Mortgage Markets

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Chapter 9

• Mortgage Markets

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Mortgage Markets

• What is a Mortgage?
• Characteristics of Mortgage Loans
• Mortgage loans are made for varied amounts -- no
  standard denomination.
• Mortgage markets are highly regulated and
  supported by federal government policies.

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Mortgage Markets

• Characteristics of Mortgage Loans (continued)
• The note is the borrowing agreement.
• Payments amortized over time.
• Interest is usually computed on the declining
  balance.
• Thirty and 15 year most common maturities
• Lower rate on 15 year mortgage
• Fifteen year has higher payments lower total
  interest expense

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Amortizing Mortgages

• Payment Includes
• Interest Owed
• Balance to Principal
• Interest on the Declining Balance

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Amortizing Mortgages

• Example 50,000 borrowed at 8 percent for 5
  years (annual payments)
• Calculating Payments
• Formula
• PVA A (PVIFA, i, n)
• Calculating the PVIFA

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Amortizing Mortgages

• Substituting into formula
• Annuity factor 3.9927
• 50,000 A(3.9927)
• A 12,522.85 (this is your payment)

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Amortizing Mortgages

• For monthly payments
• divide i by 12
• multiply n by 12
• then calculate the annuity factor

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Amortizing Mortgages
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Amortizing Mortgages

• Observations
• When is most of your interest paid?
• When do you contribute most to reducing
  principal?
• At the end of 5 years the loan is fully amortized
  so balance is ___________

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Mortgage Risks

• Credit Risk (from late payments to default)
• Related to Economic Conditions
• Directly Related to Loan/Value Ratio
• Borrower Income Level
• Borrower Credit History
• Interest Rate Risk
• Varying Market Rates Impacts Value and
  Reinvestment Returns

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Types of Mortgages

• 1. Public or Private
• Private
• Conventional mortgages private
• Public
• Insured and/or guaranteed mortgages state and
  federal governments
• Federal Housing Administration (FHA)
• Veterans Administration (VA)
• Downpayment and rates may be lower.

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Types of Mortgages

• 2. Fixed or Variable Rate
• Fixed-rate mortgages
• Adjustable rate Mortgages (ARMs)
• Rate may vary in a prescribed range (caps) or
  without limit.
• Rates may vary based on a previously determined
  interest rate index or the cost of the funds of
  the lender.

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Types of Mortgages

• 3. Other Types of Mortgages
• Balloon Payment Mortgages
• Negative Amortization Mortgages

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Types of Mortgages

• Other Types of Mortgages (continued)
• Growing Equity Mortgage (GEM)
• Second Mortgage

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Secondary Mortgage Market

• Loan includes three primary activities
• Origination
• Funding
• Servicing
• Secondary market provides liquidity

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Secondary Mortgage Market

• How do banks tap the secondary market?
• Outright Sale of Mortgage
• Mortgage Backed Securities (MBS)
• Make the mortgage market more attractive because
• issued in standardized denominations and are
  negotiable
• Issued by quality borrowers
• Usually insured and highly collateralized
• Repayment schedules vary, but many are similar to
  other bonds

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Summary

• What is a mortgage?
• Mortgage payments vary based on
• size of mortgage
• interest rate
• maturity etc. etc.
• Many different types of mortgages
• Secondary market makes mortgages more attractive
  for investors