1 / 32

Chapter 22

Chapter 22. The Residential Mortgage Market. To understand how the residential mortgage market supplies credit for individuals and families to build and buy homes.

zagiri
Download Presentation

Chapter 22

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 22 The Residential Mortgage Market

  2. To understand how the residential mortgage market supplies credit for individuals and families to build and buy homes. To understand the problems faced by lenders in designing new home loan contracts that will protect them against inflation and other risks.  Learning Objectives 

  3. To look at how federal government agencies and government-sponsored mortgage firms support the development of the market for mortgage loans.  Learning Objectives 

  4. Among the fastest growing of all financial markets today is the residential mortgage market, where individuals and families fund their purchases of homes. Originally a simple market that was primarily local and regional in character, the residential mortgage market has become an international capital market where home-mortgage-related instruments are traded around the globe. Introduction

  5. Recent Trends in New Home Prices and the Terms of Mortgage Loans Prices and Yields of Conventional Home Mortgage Loans

  6. Offsetting the relatively low home-mortgage loan rates of recent years have been record-high home prices. Overall, real home prices have risen considerably faster than homeowner incomes, discouraging some potential home buyers. Recent Trends in New Home Prices and the Terms of Mortgage Loans

  7. The Structure of the Mortgage Market

  8. The Structure of the Mortgage Market Mortgage Loans Outstanding, 2004* ($ Billions)

  9. Mortgage Lending Institutions 22 - 9

  10. Most mortgages generate multiple potential cash-flow streams: origination & commitment fees (when a mortgage loan is first applied for) periodic loan repayments & loan interest compensation for prepayment & default risks service fees associated with collecting & recording amounts owed net returns & fees from the securitization of a pool of mortgage loans Mortgage Lending Institutions

  11. A mortgage loan may be held in the originating lender’s portfolio for the promised interest and principal payments; sold to an investor at a discounted value (although the originating lender may retain servicing rights and charge the loan purchaser loan servicing fees); or packaged with other similar mortgage loans into a pool and securitized (the lender receives residual interest income and servicing fees). Mortgage Lending Institutions

  12. Savings and loan associations (S&Ls) are predominantly local lenders. They often service the mortgage loans they made. Commercial banks rank first as lenders for the purchase of homes, condominiums, and apartments, and in the commercial mortgage sector. Savings banks invest in both government-guaranteed and conventional mortgage loans. The Roles Played by Leading Financial Institutions in the Mortgage Market

  13. Life insurance companies make substantial investments in commercial as well as residential mortgage properties, both nationally and internationally. Mortgage banking houses act as a channel through which builders or contractors in need of long-term funds can find permanent mortgage financing. The Roles Played by Leading Financial Institutions in the Mortgage Market

  14. The Great Depression generated massive, unprecedented unemployment, such that property values fell, thousands of foreclosures occurred, and many mortgage lenders faced liquidity crises. So, the U.S. federal government had to move in to tackle the mortgage market’s problems, through government guarantees and the development of a secondary market. Government Activity in the Mortgage Market

  15. The major milestones include: 1932: Federal Home Loan Bank System 1934: National Housing Act, Federal Housing Administration 1938: Federal National Mortgage Association (Fannie Mae) 1944: Servicemen’s Readjustment Act, Veterans Administration Government Activity in the Mortgage Market

  16. 1968: Government National Mortgage Association (Ginnie Mae) (Its pass-throughs are popular with investors as safe, readily marketable securities with attractive rates of return.) 1970: Federal Home Loan Mortgage Corporation (Freddie Mac) (Its mortgage-backed securities include mortgage participation certificates (PCs), guaranteed mortgage certificates (GMCs), collateralized mortgage obligations (CMOs), and real estate mortgage investment conduits (REMICs).) Government Activity in the Mortgage Market

  17. The development of various types of securitized mortgages have made mortgage securities more competitive with government and corporate securities, allowing many mortgage lenders to invade the national and international capital markets for funds. However, these new financial instruments have also increased the sensitivity of mortgage interest rates to national and international market conditions. Government Activity in the Mortgage Market

