Chapter 7 Flashcards
- Loan to an individuals or business to purchase real property
- secured, or collateralized, loans
- assets purchased are collateral against the loan
- mortgage holder, or lender, has a ‘lien’ on the assets
mortgage
Securities packaged and sold as assets backing a publicly traded or privately held debt instrument
securitized
4 types of mortgages
- home
- multifamily
- commercial
- farm
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.
lien
used to purchase one-to-four family dwellings
- largest loan category
- “residential”
home mortgages (also called single-family mortgage)
used to finance the purchase of apartment complexes, townhomes, and condominiums
multifamily dwelling
are used to finance the purchase of real estate for business purposes (office buildings, shopping malls)
commercial mortgages
used to finance the purchase of farmland, buildings, etc.
farm mortgages
lenders have liens against properties until the loan is fully paid off
collateral
A portion of the purchase price of the property a financial institution requires the mortgage borrower to pay up front
- 5-10% (book says 20%) is required
down payment
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
private mortgage insurance (PMI)
required for all single-family mortgages with loan-to-value ratios greater than 80%
private mortgage insurance (PMI)
Mortgages issued by financial institutions that are not federally insured.
conventional mortgages
Mortgages originated by financial institutions, with repayment guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA).
federally insured mortgages
- limits to amount borrowed, by region
- down payments may be as little as 3.5%
federally insured
- agreement between bank and borrower
- still standardized
- may be privately insured
conventional
- potential saving in total interest paid
- monthly mortgage payments are higher
- lower degree of interest rate risk
- generally charge a lower interest rate
15-year mortgage
A mortgage is ___ when the fixed principal and interest payments fully pay off the mortgage by its maturity date.
amortized
- monthly payments
- mortgage principle paid off generally over time
- each payment pays accrued interest plus some principle
- time value of money (FV = 0)
amortization
A mortgage that 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.
fixed-rate mortgage
A mortgage in which the interest rate is tied to some market interest rate. Thus, the required monthly payments can change over the life of the mortgage.
adjustable-rate mortgage (ARM)
- borrower pays fee up front (% of principle value)
- lender lowers interest rate on loan
discount points
(One discount point paid up front is equal to 1 percent of the principal value of the mortgage)
covers the issuer’s initial costs of processing the mortgage application and obtaining a credit report
application fee
confirms the borrower’s legal ownership of the mortgaged property and ensures there are no outstanding claims against the property
title search
protects the lender against an error in the title search
title insurance
covers the cost of an independent appraisal of the value of the mortgaged property
appraisal fee
covers the remaining costs of the mortgage issuer for processing the mortgage application and completing the loan
loan origination fee
covers the costs of the closing agent who actually closes the mortgage
closing agent and review fees
occurs when a mortgage borrower takes out a new mortgage uses the proceeds obtained to pay off the current mortgage
mortgage refinancing
(most often refinanced when a current mortgage has an interest rate that is higher than the current interest rate)
- loan which doesnt conform to standards set by agencies
- ex: Fannie Mae / Freddie Mac
- exceed the conventional mortgage conforming limits.
jumbo mortgage
mortgage to a borrower with a ‘low’ credit rating, limited credit history or low assets/income relative to loan size
subprime mortgaes
- mortgage borrower receives regular monthly payments from a financial institution rather than making them
- at maturity (or borrower dies), the borrower sells the property to retire the debt
reverse-annuity mortgage (RAM)
Mortgages that are considered riskier than a prime mortgage and less risky than a subprime mortgage.
Alt-A mortgages
Adjustable rate mortgages that offer the borrower several monthly payment options.
option ARMs
Loans secured by a piece of real estate already used to secure a first mortgage
- still secured by property
second mortgages / home equity loans
option where the borrower pays both principal and interest on the loan by making payments each month
30-year fully amortizing option ARM
option where borrower pays a full principal and interest payment, but with a larger amount of principal paid each month
- this amt includes all of the interest charged on the loan for the previous month plus principal to pay off the loan
- accelerates amortization schedule
15 year fully amortizing payment option ARM
The ability of a loan buyer to sell the loan back to the originator should it go bad.
recourse
majority of secondary sales are for securitization, this creates ________
mortgage-backed securities
why sell a mortgage? (2 reasons)
- diversification and interest rate risk
- immediate profit
why buy a mortgage? (5 things)
- low risk
- large banks (foreign and domestic)
- insurance companies
- pension funds
- closed end funds
Mortgage-backed securities that __ __ promised payments of principal and interest on pools of mortgages created by financial institutions to secondary market participants holding interests in the pools.
pass-through mortgage securities
A mortgage-backed bond issued in multiple classes or tranches.
collateralized mortgage obligation (CMO)
A bond holder class associated with a CMO.
tranches
