7- McGraw-Hill/Irwin Chapter Seven Mortgage Markets
Mortgages and Mortgage-Backed Securities <ul><li>Mortgages  are loans to individuals or businesses to purchase homes, land...
Primary Mortgage Market  <ul><li>Four basic types of mortgages are issued by financial institutions </li></ul><ul><ul><li>...
Mortgage Loans Outstanding,  2007 (Trillions of $) 7- McGraw-Hill/Irwin
Mortgage Characteristics  <ul><li>Collateral : lenders place  liens  against properties that remain in place until loans a...
Mortgage Characteristics  <ul><li>Conventional mortgages  are mortgages that are not federally insured </li></ul><ul><li>A...
Mortgage Characteristics  <ul><li>Fixed-rate mortgages  lock in the borrower’s interest rate </li></ul><ul><ul><li>require...
Mortgage Characteristics  <ul><li>Discount points  are fees or payments made when a mortgage loan is issued </li></ul><ul>...
Mortgage Characteristics  <ul><li>Mortgage refinancing </li></ul><ul><ul><li>when a borrower takes out a new mortgage and ...
Mortgage Amortization  <ul><li>Each fixed monthly payment consists partly of repayment of the principal and partly of the ...
Mortgage Payments  <ul><li>The  present value of a mortgage  can be written as: </li></ul><ul><ul><ul><li>PV  = principal ...
Other Types of Mortgages  <ul><li>Automatic rate-reduction mortgages  </li></ul><ul><li>Graduated-payment mortgages (GPMs)...
Secondary Mortgage Markets <ul><li>FIs remove mortgages from their balance sheets through one of two mechanisms </li></ul>...
Secondary Mortgage Markets <ul><li>The U.S. government established the  Federal National Mortgage Association (FNMA or Fan...
Mortgage Sales <ul><li>FIs have sold mortgages among themselves for over 100 years </li></ul><ul><li>A large part of  corr...
Mortgage Sales <ul><li>Mortgage sellers : money center banks, smaller banks, foreign banks, investment banks </li></ul><ul...
Mortgage Backed Securities <ul><li>Pass-through securities  “pass through” promised principal and interest payments to inv...
Mortgage Backed Securities <ul><li>Collateralized mortgage obligations (CMOs)  are multiclass pass-throughs with multiple ...
Mortgages Outstanding by  Type of Holder (%) 7- McGraw-Hill/Irwin
International Trends in Securitization <ul><li>Foreign investors participate in U.S. mortgage and MBS markets, but the val...
Upcoming SlideShare
Loading in...5
×

Financial Markets & Institutions Ch07

3,984

Published on

Financial Markets & Institutions

Published in: Economy & Finance, Business
0 Comments
5 Likes
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
3,984
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
223
Comments
0
Likes
5
Embeds 0
No embeds

