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Flashcards in Lecture 10 - Mortgage markets Deck (15)
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1

What is a Mortgage?

  • A mortgage is a ____________  secured by real estate.
  • A developer may obtain a mortgage loan to ________  the construction of an office building and an individual/family may obtain a mortgage loan to ________  the purchase of a home.
  • The borrower pays it off overtime in some __________ of principle and interest payment that result in full payment of the debt by maturity.
  • About 81% mortgage loan are residential mortgage in the USA. That is about 85% in Australia.

What is a Mortgage?

  • A mortgage is a long term loan secured by real estate.
  • A developer may obtain a mortgage loan to finance the construction of an office building and an individual/family may obtain a mortgage loan to finance the purchase of a home.
  • The borrower pays it off overtime in some combination of principle and interest payment that result in full payment of the debt by maturity.
  • About 81% mortgage loan are residential mortgage in the USA. That is about 85% in Australia.

2

Characteristics of Residential Mortgage

 

  • Last _____ years mortgage loan has changed a lot.
  • Main change is development of the  ________________ contract.
  • Before the large banks was the main provider of the mortgage loan, but last 20 years small providers start providing mortgage loan and make the markets very __________.

Characteristics of Residential Mortgage

 

  • Last 20 years mortgage loan has changed a lot.
  • Main change is development of the active secondary market contract.
  • Before the large banks was the main provider of the mortgage loan, but last 20 years small providers start providing mortgage loan and make the markets very competitive.

3

Characteristics of Residential Mortgage
Residential Mortgage Interest Rates

Depends of the following factors:

  1. _________ depends of large number of factors, including national and international
  2. ______________  has higher interest rates.
  3. _____________ interest payment are made at the beginning of the loan(In the USA)
  4. Fixed vs variable rates
  5. Low doc loan vs standard mortgage.

Characteristics of Residential Mortgage
Residential Mortgage Interest Rates

Depends of the following factors:

  1. Market Rates depends of large number of factors, including national and international
  2. Longer term mortgage has higher interest rates.
  3. Discount Policy interest payment are made at the beginning of the loan(In the USA)
  4. Fixed vs variable rates
  5. Low doc loan vs standard mortgage.

4

Characteristics of Residential Mortgage

  • ___________ is the common characteristics of Mortgage loan
  • Down payment about _____________
  • _________________ (LMI) should be paid if deposit is less than 20% of the valuation.
  • ______________  loan payment should not be more than 25% of the gross salary.
  • All other payment including mortgage, ____________________________________
  • ______________ is an important factor.

Characteristics of Residential Mortgage

  • Collateral is the common characteristics of Mortgage loan
  • Down payment about 10% (in Australia)
  • Landers Mortgage Insurance (LMI) should be paid if deposit is less than 20% of the valuation.
  • Borrowers qualification, loan payment should not be more than 25% of the gross salary.
  • All other payment including mortgage, should not be more than 33% of the gross monthly income.
  • Credit score is an important factor.

5

Mortgage Loan Amortization

Mortgage loan borrowers agree to a monthly amount of principle and interest that will ___________________________. Fully amortize means the payment will pay off the outstanding in-debtedness by the term of loan maturity.

 

Mortgage Loan Amortization

Mortgage loan borrowers agree to a monthly amount of principle and interest that will fully amortize the loan in maturity. Fully amortize means the payment will pay off the outstanding in-debtedness by the term of loan maturity.

6

Insured and Conventional Mortgage

______________: A mortgage that is protected by mortgage insurance through the Federal Housing Administration or by private mortgage insurance. If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount.

 

A “________________” simply refers to any mortgage loan that is not insured or guaranteed by the federal government(e.g. Federal Housing Administration (FHA) or the USDA Rural Housing Service) but rather available through or guaranteed a private lender (banks, credit unions, mortgage companies)

Insured and Conventional Mortgage

Insured Mortgage: A mortgage that is protected by mortgage insurance through the Federal Housing Administration or by private mortgage insurance. If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount.

 

A “Conventional Mortgage” simply refers to any mortgage loan that is not insured or guaranteed by the federal government(e.g. Federal Housing Administration (FHA) or the USDA Rural Housing Service) but rather available through or guaranteed a private lender (banks, credit unions, mortgage companies)

7

Fixed and Variable Rate Mortgage

A________________ (FRM), often referred to as a "vanilla wafer" mortgage loan, is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float".

___________________A type of home loan in which the interest rate is not fixed. The two most common types of mortgages in the United States are fixed rate and variable rate (also called _______________).

Fixed and Variable Rate Mortgage

A fixed-rate mortgage (FRM), often referred to as a "vanilla wafer" mortgage loan, is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float".

Variable Rate Mortgage A type of home loan in which the interest rate is not fixed. The two most common types of mortgages in the United States are fixed rate and variable rate (also called adjustable rate).

8

Graduated Payment Mortgage (GPMs)

  • A type of ______________________________________ from an initial low base level to a desired, final level.
  • Typically, the payments will grow 7-12% annually from their initial base payment amount until the full payment is reached.
  • In a graduated payment mortgage, only the ____________________________, which allows many people who might not otherwise qualify for a mortgage to own a home.
  • This type of mortgage payment system may be ___________________________ as their income levels gradually rise to meet higher mortgage payments.

Graduated Payment Mortgage (GPMs)

  • A type of fixed-rate mortgage in which the payment increases gradually from an initial low base level to a desired, final level.
  • Typically, the payments will grow 7-12% annually from their initial base payment amount until the full payment is reached.
  • In a graduated payment mortgage, only the low initial rate is used to qualify the buyer, which allows many people who might not otherwise qualify for a mortgage to own a home.
  • This type of mortgage payment system may be optimal for young homeowners as their income levels gradually rise to meet higher mortgage payments.

