2.

MORTGAGE
MARKET
 2.3 Mortgage market

2.3.1 Overview of mortgage

2.3.2 Philippine mortgage markets
2.3.3 Types of mortgages
2.3.4 NINJA/NINA loans
2.3.5 Mortgage-backed securities
 2.3.1. Overview of mortgage

!  Mortgage- is a form of debt created to finance

investment in real estate
!  Mortgages differ from bonds and stocks
!  mortgages are backed by a specific piece of real
property
!  primary mortgages have no set size or
denomination
!  comparatively little information exists on mortgage
borrowers
How Mortgage Markets Facilitate the Flow of
Funds
 Mortgage Characteristics

!  Collateral: lenders place

liens against properties
that prevent sale until
loans are fully paid off
!  A down payment is a
portion of the purchase
price of the property a
financial institution
requires the borrower to
pay up front
 Mortgage Characteristics

!  Discount points are fees or payments made

when a mortgage loan is issued
!  each point costs the borrower 1 percent of the
principal value
!  the lender reduces the interest rate used to
determine the payments on the mortgage in
exchange for points paid

!  Other fees- application fee, title search, title

insurance, appraisal fee, loan origination fee,
closing agent and review fees
 Points vs. Interest rates

!  In obtaining a mortgage, bank usually offers more than 1

payment options. The common options is one without
discount fee and another one with a discount fee
!  In deciding which option for payment is preferable,
simply use cost-benefit analysis:
!  Cost: discount fee (discount points x principal)
!  PV of monthly savings – compare the monthly payments of the two
mortgage and compute its present value
!  Indifference point- the number of months or years
between two options wherein the borrower would be
indifferent. This is the point where the difference in
(interest) payments is equals the up-front payment
 Points vs. Interest rates
You plan to purchase a P5,500,000 house using 30-year
fixed-rate mortgage payable monthly. You will make a
downpayment of 20%. The bank provided you three
options follows:
Option 1: interest rate of 9% with zero points
Option 2: interest rate of 8.5% with 2.5 points
Option 3: interest rate of 8.33% with 5.0 points
a)  Compute for the monthly payments under each option
b)  Compute for option 2 and 3 discount fee
c)  Calculate the PV of monthly savings if savings can be reinvested
at 5% between options.
d)  Which is the best option?
e)  How long must you stay in the house to make it worthwhile to
pay the points if the payment saving is not invested? Hint:
compute the indifference point of option 1 & 2.
Universal and Commercial Bank Loans to real estate
as of June-2018 (in billion pesos)
 Government mortgage institutions

!  Home Development Mutual Fund (HDMF or Pag-IBIG)

!  Established through PD 1530 in 1978
!  provident savings and housing fund for employees that aims to
generate savings for financing homes for its members
!  National Home Mortgage Finance Corporation
(NHMFC)
!  Created through PD 1267 in 1977
!  Primary purpose: to develop and provide for a secondary
market for home mortgages granted by public and/or private
home financing institutions
!  Home Guaranty Corporation (HGC)
 Government mortgage institutions

!  Home Development Mutual Fund (HDMF or Pag-IBIG)

!  National Home Mortgage Finance Corporation
(NHMFC)
!  Home Guaranty Corporation (HGC)
!  Created in 1950
!  under the supervision of the Housing and Urban Development
Coordinating Council (HUDCC)
!  To guarantee the payment of any and all forms of mortgages,
loans and other forms of credit facilities and receivables
arising from financial contracts exclusively for residential
purposes and the necessary support facilities
 Government mortgage institutions

!  Social Housing Finance Corporation (SHFC)

!  Established through EO 272 in 2004
!  undertake social housing programs that will cater to the formal and
informal sectors in the low-income bracket and shall take charge of
developing and administering social housing program schemes,
particularly the CMP (community mortgage program) and the AKPF
Program (amortization support program and development financing
program)

