Rate quotes Fact or fiction
Loans differ from most products. You won't know the price total costs of your newly originated mortgage until after you have agreed to buy it. This industry-wide practice encourages some loan reps to charge you more than you were originally told but it also exposes you to risks when you deal with honest reps. Even though you negotiate interest rates, costs, and fees with your loan rep at or around the time you apply for your loan, the rate you pay can still differ from the rate you both have...
FExculpatory clause
An exculpatory clause relieves the borrower of personal liability to repay the loan. Thus, if the borrower defaults, the lender can look only to the property foreclosure for recovery of the debt. In effect, the lender may not sue the borrower on the note or obtain a deficiency judgment, if sale of the property at foreclosure does not provide sufficient funds to cover the loan's balance. Obviously, borrowers prefer to negotiate loans with exculpatory clauses, but lenders are usually unwilling to...
United Kingdom disequilibrium mortgage credit rationing research
Chapter 5 cited the UK mortgage market in the 1970s, and early 1980s, as a prime example of disequilibrium rationing. The existence of a mortgage cartel until 1983, and periods of negative real interest rates, led to mortgage queues and the use of non-price rationing mechanisms. These are the results we would expect if non-price terms of mortgage contracts were not being adjusted to clear the market Drake amp Holmes 1997 . Thus the UK provides an ideal setting for the study of disequilibrium...
Collateralized Mortgage Obligations CMOs
CMOs are created by pooling mortgage pass-thrus or mortgage whole loans and splitting their cash flows into a number of tranches. A CMO is self-supporting, i.e. the collateral cash flow is able to meet the tranches' cash flow requirement. CMOs have a broad range of investors, because they are able to satisfy disparate investor's needs for cash flows with varying levels of average lives, coupons, and stability profiles. Banks typically invest in securities with the shortest average life. Money...
WrapAround 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 requires or admits, to Joe Seller hereinafter called the Mortgagee, which term shall include the heirs, legal representatives, successors and assigns, of the said Mortgagee wherever the context so requires or admits. WITNESSETH That for good...
Components of Gain on Sale
- Fees received from borrower at closing less direct costs to originate deferred - Any impairment charges recognized during the hold period - Present value of net cash flows expected over the expected life of the loan discounted at current market rates
Finding out more about repair addendums
During closing, the originator wants to ensure that anything that could hamper your loan process has been taken care of. Were you supposed to get your plumbing fixed or other repairs completed Was there an unsafe tree in your yard that needed to be felled Make sure you've settled all of this before the closing. ng If you've made arrangements to make repairs or other changes f after your loan has been signed and sealed, one of the documents you have to sign at closing is the repair addendum....
Employment Qualification
Nobody can truly foretell the continued stability of an applicant's qualifying income unless that income is in the form of a heavily secured trust account. As with credit qualification, mortgage lenders attempt to project future employment stability with current and past history. Conforming lenders typically require two full year's of stable employment, preferably in the same field and company. Non-conforming lenders will often accept significantly less, with some programs accepting borrowers...
Final Installment Of A Fiveinstallment Series
The Federal Reserve Bank of St. Louis Mortgage Credit Partnership Credit Scoring Committee The purpose of the Federal Reserve System's Credit Scoring Committee is to publish a variety of perspectives on the credit-scoring process and to identify areas where the use of credit scores may create disparities in the home mortgage process. The first four installments in this series addressed aspects of the use of credit scores and fair-lending concerns, including the maintenance of scoring models,...
Land Trusts
A popular instrument among individual real estate investors as well as homeowners is the land trust. Note that most, though not all, states recognize land trusts. Florida, Illinois, Indiana, North Dakota and Virginia all recognize land trusts. The fee simple defeasible estate can end and when it does the ownership interest in the property is transferred away from that defeasible estate owner. The fee simple defeasible estate will indicate to whom the property will then be transferred, based on...
The Collapse Begins
By mid-2007, it was clear that the housing market had fallen into real distress. The most obvious sign, illustrated in Figure 3.22, was a long, steep plunge in home prices, as chronicled by the two S amp P Case-Shiller home price indexes. Falling prices unleashed a cascade of consequences. Many homeowners especially those who bought near the end of the boom now found themselves under water owing more than their home's current market value . Without equity, borrowers with ARMs were unable to...
