Lecture_400X_MortgageFundI

Lecture_400X_MortgageFundI - Mortgage Fundamentals I: Fixed...

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Mortgage Fundamentals I: Fixed rate mortgages
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Fixed Rate Mortgage Loans: Terminology and Structuring Key components: 1) Amount contracted upon 2) Duration 3) Payment structuring 4) Interest rates Nominal vs. real Nominal vs. effective
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Interest rates Definition: What borrowers are willing to pay and lenders are willing to accept as compensation for the use of a specific amount of funds over a specific period of time.
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Interest Rates Determinants: 1) Demand for funds Demand for housing Demand for other structures 2) Supply of funds Cost of attracting funds from savers Servicing and origination fees Losses from defaults and foreclosures / creditworthiness of borrower Interest rate risk Desirability of lending relative to return on other investments
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Loan pricing and Lender Risks 2) Interest rate risk Unanticipated inflation Uncertainty re: demand and supply of funds 3) Prepayment risk 4) Liquidity risk 5) Legislative risk
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Setting the interest rate i = r + p + f It’s a function of : r -- the real interest rate p -- the risk premium f -- expected inflation
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1) Constant Payment Mortgage – very popular for single-family residences, apartments, and shopping centers. Payments constant over time; principal increasing, interest decreasing in nonlinear fashion Desirable for both borrower and lender
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Some advantages of the CPM Low payments possible with long amortization more can qualify Constant flat payments easy to budget and administer (w/fixed i). Large initial interest portion in pmts improves PV of interest tax shields
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Lecture_400X_MortgageFundI - Mortgage Fundamentals I: Fixed...

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