No notes for slide

Financial Markets & Institutions Ch07

  1. 1. 7- McGraw-Hill/Irwin Chapter Seven Mortgage Markets
  2. 2. Mortgages and Mortgage-Backed Securities <ul><li>Mortgages are loans to individuals or businesses to purchase homes, land, or other real property </li></ul><ul><li>Many mortgages are securitized </li></ul><ul><ul><li>mortgages are packaged and sold as assets backing publicly traded or privately held debt instruments (i.e., mortgage-backed securities (MBSs) ) </li></ul></ul><ul><li>Mortgages differ from bonds and stocks </li></ul><ul><ul><li>mortgages are backed by a specific piece of real property </li></ul></ul><ul><ul><li>primary mortgages have no set size or denomination </li></ul></ul><ul><ul><li>primary mortgages generally involve only a single investor </li></ul></ul><ul><ul><li>comparatively little information exists on mortgage borrowers </li></ul></ul>7- McGraw-Hill/Irwin
  3. 3. Primary Mortgage Market <ul><li>Four basic types of mortgages are issued by financial institutions </li></ul><ul><ul><li>home mortgages are used to purchase one- to four-family dwellings </li></ul></ul><ul><ul><li>multifamily dwellings mortgages are used to purchase apartment complexes, townhouses, and condominiums </li></ul></ul><ul><ul><li>commercial mortgages are used to finance the purchase of real estate for business purposes </li></ul></ul><ul><ul><li>farm mortgages are used to finance the purchase of farms </li></ul></ul>7- McGraw-Hill/Irwin
  4. 4. Mortgage Loans Outstanding, 2007 (Trillions of $) 7- McGraw-Hill/Irwin
  5. 5. Mortgage Characteristics <ul><li>Collateral : lenders place liens against properties that remain in place until loans are fully paid off </li></ul><ul><li>A down payment is a portion of the purchase price of the property a financial institution requires the borrower to pay up front </li></ul><ul><ul><li>private mortgage insurance (PMI) is generally required when the loan-to-value ratio is more than 80% </li></ul></ul><ul><li>Federally insured mortgages </li></ul><ul><ul><li>repayment is guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA) </li></ul></ul>7- McGraw-Hill/Irwin
  6. 6. Mortgage Characteristics <ul><li>Conventional mortgages are mortgages that are not federally insured </li></ul><ul><li>Amortized mortgages have fixed principal and interest payments that fully pay off the mortgage by its maturity date </li></ul><ul><ul><li>fully amortized mortgage maturities are usually either 15 or 30 years </li></ul></ul><ul><li>Balloon payment mortgages require fixed monthly interest payments for 3 to 5 years whereupon full payment of the mortgage principal is due </li></ul>7- McGraw-Hill/Irwin
  7. 7. Mortgage Characteristics <ul><li>Fixed-rate mortgages lock in the borrower’s interest rate </li></ul><ul><ul><li>required monthly payments are fixed over the life of the mortgage </li></ul></ul><ul><ul><li>lenders assume interest rate risk </li></ul></ul><ul><li>Adjustable-rate mortgages (ARMs) tie the borrower’s interest rate to some market interest rate or interest rate index </li></ul><ul><ul><li>required monthly payments can change over the life of the mortgage </li></ul></ul><ul><ul><li>yearly interest rate changes are often capped </li></ul></ul><ul><ul><li>borrowers assume interest rate risk </li></ul></ul><ul><ul><li>ARMs can increase default risk </li></ul></ul>7- McGraw-Hill/Irwin
  8. 8. Mortgage Characteristics <ul><li>Discount points are fees or payments made when a mortgage loan is issued </li></ul><ul><ul><li>each point costs the borrower 1 percent of the principal value </li></ul></ul><ul><ul><li>the lender reduces the interest rate used to determine the payments on the mortgage in exchange for points paid </li></ul></ul><ul><li>Other fees </li></ul><ul><ul><li>application fee </li></ul></ul><ul><ul><li>title search </li></ul></ul><ul><ul><li>title insurance </li></ul></ul><ul><ul><li>appraisal fee </li></ul></ul><ul><ul><li>loan origination fee </li></ul></ul><ul><ul><li>closing agent and review fees </li></ul></ul><ul><ul><li>other fees (e.g., VA or FHA loan guarantees and PMI) </li></ul></ul>7- McGraw-Hill/Irwin
  9. 9. Mortgage Characteristics <ul><li>Mortgage refinancing </li></ul><ul><ul><li>when a borrower takes out a new mortgage and uses the proceeds to pay off an existing mortgage </li></ul></ul><ul><ul><li>mortgages are most often refinanced when an existing mortgage has a higher interest rate than prevailing rates </li></ul></ul><ul><ul><li>borrowers must balance the savings of a lower monthly payment with the costs (fees) of refinancing </li></ul></ul><ul><ul><li>an often-cited rule of thumb is that the new interest rate should be 2 percentage points less than the refinanced mortgage rate </li></ul></ul>7- McGraw-Hill/Irwin
  10. 10. Mortgage Amortization <ul><li>Each fixed monthly payment consists partly of repayment of the principal and partly of the interest on the outstanding mortgage balance </li></ul><ul><li>An amortization schedule shows how the fixed monthly payments are split between principal and interest </li></ul>7- McGraw-Hill/Irwin
  11. 11. Mortgage Payments <ul><li>The present value of a mortgage can be written as: </li></ul><ul><ul><ul><li>PV = principal amount borrowed </li></ul></ul></ul><ul><ul><ul><li>PMT = monthly mortgage payment </li></ul></ul></ul><ul><ul><ul><li>PVIFA = present value interest factor of an annuity </li></ul></ul></ul><ul><ul><ul><li>r = monthly interest rate on the mortgage </li></ul></ul></ul><ul><ul><ul><li>t = number of monthly payments over the life of the mortgage </li></ul></ul></ul><ul><li>Rearrange to isolate the payment : </li></ul>7- McGraw-Hill/Irwin
