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24 Cards in this Set
- Front
- Back
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lien status
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dictates the loan's seniority (first lien=creditor has first call on proceeds of liquidation of property)
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credit classification
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prime loan (high credit quality), subprime loan, alternative-A (alt-A)
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loan-to-value (LTV) ratio
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FV of new loan to mkt value of property; indicator of borrower leverage at the point when the loan app is filed
in refinancing: cash-out refinancing=if new loan is larger than orig; rate-and-term or no-cash refinancing=where new loan remains unchanged |
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combined LTV (CLTV)
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accounts for existence of second liens
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income ratios
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used to ensure that borrower obligations are consistent with their income
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front ratio (type of income ratio)
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total monthly payments on the home (incl. principal, prop. tax, homeowners insurance) / pretax monthly income
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back ratio (type of income ratio)
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similar to front ratio but adds other debt payments (incl. auto loan, credit card) to total payments
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prime loan income ratios
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front <= 28%
back <= 36% FICO <= 660 LTV < 95% (but lender-specific) |
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fixed rate mortgage (FRM)
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interest/note rate set at loan closing/when the rate is "locked"
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adjustable rate mortgage (ARM)
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rates change over life of loan. rate based on mvt of an underlying rate (the "index") & spread over the index (the "margin") of the loan program
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fixed-period ARM
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fixed initial rates effective for longer (3-10 yrs)
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hybrid ARM
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three rate caps: initial, periodic, life
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payment-option/negative amortization ARM
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reset monthly, min. pmt only adjusted on an annual basis and subject to payment cap that limits change at reset
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recasting the loan
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calc new payment amt
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credit guarantees
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HUD, FHA, VA, GSEs: GNMA, FHLMC, FNMA
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mtg pmt factor (for amortizing fixed rate loan)
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(r_i * (1 + r_i) ^ T) / ( (1 + r_i) ^ T - 1)
r_i = interest rate = monthly rate = annual rate/12 T = loan term |
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prepayment risk
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analogous to "call risk" for corps/munis
curtailments (partial prepayments) prepayments other than refinancing - "turnover" |
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refinancing activity depends on
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being able to obtain a new loan w/ better interest rate or smaller payment (highly dependent on level of IRs, shape of YC (short rates strongly influence ARM pricing), and availability of alternative loan products
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mtgs w/ low note rates ("out-of-the-money")
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normally prepay slowly & steadily
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loans carrying higher rates ("in-the-money")
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prone to spikes in prepayments when rates decline
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mtg shorten in avg life & duration when
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bond markets rally, constraining their price appreciation
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rising yields cause prepmts to
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slow & bond durations to extend, resulting in greater drops in price than experienced by more traditional (i.e. option-free) fixed-income products [17]
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price performance of mtgs & MBS tends to lag that of
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comparable fixed maturity instruments (like T notes) when the prevailing level of yield increases ("negative convexity")
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credit & default risk [19]
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weighted avg credit scores, LTVs
delinquencies- current, 30, 60, 90+ days delinquent (late) defaults- when borrower loses title to the property in question (generally 90+ days, or when borrower goes into bankruptcy) loss severity - FV of loss on a loan after foreclosure is completed (avg 20-40%), can be heavily influenced by loan's LTV (high LTV loan leaves less room for a decline in the value of the property in the event of a loss) |
