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Chapter 9: Mortgage Markets

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Presentation on theme: "Chapter 9: Mortgage Markets"— Presentation transcript:

1 Chapter 9: Mortgage Markets

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 rates Constant real payments: Keeping pace with inflation Payment stability: Minimize late payment/default problems Full 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 changing For mortgages allowing negative amortization, tracking changing principal and interest payments can be difficult Marketability: Ability to sell in a secondary market Sales of mortgage backed securities (MBS) help control total lender risk Substituting capital market funds for financial institution's funds

6 Mortgage Characteristics:
Insured Mortgage. Conventional Mortgage. Fixed-Rate Mortgage. Adjustable-Rate Mortgage (ARM). Mortgage Maturities. - Balloon-payment mortgage. Amortizing Mortgages.

7 Creative Mortgage Financing:
Graduated-Payment Mortgage (GPM) Growing-Equity Mortgage Second Mortgage. Shared-Appreciation Mortgage.

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.

16 End of Chapter 9

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