Chap 7

• Mortgage


  Loans to individuals or businesses to purchase a home, land, or other real property
• Securitized


  Securities packaged and sold as assets backing a publicly traded or privately held debt instrument
• Major categories of mortgages

  • Home mortgages (1-4 families)
  • Commercial mortgages
  • Multifamily dwelling mortgages
  • Farm mortgages
• Mortgages vs other capital market instruments

  • Mortgages are backed by a specific piece of real property
  • Mortgages have no set size or denomination
  • Primary mortgages generally involve a single investor
  • Primary mortgage borrowers are often individuals with less extensive and unaudited information
• Mortgage markets are a bellwether for the bond and stock markets, as well as the overall economy
• Losses associated with mortgages and off-balance-sheet mortgage-backed securities were at the heart of the recent financial crisis
• The financial crisis was triggered by a boom ("bubble") in the housing markets in the early 2000s, followed by falling house prices, rising interest rates, and rising mortgage costs leading to a wave of mortgage defaults and foreclosures
• Lien


  A public record attached to the title of the property that gives the financial institution the right to sell the property if the mortgage borrower defaults
• Down payment


  A portion of the purchase price of the property a financial institution requires the mortgage borrower to pay up front
• Private mortgage insurance (PMI)


  Insurance contract purchased by a mortgage borrower guaranteeing to pay the financial institution the difference between the value of the property and the balance remaining on the mortgage
• Federally insured mortgages


  Mortgages originated by financial institutions, with repayment guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA)
• Down payment


  Decreases the probability that the borrower will default on the mortgage
• A mortgage borrower who makes a large down payment invests more personal wealth into the home and, therefore, is less likely to walk away from the house should property values fall, leaving the mortgage unpaid
• The drop in real estate values during the recent financial crisis caused many mortgage borrowers to walk away from their homes and mortgages, as well as many mortgage lenders to fail
• Down payment size


  Generally, a 20 percent down payment is required (i.e., the loan-to-value ratio may be no more than 80 percent)
• Borrowers that put up less than 20 percent


  Are required to purchase private mortgage insurance (PMI)
• PMI


  The insurance is purchased by the lender (the financial institution) but paid for by the borrower, generally as part of the monthly payment
• PMI issuer


  Guarantees to pay the financial institution a portion (generally between 12 percent and 35 percent) of the difference between the value of the property and the balance remaining on the mortgage in the event of default
• Removing PMI requirement


  1. Waiting period of one to two years after the loan's origination date

  2. Proof through an approved appraiser that the loan-to-value ratio is less than 80 percent

  3. On-time payments during the waiting period

  4. Letter from the borrower requesting that the PMI be removed from the loan
• Federally insured mortgages


  Originated by financial institutions, but repayment is guaranteed (for a fee of 0.5 percent of the loan amount) by either the Federal Housing Administration (FHA) or the Veterans Administration (VA)
• Conventional mortgages


  Mortgages held by financial institutions and are not federally insured (but generally are required to be privately insured if the borrower's down payment is less than 20 percent of the property's value)
• Mortgage maturities


  Generally have an original maturity of either 15 or 30 years
• 15-year mortgage


  Attractive to borrowers because of the potential saving in total interest paid, but monthly payments are higher than a 30-year mortgage
• 15-year mortgage


  Attractive to financial institutions because of the lower degree of interest rate risk compared to a 30-year mortgage
• Balloon payment mortgage


  Requires a fixed monthly interest payment (and, sometimes, principal payments) for a three- to five-year period, with full payment of the mortgage principal (the balloon payment) required at the end of the period
• Balloon payment mortgage


  Monthly payments prior to maturity are lower than those on an amortized loan, but the principal is refinanced at the current mortgage interest rate at the end of the balloon loan period
• Fixed-rate mortgage


  Locks in the borrower's interest rate and thus the required monthly payment over the life of the mortgage, regardless of how market rates change
• Adjustable-rate mortgage (ARM)


  The interest rate is tied to some market interest rate, so the required monthly payments can change over the life of the mortgage
• When interest rates rise


  ARMs may cause borrowers to be unable to meet the promised payments on the mortgage
• When interest rates are low

  Mortgage borrowers generally prefer fixed-rate loans to ARMs
• When interest rates eventually rise


  ARM payments on mortgage assets will rise, making it easier for financial institutions to pay the higher interest rates to their depositors
• Discount points


  Interest payments made when the loan is issued (at closing), where one discount point paid up front is equal to 1 percent of the principal value of the mortgage
• Discount points


  In exchange for points paid up front, the financial institution reduces the interest rate used to determine the monthly payments on the mortgage
• Other mortgage fees


  • Application fee
  • Title search
  • Title insurance
  • Appraisal fee
  • Loan origination fee
  • Closing agent and review fees
  • Other costs (e.g. VA loan guarantees, FHA or private mortgage insurance)
• Other costs. Any other fees, such as VA loan guarantees, or FHA or private mortgage insurance.
• Figure 7-5 presents a sample closing statement in which the various fees are reported and the payment required by the borrower at closing is determined.
• Mortgage Closing Statement
• Borrower(s)


  Manuel Goodperson, Manuela Goodperson
• Lender


  Starpointe Savings Bank Peasant Run Plaza Warre
• Property


  321 Main St. Watchung, NJ 07060