Mortgage Amortization Schedule

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					 Chapter 10:

Mortgage Loans
                                              Chapter 10, Slide 2




                      Chapter Objectives

After completing this chapter you
  should…




Lawrence P. Schrenk                 FIN 797: Fixed-Income
                                          Securities
                      Mortgages




Lawrence P. Schrenk           FIN 797: Fixed-Income
                                    Securities
                                                     Chapter 10, Slide 4




                 What is a Mortgage?

 Mortgage        is…
    A   loan secured by the collateral of specified real
       estate property, which obliges the borrower to a
       predetermined series of payments.
 Rightof foreclosure
 Conventional mortgage
 Mortgage insurance
 Residential versus non-residential


Lawrence P. Schrenk                        FIN 797: Fixed-Income
                                                 Securities
                      The Mortgage Market




Lawrence P. Schrenk                FIN 797: Fixed-Income
                                         Securities
                                                      Chapter 10, Slide 6




                  Mortgage Originators

 Mortgage        originator is original lender
     Thrifts
     Commercial banks
     Mortgage banks

 Origination         fee
     ‘points’,   a point is 1% of the borrowed funds
   Secondary market profit
     Profit   from reselling mortgage at higher price


Lawrence P. Schrenk                         FIN 797: Fixed-Income
                                                  Securities
                                                    Chapter 10, Slide 7


                 Mortgage Originators
                       (cont’d)
 Credit      evaluation
     Payment-to-income         ratio (PTI)
         Monthly     income to monthly payments
     Loan-to-value       ratio (LTV)
         Loan   amount versus market value of property




Lawrence P. Schrenk                       FIN 797: Fixed-Income
                                                Securities
                                                            Chapter 10, Slide 8


                  Mortgage Originators
                        (cont’d)
 Disposal        of Mortgage
     Originator      can…
         Hold mortgage in own portfolio
         Sell the mortgage

         Use it as collateral for the issuance of a security
               ‘Securitization’
 Conduits
 Conforming mortgage
     Maximum PTI
     Maximum LTV
     Maximum amount
Lawrence P. Schrenk                               FIN 797: Fixed-Income
                                                        Securities
                                                  Chapter 10, Slide 9




                      Mortgage Servers

 Servicing
     Collection of monthly payments
     Late notices
     Records, etc.

 Revenues
     Service  fee (percentage of balance)
     Interest on escrow fund
     Float on monthly payment
     Miscellaneous fees, etc.

Lawrence P. Schrenk                     FIN 797: Fixed-Income
                                              Securities
                                                   Chapter 10, Slide 10




                      Mortgage Insurers

 Types
     (private)       mortgage insurance
         LTV  > 80%
         Required by the lender

         Private source or, if qualifies, FHA, VA, FmHA

     Credit    life
         Term policy
         Covers payments in the event of death



Lawrence P. Schrenk                        FIN 797: Fixed-Income
                                                 Securities
                      Mortgage Instruments




Lawrence P. Schrenk                FIN 797: Fixed-Income
                                         Securities
                                                 Chapter 10, Slide 12




                   Types of Mortgages

 Level      Payment, Fixed Rate Mortgage
     Equalinstallments
     Payment of interest and principal
         1/12thof fixed annual rate times outstanding
          balance
         Portion of outstanding principal

     Fully    amoritized


Lawrence P. Schrenk                      FIN 797: Fixed-Income
                                               Securities
                                              Chapter 10, Slide 13


                  Types of Mortgages
                       (cont’d)
 Level  Payment, Fixed Rate Mortgage
   (cont’d)
     The    payment formula

                        i 1  i  
                                  n
              MP  MB0              
                        1  i   1
                                 n


 Excel Spreadsheet ‘Mortgage
   Amortization Schedule’
Lawrence P. Schrenk                   FIN 797: Fixed-Income
                                            Securities
                                              Chapter 10, Slide 14


                  Types of Mortgages
                       (cont’d)
 Adjustable-Rate            Mortgage (ARM)
     Reset relative to a reference rate + spread
     Reference rates
         Market  rates
         Cost of funds for thrifts

     Teaserrate
     Caps and floors
         Periodic    and lifetime

Lawrence P. Schrenk                   FIN 797: Fixed-Income
                                            Securities
                                             Chapter 10, Slide 15


                  Types of Mortgages
                       (cont’d)
 Balloon        Mortgages
     Renegotiation      period
 Two-Step            Mortgages
     Single     reset point
 Growing         Equity Mortgage
     Fixedrate
     Payments increase over time
     Quicker payment of principal

Lawrence P. Schrenk                  FIN 797: Fixed-Income
                                           Securities
                                                 Chapter 10, Slide 16


                  Types of Mortgages
                       (cont’d)
 Tiered       Payment Mortgages
     Fixed   rate
     Payments increase over time
     Initial payment below fixed rate level

 Fixed/Adjustable-Rate            Mortgage
   Hybrids
     Fixed     rate turns to floating rate

Lawrence P. Schrenk                      FIN 797: Fixed-Income
                                               Securities
                      Mortgage Risk




Lawrence P. Schrenk             FIN 797: Fixed-Income
                                      Securities
                                                  Chapter 10, Slide 18




                       Mortgage Risk

 Default       Risk
     Credit    risk that borrower will default
         Influenced   by mortgage insurance
     Conditional      default rate
        A  measurement of default risk
         Probability that a loan will default this year

         Conditional on the mortgage remaining solvent
          until this year


Lawrence P. Schrenk                      FIN 797: Fixed-Income
                                               Securities
                                                   Chapter 10, Slide 19


                       Mortgage Risk
                         (cont’d)
 Default       Risk (cont’d)
     Factors
         Original    LTV or current LTV                    
         PTI                                               
         Change in housing prices                         /
         Home equity loans (second mortgages)              
         Seasoning                                         



Lawrence P. Schrenk                        FIN 797: Fixed-Income
                                                 Securities
                                                          Chapter 10, Slide 20


                        Mortgage Risk
                          (cont’d)
 Foreclosure           and Default Losses
     Legal      differences
         Foreclosure      procedure
             Judicial (more lengthy and more costly)
             Non-judicial

         Statutory    right of redemption
               Right to redeem after a foreclosure
         Deficiency     judgment
               Lender recovering deficiencies from personal assets


Lawrence P. Schrenk                               FIN 797: Fixed-Income
                                                        Securities
                                             Chapter 10, Slide 21


                      Mortgage Risk
                        (cont’d)
 Liquidity       Risk
     Large bid-ask spread in secondary
      mortgage markets
     Potential liquidity problems
         rate risk
 Interest
 Prepayment risk
     Due  to sale prior to maturity or refinancing
     Refinancing popular when rate are low


Lawrence P. Schrenk                  FIN 797: Fixed-Income
                                           Securities

				
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