This document discusses interest-only mortgages in the UK, specifically those without a known repayment vehicle. It finds that about a quarter of new mortgages are interest-only, and around 17% of first-time buyers choose this option. However, analysis shows that interest-only borrowers typically have similar or higher incomes than capital repayment borrowers, suggesting affordability is not the main driver. While some interest-only borrowers may be using lump-sum repayments or home price appreciation to repay the principal, overall motivations remain unclear without further research. The Financial Services Authority has expressed concern about the volumes of interest-only lending without plans for repayment.
The document summarizes a seminar on understanding mortgage regulation at three levels: global, European, and UK. At the global level, increased capital requirements and lack of liquidity have constrained mortgage availability. The Financial Stability Board is developing high-level principles for underwriting that emphasize income verification but allow flexibility. At the European level, a draft directive aims to harmonize rules but may not fit all local markets. Key concerns about the directive include overly broad scope, standardized pre-contractual information overwhelming customers, restrictive advertising rules, and an obligation to deny credit that could exclude some qualified borrowers.
Shadow Banking and the Global Financial Crisis: The Regulatory Response (Oxfo...J.P. Reimann
This paper studies the shadow banking system and its regulation since the global financial crisis of 2008. The shadow banking system is a newly coined term, that is not yet (or only very scarcely) regulated or defined. It has been remarked that the shadow banking sector played a major part in the leading up to the crisis. While regulators have been quick to introduce stricter rules for banks and insurance companies, the shadow banks have been left largely untouched by new regulations.
The global financial crisis began with the bursting of the US housing bubble and high default rates on subprime mortgages, which major banks had invested heavily in. When the housing market collapsed, these banks reported over $435 billion in losses. India was impacted through reductions in foreign institutional investment as these funds were called back overseas. This removed excess liquidity from the Indian economy and led to a slowdown. Small and medium enterprises have faced declining demand and difficulties obtaining financing. Infrastructure projects remain important for growth, but overall the economy has slowed significantly due to reduced foreign investment.
The document discusses how to navigate banking relationships during troubled economic times. It provides an overview of the shifts in the banking industry due to the financial crisis, including increased consolidation and losses from mortgage-backed securities and credit default swaps. It then offers advice on evaluating your bank's health, communicating proactively with your banker, understanding your loan terms and knowing when to seek other options.
RECOURSE VS NON RECOURSE FOR COMMERCIAL REAL ESTATE FINANCINGLynn Aziz
This document summarizes the key differences between recourse and nonrecourse commercial real estate loans. Recourse loans offer more flexibility in pricing and structure but involve personal liability, while nonrecourse loans eliminate personal liability but impose constraints like escrow accounts. The document examines factors like loan characteristics, flexibility, ongoing management, and liability for investors to consider when determining the best loan type for their needs and investment objectives.
This document summarizes the key events that led to the subprime mortgage crisis and current financial crisis. It describes how subprime mortgages were originated and then securitized into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). These securities became highly complex and opaque. When the housing market declined, many subprime borrowers defaulted, causing the value of MBS and CDOs to plummet. This impaired the balance sheets of financial institutions and froze credit markets. The document outlines various experts' proposals to remedy the crisis, including government purchases of toxic assets, capital injections into banks, and establishing funds to remove bad assets from banks and resolve insolvent institutions.
Shadow Banking: Implications for Financial Stability and Economic Rebalancing...pkconference
Shadow banking in China has grown rapidly in recent years, increasing financial stability risks. Major shadow banking institutions include trusts, wealth management products, and off-balance sheet bank activities. This rapid growth was driven by regulatory arbitrage as banks sought to expand credit outside of regulatory constraints. However, shadow banking also contributes to high leverage, liquidity and maturity transformation risks, exacerbating China's credit and economic imbalances. More research is needed to understand these systemic risks and appropriate regulatory responses.
This document discusses the importance of controlling operating expenses to ensure profitability on loans. It provides the following key points:
1) While interest margins have widened as rates have fallen, operating costs as a percentage of assets have risen for mortgage, consumer, and credit card loans.
2) Calculating accurate loan origination and maintenance costs is important for properly pricing loans. Formulas are provided to determine these per-loan costs based on department costs and time spent on origination vs maintenance.
3) Controlling costs, such as by requiring electronic payments, can significantly increase returns on auto loans compared to simply raising rates or fees. Reducing costs preserves competitive positioning versus competitors who rely on price increases.
The document summarizes a seminar on understanding mortgage regulation at three levels: global, European, and UK. At the global level, increased capital requirements and lack of liquidity have constrained mortgage availability. The Financial Stability Board is developing high-level principles for underwriting that emphasize income verification but allow flexibility. At the European level, a draft directive aims to harmonize rules but may not fit all local markets. Key concerns about the directive include overly broad scope, standardized pre-contractual information overwhelming customers, restrictive advertising rules, and an obligation to deny credit that could exclude some qualified borrowers.
Shadow Banking and the Global Financial Crisis: The Regulatory Response (Oxfo...J.P. Reimann
This paper studies the shadow banking system and its regulation since the global financial crisis of 2008. The shadow banking system is a newly coined term, that is not yet (or only very scarcely) regulated or defined. It has been remarked that the shadow banking sector played a major part in the leading up to the crisis. While regulators have been quick to introduce stricter rules for banks and insurance companies, the shadow banks have been left largely untouched by new regulations.
The global financial crisis began with the bursting of the US housing bubble and high default rates on subprime mortgages, which major banks had invested heavily in. When the housing market collapsed, these banks reported over $435 billion in losses. India was impacted through reductions in foreign institutional investment as these funds were called back overseas. This removed excess liquidity from the Indian economy and led to a slowdown. Small and medium enterprises have faced declining demand and difficulties obtaining financing. Infrastructure projects remain important for growth, but overall the economy has slowed significantly due to reduced foreign investment.
The document discusses how to navigate banking relationships during troubled economic times. It provides an overview of the shifts in the banking industry due to the financial crisis, including increased consolidation and losses from mortgage-backed securities and credit default swaps. It then offers advice on evaluating your bank's health, communicating proactively with your banker, understanding your loan terms and knowing when to seek other options.
RECOURSE VS NON RECOURSE FOR COMMERCIAL REAL ESTATE FINANCINGLynn Aziz
This document summarizes the key differences between recourse and nonrecourse commercial real estate loans. Recourse loans offer more flexibility in pricing and structure but involve personal liability, while nonrecourse loans eliminate personal liability but impose constraints like escrow accounts. The document examines factors like loan characteristics, flexibility, ongoing management, and liability for investors to consider when determining the best loan type for their needs and investment objectives.
This document summarizes the key events that led to the subprime mortgage crisis and current financial crisis. It describes how subprime mortgages were originated and then securitized into mortgage-backed securities (MBS) and collateralized debt obligations (CDOs). These securities became highly complex and opaque. When the housing market declined, many subprime borrowers defaulted, causing the value of MBS and CDOs to plummet. This impaired the balance sheets of financial institutions and froze credit markets. The document outlines various experts' proposals to remedy the crisis, including government purchases of toxic assets, capital injections into banks, and establishing funds to remove bad assets from banks and resolve insolvent institutions.
Shadow Banking: Implications for Financial Stability and Economic Rebalancing...pkconference
Shadow banking in China has grown rapidly in recent years, increasing financial stability risks. Major shadow banking institutions include trusts, wealth management products, and off-balance sheet bank activities. This rapid growth was driven by regulatory arbitrage as banks sought to expand credit outside of regulatory constraints. However, shadow banking also contributes to high leverage, liquidity and maturity transformation risks, exacerbating China's credit and economic imbalances. More research is needed to understand these systemic risks and appropriate regulatory responses.
This document discusses the importance of controlling operating expenses to ensure profitability on loans. It provides the following key points:
1) While interest margins have widened as rates have fallen, operating costs as a percentage of assets have risen for mortgage, consumer, and credit card loans.
2) Calculating accurate loan origination and maintenance costs is important for properly pricing loans. Formulas are provided to determine these per-loan costs based on department costs and time spent on origination vs maintenance.
3) Controlling costs, such as by requiring electronic payments, can significantly increase returns on auto loans compared to simply raising rates or fees. Reducing costs preserves competitive positioning versus competitors who rely on price increases.
An International Insolvency Law for Sovereign Debt? Learnings from the Euro ...Luca Amorello
Presentation of my new paper:
'An International Insolvency Law for Sovereign Debt?'
Seminar on “Sovereign Debt Restructuring and the Rights of Private Creditors”.
July 14, 2014,
House of Finance - Frankfurt.
