Mortgage Markets
description
Transcript of Mortgage Markets
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Mortgage Markets
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I. Mortgage
• Mortgage
A pledge of property to secure payment of a debt.
• Mortgagor: Borrower
• Mortgagee: Lender
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• Properties– Residential Properties
• Single-Family Structures
• Multifamily Structures
– Nonsidential Properties• Commercial
• Farm
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II. Primary Mortgage Market
• Mortgage Origination– Mortgage Originators
• Savings and Loans
• Savings Banks
• Commercial Banks
• Credit Unions
• Mortgage Banks
• Life Insurance Companies
• Pension Funds
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– Origination Process• Application
• Criteria– Payment-to-Income Ratio (PTI)
The ratio of monthly payment to monthly income.
– Loan-to-Value Ratio (LTV)
The ratio of the amount of the loan to the market (or appraised) value of the property.
• Credit Scoring
• Commitment Letter to the Applicant
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– Fees• Origination Fee
A point represents 1% of the borrowed funds.
• Application Fee
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• Insurance– Conventional Mortgages– Insured Mortgages
• Federal Housing Administration (FHA)
• Veterans Administration (VA)
• Rural Housing Service (RHS)
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• Claim Priority– First Mortgage– Second Mortgage– Third Mortgage
• Maturity: 15 to 30 years
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• Mortgage Design– Fixed-Rate Mortgage (Traditional Mortgage)– Adjustable-Rate Mortgage (ARM)
Rates to be reset every month, year, two years, or three years.
– Balloon-Payment Mortgage (Balloon/Reset Mortgage, Rollover Mortgage)
Rates to be renegotiated every 3 to 5 years.
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– Graduated-Payment Mortgage (GPM)
Nominal monthly repayment grows at a constant rate during a portion of the life of the contract, thereafter leveling off.
– Price-Level-Adjusted Mortgage (PLAM)
Monthly payments to be level in purchasing power terms rather than in nominal terms.
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– Growing-Equity Mortgage
The payments never level off but continue to increase throughout the life of the loan.
– Shared-Appreciation Mortgage
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• Risk– Determinants
• Equity Invested (Loan-to-Value Ratio)
• Borrower’s Income
• Borrower’s Credit History
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– Pipeline Risk
The loan applications being processed and the commitments made by a mortgage originator together are called its pipeline.
Pipeline risk refers to the risks associated with originating mortgages.
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• Price Risk
The adverse effects on the value of the pipeline if mortgage rates rise.
• Fallout Risk
The risk that applicants or those who were issued commitment letters will not close.
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III. Secondary Mortgage Market
• Conduits– Federally Sponsored Agencies
Federal Home Loan Mortgage Corporation
Federal National Mortgage Association
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– Private Institutions
Residential Funding Corporation
GE Capital Mortgage Services
Countrywide
Prudential Home Mortgage
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• Underwriting Standards– Conforming Mortgage
A mortgage loan that meets the underwriting standards to be included in a pool of mortgages underlying a security that a conduit guarantees.
• Maximum PTI• Maximum LTV• Maximum Loan Amount
– Nonconforming Mortgage
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• Servicing
• Securitization
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IV. Mortgage-Backed Securities
• Mortgage-Backed Bonds– FNMA– Freddie Mac
• Pass-Throughs: Government guaranteed mortgages– GNMA– Privately Issued Pass-Throughs (PIPs)
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• Participation Certificates (PCs): Conventional mortgages pooled by Freddie Mac
• Collateralized Mortgage Obligations (CMOs)
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• Unit Investment Trust
A passively managed trust with units sold to investors.