Seek employer assistance or seek an employer who gives assistance
In John Grisham's novel, The Firm Random House, 1991 , senior lawpart-ner Royce McKnight uses employer-sponsored, low-interest-rate home financing to help recruit Mitch McDeere into the law firm. As you know Royce tells Mitch , we require you to buy a home. It adds stability and prestige and we're very concerned about these things, especially with our associates. The firm provides a low-interest-rate mortgage loan, 30 years, fixed rate, non-assumable should you decide to sell in a few years....
Failure to Deliver
Occasionally, sellers cannot provide pool information by the notification date or cannot deliver pools on the settlement date. Sometimes an originator must delay a delivery date with a dealer, or a dealer may not be able to cover a short position in TBAs. In these cases, a fail occurs. All sellers have a strong economic incentive to deliver pools as soon as possible because buyers pay only the amount agreed to plus accrued interest through the original settlement date, and they do not pay until...
About the Good Faith Estimate GFE
The good faith estimate GFE is one of several government-required disclosures that you will receive at the time of or within three days after application. It is a legal requirement that all lenders must follow. The GFE provides the borrower with an honest approximation of the closing costs, down payment balances, prepaid expenses and all other charges that the borrower must address at the closing. The borrower should hold the lender to this estimate, with some obvious leeway. The lender must...
Equilibrium rationing separating equilibrium and liquidity constraints
This section examines the evidence for equilibrium credit rationing Sti-glitz amp Weiss 1981 Williamson 1986, 1987 . Given that empirical research in this area is sparse, then both UK and US work are discussed together. The US is particularly interesting in that default risk is fully insured for the Federal Housing Association, but not for the alternative conventional lenders. This has led to a number of interesting studies. For example, Duca amp Rosenthal 1991 use time series data to explore...
MSR Valuation The Perfect World
The value of an MSR is based upon expected cash inflows loan servicing Loan servicing income retained spread 500 ancillary income net of Float, escrow and ancillary income 60 Net income time value of money 75
FHA Drawbacks
FHA mortgages display two drawbacks. First, you'll pay FHA mortgage insurance premiums MIP to protect the lender should you fail to make your mortgage payments. This mortgage insurance initially will cost around 1.5 percent of the amount you borrow, such as 1,500 on a 100,000 mortgage. Remember though, if you don't have the cash, you can add this premium onto your mortgage loan balance. As another drawback, your loan interest rate will be boosted by one-half percent to cover additional mortgage...
Contingent liabilities
Contingent liabilities are any debt obligations that may demand payment at a future date. The most common type of contingent liability is the co-signed loan, in which the applicant is normally not responsible for the monthly payments. However, if the primary borrower defaults, the co-signer will be held responsible for the loan and default. Another type of contingent liability is student loans, which do not require payment until six months after the borrower ceases his or her formal studies....
The Collateral Managers Role in a CDO
A collateral manager is responsible for the performance of the collateral portfolio. He or she typically Selects the collateral portfolio Directs sales and purchases of collateral during the reinvestment period Oversees the work-out process for defaulted collateral and Monitors the collateral portfolio for compliance with the coverage, collateral quality, and other tests. The collateral manager's ability to generate high risk-adjusted returns through his or her research, market knowledge, and...
Marketable Title
The goal of most real estate transactions is to convey a marketable title in exchange for the purchase price. Sometimes called merchantable title, the marketable title is one that the seller or grantor truly owns it must also be free from any encumbrances and defects not permitted. The definition is simple enough, but the truth is that providing a marketable title is actually very challenging. To provide clear title, the seller's attorney or title company must examine the property's past and...
Voluntary Alienation
The three basic methods of voluntary alienation are through a will, gift or sale. For more information about the process of transferring property through a will, please see the Conveying Title Through Wills article. Conveying title to property through a gift or sale is normally accomplished with a deed. However, there are many kinds of deeds for more information about this lengthy topic, see the All About Deeds article. We hope that you've found our Mortgage and Real Estate Resource helpful and...
Prospectus Supplement
To Prospectus Dated November 22, 2004 Banc of America Mortgage Securities, Inc. Mortgage Pass-Through Certificates, Series 2005-A Principal and interest payable monthly, commencing in February 2005 Four groups consisting of eleven classes of Senior Certificates. Six classes of Class B Certificates all of which are subordinated to, and provide credit enhancement for, the Senior Certificates. Each class of Class B Certificates is also subordinated to each class of Class B Certificates, if any,...