U.S. Lending Industry Meets Mortgage Process as a ServiceCognizant
In a challenging and changing market, mortgage process as a service, orMPaaS, can provide banks with the talent and systems to handle essen¬tial lending services, enabling them to focus on rebuilding their business through product innovation to capture market share.
Euromoney - Global Insolvency & Restructuring Review 2013-14Anindya Roychowdhury
Three key points:
1) Kuwait was one of the first countries to introduce a stimulus package after the 2008 credit crunch, allocating $14 billion, but there has been limited success with only one case admitted under the bailout scheme and workouts being held up by regulatory hurdles.
2) Investment companies (ICs) in Kuwait, many of which were overleveraged, have struggled amid falling asset values and tightening regulations, with most ICs now headed towards default and in need of restructuring.
3) Restructurings have faced challenges due to reluctance among fragmented lenders to coordinate, cultural preferences for rescheduling over restructuring, and lack of specialized re
This proposal suggests offering homeowners a principal reduction if they make a substantial prepayment of at least $50,000 on their mortgage. Under the proposal, for every $1 a homeowner prepays, their principal would be reduced by $2. This targets responsible homeowners and gives them an incentive to stay current on their payments rather than strategically default. It aims to increase demand for housing and reduce the supply of foreclosures coming onto the market, helping the housing market reach equilibrium and recover more quickly.
Mercer Capital's Atlantic Coast Bank Watch | August 2013Mercer Capital
The August 2013 issue of Bank Watch is available now at www.mercercapital.com, and features articles by Jeff Davis, Madeleine Davis, and the announcement of an upcoming webinar on the recently finalized capital rules.
The document discusses Mohammad Fheili, an expert in banking and economics with over 30 years of experience. It includes his biography, noting his roles at various banks, experience teaching, and publications. The bulk of the document consists of an outline and slides for a presentation by Fheili on the economics of shadow banking and its inherent risks. The presentation covers topics like how large the shadow banking system is, the channeling and intermediation activities it replicates from traditional banking, and the risks created by its complexity and lack of regulation compared to traditional banking.
China’s turning to “tough gradualism” in discipling local government borrowin...Terry Zhang
HONG KONG, 17 Jan 2018. Pengyuan International has released a research report, titled “China’s Turning To “Tough Gradualism” In Disciplining Local Government Borrowing Foretells Higher Risk of LGFV Default”. This research report is accessible via the link: http://www.pyrating.com/CreditResearch.
The first default on public bond of local government financing vehicles in China (LGFVs) could possibly happen in 2018, although the odds are still less than 50% according to a report published today by Pengyuan International titled “China’s Turning To ‘Tough Gradualism’ In Discipling Local Government Borrowing Foretells Higher Risk of LGFV Default”.
The central government of China launched recently a three-year critical battle against financial risks. Allowing LGFV default (“shock therapy”) may become a policy choice to dispel investor belief in implicit government support to LGFVs and thus help tame hidden local government borrowing, which occurred primarily through LGFVs.
“We believe Chinese government is turning to ‘tough gradualism’ rather than “shock therapy” in disciplining local government borrowing”, said Liang Zhong, analyst of Pengyuan International, “in another word, the central government is likely to tighten relevant discipline gradually, bearing in mind the needs to balance between achieving growth target and securing financial stability”.
The report argues that the “tough gradualist approach” means some type of credit events could happen before the others. For instance, the first default on public bond by LGFV sector in onshore market is likely to precede LGFV default on public bond in offshore.
As the risk of LGFV default rises, greater scrutiny of LGFV creditworthiness becomes increasingly necessary, including scrutinizing provincial economic and fiscal data according to the report.
“If China’s central government adheres to ‘tough gradualism’, namely tightening discipline steadily over local government borrowing, there it is good chance that the once relentless hidden LGT borrowing could be tamed markedly within three years.” Said Mr. Zhong.
ANALYSTS CONTACT
Mr. Liang Zhong
+852 3596 6140
liang.zhong@pyrating.com
MEDIA CONTACT
media@pyrating.com
OTHER ENQUIRIES
contact@pyrating.com
Shadow banking refers to credit intermediation that occurs outside the traditional banking system and makes up about a quarter of total financial intermediation globally. It involves entities raising short-term funds to invest in longer-term assets, similar to banks but without the same regulation. During the financial crisis, many shadow banking entities had to sell assets quickly due to investor withdrawals, reducing asset values and spreading uncertainty. The global shadow banking system peaked at $62 trillion in 2007 before declining. Growth is driven by investors seeking higher yields, regulatory arbitrage, and complementing traditional banking.
FIS Research - High Performance Community BankingPaul McAdam
Historically, economies of scale have provided larger financial institutions with the ability to generate lower efficiency ratios and, often, higher returns on assets than community banks. Despite the disadvantages of their smaller size, some community banks outperform larger banks as well as their community bank peers during both good and bad times. This research brief focuses on the financial metrics of high-performing community banks to determine the characteristics that differentiate the elite performers from the rest of the pack.
DFA Federal Deposit Insurance Reform - PaperStephanie Bohn
Dr. Scott Hein, Professor of Finance and faculty director of the Texas Tech School of Banking, presented his research at the fourth annual Federal Reserve System/ Conference of State Bank Supervisors Community Banking in the 21st Century Research and Policy Conference at the Federal Reserve Bank of St. Louis.
the role of securitized lending and shadow banking in the 2008 financial cris...Debora Dyankova
The document discusses the role of securitized lending and shadow banking in the 2008 financial crisis. It argues that changes in regulations in the late 1990s connected traditional banking and investment banking, leading to growth of securitized lending and shadow banking. This resulted in a complex global system of interconnected financial institutions with large amounts of securitized assets being traded. The overreliance on securitized lending and lack of oversight of shadow banking contributed to the crisis, as seen when the bankruptcy of Lehman Brothers in 2008 triggered a global recession due to the domino effect across financial systems.
Ch 18 consumer loans, credit cards, and real estate lendingTazar Aung
This document discusses consumer lending, including types of consumer loans like residential mortgages, installment loans, noninstallment loans, and credit cards. It covers evaluating consumer loan applications, credit scoring, laws and regulations around consumer lending, and pricing considerations for consumer loans. Real estate lending is also discussed, along with factors in evaluating real estate loans and types of mortgages.
jimmy stepanian | Real estate commercial financing ideas | Jim stepanian |Jimmy Stepanian
The document discusses various aspects of commercial mortgages, including:
1) Commercial mortgages always involve conveying a note and mortgage between the borrower and lender, with the note detailing financial obligations and the mortgage pledging the property as security.
2) Commercial mortgages are often partially amortized "balloon" loans with short maturities of 5-10 years to reduce the lender's interest rate risk.
3) Balloon loans are less sensitive to interest rate shocks than fully amortized 30-year loans.
The chapter discusses regulation of the banking industry, why regulation takes the forms that it does, and how regulation does not always work as intended. It covers topics such as asymmetric information and bank regulation, international banking regulation, the 1980s US banking crisis, and the Federal Deposit Insurance Corporation Improvement Act of 1991. The document provides details on various types of bank regulation and their intended effects, but also how they can create unintended consequences like moral hazard.
How Resilient are MBS to CDO Market Disruptionsfinancedude
The document discusses the link between collateralized debt obligations (CDOs) and the primary mortgage-backed securities (MBS) market. It explains that CDOs were large purchasers of junior MBS tranches, providing funding that supported over $1 trillion in MBS issuance. If CDOs withdraw from this market, it could severely restrict funding for new home loans. The document recommends tighter regulation and disclosure to address risks and protect certain investors from high-risk mortgage products and securities.
Discusses briefly shadow banks, their role in the subprime crisis, their activities in China, and the regulations and measures taken to control or reduce the negative effects of those financial institutions on the world economy.
This document provides information about different types of loans, including secured and unsecured loans, demand loans, subsidized loans, personal loans, credit cards, home equity loans, home equity lines of credit, cash advances, and small business loans. It discusses the key aspects of each type of loan such as interest rates, terms, eligibility requirements, advantages, and disadvantages. The document also contains sections on bank deposits, including time/term deposits and sight deposits. It defines each type of deposit and discusses how interest is paid on deposits and how long funds must be kept in each type.
Lev Finance Cov Lite article July 2014John Sweeney
The document summarizes concerns from Standard & Poor's about rising levels of covenant-lite loans, particularly 'B' rated loans. There has been a large increase in covenant-lite issuance in recent years, with over half of 2014 covenant-lite loans being 'B' rated. While covenant-lite loans have historically seen slightly lower defaults, recoveries are also slightly lower. If economic conditions deteriorate, default rates for covenant-lite and traditional loans could spike above past crisis levels, especially for 'B' rated loans which have higher inherent risk. The proliferation of risky 'B' rated covenant-lite loans leaves borrowers vulnerable if a future liquidity crisis restricts refinancing options.
