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Chapter 9: Mortgage Markets
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Chapter 9: Mortgage Markets
Chapter Outline: Introduction. Mortgages Characteristics. Creative Mortgage Financing. Institutional Use of Mortgage Markets. Valuation of Mortgages. Risk from Investing in Mortgages. Mortgage- Backed Securities. Globalization of Mortgages.
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Introduction to Mortgages:
Definition: A mortgage is a form of debt that finances investments in property. Types of Mortgages: Residential Mortgage. Commercial Mortgage.
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Introduction to Mortgages:
Desirable Features for a Mortgage: Yield flexibility: Responsiveness to changing market rates Constant real payments: Keeping pace with inflation Payment stability: Minimize late payment/default problems Full security: Market value greater than loan amount
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Introduction to Mortgages:
Desirable Features for a Mortgage: Servicing simplicity: Collecting principal and interest when rates are changing For mortgages allowing negative amortization, tracking changing principal and interest payments can be difficult Marketability: Ability to sell in a secondary market Sales of mortgage backed securities (MBS) help control total lender risk Substituting capital market funds for financial institution's funds
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Mortgage Characteristics:
Insured Mortgage. Conventional Mortgage. Fixed-Rate Mortgage. Adjustable-Rate Mortgage (ARM). Mortgage Maturities. - Balloon-payment mortgage. Amortizing Mortgages.
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Creative Mortgage Financing:
Graduated-Payment Mortgage (GPM) Growing-Equity Mortgage Second Mortgage. Shared-Appreciation Mortgage.
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Institutional Use of Mortgage Markets:
Financial Institutions that Originate Mortgages. Participation in the Secondary Market. Securitization. Institutional Investors in Mortgages. Unbundling Mortgage Activities.
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Valuation of Mortgages:
The market price of the mortgage should equal the present value of their future cash flows.
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Valuation of Mortgages:
Factors that Affect the Risk-Free Interest Rate: Inflationary Expectations. Economic Growth. Money Supply. Budget Deficit.
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Valuation of Mortgages:
Factors that Affect the Risk Premium. - Changes in the economic growth. Indicators of Changes in Mortgage Prices: Indicators of Inflation. Indicators of Economic Growth.
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Risk from Investing in Mortgages:
Interest Rate Risk. Prepayment Risk. Credit Risk: Level of equity invested by borrower. Borrower’s income level. Borrower’s credit history.
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Mortgage-Backed Securities
Mortgage Pass-Through Securities: Definition. Interest Rate Risk on Mortgage. Repayment Risk on Mortgage.
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Mortgage-Backed Securities
Types of Mortgage Pass-Through Securities: Ginnie Mae Mortgage-Backed Securities. Fannie Mae Mortgage-Backed Securities. Publicly issued pass-through securities (PIPs). Participation Certificates (PCs). Collateralized Mortgage Obligations (CMOs).
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Globalization of Mortgage Markets
US banks operations outside the US. Foreign banks operation in the US.
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End of Chapter 9
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