Fixed Income Exam Outline.docx - Chapter 10 Residential Mortgage Loans Mortgage is the pledge of property to secure payment for a debt Lender can

Fixed Income Exam Outline.docx - Chapter 10 Residential...

This preview shows page 1 - 3 out of 28 pages.

Chapter 10: Residential Mortgage LoansMortgage is the pledge of property to secure payment for a debtLender can foreclose (seize property) of debtor for repaymentMortgage originator: original lender of a mortgageCan be thrifts, commercial banks, mortgage bankersThey may service the loans they originate for a servicing feeTypically 25 - 100 bps a yearMortgage originators can:Hold loan in portfolioSell mortgage to an investor - either will be put in portfolio or pooled with other mortgages to be used as collateral for issuance of securityUse them mortgage themselves as collateral for issuance of a securityConduits: entities that pool mortgages and sell to investorsA mortgage used as collateral for issuance of a security is said to be securitizedUnderwriting standards: requirements for originator to grant the loanPayment to income ratioMonthly income to monthly payment - lower is betterLoan to value ratioAmount of the loan to the appraised value of the property, lower means greater protection for the lenderSingle most important determinant for likelihood of default (homeowners with large amounts of equity in their homes will likely not default so they can later sell or refinance it to unlock the equity)Lien statusIndicates loans seniority in the event of forced liquidationFirst lien means this lender would have first call on proceeds from saleCredit ClassificationPrimeSafely meets underwriting standards - high credit qualitySubprimeLower credit quality or is not first lien Alternative-A loanConsidered prime loans, but have something that adversely affects creditworthiness or are hard to classify due to limited income or asset documentationLook to FICO scores and LTVCash-out refinancing: when the refinancing loan amount exceeds original loan amountRate-and-term refinancing: loan balance remains the same, only doing it to capitalize on better rates or change in termFront ratio: monthly payments / pre-tax monthly income - prime is 28% or lessBack ratio: monthly payments / pre-tax monthly income - other debts - prime is 36% or lessFixed rate mortgage: rate remains unchanged over the life of the loanAdjustable rate mortgage: index rate + marginHave periodic rate caps and lifetime rate cap and floor
Background image
Monthly mortgage payment: Original Balance*(1+i¿n¿1+i¿n1¿i¿¿)Where i = annual rate / 12 and n = number of months of the mortgage loanRemaining mortgage balance at the end of month: Original balance*(1+i¿t¿1+i¿n1¿1+i¿n¿¿¿)Where t = the month number in the mortgage (1st month, 2nd, 3rd,...360th)Principal portion of a monthly payment: Original Balance*(1+i¿t1¿1+i¿n1¿i¿¿)See page 215 for example of amortization schedule and excel homework fileIn the case of an ARM, the monthly payment makes periodic adjustments at a certain
Background image
Image of page 3

You've reached the end of your free preview.

Want to read all 28 pages?

  • Spring '14
  • JohnD.Finnerty
  • Debt, Collateralized debt obligation, Mortgage-backed security

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture