Fin 330 Ch.9 Fall 2006

Front 1

What are mortgages?

Back 1

They are loans for which the borrower pledges real property as collateral to guarantee that the debt will be repaid.

Front 2

What are Mortgage Backed Securities? MBSs

Back 2

pass through all or part of the principal and payments on "pools" of many mortgages to buyers of the MBSs.

Front 3

Mortgage loans are made for ______ _______ and ______, depending on the borrowers needs.

Back 3

varying amounts and maturities

Front 4

Who are the issuers of mortgages?

Back 4

The issuers(borrowers) of mortgages are usually families or small business entities.

Front 5

Why are mortgages secure for lenders?

Back 5

They can take over the property

Front 6

What is a fixed rate mortgage (FRM)?

Back 6

the lender takes a lien on real property and the borrower agrees to make periodic repayments of the principal amount plus interest on the unpaid balance of the debt for a predetermined period of time.

Front 7

how is it amortized?

Back 7

the periodic payment is usually over the amount of interest due and applied to the principal. When the maortgage is fully amortized (repaid) the borrower obtains a clear title to the property.

Front 8

How to calculate mortgage payment?

Back 8

PV=PMT/(1+i/n)^1 +.....+ PMT/(1+i/n)^n

Front 9

How to calculate a mortgage payment on a calculator?

Back 9

12 per p/yr
30 shift N or 360 n
I interest p/yr
150,000 pv
0 = FV
Pmt=?

Front 10

What is an Adjustable Rate Mortgage?

Back 10

a mortgage with an interest rate that adjusts periodically in response to changes in market conditions.
usually in relation to an index.

Front 11

How are ARMS structured?

Back 11

typically there is an initial fixed rate that remains for a period of 1 to 10 years. After the fixed rate ends the interest rate can increase or decrease.

Front 12

What is a 3/1 ARM?

Back 12

Fixed rate for 3 years and then it adjusts every year after that.

Front 13

Hybrid Arms?

Back 13

ARMS with an initial fixed rate that lasts 3 years or longer.

Front 14

Who likes Hybrid ARMs?

Back 14

They are popular for borrowers who expect their income levels to increase during the initail fixed rate period or expect to move in a few years. Protect lenders from interest rate risk

Front 15

The downsides or ARMs?

Back 15

*interest rates may rise and your payments may increase
*The increase may be large and consumer may default.

Front 16

What is the adjustment period?

Back 16

The period between one rate change and the next.

Front 17

1 year ARM?

Back 17

A loan with a 1 year adjustment period.

Front 18

What indexes might lenders base interest rates on?

Back 18

*The rates on 1, 3, or 5 year treasurt securities
*The national or regional average cost of funds to savings and loans associations.
*Their own cost of funds

Front 19

What is a margin?

Back 19

a few percentage points added to the index rate to calculate the ARM interest rate Index + Margin= ARM i% Rate

Front 20

ARM Interest Rate Caps?

Back 20

An interest-rate cap places a limit on the amount your interest rate can increase. Interest caps come in two versions:
- Periodic caps, which limit the interest-rate increase from one adjustment period to the next; and
- Overall caps, which limit the interest-rate increase over the life of the loan.
- By law, virtually all ARMs must have an overall cap. Many have a periodic cap.

Front 21

ARM Payment Cap?

Back 21

Limit the monthly payment increase at the time of each adjustment, usually to a percentage of the previous payment.

Front 22

Negative Amortization?

Back 22

If the payment limit is less than the new interest payment, than the amount due on the loan increases each month by the shortage amount until rates drop.

Front 23

What is a balloon Mortgage?

Back 23

Traditional loan where interest is paid until a time when the entire principal balance is due and must be repaid or refinanced at prevailing interest rates
Terms can be 3, 5 or 7 years. Rate fixed for term.

Front 24

Who are Balloon Mortgages popular with?

Back 24

Popular with borrowers who may either sell or refinance prior to maturity.

Front 25

What are rollover mortgages (ROMS) and renegotiated-rate mortgages (RRMs)?

Back 25

Refinanced at new rate every few years.
Like ARMs except adjustment period is longer than traditional ARMs.

Front 26

Describe Interest Only Mortgages?

Back 26

Low payments in initial years (usually around 5 years) – only includes interest on borrowed amount.
After initial period, payments increase such that entire loan amount is amortized by the end of 30 years.
Borrower pays interest for a considerable period on the entire loan balance, but avoids having to pay down balance in initial years but makes larger payments in later years to catch up.

Front 27

Describe Reverse Annuity Mortgages?

Back 27

RAMs allow homeowners to borrow against the equity on their homes at low rates.
Typically obtained by older people whose home loans have been paid off, but can use income of the real estate investment they own.
Many are for borrower’s lifetime as an annuity.
Homeowners’ equity declines by amount borrowed.

Front 28

If the borrower already has a mortgage on the property, the home equity loan or line would be considered......

Back 28

a second mortgage. In the event of default the second mortgage holder gets repaid only after the first mortgage principal has been repaid.

Front 29

describe a home equity line of credit?

Back 29

home equity credit line that let consumers borrow on a credit line secured with a second mortgage on their homes. It is a open line of credit.

Front 30

Mortgage Qualifying-Borrower Income?

Back 30

1. P&I 25%of mthly gross income
2. P&I + Property tax + homeowners insurance + PMI = no more than 28% gross income
3. P&I + T + HI + PMI +other debt = no more than 33% of gross income

Front 31

Mortgage Qualifying-Downpayment?

