MORTGAGE MARKETS

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MORTGAGE MARKETS

• CHAPTER 9

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REAL ESTATE MORTGAGES

• The Traditional Game
• Fixed rate 30 year FHA/VA insured mortgages
• FHA, VA 3 down, zero down (respectively)
• Federal agency is guarantor of last resort
• Conventional mortgages (35 50 of all
  mortgages) fixed or variable rate
• Minimum cash in from 10 to 20 (w/ 20 typical)
• Banker - Brokers do not retain the mortgages
• May require Insurance or larger down payments
• Large Secondary Market
• Fannie Mae and Freddie Mac guarantee or purchase
  approx. 90 of all mortgages (2010).

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REAL ESTATE MORTGAGES

• Mortgage Instruments that deal with Interest-rate
  Volatility
• Adjustable Rate Mortgage (ARM)
• Graduated Payment (GPM)
• Growing Equity Mortgage (GEM?)
• Equity-Based Financing
• Second Mortgages fixed loan amounts, rates and
  terms
• Home Equity Loans / Revolving Lines of Credit
• Competitive Equality Banking Act (1987) lifetime
  rate caps on HEL
• Home Equity Loan Consumer Protection Act (1988)
  rules for disclosure, limit flexibility on
  changing terms

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REAL ESTATE MORTGAGES

• Desirable Features for a Mortgage (Lender)
• 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
• 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

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MORTGAGE-BACKED SECURITIES

• Government Agencies Re-organized as Public
  Corporations
• FNMA (1938) (Fannie Mae) organized as government
  agency. Re-chartered in 1968 as public company.
  Provide funds to assist in homeownership.
• GNMA (1968) (Ginnie Mae) insured pass through
  because GNMA guarantees investors of
  mortgage-backed securities will receive timely
  payment of PI. Re-chartered in 1970 as public
  company.
• GNMA backed by full faith and credit of US
  Government makes it marketable! Initial
  pass-through were fixed rate mortgages More
  recent ones include variable rate. The latter
  typically have shorter payoff times
• FHLMA (1970) (Freddie Mac) More funds for
  mortgage market Public in 1989

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MORTGAGE-BACKED SECURITIES

• Standard Pass-Through Securities
• FNMA, GNMA (FHA, VA), FHLMA Mortgage-backed
  securities
• PIP (Privately Issued Pass-through) backed by
  non-conforming mortgages
• Not insured by any Agency of the US Govt may be
  commercially insured
• Collateralized Mortgage Obligations (CMO)
  developed by Freddie Mac
• Investors can purchase mortgage assets without
  having to service loans
• Transforms otherwise illiquid mortgages into
  highly marketable securities
• Also allows investors to sell part of the "option
  risk" to other investors Accomplished by
  rebundling the cash flow pool

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MORTGAGE-BACKED SECURITIES

• Mortgage Pools - Sources of Risk
• Interest Rate (market value behaves like bonds)
• Prepayment (reduces yields)
• Credit (sub-prime mortgage problem)

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Supplemental Information on MortgagesSee Phase 2
Lecture Notes

• Conforming Loans
• Securitization
• Collateralized Debt Obligation (CDO)
• Pass-Through Rates
• Mortgage-Backed Securities (MBS)
• Asset-Backed Securities (ABS)
• VA Loans

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HOMEWORK QUESTIONS

• What are the desirable features of a mortgage?
• What are the general features of an Adjustable
  rate mortgage?
• What are pass-through securities?
• What factors contributed to growth of second
  mortgages?
• Why are CMO such good investments from the
  default point of view?
• Why do mortgage investors want good
  loan-to-market value ratios?