FINANCIAL MARKETS

FINANCIAL MARKETS

CHAPTER 5. MORTGAGE MARKETS

 GOALS

1. Distinguish between a mortgage and a mortgage-backed security.

2. Describe the main types of mortgages issued by financial institutions.
3. Identify the major characteristics of a mortgage.
4. Examine how a mortgage amortization schedule is determined.
5. Describe some of the new innovations in mortgage financing.
6. Define a mortgage sale.
7. Define a pass-through security.
8. Define a collateralized mortgage obligation.
9. List the major mortgage holders in the United States.
10.Describe the trends in the international securitization of mortgages.
 MORTGAGES AND MORTGAGE-BACKED
SECURITIES

1. Mortgages are loans to individuals or businesses to purchases a home,

land, or other real property. The property purchased with the loan
serves as collateral backing the loan
2. Many mortgages (residential mortgages) are subsequently securitized by
the mortgage holder – They are packed and sold as assets backing a
publicly traded or privately held debt instrument
3. The major categories of mortgages: Home mortgages, commercial
mortgages, multifamily dwellings and farms
 MORTGAGE CHARACTERISTICS

1. Collateral
2. Down payment
3. Insured versus Conventional Mortgages
4. Mortgage Maturities
5. Interest rate
 MORTGAGE CHARACTERISTICS

1. Collateral:
i. All mortgage loans are backed by a specific piece of property that
serves as collateral to the mortgage loan
ii. The financial institution will place a lien against a property that
remains in place until the loan is fully paid off
iii. A lien is a public record attached to the title of the property that
gives the financial institution the right to sell the property if the
mortgage borrower default or falls into arrear on his or her
payment
 MORTGAGE CHARACTERISTICS

2. Down payment:
i. A financial institution requires the mortgages borrower to pay a portion of
the purchases price of the property (a down payment) at the closing (the
day the mortgage is issued)
ii. The balance of the purchase price is the face value of the mortgage (or the
loan proceeds)
iii. A down payment decreases the probability that the borrower will default on
the mortgage
iv. The size of the down payment depends on the financial situation of the
borrower (20%)
 MORTGAGE CHARACTERISTICS

3. Insured versus Conventional Mortgages:

i. Mortgages are classified as either federally insured or conventional
ii. Federally insured mortgages are originated by financial institution,
but repayment is guaranteed by either the Federal Housing
Administration (FHA) or the Veterans Administration (VA)
iii. Conventional mortgages are mortgages held by financial institutions
and are not federally insured
 MORTGAGE CHARACTERISTICS

4. Mortgage maturities:
i. 15 years or 30 years
ii. Mortgage allow the borrower to prepay all or part of the
mortgage principal early without penalty
iii. Balloon payment mortgages require a fixed monthly interest
payment for a three-to five-year period
 MORTGAGE CHARACTERISTICS

5. Interest rate
i. A fixed-rate mortgage locks in the borrower’s interest rate and thus
required monthly payments over the life of the mortgage
ii. A adjustable-rate mortgage is tied to some market interest rate or
interact index, in turn, the required monthly payments can change over
the life of the mortgage
iii. Discount points are fees made when a mortgage loan is issued
 FEES

1. Discount points are fees made when a mortgage loan is issued

2. Other fees:
1. Application fee
2. Title search
3. Appraisal fee
4. Loan origination fee
5. Closing agent and review fee
6. Other costs
 MORTGAGE REFINANCING

1. Mortgage refinancing occurs when a mortgage borrower takes

out a new mortgage and uses the proceeds obtained to pay off
the current mortgage
 MORTGAGE AMORTIZATION

1. The fixed monthly payment made by a mortgage borrower generally

consists partly of repayment of the principal borrowed and partly of the
interest on the outstanding (remaining) balance of the mortgage.

2. An amortization schedule shows how the fixed monthly payments are split
between principal and interest