A Fistful of Dollars: Lobbying and the Financial Crisis†catelong
Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and their mortgage lending activities to answer this question. We find that, during 2000-07, lenders lobbying more intensively on specific issues related to mortgage lending (such as consumer protection laws) and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing loan portfolios. Ex-post, delinquency rates are higher in areas where lobbying lenders’ mortgage lending grew faster. These lenders also experienced negative abnormal stock returns during key events of the crisis. The findings are robust to (i) falsification tests using information on lobbying activities on financial sector issues unrelated to mortgage lending, (ii) instrumental variables strategies, and (iii) a difference-in-difference approach based on state-level lending laws. These results suggest that lobbying may be linked to lenders expecting special treatments from policymakers, allowing them to engage in riskier lending behavior.
Deniz Igan, Prachi Mishra, and Thierry Tressel, Research Department, IMF‡
October 14, 2009
This document provides information about deducting home mortgage interest on tax returns. It discusses what qualifies as a secured debt, qualified home, and fully deductible interest. For most mortgages, homeowners can deduct all of their interest payments. However, for some mortgages the deduction may be limited based on the date and purpose of the loan. The document provides worksheets and guidelines to help determine if interest payments are fully deductible or if the limits in Part II need to be considered.
This document analyzes interest-only/principal-only (IO/PO) mortgage-backed securities. It finds that:
1) The PO security has much longer duration than the underlying mortgage pool and is highly sensitive to interest rate increases. In contrast, the IO security typically has negative duration and increases in value when rates rise.
2) A contingent-claims valuation model shows that IO values fall and PO values rise dramatically as rates approach the optimal prepayment point.
3) While risky, IO/PO securities can provide hedging opportunities for investors due to their differing interest rate sensitivities. However, their valuation depends on assumptions about prepayment behavior.
4) Market prices of traded
An International Insolvency Law for Sovereign Debt? Learnings from the Euro ...Luca Amorello
Presentation of my new paper:
'An International Insolvency Law for Sovereign Debt?'
Seminar on “Sovereign Debt Restructuring and the Rights of Private Creditors”.
July 14, 2014,
House of Finance - Frankfurt.
U.S. Lending Industry Meets Mortgage Process as a ServiceCognizant
In a challenging and changing market, mortgage process as a service, orMPaaS, can provide banks with the talent and systems to handle essen¬tial lending services, enabling them to focus on rebuilding their business through product innovation to capture market share.
Euromoney - Global Insolvency & Restructuring Review 2013-14Anindya Roychowdhury
Three key points:
1) Kuwait was one of the first countries to introduce a stimulus package after the 2008 credit crunch, allocating $14 billion, but there has been limited success with only one case admitted under the bailout scheme and workouts being held up by regulatory hurdles.
2) Investment companies (ICs) in Kuwait, many of which were overleveraged, have struggled amid falling asset values and tightening regulations, with most ICs now headed towards default and in need of restructuring.
3) Restructurings have faced challenges due to reluctance among fragmented lenders to coordinate, cultural preferences for rescheduling over restructuring, and lack of specialized re
This proposal suggests offering homeowners a principal reduction if they make a substantial prepayment of at least $50,000 on their mortgage. Under the proposal, for every $1 a homeowner prepays, their principal would be reduced by $2. This targets responsible homeowners and gives them an incentive to stay current on their payments rather than strategically default. It aims to increase demand for housing and reduce the supply of foreclosures coming onto the market, helping the housing market reach equilibrium and recover more quickly.
Mercer Capital's Atlantic Coast Bank Watch | August 2013Mercer Capital
The August 2013 issue of Bank Watch is available now at www.mercercapital.com, and features articles by Jeff Davis, Madeleine Davis, and the announcement of an upcoming webinar on the recently finalized capital rules.
The document discusses Mohammad Fheili, an expert in banking and economics with over 30 years of experience. It includes his biography, noting his roles at various banks, experience teaching, and publications. The bulk of the document consists of an outline and slides for a presentation by Fheili on the economics of shadow banking and its inherent risks. The presentation covers topics like how large the shadow banking system is, the channeling and intermediation activities it replicates from traditional banking, and the risks created by its complexity and lack of regulation compared to traditional banking.
China’s turning to “tough gradualism” in discipling local government borrowin...Terry Zhang
HONG KONG, 17 Jan 2018. Pengyuan International has released a research report, titled “China’s Turning To “Tough Gradualism” In Disciplining Local Government Borrowing Foretells Higher Risk of LGFV Default”. This research report is accessible via the link: http://www.pyrating.com/CreditResearch.
The first default on public bond of local government financing vehicles in China (LGFVs) could possibly happen in 2018, although the odds are still less than 50% according to a report published today by Pengyuan International titled “China’s Turning To ‘Tough Gradualism’ In Discipling Local Government Borrowing Foretells Higher Risk of LGFV Default”.
The central government of China launched recently a three-year critical battle against financial risks. Allowing LGFV default (“shock therapy”) may become a policy choice to dispel investor belief in implicit government support to LGFVs and thus help tame hidden local government borrowing, which occurred primarily through LGFVs.
“We believe Chinese government is turning to ‘tough gradualism’ rather than “shock therapy” in disciplining local government borrowing”, said Liang Zhong, analyst of Pengyuan International, “in another word, the central government is likely to tighten relevant discipline gradually, bearing in mind the needs to balance between achieving growth target and securing financial stability”.
The report argues that the “tough gradualist approach” means some type of credit events could happen before the others. For instance, the first default on public bond by LGFV sector in onshore market is likely to precede LGFV default on public bond in offshore.
As the risk of LGFV default rises, greater scrutiny of LGFV creditworthiness becomes increasingly necessary, including scrutinizing provincial economic and fiscal data according to the report.
“If China’s central government adheres to ‘tough gradualism’, namely tightening discipline steadily over local government borrowing, there it is good chance that the once relentless hidden LGT borrowing could be tamed markedly within three years.” Said Mr. Zhong.
ANALYSTS CONTACT
Mr. Liang Zhong
+852 3596 6140
liang.zhong@pyrating.com
MEDIA CONTACT
media@pyrating.com
OTHER ENQUIRIES
contact@pyrating.com
Shadow banking refers to credit intermediation that occurs outside the traditional banking system and makes up about a quarter of total financial intermediation globally. It involves entities raising short-term funds to invest in longer-term assets, similar to banks but without the same regulation. During the financial crisis, many shadow banking entities had to sell assets quickly due to investor withdrawals, reducing asset values and spreading uncertainty. The global shadow banking system peaked at $62 trillion in 2007 before declining. Growth is driven by investors seeking higher yields, regulatory arbitrage, and complementing traditional banking.
FIS Research - High Performance Community BankingPaul McAdam
Historically, economies of scale have provided larger financial institutions with the ability to generate lower efficiency ratios and, often, higher returns on assets than community banks. Despite the disadvantages of their smaller size, some community banks outperform larger banks as well as their community bank peers during both good and bad times. This research brief focuses on the financial metrics of high-performing community banks to determine the characteristics that differentiate the elite performers from the rest of the pack.
DFA Federal Deposit Insurance Reform - PaperStephanie Bohn
Dr. Scott Hein, Professor of Finance and faculty director of the Texas Tech School of Banking, presented his research at the fourth annual Federal Reserve System/ Conference of State Bank Supervisors Community Banking in the 21st Century Research and Policy Conference at the Federal Reserve Bank of St. Louis.
the role of securitized lending and shadow banking in the 2008 financial cris...Debora Dyankova
The document discusses the role of securitized lending and shadow banking in the 2008 financial crisis. It argues that changes in regulations in the late 1990s connected traditional banking and investment banking, leading to growth of securitized lending and shadow banking. This resulted in a complex global system of interconnected financial institutions with large amounts of securitized assets being traded. The overreliance on securitized lending and lack of oversight of shadow banking contributed to the crisis, as seen when the bankruptcy of Lehman Brothers in 2008 triggered a global recession due to the domino effect across financial systems.
Ch 18 consumer loans, credit cards, and real estate lendingTazar Aung
This document discusses consumer lending, including types of consumer loans like residential mortgages, installment loans, noninstallment loans, and credit cards. It covers evaluating consumer loan applications, credit scoring, laws and regulations around consumer lending, and pricing considerations for consumer loans. Real estate lending is also discussed, along with factors in evaluating real estate loans and types of mortgages.
jimmy stepanian | Real estate commercial financing ideas | Jim stepanian |Jimmy Stepanian
The document discusses various aspects of commercial mortgages, including:
1) Commercial mortgages always involve conveying a note and mortgage between the borrower and lender, with the note detailing financial obligations and the mortgage pledging the property as security.