Measurement issues in specifying mortgage termination models
One difficulty in testing option theoretic models is that the theoretical variables cannot always be measured directly. For example, the net value of the option to default or prepay which can inhibit mortgage termination, even when the option is 'in the money'. In the case of default, the value of the put option will depend upon the stochastic behaviour of particular house prices. Measuring the extent to which an option is 'in the money' its intrinsic value can also be problematic. Given that...
Approaches to the econometric modelling of mortgage termination behaviour
In this section we examine the approaches adopted to the econometric modelling of mortgage termination behaviour. This includes a discussion of the sampling and data issues involved in any estimation. As with most other research endeavours data is not always complete and theoretical variables are represented by proxy measures which require careful interpretation. The discussion also encompasses the broad outline of the econometric methods used to evaluate mortgage termination. Particular...
The Klars Save a Bundle
Through smart shopping for their one-year, adjustable-rate mortgage, Neil and Eileen Klar located an ARM with a start rate of 4.25 percent well below the then-average initial ARM rate of 5.71 percent. During their first year, the Klars made payments on their 450,000 mortgage of around 2,200 a month. The fixed-rate mortgage they were offered at the time carried an interest rate of 8.875 percent and would have required payments of 3,580 a month which meant a first-year out-of-pocket savings of...
The ABS Market Volume of Issuance in
Top 10 Non-Mortgage ABS Issuers in 2003 in millions Top 10 Non-Mortgage ABS Underwriters in 2003
Table Total Equity Buildup Appreciation Years 1
Purchase price 171,000 220,000 Appreciated value 5 p.a. 219,393 282,260 Mortgage balance 5 years 114,498 187,201 Total equity 104,895 95,059 8 percent annual appreciation rate before the 30-year mortgage actually gave you a larger equity after five years. Common advice says buy the most expensive property you can afford and you will build wealth faster through leverage and appreciation. But this advice can err. For many borrowers in many cities, the 15-year term, even on a lower-priced property...
Local governments assist with down payments
In Oakland, California, several years back, Lynne Jerome and her husband Brian Conan had for years wanted to become homeowners. But they could never put together enough for a down payment.1 We tried, says Lynne, but it was always out of our reach. With Lynne studying for a graduate degree and Brian's work as a truck driver, their family income didn't go far in the expensive California housing market. We always paid a lot of money for rent each month, says Lynne, probably comparable to a...
An IllFated Acquisition
Given that we covered our remaining short position in Wells Fargo at around 10 during the first week of March 2009 and are now long the stock you might wonder why we 're writing about it here. There are two answers first, because when we decided to write this book in early January 2009, it was one of our favorite short ideas because the stock was around 30 it 's truly stunning how quickly the stock fell in only two months. Second, because it's an interesting case study of how a company can be a...
CDO Structure Balance Sheet
A CDO's balance sheet typically has three parts Assets A portfolio of leveraged loans, structured product securities, interest rate swaps or caps, or other financial assets. Liabilities Term debt tranches typically in the form of floating rate notes that vary in seniority, rating, coupon, and average life. Also can include the fixed fee of an interest rate swap. Equity A junior tranche, which is typically in the form of preference shares or subordinated notes. Balance sheet for a hypothetical...
A Better Solution
So what 's a better solution We 're not arguing that Bank of America or Citi, WaMu, Fannie, Freddie, AIG, or Bear should have been allowed to go bankrupt nobody wants to repeat the chaos that ensued when Lehman Brothers went under. Rather, if a company blows up and can 't find a buyer , the following four things should happen 1. The government seizes it and puts it into temporary receivership as Fannie, Freddie, IndyMac, and AIG effectively were, to one degree or another . 2. Equity is...
What Caused the Bubble
It seems almost inconceivable that two-and-a-half years of reckless lending, the biggest part of it in the U.S. mortgage market, could create such an enormous bubble that its bursting would bring the world financial system to its knees and plunge nearly every economy in the world into a severe recession or worse . How did this happen The answer is that a confluence of factors created a perfect storm what Berkshire Hathaway's Charlie Munger calls Lollapalooza effects resulting in the greatest...
