chapter 9 note - Omar M. Al Nasser, Ph.D., MBA. Visiting...

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Omar M. Al Nasser, Ph.D., MBA. Visiting Assistant Professor of Finance School of Business Administration University of Houston-Victoria Email: alnassero@uhv.edu Chapter 9 Mortgage Markets Outline Background on Mortgages Types of Property Financed with Mortgages Residential Mortgage Characteristics Insured versus Conventional Mortgages Types of Residential Mortgages Institutional Use of Mortgage Markets Financial Institutions That Originate Mortgages Participation in the Secondary Market The Freddie Mac Accounting Scandal The Fannie Mae Accounting Scandal Unbundling of Mortgage Activities Valuation of Mortgages Factors That Affect the Risk-Free Interest Rate Factors That Affect the Risk Premium Summary of Factors Affecting Mortgage Prices Indicators of Changes in Mortgage Prices Risk from Investing in Mortgages Interest Rate Risk Prepayment Risk Credit Risk Measuring Risk Mortgage-Backed Securities Mortgage Pass-Through Securities Types of Mortgage Pass-Through Securities Mortgage-Backed Securities for Small Investors
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Globalization of Mortgage Markets POINT/COUNTER-POINT: Is the Trading of Mortgages Similar to the Trading of Corporate Bonds? POINT: Yes. In both cases, the issuer’s ability to repay the debt is based on income. Both types of debt securities are highly influenced by interest rate movements. COUNTER-POINT: No. The assessment of corporate bonds requires an analysis of financial statements representing the firms that issued the bonds. The assessment of mortgages requires an understanding of the structure of the mortgage market (CMOs, etc.). WHO IS CORRECT? Use InfoTrac or some other source search engine to learn more about this issue. Offer your own opinion on this issue. ANSWER: The question is primarily intended to make students compare mortgages to bonds. There are some similarities, but an institutional investor who manages a corporate bond portfolio would not be able manage a mortgage portfolio without adequate training, and vice versa. Questions 1. FHA Mortgages. Distinguish between FHA and conventional mortgages. ANSWER: FHA mortgages guarantee loan repayment, thereby covering against the possibility of default by the borrower. The guarantor is the Federal Housing Administration. Conventional mortgages are not federally insured, but they can be privately insured. 2. Mortgage Rates and Risk. What is the general relationship between mortgage rates and long-term government security rates? Explain how mortgage lenders can be affected by interest rate movements. Also explain how they can insulate against interest rate movements. ANSWER: There is a high positive correlation between mortgage rates and long-term government security rates. Mortgage lenders that provide fixed-rate mortgages could be adversely affected by rising interest
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chapter 9 note - Omar M. Al Nasser, Ph.D., MBA. Visiting...

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