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Lecture Financial institutions, markets, and money (9th Edition): Chapter 9 - Kidwell, Blackwell, Whidbee, Peterson

Chapter 9 - Mortgage markets. This chapter describes major mortgage market instruments and major participants in the mortgage markets. It also explains the important role played by government insurance, federal agencies, and regulations in shaping the mortgage market. | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University and Lanny R. Martindale, Texas A&M University CHAPTER 9 MORTGAGE MARKETS The Unique Nature of Mortgage Markets Mortgage loans are secured by the pledge of real property as collateral. Mortgage loans are made for varied amounts - no standard denomination. Issuers of mortgages are usually small family or business entities. Weak Secondary Market Little standardization of contracts and terms. Traditionally issued and held by lender. Mortgage markets are highly regulated and supported by federal government policies. Fixed Rate Mortgages (FRMs) The note is the borrowing agreement. Payments amortized over time. (See Exhibit 9.1 for example) Interest is usually computed on the declining balance. The mortgage is a lien on the property used as collateral for the loan. If the contract is broken, the lender may use the property to pay the loan. When mortgage is fully paid, the lien is removed and the borrower obtains a clear title to the property Adjustable Rate Mortgage (ARM) Fixed-rate mortgages are not acceptable to lenders in high inflation periods. With adjustable rate contracts, borrowers' costs vary with inflation and interest rate levels. Lenders shift interest rate risk to the borrower. Caps on ARM interest rates limit interest rate risk to borrowers. Capped ARMs may have a “payment cap”, “rate cap”, or both. Payment caps limit the maximum amount the payment can go up by in any year and over the life of the loan. Interest rate caps or rate caps limit the size of the increase in the loan rate in any year and over the loan’s life. Typically, the annual cap is 1-2%, and the lifetime cap is 5%. Methods of Adjustment for ARMs Rate may vary in a prescribed range (caps) or without limit. Payments, maturity, or principal may vary. Rates may vary based on a previously determined interest | Power Point Slides for: Financial Institutions, Markets, and Money, 9th Edition Authors: Kidwell, Blackwell, Whidbee & Peterson Prepared by: Babu G. Baradwaj, Towson University and Lanny R. Martindale, Texas A&M University CHAPTER 9 MORTGAGE MARKETS The Unique Nature of Mortgage Markets Mortgage loans are secured by the pledge of real property as collateral. Mortgage loans are made for varied amounts - no standard denomination. Issuers of mortgages are usually small family or business entities. Weak Secondary Market Little standardization of contracts and terms. Traditionally issued and held by lender. Mortgage markets are highly regulated and supported by federal government policies. Fixed Rate Mortgages (FRMs) The note is the borrowing agreement. Payments amortized over time. (See Exhibit 9.1 for example) Interest is usually computed on the declining balance. The mortgage is a lien on the property used as collateral for the loan. If the contract is broken, the lender may use