MORTGAGE

1
MORTGAGE

• A pledge of property to secure payment of a
  debt.
  
• Property pledged as collateral is real estate.
• Debt is the loan.
• Conventional Mortgage

2
Mortgage Insurance

• U.S. Government Mortgage Insurers
• Federal Housing Administration (FHA)
• Veterans Administration (VA)
• Rural Housing Service (RHS)
• Private Mortgage Insurers
• Mortgage Guarantee Insurance Company
• PMI Mortgage Insurance Company

3
Acceptable Collateral for Mortgages

• Residential Properties
• houses, condominiums, cooperatives, apartments
• Commercial Properties
• multifamily properties, office buildings,
  industrial properties, shopping centers, hotels,
  health care facilities

4
Mortgage Originator

• Principal originators of residential mortgage
  loans
  
• Thrifts
• Commercial banks
• Mortgage banks
• Other private mortgage originators
• Life insurance companies
• Pension funds

5
Revenue Sources

• Origination Function
• Origination fee
• Secondary marketing profits
• Other Revenue Sources
• Servicing fee
• Income from holding mortgages in an investment
  portfolio

6
Mortgage Origination Process

• Evaluating Credit Risk
• Payment-To-Income Ratio
• Loan-To-Value Ratio
• Commitment Letter form Lender
• Choice of Type of Mortgage
• Fixed-rate mortgage
• Adjustable-rate mortgage

7
Use of Mortgages by Originators

• Mortgage originators can either
• hold the mortgage in their portfolio
• sell the mortgage to an investor
• use the mortgage as collateral for the issuance
  of a security called securitization

8
Sale of Mortgage

• Conforming mortgages meet agency underwriting
  standards.
  
• Maximum PTI
• Maximum LTV
• Maximum loan amount
• Nonconforming mortgages do not meet agency
  underwriting standards.
  
• Can be held as portfolio investment
• Can be securitized

9
Risks Associated with Mortgage Origination

• Pipeline Risk
• risk associated with originating mortgages
• Price Risk
• risk of adverse effect on value of pipeline if
  mortgage rates rise
  
• Fallout Risk
• risk that applicants with commitment letters will
  not close

10
Traditional Mortgage Designs

• Fixed-Rate
• Level-Payment
• Fully-Amortized Mortgages

11
New Mortgage Designs

• Adjustable-Rate Mortgage (ARM)
• Balloon/Reset Mortgage

12
Investment Risks

• Credit Risk
• Liquidity Risk
• Price Risk
• Prepayments Risk

13
Mortgage-Backed Securities

• Mortgage Pass-Through Securities
• Derivative Mortgage-Backed Securities
• Collateralized Mortgage Obligations
• Stripped Mortgage-Backed Securities

14
Asset Securitization

• Originate mortgage
• Sell mortgage to investment banking firm
• Insure pool of mortgages
• Sell right to service loans
• Sell securities collateralized by mortgages to
  investors

15
Foundations of the Mortgage Market

• Federal Home Loan Banks (FHLBs)
• Government National Mortgage Association GNMA)
• Ginnie Mae
• Federal National Mortgage Association (FNMA)
• Fannie Mae
• Federal Home Loan Mortgage Association (FHLMC)
• Freddie Mac

16
Mortgage Pass-Through Securities

• Created when one or more holders of mortgages
  form a pool of mortgages and sell shares in the
  pool.
  
• Most are issued by Fannie Mae, Freddie Mac of
  Ginnie Mae
  
• Features
• more liquid
• securitized

17
Cash Flow Characteristics

• Monthly mortgage payments
• interest
• principal repayment
• Magnitude of monthly mortgage payments is greater
  than payments for pass-through securities
  
• servicing fee
• other fees
• Prepayments increase cash flow uncertainty

18
Factors Affecting Prepayments

• Mortgage Rates
• Spread between contract rate and market rate
• Path of market rates
• Level of market rates
• Characteristics of Underlying Mortgages
• Seasonal Factors
• General Economic Activity

19
Stripped Mortgage Securities

• Principal Only (PO)
• Interest Only (IO)

20
Collateralized Mortgage Obligation (CMO)

• Mortgage backed security in which the cash flows
  are redistributed to different bond classes
  (tranches)
  
• The underlying securities are usually mortgage
  pass-through securities guaranteed by one of the
  agencies

21
Collateralized Mortgage Obligations

• Types of Tranches
• Sequential-Pay CMOs
• Accrual Bonds
• Planned Amortization Class Tranches
• Companion or Support Class Tranches
• Floating-Rate Tranche
• Inverse Floating-Rate Tranche