FIRST SLIDE

Mortgage Market

SECOND SLIDE

Mortgage Market

- A mortgage is a pledge of property to secure payment of a debt. The mortgage market is a

collection of markets, which includes a primary and a secondary market where mortgages trade.

THIRD SLIDE

Primary Markets

-The primary mortgage market is the market where borrowers can obtain a mortgage loan
from a primary lender. Banks, mortgage brokers, mortgage bankers, and credit unions are all
primary lenders and are part of the primary mortgage market.

4th SLIDE

Secondary Markets

-The secondary mortgage market is the mortgage market in which primary lenders sell
mortgages to investors such as:

 Insurance companies.
 Mortgage banking companies.
 Pension funds.
 The federal government.

These investors become the secondary lenders.

THIRD SLIDE

 – Property pledged as collateral is real estate, which is often in the form of a house.

– Debt is the loan given to the buyer of the house by a lender.

– If a homeowner (the mortgagor) fails to pay the lender (the mortgagee), the lender has the right to
foreclose the loan and seize the property in order to ensure that is repaid.

4TH SLIDE

Nature of Mortgage Markets

 • Secured by the pledge of real property.

• Made for varying amounts and maturities.

• Issuers are typically small, unknown entities.

• Secondary market growing

• Highly regulated and supported by the federal government.

5th SLIDE
Mortgages and Mortgage-Backed Securities

 • Mortgages are loans to individuals or businesses to purchase a home, land, or other real property
• A mortgage is a form of debt that finances investment in property.

• Many mortgages are securitized

– securities are packaged and sold as assets backing a publicly traded or privately held debt
instrument

• Four basic categories of mortgages issued

– home, multifamily dwelling, commercial, and farm

6TH SLIDE

Conventional Mortgage

 • Financial institutions provide conventional mortgage.

• Conventional Mortgages means when the loan is based is solely on the credit of the borrower and
on the collateral for the mortgage.

• It is not federally insured, they can be privately insured so that the lending financial institutions can
still a void exposure to credit risk.

• The insurance premium paid for such private insurance will likely be passed on to the borrowers.

7TH SLIDE

Insured Mortgage 

 • Insured mortgages guarantee loan repayment to the lending financial institution, thereby covering
it against the possibility of default by the borrower.

• An insurance fee of 0.5 percent of the loan amount is applied to cover the cost of insuring the
mortgage.

8TH SLIDE

Mortgage Insurance

• Private Mortgage Insurers (PMI)

– insures against default for borrowers with less than a 20% down payment. Historically,
there has been no penalty for prepayment. However, this is not always the case.

– Mortgage Guarantee Insurance Company (owned by Northwestern Mutual)

– PMI Mortgage Insurance Company (owned by Sears, Reobuck)

The cost of mortgage insurance is paid to the guarantor by the mortgage originator but
passed along to the borrower in the form of higher mortgage payments. 

9TH SLIDE

Acceptable Collateral for Mortgages 

• The real estate properties that can be mortgage can be divided into two broad categories :
  Single family (one – to –four – family) residential
- house, - Condominiums - cooperatives, - apartments
 Commercial properties:
⁻ Multifamily properties e.g.- apartment buildings,
⁻ Office buildings, industrial properties, warehouse, shopping centers, hotels,
and health care facilities etc. 

10TH SLIDE

Mortgage Characteristics

 • Collateral /Lien - a public record attached to the title of the property that gives the financial
instrument the right to sell the property if the mortgage borrower defaults

• Down payment - a portion of the purchase price of the property a financial instrument requires the
mortgage borrower to pay up front

• Private mortgage insurance - insurance contract purchased by a mortgage borrower guaranteeing

to pay the financial instrument the difference between the value of the property and the balance
remaining on the mortgage

11th SLIDE

• Federally insured mortgages - originated by FIs with repayment guaranteed by either the Federal
Housing Administration (FHA) or the Veterans Administration (VA)

• Conventional mortgages - issued by financial instruments that are not federally insured

• Amortized - when the fixed principal and interest payments fully pay off the mortgage by its
maturity date

• Balloon payment mortgages - requires a fixed monthly interest payment for a three- to five-year
period with full payment of the mortgage principal required at the end of the period 

