Mortgage Market

Mortgage

Mortgages are loans to individuals

or businesses to purchase homes,
land, or other real property.

Many mortgages are securitized.

Securitization occurs when

securities are packaged and
sold as assets backing a
publicly traded or privately
held debt instrument.
Mortgage

Advantages of securitization:

FIs can reduce the liquidity risk, interest rate risk, and credit risk of their loan
portfolios.

FIs generate income from origination and service fees.

Mortgage
Mortgages differ from bonds and stocks.

• Mortgages are backed by a specific piece of real property.

• Primary mortgages have no set size or denomination.
• Primary mortgages generally involve a single investor.
• Comparatively little information exists on mortgage borrowers.
Primary Mortgage Market

Home Multifamily Commercial Farm

Mortgage dwelling Mortgage Mortgage
Primary Mortgage Market
Four basic types of mortgages are issued by financial institutions.

✓ Home mortgages are used to purchase one- to four-family dwellings

(called “single-family mortgages”).
✓ Multifamily dwelling 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.
Mortgage

You can have mortgages associated

A mortgage is any loan that pledges with buildings and pieces of land,
a piece of real estate as collateral. but the everyday consumer is
probably most familiar with the
mortgage as a home loan.
Mortgage
A mortgage is a type of loan used to purchase or maintain a
home, plot of land, or other types of real estate.

The borrower agrees to pay the lender over time, typically in a

series of regular payments that are divided
into principal and interest.
The property then serves as collateral to secure the loan.
Mortgage

The mortgage obliges the The lender (mortgagee) has

A mortgage is a loan secured
borrower (mortgagor) to the right of foreclosure (can
by the collateral of some
make predetermined series seize the property) if the
specific real estate property.
of payments. mortgagor defaults.
Mortgage
A borrower must apply for a mortgage through their preferred
lender and ensure that they meet several requirements,
including minimum credit scores and down payments.
The borrower agrees to pay the lender over time, typically in a
series of regular payments that are divided
into principal and interest.
The property then serves as collateral to secure the loan.
Mortgage

Mortgage applications go through a rigorous underwriting process before they

reach the closing phase.

Mortgage types, such as conventional or fixed-rate loans, vary based on the

needs of the borrower.
 How Mortgages Work

Individuals and businesses use mortgages to buy real estate without paying the entire purchase price up front.

The borrower repays the loan plus interest over a specified number of years until they own the property free and
clear.

Most traditional mortgages are fully-amortizing.

This means that the regular payment amount will stay the same, but different proportions of principal vs. interest will
be paid over the life of the loan with each payment. Typical mortgage terms are for 15 or 30 years.
 How Mortgages Work

Mortgages are also known as liens against property or claims on property. If the borrower stops paying the
mortgage, the lender can foreclose on the property.

For example, a residential homebuyer pledges their house to their lender, which then has a claim on the
property. This ensures the lender’s interest in the property should the buyer default on their
financial obligation. In the case of a foreclosure, the lender may evict the residents, sell the property, and
use the money from the sale to pay off the mortgage debt.
The Mortgage Process

Would-be borrowers begin

the process by applying to
one or more mortgage
lenders.

This may include bank and

investment statements,
recent tax returns, and proof
of current employment. The
lender will generally run a
credit check as well.
The lender will ask for
evidence that the borrower
is capable of repaying the
loan.
The Mortgage Process

If the application is approved, the lender will offer the borrower a loan of up
to a certain amount and at a particular interest rate.

Homebuyers can apply for a mortgage after they have chosen a property to
buy or even while they are still shopping for one, thanks to a process known
as pre-approval.

Being pre-approved for a mortgage can give buyers an edge in a tight housing
market because sellers will know that they have the money to back up their
offer.
The Mortgage Process

Once a buyer and seller agree on the terms of their deal, they or their
representatives will meet at what’s called a closing.
This is when the borrower makes their down payment to the lender.

The seller will transfer ownership of the property to the buyer and receive the
agreed-upon sum of money, and the buyer will sign any remaining mortgage
documents.

