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THE STANDARD INSTRUMENT AND THE NATURE OF THE PROBLEM: AN HISTORICAL PERSPECTIVE

THE STANDARD INSTRUMENT AND THE NATURE OF THE PROBLEM: AN HISTORICAL PERSPECTIVE. ASSET - LIABILITY MIX PROBLEM RATE CEILING CONSTRAINTS USURY CEILINGS DE-REGULATION OF LIABILITIES AND ASSETS ACTIVITY OF OTHER FINANCIAL INTERMEDIARIES AND WALL STREET. ALTERNATIVE MORTGAGE INSTRUMENT DESIGN.

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THE STANDARD INSTRUMENT AND THE NATURE OF THE PROBLEM: AN HISTORICAL PERSPECTIVE

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  1. THE STANDARD INSTRUMENT AND THE NATURE OF THE PROBLEM: AN HISTORICAL PERSPECTIVE • ASSET - LIABILITY MIX PROBLEM • RATE CEILING CONSTRAINTS • USURY CEILINGS • DE-REGULATION OF LIABILITIES AND ASSETS • ACTIVITY OF OTHER FINANCIAL INTERMEDIARIES AND WALL STREET

  2. ALTERNATIVE MORTGAGE INSTRUMENT DESIGN • INTEREST RATE RISK • INFLATION / DEFLATION

  3. INSTRUMENT MODIFICATION TO REDUCE RISKS OF INTEREST RATE UNCERTAINTY • PARTICIPATION IN EQUITY • SHORTENING OF MATURITIES

  4. VRMs vs GPMs • VRMs • VARIABLE PAYMENT / FIXED TERM • VARIABLE TERM / FIXED PAYMENT HYBRIDS • RESTRICTED VS. UNRESTRICTED • GPMs • TOTAL BALLOON • INTEREST ONLY • PARTIAL PRINCIPLE PAYDOWN • AMORTIZED LOAN • GEM

  5. DESIGN OBJECTIVES • TILT PROBLEM OF BORROWER • RATE RISK OF LENDER • LONG RUN “PAYMENT RISK” BURDEN TO BORROWER • SHORT RUN “PROPERTY VALUE RISK” TO LENDER

  6. PROBLEMS INHERENT IN DESIGN OF MORTGAGES • INDEX CHOICE AND REAL RETURNS • SECONDARY MARKETABILITY

  7. RISK MANAGEMENT STRATEGIES • HEDGING WITH FINANCIALS - FUTURES - OPTIONS • BETTER DURATION MATCHING OF ASSETS AND LIABILITIES • NO HOLD STRATEGIES - REMICs • DIVERSIFICATION OF BUSINESSES • RISK SHARING ALTERNATIVES THROUGH INSTRUMENT DESIGN

  8. RISK MANAGEMENT STRATEGIES SYNTHETIC ALTERNATIVES REDUCE RISK DEFENSIVE STRATEGY OFFENSIVE STRATEGY

  9. MODULE DEVELOPMENT • TOOLS OF RISK MANAGEMENT • PORTFOLIO BALANCE AND RISK-RETURN BALANCE • DESIGN OF ALTERNATIVE MORTGAGE INSTRUMENTS • HEDGING TECHNIQUES FOR “PIPELINE” ACTIVITIES • LIQUIFICATION OF PORTFOLIO • LIABILITY MANAGEMENT • DIVERSIFICATION OF ASSETS

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