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Full Faith and Credit - History


Full faith and credit - first words of Article IV, Section 1 of the Constitution, which requires states to respect the "public acts, records, and judicial proceedings" of all the other states.

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What is the full faith and credit clause? A. This clause states that the United States Constitution is the supreme law of the land. B. This clause guarantees that all the states will continue to have governments that are chosen by the people. C. Also known as the elastic clause, this clause gives Congress all the powers it needs to carry out its enumerated powers. D. This clause requires the states to cooperate with each others' laws.

The answer is C. Just wanted to really confirm that answer.

this clause states that united states

The correct answer is c.laws passed in one state are honored by other states.

This is done to prevent states having feuds with one another and to prevent a civil war or anything similar. This applies to laws unique to the state since federal laws are the same for all states. This for example is the right to have a death penalty. Other states have to honor the fact that there's such a law and can't bother the state about it since it's not something found in a federal law.


Full Faith and Credit Clause

The Full Faith and Credit Clause𠅊rticle IV, Section 1, of the U.S. Constitution—provides that the various states must recognize legislative acts, public records, and judicial decisions of the other states within the United States. It states that "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State." The statute that implements the clause, 28 U.S.C.A. § 1738, further specifies that "a state's preclusion rules should control matters originally litigated in that state." The Full Faith and Credit Clause ensures that judicial decisions rendered by the courts in one state are recognized and honored in every other state. It also prevents parties from moving to another state to escape enforcement of a judgment or to relitigate a controversy already decided elsewhere, a practice known as forum shopping.

In drafting the Full Faith and Credit Clause, the Framers of the Constitution were motivated by a desire to unify their new country while preserving the autonomy of the states. To that end, they sought to guarantee that judgments rendered by the courts of one state would not be ignored by the courts of other states. The Supreme Court reiterated the Framers' intent when it held that the Full Faith and Credit Clause precluded any further litigation of a question previously decided by an Illinois court in Milwaukee County v. M. E. White Co., 296 U.S. 268, 56 S. Ct. 229, 80 L. Ed. 220 (1935). The Court held that by including the clause in the Constitution, the Framers intended to make the states "integral parts of a single nation throughout which a remedy upon a just obligation might be demanded as of right, irrespective of the state of its origin."

The Full Faith and Credit Clause is invoked primarily to enforce judgments. When a valid judgment is rendered by a court that has jurisdiction over the parties, and the parties receive proper notice of the action and a reasonable opportunity to be heard, the Full Faith and Credit Clause requires that the judgment receive the same effect in other states as in the state where it is entered. A party who obtains a judgment in one state may petition the court in another state to enforce the judgment. When this is done, the parties do not relitigate the issues, and the court in the second state is obliged to fully recognize and honor the judgment of the first court in determining the enforceability of the judgment and the procedure for its execution.

The Full Faith and Credit Clause has also been invoked to recognize the validity of a marriage. Traditionally, every state honored a marriage legally contracted in any other state. However, in 1993, the Hawaii Supreme Court held that Hawaii's statute restricting legal marriage to parties of the opposite sex establishes a sex-based classification, which is subject to Strict Scrutiny if challenged on Equal Protection grounds (Baehr v. Lewin, 852 P.2d 44, 74 Haw. 530). Although the court did not recognize a constitutional right to same-sex marriage, it raised the possibility that a successful equal protection challenge to the state's marriage laws could eventually lead to state-sanctioned same-sex marriages. In response to the Baehr case, Congress in 1996 passed the Defense of Marriage Act (110 Stat. § 2419), which defines marriage as a union of a man and a woman for federal purposes and expressly grants states the right to refuse to recognize a same-sex marriage performed in another state.

During the 1980s and 1990s, the Full Faith and Credit Clause was applied to new matters. Child Custody determinations had historically fallen under the jurisdiction of state courts, and before the 1970s, other states did not accord them full faith and credit enforcement. As a result, a divorced parent who was unhappy with one state's custody decision could sometimes obtain a more favorable ruling from another state. This was an incentive for a dissatisfied parent to kidnap a child and move to another state in order to petition for custody. In response to this situation, the Uniform Child Custody Jurisdiction Act (UCCJA) was adopted by the National Conference of Commissioners on Uniform State Laws in 1968. By 1984, every state had adopted a version of the UCCJA. In 1980, Congress passed the Parental Kidnapping Prevention Act (28 U.S.C.A. § 1738A), which aids enforcement and promotes finality in child custody decisions by providing that valid custody decrees are entitled to full faith and credit enforcement in other states. The Violence against Women Act of 1994 (Pub. L. No. 103-322 [codified in scattered sections of 8 U.S.C.A., 18 U.S.C.A., 42 U.S.C.A.]) extends full faith and credit to the enforcement of protective orders, which previously were not enforced except in the state where they were rendered. This gave a new measure of protection to victims who moved to a different state after obtaining a protective order in one state.

Further readings

Cooke, Edward F. 1995. A Detailed Analysis of the Constitution. Lanham, Md.: Littlefield Adams.

Demelis, Linda M. 1994. "Interstate Child Custody and the Parental Kidnapping Prevention Act: The Continuing Search for a National Standard." Hastings Law Journal 45.

