Mortgage Markets by a number of global, national, and regional that the balance on the mortgage will be zero when
and regional that the balance on the mortgage will be zero when the
• Long-term loan secured by the real estate
• An agreement between you and a lender that gives the
lender the right to take your property if you fail to
repay the money you’ve borrowed plus interest
• An amortized loan whereby a fixed payment pays
both principal and interest each month.
History of Mortgage
Mortgages were used in 1880s, but massive defaults in the
agricultural recession of 1890 made long-term mortgage
difficult to attain.
The National Banking Act of 1863
• Were arrange between individuals, usually with the
help of a lawyer who brought the parties together and
drew up the papers.
1880
• Mortgage bankers had learn to streamline their
operations by selling bond to raise the long-term funds
they lent
1890s
• Agricultural recession results in many defaults. Land
price fell, and large number of the mortgage bankers
went bankrupt.
1930s
• Mortgage market was again devastated by the Great
Depression. Million of borrowers were without work
and were unable to make their loan payments. This
tied to foreclosure and land sales cause property values
to collapse
Balloon loans
• the borrower paid only interest for 3-5 years, at which
time the entire loan amount become due.
CHARACTERISTICS OF THE RESIDENTIAL MORTGAGE
1. Mortgage interest rate
a. Market rates – long-term market rates are
determined by the supply of and demand for
long term-funds which are in turn influenced
factors
b. Terms – Longer – term mortgages have higher
interest rates than shorter-term mortgages
c. Discount points – interest payments made at
the beginning of a loan
2. Loan Terms- mortgage loan contracts contain many
legal and financial terms, most of which protect lender
from financial loss.
a. Collateral – usually the real estate being
financed, pledge as security. The lending
institution will place a lien against the
property, and this remains in effect until the
loan is paid off
b. Down payments – a portion of the purchase
price paid by the borrower. The balance of the
purchase price is paid by the loan proceeds.
The down payment reduces moral hazard for
the borrower.
c. Private Mortgage Insurance – insurance
against default by the borrower. Insurance
policy that guarantees to make up any
discrepancy between the value of the property
and the loan amount, should a default occur.
Includes credit history, employment history,
etc., to determine the borrowers ability to
repay the mortgage as specified in the
contract.
d. Borrower qualification – before granting a
mortgage loan, the lender would determine
whether the borrower qualified for it.
Qualifying for a mortgage loan was different
from qualifying for a bank loan because most
lenders sold their mortgage loans to one of a
few federal agencies in the secondary mortgage
market.
MORTGAGE LOAN AMORTIZATIION
• Mortgage loans are amortized loans. this means that a
fixed, level payment will pay interest due plus a
portion of the principal each month. It is designed so
last payment is made.
Fully Amortize
• Payments will pay off the outstanding indebtedness
by the time the loan matures
TYPES OF MORTGAGE LOANS
A. INSURED MORTGAGE
o are originated by banks or other mortgage
lenders but are guaranteed by either the
Federal Housing Administration (FHA) or the
Veterans Administration (VA)
o The FHA or VA then guarantees the bank
making the loans against any losses—meaning
that the agency guarantees that it will pay off
the mortgage
Advantage: a borrower who qualifies for an FHA or
VA loan is that only a very low or zero down payment
is required.
CONVENTIONAL MORTGAGE
o originated by the same sources as insured loans
but are not guaranteed.
B. FIXED RATE MORTGAGE
o the interest rate and the monthly payment do
not vary over the life of the mortgage
ADJUSTABLE-RATE MORTGAGE
o tied to some market interest rate and therefore
changes over time
CAPS – limits in ARM
o make ARMs more palatable to borrowers.
C. GRADUATED-PAYMENT MORTGAGE (GPMs)
 o useful for home buyers who expect their
incomes to rise
o has lower payments in the first few years; then
the payments rise. The early payments may not
even be sufficient to cover the interest due, in
which case the principal balance increases. As
time passes, the borrower expects income to
increase so that the higher payment will not be a
burden
o Initial low payment increases each year; loan
amortizes in 30 years
advantage: that borrowers will qualify for a larger loan than if
they requested a conventional mortgage. This may help buyers
purchase adequate housing now and avoid the need to move to
more expensive homes as their family size increases
Disadvantage: the payments escalate whether or not the
borrower’s income does
D. GRADUATED-PAYMENT MORTGAGE
o Initial payment increases each year; loan
amortizes in less than 30 years
o to help the borrower pay off the loan in a shorter
period of time
The GEM is similar to the graduated-payment mortgage; the
difference is that the goal of the GPM is to help the borrower
qualify by reducing the first few years’ payments. The loan
still pays off in 30 years. The goal of the GEM is to let the
borrower pay off early.
