2 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.
3 Introduction to Mortgages: Definition:A mortgage is a form of debt that finances investments in property.Types of Mortgages:Residential Mortgage.Commercial Mortgage.
4 Introduction to Mortgages: Desirable Features for a Mortgage:Yield flexibility:Responsiveness to changing market ratesConstant real payments:Keeping pace with inflationPayment stability:Minimize late payment/default problemsFull security:Market value greater than loan amount
5 Introduction to Mortgages: Desirable Features for a Mortgage:Servicing simplicity:Collecting principal and interest when rates are changingFor mortgages allowing negative amortization, tracking changing principal and interest payments can be difficultMarketability:Ability to sell in a secondary marketSales of mortgage backed securities (MBS) help control total lender riskSubstituting capital market funds for financial institution's funds
8 Institutional Use of Mortgage Markets: Financial Institutions that Originate Mortgages.Participation in the Secondary Market.Securitization.Institutional Investors in Mortgages.Unbundling Mortgage Activities.
9 Valuation of Mortgages: The market price of the mortgage should equal the present value of their future cash flows.
10 Valuation of Mortgages: Factors that Affect the Risk-Free Interest Rate:Inflationary Expectations.Economic Growth.Money Supply.Budget Deficit.
11 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.
12 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.
13 Mortgage-Backed Securities Mortgage Pass-Through Securities:Definition.Interest Rate Risk on Mortgage.Repayment Risk on Mortgage.
14 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).
15 Globalization of Mortgage Markets US banks operations outside the US.Foreign banks operation in the US.