them with pools (bundles) of mortgages and either these assets for securities or sell them outright to one of the two companies. Under Fannie Mae's and Freddie Mac's swap programs, an originator exchanges a mortgage pool for a mortgage-backed security that is issued and guaranteed by one of the two companies and that represents an interest in the same pool. Fannie Mae and Freddie Mac promise the security holders that the latter will receive timely payment of interest and principal on the underlying mortgages, less an annual guarantee fee of about 20 basis points (0.20 percent) on the remaining principal. In essence, Fannie Mae and Freddie Mac are providing insurance to holders of mortgage-backed securities against default risk on the underlying mortgages and are thus bearing that risk themselves. …