Mortgage Market Slides Flashcards
_______ are loans to individuals or businesses to purchase homes, land, or other real property
Mortgages
Many mortgages are pooled and sold and then the mortgage payments are used to collateralize ______________
Mortgage-backed securities
What are the four basic types of mortgages are issued by financial institutions?
Home, multifamily dwellings, commercial, and farm mortgages
What are lenders place liens against properties that remain in place until loans are fully paid off?
Collateral
A ________ is a portion of the purchase price of the property a financial institution requires the borrower to pay up front
Down payment
__________ is generally required when the loan-to-value ratio is more than 80%
Private mortgage insurance (PMI)
________ is guaranteed by either the Federal Housing Administration (FHA) or the Veterans Administration (VA)
Repayment
__________ mortgages are mortgages that are not federally insured
Conventional
__________ mortgages have fixed principal and interest payments that fully pay off the mortgage by its maturity date
Amortized
Fully amortized mortgage maturities are usually ________
Either 15 or 30 years
___________ mortgages require fixed monthly interest payments for 3 to 5 years whereupon full payment of the mortgage principal is due
Balloon payment
__________ mortgages lock in the borrower’s interest rate
Fixed-rate
______________ tie the borrower’s interest rate to some market interest rate or interest rate index
Adjustable-rate mortgages (ARMs)
Borrowers assume __________ risk with an ARM
interest rate
ARMs can increase ______ risk
default
_________ are fees or payments made when a mortgage loan is issued
Discount points
Mortgages are most often __________ when an existing mortgage has a higher interest rate than current rates
Refinanced
An ______________ shows how the fixed monthly payments are split between principal and interest
Amortization schedule
________ mortgages are mortgages for loan amounts that exceed the maximum ‘conforming’ limits allowed by the mortgage agencies Fannie Mae and Freddie Mac
Jumbo
________ mortgages are mortgages where the borrowers do not qualify for a ‘prime’ credit rating because of a low credit score arising from prior credit problems such as delinquencies and defaults. Or they may simply lack sufficient credit history or have insufficient income.
Subprime
____________ are mortgages that are riskier than prime but not as risky as subprime
Alternative A-papers
Interest rates on _________ are usually between prime and subprime rates
Alt-A loans
Give homebuyers an initial choice of payment options
Option ARMs (‘Pick-n-Pay’ mortgages)
__________ are subordinated claims to senior mortgages
Second mortgages
- Retirees or homeowners with a substantial amount of equity in their home can sell the equity back to a bank over time
- Various payment options are available
- Costs and servicing fees are high
Reverse-annuity mortgages (RAMs)
What two mechanisms are used by FIs to remove mortgages from their balance sheets?
By pooling recently originated mortgages together and selling them in the secondary market
By securitizing mortgages
What are two advantages of securitization?
- FIs can reduce the liquidity risk, interest rate risk, and credit risk of their loan portfolios
- FIs generate income from origination and service fees
What are some examples of mortgage sellers?
Money center banks, smaller banks, foreign banks, investment banks
_________ allow FIs to manage credit risk, achieve better asset diversification, and improve their liquidity and interest rate risk positions
Mortgage sales
What are some examples of mortgage buyers?
Foreign and domestic banks, insurance companies, pension funds, closed-end bank loan mutual funds, and nonfinancial corporations
The U.S. government established the _____________________ in the 1930s to buy FHA and VA mortgages from thrifts so they could make more mortgage loans
Federal National Mortgage Association (FNMA or Fannie Mae)
_____________________ was formed in 1968 to facilitate financing of conventional mortgages
The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac)
_________ promised principal and interest payments to investors
Pass-through securities “pass through”
What three agencies are directly involved in the creation of pass-through securities?
Ginnie Mae, Fannie Mae, Freddie Mac
_______________ create pass-throughs from nonconforming mortgages
Private mortgage pass-through issuers
The U.S. government established the _________________ in 1938 to buy mortgages from thrifts so they could make more mortgage loans
Federal National Mortgage Association (FNMA or Fannie Mae)
What is the main function of Fannie Mae?
issues MBS and guarantees full and timely principle and interest payments
___________ buys and holds mortgages on its balance sheet and issues bonds directly to finance purchases
FNMA
Creates MBS by purchasing packages of mortgages from originators and/or banks and thrifts. It also swaps MBS with a bank or thrift for mortgages
FNMA
____________ is similar to Fannie Mae
- Stockholder owned (though currently in conservatorship of the Federal Housing Finance Agency(FHFA)).
- Has line of credit with Treasury
- Bonds rated AAA
- Buys mortgages, issues MBS
Federal home Loan Mortgage Corporation (FHLMC or Freddie Mac)
__________ primarily deals with thrifts
Federal home Loan Mortgage Corporation (FHLMC or Freddie Mac)
The ________________ was started in 1968 when it split off from Fannie Mae
Government National Mortgage Association (GNMA or Ginnie Mae)
What are the two major functions of Ginnie Mae?
Sponsor MBS securities programs by Financial Institutions and Guarantees timing of investments
What is the main function of Ginnie Mae?
Timing insurance
What does Ginnie Mae not insure?
The default risk
Only supports pools of mortgage loans that are insured against default FHA or VA
Ginnie Mae
_____________ are multiclass pass-throughs with multiple bond holder classes or tranches
Collateralized mortgage obligations (CMOs)
___________ allow FIs to raise long-term low-cost funds without removing mortgages from their balance sheets
Mortgage-backed bonds (MBBs)
______ is the world’s second largest and most developed securitization market
Europe is the world’s second largest and most developed securitization market