12TH SLIDE

• Fixed-rate mortgage - locks in the borrower’s interest rate and thus the required monthly payment
over the life of the mortgage, regardless of market rate changes

• Adjustable-rate mortgage - where the interest rate is tied to some market interest rate with
potential for change in required monthly payments over the life of the mortgage

• Discount points - interest payments made when the loan is issued (at closing). One discount point
= 1 percent of the principle value of the mortgage

• Amortization schedule - schedule showing how the monthly mortgage payments are split between
principal and interest

13th SLIDE

Mortgage Originator 

 • The original lender is called mortgage originator. Principal originators of residential mortgage loans
are:

– Thrifts
 – Commercial banks

– Mortgage banks

• Other private mortgage originators

– Life insurance companies

– Pension funds

14th SLIDE

Revenue Sources

• Mortgage originators may generate income from mortgage activity . The origination Functions are:

– Origination fee: expressed in terms of points, where each point represents 1% of the
borrowed funds. Originators may also charge application fees and certain processing fees.

– Secondary marketing profits: profits that might be generated from selling a mortgage at a
higher price than it originally costs.

15th SLIDE

Mortgage Origination Process

• Evaluating Credit Risk

– Payment-To-Income Ratio

– Loan-To-Value Ratio

• Commitment Letter form Lender

• Choice of Type of Mortgage

– Fixed-rate mortgage

– Adjustable-rate mortgage

16TH SLIDE

Mortgage Origination Process

• At first the potential homeowner completes an application form, which provides financial
information about the applicant and pays an application fee;
• Then the mortgage originator evaluating Credit Risk by using the following ratios:
– Payment-To-Income Ratio (PTI) = monthly payments/monthly income- measures
the ability of the applicant to make monthly payments,
– So, the lower the ratio, the greater the applicant will be able to meet the required
payments.
17TH SLIDE

Mortgage Origination Process

– Loan-To-Value Ratio (LTV) : the ratio of the amount of the loan to the market (or
appraised) value of the property.
 – So, the lower the ratio, the greater the protection for the lender if the applicant
defaults on the payments and the lender must repossess and sell the property.

 Commitment Letter form Lender: If the lenders decides to lend the funds it sends a
commitment letter to the applicant.
o The length of time of the commitment varies between 30 to 60 days.
o Commitment latters obligates the lender not to the applicant.

18TH SLIDE

Choice of Type of Mortgage

At the time the application is submitted , the mortgage originator will give the applicant a choice
among the various types of mortgages. These are:

–Fixed-rate mortgage

–Adjustable-rate mortgage

19TH SLIDE

Fixed rate Mortgage

• A fixed rate mortgage looks in the borrower’s interest rate over the life of the mortgage. Thus the
periodic interest payment received by the lending financial institution is constant, regardless of how
market interest rates change over time. (Balloon Payment mortgage)

• The lender typically gives the applicant a further choice of when the interest rate on the mortgage
will be determined.

20TH SLIDE

 • The three choices are:

– At the time the loan application is submitted.

– At the time a commitment letter is issued and

– At the date when the property is purchased.

• These choices granted the applicant – the right to decide whether or not to close on the property
and the right to select when to set the interest rate

21ST SLIDE

Adjustable rate mortgage (ARM)

 • An adjustable rate mortgage allows the mortgage interest rate to adjust to market conditions.

• Its contract will specify a precise formula for this adjustment.

• The formula and the frequency of adjustment can vary among mortgage contracts. (Capital
recovery)
22ND

Calculation of Monthly Mortgage Payments

PV = PMT(PVIFA i/12, n × 12)

Where:

PV = Principal amount borrowed through the mortgage

PMT = Monthly mortgage payment

PVIFA = Present value interest factor of an annuity

i = Annual interest rate on the mortgage

n = Length of the mortgage in years

23RD

Risk from investing in Mortgages

In mortgages three types of risk. That are-

1. Interest rate risk:

• Financial institutions that hold mortgages are subject to interest rate risk because
the values of mortgages tend to decline in response to an increase in interest rates.
2. Prepayment risk:
• Prepayment risk is the risk that a borrower may prepay the mortgage in response
to a decline in interest rates.

24TH

3. Credit risk:

• Credit risk or default risk is the possibility that borrowers will make late payments or
even default. Whether investors sell their mortgages prior to maturity or hold them until
maturity, they are subject to credit risk