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Mortgage Loans

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Mortgage Loans Fixed Income Securities Outline What is a mortgage? Major Originators Alternative Mortgage Instruments Prepayments and their impacts on cash flows ... – PowerPoint PPT presentation

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Title: Mortgage Loans


1
Mortgage Loans
  • Fixed Income Securities

2
Outline
  • What is a mortgage?
  • Major Originators
  • Alternative Mortgage Instruments
  • Prepayments and their impacts on cash flows
  • Risks of investing in mortgages
  • Factors that affect default on mortgage loans

3
What is a Mortgage?
  • A loan that is secured by the collateral of
    specified real estate property, which obliges the
    borrower to make a predetermined series of
    payments.
  • In the event of default by the borrower, the
    lender can sell off the property

4
General Features of a Mortgage Loan
  • Loan is based on the credit of the borrower and
    the collateral for the mortgageConventional
    Mortgage
  • Mortgage Insurance
  • Usually, amount of loan less than the market
    value of the property
  • Classified as one to four family homes
    (residential property) and income property
    (office space and apartment buildings)
  • Loan originators include thrifts, mortgage
    companies, and commercial banks for income
    property

5
  • Loan originators for income property include
    commercial banks, thrifts, and insurance
    companies
  • Usually, mortgage companies sell most of their
    mortgages in the secondary market
  • Two primary factors that determine whether loan
    should be extended or not
  • The payment to income ratio
  • The loan to total value ratio

6
Alternative Mortgage Instruments
  • Standard Fixed-rate mortgage
  • A borrower would take out a mortgage loan for a
    principal amount P and repay in equal monthly
    installments of M
  • Adjustable Rate Mortgage
  • A loan in which the contract rate is reset
    periodically in accordance with some pre-chosen
    reference rate, typically one based on short-term
    interest rate.
  • Graduated Payment Mortgage
  • Growing Equity Mortgage

7
Fixed-Rate Mortgage and Interest Rate Risk
  • A rising term-structure can create a gap in the
    balance sheet of the lending institution

8
ARM and Default Risk
  • If reference rate rises too much, risk of default
    rises

9
Risks in Mortgage Loan Market
  • Default Risk
  • Loan to value ratio
  • Second mortgages behind first mortgage
  • Seasoning Effect
  • Liquidity Risk
  • Interest Rate Risk
  • Prepayment Risk
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