Money & Capital Markets Ch 14

Front 1

What distinguishes the mortgage markets from other capital markets?

Back 1

Securities in the mortgage market are collateralized by real estate

Front 2

Most mortgage loans once had balloon payments; now most current mortgage loans fully amortize. What is the difference between a balloon loan and an amortizing loan?

Back 2

Balloon loans - require that a large payment be made to pay off the remaining balance

Amortizing loans - structured so that equal monthly payments made such that the total of all payments cover both interest and principal over the life of the loan

Front 3

What features contribute to keeping long-term mortgage interest rates low?

Back 3

The global market for loans results in competition that keeps the rates low

Front 4

What are discount points, and why do some mortgage borrowers choose to pay them?

Back 4

- Paid when loan is initiated in order to obtain a reduced rate

- If borrower plans to hold on to the loan long enough for the value of the reduced interest rate to exceed up-front cost of the points, it's a good idea to elect to pay them

Front 5

What is a lien, and when is it used in mortgage lending?

Back 5

- A publicly recorded claim on a piece of real property that has been pledged as collateral

- Mortgage lenders file liens to secure loans

Front 6

What is the purpose of requiring that a borrower make a down payment before receiving a loan?

Back 6

Means that if the borrower chooses not to make payments on the loan, the borrower will suffer some financial loss. This increases the likelihood that the borrower will contineu to make the promised payments

Front 7

What kind of insurance do lenders usually require of borrowers who have less than an 80% loan-to-value ratio?

Back 7

Private mortgage insurance

Front 8

Lenders tend not to be as flexible about the qualifications required of mortgage customers as they can be for other types of bank loans. Why is this so?

Back 8

Most mortgage loans are sold to government agencies. The agencies establish criteria for which loans they will accept. If the loans do not meet those criteria, the initiating bank can't sell them.

Front 9

Distinguish between conventional mortgage loans and insured mortgage loans.

Back 9

- Insured mortgage loans - The Veterans Administration and the Federal Housing Administration guarantee lenders against losses from loans insured by them

- Conventional mortgage loans - do not have guarantee of insured loans, so lender usually requires PMI

Front 10

Interpret what is meant when a lender quotes the terms on a loan as “floating with the T-bill plus 2 with caps of 2 and 6.”

Back 10

- Loan is an ARM on which interest rate is set at 2 percentage points above the prevailing T-Bill rate.

- The interest can increase or decrease no more than 2% in one year and no more than 6% over its life.

Front 11

The monthly payments on both graduated-payment loans and growing-equity loans increase over time. Despite this similarity, the two types of loans have different purposes. What is the motivation behind each type of loan?

Back 11

Graduated-payment loans - goal is to let the borrower qualify by reducing the first few years' payments

Growing-equity loans - goal is to let borrower pay off early

Front 12

Many banks offer lines of credit that are secured by a second mortgage (or lien) on real property. These loans have been very popular among bank customers. Why are homeowners so willing to pledge their homes as security for these lines of credit?

Back 12

The IRS allows the interest paid on 1st and 2nd mortgages to be deducted from income before computing the amount of taxes due. This tax shield lowers the effective rate of interest on the mortgages.

Front 13

The reverse annuity mortgage (RAM) allows retired people to live off the equity they have in their homes without having to sell the home. Explain how a RAM works.

Back 13

Bank accepts the home as security and advances money each month. When the borrower dies, the borrower's estate sells the property to retire the debt.

Front 14

What is a securitized mortgage?

Back 14

A MBS in one which has a pool of mortgages pledged as collateral.

Front 15

Describe how a mortgage pass-through works.

Back 15

The payments on a pool of mortgages are sent by the borrowers to a trustee, who then passes the payments through to holders of securities that are backed by the pass-through.