Yield Pickup Swaps and Realized Losses
Probably a majority of institutional bond swaps are done purely for the purpose of achieving an immediate gain in return, either in terms of current coupon income or in terms of yield-to-maturity or both. These swaps can be made and often are made without reference to substitutions or to yield spreads, interest rate trends, or overvaluation or undervaluation of the issues involved. For example, suppose the investor swaps from the 30-year 4's at 67.18 to yield 6.50 into the 30-year 7's at 100 to...
Avoid the bang of a bursting balloon
Sellers who agree to carry back a second mortgage frequently insist on a payoff term of seven years or less. Some sellers want their money the sooner the better. From your view, a short-term second mortgage usually won't make much sense. The short term sends the monthly payments too high. But here's how to solve this problem. It's called a balloon mortgage. When you use a balloon mortgage, you make monthly payments and then pay the outstanding balance after maybe five or seven years. Say the...
Kathleen Muller
Ms. Muller is the executive director of the HOPE HomeOwnership Center in Evansville, Ind. She has been with HOPE for about 12 years. HOPE provides counseling on housing to residents throughout the entire Evansville metropolitan statistical area. For 35 years, HOPE has been providing credit and budget analysis for families to help them determine their ability to buy a house. HOPE also has been certifying their eligibility for special innovative loan packages. During the past year, HOPE served...
An overview of the option theoretic approach to mortgage valuation
The valuation of a mortgage contract can be seen as the value of three different forms of security. The actual contract terms, and the discounted cash flows to the lender using the current market rate of interest can be represented as a non-callable bond. However, the borrower has both the option to prepay or to default on the mortgage. The option to default is a put option involving the possibility of selling the property back to the lender to repay the outstanding debt. The option to prepay...
How Payments Flow to the Tranches
Table 10.5 shows the status of the remaining tranches in the RMBS. Note that tranches M-5 through M-11 and the equity tranche have already been wiped out and there 's almost nothing left of the M- 4 tranche. This table shows that tranche IA has been paid down from 366 million to 223 million and the IIA1 tranche has been paid down from 323 million to only 52 million and no other tranches have been paid anything. A total of 413 million has gone to the top two tranches in this pool 253 million...
The Nonagency Market
In the early days of the secondary mortgage market, life was simple. Investors could buy Freddies, Fannies, or Ginnies. Mortgage loans originated outside the agency guidelines were held in portfolio by the originating institution or were sold as whole loans to another institution familiar with mortgage collateral. This was the way the world worked. Then things became a bit more complicated as issuers began securitizing their jumbo loans. As time went by, investors became more comfortable with...
Use pledged collateral to eliminate PMI
If you don't have enough money for a big down payment, and you can't or don't want to buy mortgage insurance or obtain a second mortgage, you've got another possibility. It's called pledged collateral. We don't care where the collateral comes from, says Elmer Frank of First American Savings. As long as we feel secure, we'll consider the loan. We've taken stocks, bonds, mortgages, retirement accounts, and once a Mercedes 300 SL Gullwing. We did, though, refuse to accept a racehorse.
Balloon Mortgage
THIS IS A BALLOON MORTGAGE AND THE FINAL PAYMENT OR THE BALANCE DUE UPON MATURITY IS 120,000.00 TOGETHER WITH ACCRUED INTEREST, IF ANY, AND ALL ADVANCEMENTS MADE BY TOE MORTGAGEE UNDER THE TERMS OF THIS MORTGAGE . THIS MORTGAGE DEED, made and executed the 1st, 3rd, 6th, etc. day of March, 1996, by Joe Buyer, hereinafter called the Mortgagor, which term shall include the heirs, legal representatives successors and assigns, of the said Mortgagor wherever the context so required or admits, to Joe...
Interim financing
Short-term financing in anticipation of a long-term loan is often called interim financing. Many construction loans are actually interim loans. Construction loans are typically short-term financing that is paid off as soon as the building is completed. Another form of interim financing may involve obtaining a second mortgage on the applicant's current home in order to cash out sufficient funds for the down payment on another purchase. These interim financing arrangements are normally not...
