econ423lec16 - The Plan for Today Homework Quiz#5 Mortgage...

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7/13/2009 1 MORTGAGE MARKETS JULY 13 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today box2 Homework Quiz #5 box2 Mortgage Markets box5 Interest Rates and Discount Points box5 Loan Terms box5 Amortization box2 Types of Mortgages Recall from last time… box2 A Mortgage is… box5 A long-term loan secured by real estate box5 An amortized loan whereby a fixed payment pays both principal and interest each month. box2 As of 2006, the U.S. had over 13 trillion dollars of mortgage debt outstanding. History of Mortgages box2 Until post-WWII, most mortgage loans were short-term balloon loans. box5 Maturities of five years or less. box5 Typically, the lender renews the loan. box2 Problems during the depression box5 Lenders could not continue to extend credit. box5 As a part of the depression recovery program, the federal government assisted in creating the standard 30-year mortgage we know today. Residential Mortgage Characteristics box2 Mortgages can be roughly classified along the following three dimensions: 1. Mortgage Interest Rates 2. Loan Terms 3. Mortgage Loan Amortization Mortgage Interest Rates box2 The stated rate on a mortgage loan is generally determined by three factors: box5 Market Rates -General rates on Treasury bonds box5 Term -Longer-term mortgages have higher rates box5 Discount Points -Lower rates negotiated for cash up front box2 Mortgage rates are typically higher than Treasury rates – Why?
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