Ch 11 Sources of Funds for Residential Mortgages (SP16V2)

Ch 11 Sources of Funds for Residential Mortgages (SP16V2) -...

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Chapter 11 Sources of Funds for Residential Mortgages
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11-2 Introduction… Ch. 9 we were introduced to “ mortgage loans Ch. 10 we looked at types of mortgages and borrower decisions Now in Ch. 11 we’ll look at where the money we borrow comes from…the sources of funds for mortgage loans You’ll see that the source of funds for mortgage loans has changed dramatically having both +/- impacts 2000-2006 saw unprecedented loan availability on favorable terms that led to the highest rate of ownership and demand that drove prices to unsustainable heights (“ housing bubble ”) The modern sources of funds for mortgage loans involves two markets : Primary market Secondary market
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11-3 Modern primary mortgage market… Where mortgage loans are originated (made) Lenders making loans to borrowers Players… Borrowers Lenders Mortgage banks Commercial banks Mortgage brokers (“ mortgage loan originators ”) Connecting lenders and borrowers
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11-4 Modern secondary mortgage market… Where lenders sell mortgage loans to investors Dependent upon loan “ securitization Pooling loans and selling off the cash flows from the pool as “ mortgage backed securities ” (“ MBS ”) Players… Government-sponsored enterprises (“ GSE ) Federal National Mortgage Assoc’n (“ Fannie Mae ”) Federal Home Loan Mortgage Corp’n (“ Freddie Mac ”) Private securitizers as well
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11-5 Traditional vs. modern funding… Traditional Modern
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11-6 A revolution in home mortgage loans…
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11-7 Depository lenders… Called financial intermediaries Between depositors and borrowers Pool small deposits to make larger loans Also called portfolio lenders Make (originate) Fund (from deposits) Hold & service loans in portfolio of investments Types Commercial banks Savings & loan associations (“ Thrifts ”)
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11-8 Savings & loan associations (“ thrifts ”)… Main player/provider of traditional residential mortgage loans Dominated post-WWII and into 1980s Extremely localized (local deposits; local loans) Fatal flaw: “ asset-liability maturity mismatch ” (funded long-term fixed-rate loans with short-term deposits ) Stock market crash and resulting “ bank run ” of 1929: Deposit insurance provided by the Federal Deposit Insurance Corporation ( FDIC ) $250,000 per depositor per bank ($2,500 in 1930s) It's a Wonderful Life: Run on the Bank S&Ls eventually lost deposits anyway
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11-9 Savings and loan crash of 1980s… Record home loans in 1960s/70s – all fixed rate Interest rates soared in war on inflation in late 70’s/early 80’s Asset-liability maturity mismatch takes major toll on S&Ls Advent of money market/mutual funds compounds problem Gov’t deposit insurance going to incur unprecedented losses 1980s “ deregulation
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  • Spring '08
  • PENG,LIANG
  • Mortgage loan, FHA, mortgage loans

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