Hamilton, Heather. 1998. "The Defense of Marriage Act: A Critical Analysis of Its Constitutionality Under the Full Faith and Credit Clause." DePaul Law Review 47 (summer).

Hasegawa, Kaleen S. 1999. "Re-Evaluating the Limits of the Full Faith and Credit Clause." University of Hawaii Law Review 21 (winter).

Olson, Thomas A. 1995. "Rethinking Montana's View of Interstate Custody Disputes." Montana Lawyer 20.

Shuki-Kunze, Jennie R. 1998. "The 'Defenseless' Marriage Act: The Constitutionality of the Defense of Marriage Act as an Extension of Congressional Power Under the Full Faith and Credit Clause." Case Western Reserve Law Review 48 (winter).


Protection Orders

BWJP’s National Center on Protection Orders and Full Faith & Credit (NCPOFFC) provides technical assistance and training on protection orders, the Full Faith and Credit (FFC) provision of the Violence Against Women Act (VAWA) and inter-jurisdictional enforcement of protection orders.

The Full Faith and Credit (FFC) provision of VAWA requires that protection orders issued in one jurisdiction must be recognized and enforced in other jurisdictions. The effective enforcement of protection orders across jurisdictional lines is vital to the safety of victims. The National Center on Full Faith and Credit (NCFFC) was created in 1995 to support the implementation of the FFC provision of VAWA. The office also addressed federal legislation on firearms prohibitions related to domestic violence.

In 2009, the name was changed to reflect the comprehensive scope of protection order-related work undertaken by the office, thus the National Center on Protection Orders and Full Faith & Credit (NCPOFFC).

We provide problem-solving technical assistance and training to individuals and jurisdictions on the following:

  • Identifying and resolving systemic problems in local procedures for issuance, service and enforcement of protection orders.
  • Interjurisdictional enforcement of protection orders.
  • Child custody provisions within protection orders.
  • Federal and state firearms prohibitions related to domestic violence.
  • Federal domestic violence and stalking crimes.

Audiences include, but are not limited to, law enforcement officers, prosecutors, judges, court administrators, court personnel, civil attorneys, victim advocates, and other allied professionals.


What Is the Full Faith and Credit Clause?

The Full Faith and Credit Clause is an important part of the U.S. Constitution. Found in Article IV, Section 1, the clause requires that all decisions, public records, and rulings from one state be honored in all the other U.S. states. That is, each U.S. court must give "full faith" and "credit" to the decisions rendered by other courts. Without the Full Faith and Credit Clause, conflicts might arise between states, and the legal system would be entangled in various overlapping rulings.

Contents

Does the Full Faith and Credit Clause Apply to Family Law Rulings?

Yes, aside from public records and legislative issues, the Full Faith and Credit Clause requires courts to recognize various family law rulings coming in from other states. For instance, the clause may require courts to uphold out-of-state rulings regarding:

What If a Person Attempts to Violate the Clause?

Thus, a person cannot simply relocate to another state simply for the purpose of obtaining a different ruling on child custody or other family law issues. Instead, what will happen is that the court in the new state will examine records from the previous rulings in the other state, and will institute findings based on these records.

Purposely finding fault with a particular court, or going from place to place looking for a suitable venue is generally prohibited by laws of civil procedure. Abuses of the Full Faith and Credit Clause can lead to consequences for the plaintiff, such as a contempt order or a court fine.

On the other hand, if the court violates the Full Faith and Credit Clause by not honoring a ruling from another court, it could lead to a re-determination of the case or an appeal in a different court.

Do I Need a Lawyer for Help with the Full Faith and Credit Clause?

Dealing with constitutional laws can often be very challenging. You may wish to hire a government lawyer if you need help with any type of constitutional law or with any procedural matters. Your attorney can guide you to the proper solution for your issue, and can represent you in court if you need to file a legal claim.


Contents

The process of securitization is complex and depends greatly on the jurisdiction within which the process is conducted. Among other things, securitization distributes risk and permits investors to choose different levels of investment and risk. [4] The basics are:

  1. Mortgage loans (mortgage notes) are purchased from banks and other lenders, and possibly assigned to a special purpose vehicle (SPV).
  2. The purchaser or assignee assembles these loans into collections, or "pools".
  3. The purchaser or assignee securitizes the pools by issuing mortgage-backed securities.

While a residential mortgage-backed security (RMBS) is secured by single-family or two- to four-family real estate, a commercial mortgage-backed security (CMBS) is secured by commercial and multi-family properties, such as apartment buildings, retail or office properties, hotels, schools, industrial properties, and other commercial sites. A CMBS is usually structured as a different type of security than an RMBS.

These securitization trusts may be structured by government-sponsored enterprises as well as by private entities that may offer credit enhancement features to mitigate the risk of prepayment and default associated with these mortgages. Since residential mortgage holders in the United States have the option to pay more than the required monthly payment (curtailment) or to pay off the loan in its entirety (prepayment), the monthly cash flow of an MBS is not known in advance, and an MBS therefore presents a risk to investors.

