Ch 7 Mortgage Markets Overview PDF

CH 7 Mortgage Markets FIN 230 – Financial Markets and Institutions What is the mortgage market? The mortgage market is a financial market where mortgage loans are originated, funded, traded, and invested in. A mortgage is a loan secured by real estate collateral. Many mortgages, such...

CH 7 Mortgage Markets FIN 230 – Financial Markets and Institutions What is the mortgage market? The mortgage market is a financial market where mortgage loans are originated, funded, traded, and invested in. A mortgage is a loan secured by real estate collateral. Many mortgages, such as residential mortgages, are securitized. FIN 230 – Financial Markets and Institutions What types of mortgages are issued in the primary mortgage market? Home mortgages: loans used to purchase residential properties (also known as single-family mortgages) Multifamily dwelling mortgages: loans used to purchase larger residential properties (i.e., apartment complexes, townhouses) Commercial mortgages: loans used to purchase real estate for business or commercial purposes (i.e., office buildings, warehouses) Farm mortgages: loans used to purchase agricultural land and farms FIN 230 – Financial Markets and Institutions What are characteristics of mortgages? Mortgages are backed by collateral. As part of the mortgage agreement, the financial institution requires a down payment. Mortgages are either federally insured or conventional. A mortgage generally has an original maturity of 15 or 30 years. A mortgage is considered amortized when regular fixed payments of both principal and interest are structured to fully repay the loan by the maturity date. This is known as a fully amortized loan. In a balloon payment mortgage, regular monthly payments cover only a portion of the principal and interest, or sometimes just the interest, for a set period. At the end of the term, a large lump sum payment, known as the balloon payment, is required to pay off the remaining loan balance. In a fixed-rate mortgage, the interest rate remains the same for the entire term of the mortgage. In an adjustable-rate mortgage, the interest rate is tied to some market FIN 230 – Financial Markets and Institutions What are other types of mortgages? Jumbo mortgages are loans for more expensive homes. Subprime mortgage is a home loan given to borrowers with poor credit histories. Alt-A mortgage is a type of home loan that falls between a prime and subprime mortgage in terms of risk. Option ARMs are adjustable-rate mortgages that offer the borrower several monthly payment options. Second mortgage is a loan taken out on a property that already has a primary mortgage. Home-equity loan is a line of credit secured with a second mortgage. Reverse-annuity mortgage (RAM) is when the mortgage borrower receives regular monthly payments from a financial institution rather than making them. FIN 230 – Financial Markets and Institutions What are ways of trading mortgages in the secondary mortgage market? Selling mortgages FI gives a mortgage to a borrower. FI then sells the mortgage to another company or investor in the secondary market. This helps the FI get more money to lend out to new homebuyers. Securitizing mortgages Issuing securities backed by newly originated mortgages. This helps FIs manage risks, improve liquidity, and generate additional funds for lending. Three main types of mortgage-backed securities: pass-through securities, collateralized mortgage obligations (CMOs), and mortgage-backed bonds. FIN 230 – Financial Markets and Institutions