Money And Capital Market Notes
Chapter 9 notes
Mortgage markets exist to help individuals, businesses, and other economic units to finance the purchase of a home or other property.
Characteristics of mortgage markets:
1. Mortgage loans are always secured by the pledge of real property—land or buildings— as collateral.
2. Second, mortgage loans are made for varying amounts and maturities depending on the borrower’s needs.
3. Issuers (borrowers) of mortgage loans are typically small, relatively unknown financial entities.
4. Secondary capital markets for stocks and bonds are highly developed and work very efficiently.
5. Mortgage markets are both highly regulated and strongly supported by federal government policies.
Type of mortgages:
Fixed-rate mortgage (FRM): the lender takes a lien on real property and the borrower agrees to make periodic repayments of the principal amount borrowed plus interest on the unpaid balance of the debt for a predetermined period of time.
Adjustable-rate mortgages (ARMs): An ARM is a mortgage with an interest rate that adjusts periodically in response to changes in market conditions. The interest rate adjustment is based on a published market index.
Bybrid ARMs: they are a mixed between fixed rate mortgages and adjustable rate mortgages.
ARM Rate Adjustments: Measures for adjusting rates: Treasury security rates, current fixed-rate mortgage indexes, COFIs, the prime rate, and the LIBOR.
ARM Caps: If rates rise sufficiently, monthly payments could rise to the point that the borrower is unable to make the monthly payment. With an interest rate cap the likelihood of default is limited.
Pricing Risk Transfers: the lenders and borrwers are will to pay each other in order for one of them to assume interest rate risk. Thus, The market, then, prices risk differences in variable- and fixed-rate obligations by set- ting the degree of rate reduction for adjustable-rate mortgages that satisfies both borrowers and lenders
Prepayment penalties: Lenders that offer low initial
Mortgage markets exist to help individuals, businesses, and other economic units to finance the purchase of a home or other property.
Characteristics of mortgage markets:
1. Mortgage loans are always secured by the pledge of real property—land or buildings— as collateral.
2. Second, mortgage loans are made for varying amounts and maturities depending on the borrower’s needs.
3. Issuers (borrowers) of mortgage loans are typically small, relatively unknown financial entities.
4. Secondary capital markets for stocks and bonds are highly developed and work very efficiently.
5. Mortgage markets are both highly regulated and strongly supported by federal government policies.
Type of mortgages:
Fixed-rate mortgage (FRM): the lender takes a lien on real property and the borrower agrees to make periodic repayments of the principal amount borrowed plus interest on the unpaid balance of the debt for a predetermined period of time.
Adjustable-rate mortgages (ARMs): An ARM is a mortgage with an interest rate that adjusts periodically in response to changes in market conditions. The interest rate adjustment is based on a published market index.
Bybrid ARMs: they are a mixed between fixed rate mortgages and adjustable rate mortgages.
ARM Rate Adjustments: Measures for adjusting rates: Treasury security rates, current fixed-rate mortgage indexes, COFIs, the prime rate, and the LIBOR.
ARM Caps: If rates rise sufficiently, monthly payments could rise to the point that the borrower is unable to make the monthly payment. With an interest rate cap the likelihood of default is limited.
Pricing Risk Transfers: the lenders and borrwers are will to pay each other in order for one of them to assume interest rate risk. Thus, The market, then, prices risk differences in variable- and fixed-rate obligations by set- ting the degree of rate reduction for adjustable-rate mortgages that satisfies both borrowers and lenders
Prepayment penalties: Lenders that offer low initial