FINC 3340

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FINC 3340

• Mortgage Markets

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Learning Objectives

• After completing this material, you should
• understand the basics of the mortgage lending
  process, including variations on the standard
  mortgage contract
  
• understand the functioning of the secondary
  mortgage market and the process of
  securitization
  
• understand the basic characteristics of
  engineered securities like IO and PO strips and
  CMOs

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Understanding the Mortgage Market

• The Primary Market - Originating Loans
• Types of Mortgage Loans
• Insured and Conventional Mortgages
• Fixed-Rate Mortgages
• Adjustable-Rate Mortgages
• Other Types
• Graduated-Payment Mortgages (GPMs)
• Growing Equity Mortgages (GEMs)
• Shared-Appreciation Mortgages (SAMs)
• Equity Participation Mortgages
• Second Mortgages
• Reverse Annuity Mortgages (RAMs)

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The Secondary Market

• The development of an active secondary market for
  mortgages and mortgage-related securities is one
  of the single most important developments of the
  financial "revolution" of recent years.
  Consequently, we will look in much more detail at
  this aspect of mortgage markets.
• How does the secondary market work for mortgages?
  GNMA, FNMA, FHLMC and lots of other letters...

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The Secondary Market

• How does pooling and securitization work?

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Financial Engineering

• Mortgage Strips
• Interest Only (IO) -
• Principal Only (PO) -
• How do these behave as rates move? That is, what
  are the interest rate risk characteristics of
  these securities?

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Mortgage-backed security, IO, and PO values
across interest rate scenarios
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Financial Engineering

• An application of engineering creating a
  synthetic mortgage from IO and PO strips.
  
• HOW?
• WHY?

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Financial Engineering

• CMO's what are these?

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Financial Engineering

• A closer examination of the cash flow divisions
  compare CMO cash flows to IO/PO cash flows.
  
• Why are these attractive?