By Richard A. Gerbino, Esq. and Mario A. Serra, Esq.
The concept of mortgage securitization is a natural by-product of the secondary mortgage market. Since the 1960's the Unites States economy has slowly evolved into one very much dependent upon and driven by the Housing Market. A robust housing market gives rise to the need for skilled and unskilled laborers and artisans; provides revenue for manufacturers, suppliers and retailers of building products, furniture, appliances and all types of home goods and furnishings, as well as creating a need for professional services rendered by architects, engineers and legal counsel. Needless to say, many companies and individuals derive their income from employment gained in times of healthy home sales. In order to facilitate the American dream of home ownership and maintain strong economic growth in the housing sector, it was recognized that mortgage originators had finite resources and could not continue to lend money at a rate sufficient to fulfill the needs and housing demands of a growing population willing and able to purchase a home. The secondary market was intended therefore, to create a new source of capital that a single market of primary lenders could not provide. Simply stated, the secondary mortgage market is a market for the sale of securities collateralized by the value of mortgaged loans which mortgages are secured by the homes they encumber. A mortgage lender, a commercial Bank, or other lending entity groups, or “pools” a number of loans they have originated and sells the pool of loans to third party investors unrelated to the original mortgage transaction, thereby replenishing the funds of loan originators so that more new loans can be made. In this manner, individual mortgage loans when pooled, and often placed and held into a Trust, are transformed into securities that can be publicly traded to investors such as pension funds, insurance companies, hedge funds and individuals, much like shares of stock of other entities.
Initially, and for many years, the secondary mortgage market has been dominated by the quasi governmental entities commonly known as Fannie Mae and Freddie Mac. Created by Congressional charter approximately forty years ago as government sponsored enterprises (GSEs)- loosely defined as privately owned financial institutions established by the government to fulfill a public mission, these two GSEs were meant to provide a reliable source of funding in the secondary market. Interestingly, until recently, Fannie Mae and Freddie Mac holdings were not officially guaranteed by the US Government, although most investors and the general public perceived, perhaps correctly, that the federal government would not permit either entity to default or fail.
Finally, it is important to note that mortgage loans, when paid pursuant to their terms have historically been reliable income producing investment products-until the mortgage default meltdown that is, which despite a common misconception, was not caused by mortgage securitization. Well, not entirely, but that’s a topic for another time.
For more information please contact via email Mario A. Serra or by phone at 973-538-4700 ext. 196.
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