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42 Cards in this Set

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What does the mortgage market include?
primary or origination market; secondary market where mortgages are traded
What is the mortgagor?
the homeowner
What is the mortgagee?
the lender; has right to foreclose the loan and seize the property in order to ensure that it is repaid
What is a conventional mortgage?
loan based solely on the credit of the borrower and on the collateral for the mortgage
What is the mortgage originator and what types are there?
original lender; thrifts, commercial banks, mortgage bankers, life insurance companies, pension funds
What is an origination fee?
initial fee to get mortgage; usually 1 to 2 points
What is the servicing fee?
collecting monthly payments from mortgagor, forwarding proceeds to the owners of the loans; usually 50 to 100 basis points per year
What is mortgage banking?
the activity of originating mortgages
What are the primary factors deciding whether money will be lent?
1. payment-to-income ratio PTI
2. loan-to-value ratio
What is the payment-to-income ratio?
ratio of monthly payments to monthly income, measures ability of the applicant to make monthly payments; lower the ratio the better credit
What is the borrower's down payment?
the difference between the purchase price of the property and the amount borrowed
What is the loan-to-value ratio?
ratio of the amount of the loan to the market (or appraised) value of the property; lower the ratio the better the protection for the lender if the applicant defaults and the lender must repossess and resell the property
What is a commitment letter?
for a fee, the applicant has the rights, not the obligation, to require the lender to provide funds at a certain interest rate and on certain terms
What options do mortgage originators have with the mortgages?
1. hold it in their portfolio
2. sell the mortgage to an investor that wants to hold it in their portfolio or use it as collateral to issue a security
3. use mortgage itself as collateral for issuance of a security
What are conduits?
government agencies and private companies that buy and pool mortgages and then sell them to investors
What are the standards for a conforming mortgage?
1. a maximum PTI
2. a maximum LTV
3. maximum loan amount
if applicant does not meet these underwriting standards, then the mortgage is called a nonconforming mortgage
What is the pipeline?
loan applications being processed + commitments made by a mortgage originator
What is pipeline risk? What are the two components?
risk associated with originating mortgages; two components: price risk and fallout risk
What is price risk?
risk of mortgage rates rising; forcing lender to either sell mortgages below value of funds lent to homeowners or retain an investment with a below-market mortgage rate
What is fallout risk?
applicants who were issued commitment letters do not close by purchasing the property; because mortgage rates fall, unfavorable property inspection report; risk when originator has a contract to deliver the mortgage to a conduit
What does fully amortized mean?
there is no mortgage balance remaining
What does self-amortizing mean?
payments made by the borrower will completely pay off the interest and principal
What are prepayments?
payments made in excess of the scheduled principal repayments; prepay to move, borrower has right to pay off mortgage balance at any time at par, only has to pay outstanding mortgage balance
What are PPMs?
prepayment penalty mortgages
What is the mismatch problem?
mismatch of the maturity of the assets (mortgages) and the liabilities to fund those assets; speculation will be a losing proposition if interest rates rise especially if inflation is high; banks try to counteract this problem by lengthening its liabilities through term deposits
What is the tilt problem?
real-burden of the loan is tilted to the early years of it because inflation and real income rises make the real value of monthly payments decline; tilt problem remains because payments are still based on nominal rather than a real interest rate
What type of mortgages do banks issue to combat the mismatch problem?
adjustable-rate mortgages; asset return matches the short-term market rates, thus better matching the cost of the liabilities or cost of funds
What is a mortgage?
a pledge of property to secure payment of a debt
What are periodic caps?
for ARMs, limit the amount that the interest rate may increase or decrease at the reset date
What are lifetime caps?
determines maximum interest rate that the lender can charge over the life of the loan
What is the fundamental difference between basic ARMs and balloon/reset mortgages?
balloon/reset mortgages with mortgage rate that is reset less frequently; long-term financing with a specific future date in which the contract is renegotiated
What three mortgage designs have been offered to solve the tilt problem?
1. the graduated payment mortgage
2. the price-level adjusted mortgage
3. the dual-rate mortgage
What is a graduated-payment mortgage GPM?
nominal monthly payments grow at a constant rate during a portion of the life of the contract and then level off; mortgage rate is fixed for the life of the loan; GPMs do not succeed in giving debtors a level real repayment stream
What is price-level-adjusted mortgage PLAM?
monthly payments are designed to be level in purchasing power terms (use Consumer Price Index) rather than in nominal terms, fixed rate is the "real" rate rather than the nominal rate
What is the dual-rate mortgage AKA the inflation-proof mortgage?
payments rise at the rate of inflation; differs from PLAM in that amount owed by borrower is computed on the basis of a floating short-term rate- less prepayment risk, no interest rate risk
What is a growing-equity mortgage GEM?
fixed-rate mortgage whose monthly payments increase over time; shortens the life of a mortgage; lender willing to provide a lower mortgage rate because it has a shorter life; help borrower because over time he can afford to make the higher payments
What are reverse mortgages?
designed for senior homeowners who want to convert their home equity into cash; borrowers does not have to repay the loan until they no longer occupy the home
What are high-LTV loans?
mortgagor with good credit has option of making a lesser down or no down payment, resulting in loans with higher LTVs
What are Alt-A loans?
loans to borrowers whose qualifying characteristics do not meet the conforming underwriting criteria established by the government-sponsored enterprises; borrower may be self-employed and have poor income verification, usually have good credit; rates on Alt-A loans range between 75 to 125 basis points above comparable
What are subprime loans?
loans to those who have or had bad credit
What is debt-to-service coverage DSC?
ratio of the property's net operating income divided by the debt service; ratio greater than 1 means that the cash flow from the property is sufficient to cover debt servicing
What investment risks are faced by investors in mortgage loans?
1. credit risk, aka default risk
2. liquidity risk
3. price risk
4. prepayment risk