Mortgage

Submitted By:
Taniya Vij
Primary and Secondary
Mortgage Markets
• The primary mortgage market is the loan origination market
• Numerous institutions supply capital to borrowers
• Mortgage originators can either hold loans in their portfolios
or sell them in the secondary mortgage market
• The principal buyers in the secondary mortgage market are
Fannie Mae and Freddie Mac
30-Year Fixed Rate Mortgages
1970-2020
Prime Conventional
Mortgage Loans
• Fixed-rate level payment mortgage
• Over 64% of loans in 2020 were conventional mortgages
• Compared to 85% IN 2011
• Conventional mortgages typically require 20% down (0.80 loan
to value)
• Conforming conventional loan: meets requirements for
purchase in secondary markets for Fannie Mae or Freddie Mac
• Nonconforming Loans
• Exceed loan limits (currently $417,000 for most areas of the
continental US)
• May require private mortgage insurance (PMI
• Adjustable Rate Mortgages (ARM): rates reflect changes in
lending rates over time
FHA Mortgages
(Federal Housing Administration)
• Primary Objective of 1949 Act: provide good housing
• FHA is a loan insurance program
• Loans made by private lenders
• Mortgage payment includes insurance premiums (included in loan)
• FHA insures 100% of loan and makes payments if borrower defaults
• If foreclosed, title passes to HUD
• Various types of mortgages covered by FHA programs
• Veterans Administration has similar program
Other Mortgage Types
• Purchase money mortgage: Mortgage given by a property
buyer simultaneous with receipt of title
• Among real estate brokers: refers to a second mortgage loan
from a seller to reduce the buyer’s down payment (Amounts to
installment payments with interest)
• Among government agencies: any loan that finances a purchase
• Piggyback loan:
• A second mortgage paired with an underlying 1st mortgage
• Keeps the 1st below 80 percent LTV, thus avoiding required
mortgage insurance
Other Mortgage Types
C.Home Equity Loans (HEL)
• Some home equity loans are closed-end, fixed-term loans
• Mostly open-end or line-of-credit loans (HELOC)
• Interest is Tax deductible
• Strength of the house as security provides favorable rate and
longer term
• Usually limited to total mortgage debt (sum of all mortgage loans)
of 75% to 80% of value
Other Mortgage Types
D.Reverse Mortgage
• Many older households are income constrained
• Over 80% own their home
• Most have little or no mortgage debt
• Most do not want to sell
• Converts home equity into income
• Owners not be forced to move except if owner fails to maintain
insurance & taxes
• Two major problems:
• Owner may outlive cash flows
• Loans may exceed value of home (if property values decline over
time)
Other Mortgage Types
E.Interest-Only:
• No amortizing of principal.
• Frequently involves a balloon payment
F. Sub-Prime Loans
• Extending credit to high risk borrowers
• High default rates due to poor or no creditworthiness background
checks
• Serious problems occurred for borrower when rates adjusted (always
up)
G.Alt-A Loans
• Minimal or no down payments
• Very weak credit scores
• Bank not required to verify information provided by borrowers
• The “NINJA” loans
Loan Cost Measures
• Annual Percentage rate (APR)
• APR converts regular interest expense and up-front loan fees into
a single equivalent interest expense
• APR is far superior to interest rate alone in comparing the cost of
loans
• APR has a bias for most applications:
• APR assumes that up-front fees are spread over the full maturity of
the loan
• Since most loans are prepaid before maturity, APR will tend to
understate the true cost of borrowing when up-front fees are
charged
• Final APR affected by prepayments
Loan Cost Measures
• Motives for Refinancing
• Lowering loan costs (lower APR)
• Reduce the term of the loan (30 to 20 or 15 year mortgage)
• Lower total amount of interest paid
• Net Benefit = Total Savings – Cost of Refinancing
• Lower rate results in lower interest deduction – slightly higher tax
due
• Spread should be ~ 2%: Old – new: Recoup costs over 18 to 24
months
THANKYOU