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Residential Mortgage Loans

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conventional mortgage lender makes loan based on credit ... Reverse Mortgage. for seniors who want to convert home equity into cash. Nonconforming Mortgages ... – PowerPoint PPT presentation

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Title: Residential Mortgage Loans


1
Residential Mortgage Loans
  • Chapter 10

2
Mortgage Market
  • loan secured by collateral of specified real
    estate property which obliges borrower to make
    predetermined series of payments
  • lender has right of foreclosure if borrower
    defaults
  • conventional mortgage lender makes loan based
    on credit of borrower and on collateral for
    mortgage
  • mortgage insurance
  • FHA
  • VA
  • FmHA
  • private

3
Mortgage Market
  • participants
  • mortgage originators original lender
  • thrifts
  • mortgage bankers
  • commercial banks
  • sources of profit to originators
  • origination fee specified in points (1 of
    borrowed)
  • secondary marketing profit selling loan for
    more than original cost
  • mortgage servicers
  • mortgage insurers

4
Mortgage Market
  • origination
  • PTI (payment-to-income) ratio
  • monthly payments to monthly income lower ratio,
    greater likelihood applicant can meet payments
  • LTV (loan-to-value) ratio
  • ratio of amount of loan to market value of
    property the lower the ratio, the more
    protection the lender has if default
  • originators can
  • hold mortgage in their portfolio
  • sell mortgage to investor who wants to put in
    with pool of mortgages
  • use mortgage themselves as collateral for
    issuance of security (securitization)
  • conduit when federally sponsored or private
    agency buy mortgages, pool, and sell to investors
  • conforming mortgage vs. nonconforming mortgage

5
Mortgage Market
  • sources of revenue from mortgage servicing
  • servicing fee
  • interest earned by servicer from escrow balance
  • float earned on monthly mortgage payment
  • ancillary income
  • late fees
  • commissions from cross-selling
  • fees from selling mailing lists
  • portfolio of borrowers is potential source for
    other loans

6
Mortgage Market
  • types of mortgage-related insurance
  • PMI
  • credit life
  • not required by lender
  • provides for continuation of payments after death
    of insured person

7
Mortgage Loans
  • Level-Payment Fixed-Rate Mortgage
  • borrower pays interest and repays principal in
    equal installments over agreed-upon period of
    time fully amortized over period
  • example 30 year 100,000 loan with 8.125 rate
  • monthly interest rate is 0.0067708
  • interest for month 1 is 677.08 and monthly
    payment is 742.50 - 65.41 to reduce principal

8
(No Transcript)
9
Monthly Mortgage Payment
  • where
  • MP monthly mortgage payment
  • n of months
  • MB0 original balance
  • t simple monthly note rate

10
ARMs
  • mortgage where contract rate is reset
    periodically in accordance with reference rate
  • reference rate categories
  • market-determined rates (Treasury based)
  • calculated rates based on cost of funds for
    thrifts
  • (based on monthly weighted average interest costs
    for thrifts)

11
ARMs
  • teaser rate usually offered
  • periodic rate caps
  • lifetime rate caps and floors
  • hybrid ARM
  • rate fixed for period and then floats after
  • 3/1 ARM means fixed for 3 years and then resets
    annually
  • interest-only hybrid ARM
  • reduce initial monthly payments pmts first
    consist of only interest on loan with
    amortization of principal to start later
  • balloon mortgage
  • borrower given long-term financing but at set
    dates, contract rate is renegotiated
  • Prepayment Penalty Mortgage
  • lockout period during which prepayments are not
    permitted
  • Reverse Mortgage
  • for seniors who want to convert home equity into
    cash

12
Nonconforming Mortgages
  • loan that does not satisfy one or more of
    underwriting standards of Fannie, Freddie, and
    Ginnie (amt of loan, credit worthiness,
    documentation of loan, purpose of loan)
  • conventional nonconforming loan does not have any
    credit guarantee
  • Jumbo loan loan larger than conforming limit
  • subprime borrowers whose credit has been
    impaired
  • Alt-a loan loans to borrowers who have high
    credit scores but have variable incomes, are
    unable or unwilling to document stable income
    history, or are buying second homes or investment
    properties
  • so reduced or alternate forms of documentation
    are used to qualify loans
  • borrowers typically have excellent credit ratings
  • High LTV loans borrower with good credit
    quality has option of making a lesser or no down
    payment

13
Risks Associated with Investing in Mortgages
  • credit risk
  • liquidity risk
  • interest rate risk
  • prepayment risk

14
Credit Risk
  • risk that borrower will default
  • single mortgage credit risk is not as important
    if investing in pool of mortgages
  • 10 of pool of 1,000 will default but which ones??
  • prime loan 30 year FRM with 75 to 80 LTV
    ratio that is fully documented for the purchase
    of an owner-occupied single family detached home

15
Credit Risk
  • factors associated with lower default rates
  • LTV ratio single most important determinant
  • current LTV vs. original LTV
  • mortgage term credit risk is greater the longer
    the mortgage term (so 15 year lt risk than 30
    year)
  • mortgage type FRMs considered prime because
    everyone knows payment and amortization schedule
  • transaction type loans for purchases safer than
    those for cash-out refinancings
  • documentation income, employment, and asset
    verification
  • occupancy status less risk if borrower lives in
    home
  • property type single family detached homes
    least risky
  • mortgage size/house price
  • credit worthiness of borrower
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