!  National Housing Authority (NHA)

!  Created in 1938
!  Mandated to engage in housing production for low income families
 Types of mortgages

!  Home mortgages (aka single-family mortgages)

are used to purchase one- to four-family dwellings
!  Multifamily dwellings mortgages are used to
purchase apartment complexes, townhouses, and
condominiums
!  Commercial mortgages are used to finance the
purchase of real estate for business purposes
!  Farm mortgages are used to finance the purchase
of farms
 Types of mortgages

!  Prime mortgage – borrower meets traditional lending

standards
!  Subprime mortgage- borrowers do not qualify for a
‘prime’ credit rating
!  Alt-A mortgages- riskier than prime but not as risky as
subprime. interest rates are usually between prime and
subprime rates

!  Insured mortgage- loan is insured by Federal Housing

Administration (FHA) or Veterans Administration (VA)
!  Conventional mortgage- loan is not insured by FHA
or VA
 Types of mortgages

!  Fixed-rate mortgages- locks in the borrower’s interest

rate over the life of the mortgage

!  Adjustable-rate mortgages (ARMs) aka variable-

rate mortgages- allows the mortgage interest rate to
adjust to market conditions by tying the interest rate to
to some market interest rate or interest rate index

!  Option ARMs (‘Pick-n-Pay’ mortgages)- give

homebuyers an initial choice of payment options: a)
minimum payment (1% interest for 12 mos.), b) interest
only payment, c) 15 or 30 year fully amortizing
 Types of mortgages

Amortized mortgages have fixed principal and interest

payments that fully pay off the mortgage by its maturity date
Balloon payment mortgages require fixed monthly
interest payments for 3 to 5 years whereupon full payment of
the mortgage principal is due
Graduated-payment mortgages (GPMs) — Allow the
borrower to make small payments initially on the mortgage;
the payments increase on a graduated basis over the first 5 to
10 years and then level off.
Growing-equity mortgages — Monthly payments are
initially low and increase over time. The payments never level
off but continue to increase throughout the life of the loan.
 Types of mortgages

!  Second mortgages —in conjunction with the

primary or first mortgage, subordinated claims to
senior mortgages
!  Shared-appreciation mortgages — Allow a
home purchaser to obtain a mortgage at a below-
market interest rate. In return, the lender will
share in the price appreciation of the home
!  Jumbo mortgages- loan amounts that exceed
the maximum ‘conforming’ limits allowed by the
mortgage agencies
 Types of mortgages

!  Reverse-annuity mortgages (RAMs) aka

Reverse-equity mortgages (REMs) is where
retirees or senior homeowners can borrow against the
value of their home and receive funds as a lump sum, fixed
monthly payment or line of credit. This mortgage doesn’t
require the homeowner to make any loan payments.
Instead, the entire loan balance becomes due and payable
when the borrower dies, moves away permanently or sells
the home
!  In 2016, NHMFC launched MABUHAY (HLRPP 3), a Reverse
Mortgage Program, for senior citizens
 NINA/ NINJA Mortgages

NINA- No Income/ No Asset mortgage

does not require income/asset disclosure but simply
verify employment of lender
classify as Alt-A and has higher interest than prime
mortgage
NINJA- No Income/ No Job/ No Asset
mortgage
solely based on credit score
no verification process and no collateral
issued to subprime borrowers,
 Mortgage-backed securities explained

https://www.investopedia.com/terms/m/mbs.asp
 Mortgage-Backed Securities

Three types:
1.  Pass-through
securities
2.  Collaterized
mortgage
obligations
(CMOs)
3.  Mortgage
backed bonds
 Mortgage-Backed Securities

!  Pass-through securities “pass through” promised

principal and interest payments to investors
!  Threeagencies are directly involved in the creation of
pass-through securities
" Ginnie Mae
" Fannie Mae
" Freddie Mac