The lender may charge fees for originating the loan (sometimes in the form
of points) at the closing.
Types of Mortgages
• Mortgages come in a variety of forms. The most common
types are 30-year and 15-year fixed-rate mortgages.

• Some mortgage terms are as short as five years, while others

can run 40 years or longer.

• Stretching payments over more years may reduce the

monthly payment, but it also increases the total amount of
interest that the borrower pays over the life of the loan.
The following are just a few examples of some of the most popular types of
mortgage loans available to borrowers.

• Fixed-Rate Mortgages

The standard type of A fixed-rate mortgage

mortgage is fixed- is also called a
rate. traditional mortgage.

With a fixed-rate
mortgage,
the interest rate stays
the same for the
entire term of the
loan, as do the
borrower's monthly
payments toward the
mortgage.
Typical Loan Structures

Fixed-rate mortgage
(FRM) – level
monthly payments
of principal and
interest until
maturity, typically
15 or 30 years.
The following are just a few examples of some of the most popular
types of mortgage loans available to borrowers.

Adjustable-Rate Mortgage (ARM)

• With an adjustable-rate mortgage (ARM) the interest rate is fixed

for an initial term, after which it can change periodically based on
prevailing interest rates.

• The initial interest rate is often a below-market rate, which can

make the mortgage more affordable in the short term but possibly
less affordable long-term if the rate rises substantially.

• ARMs typically have limits, or caps, on how much the interest rate
can rise each time it adjusts and in total over the life of the loan.
Typical Loan Structures

Adjustable-rate mortgage
(ARM) – monthly
payments based on a
floating interest rate,
adjusted periodically,
according to a
predetermined interest
rate index.
The following are just a few examples of some of the most popular
types of mortgage loans available to borrowers.

Interest-Only Loans

• Other, less common types of mortgages, such as interest-only

mortgages and payment-option ARMs, can involve complex
repayment schedules and are best used by sophisticated
borrowers.

• These types of loans may feature a large balloon payment at its

end.
Balloon mortgage – like
FRM until balloon date
when all principal comes
due.
 Balloon
mortgage

▪ A balloon mortgage is a real estate loan with an initial period

of low or no monthly payments.

▪ The borrower pays off the full balance in a lump sum at the
end of the term.

▪ The monthly payments, if any, may be interest only, and the

interest rate is commonly low.
The following are just a few examples of some of the most popular
types of mortgage loans available to borrowers.

Reverse Mortgages

• As their name suggests, reverse mortgages are a very different

financial product. They are designed for homeowners age 62 or
older who want to convert part of the equity in their homes
into cash.

• These homeowners can borrow against the value of their home

and receive the money as a lump sum, fixed monthly payment,
or line of credit. The entire loan balance becomes due when
the borrower dies, moves away permanently, or sells the home.
Typical Loan Structures

Borrower has the option to pay the

loan off early (prepay) at prespecified
terms.
Mortgage refinancing

• When a borrower takes out a new mortgage and uses the proceeds to pay off
an existing mortgage.

• Mortgages are most often refinanced when an existing mortgage has a higher
interest rate than current rates.

• Borrowers must balance the savings of a lower monthly payment with the
costs (fees) of refinancing.
According to the Federal Home Loan Mortgage Corp., average interest rates
looked like this as of Nov. 2023:

▪ 30-year fixed-rate mortgage: 7.76%

▪ 15-year fixed-rate mortgage: 7.03%
According to the Federal Home Loan Mortgage Corp., average interest rates
looked like this as of Nov. 2023:

▪ 30-year fixed-rate mortgage: 7.76%

▪ 15-year fixed-rate mortgage: 7.03%

▪ BSP

▪ Accordingly, the interest rates on the overnight deposit and lending

facilities will be set to 6.0 percent and 7.0 percent, respectively.
Warning:

▪ Mortgage lending discrimination is illegal. If you think you’ve been discriminated

against based on race, religion, sex, marital status, use of public assistance,
national origin, disability, or age, there are steps that you can take.

▪ One such step is to file a report with the Consumer Financial Protection Bureau
(CFPB) or the U.S. Department of Housing and Urban Development (HUD).