In the United States, the most common securitization trusts are sponsored by Fannie Mae and Freddie Mac, US government-sponsored enterprises. Ginnie Mae, a US government-sponsored enterprise backed by the full faith and credit of the US government, guarantees that its investors receive timely payments but buys limited numbers of mortgage notes. Some private institutions also securitize mortgages, known as "private-label" mortgage securities. [5] [6] Issuances of private-label mortgage-backed securities increased dramatically from 2001 to 2007 and then ended abruptly in 2008, when real estate markets began to falter. [7] An example of a private-label issuer is the real estate mortgage investment conduit (REMIC), a tax-structure entity usually used for CMOs among other things, a REMIC structure avoids so-called double taxation. [8]

Advantages and disadvantages Edit

The securitization of mortgages in the 1970s had the advantage of providing more capital for housing at a time when the demographic bulge of baby boomers created a housing shortage and inflation was undermining a traditional source of housing funding, the savings and loan associations (or thrifts), which were limited to providing uncompetitive 5.75% interest rates on savings accounts and consequently losing savers' money to money market funds. Unlike the traditional localized, inefficient mortgage market where there might be a shortage or surplus of funds at any one time, MBSs were national in scope and regionally diversified. [9] Mortgage backed securities helped move interest rate out of the banking sector and facilitated greater specialization among financial institutions.

However, mortgage-backed securities may have "led inexorably to the rise of the subprime industry" and "created hidden, systemic risks". They also "undid the connection between borrowers and lenders". Historically, "less than 2% of people lost their homes to foreclosure", but with securitization, "once a lender sold a mortgage, it no longer had a stake in whether the borrower could make his or her payments." [10]

Among the early examples of mortgage-backed securities in the United States were the slave mortgage bonds of the early 18th century [11] and the farm railroad mortgage bonds of the mid-19th century which may have contributed to the panic of 1857. [12] There was also an extensive commercial MBS market in the 1920s. [13]

US government Edit

As part of the New Deal following the Great Depression, the US federal government created the Federal Housing Administration (FHA) with the National Housing Act of 1934 to assist in the construction, acquisition, and rehabilitation of residential properties. [14] The FHA helped develop and standardize the fixed-rate mortgage as an alternative to the balloon payment mortgage by insuring them, and helped the mortgage design garner usage. [15]

In 1938, the government also created the government-sponsored corporation Fannie Mae to create a liquid secondary market in these mortgages and thereby free up the loan originators to originate more loans, primarily by buying FHA-insured mortgages. [16] As part of the Housing and Urban Development Act of 1968, Fannie Mae was split into the current Fannie Mae and Ginnie Mae to support the FHA-insured mortgages, as well as Veterans Administration (VA) and Farmers Home Administration (FmHA) insured mortgages, with the full faith and credit of the US government. [17] In 1970, the federal government authorized Fannie Mae to purchase private mortgages—that is, those not insured by the FHA, VA, or FmHA, and created Freddie Mac to perform a role similar to that of Fannie Mae. [17] Ginnie Mae does not invest in private mortgages.

Securitization Edit

Ginnie Mae guaranteed the first mortgage pass-through security of an approved lender in 1968. [18] In 1971, Freddie Mac issued its first mortgage pass-through, called a participation certificate, composed primarily of private mortgages. [18] In 1981, Fannie Mae issued its first mortgage pass-through, called a mortgage-backed security. [19] In 1983, Freddie Mac issued the first collateralized mortgage obligation. [20]

In 1960 the government enacted the Real Estate Investment Trust Act to allow the creation of the real estate investment trust (REIT) to encourage real estate investment, and in 1977 Bank of America issued the first private label pass-through. [21] In 1983 the Federal Reserve Board amended Regulation T to allow broker-dealers to use pass-throughs as margin collateral, equivalent to over-the-counter non-convertible bonds. [22] In 1984 the government passed the Secondary Mortgage Market Enhancement Act to improve the marketability of private label pass-throughs, [21] which declared nationally recognized statistical rating organization AA-rated mortgage-backed securities to be legal investments equivalent to Treasury securities and other federal government bonds for federally chartered banks (such as federal savings banks and federal savings associations), state-chartered financial institutions (such as depository banks and insurance companies) unless overridden by state law before October 1991 (which 21 states did [23] ), and Department of Labor–regulated pension funds. [24]

The Tax Reform Act of 1986 allowed the creation of the tax-exempt real estate mortgage investment conduit (REMIC) special purpose vehicle for the express purpose of issuing pass-throughs. [25] The Tax Reform Act significantly contributed to the savings and loan crisis of the 1980s and 1990s that resulted in the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which dramatically changed the savings and loan industry and its federal regulation, encouraging loan origination. [26] [27]

Subprime mortgage crisis Edit

Low-quality mortgage-backed securities backed by subprime mortgages in the United States caused a crisis that played a major role in the 2007–08 global financial crisis. By 2012 the market for high-quality mortgage-backed securities had recovered and was a profit center for US banks. [28]

Most bonds backed by mortgages are classified as an MBS. This can be confusing, because a security derived from an MBS is also called an MBS. To distinguish the basic MBS bond from other mortgage-backed instruments, the qualifier pass-through is used, in the same way that "vanilla" designates an option with no special features.

