HOFIS 24 - Mortgages & the Mortgage Market Flashcards
Mortgage definition
Loan secured by the underlying real estate
Lien status
- Dictates the loan’s seniority in liquidation
- First-lien status: grant the lender first call on proceeds of liquidation of property
- Second-lien status: used for purposes such as home improvements or other large purchases
Balloon Mortgages
Require the borrower to repay all unamortized principal at a specified date (e.g., 5 or 7 years)
Adjustable-rate Mortgages (ARMs)
Have an interest rate that varies during the term
- Set based on underlying index plus spread a (margin)
- Rates usually reset annually
- Teaser (artificially low) rate in the first year
Interest-only (IO) ARM Mortgages
- Have lower monthly payments initially since no principal is included; at the end of the IO period, the loan is recast
- Recast a loan means the payments are recalculated so that the new payments (principal and interest) will pay off the loan over the remaining perdiod
Payment-Option and Negative-Amortization Mortgages
Allow for payments less than the monthly interest accrual
- Less common and illegal in some states
Role and Sources of Mortgage Credit Support
- Enhance mortgage loans liquidity
- Come from the goverment, GSEs, or private entities
Jumbo Loans
- Loans larger than the conforming limits
- Securitized by private-label transactions (private sector - not agencies or GSEs)
Morgage Loan Conforming vs Nonconforming Balances
- Conforming balances are loans within limits set by statue for GSEs
- Freddie Mac and Fannie Mae
- Ginnie Mae limits are lower and differentiated b/w high and low costs states
Alternative- A (Alt-A) Mortgages
Fall b/w prime and subprime mortgages
Direct vs. Third-Party Originations in the Mortgage Industry
- Direct lender - underwrite and provide loans direclty to borrowers
- Brokers - represents clients and works with various lenders
- Wholesale channels - lender operations that work with brokers
- Retail channels - ones that work directly with borrowers
Depository vs. Nondepository in the Mortgage Industry
- Depository institutions - (e.g., banks) can use deposits to fund loan activities
- Nondepository lender - (e.g., mortgage bankers) sell most of their loan production to investors
Originators vs. Servicers in the Mortgage Industry
- Originators - underwrite and fund loans
- Servicers - collect monthly payments, handle property taxes, and deal with delinquencies
Fully Amortized Mortgage Monthly Payment Formula
- B is the original loan balance;
- i is the monthly interest rate;
- n is the loan term in months
Committed vs Uncommitted Mortgage Loans
- Uncommitted loans - borrower has not yet locked in an interest rate
- Committed loans - borrower has locked in the interest rate