Other types of

Mortgages
PRESENTED BY:
Borja, Patricia
Indefenso, Nicole
Romo, Ross Janelle
Samiano, Caila Andrea
Soriano, Dave Iverson

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Capital Market Mortgages Securitized

 this is where Equity  Securities
(stocks) , Securities  are loans to
individuals or packaged and
(bond, mortgages sold as assets
and notes). businesses to
purchase a home,land backing a
 The said instrument publicly traded or
have a maturity or or other real property.
privately held
more than one year. debt instrument.
New methods of CREATIVE This includes :
FINANCING have been developed
by financial institutions to attract • Jumbo Mortgages
mortgage borrowers. • Subprime Mortgages
• Alt-A's
• Option ARM's
• Second Mortgages
• Reverse-Annuity
Mortgages
 Jumbo Mortgages

• These are mortgages • Limits are set by the two Interest rates and down
that exceed the government-sponsored payments are generally
conventional mortgage enterprises Fannie Mae higher than conforming
conforming limits. and Freddie Mac, and mortgages
• These are not backed by are based on the
Fannie Mae and Freddie maximum value of any
Mac individual mortgage they
will purchase from a
mortgage lender.
• It is not eligible to be
purchased , guaranteed,
or securitized by Fannie
and Freddie
 Subprime Mortgages

• Mortgages to borrowers • Higher rate of default The 2008 financial crisis

who have weakened aand thus riskier loans to has been blemed in large
credit histories. mortgage lender. part on the proliferation of
• They do not qualify for • As a result , these subprime mortgages.v
prime mortgages due to mortgages have higher
the said credit histories interest rates
includingpayment
deliquencies, and
possibly charge-offs,
judgments, and
bankcruptcies
 Alternative-A Paper
(Alt- A's) Mortgages

• Mortgages that are • Less than full • This does not meet the
considered more risky documentatiions , lower standard of conforming
than a prime mortgage credit scores, higher loan mortgages for sale to
and less risky than a to value ratios and more Fannie and Freddie.
subprime mortgages. investment properties
than prime.
• more extensive
documentation, higher
credit scores, lower loan
to value ratios and fewer
investment properties
than subprime.
 Option ARM's
(Adjustable Rate Mortgages)
Mortgages

• These are adjustable rate • The four major types of • Minimum payment
mortgages that offer the payment options include • Interest- only payment
borrower several monthly • 30-year fully amortizing
payment options. payment
• These are also called • 15-year fully amortizing
pick-a-payment or pay- payment
option ARM's, are 15- or
30-year adjustablee rate
mortgages.

These are:
Minimum Payment
Lowest of the four payment
option and carries the most
risk. The monthly payment is
for 12 months at an initial
interest rate.
Interest Only Payment
requires the borrower to pay
only the interest on the loan
during the initial period of the
loan. During this period, No
prinicpal must be paid but
after this period the mortgage
should be amortized to keep
up to the term. This means
monthly payments will
increase.
30-year fully amortizing
borrowers pays both principal
and interest on the loan. By
making this payment each
month, the borrower is
ensured that all interest and
principal payments are fully
paid on schedule, based on a
30-year term.
15-year fully amortizing
These are similar to the 30-
year fully amortizing payment
but with a large amount of
principal paid each month.
This amount includes all of
the interest charged on the
loan for the previous month
plus principal to pay off the
loan based on a 15-yyear
term.
 Second Mortgages

• are loans secured by a • Interest rate charged is • This allow mortgage

piece of real estate higher and the amount borrower to raise fund
already used to secure a borrowed will be lower without having to sell
first mortgage. than that of the first their homes.
• Should the dafault occur, mortgage
the second mortgage • About 15 % of all primary
holder is paid only after mortgages have
the first mortgage is paid secondary mortgages.
off.
 Reverse Annuity
Mortgages

• mortgage borrower • RAM's were designed as • Maturities on RAM's are

receives regular monthly
payments from a
financial institutir than
making them.
• When the RAM matures
(or the borrower dies) the
borrower or (the estate of
the borrower) sells the
property to retire the
debt.
a way for retired people generally set such that
to live on the equity they the borrower will likely
have built up in their die prior to maturity.
homes without the
necessity of selling the
homes.
Secondary
Mortgage
Market

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Secondary Mortgage Market
• Through one of two mechanism , financial institutions can
Simple PowerPoint Presentation
remove mortgages from their balance sheets, placing them
for trading
Simple in secondary
PowerPoint mortgages market.
Presentation

Simple
1. PowerPoint
They canPresentation
pool their recently originated
mortgages
Simple PowerPoint together to sell them in the
Presentation
secondary mortgage market.
2. Financial institutions can issue mortgage-
backed securities, creating securities that
are backed by their newly originated
mortgages.
The sale/securitizating of mortgages in the secondary
mortgage markets reduces the liquidity risk, interest rate
You can simply impress your audience and
risk, and zing
add a unique credit risktoexperienced
and appeal your by the originating financial
Presentations. Easy to change colors, photos
institutions compared to keeping the mortgages in their
and Text. You can simply impress your
asset
audienceportfolios.
and add a unique zing and appeal to
your Presentations.
Moreover, selling/securitizing mortgages can generate fee
income for the mortgage-originating financial institution.
 History and Background of Secondary
Mortgage Markets
• The secondary mortgage markets were created by the federal government to
help boost U.S. economic activity during the great depression.

 1938 - estbalished the Federal National Mortgage Association (FNMA or

Fannie Mae).
 Also established Federal Housing Administration (FHA) and Vetterans
Administration (VA)
 1968 - Fannie Mae was converted into a publicly traded company owned
by investors.
 Late 1960's - fewer veterans were obtaining guaranteed VA loans.
 Government created the Government National Moortgage Association
GNMA, or Ginnie Mae) and the Federal Home Loan Mortgage Corporation
(FHLMC , or Freddie Mac)
 1989- Like Fannie Mae And Freddie Mac became quite large and was
converted to a public company , removing the debt from the balance sheet
of the federal government.
 Mortgage
Sales

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Mortgage Sales
occurs when a financial institution originates a mortgage and sells it
with or without recourse to an outside buyer.

If the mortgage is sold without recourse, the financial institution not

only removes it from its balance sheet but also has no explicit liability if
the mortgage eventually goes bad.

If however, the mortgage is sold with recourse, under certain conditions

the buyer can retain the mortgage to the selling financial institution.
Therefore, the financial institution retains a contingent credit risk liability.
Mortgage-backed
Securities
 Mortgage-backed
Securities
Securitization of mortgages involves pooling of a group of mortgages
with similar characteristics, the removal of these mortgages from the
balance sheet, and the subsequent sale of interest in the mortgagepool
to secondary market investors.

Securitization of mortgages result to mortgage-backed securities which

can be traded to secondary mortgage market.

Mortgage-backed securities allow mortgage issuers to separate the

credit risk exposure from the lending process itself.
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