Collateralized Mortgage Obligations (CMOs) sometimes referred to as Real Estate Mortgage Investment Conduits (REMICs), are one of few innovative investment methods available in today’s investment world. CMOs offer relative safety, regular payments and notable yield advantages over other better known fixed-income securities of comparable credit quality.
A wide variety of CMO securities with different cash flow and expected maturity characteristics have been designed to meet specific investment objectives. While CMOs offer advantages to investors, they also carry certain risks which will be further explained in this document. To determine if CMOs fit within your investment portfolio, you should first understand the distinctive features of these securities.
CMOs were first introduced in 1983. The Tax Reform Act of 1986 allowed CMOs to be issues in the form of REMICs, creating certain tax and accounting advantages for issuers and for certain large institutional and foreign investors. Today, almost all CMOs are issued in REMIC form. Remember that throughout this CMO explanation, REMICs and CMOs are interchangeable.
THE BUILDING BLOCKS OF CMOS
Mortgage Loans and Mortgage Pass-Throughs. When a CMO is created, it begins with a mortgage loan extended by a financial institution (such as a savings and loan, commercial bank or mortgage company) to finance a borrower’s home or other real estate. The homeowner usually pays the mortgage loan in monthly installments composed of both interest and “principal”. Over the duration of the mortgage loan, the interest component of payments in the early years gradually declines as the principal component increases.
To obtain funds to generate more loans, lenders either “pool” groups of loans with similar characteristics to create securities or sell the loans to issuers of mortgage securities. The securities most commonly created from pools of mortgage loans are “mortgage pass-through securities” (MBS) or “participation certificates” (PCs). MBS represent a direct ownership interest in a pool of mortgage loans. As the homeowners whose loans are in the pool make their mortgage loan payments, the money is distributed on a pro rata basis to the holders of the securities.
Several factors can affect the homeowners’ payments. Typically, the homeowner will “prepay” the mortgage loan by selling the property, refinancing the mortgage or otherwise paying off the loan in part or whole. Most mortgage pass-through securities are based on fixed-rate mortgage loans with an original maturity of 30 years, but experience shows that most of these mortgage loans will be paid off much earlier.
While the creation of MBS greatly increased the secondary market for mortgage loans by pooling them and selling interests in the pool, the structure of such securities has inherent limitations. MBSs only appeal to investors with a certain investment horizon – on average, 10-12 years.
CMOs were developed to offer investors a wider range of investment time frames and greater cash-flow certainty than had previously been available with MBS. The CMO issuer assembles a package of these MBS and uses them as collateral for a multiclass security offering. The different classes of securities in a CMO offering are known as tranches, from the French word for slice. The CMO structure enables the issuer to direct the principal and interest cash flow generated by the collateral to the different tranches in a prescribed manner, as defined in the offering’s prospectus, to meet different investment objectives.
THE HIGH CREDIT QUALITY OF CMOS
The Government National Mortgage Association (GNMA, or Ginnie Mae) an agency of the U.S. government, along with U.S. government-sponsored enterprises (GSE) such as the Federal National Mortgage Association (FNMA, or Fannie Mae) or the Federal Home Loan Mortgage Corporation (FHLMC, or Freddie Mac), guarantee most MBSs. Ginnie Mae is a government-owned corporation within the Department of Housing and Urban Development. Fannie Mae and Freddie Mac have federal charters and are subject to some oversight by the federal government, but are publicly owned by stockholders.
Fannie Mae and Freddie Mac issue and guarantee pass-through securities. Ginnie Mae only adds its guarantee to privately issued pass-throughs backed by government issued (FHA and VA) mortgages. Fannie Mae and Freddie Mac have issues CMOs for quite some time; the Department of Veterans Affairs (VA) began to issue CMOs in 1992, and Ginnie Mae initiates its own CMO program which began in 1994. Securities guaranteed or guaranteed and issues by these entities are known generically as “agency” mortgage securities. The agency guarantees enhance their credit quality for investors. In addition, the mortgages backing Fannie Mae and Freddie Mac mortgage securities must meet strict quality criteria. Those backing GNMA pass-throughs are underwritten in accordance with the rules and regulations of the FHA and the VA, which insure them against default.
The extent of the agency guarantee depends on the entity making it. Ginnie Mae, for example, guarantees the timely payment of principal and interest on all of its mortgage securities, and its guarantee is backed by the “full faith and credit” of the U.S. government. Holders of Ginnie Mae mortgage securities are therefore assured of receiving payments promptly each month, regardless of whether the underlying homeowners make their payments. They are guaranteed to receive the full return of face-value principal even if the underlying borrowers default on their loans. Mortgage securities issued by the VA carry the same full faith and credit U.S. government guarantees.
Fannie Mae guarantees timely payment of both principal and interest on its mortgage securities whether or not the payments have been collected from the borrowers. Freddie Mac also guarantees timely payment of both principal and interest on its Gold PCs and CMOs. Some older series of Freddie Mac PCs guarantee timely payment of interest, but only the eventual payment of principal. Although neither Fannie Mae or Freddie Mac securities carry the additional full faith and credit U.S. government guarantee, the credit markets consider the credit on these securities to be equivalent to that of securities rated triple-A or better.
Some private institutions, such as subsidiaries of investment bank, financial institutions and home-builders, also issue mortgage securities. When issuing CMOs, they often use agency mortgage pass-through securities as collateral; however, their collateral may include different or specialized types of mortgage loans and/or pools, letters of credit and other types of credit enhancements. These private-labeled CMOs are the sole obligation of their issuer. To the extent that private-label CMOs use agency mortgage pass-through securities as collateral, their agency collateral carries the respective agency’s guarantees. Private-label CMOs are assigned credit ratings by independent credit agencies based on their structure, issuer, collateral and any guarantees or outside factors. Many carry the highest AAA credit rating.
