1 簡介 The Mortgage Market

2 Introduction We have already noted real estate is capital intensive The typical capital structure is dominated by debt That is a major portion of the funds to purchase a home or construct an office building etc must be borrowed The segment of capital markets where these funds are borrowed is called the mortgage market This sector of the debt market is by far the largest in the world

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6 Total Mortgage Credit Outstanding in the U.S.

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8 Why Study Mortgage Market ? Shed light on how traditional method of financing assets by financial intermediaries is rapidly changing securitization is the new BIG BROTHER Demonstrates how financial engineering can redirect cash flows to create securities that more closely satisfy the asset/liability needs of investors Government agencies provide Credit guarantees for mortgage backed securities should government agencies continue to provide guarantee

9 Supply of loanable funds The amount of funds borrowed and lent depends on interest rates. –As rates rise many spending units save more and spend less –Simultaneously when interest rates rise many spending units demand less credit –The figure following illustrates the operation of supply and demand for loanable funds –The demand schedule is downward sloping, reflecting greater willingness to borrow at lower rates. –The supply schedule, s 1, rise to the right, because people have more to lend at higher rates –The intersection of the of the two schedules determines the amount of funds lent, f 1, and the prevailing interest rate, i 1

10 Supply and demand for loanable funds d1d1 s2s2 s1s1 f1f1 f2f2 i1i1 i2i2 Amount of loanable funds Interest rate

11 Real Estate Financial Instrument When ever real estate is financed, the property is pledged as collateral or security creating a financial instrument known either as MORTGAGE or DEED OF TRUST Power of secured debt: attempting to buy a $300 suit on credit versus obtaining $200,000 loan to build a house –Mortgage : Two Parties –Deed of Trust : Three Parties –Promissory Note –Title Pledge

12 Note + Pledge Funds Pledge and lien are extinguished with performance of mortgage contract MORTGAGE Borrower (Mortgagor) Lender (Mortgagee) A bilateral financial contract

13 Note Funds pledge of title Title goes to borrow if no default if default property is sold and proceeds goes to lender DEED OF TRUST Borrower (Trustor) Lender (Beneficiary) Trustee A three-party financial contract

14 Important Contractual Provisions in Real Estate Financial Instruments Parties to the contract Loan amount Term of loan Interest rate Amortization period Property description Priority of loan Acceleration clause, once default Escalation clause, once selling house Prepayment clause callable mortgage non-callable mortgage

15 Important Contractual Provisions in real estate financial instrument Due-on-Sale Clause Default Clause (put option) Personal Liability Clause Deficiency Judgment Foreclosure Redemption Rights –Equitable right –Statutory right Escrow Provisions

16 Loan Termination Termination by satisfying contract ending lien against pledged property trustee provides deed of release defeasance clause Termination by mutual agreement Refinance Recasting Termination by foreclosure

17 Redemption Rights date of default Foreclosur e suite filed Foreclosure sale End of Statutory period Equitable Right of Redemption Period Statutory Right of Redemption Period FORECLOSURE PROCESS

18 Alternative mortgage contracts Fixed Rate Mortgage (FRM) Adjustable Rate Mortgage (ARM) Graduated Payment Mortgage (GPM) Shared Appreciation Mortgage (SAM) Reverse Annuity Mortgage (RAM) Growing Equity Mortgage (GEM) Balloon Mortgage

19 Other Mortgages Junior Mortgage Purchase Money Mortgage Land Contract Wraparound Mortgage

20 Types of mortgage amortization Interest only mortgage (bullet loans) Partially amortizing or balloon mortgage Fully amortizing

21 Risks faced by mortgage finance intermediaries Credit risk: risk that money borrowed might not returned timely Default risk: risk that money lent might not be repaid Cash flow risk: risk that market conditions will alter scheduled cash flows –prepayment risk –inflation risk –exchange risk –interest rate risk Liquidity risk: risk that money will be needed before it is due