!  Privatemortgage pass-through issuers create pass-

throughs from nonconforming mortgages
 Mortgage-Backed Securities
Collateralized mortgage
obligations (CMOs)
!  are multiclass pass-throughs
with multiple bond holder
classes or tranches
!  each bond holder class has
a different guaranteed
coupon
!  mortgage prepayments
retire only one tranche at
a time, so all other trances
are sequentially
prepayment protected
Mortgage-backed bonds
(MBBs)
!  MBBs allow FIs to raise long-
term low-cost funds without
removing mortgages from
their balance sheets (pass-
throughs and CMOs are
removed from Fis BS)
!  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
 RA 9267:
Securitization Act of 2004

!  to promote the development of the capital market

by supporting securitizaiton
!  to pursue the development of a secondary market,
particularly for residential mortgage-backed
securities and other housing-related financial
instruments, as well as other types of asset-backed
securities (ABS)
!  All ABS shall be registered with SEC
!  Secondary Mortgage Institution (SMI) shall also be
registered with SEC
 MBS in the Philippines

!  National Home Mortgage Finance Corp (NHMFC)

!  Bahay Bonds 1 (2009) and Bahay Bonds 2 (2012)-
residential mortgage-backed securitization (RMBS)
program aimed at raising funds in order to sustain
NHMFC housing loan services to its beneficiaries. 2
classes, tax exempt and are based on cash flows from
the best quality loans in NHMFC’s portfolio.
!  Housing Loans Receivable Purchasing Program
(HLRPP) 1, 2 & 3- purchase loans and mortgages and
sell securities backed-up by loans and mortgages in
the fixed-income market
 2.3 Mortgage market

2.3.1 Overview of mortgage

2.3.2 Philippine mortgage markets
2.3.3 Types of mortgages
2.3.4 NINJA/NINA loans
2.3.5 Mortgage-backed securities
Knowledge Check

2.1-2.3
 KC: True or False

1.  Money markets exist to help reduce the opportunity

cost of holding cash balances.
2.  The clean price plus accrued interest is called the dirty
price of the security.
3.  Callable bonds’ option adjusted spread is usually higher
than its corresponding zero-spread.
4.  Both NINA and NINJA loan are considered to be a type
of subprime lending; but the bank takes on more risk
for extending NINA loan than NINJA loan.
5.  On a fixed-rate mortgage, the interest amount the
homeowner pays falls each period the mortgage is
outstanding.
 KC: True or False

6.  Accrued interest owed to the bond seller decreases as the

next coupon payment date approaches.
7.  Bond equivalent yield considers the compounding of
interest in computing the investment return.
8.  STRIP is a treasury security in which the periodic
interest payment is separated from the final principal
payment.
9.  A discount point on a mortgage loan refers to one
monthly payment of principal and interest.
10.  Option ARMs are mortgages considered as more risky
than prime mortgage and less risky than subprime
mortgage.
 KC: Multiple Choice

11. The discount yield on a T-bill differs from the T-bill's bond
equivalent yield (BEY) because
I. the discount yield is the return per dollar of face value and
the BEY is a return per dollar originally invested.
II. a 360-day year is used on the discount yield and the BEY
uses 365 days.
III. the discount yield is calculated without compounding, and
the BEY is calculated with compounding.
A I only
B II only
C I and II
D II and III
 KC: Multiple Choice

12. Bearer bonds are bonds

A with coupons attached that are redeemable by

whoever has the bond.
B where the registered owner automatically
receives bond payments when scheduled.
C in which the issue matures on a series of dates.
D issued in another currency other than the bond
issuer's home currency.
 KC: Multiple Choice

13. Mortgage payments are ____ on a 15-year fixed-

rate mortgage than on a 30-year fixed-rate mortgage,
and ______ is paid on a 15-year mortgage than on a
30-year mortgage; ceteris paribus.