As an additional investor protection, the CMO issuer typically segregates the CMO collateral or deposits it in the care of the trustee, who holds it for the exclusive benefit of the CMO bondholders.
For the above reasons described, CMOs are considered by a select few platforms to be an asset that is easy to validate and prove ownership. In addition, the trading platform is able to be added as the CMOs Beneficiary allowing for the appropriate financing lines to be obtained. The result is a CMO asset that can be purchased for pennies on the dollar with nominal returns and subsequently placed and traded successfully in a Private Trading Program with yields the owner once only dreamed of.
If like countless homeowners you have been accountable, paid your loan on time even though it is higher than market cost, all the while watching those around you purchase and refinance at reduced and lesser costs. Well, good updates if at last right here. A show you are able to make use of to decrease your interest rate has certainly come along and you are ready to refinance. That is, the new HARP 2 Refinance show, which is proposed for home-owners whose credits are owned by Fannie Mae or Freddie Mac, and that are obligated to repay beyond the estate is worth, that are under water on their loan.
But as the show is argued roll out, it’s amusing. The inquiry often then develops: “Ought to I refinance? Exactly how numerous years could it take to pay this home loan down to just what my residence costs presently?” And at that point some home-owners consider the real alternative of doing a brief purchase.
Definitely there is nothing at all wrong by having a short sale. Lots of folks are selling their homes for less than it is presently worth, and the loan provider is betting along and also taking the decline.
But, if you organize to be in the residence long term, that is, for a variety of years to come, at that point the HARP 2 refinance might be merely the alternative that aids you retain the house, substantially raise cash flow on the estate, and also wait it out as your block rises in value again over the coming few several years.
Time is one your edge, so long as you don’t have to relocate. If you seem protected in your task, as well as children are doing well in their colleges and also by having their circle of buddies, that point you will definitely do well over the long haul to stay in your house, as well as enjoy this HARP Refinance and have fun with a grown family capital, while likewise rejoicing in your house. The home that you have produced your family member, where your memories are as well as have been created. You can presently feel remarkably content in sitting tight in your home, with this brand-new refinance alternative.
Oh, and also here is one more consideration relating to the HARP 2 Refinance as opposed to short marketing your residence. The Headache Factor. Some folks will definitely tout the effective real estate deals out there today, and encourage you to market your existing house so about will benefit from the heaps out there.
Selling your residence on a short sale is not easy. Generally it takes 4-10 calendar months, and a ton of residence showings as well as a great deal of documents to your existing lender. A refinance, on the other hand, and would like to refinance by having a HARP 2 refinance course, you will certainly give comparable documents, then hang around 30-45 days to close your credit, depending on the amount of loans that your lender has at the time.
In closing, take a close look at the HARP 2 Refinance if you otherwise certify – meaning your credit is owned by Fannie or Freddie. And also, you can abide by the link above to view who already owns your credit. Tip: it is undoubtedly not the provider you are presently sending your once per month repayment to.
Well, if people refinance their residences at lesser interest rates, it means that they have additional money in their pockets to devote. They will certainly will revive or boost their properties or buy even more up-to-the-minute automobiles etc. The knock on result of having even more fluid money rolling about could be observed extremely promptly as well as this should likewise induce the roles market as well. You may find out more information by trying refinancing underwater mortgage
Customer relationship management (CRM) is an integral part of a mortgage brokers job because it is extremely important to follow up with customers in a timely and respectful manner. This means leaving enough space between contact attempts, so as to not appear pushy or over-eager to secure a loan. Let mortgage broker software help you manage your client base, help generate mortgage leads and provide marketing automation for you to make your life easier and to grow your business quicker. Many software programs even offer additional benefits like loan calculations, all of which are automated and accurate.
You can now easily maintain a client database with a mortgage broker software program, as it allows you to view your current loans in progress online in an easy to use manner. Alternatively, a searchable database allows you to locate prior clients when you have new offers that may interest them. The possibilities are endless to improve workflow and increase mortgage CRM when you use a reputable software program, for instance you can create comparison charts for various options to display to your refinance customers.
Maybe a 20 year note would be a more cost effective solution, as opposed to keeping your mortgage payments on a 30 year note. Its never been easier to show them their options as it is now, thanks to these easy to understand comparison charts. You can even utilize hundreds of marketing templates to produce flyers that look professionally designed as well!
Mortgage broker software programs are compatible with standard loan applications like Fannie Mae and Freddie Mac. These programs are specially designed to speed up the application process because they offer user friendly electronic alternatives to filling out forms. Submit PDF loan applications via email to your clients, that way they can print and sign them at their leisure, or fill them out electronically and email them back. Going green is another advantage to this type of software. You can eliminate printing multiple hard copies of applications for others involved in the mortgage process, like loan officer assistants and mortgage underwriters. All of these advantages make a smooth, seamless process for you and your clients.
You are also likely to increase your customer retention rates when you use mortgage broker software programs. When you engage the services of a professional company with reliable software, you open yourself up to incredible results. The benefits to working with a professional company includes customized software solutions that can help build your business from the ground up, or obtaining targeted solutions for portions of your mortgage broker business. Ongoing technical support is also a standard benefit with software packages you purchase. Researching all of your options for software solutions can help you obtain the program that is right for your company and your budget.