2) Commercial mortgages are often partially amortized "balloon" loans with short maturities of 5-10 years to reduce the lender's interest rate risk.
3) Balloon loans are less sensitive to interest rate shocks than fully amortized 30-year loans.
The chapter discusses regulation of the banking industry, why regulation takes the forms that it does, and how regulation does not always work as intended. It covers topics such as asymmetric information and bank regulation, international banking regulation, the 1980s US banking crisis, and the Federal Deposit Insurance Corporation Improvement Act of 1991. The document provides details on various types of bank regulation and their intended effects, but also how they can create unintended consequences like moral hazard.
How Resilient are MBS to CDO Market Disruptionsfinancedude
The document discusses the link between collateralized debt obligations (CDOs) and the primary mortgage-backed securities (MBS) market. It explains that CDOs were large purchasers of junior MBS tranches, providing funding that supported over $1 trillion in MBS issuance. If CDOs withdraw from this market, it could severely restrict funding for new home loans. The document recommends tighter regulation and disclosure to address risks and protect certain investors from high-risk mortgage products and securities.
Discusses briefly shadow banks, their role in the subprime crisis, their activities in China, and the regulations and measures taken to control or reduce the negative effects of those financial institutions on the world economy.
This document provides information about different types of loans, including secured and unsecured loans, demand loans, subsidized loans, personal loans, credit cards, home equity loans, home equity lines of credit, cash advances, and small business loans. It discusses the key aspects of each type of loan such as interest rates, terms, eligibility requirements, advantages, and disadvantages. The document also contains sections on bank deposits, including time/term deposits and sight deposits. It defines each type of deposit and discusses how interest is paid on deposits and how long funds must be kept in each type.
Lev Finance Cov Lite article July 2014John Sweeney
The document summarizes concerns from Standard & Poor's about rising levels of covenant-lite loans, particularly 'B' rated loans. There has been a large increase in covenant-lite issuance in recent years, with over half of 2014 covenant-lite loans being 'B' rated. While covenant-lite loans have historically seen slightly lower defaults, recoveries are also slightly lower. If economic conditions deteriorate, default rates for covenant-lite and traditional loans could spike above past crisis levels, especially for 'B' rated loans which have higher inherent risk. The proliferation of risky 'B' rated covenant-lite loans leaves borrowers vulnerable if a future liquidity crisis restricts refinancing options.
A Fistful of Dollars: Lobbying and the Financial Crisis†catelong
Has lobbying by financial institutions contributed to the financial crisis? This paper uses detailed information on financial institutions’ lobbying and their mortgage lending activities to answer this question. We find that, during 2000-07, lenders lobbying more intensively on specific issues related to mortgage lending (such as consumer protection laws) and securitization (i) originated mortgages with higher loan-to-income ratios, (ii) securitized a faster growing proportion of their loans, and (iii) had faster growing loan portfolios. Ex-post, delinquency rates are higher in areas where lobbying lenders’ mortgage lending grew faster. These lenders also experienced negative abnormal stock returns during key events of the crisis. The findings are robust to (i) falsification tests using information on lobbying activities on financial sector issues unrelated to mortgage lending, (ii) instrumental variables strategies, and (iii) a difference-in-difference approach based on state-level lending laws. These results suggest that lobbying may be linked to lenders expecting special treatments from policymakers, allowing them to engage in riskier lending behavior.
Deniz Igan, Prachi Mishra, and Thierry Tressel, Research Department, IMF‡
October 14, 2009
This document provides information about deducting home mortgage interest on tax returns. It discusses what qualifies as a secured debt, qualified home, and fully deductible interest. For most mortgages, homeowners can deduct all of their interest payments. However, for some mortgages the deduction may be limited based on the date and purpose of the loan. The document provides worksheets and guidelines to help determine if interest payments are fully deductible or if the limits in Part II need to be considered.
This document analyzes interest-only/principal-only (IO/PO) mortgage-backed securities. It finds that:
1) The PO security has much longer duration than the underlying mortgage pool and is highly sensitive to interest rate increases. In contrast, the IO security typically has negative duration and increases in value when rates rise.
2) A contingent-claims valuation model shows that IO values fall and PO values rise dramatically as rates approach the optimal prepayment point.
3) While risky, IO/PO securities can provide hedging opportunities for investors due to their differing interest rate sensitivities. However, their valuation depends on assumptions about prepayment behavior.
4) Market prices of traded
This document provides information about the Homeowners Mortgage Support (HMS) program, which allows struggling homeowners to delay some monthly interest payments on their mortgage for up to two years. It explains that HMS is for those whose income has temporarily dropped, and that applicants must commit to paying at least 50% of the monthly interest due and eventually repaying all postponed amounts. The document also outlines eligibility requirements and provides examples of homeowners who may or may not qualify for the program.
Nsl Product Guide Fixed Rate Interest Onlywindiee Green
This document describes North Star Lending's fixed rate interest-only mortgage product. It offers 30 and 40 year fixed rate mortgages with an interest-only payment period for the first 10 years, then fully amortizing for the remaining term. It provides loan-to-value limits, qualifying criteria, eligible property types, occupancy types, and underwriting guidelines for the product.
This document provides guidance for homeowners who are unable to meet their mortgage repayments. It outlines key steps to take such as speaking to your mortgage lender as soon as possible, getting money advice from specialist agencies, and paying what you can afford even if it's not the full amount due. The document also discusses potential financial help options from insurance policies, state benefits, and government schemes. It answers common questions about the complaint process and legal actions. The overall message is to act now, explore all available options for assistance, and avoid rash decisions like taking on more debt without advice.
1. Most Americans are not financially capable and have strikingly low levels of financial literacy.
2. Lack of financial literacy and capability creates instability at both the micro and macro levels by leading many to engage in risky financial behaviors that generate fees and costs and leave them vulnerable to economic shocks.
3. The study found many homeowners did not understand their mortgage terms and a significant portion used high-cost borrowing methods, indicating financial illiteracy played a role in the financial crisis.
1. The US mortgage market has grown significantly over time, with mortgage debt outstanding growing to over $8 trillion as of 2004, roughly doubling as a percentage of disposable personal income since 1980.
2. Mortgages are originated by a variety of retail institutions and are often sold on the secondary market, with government sponsored entities like Fannie Mae and Freddie Mac securitizing lower risk mortgages that meet certain criteria.
3. The aggregate loan-to-value ratio for owner-occupied housing has increased less sharply than other debt measures and has not increased much since the mid-1990s.
The document outlines examples of good practices for interest-only mortgages identified by the Financial Services Authority. It discusses checking the plausibility of repayment strategies, implementing extra safeguards for riskier strategies like selling the mortgaged property, using clear proposal forms to document strategies, effective disclosure of risks to consumers, and proactively reviewing maintenance of repayment vehicles.
This document provides an overview of how to calculate mortgage loans using present value concepts. It discusses how to calculate the annual payment for a mortgage using either the annuity factor or the mortgage constant. It also explains how to estimate the unpaid balance of a mortgage at a given time. Additionally, it shows how extending the maturity of a loan reduces the required annual payment and discusses how the mortgage constant relates to the interest rate on the loan.
This document describes the EBS Switcher Mortgage. It offers competitive variable or fixed interest rates, free legal fees when using a solicitor from their panel, up to 75% loan to value, minimum loan of €70,000, and options like interest-only payments or reduced payments for the first 3 years. Customers can visit a local EBS branch, call 1850 654 321, or go online at ebs.ie for more details on rates and terms.
1) The document summarizes recent guidance from federal regulators on nontraditional mortgage products like interest-only and payment option ARMs.
2) The guidance emphasizes the importance of prudent underwriting standards that consider a borrower's ability to repay, the risks of payment shock, and ensuring borrowers understand product risks.
3) It also stresses the need for portfolio risk management practices like stress testing to evaluate how loan performance may be impacted by economic conditions.
This document discusses organizational development. It defines an organization as a collection of people working together to achieve goals. There are two types of organizations: formal and informal. A formal organization is deliberately designed by management with well-defined jobs and reporting structures. An informal organization originates spontaneously through personal interactions and establishes group norms. Organizational development aims to increase an organization's relevance and viability through planned change efforts led by managers. It involves understanding factors that influence human behavior like motivation, leadership, culture and environment.
This document provides information on the STAF and STAF-SG balancing valves including:
- They are flanged cast iron or ductile iron valves used for balancing, pre-setting, measuring, and shutting off flow in heating and cooling systems.
- Key features include an accurate handwheel with digital readout and self-sealing measuring points.