Cut the cost of PMI by learning where rates break
Private mortgage insurance can add other costs to your monthly payment when you finance with little or nothing down. Mortgage insurers, however, do not charge all borrowers the same amount of premium. Instead, they use risk-adjusted pricing. In a manner similar to the way lenders risk-adjust interest rates, conditions, and terms, mortgage insurers vary their premiums according to risk factors such as Borrowers' financial profile such as net worth, cash reserves, job stability, and so on For...
Potential New ARM Product
Duration is used to measure the interest risk of a fixed income security. The higher the duration is, the more interest risk that security bears. From the investor's perspective, she will benefit if interest rates fall, and suffer if interest rates climb, if the security is non-callable no prepayment option . From the mortgage borrower's point of view, he will exercise his prepayment option if interest rates drop, and thus reduce the benefit for the investor. He will be able to lock in the low...
United States disequilibrium mortgage credit rationing research
The research reported here concerns studies the span both pre- and post-financial deregulation in the US. That is, they can be used to detect the impact of financial deregulation or assess the extent of credit rationing during regulated periods. Before 1983 there were restrictions on the rates charged on savings deposits. This meant that during periods when the maximum deposit rates were binding, lenders were short of funds with mortgages rationed, a process known as disintermediation. It has...
Mortgage Contract Characteristics Continued
Mortgage rates are the cost to a mortgagor for borrowing money. This rate is referred to as the interest on the mortgage. Rates are quoted annually, but paid in installments determined in the contract frequency of payment , usually monthly. Rates can be fixed for the life of the loan, they can float based on an index and a spread, or they can be fixed for a set period and then begin to float. Floating rate mortgages typically have life caps as well as periodic caps. The main characteristics...
Developer vs Contractor
An important clarification must be made between two seemingly similar situations that require two differing loan programs. A construction loan is required when the borrower's funds are needed for the actual building of the property. Large-scale developers usually do NOT require the buyer to obtain construction financing. Instead, most developers will require that the borrower be approved for a purchase mortgage loan. The actual construction of the property is funded with the developer's own...
The simultaneous determination of mortgage demand and choice of mortgage
The research reported under this heading relates back to the demand for mortgage debt discussed in Chapter 2 and the possibility, raised in Chapter 7, that mortgage costs were endogenous to mortgage housing demand equations. In Chapter 2 we noted the possibility that the choice of mortgage instrument and the size of the mortgage debt might be simultaneously determined. Theoretical work has suggested the possible importance of this simultaneous determination Brueckner amp Follain 1988 Brueckner...
Prepayment specific studies
A number of empirical studies have focused upon prepayment behaviour alone Green amp LaCour Little 1999 Abrahams 1997 Quigley amp Van Order 1990 Bennet et al. 1998, 2000, 2001 . This does not mean that default is ignored entirely. For example, Green amp LaCour Little and Abrahams, assume that default patterns are modelled in the base hazard of a Cox Proportional Hazards model. Other studies offer some control by including a measure of equity, or the loan-to-value ratio, at origination Quigley...
The USDA offers a prime choice for low to moderateincome homebuyers
I'd like to write to the president about expanding this program, says Tom Dixon of Catawba County, North Carolina. In referring to the United States Department of Agriculture's Rural Development Administration mortgage, Tom enthuses that, It's a great program . . . this loan can get people into their own houses. This loan makes a tremendous difference to their lives. Under this program, anyone who has a steady job and good credit can afford a house. That's the wonderful thing about this loan....
Refuse to yield to oversized yieldspread premiums YSPs
Most mortgage originators want to sell you a loan to earn a commission. No loans, no paycheck. Plus, loan reps earn their highest commissions when they sell you higher-cost loan products. If your loan rep says, The best I can do is a rate of 6.25 percent and 2 points, don't accept that claim as the gospel truth. Just like a car salesperson or any other type of salesperson , the loan rep may be testing you. If you agree, great. If you balk, the rep can say, Oh, wait a minute, I've just thought...