Subtypes of mortgage-backed security include:

  • Pass-through securities are issued by a trust and allocate the cash flows from the underlying pool to the securities holders on a pro rata basis. A trust that issues pass-through certificates is taxed under the grantor trust rules of the Internal Revenue Code. Under these rules, the holder of a pass-through certificate is taxed as a direct owner of the portion of the trust allocatable to the certificate. In order for the issuer to be recognized as a trust for tax purposes, there can be no significant power under the trust agreement to change the composition of the asset pool or otherwise to reinvest payments received, and the trust must have, with limited exceptions, only a single class of ownership interests. [29]
    • A residential mortgage-backed security (RMBS) is a pass-through MBS backed by mortgages on residential property.
    • A commercial mortgage-backed security (CMBS) is a pass-through MBS backed by mortgages on commercial property.
    • An interest-only stripped mortgage-backed security (IO) is a bond with cash flows backed by the interest component of property owner's mortgage payments.
      • A net interest margin security (NIMS) is re-securitized residual interest of a mortgage-backed security [33]

      There are a variety of underlying mortgage classifications in the pool:

      • Prime mortgages are conforming mortgages with prime borrowers, full documentation (such as verification of income and assets), strong credit scores, etc.
      • Alt-A mortgages are an ill-defined category, generally prime borrowers but non-conforming in some way, often lower documentation (or in some other way: vacation home, etc.) [34] Alt-A mortgages tend to be larger in size than subprime loans and have significantly higher credit quality. For example, an Alt-A loan might be to an individual with multiple and varying sources of income non-owner occupied, investment properties are often Alt-A loans. Because Alt-A loans are not conforming loans, they are not eligible for purchase by Fannie Mae or Freddie Mac. [35]
      • Subprime mortgages generally have weaker credit scores as well as little to no verification of income or assets, high debt-to-income ratios, etc.
      • Jumbo mortgage when the size of the loan is bigger than the "conforming loan amount" as set by Fannie Mae or Freddie Mac. As such, the mortgage rates on jumbo loans are somewhat higher than for conforming loans. [35]

      These types are not limited to Mortgage Backed Securities. Bonds backed by mortgages but that are not MBSs can also have these subtypes.

      There are two types of classifications based on the issuer of the security:

      • Agency, or government, issued securities by government-sponsored enterprise issuers, such as Fannie Mae, Freddie Mac, and Ginnie Mae.
        • Fannie Mae and Freddie Mac sell short term (3–6 month) bills at auction on a weekly schedule, [36] and longer-term (1–10 year) notes at monthly auctions. [37]
        • The underlying mortgages for Agency MBS are one to four-single family residential mortgages only.
        • The underlying mortgages for Non-Agency MBS are backed by second mortgage loans, manufactured housing loans, and a variety of commercial real estate loans, in addition to single family residential mortgages.

        Secondary mortgage market Edit

        The secondary mortgage market is the market where a network of lenders sell, and investors buy, existing mortgages or MBS. A large percentage of newly originated mortgages are sold by their originators into this large and liquid market where they are packaged into MBS and sold to public and private investors, including Fannie Mae, Freddie Mac, pension funds, insurance companies, mutual funds and hedge funds.

        Because of the long-term nature of mortgages, the secondary market is an essential factor in maintaining lender liquidity. The infusion of capital from investors provides mortgage lenders such as banks, thrifts, mortgage bankers and other loan originators with a market for their loans. In addition to providing liquidity and increasing overall efficiency, the secondary market can smooth out geographic credit disparities. However, in some respects, particularly where subprime and other riskier mortgages are involved, the secondary mortgage market may exacerbate certain risks and volatility. [4]

        TBAs Edit

        TBAs—short for "to-be-announced" securities—involve a special type of trading of mortgage-backed securities. TBAs are the most liquid and important secondary mortgage market, with volume in the trillions of dollars annually. [38] TBAs are traded by MBS traders with notional amounts. There are settlement days when the traders have to make good on their trades. At that time, they choose fractions from various pools to make up their TBA. Only agency mortgage-backed securities trade in the TBA market. [38] "In a TBA transaction, the parties agree on a price for delivering a given volume of Agency Pass-Through Mortgage-Backed Securities at a specified future date. The distinguishing feature of a TBA transaction is that the actual identity of the securities to be delivered at settlement is not specified on the date of execution (“Trade Date”). Instead, the parties to the trade agree on only five general parameters of the securities to be delivered: issuer, mortgage type, term, coupon, and month of settlement." [39]

        TBAs are critical in determining the ultimate interest rates that mortgage borrowers pay, since mortgage originators can "lock in" rates and use TBAs to hedge their exposure. TBAs are also used to hedge many non-TBA eligible mortgage products, such as hybrid ARMs and non-agency mortgages. [38]

        Covered bonds Edit

        In Europe there exists a type of asset-backed bond called a covered bond, commonly known by the German term Pfandbriefe. Covered bonds were first created in 19th-century Germany when Frankfurter Hypo began issuing mortgage covered bonds. The market has been regulated since the creation of a law governing the securities in Germany in 1900. The key difference between covered bonds and mortgage-backed or asset-backed securities is that banks that make loans and package them into covered bonds keep those loans on their books. This means that when a company with mortgage assets on its books issues the covered bond, its balance sheet grows, which would not occur if it issued an MBS, although it may still guarantee the securities payments.

        There are many reasons for mortgage originators to finance their activities by issuing mortgage-backed securities. Mortgage-backed securities:

        1. transform relatively illiquid, individual financial assets into liquid and tradable capital market instruments
        2. allow mortgage originators to replenish their funds, which can then be used for additional origination activities
        3. can be used by Wall Street banks to monetize the credit spread between the origination of an underlying mortgage (private market transaction) and the yield demanded by bond investors through bond issuance (typically a public market transaction)
        4. are often a more efficient and lower-cost source of financing in comparison with other bank and capital markets financing alternatives.
        5. allow issuers to diversify their financing sources by offering alternatives to more traditional forms of debt and equity financing
        6. allow issuers to remove assets from their balance sheet, which can help to improve various financial ratios, utilize capital more efficiently, and achieve compliance with risk-based capital standards

        The high liquidity of most mortgage-backed securities means that an investor wishing to take a position need not deal with the difficulties of theoretical pricing described below the price of any bond is essentially quoted at fair value, with a very narrow bid/offer spread. [ citation needed ]

        Reasons (other than investment or speculation) for entering the market include the desire to hedge against a drop in prepayment rates (a critical business risk for any company specializing in refinancing).

        As of the second quarter of 2011, there was about $13.7 trillion in total outstanding US mortgage debt. [40] There were about $8.5 trillion in total US mortgage-related securities. [41] About $7 trillion of that was securitized or guaranteed by government-sponsored enterprises or government agencies, the remaining $1.5 trillion being pooled by private mortgage conduits. [40]

        According to the Bond Market Association, gross US issuance of agency MBS was (see also chart above):

        • 2005: USD 0.967 trillion
        • 2004: USD 1.019 trillion
        • 2003: USD 2.131 trillion
        • 2002: USD 1.444 trillion
        • 2001: USD 1.093 trillion

        Valuation Edit

        The weighted-average maturity (WAM) and weighted average coupon (WAC) are used for valuation of a pass-through MBS, and they form the basis for computing cash flows from that mortgage pass-through. Just as this article describes a bond as a 30-year bond with 6% coupon rate, this article describes a pass-through MBS as a $3 billion pass-through with 6% pass-through rate, a 6.5% WAC, and 340-month WAM. The pass-through rate is different from the WAC it is the rate that the investor would receive if he/she held this pass-through MBS, and the pass-through rate is almost always less than the WAC. The difference goes to servicing costs (i.e., costs incurred in collecting the loan payments and transferring the payments to the investors.)

        To illustrate these concepts, consider a mortgage pool with just three mortgage loans that have the following outstanding mortgage balances, mortgage rates, and months remaining to maturity:

        Weighted-average maturity Edit

        The weighted-average maturity (WAM) of a pass-through MBS is the average of the maturities of the mortgages in the pool, weighted by their balances at the issue of the MBS. Note that this is an average across mortgages, as distinct from concepts such as weighted-average life and duration, which are averages across payments of a single loan.

        The weightings are computed by dividing each outstanding loan amount by total amount outstanding in the mortgage pool (i.e., $900,000). These amounts are the outstanding amounts at the issuance or initiation of the MBS. The WAM for the above example is computed as follows:

        WAM = (22.2 2 % × 300) + (44.4 4 % × 260) + (33.3 3 % × 280) = 66.6 6 + 115.5 5 + 93.3 3 = 275.5 5 months

        Another measure often used is the Weighted-average loan age.

        Weighted-average coupon Edit

        The weighted-average coupon (WAC) of a pass-through MBS is the average of the coupons of the mortgages in the pool, weighted by their original balances at the issuance of the MBS. For the above example this is:

        WAC = (22.2 2 % × 6.00%) + (44.4 4 % × 6.25%) + (33.3 3 % × 6.50%) = 1.3 3 % + 2.7 7 % + 2.16 6 % = 6.27 7 %

        Theoretical pricing Edit

        Pricing a "vanilla" corporate bond is based on two sources of uncertainty: default risk (credit risk) and interest rate (IR) exposure. [42] The MBS adds a third risk: early redemption (prepayment). The number of homeowners in residential MBS securitizations who prepay increases when interest rates decrease. One reason for this phenomenon is that homeowners can refinance at a lower fixed interest rate. Commercial MBS often mitigate this risk using call protection. [43]

        Since these two sources of risk (IR and prepayment) are linked, solving mathematical models of MBS value is a difficult problem in finance. The level of difficulty rises with the complexity of the IR model and the sophistication of the prepayment IR dependence, to the point that no closed-form solution (i.e., one that could be written down) is widely known. In models of this type, numerical methods provide approximate theoretical prices. These are also required in most models that specify the credit risk as a stochastic function with an IR correlation. Practitioners typically use specialised Monte Carlo methods or modified Binomial Tree numerical solutions.

        Interest rate risk and prepayment risk Edit

        Theoretical pricing models must take into account the link between interest rates and loan prepayment speed. Mortgage prepayments are usually made because a home is sold or because the homeowner is refinancing to a new mortgage, presumably with a lower rate or shorter term. Prepayment is classified as a risk for the MBS investor despite the fact that they receive the money, because it tends to occur when floating rates drop and the fixed income of the bond would be more valuable (negative convexity). In other words, the proceeds received would need to be reinvested at a lower interest rate. [8] Hence the term prepayment risk.