What Is a MortgageBacked Security MBS 1
The MBS assumes the same characteristics as the collateral that secure the principal and interest Bonds that are based on collateral with fixed rates are called fixed rate MBS. Bonds that are based on collateral with floating rates are called adjustable rate mortgage-backed securities, or ARMs Bonds that are based on collateral with a fixed period and then a floating period of rates are called hybrid MBS. The most common hybrid MBS are 3 1, 5 1, 7 1, and 10 1, meaning a fixed period of 3, 5,...
NonConstancy of Credit Spread Sensitivities
The non-constancy of credit spread sensitivities would naturally be embedded in their dependence on state variables in the RCR model. However, we would like to see how they change over time, and compare it to the simple linear regression sensitivity estimators, and find out why the RCR estimators provide better accuracy. Let's take one bond as example, the bond with CUSIP of 001765AE, one of American Airlines' long term bonds, and depict its random coefficients and constant coefficients. The...
The Total Future Value Volatility at Longer Horizons
The preceding development of an RFV-VOL 1,H volatility also provides an answer to the question of the volatility TFV-VOL H of a cash flow's TFV H with a horizon H that coincides with the flow's last payment M, that is, where H M. With horizons that match the flow's last payment, there are by definition no tail flows and so the total future value, TFV, consists of just the reinvestment-driven RFV 1,H . Because the reinvestment effect is always positive, TFV-VOL M RFV-VOL 1, M M - D 1, M higher...
The Volatility of Yields
Heretofore we have used and compared two ways of measuring the volatility of yields 1 by percentage change 3373 and 2 by basis point change 100 basis points . We have found that the valuation of a pure coupon stream exactly follows percentage changes in yield and that the valuation of a pure lump sum payment loosely follows basis point changes in yield see Table 15 . Which standard of yield volatility is true to real life Common sense says that yields fluctuate according to percentages of...
Save s with a Mortgage Credit Certificate MCC
The mortgage credit certificate MCC can shave 1,000s off the cost of home financing. This tax credit is available in about 25 states. Although an MCC doesn't directly reduce your interest rate, it does help you qualify for a larger mortgage with lower payments by cutting thousands of dollars off your income tax bill. State and local housing finance agencies cooperate to sponsor MCC programs with selected mortgage lenders. An ad for the Massachusetts American Dream MCC first-time buyer mortgage...
Defaults
Given the strong credit performance of prime conventional loans, defaults generally are ignored as a component of prepayments in conventional pools. For example, in 2004, Freddie Mac reported serious delinquencies delinquent 90 days or more or in foreclosure of 0.73 to 0.87 on loans in portfolios and securities, whereas Fannie Mae reported 0.57 to 0.64 . Government loans, on the other hand, experience serious delinquencies at two to three times higher rates. For example, in its National...
Trading And Settlement Procedures For Other Mbs Products
Nonagency MBS and REMICs backed by both agency and nonagency collateral are composed of specified pools and do not trade on a TBA basis. New issues settle on the date provided in the prospectus. In the secondary market, these securities trade on an issue-specific basis and generally settle on a corporate basis five business days after the trade . Unlike TBA securities, they have nothing to gain from a monthly settlement schedule whereby pools are pieced together to create more generic totals.
An Overview Of Mortgages And The Mortgage Market
Managing Director Countrywide Securities Corporation Frederick Frank Adjunct Professor of Finance School of Management Yale University Executive Vice President Countrywide Securities Corporation The mortgage market in the United States has emerged as one of the largest asset classes. As of the end of 2004, the total face value of one- to four-family residential mortgage debt outstanding was approximately 8.1 trillion, with roughly 60 of the outstanding balance securitized into a variety of...
The prepayment behaviour of the wealth maximising borrower
The option theoretic approach to mortgage valuation offers an explanation of prepayment behaviour. This behaviour results from breaching a boundary condition for the value of a risky mortgage involving those values of H and r which induce prepayment. This boundary is known as a free boundary because the borrower can prepay the debt at any time during the life of the current mortgage contract, and will do so depending upon the combination of r and H. This is the main reason why we work backwards...
What Is a Subprime Mortgage and Who Is a Subprime Borrower
How Do Regulators Characterize Subprime Borrowers By providing loans to borrowers who do not meet the credit standards for borrowers in the prime market, subprime lending can and does serve a critical role in the nation's economy. These borrowers may have blemishes in their credit record, insufficient credit history or non-traditional credit sources. Through the subprime market, they can buy a new home, improve their existing home, or refinance their mortgage to increase their cash on hand....
