The Nonagency Market

In the early days of the secondary mortgage market, life was simple. Investors could buy "Freddies," "Fannies," or "Ginnies." Mortgage loans originated outside the agency guidelines were held in portfolio by the originating institution or were sold as whole loans to another institution familiar with mortgage collateral. This was the way the world worked.

Then things became a bit more complicated as issuers began securitizing their jumbo loans. As time went by, investors became more comfortable with mortgage product, and originators learned to segregate their other loans into groups that could be securitized. For example, alt-A developed out of the jumbo market when issuers found that homeowners with prime credit but with ownership and/or documentation issues that did not meet the jumbo criteria existed in sufficient number to establish a new category of loans that could be securitized. And while subprime had been around for many years, it took the development of the securitization/gain-on-sale model of the early 1990s to propel it into a full-fledged member of the mortgage market.

More recently, a variety of high loan-to-value (hi-LTV) ratio, home equity line of credit (HELOC), scratch and dent, and second-lien mortgages have been securitized, and nonagency MBS now come in many flavors and sizes. Therefore, today investors can find nonagency mortgage securities that fit almost any investment objective. Also, with the rapid appreciation in home prices in recent years, new product types, such as interest-only (IO) option ARMs and piggy-backed loans, have grown in popularity.

These new loan types allow homeowners to purchase more expensive homes than traditional mortgage products, but since there are little data on their prepayment or credit performance, they have added a note of uncertainty to the nonagency market.

Secrets of the Credit Industry

Secrets of the Credit Industry

Legal strategies that credit bureaus, creditors and debt collectors do not want you to know! How to use consumer credit protection laws, without hiring a lawyer, and without going to court! At some point in your life, either you, or someone you know will need this information.

Get My Free Ebook

Post a comment