Mortgage demand under uncertainty and mortgage contract heterogeneity
A number of models approach the choice of mortgage instrument using similar arguments to those encountered in the theoretical analysis of mortgage demand in Chapter 2. In particular, the modelling of mortgage demand under uncertainty where borrowers are risk averse. The household utility function presented in that chapter expression 2.5 included wealth and its variance. Portfolio theory stresses the covariance of asset returns. If a household is focused upon portfolio wealth and its variance -...
Disclosures For Form S Registered Mbs Offerings
Investment-grade MBS offerings registered on Form S-3 present their principal disclosures in the base prospectus and prospectus supplement in lieu of incorporating such information by reference. The new Form S-3 instruction for ABS, as described in Regulation AB,6 specifies additional information that must be reported in the registration. All current disclosure items will continue to be required as applicable. Issuers must determine which information is applicable and material 4. Summary of...
The Handbook Of Mortgagebacked Securities 1
New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright 2006, 2001, 1995 by Frank J. Fabozzi. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.
List of Illustrations
Figure 2.1 Three of Five Housing Units Are Owner Figure 2.2 Mortgage Debt Enables Homeownership and Leads to Wealth Accumulation Quarterly, 1952-Q2 2008 11 Figure 2.3 In 2008, Mortgage Debt Accounts for More than 50 Percent of the Value of Housing Stock Quarterly, 1952-Q2 2008 12 Figure 2.4 Value of Housing Units How Much Has Been Borrowed, Who Are the Borrowers, and Who Funds Them Q2 2008 13 Figure 2.5 Sources of Funding for Residential and Commercial Mortgages Q2 2008 14 Figure 2.6 Types of...
Empirical studies of amortisation behaviour
Empirical studies have been concerned with the choice of maturity of a mortgage and thus implicitly consider the rate of amortisation. This research has covered mortgage choices in the US Dhillon et al. 1990 , Canada Breslaw et al. 1996 and the UK Leece 1997 . For example, Dhillon et al. 1990 evaluated the choice between a 15- and a 30-year fixed rate mortgage and estimated a simple probit to represent this choice. The empirical results stress the importance of affordability and tax subsidies....
FICO Distributions
I show this in Exhibit 5-3, which details FICO distributions for the three main parts of the nonagency market. The data are for deals originated in 2004. While there is some drift from year to year, the distributions for 2004 provide a good idea of how the loan characteristics are distributed in the different sectors. As shown in this exhibit, the jumbo sector has a distribution with the highest FICO scores. Not only are most of its scores greater than 675, but the lower cutoff point is roughly...
The Series A Certificates
Initial Rating of Certificates'31 Moody's Fitch Source Banc of America Mortgage Securities, Inc., Mortgage Pass-Through Certificates, Series 2005-A, Prospectus filed pursuant to rule 424, available at the Securities and Exchange Commission Web site http www.sec.gov, central index key CIK number 0001315171. The temporary reduction in the class 1-A-1 interest rate allows the creation of the class 1-IO certificate, which is described as an interest-only class.8 The interest rate of the 1-IO...
Definition of the YieldtoCall
When a bond is callable, i.e., redeemable prior to maturity at the issuer's option, the cash flow implicit in the yield-to-maturity figure is subject to possible early alteration. Most corporate bonds issued today are callable, but with a certain period of call protection before the call option can be exercised. At the expiration of this period the bond may be called at a specified call price which usually involves some premium over par. This call price may decline in steps towards par in...
Distribution Of Characteristics
In the preceding analysis I discussed how different loan and borrower characteristics defined the nonagency sectors. For the most part, I focused on minimum acceptable levels and sector averages. However, it is actually the distribution of these various factors that is most important. I say this because most of these variables have an impact on credit performance and speed in nonlinear ways. For example, defaults may increase x going from a FICO score of 700 to 650 but increase 3x moving an...
Perspectives from Buffett and Klarman
For further perspectives on this treacherous environment, let's turn to two of the greatest investors of all time Berkshire Hathaway 's Warren Buffett and Seth Klarman of the Baupost Group. On October 16, 2008, Buffett published an Op-Ed in the New York Times in which he highlighted the perils facing investors The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In...