  12. 12. Other Types of Mortgages <ul><li>Automatic rate-reduction mortgages </li></ul><ul><li>Graduated-payment mortgages (GPMs) </li></ul><ul><li>Growing-equity mortgages (GEMs) </li></ul><ul><li>Second mortgages and home equity loans </li></ul><ul><li>Shared-appreciation mortgages (SAMs) </li></ul><ul><li>Equity-participation mortgages (EPMs) </li></ul><ul><li>Reverse-annuity mortgages (RAMs) </li></ul>7- McGraw-Hill/Irwin
  13. 13. Secondary Mortgage Markets <ul><li>FIs remove mortgages from their balance sheets through one of two mechanisms </li></ul><ul><ul><li>by pooling recently originated mortgages together and selling them in the secondary market </li></ul></ul><ul><ul><li>by securitizing mortgages (i.e., by issuing securities backed by newly originated mortgages) </li></ul></ul><ul><li>Advantages of securitization </li></ul><ul><ul><li>FIs can reduce the liquidity risk, interest rate risk, and credit risk of their loan portfolios </li></ul></ul><ul><ul><li>FIs generate income from origination and service fees </li></ul></ul>7- McGraw-Hill/Irwin
  14. 14. Secondary Mortgage Markets <ul><li>The U.S. government established the Federal National Mortgage Association (FNMA or Fannie Mae) in the 1930s to buy mortgages from thrifts so they could make more mortgage loans </li></ul><ul><li>FHA and VA insured loans make securitization easier </li></ul><ul><li>Government National Mortgage Association (GNMA or “Ginnie Mae”) and Federal Home Loan Mortgage Corp. (FHLMC or “Freddie Mac”) created in the 1960s </li></ul><ul><ul><li>encouraged continued expansion of the housing market </li></ul></ul><ul><ul><li>provided direct and indirect guarantees that allow for the creation of mortgage-backed securities </li></ul></ul>7- McGraw-Hill/Irwin
  15. 15. Mortgage Sales <ul><li>FIs have sold mortgages among themselves for over 100 years </li></ul><ul><li>A large part of correspondent banking involves small banks selling parts of large loans to larger banks </li></ul><ul><li>Large banks often sell parts of their loans (i.e., participations ) to smaller banks </li></ul><ul><li>Mortgage sales occur when an FI originates a mortgage and sells it to an outside buyer </li></ul><ul><ul><li>a loan sale is made with recourse if the loan buyer can sell the loan back to the originator should it go bad </li></ul></ul>7- McGraw-Hill/Irwin
  16. 16. Mortgage Sales <ul><li>Mortgage sellers : money center banks, smaller banks, foreign banks, investment banks </li></ul><ul><li>Mortgage sales allow FIs to manage credit risk, achieve better asset diversification, and improve their liquidity and interest rate risk positions </li></ul><ul><li>FIs are encouraged to sell loans for economic and regulatory reasons </li></ul><ul><ul><li>sold mortgages can still generate fee income for the bank </li></ul></ul><ul><ul><li>sold mortgages reduce the cost of reserve and capital requirements </li></ul></ul><ul><li>Mortgage buyers : foreign and domestic banks, insurance companies, pension funds, closed-end bank loan mutual funds, and nonfinancial corporations </li></ul>7- McGraw-Hill/Irwin
  17. 17. Mortgage Backed Securities <ul><li>Pass-through securities “pass through” promised principal and interest payments to investors </li></ul><ul><li>Three agencies are directly involved in the creation of pass-through securities </li></ul><ul><ul><li>Ginnie Mae </li></ul></ul><ul><ul><li>Fannie Mae </li></ul></ul><ul><ul><li>Freddie Mac </li></ul></ul><ul><li>Private mortgage pass-through issuers create pass-throughs from nonconforming mortgages </li></ul>7- McGraw-Hill/Irwin
  18. 18. Mortgage Backed Securities <ul><li>Collateralized mortgage obligations (CMOs) are multiclass pass-throughs with multiple bond holder classes or tranches </li></ul><ul><ul><li>each bond holder class has a different guaranteed coupon </li></ul></ul><ul><ul><li>mortgage prepayments retire only one tranche at a time, so all other trances are sequentially prepayment protected </li></ul></ul><ul><li>Mortgage backed bonds (MBBs) </li></ul><ul><ul><li>MBBs allow FIs to raise long-term low-cost funds without removing mortgages from their balance sheets </li></ul></ul><ul><ul><li>a group of mortgage assets is pledged as collateral against a MBB issue, but there is no direct link between the cash flows of the mortgages and the cash flows on the MBB </li></ul></ul>7- McGraw-Hill/Irwin
  19. 19. Mortgages Outstanding by Type of Holder (%) 7- McGraw-Hill/Irwin
  20. 20. International Trends in Securitization <ul><li>Foreign investors participate in U.S. mortgage and MBS markets, but the value held has decreased since 1992 </li></ul><ul><li>Europe is the world’s second largest and most developed securitization market </li></ul><ul><ul><li>the United Kingdom is the biggest MBS issuer in the European market, followed by Germany </li></ul></ul><ul><ul><li>the advent of the Euro has accentuated the increased trend in securitization in Europe </li></ul></ul><ul><li>Mortgage lending has grown in Russia since the early 2000s because of changes in property ownership laws </li></ul>7- McGraw-Hill/Irwin
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×