MORTGAGE TYPES RYAN BIZON

DISCUSSION POINTS CategoriesClassifications Commercial Mortgages Balloon Mortgages Summary

TWO MAIN CATEGORIES Residential Mortgage Classified According To: Lien Status Credit Classification Interest Rate Type Amortization Type Credit guarantees Loan Balances Prepayments and Prepayment Penalties

TWO MAIN CATEGORIES Commercial Mortgage (Income Producing) Classified As: Multifamily Properties Apartment Buildings Office Buildings Industrial Properties Shopping Centers Hotels Health Care Facilities Others

CLASSIFICATION Lien Status Indicates the loan’s seniority in the event of the forced liquidation of the property because of default by the obligor. First Lien – A lender is first in line during liquidation of property Second or Junior Lien – A lender comes after the first lien status is paid off

CLASSIFICATION Credit Classification Prime Loan – Borrower has strong employment and credit histories with enough income to make payments Subprime Loan – Borrower has lower credit quality Alternative-A Loan (alt-A) – Area between

CLASSIFICATION Interest Rate Type Fixed-Rate Mortgage Adjustable-Rate Mortgage (ARM) Index Periodic Caps / Life Caps / Floor Caps Hybrid ARM Most have a 30 or 15 year maturity

CLASSIFICATION Credit Guarantees Government Loans Backed by the federal government Department of Housing and Urban Development (HUD) Federal Housing Administration (FHA) Generally small down payment and low level of income Veterans Affairs (VA) For veterans and reservists Private Mortgage Insurer Conventional Loans

CLASSIFICATION Amortization - Amount of loan payment that repays the principle borrowed Fully Amortizing Loans Fixed Rate Recasting The Loan ARM Interest-Only Lockout Period – Period of time where only the interest is paid

CLASSIFICATION Prepayment: When all or part of the principal is paid off prior to it’s scheduled maturity Partial Prepayment or Curtailment Lowers total interest paid Pays off loan faster Call Option Borrower’s right to prepay a loan in whole or part without penalty Prepayment Penalty Mortgage A mortgage design that will penalize a borrower for paying off the loan before maturity

COMMERCIAL MORTGAGES Income-Producing Properties Nonrecourse Loans – If borrower fails to make payments the lender can only look to the income-producing property to make the interest and principal payments. Value is based on properties’ cash flow capabilities Performance Indicator Debt-to-Service Coverage Ratio: ratio of a property’s net operating income divided by the debt

BALLOON MORTGAGE A mortgage that does not fully amortize over the life of the loan Due to this there is a large lump sum due at maturity of loan Balloon mortgages are typically used in commercial properties rather than residential Can have a fixed or adjustable interest rate Used when increase in income is expected or borrower plans to sell property before balloon In Default If a borrower fails to make balloon payment Lender can extend the loan Default Interest Rate Higher interest rate charged once borrower is in default

SUMMARY Two Categories Residential or Commercial Most Common 30 / 15 year fixed 30 / 15 year ARM Balloon Classifications Lien status Credit Classification Interest Rate Type Amortization Type Credit Guarantees Loan Balances Prepayment and Penalties