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MRMM-14-overview-of-mortgages-and-the-consumer-mortgage-market.html
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<!doctype html>
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<head>
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<title>Market Risk Measurement and Management | Chapter 14 | Overview of Mortgages and the Consumer Mortgage Market</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Chapter 14</h1>
<h3>Overview of Mortgages and the Consumer Mortgage Market</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Introduction</h2>
<ul>
<li>Mortgage - a loan that is secured by underlying assets that can be repossessed in the event of default</li>
<li>Servicers - collect payments from borrowers and pass them to investors</li>
</ul>
</section>
<section>
<h2>Key Attributes</h2>
<ul>
<li>Lien status - denotes the loan's seniority in the event of forced liquidation</li>
<li>Original loan term - typically 30-years</li>
<li>Credit classification - Prime, alt-A, and sub-prime</li>
<ul>
<li>Credit scores</li>
<li>Loan-to-value (LTV) ratios</li>
<li>Income ratios</li>
<li>Documentation</li>
</ul>
<li>Interest rate type - Fixed-rate, adjustable-rate (ARMs)</li>
<li>Amortization type - fully amortizing, interest-only</li>
<li>Credit guarantees</li>
<li>Loan balances</li>
</ul>
</section>
<section>
<h2>Prepayments and Prepayment Penalties</h2>
<ul>
<li>"Due on sale" clause</li>
<li>Full or partial prepayments often at the option of the borrower</li>
<li>Penalties often used to discourage early prepayment</li>
</ul>
<aside class="notes">
A "due on sale" clause requires that the remaining balance of a loan be repaid when the underyling asset is sold.
</aside>
</section>
<section>
<h2>Mortgage Loan Mechanics</h2>
<ul>
<li>Mortgage payment factor = [Interest rate(1+Interest rate)<sup>Loan term</sup>]/[(1+Interest rate)<sup>Loan term</sup>-1]</li>
<li>Monthly payment = Payment factor × Loan balance</li>
</ul>
</section>
<section>
<h2>Risks</h2>
<ul>
<li>Prepyament risk</li>
<ul>
<li>Causes mortgages to exhibit negative convexity</li>
</ul>
<li>Credit and default risk</li>
<ul>
<li>Delinquencies</li>
<li>Defaults</li>
<li>Loss severity</li>
</ul>
</ul>
<aside class="notes">
Prepayments can force a lender to replace a high-yielding asset with a low-yielding one. Prepayments are often made for the following reasons: (1) sale of the property, (2) destruction of the property, (3) default, (4) curtailments (partial prepayments), and (5) refinancing. Credit analysis of a mortgage pool requires: (1) quantifying and stratifying the characteristics of the thousands of loans underlying the investment, (2) estimating how said attributes will perform based on standard metrics and possible cases, (3) calculating returns based on examined scenarios.
</aside>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
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