1. Alternative Mortgage Instruments
Chapter 9
Alternative Mortgage Instruments

2. 9-1
Learning Objectives
List the basic characteristics of several types of alternatives mortgage instruments
Define standard mortgage elements such as interest rate, payment, discount points, and term
Describe how characteristics of various alternative mortgage instruments solve the problems of a fixed-rate mortgage in an inflationary environment

3. 9-2
Interest Rate Risk
Thrifts have traditionally financed long-term assets (mortgages) with short-term liabilities (deposits)
When inflation increases interest rates, mortgage prepayments slow and rates on deposits increase
Rising interest rates create affordability problems

4. Adjustable-Rate Mortgage (ARM)
9-3
Adjustable-Rate Mortgage (ARM)
Frequency of Rate change
Index
Margin
Interest Rate Caps
Teaser Rate
Convertibility

5. Graduated Payment Mortgage (GPM)
9-4
Graduated Payment Mortgage (GPM)
Expectations of future inflation and the tilt effect
Payments on this fixed-rate loan are lower at the beginning of the loan and higher at the end
Negative Amortization
Borrowers can qualify for a larger loan and housing becomes more affordable

6. Price-Level Adjusted Mortgage (PLAM)
9-5
Contract rate is the real rate of return
Mortgage balance is adjusted by the inflation rate after the inflation has occurred
Upward adjustments create negative amortization
If inflation is not neutral, mortgage payments may increase at a faster rate than borrower’s income
Mortgage balance may increase at a faster rate than the value of the property
PLAMs may be used in conjunction with price-level adjusted deposits(PLADs)

7. Reverse Annuity Mortgage (RAM)
9-6
Reverse Annuity Mortgage (RAM)
Typical mortgage is “ rising equity, falling debt”
RAM is “ falling equity, rising debt”
Borrower receives a series of payments and repays in a lump sum at some future time

8. Other Mortgage Types Home Equity Loan Biweekly Mortgage
9-7
Other Mortgage Types
Home Equity Loan
Biweekly Mortgage
Fifteen-year versus Thirty-year loans