Tài chính doanh nghiệp - The residential mortgage market

Money and Capital Markets24C h a p t e rEighth EditionFinancial Institutions and Instruments in a Global MarketplacePeter S. RoseMcGraw Hill / IrwinSlides by Yee-Tien (Ted) FuThe Residential Mortgage Market Learning Objectives To understand how the residential mortgage market supplies credit to build and buy homes.To learn about the problems faced by families and individuals in finding credit to finance the purchase of their homes.To see 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 LoansAverage Terms Quoted on Conventional Home Mortgage Loans (U.S. Primary Market) 1974 1980 1990 2000 Purchase price ($000) $40.10 $83.50 $153.20 $234.50Amount of loan ($000) 29.80 59.30 112.40 177.00Loan/price ratio (%) 74.30 73.30 74.50 77.40Maturity (years) 26.30 28.20 27.30 29.20Fees & charges (points) 1.30 % 2.10 % 1.93 % 0.70 %Contract interest rate (%) 8.71 12.25 9.68 7.41FHA mortgage yield (%) 9.22 13.95 10.17 7.45 ** FHA mortgage yield is for 1999.Data Source: Board of Governors of the Federal Reserve System,The Structure of the Mortgage MarketData Source: Board of Governors of the Federal Reserve SystemOutstanding Mortgage Loans in the U.S.$ billionsTotal Mortgage DebtResidential Properties(1-4 family & multifamily)Nonresidential Properties(commercial & farm)The Structure of the Mortgage MarketFlow of SavingsGovernment loans to mortgage lendersCommercial banks & bank holding co.Savings & loan associationsSavings banksCredit unionsReal estate investment trustsInsurance co.Pension plansMutual fundsIndividual domestic investorsForeign investorsConventional home mortgage loansMortgage banksGovernment guaranteed home loansCommercial mortgage loansFarm & ranch mortgage loansPrivate mortgage pools (securitized loans)Federal & federally sponsored mortgage agenciesBuilders & developers of residential & commercial propertiesHome buyers, business firms, & other recipients of mortgage creditMortgage Lending InstitutionsSource: Board of Governors of the Federal Reserve System24 - 8Mortgage 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 Financial InstitutionsIn 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 Financial InstitutionsIn 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 ActivityThe Great Depression generated massive, unprecedented unemployment, such that there were thousands of foreclosures, property values fell, 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 ActivityThe 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 Activity1968: 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).)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) and balloon loans.Reverse-annuity mortgages (RAMs) have also been developed to help older families.Innovations in Mortgage InstrumentsMortgage lock-ins protect borrowers from an increase in loan rates during the house-buying process, while loan modification agreements aid troubled borrowers in avoiding disclosure.In recent years, as market interest rates fell, many homeowners have chosen to refinance their home mortgages. Some have also opted to take home equity loans.Money and Capital Markets in CyberspaceMore information about the residential mortgage market can be found at: ReviewIntroductionRecent 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 Financial Institutions in the Mortgage MarketSavings and Loan AssociationsCommercial BanksLife Insurance CompaniesSavings BanksMortgage BankersChapter ReviewGovernment ActivityThe Impact of the Great Depression on Government Involvement in the Mortgage MarketThe Creation of Fannie Mae (FNMA)The Creation of Ginnie Mae (GNMA)The Federal Home Loan Mortgage Corporation (FHLMC)Chapter ReviewInnovations in Mortgage InstrumentsVariable-Rate and Adjustable Mortgage InstrumentsConvertible MortgagesReverse-Annuity MortgagesMortgage Lock-insRefinancing Home Mortgages and Home Equity Loans