- They are available in sizes from DN 20-400 and pressure classes PN 16 and PN 25 with maximum working temperatures up to 120°C.
- Detailed specifications, diagrams, and technical descriptions are given to size the valves for different flow rates and pressure drops.
Agency Design and Policy-Based Evidence-Making at the Consumer Financial Prot...Mercatus Center
This document discusses issues with the structure and policymaking approach of the Consumer Financial Protection Bureau (CFPB). It argues that the CFPB's structure as an independent agency headed by a single director and exempt from oversight makes it unconstrained. It also criticizes the CFPB's approach of using "policy-based evidence making" to justify regulations while ignoring alternative evidence. Specific rules and studies by the CFPB on mortgages, auto lending, payday lending, and overdraft protection are analyzed to show flaws in the CFPB's methods and use of evidence to support its policies.
9 Mortgage MarketsCHAPTER OBJECTIVESThe specific objectives of.docxblondellchancy
9 Mortgage Markets
CHAPTER OBJECTIVES
The specific objectives of this chapter are to:
· ▪ provide a background on mortgages,
· ▪ describe the common types of residential mortgages,
· ▪ explain the valuation and risk of mortgages,
· ▪ explain mortgage-backend securities, and
· ▪ explain how mortgage problems led to the 2008- 2009 credit crisis.
9-1 BACKGROUND ON MORTGAGES
A mortgage is a form of debt created to finance investment in real estate. The debt is secured by the property, so if the property owner does not meet the payment obligations, the creditor can seize the property. Financial institutions such as savings institutions and mortgage companies serve as intermediaries by originating mortgages. They consider mortgage applications and assess the creditworthiness of the applicants.
The mortgage represents the difference between the down payment and the value to be paid for the property. The mortgage contract specifies the mortgage rate, the maturity, and the collateral that is backing the loan. The originator charges an origination fee when providing a mortgage. In addition, if it uses its own funds to finance the property, it will earn profit from the difference between the mortgage rate that it charges and the rate that it paid to obtain the funds. Most mortgages have a maturity of 30 years, but 15-year maturities are also available.
9-1a How Mortgage Markets Facilitate the Flow of Funds
WEB
www.mbaa.org
News regarding the mortgage markets.
The means by which mortgage markets facilitate the flow of funds are illustrated in Exhibit 9.1. Financial intermediaries originate mortgages and finance purchases of homes. The financial intermediaries that originate mortgages obtain their funding from household deposits. They also obtain funds by selling some of the mortgages that they originate directly to institutional investors in the secondary market. These funds are then used to finance more purchases of homes, condominiums, and commercial property. Overall, mortgage markets allow households and corporations to increase their purchases of homes, condominiums, and commercial property and thereby finance economic growth.
Institutional Use of Mortgage Markets Mortgage companies, savings institutions, and commercial banks originate mortgages. Mortgage companies tend to sell their mortgages in the secondary market, although they may continue to process payments for the mortgages that they originated. Thus their income is generated from origination and processing fees, and not from financing the mortgages over a long-term period. Savings institutions and commercial banks commonly originate residential mortgages. Commercial banks also originate mortgages for corporations that purchase commercial property. Savings institutions and commercial banks typically use funds received from household deposits to provide mortgage financing. However, they also sell some of their mortgages in the secondary market.
Exhibit 9.1 How Mortgage Markets Facilitate t ...
Car-title loans are expensive loans secured by the title to a borrower's vehicle. They often involve single balloon payments that are difficult for borrowers to repay in one month due to high fees. This typically forces borrowers into a cycle of repeatedly refinancing the loan, keeping them in long-term debt. Analysis of loan data found that borrowers paid back over three times the amount borrowed on average. The loans disproportionately impact low-income individuals, as the payment structures are not affordable based on typical incomes and expenses. The threats of high fees, repossession, and inability to get out of the debt cycle can have serious financial and personal consequences for vulnerable borrowers.
Are Collateralized Loan Obligations the ticking time bomb that could trigger ...Kaan Sapanatan, CFA, CAIA
This document discusses collateralized loan obligations (CLOs) and whether they pose risks to the financial system. It provides background on the 2008 financial crisis and post-crisis regulations. CLOs have grown significantly since the crisis while providing higher returns than other fixed income assets. However, there are concerns about deteriorating underwriting standards, increasing corporate debt levels, and shifts in the CLO investor base to less regulated entities. If an economic downturn occurred, losses on CLOs could have negative impacts on the financial system and real economy. Overall the document examines both sides of the CLO debate and whether they could potentially trigger the next crisis.
This document provides an overview of payday lending regulations and practices. It discusses how regulations vary significantly between states and countries. It also examines the different ways interest rates on payday loans are calculated, loan processes, borrower demographics, arguments around the sustainability of high interest payday loans, and recent regulatory actions.
The document discusses finding the right loan mix for credit unions. It recommends supplementing low-balance credit products with high-balance secured loans. Specifically, it suggests credit unions focus on secured loans like traditional second mortgages and mobile home loans, which can offer higher returns than low-balance signature loans and overdraft lines of credit that may lose money. The document also stresses the importance of calculating return on assets for different loan products to identify which are most profitable.
Chapter 20Consumer Credit TransactionsL E A R N I N G .docxketurahhazelhurst
Chapter 20
Consumer Credit Transactions
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should understand the following:
1. How consumers enter into credit transactions and what protections they
are afforded when they do
2. What rights consumers have after they have entered into a consumer
transaction
3. What debt collection practices third-party collectors may pursue
This chapter and the three that follow are devoted to debtor-creditor relations. In
this chapter, we focus on the consumer credit transaction. Chapter 21 "Secured
Transactions and Suretyship" and Chapter 22 "Mortgages and Nonconsensual
Liens" explore different types of security that a creditor might require. Chapter 23
"Bankruptcy" examines debtors’ and creditors’ rights under bankruptcy law.
The amount of consumer debt, or household debt1, owed by Americans to
mortgage lenders, stores, automobile dealers, and other merchants who sell on
credit is difficult to ascertain. One reads that the average household credit card debt
(not including mortgages, auto loans, and student loans) in 2009 was almost
$16,000.Ben Woolsey and Matt Schulz, Credit Card Statistics, Industry Statistics, Debt
Statistics, August 24, 2010, http://www.creditcards.com/credit-card-news/credit-
card-industry-facts-personal-debt-statistics-1276.php. This is “calculated by
dividing the total revolving debt in the U.S. ($852.6 billion as of March 2010 data, as
listed in the Federal Reserve’s May 2010 report on consumer credit) by the
estimated number of households carrying credit card debt (54 million).” Or maybe
it was $10,000.Deborah Fowles, “Your Monthly Credit Card Minimum Payments May
Double,” About.com Financial Planning, http://financialplan.about.com/od/
creditcarddebt/a/CCMinimums.htm. Or maybe it was $7,300.Index Credit Cards,
Credit Card Debt, February 9, 2010, http://www.indexcreditcards.com/
creditcarddebt. But probably focusing on the average household debt is not very
helpful: 55 percent of households have no credit card debt at all, and the median
debt is $1,900.Liz Pulliam Weston, “The Big Lie about Credit Card Debt,” MSN Money,
July 30, 2007.
1. Debt owed by consumers.
726
http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php
http://www.creditcards.com/credit-card-news/credit-card-industry-facts-personal-debt-statistics-1276.php
http://financialplan.about.com/od/creditcarddebt/a/CCMinimums.htm
http://financialplan.about.com/od/creditcarddebt/a/CCMinimums.htm
http://www.indexcreditcards.com/creditcarddebt
http://www.indexcreditcards.com/creditcarddebt
In 2007, the total household debt owed by Americans was $13.3 trillion, according to
the Federal Reserve Board. That is really an incomprehensible number: suffice it to
say, then, that the availability of credit is an important factor in the US economy,
and not surprisingly, a number of statutes have been enacted over the years to
protect consumers both before and a ...
This document summarizes the growth of online lending platforms and their impact on traditional banks. It discusses how online lenders have more efficiently served small businesses and consumers through streamlined online application processes. It also describes how some online lenders have partnered with large banks, such as OnDeck partnering with JP Morgan. This allows banks to utilize the online lenders' platforms and underwriting technologies to offer loans at lower costs than traditional in-person lending processes while keeping the loans on the banks' balance sheets. The partnership helps online lenders expand their reach while improving their resilience through the stability of banks' funding sources.
PPT on 2008. US SUB PRIME CRISIS-2.pptxkthegreatks
The document discusses the microeconomic causes and variables that contributed to the 2007-2008 global financial crisis, including poor lending standards, credit derivatives, and the originate-and-distribute model that reduced screening of borrowers. It also examines the impact on the US and global economies, including job losses, declining wealth, and slow recovery for many. Government responses including the Troubled Asset Relief Program aimed to stabilize financial markets and restore confidence.
