Week 5: Mortgage Market Flashcards
What are mortgages?
Long-term loans secured by real estate
What 3 characteristics define mortgages?
- Mortgage interest rates
- Loan terms
- Mortgage amortization
What are mortgage interest rates determined by?
- Market rates
- Term
- Discount points - upfront cash
What are mortgage interest rates determined by?
- Market rates
- Term
- Discount points - upfront cash
What are mortgage-based securities (MBS)?
What is an advantage?
Part of the secondary mortgage markets.
An MBS is a pool of several mortgages for which the rights to the cash flows are sold as separate securities
Advantage: diversification
What are subprime loans?
Collateralized loans to borrowers who have poor credit rating, or other issues.
What are CDOs?
Collateralized Debt Obligations
Bundles of MBS
What caused the Real Estate Bubble?
2000-2005
- Increase in subprime loans created new demand for housing.
- Real estate speculators
Result: Significant increase in house prices every year
What is a lien?
It protects the lender’s right to sell property if the underlying loan defaults.
How do mortgage markets differ from stock and bond markets?
- The usual borrowers in capital markets are governments and businesses, while in mortgage market they are individuals
- Most mortgages are secured by real estate, while capital market borrowing is unsecured
- Developing a secondary market for mortgages is more difficult due to different amounts and maturities amongst mortgages.
How do mortgage markets differ from stock and bond markets?
- The usual borrowers in capital markets are governments and businesses, while in mortgage market they are individuals
- Most mortgages are secured by real estate, while capital market borrowing is unsecured
- Developing a secondary market for mortgages is more difficult due to different amounts and maturities amongst mortgages.
