Tài chính doanh nghiệp - Chapter 22: The residential mortgage market

Chapter 22The Residential Mortgage Market Learning Objectives To understand how the residential mortgage market supplies credit for individuals and families to build and buy homes.To understand the problems faced by lenders in designing new home loan contracts that will protect them against inflation and other risks. Learning Objectives To look at how federal government agencies and government-sponsored mortgage firms support the development of the market for mortgage loans.IntroductionAmong the fastest growing of all financial markets today is the residential mortgage market, where individuals and families fund their purchases of homes.Originally a simple market that was primarily local and regional in character, the residential mortgage market has become an international capital market where home-mortgage-related instruments are traded around the globe.Recent Trends in New Home Prices and the Terms of Mortgage LoansPrices and Yields of Conventional Home Mortgage LoansRecent Trends in New Home Prices and the Terms of Mortgage LoansOffsetting the relatively low home-mortgage loan rates of recent years have been record-high home prices.Overall, real home prices have risen considerably faster than homeowner incomes, discouraging some potential home buyers.The Structure of the Mortgage MarketThe Structure of the Mortgage MarketMortgage Loans Outstanding, 2004* ($ Billions)Mortgage Lending Institutions22 - 10Mortgage Lending InstitutionsMost mortgages generate multiple potential cash-flow streams:origination & commitment fees (when a mortgage loan is first applied for)periodic loan repayments & loan interestcompensation for prepayment & default risksservice fees associated with collecting & recording amounts owednet returns & fees from the securitization of a pool of mortgage loansMortgage Lending InstitutionsA mortgage loan may beheld in the originating lender’s portfolio for the promised interest and principal payments;sold to an investor at a discounted value (although the originating lender may retain servicing rights and charge the loan purchaser loan servicing fees); orpackaged with other similar mortgage loans into a pool and securitized (the lender receives residual interest income and servicing fees).The Roles Played by Leading Financial Institutions in the Mortgage MarketSavings and loan associations (S&Ls) are predominantly local lenders. They often service the mortgage loans they made.Commercial banks rank first as lenders for the purchase of homes, condominiums, and apartments, and in the commercial mortgage sector.Savings banks invest in both government-guaranteed and conventional mortgage loans.The Roles Played by Leading Financial Institutions in the Mortgage MarketLife insurance companies make substantial investments in commercial as well as residential mortgage properties, both nationally and internationally.Mortgage banking houses act as a channel through which builders or contractors in need of long-term funds can find permanent mortgage financing.Government Activity in the Mortgage MarketThe Great Depression generated massive, unprecedented unemployment, such that property values fell, thousands of foreclosures occurred, and many mortgage lenders faced liquidity crises.So, the U.S. federal government had to move in to tackle the mortgage market’s problems, through government guarantees and the development of a secondary market.Government Activity in the Mortgage MarketThe major milestones include:1932: Federal Home Loan Bank System1934: National Housing Act, Federal Housing Administration1938: Federal National Mortgage Association (Fannie Mae)1944: Servicemen’s Readjustment Act, Veterans AdministrationGovernment Activity in the Mortgage Market1968: Government National Mortgage Association (Ginnie Mae) (Its pass-throughs are popular with investors as safe, readily marketable securities with attractive rates of return.) 1970: Federal Home Loan Mortgage Corporation (Freddie Mac) (Its mortgage-backed securities include mortgage participation certificates (PCs), guaranteed mortgage certificates (GMCs), collateralized mortgage obligations (CMOs), and real estate mortgage investment conduits (REMICs).)Government Activity in the Mortgage MarketThe development of various types of securitized mortgages have made mortgage securities more competitive with government and corporate securities, allowing many mortgage lenders to invade the national and international capital markets for funds.However, these new financial instruments have also increased the sensitivity of mortgage interest rates to national and international market conditions.Innovations in Mortgage InstrumentsThe problems created by fixed-rate mortgages (FRMs) led to the development of variable-rate mortgages (VRMs) and adjustable mortgage instruments (AMIs).Volatile interest rates also led to the development of convertible mortgage instruments (CMIs), balloon loans and hybrid mortgages.Innovations in Mortgage InstrumentsInterest-only mortgages offer borrowers the option of only paying the interest on their home mortgages, without retiring loan principal, for an initial time period.Reverse-annuity mortgages (RAMs) have also been developed to help older families.Innovations in Mortgage InstrumentsIt is interesting that, with all the new mortgage instruments developed in recent years, fixed-rate mortgages (FRMs) continue to hold a major share of the residential loan market.Pricing and Other Issues inHome Mortgage LendingA key reference interest rate that many mortgage lenders use to determine the appropriate loan rate on new home loans is the 10-year U.S. Treasury bond rate.A comparison of recent 10-year T-bond yields to home mortgage contract rates indicates that mortgage rates move closely with T-bond rates and maintain a yield spread of about 1.6 to 2 percentage points between them.Pricing and Other Issues inHome Mortgage LendingComparison of Home Mortgage Interest Rates and the Annual Yields on Ten-Year U.S. Treasury BondsMortgage Lock-Ins, Loan Modifications, and ForeclosuresMortgage lock-ins protect borrowers from an increase in loan rates during the house-buying process, while loan modification agreements aid troubled borrowers in avoiding foreclosure.Refinancing Home MortgagesIn recent years, as market interest rates fell and house values increase, many homeowners have chosen to refinance their home mortgages. The ability of a homeowner to obtain refinancing depends critically upon a strong credit history and a significant amount of accumulated equity built up in the home to be refinanced.Predatory LendingAllegedly, some unscrupulous lenders attempt to mislead poorly informed, less well-educated borrowers into taking out high-cost loans, often with their home pledged as collateral.The current debate on such predatory loans centers mainly on how to distinguish predatory from legitimate lending practices and how to protect the most vulnerable consumers.Markets on the NetA Consumer’s Guide to Mortgage Lock-ins at Deposit Insurance Corporation at www.fdic.gov/consumers/consumer/newsFederal Home Loan Mortgage Corporation at www.freddiemac.comFederal National Mortgage Association at www.fanniemae.comMarkets on the NetGovernment National Mortgage Association at www.ginniemae.govInterest Rate Calculator at www.interestratecalculator.comMortgage Bankers Association of America at www.mbaa.orgChapter ReviewIntroduction to the Residential Mortgage MarketRecent Trends in New Home Prices and the Terms of Mortgage LoansThe Structure of the Mortgage MarketVolume of Mortgage LoansResidential versus Nonresidential Mortgage LoansMortgage Lending InstitutionsChapter ReviewThe Roles Played by Leading Financial Institutions in the Mortgage MarketSavings and Loan AssociationsCommercial BanksLife Insurance CompaniesSavings BanksMortgage BankersChapter ReviewGovernment Activity in the Mortgage MarketThe Impact of the Great Depression on Government Involvement in the Mortgage MarketLaunching the Federal Home Loan Bank SystemSetting Up the Federal Housing and Veterans Administrations (FHA and VA)The Creation of Fannie Mae (FNMA)The Creation of Ginnie Mae (GNMA)The Federal Home Loan Mortgage Corporation (FHLMC)Chapter ReviewInnovations in Mortgage InstrumentsFixed-Rate Home MortgagesVariable-Rate and Adjustable Mortgage InstrumentsConvertible MortgagesInterest-Only MortgagesReverse-Annuity MortgagesChapter ReviewPricing and Other Issues in Home Mortgage LendingPricing Home Mortgages and the Treasury Security MarketMortgage Lock-Ins, Loan Modifications, and ForeclosuresRefinancing Home MortgagesPredatory Lending