Chapter 22

The Residential
Mortgage Market

Mortgage
A pledge of property to secure payment

of a debt.
Property pledged as collateral is real estate
Debt is the loan

Conventional mortgage

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Income from Mortgage

Origination
Origination

Sale of mortgage in secondary market

Service fees

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Acceptable Collateral for Mortgages

Residential Properties
houses, condominiums, cooperatives,
apartments
Commercial Properties
multifamily properties, office buildings,
industrial properties, shopping centers,
hotels, health care facilities

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Mortgage Originator
Principal originators of residential

mortgage loans
Thrifts
Commercial banks

Mortgage banks

Other private mortgage originators

Life insurance companies
Pension funds

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Mortgage Origination Process

Evaluating Credit Risk
Payment-To-Income Ratio
Loan-To-Value Ratio
Commitment Letter form Lender

Choice of Type of Mortgage

Fixed-rate mortgage
Adjustable-rate mortgage

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Use of Mortgages by Originators

Mortgage originators can either:
hold the mortgage in their portfolio
sell the mortgage to an investor
use the mortgage as collateral for the
issuance of a security called securitization

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Sale of Mortgage
Conforming mortgages meet agency

underwriting standards
Maximum PTI
Maximum LTV
Maximum loan amount

Nonconforming mortgages do not meet

agency underwriting standards

Can be held as portfolio investment
Can be securitized
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Risks Associated with Mortgage

Origination
Pipeline Risk
risk associated with originating mortgages
Price Risk
risk of adverse effect on value of pipeline if
mortgage rates rise
Fallout Risk
risk that applicants with commitment letters
will not close

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Mortgage Servicer
Sources of fees
servicing fee
interest on escrow
float earned on the monthly mortgage

payment
ancillary income such as late fee,

commissions on cross-selling, and

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selling mailing lists

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Credit Classifications
Prime
Subprime
Alt-A

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Fully Amortized Loan

Where MP
MBo
i
n

12

=
=
=
=

monthly mortgage payment

original mortgage balance
note rate divided by 12
number of months of the mortgage loan

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Remaining Mortgage Balance

Where MPt = mortgage balance after t months

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Monthly Scheduled Principal

Where SPt

14

= scheduled principal repayment for month t

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Mortgage Insurance
U.S. Government Mortgage Insurers
Federal Housing Administration (FHA)
Veterans Administration (VA)
Rural Housing Service (RHS)

Private Mortgage Insurers

Mortgage Guarantee Insurance Company
PMI Mortgage Insurance Company

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Investment Risk
Credit risk

Liquidity risk
Price risk
Prepayment risk

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