Securities 1
Vice President Mortgage Strategy RBS Greenwich Capital Pass-through securities represent ownership interests in pools of residential mortgage loans secured by single-family homes one- to four-family units . Principal and interest payments are passed through to the owners of the pool on a pro rata basis, with the proviso that a small portion of the interest is held back by the issuer servicer to cover administration expenses and guarantee fees. The amount of this servicing strip varies across...
Evaluating Bond Portfolio Swaps
If all bond swaps were good bond swaps, we would use a more constructive title for this chapter and call it EVALUATING BOND PORTFOLIO IMPROVEMENTS. Alas, however, there are as many bad swaps as good, so we have chosen the conventional and neutral term swap. The purpose of this chapter and the next is to present a comprehensive method of evaluating several types of swaps. This method combines in one figure most of the advantages and disadvantages of each specific swap in a way that permits an...
The Collapse of Lending Standards
Lending standards collapsed to an almost unimaginable degree during the great bubble, to the point that in some areas if you had a pulse, you could get a mortgage. The collapse manifested itself in many ways. In 2001, the combined loan-to-value ratio for the average mortgage was 74 percent, meaning the buyer had put down 26 percent of the cost of the home see Figure 1.7 . When doing any kind of lending, it's critical that the borrower has meaningful skin in the game, so there is a strong...
Prepaid Expenses Not Included
Closing costs are one-time expenses. In addition, the borrowers must be prepared for prepaid expenses at the closing. Prepaid expenses are regular parts of the projected monthly housing payment interest, insurance, taxes amp assessments that must be paid in advance. For example, the borrower may be required to establish an escrow account at the time of the closing. The borrower will normally have to escrow two or three months of insurance and real estate tax payments into the escrow account....
H Release clause
An acquisition and development loan obtained by a developer may be used to develop a number of building lots. Many such loan agreements contain clauses that allow the developer to release developed lots as security for the loan. In addition, a specified amount is paid back to the lender. Usually the amount that must be paid to obtain a release is greater than the proportionate amount of the loan allocated to the lot. For example, if a developer borrows 100,000 to develop 10 lots, the release...
Construction vs ConstructionPermanent
The typical construction loan is normally an interim or short-term financing that provides the borrowers and their contractor with the funds to build a new home. They are short-term loans in that they must be paid off or refinanced immediately after the construction is completed. In some cases, the construction loan will only cover the actual construction of the structure, and not the purchase of the lot on which the structure house will be built. Construction loans are riskier for the lender....
SubprimePrime Rate Spread
In general, interest rates on subprime mortgages are higher than on prime mortgages to compensate the lender for the additional default risk associated with subprime loans. In this section we analyze the time series of the subprime-prime rate spread, both with and without adjustment for changes in loan and borrower characteristics. We focus on fixed-rate mortgages for this exercise. For hybrid mortgages the subprime-prime comparison is more complicated because i both the initial teaser rate and...
Net par outstanding trillion
Structured finance 2.2 trillion Public finance 1.3 trillion International other asset-backed securities 19 International other asset-backed securities 19 Source Association of Financial Guaranty Insurers. U.S. other asset-backed securities 45 Source Association of Financial Guaranty Insurers. The case of home mortgages that are securitized by private-label issuers is different. Instead of receiving real or implied government backing, these securities have typically been guaranteed by monoline...
Disequilibrium rationing
The most clear cut example of disequilibrium rationing is the UK mortgage market in the 1970s and early 1980s. Up to 1983 UK mortgage finance was controlled by a cartel of building societies mutual organisations . The existence of disequilibrium rationing in the United States is more controversial Meltzer 1974 Hendershott 1981 Jaffee amp Rosen 1979 , though Kent 1987 cites 1966, 1969-70 and 1974-75 as periods when disequilibrium credit rationing might have been evident in the US economy. In the...
Countrywide Credit Borrowed From Bank Of America
Beneficial's success was lost somewhat on Angelo Mozilo. In the early to mid-1970s he and his partner, David Loeb, were busy managing a very young mortgage banking company called Countrywide Credit Industries, which went public on the New York Stock Exchange in 1969, raising 450,000. They were hoping for 3 million. The two men, who had met while working for a home lending company that Loeb owned part of, launched the first version of Countrywide on Loeb 's kitchen table in his apartment at 99th...