        Professional investors generally use arbitrage-pricing models to value MBS. These models deploy interest rate scenarios consistent with the current yield curve as drivers of the econometric prepayment models that models homeowner behavior as a function of projected mortgage rates. Given the market price, the model produces an option-adjusted spread, a valuation metric that takes into account the risks inherent in these complex securities. [44]

        There are other drivers of the prepayment function (or prepayment risk), independent of the interest rate, such as:

        • economic growth, which is correlated with increased turnover in the housing market
        • home prices inflation
        • unemployment
        • regulatory risk (if borrowing requirements or tax laws in a country change this can change the market profoundly) trends, and a shifting risk aversion profile, which can make fixed rate mortgages relatively more or less attractive

        Credit risk Edit

        The credit risk of mortgage-backed securities depends on the likelihood of the borrower paying the promised cash flows (principal and interest) on time. The credit rating of MBS is fairly high because:

        1. Most mortgage originations include research on the mortgage borrower's ability to repay, and will try to lend only to the creditworthy. An important exception to this is "no-doc" or "low-doc" loans.
        2. Some MBS issuers, such as Fannie Mae, Freddie Mac, and Ginnie Mae, guarantee against homeowner default risk. In the case of Ginnie Mae, this guarantee is backed with the full faith and credit of the US federal government. [45] This is not the case with Fannie Mae and Freddie Mac, but these two entities have lines of credit with the US federal government however, these lines of credit are extremely small compared to the average amount of money circulated through these entities in one day's business. Additionally, Fannie Mae and Freddie Mac generally require private mortgage insurance on loans in which the borrower provides a down payment that is less than 20% of the property value.
        3. Pooling many mortgages with uncorrelated default probabilities creates a bond with a much lower probability of total default, in which no homeowners are able to make their payments (see Copula). Although the risk neutralcredit spread is theoretically identical between a mortgage ensemble and the average mortgage within it, the chance of catastrophic loss is reduced.
        4. If the property owner should default, the property remains as collateral. Although real estate prices can move below the value of the original loan, this increases the solidity of the payment guarantees and deters borrower default.

        If the MBS was not underwritten by the original real estate and the issuer's guarantee, the rating of the bonds would be much lower. Part of the reason is the expected adverse selection against borrowers with improving credit (from MBSs pooled by initial credit quality) who would have an incentive to refinance (ultimately joining an MBS pool with a higher credit rating).

        Real-world pricing Edit

        Because of the diversity in MBS types, there is wide variety of pricing sources. In general, the more uniform or liquid the MBS, the greater the transparency or availability of prices. [38] Most traders and money managers use Bloomberg and Intex to analyze MBS pools and more esoteric products such as CDOs, although tools such as Citi's The Yield Book, Barclays POINT, and BlackRock's AnSer are also prevalent across Wall Street, especially for multi–asset class managers. Some institutions have also developed their own proprietary software. Tradeweb is used by the largest bond dealers (the "primaries") to transact round lots ($1 million and larger).

        Complex structured products tend to trade less frequently and involve more negotiation. Prices for these more complicated MBSs, as well as for CMOs and CDOs, tend to be more subjective, often available only from dealers. [38]

        For "vanilla" or "generic" 30-year pools (issued by Fannie Mae, Freddie Mac, or Ginnie Mae) with coupons of 3.5%–7%, one can see the prices posted on a TradeWeb screen by the primaries called To Be Allocated (TBA). This is due to the actual pools not being shown. These are forward prices for the next 3 delivery months since pools have not been cut only the issuing agency, coupon, and dollar amount are revealed. A specific pool whose characteristics are known would usually trade "TBA plus ticks" or a "pay-up", depending on characteristics. These are called "specified pools", since the buyer specifies the pool characteristic he/she is willing to "pay up" for.

        The price of an MBS pool is influenced by prepayment speed, usually measured in units of CPR or PSA. When a mortgage refinances or the borrower prepays during the month, the prepayment measurement increases.

        If an investor has acquired a pool at a premium (>100), as is common for higher coupons, then they are at risk for prepayment. If the purchase price was 105, the investor loses 5 cents for every dollar prepaid, which may significantly decrease the yield. This is likely to happen as holders of higher-coupon mortgages can have a larger incentive to refinance.

        Conversely, it may be advantageous to the bondholder for the borrower to prepay if the low-coupon MBS pool was bought at a discount (<100). This is due to the fact that when the borrower pays back the mortgage, he does so at "par". If an investor purchases a bond at 95 cents on the dollar, as the borrower prepays the investor gets the full dollar back, increasing their yield. However, this is less likely to occur, as borrowers with low-coupon mortgages have lower, or no, incentives to refinance.

        The price of an MBS pool is also influenced by the loan balance. Common specifications for MBS pools are loan amount ranges that each mortgage in the pool must pass. Typically, high-premium (high-coupon) MBSs backed by mortgages with an original loan balance no larger than $85,000 command the largest pay-ups. Even though the borrower is paying an above market yield, he or she is dissuaded from refinancing a small loan balance due to the high fixed cost involved.

        Low Loan Balance: < $85,000
        Mid Loan Balance: $85,000–$110,000
        High Loan Balance: $110,000–$150,000
        Super High Loan Balance: $150,000–$175,000
        TBA: > $175,000

        The plurality of factors makes it difficult to calculate the value of an MBS security. Often market participants do not concur, resulting in large differences in quoted prices for the same instrument. Practitioners constantly try to improve prepayment models and hope to measure values for input variables implied by the market. Varying liquidity premiums for related instruments and changing liquidity over time make this a difficult task. One factor used to express price of an MBS security is the pool factor.

