econ423lec17 - The Plan for Today...

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7/14/2009 1 MORTGAGE MARKETS, PART II FOREIGN EXCHANGE MARKETS JULY 14 TH , 2009 Lauren Heller Econ 423, Financial Markets The Plan for Today b Announcements/Housekeeping b Mortgage Markets, Part II b Mortgage Lenders and Secondary Markets b Mortgage backed Securities and Subprime Loans b Foreign Exchange Markets b Homework #6 Distribution Announcements b Homework Quiz #5 Grades – Nice Job! b Internship Opportunities b Econ 423 Portfolio Update b As of this morning, our portfolio has gained 2.81% overall ($280.81 on a $10,000 investment) b Biggest gainer: Bank of America (+12.27%) b Upcoming Events b Homework Quiz #6 – This Thursday Recall from last time… b A Mortgage is… b A long-term loan secured by real estate b An amortized loan whereby a fixed payment pays both principal and interest each month. b As of 2006, the U.S. had over 13 trillion dollars of mortgage debt outstanding. Mortgage Lending Institutions b Who are the primary holders of mortgages today? Mortgage Loan Servicing b Most mortgages are immediately sold to another investor by the originator. b Frees cash to originate another loan and generate additional fee income. b Origination Fees – Typically 1% b Loan Servicing b Collecting monthly payments and keeping records. b Servicers usually keep a portion of the payments received to cover their costs.
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7/14/2009 2 Mortgage Loan Servicing Mortgage lender originates loan Investor holds the loan Servicing agent handles the paperwork Originator packages the loan for an investor Secondary Mortgage Markets b Originally established by the federal government after WWII. b Created Fannie Mae to buy mortgages from thrifts. b The market experienced tremendous growth in the early to mid-1980’s b Has continued to remain a strong market in the U.S. until recently Mortgage Securitization b Developed because of problems dealing with single mortgages b Risk of either default or prepayment b Servicing costs b Pools of mortgages eliminated part of this problem through diversification. b As a result, the mortgage-backed security (MBS) was created. b Pools including hundreds of mortgages gathered b The rights to the cash flows generated by the mortgages were sold as separate securities.
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econ423lec17 - The Plan for Today...

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