Multiple Borrowers Multiple Scores
Even when you and your spouse co-borrower show more than adequate income to buy and finance a property, both borrowers often need credit scores or explanations that surpass lender standards. Without meeting this requirement, the lower-score borrower might have to withdraw as a co-borrower. The lender will then limit the loan amount to the qualifying capacity of the higher-score borrower. You can work around this problem. Buy a two- or four-unit property, or a home with an accessory apartment,...
Credit Enhancements For Nonagency Mbs Products
Frederick Frank Adjunct Professor of Finance School of Management Yale University The investor in nonagency mortgage-backed securities products is exposed to credit risk. Because there is no explicit or implicit government guarantee, all nonagency securities are credit enhanced in order to obtain a specific credit rating for each tranche in a deal. Credit enhancement mechanisms can take various forms, both from external parties and within the structure of the deal. External credit enhancement...
General background
For those countries with large and extensive mortgage markets, such as the United States US and the United Kingdom UK , mortgage finance can be the single most important source of personal borrowing, dominating the balance sheets of many households. Thus the size, extent and the contractual features of mortgage finance are bound to have important implications for the national economic performance of many countries, along with individual and social welfare. Given the benefits of owner...
Notification
To qualify for delivery on the settlement date, the seller must provide the buyer with pool information by 3 p.m. EST two days prior to settlement this is known as the 48-hour rule . The seller also must indicate the face value of securities to be Sample Pool Information for 1 Million Trade Sample Pool Information for 1 Million Trade Principal Accrued Interest Total Due delivered. This information is transmitted electronically via the Electronic Pool Notification EPN system. International...
Arguments against Short Selling
Shorting looked easy in 2008, but in reality it's a brutally tough business. In many ways, it appears to involve nothing more than applying the same analyses one uses when determining whether to buy a stock On the long side, investors generally seek companies with good management, strong growth, high margins and returns on capital, little or no debt, clean balance sheets, and sustainable competitive advantages all at a low price. Conversely, short sellers look for weak or dishonest management...
Cash deposits toward purchase
With purchases, buyers are normally required to make a large deposit to secure the purchase contract. This deposit is usually called the earnest money deposit, and is held by the seller's agent. This deposit is credited toward the applicant's liquid asset requirements. Loan processors will normally require the following items to confirm that the funds used for the earnest money deposit are acceptable 1. A Verification of Earnest Money Deposit VEMD completed by the agent or Realtor currently...
The Volatility of Bond Prices
It is sometimes erroneously supposed that the volatility of high-grade bond prices in response to a given change in yield is entirely a function of maturity. This is only partly true. There are two other factors which affect volatility importantly the coupon rate and the general level of yields. All things else being equal, with the same percentage change in yield, the volatility of the price of a bond increases 1 As maturity lengthens, the longer the maturity, the greater the price volatility...
Impact on the Broader Economy
The train wreck in the U.S. housing market has triggered a credit crunch that has caused a severe economic decline worldwide. This, in turn, is exacerbating the problems in the housing market, creating a vicious circle. For example, if a business has difficulty borrowing Figure 3.15 Case Study California Home and Condo Resales Source MDA Dataquick. Note includes new construction. Figure 3.15 Case Study California Home and Condo Resales Source MDA Dataquick. Note includes new construction....
Save Taxes and Improve Cash Flow Do a Cost Segregation Study
TO SHELTER LARGE AMOUNTS OF MONEY FROM TAX LIABILITY, ENGAGE IN A COST SEGREGATION STUDY. Tax-deferral strategies are a great way to minimize taxes, and cost segregation and section 1031 Exchanges are two of the most valuable tax-deferral strategies available to commercial real estate owners today. We've dealt with 1031 Exchange programs in the previous two chapters. Now we turn to cost segregation analysis. New investors are improving cash flow and finding immediate tax savings from their...
Expanded Pool Disclosure
Well into the 1980s, analysis of prepayment risk and value focused on the pass-through characteristics that related to refinancing incentive or affordability restraints on turnover , seasoning, and burnout WAC, WAM, estimated age, and factor or percent of principal balance still outstanding. However, as the market continued to grow and mature, MBS broker-dealers and investors began to focus on regional differences in prepayment behavior. For example, California loans, dominated by those...