CHAPTER 17 Martellini Lecture

CHAPTER 17 Martellini Lecture - CHAPTER 17 MARTELLINI...

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CHAPTER 17 MARTELLINI MORTGAGE BACKED SECURITIES Mortgage backed securities (MBSs): Securities backed by the cash flows of a mortgage or a pool of mortgages Three types of MBSs: 1. Mortgage pass through securities 2. collateralized mortgage obligations (CMOs) 3. Stripped mortgage backed securities Key ideas: Loan secured by the collateral of some specified real estate property Mortgagor = borrower Mortgagee = lender Borrower fails to make contracted payments, lender has right to seize the property in order to be paid back Categories of property: Commercial Residential Agency residential MBSs = are residential MBSs which benefit from a built-in government guarantee. Commercial mortgages: shorter maturities are either non-amortizing or partially amortizing have a prepayment penalty THE AMORTIZATION MECHANISM Key ideas of amortization: In a fixed rate, level payment mortgage: Borrower makes equal payment at start of each month until the loan is fully amortized or paid off. Each payment consists of part interest, equal to 1/12 of the mortgage rates times the principal outstanding amount at the start of the previous month The other part of the payment consists of the principal which is the repayment of a fraction of the outstanding principal See Example 17.1 on pages 594-595 for calculation of monthly mortgage payment for 15 year maturity, 12% interest rate, and $1 million principal.
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