9

Growing Equity Mortgage (GEMs)

  • Lenders designed the growing equity mortgage to loan to _________________________________. With a GEM, _____________________________________________________.
  • As the payments increase, the additional amount above and beyond what would be a _________________ is applied directly to the remaining balance of the mortgage, shortening the life of the mortgage and increasing interest savings.

Growing Equity Mortgage (GEMs)

  • Lenders designed the growing equity mortgage to loan to help the borrower pay-off the loan in a shorten period of time. With a GEM, the payments will initially be the same on the conventional mortgage. However, over the time payment increase.
  • As the payments increase, the additional amount above and beyond what would be a fully amortizing payment is applied directly to the remaining balance of the mortgage, shortening the life of the mortgage and increasing interest savings.

10

Reverse Annuity Mortgage (RAMs)

  • A type of mortgage in which a __________________________________. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold.
  • When the _____________________________________________________ which it then sells to repay the loan. Any extra profit is remitted to the borrower or his/her estate.
  • A reverse mortgage ________________________________________ without the inconvenience of moving.
  • ___________________________________ in order to be eligible for a lifetime reverse mortgage, while the _______________________________________.

Reverse Annuity Mortgage (RAMs)

  • A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold.
  • When the borrower moves from the house or dies, the lender takes possession of the home, which it then sells to repay the loan. Any extra profit is remitted to the borrower or his/her estate.
  • A reverse mortgage allows a homeowner to access his/her home's equity without the inconvenience of moving.
  • In the United States, one must be 62 years old in order to be eligible for a lifetime reverse mortgage, while the U.K. requires potential borrowers to be at least 55.

11

Second Mortgages (Piggyback)

  • A “piggyback” second mortgage is a home equity loan or home equity line of credit (HELOC) that is made at the same time as your main mortgage.
  • ___________________________________________________________________________________________________________________________________________________________________________.

Second Mortgages (Piggyback)

  • A “piggyback” second mortgage is a home equity loan or home equity line of credit (HELOC) that is made at the same time as your main mortgage.
  • Its purpose is to allow borrowers with low down payment savings to borrow additional money in order to qualify for a main mortgage without paying for private mortgage insurance.

12

Piggyback Example

 

- Borrowers with a down payment less than 20 percent of the home’s price will need to pay for mortgage insurance. When using a “piggyback” mortgage, lenders structure the loans differently. 

- For example, the same borrower might pay for the home with: a 10 percent down payment, 80 percent main mortgage, and a 10 percent “piggyback” second mortgage. In this scenario, the borrower is still borrowing 90 percent of the value of the home, but the main mortgage is only 80 percent. 

- The “piggyback” second mortgage typically carries a higher interest rate, which is also often adjustable. These programs are offered under a variety of lender-specific brand names, but follow the same basic structure.

Piggyback Example

 

- Borrowers with a down payment less than 20 percent of the home’s price will need to pay for mortgage insurance. When using a “piggyback” mortgage, lenders structure the loans differently. 

- For example, the same borrower might pay for the home with: a 10 percent down payment, 80 percent main mortgage, and a 10 percent “piggyback” second mortgage. In this scenario, the borrower is still borrowing 90 percent of the value of the home, but the main mortgage is only 80 percent. 

- The “piggyback” second mortgage typically carries a higher interest rate, which is also often adjustable. These programs are offered under a variety of lender-specific brand names, but follow the same basic structure.

13

Loan Serving

  • Many financial institutions do not want to hold large portfolios of long-term security.
  • Commercial banks mainly collected their funds from short term sources and also through doing a large amount of OBS and fee based income.
  • Loan originations fees are typically 1% of the loan amount, though these varies with the market.
  • Once the loan has been made, many lenders sell it to another investor.

Loan Serving

  • Many financial institutions do not want to hold large portfolios of long-term security.
  • Commercial banks mainly collected their funds from short term sources and also through doing a large amount of OBS and fee based income.
  • Loan originations fees are typically 1% of the loan amount, though these varies with the market.
  • Once the loan has been made, many lenders sell it to another investor.

14

Securitization of Mortgage

Securitization is the process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the re-packaged instruments to investors, and this process can encompass any type of financial asset and promotes liquidity in the marketplace.

Securitization of Mortgage

Securitization is the process through which an issuer creates a financial instrument by combining other financial assets and then marketing different tiers of the re-packaged instruments to investors, and this process can encompass any type of financial asset and promotes liquidity in the marketplace.

15

Mortgage Backed Security

- ______________________________________________________________. By combining mortgages into one large pool, the issuer can divide the large pool into smaller pieces based on each individual mortgage's inherent risk of default and then sell those smaller pieces to investors.

- In securitization, the company holding the loans, also known as the originator, gathers the data on the assets it would like to remove from its associated balance sheets. These assets are then grouped together by factors such as time remaining on the loan, the level of risk, the amount of remaining principle, and others.

Mortgage Backed Security

- Mortgage-backed securities are a perfect example of securitization. By combining mortgages into one large pool, the issuer can divide the large pool into smaller pieces based on each individual mortgage's inherent risk of default and then sell those smaller pieces to investors.

- In securitization, the company holding the loans, also known as the originator, gathers the data on the assets it would like to remove from its associated balance sheets. These assets are then grouped together by factors such as time remaining on the loan, the level of risk, the amount of remaining principle, and others.