  18. The problems created by fixed-rate mortgages (FRMs) led to the development of variable-rate mortgages (VRMs) and adjustable mortgage instruments (AMIs). Volatile interest rates also led to the development of convertible mortgage instruments (CMIs), balloon loans and hybrid mortgages. Innovations in Mortgage Instruments

  19. Interest-only mortgages offer borrowers the option of only paying the interest on their home mortgages, without retiring loan principal, for an initial time period. Reverse-annuity mortgages (RAMs) have also been developed to help older families. Innovations in Mortgage Instruments

  20. It is interesting that, with all the new mortgage instruments developed in recent years, fixed-rate mortgages (FRMs) continue to hold a major share of the residential loan market. Innovations in Mortgage Instruments

  21. A key reference interest rate that many mortgage lenders use to determine the appropriate loan rate on new home loans is the 10-year U.S. Treasury bond rate. A comparison of recent 10-year T-bond yields to home mortgage contract rates indicates that mortgage rates move closely with T-bond rates and maintain a yield spread of about 1.6 to 2 percentage points between them. Pricing and Other Issues inHome Mortgage Lending

  22. Pricing and Other Issues inHome Mortgage Lending Comparison of Home Mortgage Interest Rates and the Annual Yields on Ten-Year U.S. Treasury Bonds

  23. Mortgage lock-ins protect borrowers from an increase in loan rates during the house-buying process, while loan modification agreements aid troubled borrowers in avoiding foreclosure. Mortgage Lock-Ins, Loan Modifications, and Foreclosures

  24. In recent years, as market interest rates fell and house values increase, many homeowners have chosen to refinance their home mortgages. The ability of a homeowner to obtain refinancing depends critically upon a strong credit history and a significant amount of accumulated equity built up in the home to be refinanced. Refinancing Home Mortgages

  25. Allegedly, some unscrupulous lenders attempt to mislead poorly informed, less well-educated borrowers into taking out high-cost loans, often with their home pledged as collateral. The current debate on such predatory loans centers mainly on how to distinguish predatory from legitimate lending practices and how to protect the most vulnerable consumers. Predatory Lending

  26. A Consumer’s Guide to Mortgage Lock-ins at http://www.pueblo.gsa.gov Federal Deposit Insurance Corporation at www.fdic.gov/consumers/consumer/news Federal Home Loan Mortgage Corporation at www.freddiemac.com Federal National Mortgage Association at www.fanniemae.com Markets on the Net

  27. Government National Mortgage Association at www.ginniemae.gov Interest Rate Calculator at www.interestratecalculator.com Mortgage Bankers Association of America at www.mbaa.org Markets on the Net

  28. Introduction to the Residential Mortgage Market Recent Trends in New Home Prices and the Terms of Mortgage Loans The Structure of the Mortgage Market Volume of Mortgage Loans Residential versus Nonresidential Mortgage Loans Mortgage Lending Institutions Chapter Review

  29. The Roles Played by Leading Financial Institutions in the Mortgage Market Savings and Loan Associations Commercial Banks Life Insurance Companies Savings Banks Mortgage Bankers Chapter Review

  30. Government Activity in the Mortgage Market The Impact of the Great Depression on Government Involvement in the Mortgage Market Launching the Federal Home Loan Bank System Setting Up the Federal Housing and Veterans Administrations (FHA and VA) The Creation of Fannie Mae (FNMA) The Creation of Ginnie Mae (GNMA) The Federal Home Loan Mortgage Corporation (FHLMC) Chapter Review

  31. Innovations in Mortgage Instruments Fixed-Rate Home Mortgages Variable-Rate and Adjustable Mortgage Instruments Convertible Mortgages Interest-Only Mortgages Reverse-Annuity Mortgages Chapter Review

  32. Pricing and Other Issues in Home Mortgage Lending Pricing Home Mortgages and the Treasury Security Market Mortgage Lock-Ins, Loan Modifications, and Foreclosures Refinancing Home Mortgages Predatory Lending Chapter Review

More Related