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Chapter 9

Chapter 9. Alternative Mortgage Instruments. 9-1. Learning Objectives. List the basic characteristics of several types of alternatives mortgage instruments Define standard mortgage elements such as interest rate, payment, discount points, and term

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Chapter 9

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  1. Chapter 9 Alternative Mortgage Instruments

  2. 9-1 Learning Objectives • List the basic characteristics of several types of alternatives mortgage instruments • Define standard mortgage elements such as interest rate, payment, discount points, and term • Describe how characteristics of various alternative mortgage instruments solve the problems of a fixed-rate mortgage in an inflationary environment

  3. 9-2 Interest Rate Risk • Thrifts have traditionally financed long-term assets (mortgages) with short-term liabilities (deposits) • When inflation increases interest rates, mortgage prepayments slow and rates on deposits increase • Rising interest rates create affordability problems

  4. 9-3 Adjustable-Rate Mortgage (ARM) • Frequency of Rate change • Index • Margin • Interest Rate Caps • Teaser Rate • Convertibility

  5. 9-4 Graduated Payment Mortgage (GPM) • Expectations of future inflation and the tilt effect • Payments on this fixed-rate loan are lower at the beginning of the loan and higher at the end • Negative Amortization • Borrowers can qualify for a larger loan and housing becomes more affordable

  6. 9-5 Price-Level Adjusted Mortgage (PLAM) • Contract rate is the real rate of return • Mortgage balance is adjusted by the inflation rate after the inflation has occurred • Upward adjustments create negative amortization • If inflation is not neutral, mortgage payments may increase at a faster rate than borrower’s income • Mortgage balance may increase at a faster rate than the value of the property • PLAMs may be used in conjunction with price-level adjusted deposits(PLADs)

  7. 9-6 Reverse Annuity Mortgage (RAM) • Typical mortgage is “ rising equity, falling debt” • RAM is “ falling equity, rising debt” • Borrower receives a series of payments and repays in a lump sum at some future time

  8. 9-7 Other Mortgage Types • Home Equity Loan • Biweekly Mortgage • Fifteen-year versus Thirty-year loans

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