tailieunhanh - Lecture Financial markets and institutions - Chapter 9: Mortgage markets

In this chapter, the following content will be discussed: Background on mortgages, residential mortgage characteristics, creative mortgage financing, institutional use of mortgage markets, valuation of mortgages, risk from investing in mortgages, mortgage-backed securities, globalization of mortgage markets. | Chapter 9 Mortgage Markets Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Chapter Outline Background on mortgages Residential mortgage characteristics Creative mortgage financing Institutional use of mortgage markets Valuation of mortgages Risk from investing in mortgages Mortgage-backed securities Globalization of mortgage markets Background on Mortgages A mortgage is a form of debt that finances investment in property The debt is secured by the property The mortgage is the difference between the down payment and the value to be paid for the property Financial institutions such as savings institutions and mortgage companies originate mortgages They accept mortgage applications and assess the creditworthiness of the applicants The mortgage contract specifies the mortgage rate, the maturity, and the collateral that is backing the loan The originator charges an origination fee The originator may earn a profit from the difference between the mortgage rate and the rate that it paid to obtain funds Background on Mortgages (cont’d) The level of mortgage debt has risen over time Mortgage debt rises at a slower rate during recessions The majority of mortgage debt outstanding is on one- to four-family properties Residential Mortgage Characteristics The mortgage contract should specify: Whether the mortgage is federally insured The amount of the loan Whether the interest rate is fixed or adjustable The interest rate to be charged The maturity Other special provisions Residential Mortgage Characteristics (cont’d) Insured versus conventional mortgages Federally insured mortgages guarantee loan repayment to the lending financial institution The insurance fee is percent of the loan amount The guarantor is either the FHA or the VA The maximum mortgage amount is limited by law The volume of FHA loans has consistently exceeded that of VA loans Conventional mortgages can . | Chapter 9 Mortgage Markets Financial Markets and Institutions, 7e, Jeff Madura Copyright ©2006 by South-Western, a division of Thomson Learning. All rights reserved. Chapter Outline Background on mortgages Residential mortgage characteristics Creative mortgage financing Institutional use of mortgage markets Valuation of mortgages Risk from investing in mortgages Mortgage-backed securities Globalization of mortgage markets Background on Mortgages A mortgage is a form of debt that finances investment in property The debt is secured by the property The mortgage is the difference between the down payment and the value to be paid for the property Financial institutions such as savings institutions and mortgage companies originate mortgages They accept mortgage applications and assess the creditworthiness of the applicants The mortgage contract specifies the mortgage rate, the maturity, and the collateral that is backing the loan The originator charges an origination fee The originator