Lecture12 - Introduction Lecture 12: Mortgage Markets...

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1 1 Lecture 12: Mortgage Markets ECON435: Financial Markets and the Macroeconomy Anton Korinek Spring 2011 2 Introduction Mortgage: long-term loan secured by real estate and [traditionally] a downpayment paid off over time (amortization) fixed rate or variable rate typically residential (around 80%) 3 History of the Mortgage Market In 19 th century: National Banking Act restricted mortgage lending many states forbid mortgage lending banks should not tie up their capital mortgages mostly from wealthy individuals Late 19 th century: mortgage brokers sold bonds backed by mortgages in mid-West big boom big recession in 1890s (Bryan’s “cross of gold” speech) The Wonderful Wizard of Oz 4 http://en.wikipedia.org/wiki/Political_interpretations_of_The_Wonderful_Wizard_of_Oz 5 After WW I Banks were allowed to originate mortgages Again, large boom Popularity of “balloon loans” Big crash 1929 Great Depression 1930 - 1933 6 Calculating Mortgage Payments What is the monthly payment P on a mortgage in the amount of PV that runs for T months at a monthly interest rate of i m ? PV P 1 i m P 1 i m 2 P 1 i m 3 P 1 i m T P 1 i m 1 1 1 i m 1 1 i m 2 1 1 i m T 1 P 1 i m 1 1 1 im T 1 1 1 im P 1 i m 1 1 1 im T im 1 P i m 1 1 1 i m T
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2 7 Example: Mortgage Payments Mortgage parameters: $100k mortgage = PV 6% nominal rate = .5% monthly interest rate = i m 30 years = 360 months = T Monthly payment P : P PV im 1 1 1 im T 100,000 .005 1 1 1.005 360 8 Mortgage Interest Rates Determinants of Mortgage Interest Rates: 1. Long-term market rates benchmark: Treasuries spread determined by riskiness of borrower 2. Term: 30 years, 20 years, 15 years, … 3. Discount points (or “points”): points = interest payments made at closing of loan points reduce interest rate for rest of loan term important consideration: how long will you stay?
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Lecture12 - Introduction Lecture 12: Mortgage Markets...

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