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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 box2 Announcements/Housekeeping box2 Mortgage Markets, Part II box5 Mortgage Lenders and Secondary Markets box5 Mortgage backed Securities and Subprime Loans box2 Foreign Exchange Markets box2 Homework #6 Distribution Announcements box2 Homework Quiz #5 Grades –Nice Job! box2 Internship Opportunities box2 Econ 423 Portfolio Update box5 As of this morning, our portfolio has gained 2.81% overall ($280.81 on a $10,000 investment) box5 Biggest gainer: Bank of America (+12.27%) box2 Upcoming Events box5 Homework Quiz #6 –This Thursday 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. Mortgage Lending Institutions box2 Who are the primary holders of mortgages today? Mortgage Loan Servicing box2 Most mortgages are immediately sold to another investor by the originator. box5 Frees cash to originate another loan and generate additional fee income. box5 Origination Fees –Typically 1% box2 Loan Servicing box5 Collecting monthly payments and keeping records. box5 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 box2 Originally established by the federal government after WWII. box5 Created Fannie Mae to buy mortgages from thrifts. box2 The market experienced tremendous growth in the early to mid-1980’s box5 Has continued to remain a strong market in the U.S. until recently Mortgage Securitization box2 Developed because of problems dealing with single mortgages box5 Risk of either default or prepayment box5 Servicing costs box2 Pools of mortgages eliminated part of this problem through diversification. box2 As a result, the mortgage-backed security (MBS) was created.
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