Download Institutional Use of Mortgage Markets

Chapter 9: Mortgage Markets
Chapter 9: Mortgage Markets
Chapter Outline:
•
Introduction.
•
Mortgages Characteristics.
•
Creative Mortgage Financing.
•
Institutional Use of Mortgage Markets.
•
Valuation of Mortgages.
•
Risk from Investing in Mortgages.
•
Mortgage- Backed Securities.
•
Globalization of Mortgages.
1-2
Introduction to Mortgages:
•
Definition:
A mortgage is a form of debt that finances investments in
property.
•
Types of Mortgages:
1. Residential Mortgage.
2. Commercial Mortgage.
Introduction to Mortgages:
Desirable Features for a Mortgage:
• Yield flexibility:
Responsiveness to changing market rates
• Constant real payments:
Keeping pace with inflation
• Payment stability:
Minimize late payment/default problems
• Full security:
Market value greater than loan amount
Introduction to Mortgages:
Desirable Features for a Mortgage:
• Servicing simplicity:
Collecting principal and interest when rates are changing
For mortgages allowing negative amortization, tracking
changing principal and interest payments can be difficult
• Marketability:
Ability to sell in a secondary market
Sales of mortgage backed securities (MBS) help control
total lender risk
Substituting capital market funds for financial institution's
funds
Mortgage Characteristics:
• Insured Mortgage.
• Conventional Mortgage.
• Fixed-Rate Mortgage.
• Adjustable-Rate Mortgage (ARM).
• Mortgage Maturities.
- Balloon-payment mortgage.
• Amortizing Mortgages.
Creative Mortgage Financing:
• Graduated-Payment Mortgage (GPM)
• Growing-Equity Mortgage
• Second Mortgage.
• Shared-Appreciation Mortgage.
Institutional Use of Mortgage
Markets:
• Financial Institutions that Originate Mortgages.
• Participation in the Secondary Market.
• Securitization.
• Institutional Investors in Mortgages.
• Unbundling Mortgage Activities.
Valuation of Mortgages:
The market price of the mortgage should equal
the present value of their future cash flows.
Valuation of Mortgages:
•
Factors that Affect the Risk-Free Interest
Rate:
1. Inflationary Expectations.
2. Economic Growth.
3. Money Supply.
4. Budget Deficit.
Valuation of Mortgages:
• Factors that Affect the Risk Premium.
- Changes in the economic growth.
• Indicators of Changes in Mortgage Prices:
- Indicators of Inflation.
- Indicators of Economic Growth.
Risk from Investing in Mortgages:
• Interest Rate Risk.
• Prepayment Risk.
• Credit Risk:
- Level of equity invested by borrower.
- Borrower’s income level.
- Borrower’s credit history.
Mortgage-Backed Securities
• Mortgage Pass-Through Securities:
- Definition.
- Interest Rate Risk on Mortgage.
- Repayment Risk on Mortgage.
Mortgage-Backed Securities
•
Types of Mortgage Pass-Through Securities:
1.
Ginnie Mae Mortgage-Backed Securities.
2.
Fannie Mae Mortgage-Backed Securities.
3.
Publicly issued pass-through securities (PIPs).
4.
Participation Certificates (PCs).
5.
Collateralized Mortgage Obligations (CMOs).
Globalization of Mortgage Markets
• US banks operations outside the US.
• Foreign banks operation in the US.
End of Chapter 9