FINANCIAL MARKETS

Phan Quynh Trang

FINANCIAL MARKETS

CHAPTER 5. MORTGAGE MARKETS

 GOALS

1. Mortgages and mortgage-backed securities.

2. Types of mortgages
3. Mortgage amortization
4. Mortgage sales; pass-through securities; collateralized
mortgage obligations.
5. Mortgage holders
 MORTGAGES

1. Mortgages are loans to individuals or businesses to

purchases a home, land, or other real property.
2. Residential mortgages are securitized (60%)
3. 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
 COLLATERAL

i. Mortgage is back by property (a lien)

ii. A lien is a public record attached to the title of the
property
 DOWN PAYMENT

 Is a portion of the purchases price of the property at the

day the mortgage is issued (the closing)
 Decreases the probability of mortgage default
 The size of the down payment (20%): private mortgage
insurance
 INSURED VS. CONVENTIONAL
MORTGAGES

 Federally insured mortgages are originated by financial

institution, but repayment is guaranteed by either the
Federal Housing Administration (FHA) or the Veterans
Administration (VA)
 Conventional mortgages are held by financial
institutions and are not federally insured (private
mortgage insurance)
 MORTGAGE MATURITY

 15 years or 30 years
 Mortgage allow the borrower to prepay all or part of the
mortgage principal early without penalty
 Balloon payment mortgages require a fixed monthly
interest payment for a three-to five-year period
 INTEREST RATE

i. A fixed-rate mortgage
ii. A adjustable-rate mortgage
iii. Discount points: fees (percent of principal value)
 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

 A mortgage borrower takes out a new mortgage and uses

the proceeds obtained to pay off the current mortgage
 Transaction and re-contracting cost
 MORTGAGE AMORTIZATION

 The fixed monthly payment made by a mortgage borrower

 An amortization schedule shows how the fixed monthly
payments are split between principal and interest
MORTGAGE AMORTIZATION
MORTGAGE AMORTIZATION
 MORTGAGE AMORTIZATION

 Purchase price: $150,000; maturity: 30 years; rate: 8%;

discount points: 0; down payment: 20%

 Monthly mortgage payment: $880.52

 MORTGAGE AMORTIZATION

 Purchase price: 2 billion VND; maturity: 1 years; rate: 6%;

discount points: 0; down payment: 25%

 Show monthly mortgage payment schedule.

MORTGAGE AMORTIZATION
 MORTGAGE AMORTIZATION

 Purchase price: $150,000; maturity: 15 years; rate: 7.25%;

discount points: 0; down payment: 20%

 Monthly mortgage payment: $1,095.44

 Amortization schedule in this case?

 OTHER TYPES OF MORTGAGES

1. Jumbo mortgages
2. Subprime mortgages
3. Alt-A mortgages
4. Option ARMs
5. Second mortgages
6. Reverse-Annuity mortgages
 OTHER TYPES OF MORTGAGES

 Jumbo mortgages are those mortgages that exceed the

conventional mortgage conforming limits
 Subprime mortgages are mortgages to borrowers who do
not qualify for prime mortgages because of weakened credit
histories
 Alt-A mortgages (Alternative A-paper) are mortgages that
are considered more risky than a prime mortgage and less
risky than a subprime mortgage
 OTHER TYPES OF MORTGAGES

 Option ARMs (pay-option ARMs) are 15-or 30-year

adjustable rate mortgage that offer the borrower several
month payment options
 Second mortgages are loans secured by a piece of real estate
already used to secure a first mortgage
 Reverse-Annuity mortgages (RAMs): with RAMs, a
mortgage borrower receives regular monthly payments from
a financial institution rather than making them
 MORTGAGE SALES

1. A mortgage sale: FI originates a mortgage and sells it with

or without recourse to an outside buyer
2. Purpose: manage credit, liquidity, interest rate risk and asset
diversification
 MORTGAGE SALES

1. Major buyers of primary mortgage loans: investment banks,

vulture funds, domestic banks, foreign banks, insurance
companies and pension funds
2. Major sellers of mortgage loans: money center banks, small
regional or community banks, investment banks, hedge
funds, and the U.S. government
 MORTGAGE-BACKED SECURITIES

1. Three types of mortgage-backed securities:

i. The pass-through security
ii. The collateralized obligation
iii. The mortgage backed bond
2. Mortgage-backed securities allow mortgage issuers to
separate the credit risk exposure from the lending process
itself
 PASS-THROUGH SECURITIES

1. Pool mortgages and other assets to offer investors

2. Promise payments of principal and interest on pools of
mortgage to secondary market investors
3. Issuers: public (GNMA, FNMA, FHLMC) and private
(banks, thrifts..)
 COLLATERALIZED MORTGAGE OBLIGATION

 A multiclass pass-through with a number of different bond

holder classes (tranches)
 Has guaranteed coupon
 Prepayment risk
 MORTGAGE-BACKED BONDS

 Remain on the balance sheet

 Cash flows on mortgages do not directly link to the
interest and principal payments of MMBs
 PARTICIPANTS

 Mortgage Pools
 Depository Institutions
 Mortgage Companies
 Life Insurance Companies
 Other Financial Institutions
 Others
 TRENDS

 Third-party technology and data providers are streamlining more

parts of the mortgage process.
 Nonbank lenders continue to grow market share.
 Next-generation “subservicers”3 are introducing more-efficient
digital platforms.
 Companies are bundling home-buying services, including
mortgages.
 Nonqualified mortgage (non-QM) lenders are reentering the
market.
https://www.mckinsey.com/industries/private-equity-and-principal-
investors/our-insights/five-trends-reshaping-the-us-home-mortgage-
industry