Test 4 Study Guide Flashcards
What is the difference between the primary mortgage market and the secondary mortgage market?
Primary: Where lenders and borrowers meet to create mortgages
Secondary: Where lenders sell the loans that they have originated to other investors
What does it mean for a mortgage to be a prime mortgage?
Prime mortgages are loans to borrowers with good credit records and who are able to document their income and assets
What does it mean for a mortgage to be a conventional mortgage?
Conventional mortgages are loans that do not have mortgage insurance or a loan guarantee from a U.S. governmental agency
What does it mean for a mortgage to be a conforming mortgage?
A conforming loan is one that meets the
standards that are required for Fannie Mae or Freddie Mac to purchase the loan
What is the purpose of private mortgage insurance?
PMI is the substitute that lenders use to protect themselves from default losses
When is a lender likely to require that a borrower take out a private mortgage insurance policy?
What does the borrower acquire the right to terminate their private mortgage insurance policy?
Borrower has the right to terminate when
the loan balance falls below 80% of the
original home value.
When is an insurer required to terminate a private mortgage insurance policy?
Insurer must terminate the policy when the loan balance falls below 78% of the original home value.
What role does the Federal Housing Administration play in the U.S. housing finance system?
Provides default insurance to lenders who are willing to make loans consistent with the guidelines of their various programs.
What does it mean for a loan to be a “VA” loan?
- Loans are made by private lenders
- Comes with a guarantee against default
losses:
What does it mean for a loan to be each of the following types of loans:
a. Hybrid adjustable-rate mortgage
b. Option adjustable-rate mortgage
c. Subprime loan
d. Alt-A loan
a. Hybrid ARM- Adjustable-rate mortgage that locks in the initial rate for 2,3,5,7, or 10 years; converts to a traditional ARM thereafter
b. Option ARM- Borrower can choose one of three payments:
1. Fully amortizing
2. Interest-only
3. Minimum monthly payment determined by an excessively low
interest rate (i.e. 1.5%)
c. Subprime loans- Almost all adjustable-rate mortgages
Common types include:
- 2-28 hybrids
- Interest-only
- Option ARMs
d. Alt-A Loans- Conventional loans with less stringent underwriting requirements:
- Higher LTV
- Lower credit scores
- Reduced documentation of income or assets
What does it mean for a depository lender to be a financial intermediary?
They are financial intermediaries:
- Pool small amounts of savings
- Channel them to large-scale uses (e.g.; mortgage loans)
What does it mean for a deposit lender to be a portfolio lender?
They are portfolio lenders
- Create loans
- Retain loans in portfolio of investments
What types of duties does a loan servicer perform?
At what point in the mortgage pipeline is a mortgage company susceptible to fallout risk? When are they susceptible to price risk? How much interest rates change in each case for the lender to experience each type of risk?
What role do each of the following institutions play in the U.S. housing finance system:
a. Fannie Mae
b. Ginnie Mae
c. Freddie Mac
a. Fannie Mae (1968): Spun off from HUD to become a primary purchaser of FHA and VA mortgage loans
b. Ginnie Mae (1968): Empowered to guarantee “pass-through” mortgage-backed securities based on FHA and VA loans
c. Freddie Mac (1970): Formed to purchase and securitize conventional home loans from thrifts
Approximately what percentage of residential loans in the U.S. are securitized?
Nearly two-thirds of all new home loans
have been securitized in recent years
What are the primary differences between Fannie Mae and Freddie Mac?
Differences:
- Fannie Mae was much bigger than
Freddie Mac
- Fannie Mae was the sole purchaser
of FHA and VA loans.
- Freddie securitized everything while
Fannie held a mortgage portfolio
What is the difference between a levered investment and an unlevered investment?
Unlevered = No Debt = We pay cash for the property
Levered= Borrowing Loans
How is the initial equity investment calculated for an investment?
Initial equity investment (IEI):
- How much of our money will we need to commit to the investment?
- Now, we are covering 70% of the purchase price with the loan.
- So our initial equity investment will be 30% of the purchase price
or $900,000
Once you have the net operating income for a property, how do you calculate the before-tax cash flow?
BTCF = Net Operating Income – Annual Debt Service
Once you know the net sale proceeds for a property, how do you calculate the before-tax equity reversion?
BTER = Net Sale Proceeds – Amount Outstanding
Once you have all of the cash flows associated with an investment (the initial equity investment, the before-tax
cash flows, and the before-tax equity reversion), how do you calculate the internal rate of return or net present
value of the investment.
How do you calculate the monthly payment for a loan?
Using the financial calculator:
- Clear TVM
- Set P/Y at 1
- 200,000 (PV)
- 6 divided by 12 (I/Y)
- 360 (N)
- CPT PMT
- The monthly payment on this loan will be
$1,199.10
How do you calculate the amount outstanding for a loan?
1st method: PV of all remaining payments:
- Clear TVM
- (1199.10) (PMT)
- 6 divided by 12 (I/Y)
- 180 (N)
- CPT PV
- You still owe $142,098 at the end of the 15th year
2nd method: Using the calculator’s
Amortization function:
- Compute monthly payment again
- 2nd AMORT
- P1 =1
- P2 = 180
- BAL = 142,098
How do you calculate how much of a particular payment is principal and how much is interest?
Using the amortization function:
- Calculate monthly payment (again!)
- 2nd AMORT
- P1 = 180
- P2 = 180
- PRN = $486
How do you calculate how much interest and/or principal a borrower pays in a particular year of a loan?
How does the effective borrowing cost calculation differ from the lender’s yield calculation?
Borrowing Cost: The effective borrowing cost of a loan is a measure that is used
to determine the true cost of a loan once all of the payments associated with the loan are taken into consideration
Lender’s Yield: a measure of the investment return to the lender on the loan
What were the three reasons that were given in class for why lenders may benefit from getting a borrower to
pay points?
- To increase the lender’s effective yield by shifting more of the loan’s repayment to the beginning of the life of the loan.
- To generate more current income from the loan
- Reduces borrower’s incentive to refinance because interest rates decrease as the number of discount points increases
How do you calculate a borrower’s effective borrowing cost if you assume that they will make all of the
scheduled payments for the loan?
Two ways to calculate the payoff amount in month 36:
- Option #1: Balance after 35th payment + monthly interest charge
- Loan #1:
* Balance after 35th payment: $188,877.06 (AMORT)
- Monthly interest charge: (3.75%/12) × $188,877.06 = $590.24
- Payoff amount: $189,467.30
- Option #2: Balance after 36th payment + Monthly Payment
o Balance after 36th payment:
o AMORT (P1 =1 , P2 = 36)
o BAL = $188,541.07
o Monthly Payment ($926.23)
o Terminal cash flow = $189,467.30
o This option is quicker and easier
How do you calculate the payoff amount for a borrower who pays a loan off in a particular month?
How do you calculate a borrower’s effective borrowing cost if you assume that they pay the loan off early?
How do you calculate the initial payment for an adjustable-rate mortgage?
How do you calculate the new payment for an adjustable-rate mortgage when the interest rate changes on the
loan?
