Transcript No Slide Title

Chapter Seven
Mortgage Markets
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Mortgages and Mortgage-Backed
Securities
• Mortgages are loans to individuals or
businesses to purchase a home, land, or other
real property
• Many mortgages are securitized
– mortgages are packaged and sold as assets backing a
publicly traded or privately held debt instrument
• Four basic categories of mortgages issued
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7-2
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Mortgage Loans Outstanding, 2004 ($Bn)
$582
$141
$1,635
$7,771
family
McGraw-Hill/Irwin
commercial
7-3
multifamily
farm
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Mortgage Characteristics
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Lien
Down payment
Private mortgage insurance
Federally insured mortgages
Conventional mortgages
Amortized
Balloon payment mortgages
(continued)
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•
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•
Fixed-rate mortgage
Adjustable-rate mortgage
Discount points
Amortization schedule
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7-5
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Calculation of Monthly Mortgage
Payments
PV = PMT(PVIFA r,t )
Where:
PV = Principal amount borrowed through the mortgage
PMT = Monthly mortgage payment
PVIFA = Present value interest factor of an annuity
r = interest rate, i, divided by 12 (months/year)
t = number of months (payments) over life of the mortgage
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Comparison of Monthly Mortgage
Payments
$150,000 home with 30-year mortgage at 8%, 0 points, 20% down
$120,000 = PMT(PVIFA 8%/12, 30  12 )
PMT = $120,000/136.2835 = $880.52
$150,000 home with 15-year mortgage at 8%, 0 points, 20% down
$120,000 = PMT(PVIFA 8%/12, 15  12 )
PMT = $120,000/104.6406 = $1146.78
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Other Types of Mortgages
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Automatic rate-reduction mortgages
Graduated-payment mortgages
Growing-equity mortgages
Second mortgages
Home equity loan
Shared-appreciation mortgage (SAM)
Equity-participation mortgage
Reverse-annuity mortgage
McGraw-Hill/Irwin
7-8
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Secondary Mortgage Market
• Advantages for FI to securitize
– reduces liquidity risk, interest rate risk, and credit risk of
FIs portfolio
– FI retains income from origination fees and service fees
• FI’s remove mortgages from their balance
sheet through one of two mechanisms
– pool recently originated mortgages together and sell
them in the secondary market
– issue mortgage-backed securities that are backed by
their newly originated mortgages
McGraw-Hill/Irwin
7-9
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History of Secondary Mortgage Markets
• Federal National Mortgage Association (FNMA or
“Fannie Mae”) created during the Great Depression
• FHA and VA insured loans also created during this time
• Government National Mortgage Association (GNMA or
“Ginnie Mae”) and Federal Home Loan Mortgage
Corp. (FHLMC or “Freddie Mac”) created during
1960’s
• Wide variety of mortgage-backed securities have been
developed and in 1999, approximately 50% of
mortgages are securitized
McGraw-Hill/Irwin
7-10
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Mortgage Sales
• Mortgage sale
• Allow FIs to manage credit risk and achieve better
asset diversification, improves their liquidity risk
• FIs are encouraged to sell loans for economic and
regulatory reasons
• Major buyers of mortgage loans
• Major sellers of mortgage loans are money center
banks, smaller banks, foreign banks, investment
banks
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Securitization of Mortgages
• Pass-through mortgage securities
• Issued in standard denominations,
usually $25,000 with increments of
$5,000 beyond the minimum
• Three government owned or sponsored
agencies involved - Ginnie Mae (GNMA),
Fannie Mae (FNMA, and Freddie Mac
(FHLMC)
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Government-Related Mortgage-Backed
Pass-Through Securities Outstanding ($Bn)
2000
1500
1000
500
0
1995
GNMA
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FNMA
1998
2000
FHLMC
7-13
2004
Private Mortgages
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Collateralized Mortgage Obligations
• CMO - a mortgage-backed bond issued in
multiple classes or tranches
– tranches - a bond holder class associated with a CMO
• Created by packaging and securitizing whole
mortgage loans or resecuritizing pass-through
securities
• Attractive to secondary mortgage market
investors because they can choose a particular
CMO class that fits their maturity needs
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7-14
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Mortgages Outstanding by Type of Holder(%),
2004
3.37
Mortgage Pools
0.32 4.39
2.62
52.42
36.88
McGraw-Hill/Irwin
7-15
Depository
Institutions
Life Insurance
Companies
Other Financial
Institutions
Mortgage
Companies
Other
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One- to Four-Family Mortgage Originations,
2004
17.50
28.30
Mortgage
Companies
Commercial Banks
Thrifts
Other
27.50
26.70
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7-16
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Issuers of Ginnie Mae Securities, 2004
Mortgage
Companies
Commercial Banks
31.10
Thrifts
50.30
Other
9.50
9.10
McGraw-Hill/Irwin
7-17
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