A Primer On The Mortgage Market And Mortgage Finance Mc Donaldsmullin2
This document provides a primer on the mortgage market and mortgage finance. It discusses the basics of mortgages, including the loan amount, term, repayment schedule, and interest rate. It also describes the risks to lenders, including default and market risk, and how mortgages are secured by collateral, usually the property being purchased. The primer defines key mortgage terms and concepts to aid individuals in making better mortgage decisions.
New Mortgage Fraud Scheme and Highest and Best Use Issue By Dave TowneBill Cobb, Appraiser
New Mortgage Fraud Scheme and Highest and Best Use Issue By Dave Towne
"Appraisers………
This may not affect you directly, but you should be aware of this new fraud situation. I decided to send this after talking with another appraiser about a potential assignment that might fall into the category the article below describes.
The appraiser was asked to appraise a SFR rental. Upon arriving at the property, doing the inspection, and observing the neighborhood, plus analyzing ownership of the undeveloped adjacent property owned by the same entity as the SFR, it became evident that the H&BU was actually more appropriately financially feasible and legally permissible, plus physically possible and maximally productive as a Multi-Family property. This is because properties to either side of the SFR are already MF per area zoning, as the changes to the area have been made over prior years.
When this situation was discussed with the client – prior to starting the report, the attempt was made to ‘force’ the appraiser to just accept the SFR assignment and ignore the completed H&BU analysis – as is required under USPAP and per the 1004 (and other) Form. The appraiser ultimately declined the assignment due to the client’s intimidation and coercion, and found out it was just given to another appraiser - probably to be done as a SFR.
Will the new appraiser do a thorough H&BU analysis or just ignore that aspect of responsibility? Who knows.
Will this property be part of the ‘Reverse Occupancy’ scheme as the Mortgage News Daily article explains? Also…who knows."
This document provides a summary of Cameron Cowan's statement on securitization before two Congressional subcommittees. It discusses the history and growth of securitization, including the creation of mortgage-backed securities and asset-backed securities. Securitization involves pooling financial assets and issuing bonds backed by the cash flows from those assets, allowing originators to access funds upfront. This market has grown tremendously since the 1970s and now stands at $6.6 trillion, greatly expanding access to credit for borrowers and investment opportunities for investors.
Does less regulation equal more loan defaultsusmajormovers
The recent U.S. House vote to roll back mortgage lending limits of the 2010 Dodd-Frank Bill was termed the “crown jewel” of Republican reform, but it is by no means a shoe-in in the Senate. However, if efforts are successful at raising the Debt-to-Income (DTI) ratio from its present 43% limit, what effect will the change have on future loan default rates? No one seems to have a functioning crystal ball, but there are few historical statistics to rely upon for hints.
- Deficiency judgments, where the foreclosure sale amount is less than what is owed on the mortgage, are rising as lenders try to recover unpaid debt. This is happening more as many foreclosed homes were worth less than the outstanding loan amount.
- Pursuing deficiency judgments involves complex considerations around regulations, optics, and maintaining good public relations. Lenders must balance recovering losses with perceptions of punishing struggling borrowers.
- Smaller lenders have been more aggressive than large lenders in pursuing deficiency judgments due to factors like needing to focus on profits and knowing customers personally. Successful efforts usually involve resolution and payment plans rather than aggressively pursuing bankruptcy.
Seminar: Gender Board Diversity through Ownership NetworksGRAPE
Seminar on gender diversity spillovers through ownership networks at FAME|GRAPE. Presenting novel research. Studies in economics and management using econometrics methods.
BONKMILLON Unleashes Its Bonkers Potential on Solana.pdfcoingabbar
Introducing BONKMILLON - The Most Bonkers Meme Coin Yet
Let's be real for a second – the world of meme coins can feel like a bit of a circus at times. Every other day, there's a new token promising to take you "to the moon" or offering some groundbreaking utility that'll change the game forever. But how many of them actually deliver on that hype?
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OJP data from firms like Vicinity Jobs have emerged as a complement to traditional sources of labour demand data, such as the Job Vacancy and Wages Survey (JVWS). Ibrahim Abuallail, PhD Candidate, University of Ottawa, presented research relating to bias in OJPs and a proposed approach to effectively adjust OJP data to complement existing official data (such as from the JVWS) and improve the measurement of labour demand.
Independent Study - College of Wooster Research (2023-2024) FDI, Culture, Glo...AntoniaOwensDetwiler
"Does Foreign Direct Investment Negatively Affect Preservation of Culture in the Global South? Case Studies in Thailand and Cambodia."
Do elements of globalization, such as Foreign Direct Investment (FDI), negatively affect the ability of countries in the Global South to preserve their culture? This research aims to answer this question by employing a cross-sectional comparative case study analysis utilizing methods of difference. Thailand and Cambodia are compared as they are in the same region and have a similar culture. The metric of difference between Thailand and Cambodia is their ability to preserve their culture. This ability is operationalized by their respective attitudes towards FDI; Thailand imposes stringent regulations and limitations on FDI while Cambodia does not hesitate to accept most FDI and imposes fewer limitations. The evidence from this study suggests that FDI from globally influential countries with high gross domestic products (GDPs) (e.g. China, U.S.) challenges the ability of countries with lower GDPs (e.g. Cambodia) to protect their culture. Furthermore, the ability, or lack thereof, of the receiving countries to protect their culture is amplified by the existence and implementation of restrictive FDI policies imposed by their governments.
My study abroad in Bali, Indonesia, inspired this research topic as I noticed how globalization is changing the culture of its people. I learned their language and way of life which helped me understand the beauty and importance of cultural preservation. I believe we could all benefit from learning new perspectives as they could help us ideate solutions to contemporary issues and empathize with others.
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Eco-Innovations and Firm Heterogeneity.Evidence from Italian Family and Nonf...
Interest Only Why all the interest
1. More Mortgage Info CML Housing Finance Issue 11 2006
Interest-only: why all the interest?
About a quarter of new regulated mortgages are taken out on an interest-only basis where
there is no known repayment vehicle. Although this proportion has remained stable for at
least 18 months, the FSA has recently expressed concern that such large volumes appear
to have no formal plans for ultimate capital repayment.
We have found no evidence for the widely-held assertion that affordability pressures are
driving borrowers to interest-only products. First-time buyers are in fact less likely to take
out straight interest-only loans than other borrowers. Income multiples are similar or
slightly lower than for capital and interest borrowers.
Data suggests that the typical borrower taking out a straight interest-only mortgage has a
similar ability to repay as a capital and interest borrower.
Many borrowers opting for interest-only products appear to be cash-flow constrained.
This may be because their income is "lumpy" and they value the ability to combine
minimum monthly outgoings with the freedom to make lump-sum repayments of capital
as and when their income allows. Or because of personal circumstances, such as a recent
history of credit problems.
Risk factors, such as high LTVs, borrowers with an impaired credit history and self-
certified, are associated with straight interest-only borrowing to varying extents, but these
are mitigated at least in part by lower risk in other areas.
Unfortunately, we know too little about the motivation of borrowers who take out interest-
only mortgages, or their actions after the mortgage sale, to form more concrete views at
this stage. The FSA has been conducting research in this area and will be publishing its
findings in December 2006.
Introduction
When taking out a mortgage, each borrower makes a choice on how to repay the capital on the
loan. There are many options, but they can be broken down into two main types – capital and
interest, or interest-only. With capital and interest, the borrower repays the loan principal in
Author increments over the life of the loan. This is a risk-averse option, giving the borrower certainty
James Tatch
that the loan will be repaid as long as they make their contractual payments throughout the term
Senior Statistician, CML
of the mortgage.
Editor
Bob Pannell The other option is an interest-only mortgage. Here the contract between the lender and
Head of Research, CML borrower relates only to paying interest on the loan throughout the life of the mortgage, with no
November 2006 1
2. More Mortgage Info
CML Housing Finance
scheduled repayments of the capital until the end of the loan. So the balance outstanding remains
the same unless the borrower makes discretionary capital repayments.
Interest-only borrowers may choose whether or not to take out an investment vehicle to sit
alongside the mortgage. For those borrowers who choose not to, they can always make
discretionary repayments later on. However the longer they leave it, the larger any regular
payments would have to be because there is less time left to pay the principal off. If no
arrangements are made there is risk that, when the principal becomes due for repayment at the
end of the mortgage term, they may have no specific means of doing so. It is unclear to what
extent this is happening in the market, but the FSA is currently conducting research to assess
whether some areas of interest-only borrowing is problematic. This article focuses on "straight"
interest-only loans, where there is no known repayment vehicle.