A lower, less interest

B lower, more interest
C higher, less interest
D higher, more interest
 KC: Multiple Choice

14. Which one of the following bonds is likely to have

the highest required rate of return, ceteris paribus?

A AAA-rated non-callable corporate bond with a sinking

fund
B AA-rated callable corporate bond with a sinking fund
C AAA-rated callable corporate bond with a sinking fund
D AA-rated callable corporate bond without a sinking fund
 KC: Multiple Choice

15. Option-adjusted spread is computed by deducting

option value from _____.

A B-spread
B I-spread
C G-spread
D Z-spread
 KC: Multiple Choice

16. Bonds that mature on a series of dates, with

portion of the issues paid off on each is
called________.

A Amortizing bonds
B Registered bonds
C Serial bonds
D Term bonds
 KC: Multiple Choice

17. . Characteristics of mortgage include the following

EXCEPT:
A Long Maturity (more than 10 years)
B Convertible
C Collateral
D Down payment
 KC: Multiple Choice

18. For the purposes for which they are used, money market
securities should have which of the following
characteristics:
I. Low trading costs
II. Little price risk
III. High rate of return
IV. Life greater than one year

A I and III
B II and IV
C III and IV
D I and II
 KC: Multiple Choice

19. During the early years of a balloon mortgage loan,

the lender applies:

A All of the monthly payment to the outstanding

principal balance.
B All of the monthly payment to interest on the loan.
C Most of the monthly payment to the outstanding
principal balance.
D Most of the monthly payment to interest on the loan.
 KC: Multiple Choice

20. A bond with default risk will ______ have a

______ risk premium.

A always, negative
B always, positive
C sometimes, negative
D sometimes, positive
 KC: Problem Solving

21. A commercial paper with a yield of id= 9% matures

in 120 days. It has a face value of P500,000 with a
current purchase price of P475,000. Compute the (a)
bond equivalent yield; and (b) effective annual
return

22. What would be the monthly amortization payment

of a 15-year P12,000,000 mortgage with 8.75%
interest and 5 points.
 KC: Problem Solving

23. A 20-year 12% corporate bond has remaining 12

years to maturity. At its current price, the bond has
YTM of 10.30%. Currently, a 10-year and 15-year
treasury bond has YTM of 6.25% and 7%. Compute
for the (a) G-spread and (b) I-spread

24. You plan to obtain a P5,500,000, 20-year fixed-

rate mortgage at a rate of 10% with zero points or at
a rate of 9.25% with 10 discounts points. Assuming
the monthly payments are not reinvested, compute
for the following: (a) Cost of discount, (b) total
savings from monthly payment, (c) net cost or
savings of option 2
 KC: Problem Solving

25. What is the bond equivalent yield of P200,000 face

value commercial paper currently selling at
P194,800 at a yield of id= 4.15%?

26. Calculate the BEY and EAR on an interbank loan

that is 15 days from maturity and has a quoted yield
of isp= 0.85%. The loan has a face value of P100,000
and current price of P99,900.
 KC: Problem Solving

27. Consider an investor who, on January 1, 2020,

purchases a TIPS bond with an original principal of
P500,000, an 8% annual coupon rate, and 10 years to
maturity. If the semi-annual inflation rate during the
first 6 months is 0.7%, calculate the:
(a)  principal amount used to determine the first semi-
annual coupon payment; and
(b)  first semi-annual coupon payment
 KC: Problem Solving

28. On February 25, 2019, you purchased a P100,000 T-

note that matures on December 31, 2030 (settlement
occurs three days after purchase, so you receive actual
ownership of the bond on February 28, 2019). The
coupon rate on the T-note is 5.5% and the current price
quoted on the bond is 102.5%. The last coupon payment
occurred December 31, 2018 (59 days before settlement),
and the next coupon payment will be paid on June 30,
2019 (122 days from settlement).
!  a. Calculate the accrued interest due to the seller from the buyer at
settlement.
!  b. Calculate the dirty price of this transaction.