Lecture 23 - Mortgage Lending Part 2

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EXAMKNOW relationships described in mortgage rate sheet and other information and how features affect risk or return; KNOW how to calculate the marginal cost of PMI; KNOW mortgage banking sources of income and risk.

View but DO NOT PRINT the mortgage rate pricing sheet for 10/30/06 at MtgRates10.30.06.pdf.  Print the rate relationships for the pricing sheet at MtgRates103006.doc.

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Print the short notes on the marginal cost of Private Mortgage Insurance (PMI) at mtgpmi.doc.

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See household debt service ratio at Household Debt Service Ratios 2014 Q4.xlsx which peaks in 2007 Q4.

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We will not cover the the new Qualified Residential Mortgages (QRM) requirements because they were covered in the lecture 10 notes about securitization. Know that some of the key features of a QRM are (1) monthly total payment/gross income ratios <= 43%, including the highest possible payment on an ARM, (2) no interest-only payments or negative amortization, and (3) no "low" or "no" documentation loans are allowed. Regulators also decided (10.21.14) against a 20% down payment alternative QRM requirement to avoid the 5% skin in the game requirement. Most non-QRM loans will be held on the bank's books and not sold as part of a mortgage-backed security.

Examine figure 2 on page 5 in the following report for the Mortgage Bankers Association of Central Florida that shows how prices have fluctuated. House prices not only affect affordability for new mortgages, but they also affect the credit risk of outstanding mortgages, particularly when the home is worth less than the outstanding loan amount, i.e., the loan is "under water."

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Print notes on mortgage banking income and risk at MtgBanking.doc. You are NOT responsible for valuing mortgage service rights. 

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UNLESS WE COVER THE FOLLOWING TOPICS IN CLASS THEY WILL NOT BE ON THE EXAM.

If there is time we will review the latest Senior Loan Officer Opinion Survey on Bank Lending Practices at Selected Large Banks in the U.S. with respect to loan terms for residential and consumer loans.  The latest and past surveys may be found at the link below.  DO NOT PRINT IT.

http://www.federalreserve.gov/boarddocs/SnLoanSurvey/

The characteristics of deficiency judgments (definition, length for possible action, prime targets for lenders) (10 pages) are described in DeficiencyJudgments.doc.  The differences in the more restrictive foreclosure laws and practices in Europe vs. the US are described in WSJUSvsEuropeForeclosures013113.doc.

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"What are covered bonds?" at CoveredBondsDec08.pdf.

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