        One critical component of the securitization system in the US market is the Mortgage Electronic Registration Systems (MERS) created in the 1990s, which created a private system wherein underlying mortgages were assigned and reassigned outside of the traditional county-level recording process. The legitimacy and overall accuracy of this alternative recording system have faced serious challenges with the onset of the mortgage crisis: as the US courts flood with foreclosure cases, the inadequacies of the MERS model are being exposed, and both local and federal governments have begun to take action through suits of their own and the refusal (in some jurisdictions) of the courts to recognize the legal authority of MERS assignments. [46] [47] The assignment of mortgage (deed of trust) and note (obligation to pay the debt) paperwork outside of the traditional US county courts (and without recordation fee payment) is subject to legal challenge. Legal inconsistencies in MERS originally appeared trivial, but they may reflect dysfunctionality in the entire US mortgage securitization industry.


        Full Faith and Credit Clause

        The Full Faith and Credit Clause&mdashArticle IV, Section 1, of the U.S. Constitution&mdashprovides that the various states must recognize legislative acts, public records, and judicial decisions of the other states within the United States. It states that "Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State." The statute that implements the clause, 28 U.S.C.A. § 1738, further specifies that "a state's preclusion rules should control matters originally litigated in that state." The Full Faith and Credit Clause ensures that judicial decisions rendered by the courts in one state are recognized and honored in every other state. It also prevents parties from moving to another state to escape enforcement of a judgment or to relitigate a controversy already decided elsewhere, a practice known as forum shopping.

        In drafting the Full Faith and Credit Clause, the Framers of the Constitution were motivated by a desire to unify their new country while preserving the autonomy of the states. To that end, they sought to guarantee that judgments rendered by the courts of one state would not be ignored by the courts of other states. The Supreme Court reiterated the Framers' intent when it held that the Full Faith and Credit Clause precluded any further litigation of a question previously decided by an Illinois court in Milwaukee County v. M. E. White Co., 296 U.S. 268, 56 S. Ct. 229, 80 L. Ed. 220 (1935). The Court held that by including the clause in the Constitution, the Framers intended to make the states "integral parts of a single nation throughout which a remedy upon a just obligation might be demanded as of right, irrespective of the state of its origin."

        The Full Faith and Credit Clause is invoked primarily to enforce judgments. When a valid judgment is rendered by a court that has jurisdiction over the parties, and the parties receive proper notice of the action and a reasonable opportunity to be heard, the Full Faith and Credit Clause requires that the judgment receive the same effect in other states as in the state where it is entered. A party who obtains a judgment in one state may petition the court in another state to enforce the judgment. When this is done, the parties do not relitigate the issues, and the court in the second state is obliged to fully recognize and honor the judgment of the first court in determining the enforceability of the judgment and the procedure for its execution.

        The Full Faith and Credit Clause has also been invoked to recognize the validity of a marriage. Traditionally, every state honored a marriage legally contracted in any other state. However, in 1993, the Hawaii Supreme Court held that Hawaii's statute restricting legal marriage to parties of the opposite sex establishes a sex-based classification, which is subject to STRICT SCRUTINY if challenged on EQUAL PROTECTION grounds (Baehr v. Lewin, 852 P.2d 44, 74 Haw. 530). Although the court did not recognize a constitutional right to same-sex marriage, it raised the possibility that a successful equal protection challenge to the state's marriage laws could eventually lead to state-sanctioned same-sex marriages. In response to the Baehr case, Congress in 1996 passed the Defense of Marriage Act (110 Stat. § 2419), which defines marriage as a union of a man and a woman for federal purposes and expressly grants states the right to refuse to recognize a same-sex marriage performed in another state.


        Change is Coming

        In the interim, the same central banks will eventually act to quash even retail demand for gold by outpricing this asset once inflationary conditions get too absurd to control or publicly downplay.

        The players to this rigged game may be corrupt but they aren’t stupid. They may hate gold in public, but they own a lot of it in private.

        In a rigged game, it’s all about the house controlling the casino.

        That is, failed policy makers recognize that once faith in the global fiat system implodes, as it will, whatever new SDR or Digital Central Bank Currency (DCBC) the IMF, BIS and other rigged players impose upon us in the inevitable “re-set” to come, the new “digital solution” will have zero credibility unless it includes some form of recalibration to a much higher-priced gold.

        That’s why countries like Russia and China and central banks around the world are playing the long game and buying gold today at artificially repressed prices but once those prices multiply, the retail investor could be easily priced out of this rising asset.

        Rigged or not, the smart money knows gold follows 1) the broad increase in the money supply per capita and 2) increasingly negative real rates.

        As inflation and money supply rises naturally from smoking money printers, and as governments repress rates via monetized yield control, the setting for inflation to outpace yields is clear, which means the path ahead for gold is equally so.

        Thus, if you still think today’s rising gold price is too high, you ain’t seen nothing yet.

        That’s a fact, not sensationalism.

