Home Mortgage Loans

An Overview Of Mortgages And The Mortgage Market

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Anand K. Bhattacharya, Ph.D.

Managing Director Countrywide Securities Corporation

Frederick Frank Adjunct Professor of Finance School of Management Yale University

William S. Berliner

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 investment vehicles. By way of comparison, at the same point in time, the outstanding amount of U.S. Treasury notes and bonds totaled $3.9 trillion.1 For a variety of reasons, such as product innovation, technological advancement, and demographic and cultural changes, the composition of the primary mortgage market is evolving at a rapid rate—older concepts are being updated while a host of new products is also being developed and marketed. Consequently, the mortgage lending paradigm continues to be refined in ways that have allowed lenders to offer a large variety of products designed to appeal to consumer needs and tastes. This evolution has been facilitated by attendant increased sophistication in pricing that has allowed for the quantification of the inherent risks in such loans.

The purpose of this chapter is to provide a general framework for understanding the overall nature and structure of the mortgage market. The various products originated in the mortgage markets are summarized, and the ongoing evolution in the development of such products is discussed. Additionally, the process of determining mortgage-lending rates is also outlined, along with an evaluation of the risks associated with such mortgage products.

1. Source: Federal Reserve.