Chapter 10: Residential Mortgage Loans●Mortgage is the pledge of property to secure payment for a debt○Lender can foreclose (seize property) of debtor for repayment●Mortgage originator: original lender of a mortgage○Can be thrifts, commercial banks, mortgage bankers■They may service the loans they originate for a servicing fee●Typically 25 - 100 bps a year●Mortgage originators can:○Hold loan in portfolio○Sell mortgage to an investor - either will be put in portfolio or pooled with other mortgages to be used as collateral for issuance of security○Use them mortgage themselves as collateral for issuance of a security●Conduits: entities that pool mortgages and sell to investors●A mortgage used as collateral for issuance of a security is said to be securitized●Underwriting standards: requirements for originator to grant the loan○Payment to income ratio■Monthly income to monthly payment - lower is better○Loan to value ratio■Amount of the loan to the appraised value of the property, lower means greater protection for the lender■Single 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 status○Indicates loans seniority in the event of forced liquidation○First lien means this lender would have first call on proceeds from sale●Credit Classification○Prime■Safely meets underwriting standards - high credit quality○Subprime■Lower credit quality or is not first lien ○Alternative-A loan■Considered prime loans, but have something that adversely affects creditworthiness or are hard to classify due to limited income or asset documentation○Look to FICO scores and LTV●Cash-out refinancing: when the refinancing loan amount exceeds original loan amount●Rate-and-term refinancing: loan balance remains the same, only doing it to capitalize on better rates or change in term●Front ratio: monthly payments / pre-tax monthly income - prime is 28% or less●Back ratio: monthly payments / pre-tax monthly income - other debts - prime is 36% or less●Fixed rate mortgage: rate remains unchanged over the life of the loan●Adjustable rate mortgage: index rate + margin○Have periodic rate caps and lifetime rate cap and floor
●Monthly mortgage payment: Original Balance*(1+i¿n¿1+i¿n−1¿i¿¿)○Where i = annual rate / 12 and n = number of months of the mortgage loan●Remaining mortgage balance at the end of month: Original balance*(1+i¿t¿1+i¿n−1¿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¿t−1¿1+i¿n−1¿i¿¿)●See page 215 for example of amortization schedule and excel homework file●In the case of an ARM, the monthly payment makes periodic adjustments at a certain