Market data on interest-only
There are some substantial questions around the data on interest-only mortgages. The
information is difficult to collect and monitor, because often the mortgage lender is not the
provider of the investment vehicle, if one exists. Borrowers are under no obligation to tell their
lender what investment vehicle they have chosen, and the FSA does not require lenders to
monitor this information (we discuss the regulatory issues later in more detail). In addition,
lenders are not able to monitor whether payments into the investment are kept up throughout the
term of the mortgage, or how any investment is performing.
Figures from the Survey of Mortgage Lenders (SML) give an historical perspective on trends in
methods of repayment. In the 1970s the majority of loans were taken out on a capital and interest
basis. But the 1980s saw a switch to interest-only, mostly backed with endowment policies.
Since the mid 1990s there has been a dramatic switch back to capital and interest, due in large
part to the poor performance of endowment policies, associated with significant changes in the
interest rate environment. The proportion of interest-only mortgages where there was no known
repayment vehicle climbed during the late 1990s to peak in 1999, at just below a quarter of new
mortgages. This proportion then dipped temporarily before reviving again from 2003 onwards.
The SML was discontinued in 2005 and replaced with the CML's more comprehensive Regulated
Mortgage Survey (RMS). One of the unfortunate consequences of this change, reflecting
substantial differences in SML and RMS methodologies and survey coverage, is that information
on repayment methods cannot be readily compared across the two sources.
The RMS collects data from lenders on individual regulated mortgage transactions -
predominantly house purchase loans and remortgages. Amongst other data items, RMS collects
data on the method of repayment, broken down by capital and interest, interest-only with
2 November 2006
3. More Mortgage Info Interest-only: why all the interest?
specified vehicle (endowment, ISA, pension and other). But it also has a category for interest-
only with unknown vehicle. For this last category, there may in fact be a vehicle in place, but if
the lender does not have the means to identify it (for example because it is provided by another
firm), then they can only report that the loan is on an interest-only basis with no evidence of an
investment vehicle being in place. This provides an upper limit on how many regulated loans
there may be on a straight interest-only basis.
RMS indicates that in the third quarter of 2006 around 23% of reported loans were taken out on
an interest-only basis where the lender could not verify what investment vehicle, if any, the
borrower had in place. This proportion has remained stable since the RMS began in April 2005.
Chart 1: Methods of repayment, house purchase loans
%
100
80
60
40
20
0
1975 1980 1985 1990 1995 2000 2005
Capital and interest Interest-only with repayment vehicle
Interest-only with no known vehicle Mix of repayment types
Source: Regulated Mortgage Survey/Survey of Mortgage Lenders, CML/BankSearch and DCLG
Notes: From April 2005 onwards, there is a major shift in the reported incidence of interest-only loans as a result of the
switch in data source from the SML to the RMS.
Who takes out interest-only loans?
RMS figures indicate that 17% of first-time buyers take out a mortgage on an interest-only basis
with no known repayment vehicle. This compares with around 25% for home movers and those
remortgaging. Although first-time buyers are less likely to choose interest-only than other
borrowers, we might expect those who do to be more vulnerable because they face the most
severe affordability constraints and have the least equity. For this reason, our analysis focuses
mostly on first-time buyers. Broadly speaking, however, the identified trends apply equally to
other types of interest-only borrower.
November 2006 3
4. More Mortgage Info
CML Housing Finance
Chart 2: Methods of repayment, Q3 2006
%
80
70
60
50
40
30
20
10
0
Capital and interest Interest-only with Interest-only with no Mix of repayment
repayment vehicle known vehicle methods
First-time buyers Home movers Remortgagors
Source: Regulated Mortgage Survey, CML/BankSearch
We know that first time buyers are more likely to use mortgage intermediaries than other
borrowers. They are new to the housing market and so may be less comfortable with shopping
around and prefer to use the services of a broker. The RMS tells us that a higher proportion of
intermediary business comprises interest-only mortgages sold with an accompanying investment
vehicle alongside. But the RMS data also shows that 21% of first-time buyers who buy via an
intermediary take out an interest-only product where there is no known repayment vehicle. This
compares with just 10% of those who buy direct through the lender. But this does need to be
interpreted with caution. If a borrower goes through a broker for an interest-only loan and also
takes out a repayment vehicle, they will most likely buy this through the broker too. And
because the lender did not provide the vehicle, they are less likely to know of its existence.
Chart 3: Repayment methods by distribution channel, first time buyers
Q3 2006
%
80
60
40
20
0
Capital and interest Interest-only with Interest-only with no Mix of repayment
repayment vehicle known vehicle methods
Direct Via intermediary
Source: Regulated Mortgage Survey, CML/BankSearch
4 November 2006
5. More Mortgage Info Interest-only: why all the interest?
The added difficulty in identifying the repayment vehicle for loans sold via intermediaries could
potentially distort other findings. For this reason we have undertaken each of the following
analyses separately for direct and intermediary sales. In each case, the findings remain valid and
so we have not shown the results separately.
Interest-only for income-stretch?
At a time of intense affordability pressures, one possible reason for taking out an interest-only
loan without a formal repayment vehicle could be to reduce the burden of monthly mortgage
payments. A homebuyer taking out an average size loan of £120,449 in Q3 2006, at a typical
interest rate of 5.01% over 25 years, would face a monthly capital and interest payment of £713.
But on an interest-only basis with no repayment vehicle, the total payments would be £515.
Borrowers desperate to get onto (or move up) the housing ladder might choose interest-only as
the only way of servicing a mortgage large enough to enable them to purchase their chosen
property.
While we have already seen that first-time buyers are in fact less likely than other borrowers to
choose interest-only (Chart 2), we need to look at whether those first-time buyers who do choose
interest-only are particularly stretched. The RMS data shows clear differences between the
affordability characteristics of first-time buyers taking out interest-only mortgages with no
known repayment vehicle and those on capital and interest.
Table 1: Affordability characteristics, first-time buyers, Q3 2006
Repayment method
. Capital Interest-only
and with no known
interest Repayment
Vehicle
Loan size £102,000 £133,551
Purchase price £125,000 £155,000
Deposit £11,609 £14,000
Income £32,070 £42,500
Percent advance 90 90
Income multiple 3.22 3.18
Debt servicing ratio, % 16.7 17.6
Source: Regulated Mortgage Survey, CML/BankSearch
Notes: Figures shown are based on medians of affordability statistics for individual loans, and so will not cross-calculate
within the table.
This does in fact provide a further degree of comfort. Interest-only borrowers have substantially
higher incomes than those on capital and interest. They take out larger loans to buy more
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expensive properties, but because of their higher incomes they have broadly similar income
multiples to those on capital and interest. This provides further evidence that first-time buyers
are not systematically using interest-only for income stretch. Instead it suggests a preference by
more affluent borrowers to choose their own repayment strategy to accompany an interest-only
mortgage. A similar pattern is found across every region of the UK and for all types of borrower,
with interest-only borrowers having higher incomes and the same or lower income multiples than
those on capital and interest.
Interest-only lending on the fringes?
In the first-time buyer market, there will always be some at the high end of the affordability
spectrum who seek to borrow at the limits and maximise their borrowing capability. This is
especially so in the current climate, with the ratio of house prices to incomes significantly in
excess of the long-run average. But are those borrowing near the limits gravitating to interest-
only?
Although the typical income multiples of first time buyers on capital and interest and interest-
only are similar, there are small differences in the distribution of loans around this. A similar
proportion of interest-only and capital and interest borrowers take out loans below three times
income multiple. A higher proportion of interest-only loans are taken out at three to three and a
half times income multiple compared to those on capital and interest. But the converse is true at
higher income multiples – especially above four times income - where lenders rely more heavily
on affordability models and/or manual underwriting processes to assess risk more fully. This
appears to be strong evidence that the most affordability-stretched of borrowers do not go for
straight interest-only.
Chart 4: Distribution of income multiples, first time buyers Q3 2006
%
35
30
25
20
15
10
5
0
under 2 2.0<3.0 3.0<3.5 3.5<4.0 4.0 and over
Capital and interest Interest-only with no known vehicle
Source: Regulated Mortgage Survey, CML/BankSearch
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7. More Mortgage Info Interest-only: why all the interest?
Looking at the distribution of loan-to-valuation ratios, a different picture emerges. The data
indicates that the typical first-time buyer takes out a loan with a 90% LTV, whether on capital
and interest or interest-only. But a significantly higher proportion of borrowers on interest-only
have LTVs between 90% and 100% (and significantly fewer with LTVs under 70%). So those
on interest-only are more likely to have a smaller equity cushion at the outset of the loan, putting
them at greater risk if their circumstances take an early turn for the worse.
Chart 5: Repayment methods by loan-to-valuation band, first time
buyers Q3 2006
%
30
25
20
15
10
5
0
< 50% 50%<70% 70%<80% 80%<90% 90%<95% 95%<100% 100% and
above
Capital and interest Interest-only with no known vehicle
Source: Regulated Mortgage Survey, CML/BankSearch
Of course, lenders look at LTV and income multiple in conjunction when assessing each loan
application. As one would expect, higher LTVs tend to be offset by lower income multiples and
vice versa., and this is equally true for interest-only mortgages. In fact, the combination of
higher income multiple and higher LTV appears slightly more favourable than for those taking
out capital and interest products.
We know from Table 1 that borrowers who take out a straight interest-only mortgage are
typically able to afford capital repayments. An interesting question then is what they are doing
with the money they are not spending on a repayment vehicle. Some borrowers may in fact opt
for straight interest-only so they can pay off the loan in lump sums as and when they choose.
This may be an attractive option for individuals, such as contract workers, the self-employed or
employees expecting substantial bonuses, who have incomes that are "lumpy". A straight
interest-only product gives such borrowers the flexibility to pay off their principal on an ad-hoc
basis, while at the same time minimising their regular monthly outgoings. Unfortunately, we
don't know the extent to which borrowers are in fact doing this, because we do not know what
borrowers do after the point of sale. There may well be some borrowers who take out interest-
only loans at relatively high LTVs, and who are counting on selling the property at a profit at a
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later date to repay the debt. This would of course be a potential high risk strategy for getting
onto the housing ladder, because it presumes that the housing market continues to be buoyant.
Another area of higher risk lending is the adverse credit market. Here the data indicates that
borrowers with an impaired credit history are significantly more likely to choose interest-only
than prime borrowers. This is understandable, given that many such borrowers are likely to be
cash-constrained and facing a challenging few years in getting their finances back onto an
orderly basis (see Housing Finance article on adverse credit mortgages).
Chart 6: Proportion of loans that are interest only by credit history of
borrower, Q3 2006
%
40
35
30
25
20
15
10
5
0
First-time buyers Home movers Remortgagors
No adverse credit Adverse credit
Source: Regulated Mortgage Survey, CML/BankSearch
Notes: Adverse credit history conforms to the definitions set out by FSA for mortgage reporting, and relates to material
loan arrears, CCJs and recent IVAs or bankruptcies.
Table 2: Affordability characteristics, first-time buyers on interest-only
by credit history, Q3 2006
Credit history of borrowers
No adverse Adverse
credit history credit history
Loan size £135,000 £118,800
Purchase price £157,500 £125,000
Deposit £14,400 £9,537
Income £42,700 £40,000
Percent advance 90 90
Income multiple 3.20 2.96
Debt servicing ratio 17.5 18.3
Source: Regulated Mortgage Survey, CML/BankSearch
Notes:
1. Figures are medians of affordability statistics for individual loans, and so will not cross-calculate within the table.
2. Adverse credit history conforms to the definitions set out by FSA for mortgage reporting, and relates to material loan
arrears, CCJs and recent IVAs or bankruptcies.
8 November 2006
9. More Mortgage Info Interest-only: why all the interest?
When we look further at the profile of interest-only borrowers (Table 2), we see that those with
adverse credit history have broadly similar incomes to those without, but borrow substantially
less. This means that they have a significantly lower income multiple – at a shade under three
times income this is well below the industry average for all first-time buyers. So, although
credit-impaired borrowers are more likely than others to choose interest-only, they are not
simultaneously stretching their income excessively. This suggests that the straight interest-only
nature of many impaired credit loans does not represent a material additional risk factor.
One factor that can mitigate borrowers' risk is the type of interest-rate product chosen. Fixed rate
loans insure highly-leveraged borrowers against payment shocks if short-term interest rates rise.
However the data indicates that interest-only borrowers are more likely to choose discounted
variable and tracker rate products, and so do not seem to be mitigating risk in this manner. This
suggests that there may be a greater overall degree of interest rate risk associated with such
lending. But it is difficult to quantify this because we do not know what straight interest-only
borrowers do with the money not allocated to capital repayments or a repayment vehicle, and
how this may affect their coping strategy if short-term interest rates rise. Putting such money on
short-term deposit could for example provide a significant cushion in such circumstances.
Chart 7: Interest-only lending by type of interest rate product, first-
time buyers Q3 2006
%
90
80
70
60
50
40
30
20
10
0
Fixed rate Discounted Tracker Capped SVR Other
variable rate
Capital and interest Interest-only with no known vehicle
Source: Regulated Mortgage Survey, CML/BankSearch
A separate area of regulatory interest is self-certified lending – where the lender does not require
the borrower to provide proof of income. The RMS does not explicitly identify self-certified
loans, and there is a significant grey area in reporting as to where "fast track" lending ends and
self cert begins. But we are able to undertake a "broad brush" analysis making use of the fact
that lenders do relatively little fast track lending over 75% LTV. We focus here on those
borrowers who are employed.
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Chart 8: “Self-certified” loans by method of repayment, employed
borrowers only Q3 2006
% self-certified
16
14
12
10
8
6
4
2
0
First-time buyers Home movers Remortgagors
Capital and interest Interest-only with no known vehicle
Source: Regulated Mortgage Survey, CML/BankSearch
Notes: The measure of self-certified lending is a CML defined proxy measure only and the proportions shown are
intended to indicate orders of magnitude only.
As we can see from Chart 8, employed interest-only borrowers are more likely to choose a self-
certified loan than borrowers on capital and interest, but the overall percentage differences are
small. While there could be isolated instances of self cert borrowers inflating their incomes
fraudulently, so obtaining a larger and riskier loan, lenders go to considerable lengths to ensure
that this does not happen and the FSA has not identified any systematic problems to date. The
reported incomes of self-certified borrowers are somewhat higher than others, but firms typically
apply more conservative lending criteria including lower income multiples, so the overall impact
on credit risk is likely to be fairly neutral.
What the regulator says
Borrowers who take out loans on an interest-only basis are under no contractual obligation to put
a repayment vehicle in place. The FSA does not expect lenders to require or verify that the
borrower puts adequate arrangements in place. As described earlier, it would be problematic to
do so since a borrower is free to purchase an investment vehicle from anybody they choose. The
FSA does, however, require lenders under Mortgage Conduct of Business (MCOB) rules to
clearly point out to borrowers on interest-only mortgages what the implications of this repayment
choice are. Specifically each annual statement reminds the interest-only borrower that at the end
of the term the full amount of the original advance will become due. The statement goes on to
make it clear out that the borrower must ensure they have the means to repay the principal at the
end of the term.
A further provision is made for interest-only lending under the Responsible Lending section of
MCOB. Specifically, if the lender knows that all or part of a loan is to be on an interest-only
basis, they should assess affordability as if the borrower were on capital and interest. We have
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11. More Mortgage Info Interest-only: why all the interest?
seen that interest-only borrowers typically have the same or slightly lower income multiples than
those on capital and interest. This provides strong evidence that lenders are indeed assessing
affordability in accordance with MCOB rules, regardless of the borrower's chosen method of
repayment. And in providing them with clear advice on the risks and implications of interest-
only borrowing, both at the outset and in each year's annual statement, the lender will have made
sure the borrower has both the financial wherewithal and information to make adequate
arrangements for repayment of the loan.
Although interest-only is well provided for under MCOB rules, it nonetheless remains a closely
watched area, especially for those borrowers thought to be most at risk. The FSA is currently
conducting thematic research into interest-only mortgages, focusing on Treating Customers
Fairly issues – including ensuring that interest-only borrowers have been given suitable advice at
the point of sale and throughout the life of the mortgage. The research findings are due out in
December 2006.
Conclusions
In examining the profile of borrowers taking out straight interest-only mortgages compared with
other borrowers, there does not seem to be a systemic pattern that puts them in a materially
different risk category. They do tend to have higher LTVs, but they also have higher incomes
and broadly similar income multiples compared to other borrowers. A higher proportion of
interest-only borrowers come from the credit-impaired and self-certified sectors, but in these
cases there are also mitigating factors that fully or partially offset these risks. We look forward
to the light that the FSA's research will shed on this area of mortgage lending when it is
published in December 2006.
References
Financial Services Authority (2003), Mortgages: Conduct of Business Sourcebook Instrument,
Financial Services Authority
Pannell, B and Smith, J (2005) Understanding first-time buyers, CML Research
Pannell B (2006), Adverse credit mortgages, CML Research
Tatch, J (2006) Will the real first-time buyers please stand up?, CML Research
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