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        Egon von Greyerz
        Founder and Managing Partner
        Matterhorn Asset Management
        Zurich, Switzerland
        Phone: +41 44 213 62 45


        Understanding the Government National Mortgage Association

        The Government National Mortgage Association was established in 1968 as part of the U.S Department of Housing and Urban Development (HUD) to promote affordable homeownership.   Ginnie Mae doesn't create or advance mortgages but guarantees them for single and multifamily homes. Since these loans are backed by the government, homeowners are able to secure lower interest rates, therefore lowering their borrowing costs.

        It was the first organization to create and guarantee mortgage-backed securities in 1970 and has continued to back these instruments ever since. Securities were first sold on the international market on the Luxembourg Stock Exchange in 1983.   Ginnie Mae essentially stands a few steps behind the mortgage market neither issuing, selling, or buying pass-through mortgage-backed securities, nor purchasing mortgage loans. Instead, approved private lenders originate eligible loans, pool them into securities, and issue mortgage-backed securities guaranteed by Ginnie Mae. According to the association's website, Ginnie Mae's MBS portfolio balance is worth $2.1 trillion.  

        Ginnie Mae has guaranteed mortgage-backed securities since 1970 to help open the home mortgage market to first-time homemakers, low-income borrowers, and other underserved groups.

        By doing this, Ginnie Mae guarantees the timely payment of principal and interest from approved issuers—such as mortgage bankers, savings and loans, and commercial banks—of qualifying loans. An investor in a GNMA security doesn't know who the underlying issuer of the mortgages is, but merely that the security is guaranteed by Ginnie Mae. This means it is backed by the full faith and credit of the U.S. government, just like the instruments issued by the U.S.Treasury.   The GNMA guarantee means that Investors with shares in Ginnie Mae funds never have to worry about the impact of late payments or mortgage defaults on their investment. When mortgage borrowers fail to make a payment, Ginnie Mae steps in to honor those missed payments.

        Ginnie Mae's efforts serve to expand the pool of homeowners by mostly aiding lending to homeowners who are traditionally underserved in the mortgage market. Most mortgages securitized as Ginnie Mae MBSs are insured by the Federal Housing Administration (FHA), which typically insures mortgages to first-time home buyers and low-income borrowers. Other frequent beneficiaries of Ginnie Mae guarantees are securities made up of mortgages insured by the Veterans Administration (VA) and the Rural Housing Service (RHS).


        Full Faith and Credit - History

        Article 4 of the Constitution is the article that details the states of the United States of America. The article discusses what the responsibilities are, and what duties the states have. The article also discusses the role of the federal government, and what the responsibilities are on that front. This article is broken down in to 4 distinct sections, and these are further broken down in to the different clauses under each section and each power.

        Section 1: Each State to Honor all Others

        This is the Full Faith and Credit Clause. The clause details that each state is required to extend credit and extend full faith to the public acts, to any court proceedings, and to the other states in the U.S. The section further breaks down the fact that Congress has the power to watch over this and step in if these things are not taking place.

        Section 2: State Citizens, Extradition

        This section dictates what the responsibilities of the states are in relation to the locals, as well as in relation to one another, based on a series of events that might take place in the states. It gives guidelines on how to govern the people, and how to deal with neighboring states.

        This is the Privileges and Immunities clause, which dictates the state must protect immunities and what the privileges are between the states.

        This is the Extradition clause, stating that any individual that is charged with a crime, and who tries to escape to another state, can be forced by government officials (in either state), to return to the state they were charged in.

        The Fugitive Slave clause first took effect during the period of slavery in the U.S. If slaves ran away from the state they were from, they would in turn have to be brought back, allowing the owner to claim that slave. With the passing of the 13th Amendment, this clause is no longer viable in the Constitution.

        Section 3: New States

        This section deals with federal property. It also deals with any new states that might be accepted in to the union as a U.S. state. It dictates what kind of powers that state has as well as what powers the elected officials in that new state will have.

        This clause states that Congress has the power to admit new states in to the union. But, it limits the fact that new states cannot be formed by combining a number of states that are already in existence in the union. In order for this to occur, Congress would have to get permission from the legislature in each of the separate states that it would like to combine to create a new state.

        This is known as the Territorial Clause, and is sometimes called the property clause. This clause gives the U.S. Congress the final power over any territory in the country. The clause also gives Congress the power to remove certain territories. Lastly, it gives Congress the power to create laws over the territories that they are governing.

        Section 4: Republican Government

        This final section of Article 4 of the Constitution dictates what obligations the United States has as a country.

        This is known as the Guarantee Clause. This clause states that the Federal government in the U.S. have an obligation to guarantee each of the 50 states a government, and this government is a republic. Basically, it gives each state their own choice as to how to run and operate the state, and gives state officials the power to create laws, rules, and regulations, unless there is already a federal law in place dealing with certain issues, which would then trump the state law being created.

        The second clause protects the states against domestic violence, and it protects the states against invasion.

        Depending on certain emergencies and exigent factors coming in to play, the federal government always has some kind of power to interfere with state power and the way that state officials govern their state. However, Article 4 of the Constitution is one that provides the states with certain powers that were not available to them prior to the Constitution being written. States were solely controlled by federal government, and each state had to abide by certain rules and had no say as to how it would govern its people.


        Watch the video: Article IV for Dummies: Full Faith and Credit Explained (January 2022).