Lecture 22 - Mortgage Lending Part 1

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EXAM- Possible questions include know how to qualify someone for the maximum home loan or home price amounts, understand relationships between interest rates and effect of prepayment on loan values, know how to calculate PV of home loans under different scenarios of interest rates and prepayment rates.Know features of an ARM and how they relate to interest rates and payments. Know the relationship between the 30-year FRM rate and the 10-year Treasury rate.

Print following notes and handbook and bring to class.

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Read/skim short article on Measuring Interest Rate Risk at  MeasuringIntRiskforMtg.mht but print and bring to class Figure 1 at

MeasuringIntRiskforMtgFig1.pdf and Figure 2 at MeasuringIntRiskforMtgFig2.pdf.

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Know features of ARMs in the Federat Reserve's Consumer Handbook on Adjustable-Rate Mortgages (18 pages) at

FEDConsumerHandbookonARMs.mht (225.50 kb).

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KNOW that the 30-year fixed-rate mortgage (FRM) rate is closely tied to the 10-year Treasury rate.  See graph at link below.  However, "Determinants of Mortgage Interest Rates: Treasuries versus Swaps," C. Stace Sirmans, Stanley D. Smith, and G. Stacy Sirmans, Journal of Real Estate Finance and Economics, (2013) Vol. 47, Issue 4 (October), DOI 10.1007/s11146-013-9445-9, demonstrates that conventional mortgage rates are better explained by the 10-year swap rate than the 10-year Treasury rate.

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OPTIONAL (NOT ON EXAM):  For an international comparison of mortgage products in 2010 see http://www.housingamerica.org/RIHA/RIHA/Publications/74023_10122_Research_RIHA_Lea_Report.pdf

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