E. SECONDARY MORTGAGES
o Loans that are secured by the same real estate
that is used to secure the first mortgage
o Loan is secured by a second lien against the real
estate; often used for lines of credit or home
improvement loans
PURPOSES OF SECONDARY MORTGAGE
a. to give borrowers a way to use the equity they
have in their homes as security for another loan
b. to take advantage of one of the few
c. remaining tax deductions available to the middle • Is the purchasing and selling of existing home loans,
class which are typically bundled together and traded as
mortgage-backed securities.
F. REVERSE ANNUITY MORTGAGE • After WWII, the federal government established the
o is an innovative method for retired people to live secondary mortgage market by creating Fannie Mae to
on the equity they have in their homes. buy mortgages from thrifts.
o Lender disburses a monthly payment to the
borrower on an increasing-balance loan; loan
comes due when the real estate is sold.
Advantage: It allows retired people to use the equity in their
homes without necessity of selling it
MORTGAGE-LENDING INSTITUTIONS
• Thrift industry was established with the mandate from
Congress to provide mortgage loans to families.
Congress gave these institutions the ability to attract
depository by allowing S&L to pay slightly higher
interest rates on deposits. PLAYERS IN SECONDARY MORTGAGE MARKET
LOAN SERVICING a. Borrowers
b. Investors
• The originator immediately sells the majority of
mortgages to another investor. This frees up cash to
c. Banks/lenders
d. Aggregators
make another loan and earn more fees. The monthly
e. Rating agencies
payments must be collected, and records must be kept.
SECURITIZATION OF MORTGAGE
RESERVE ACCOUNTS
• Developed because of problems dealing with single
• are established for most mortgage loans to permit the
mortgages such as the risk of default or prepayment, as
lender to make tax and insurance payments for the
well as servicing. Through diversification, mortgage
borrower.
pools eliminated some of this problem.
THREE DISTINCT ELEMENTS TO MOST MORTGAGE
PROBLEMS INTERMEDIARIES FACED WHEN TRYING
LOANS
TO SELL MORTGAGE
1. The originator packages the loan for an investor.
a. Mortgage are usually small to be wholesale instrument
2. The investor holds the loan. b. Mortgages are not standardized
c. Mortgage loans are relatively costly to service
3. The servicing agent handles the paperwork d. Mortgages have unknown default risks
SECONDARY MORTGAGE
WHAT IS A MORTGAGE-BACKED SECURITY?
 • is a bond-like investment made up of a collection of • Are a type of structured investment finance product that
home loans purchased from the banks that issued them. contain various assets and loan products.
• Investment banks package bank loans, mortgages, and
MORTGAGE GOVERNMENT-SPONSORED
other assets into collateralized debt obligations similar to
ENTERPRISES funds for institutional investors to buy.
a. federal Home Loan Banks THE REAL ESTATE BUBBLE
b. Federal National Mortgage Association (Fannie Mae)
c. Federal Home Loan Mortgage Corporation (Freddie • Often known as a property bubble or housing bubble in
Mac) residential markets, is an economic bubble that arises on
a regular basis in local or global real-estate markets,
IMPACT OF SECURITIZATION ON THE MORTGAGE
usually following a land boom.
MARKET
• Reduces the problems caused by regional lending
institution's sensitivity to local economic fluctuations.
• Borrowers have access to a national capital market.
• Investors have low-risk and long-term investments in
mortgages without having to service the loan.
MORTGAGE PASS-THROUGH
• A security that has the borrower's mortgage payments
pass through the trustee before being disbursed to the
investors.
• This design did eliminate some risk, but investors still
faced prepayment risk.
TYPES OF MORTGAGE PASS-THROUGH SECURITIES
• Government National Mortgage Association (GNMA)
Pass-Throughs
• Federal Home Loan Mortgage Corporation (FHLMC)
Pass-Throughs
• Private Pass-Throughs (PIPs)
SUBPRIME MORTGAGE
• A type of home loan extended to individuals with poor,
incomplete, or nonexistent credit histories.
• Subprime loans are those made to borrowers who do not
qualify for loans at the going market rate of interest
because of a poor credit rating or because the loan is
larger than justified by their income.
COLLATERAL DEBT OBLIGATION