Back 31

Historically, a 20% down payment was required for mortgages but that is no longer the case.
Federal Home Administration (FHA) loans for low income borrowers require 3%.
Veterans Administration (VA) loans may be as low as 0%.
FHA and VA loans require an insurance premium to cover the cost but it is low.

Front 32

Private Mortgage Insurance?

Back 32

Lets borrowers buy home with less than 20% down. The borrower buys for insurance to guarantee mortgage until 20% (or above) equity level is reached is reached.

Front 33

80/20 loans?

Back 33

80% first mortgage with 20% second mortgage allows first mortgage to be obtained without PMI. (Other similar 80/10/10, etc. for people with smaller downpayment)

Front 34

Who is a sub prime borrower?

Back 34

one who cannot qualify for prime financing terms but can qualify for sub-prime financing terms. The failure to qualify for prime  financing is due primarily to low credit scores.

Front 35

Mortgage Prepayment Risk?

Back 35

Some mortgages will include a pre-payment penalty so that if you refinance when rates go lower you are penalized but mortgages can be paid off early (called) when you sell the property or refinance.
So investors in mortgages always bear the risk that the securities will be called when rates fall as people refinance.

Front 36

What are mortgage backed securities?

Back 36

Standardized Securities created with the underlying mortgages serving as the basis of the cash flows from the security. You effectively have a bond with standardized values with interest and principal payments based on underlying mortgages.
This makes mortgages tradable in the secondary market. More difficult to trade individual mortgages.

Front 37

Pass-Through Securities

Back 37

Interest and Principal payments pass through to the owners of the “Security”.
So a set of individual mortgages are collected into one security. Shares are sol in the security. If you own 5% of the security you get 5% of the interest and principal payments made on the mortgages in that pool during that period.

Front 38

FHA

Back 38

Federal Housing Authority created in 1934 to provide mortgage insurance on loans made by approved lenders

Front 39

FNMA

Back 39

In 1938, the Federal National Mortgage Association (FNMA – Fannie Mae) was authorized to buy FHA insured loans to ensure there was a market for FHA insured mortgages

Front 40

What happened in 1968?

Back 40

In 1968, FNMA was split up into two entities – FNMA and GNMA (Government National Mortgage Association) – (Ginnie Mae).

Front 41

Ginnie Mae Pass Throughs

Back 41

GNMA guarantees the timely payment of principal and interest on mortgage backed securities backed by federally insured or guaranteed loans.
GNMA charges issuers of pass-throughs a fee ranging from 0.25 % to 0.75 % to offer its guarantee.
Investors in Ginnie Mae securities will earn a lower yield reflecting a lower default risk because of the dual guarantee by GNMA on the MBS and the FHA/VA guaranty on the original loans.

Front 42

Ginnie Mae I

Back 42

Ginnie Mae I are pass-throughs secured by a mortgage pool consisting of the same type of mortgage loans.
- Have the same interest rate.
- Are originated by the same lender.
- The minimum pool size is $1 million.

Front 43

Ginnie Mae II

Back 43

Ginnie Mae II are also pass-throughs secured by a mortgage pool consisting of the same type of mortgage loans, but are different in other aspects.
- They may be issued by multiple lenders.
- Interest rates may vary over the portfolio of loans by as much as 75 basis points (or 0.75%).
- The minimum pool size is $250,000 for multi-lender pools and $1 million for single-lender pools.

Front 44

Freddie Mac Participation Certificates

Back 44

Participation certificates (PCs) are issued by the FHLMC and conventional loans are purchased from S&Ls.
PCs are different from GNMA securities.
Include conventional mortgages as collateral.
Mortgages are not federally insured.
Mortgages are pooled by FHLMC, not by private-sector originators.
Interest rates among pooled mortgages vary.
Larger individual mortgages
Mortgage originators service the mortgages (collect payments) for a fee.

Front 45

Fannie Mae Pass Throughs

Back 45

pools of conventional or insured mortgages.
Issued by FNMA.
Offers securities similar to FHLMCs' PC.
Can issue pass-throughs for either conventional or federally insured mortgage loans.

Front 46

Privately Issued pass Throughs?

Back 46

First issued in 1977 by Bank of America.
PIPs are issued by private institutions or mortgage bankers.
They are similar to “Ginnie Maes” except that they are backed by conventional mortgages.
Typically used to securitize large, non-conforming mortgage loans called jumbo loans.

Front 47

Collateralized Mortgage Obligations (CMOs)

Back 47

fixed maturity date and interest payments similar to bonds.
CMOs are mostly sold by FHLMC; other GSEs and private issuers can also issue CMOs.
CMOs are like serial bonds.
CMO issues have between 3 and 10 classes.
Investors can choose the class that matches their maturity preference.
CMOs are sometimes split into “interest only” (IO) and “principal only” (PO) classes (similar to stripped treasuries).
CMOs have a major disadvantage because they can create tax problems for the originators.

Front 48

Real Estate Mortgage Investment Conduit (REMIC)

Back 48

Investor pays taxes.
Type of CMO.
Differs from CMOs only in how they are set up legally.

Front 49

“Fannie Mae” bonds and “Freddie Mac” bonds

Back 49

Federal agencies like FNMA and FHLMC issue bonds to raise funds using the mortgage loans they own as collateral. These are referred to as “Fannie Mae” bonds and “Freddie Mac” bonds respectively.