Lecture 5: Types of residential mortgage loans, Amortization

Question 1

What is Lien Status

Answer 1

Lien status indicates the loans seniority in the event of forced liquidation of the property by the obligor.

• First lien/senior lien has priority of the proceeds of liquidation
• second lien gets proceeds after first lien is paid in full.

Question 2

types of credit classification and what theyre based off

Answer 2

Prime loan : borrower viewed to have high credit quality
Subprime Loan : borrower viewed to have low credit quality (600 or lower)
based off of FICO scores: ranging from 350 - 800, higher the score lower the credit risk

Question 3

Credit quality indicators

Answer 3

Loan to value has been a good predictor of default, higher the loan to value ratio, the greater the likelihood of default
Payment to income also a good predictor:
Front ratio is computed by dividing total monthly payments by applicants pre tax income
back ratio is similar but it adds other debt payments such as credit card payments.

Question 4

Types of interest rates

Answer 4

Fixed Rate mortgage
- interest rate is set at closing of the loan and remains unchanged for the life of the loan.

Adjustable rate mortgage
- rate based on the movement of underlying rate: index/reference rate
2 categories of ARM’s
- market determined rates
- calculated based on cost of funds for thrifts.

• basic ARM resets periodically and has no other terms that affect monthly payments

Question 5

terms that affect mortgage rate

Answer 5

1. periodic rate caps
   - limits amount that interest rates can increase or decrease at set date
2. lifetime cap and floor
   - lifetime cap expressed in terms of initial rate
   - can have a floor of what can be charged over the life of the loan.

Question 6

Amortization of loan

Answer 6

Usually fully amortizing loans

Question 7

credit guarantees

Answer 7

referred to as govt loans is guaranteed by fed govt

loans that have no backing are referred to as conventional loans

Question 8

Loan balance limits

Answer 8

govt loans backed by freddie mac or fannie mae generally have limits on the balance of the loan. these are conforming

anything outside the limits referred to as jumbo loans

Question 9

Prepayments and penalties

Answer 9

homeowners often repay part or all of their mortgage before maturity. this represents a loss in FCF for banks, because of this banks often impose penalties on prepayments.

Question 10

Amortization

Answer 10

can calculate monthly payments, remaining balance and scheduled principal payment using formulas given… ??? lol