Chain of title
True ownership is primarily supported by a good chain of title. The chain of title provides a list of all conveyances and other documents recorded against the property. The chain of title should indicate that all of the conveyances between buyers and sellers are legitimate and unbroken. For example, Fred sold to Gene, Gene sold to Harriet, Harriet sold to Indira, and Indira sold to Jesse. The chain should be uninterrupted. For example, the chain of title should not indicate that Quentin sold to...
The choice of mortgage instrument in the United Kingdom
Many of the questions explored in the US research are relevant to the UK mortgage market. In the UK the innovation was the fixed rate mortgage fixed rate 1 which became popular in the early 1990s see Figure 8.2 . Mirroring US research we can ask several pertinent questions. What is the impact of the FRM-VRM interest rate differential on the choice of a fixed rate mortgage Do wealth and personal characteristics influence mortgage choice Are the choice of mortgage instrument and mortgage housing...
Process
With a purchase option, the buyer pays the seller for an option to buy the property at a certain price within a certain amount of time. This option contract can be arranged to provide a variety of conditions, contingencies and exit strategies. The option contract approach offers key advantages to the buying investor Exercise purchase with refinance loan after 12 months Minimize risk exposure and expenses The basic terms of the contract is that the seller takes the option fee as income. The...
MBIA s Business Model
MBIA 's business model is to collect a small amount of money up front insurance premiums in exchange for a promise to pay potentially large but unlikely-to-occur losses in the future in most cases, decades into the future. The best analogy for this business model is picking up pennies in front of a steamroller it's nicely profitable until something goes wrong, and then . . . splat This is a very different type of business model from, for instance, an auto insurer like GEICO, which collects...
Mortgage Options
A standard mortgage option contract specifies Collateral Program, maturity and coupon. Strike price Strikes are usually quoted relative to the standard forward settlement price as of the option expiry date. Expiration date The standard expiration date is seven business days before the standard settlement date during the month of option expiration. However, other expiry dates are possible. If the option is exercised, the option holder writer must accept deliver TBA collateral. Mortgage options...
The Rate Anticipation Swap
When portfolio managers anticipate an important change in the level or structure of interest rates they often make swaps designed to protect or benefit their portfolios. Most commonly these Rate Anticipation Swaps consist of shortening maturities if higher long yields are expected or lengthening maturities if lower long yields are expected. It should be noted that the decisive factor is the expected long rate the change in the long rate will almost always be the chief determinant of the value...
Hedge accounting MSR value increases 1
Additionally, as the value of the MSR asset increases, existing impairment reserves may be recovered. Derivatives are closed resulting in the payment of 400 in cash. The offsetting entry increases the MSR book basis as follows Derivatives are marked to market each period through earnings. The MSR also is marked to market each period for the risk hedged. Closing a derivative position reduces the derivative asset liability, but does not affect the MSR. The accounting follows
Types of CMBS Floating Rate Loans
Borrowers requiring transitional or interim financing typically prefer floating rate loans. Reasons for transitional or interim financing include Repositioning or renovating a property. Generally short term less than five-year loan maturity . Borrowers who think interest rates will drop also prefer floating rate loans. Borrowers who may want access to a prepayment option Can usually prepay after a 1 year lockout period. Seek to maintain financial flexibility. Expects to refinance after...
Chapter Overleveraged from Main Street to
Chapter 2 Overview of the Housing and Mortgage Low Interest Rates Contribute to Credit Boom and Record Homeownership Rates 29 Mortgage Originations, Home Prices, and Chapter 3 Buildup and Meltdown of the Mortgage What Is a Subprime Mortgage and Who Is a Subprime Borrower 42 Subprime Lending Grows Rapidly and New Products Gain Acceptance 46 Subprime Mortgages Enable More Widespread Homeownership 56 Securitization Facilitates the Funding of Subprime Mortgages 61 The Housing Bubble Reaches the...
Generalizing the PV Model to Equities
The YTM is a well-defined measure because the coupon flows over the maturity of high-grade noncallable bonds are well defined. Therefore, for a given market price, there is only one uniform rate that can discount these fixed flows back to the given price. However, turning to investments with less well-defined flows, such as equities or callable bonds, the problem becomes more complex on a number of counts. At the outset, there needs to be some process for estimating the flows themselves. Such...