Mortgage Markets

I. Mortgage

• Mortgage

A pledge of property to secure payment of a debt.

• Mortgagor: Borrower

• Mortgagee: Lender

• Properties– Residential Properties

• Single-Family Structures

• Multifamily Structures

– Nonsidential Properties• Commercial

• Farm

II. Primary Mortgage Market

• Mortgage Origination– Mortgage Originators

• Savings and Loans

• Savings Banks

• Commercial Banks

• Credit Unions

• Mortgage Banks

• Life Insurance Companies

• Pension Funds

– Origination Process• Application

• Criteria– Payment-to-Income Ratio (PTI)

The ratio of monthly payment to monthly income.

– Loan-to-Value Ratio (LTV)

The ratio of the amount of the loan to the market (or appraised) value of the property.

• Credit Scoring

• Commitment Letter to the Applicant

– Fees• Origination Fee

A point represents 1% of the borrowed funds.

• Application Fee

• Insurance– Conventional Mortgages– Insured Mortgages

• Federal Housing Administration (FHA)

• Veterans Administration (VA)

• Rural Housing Service (RHS)

• Claim Priority– First Mortgage– Second Mortgage– Third Mortgage

• Maturity: 15 to 30 years

• Mortgage Design– Fixed-Rate Mortgage (Traditional Mortgage)– Adjustable-Rate Mortgage (ARM)

Rates to be reset every month, year, two years, or three years.

– Balloon-Payment Mortgage (Balloon/Reset Mortgage, Rollover Mortgage)

Rates to be renegotiated every 3 to 5 years.

– Graduated-Payment Mortgage (GPM)

Nominal monthly repayment grows at a constant rate during a portion of the life of the contract, thereafter leveling off.

– Price-Level-Adjusted Mortgage (PLAM)

Monthly payments to be level in purchasing power terms rather than in nominal terms.

– Growing-Equity Mortgage

The payments never level off but continue to increase throughout the life of the loan.

– Shared-Appreciation Mortgage

• Risk– Determinants

• Equity Invested (Loan-to-Value Ratio)

• Borrower’s Income

• Borrower’s Credit History

– Pipeline Risk

The loan applications being processed and the commitments made by a mortgage originator together are called its pipeline.

Pipeline risk refers to the risks associated with originating mortgages.

• Price Risk

The adverse effects on the value of the pipeline if mortgage rates rise.

• Fallout Risk

The risk that applicants or those who were issued commitment letters will not close.

III. Secondary Mortgage Market

• Conduits– Federally Sponsored Agencies

Federal Home Loan Mortgage Corporation

Federal National Mortgage Association

– Private Institutions

Residential Funding Corporation

GE Capital Mortgage Services

Countrywide

Prudential Home Mortgage

• Underwriting Standards– Conforming Mortgage

A mortgage loan that meets the underwriting standards to be included in a pool of mortgages underlying a security that a conduit guarantees.

• Maximum PTI• Maximum LTV• Maximum Loan Amount

– Nonconforming Mortgage

• Servicing

• Securitization

IV. Mortgage-Backed Securities

• Mortgage-Backed Bonds– FNMA– Freddie Mac

• Pass-Throughs: Government guaranteed mortgages– GNMA– Privately Issued Pass-Throughs (PIPs)

• Participation Certificates (PCs): Conventional mortgages pooled by Freddie Mac

• Collateralized Mortgage Obligations (CMOs)

• Unit Investment Trust

A passively managed trust with units sold to investors.