Financial Markets and Institutions (8th Edition) (Pearson Series in Finance) 8th Edition by Frederic S Mishkin (Author), Stanley Eakins (Author) Chapter 14
Questions
- What distinguishes the mortgage markets from other capital markets?
- What kind of insurance do lenders usually require of borrowers who have less than 80% loan-to-value ratios?
- Lenders tend not to be as flexible about the qualifications required of mortgage customers as they can be of other types of bank loans. Why is this so?
Problems
- Compute the required monthly payment on an $80,000 30-year fixed-rate mortgage with a nominal interest rate of 5.80%. How much of the payment goes toward principal and interest during the first year?
- Consider a 5-year balloon loan for $100,000. The bank requires a monthly payment equal to that of a 30-year fixed-rate loan with a nominal annual rate of 5.5%. How much will the borrower owe when the balloon payment is due?
- Consider the following options available to a mortgage borrower:
| Option | Loan Amount | Interest Rate (%) | Type of Mortgage | Discount Points |
| 1 | $100,000 | 6.75 | 30-yr fixed | 0 |
| 2 | $150,000 | 6.25 | 30-yr fixed | 1 |
| 3 | $125,000 | 6.0 | 30-yr fixed | 2 |
What is the effective rate for each option?
- Two mortgage options are available: a 30-yr fixed-rate loan at 6% with no discount points, and a 30-year fixed-rate loan at 5.75% with 1 discount point. How long do you have to stay in the house for the mortgage with points to be a better option? Assume a $100,000 mortgage.
Part II: Other Questions
Question 1: Earlier in the semester we discussed the following three goals of the financial system:
- Facilitate transfers of funds from savers to investors
2. Facilitate sharing of risks
3. Provide liquidity
Question 1a: How do MBS’s (Mortgage Backed Securities) achieve these goals?
Question 1b: Do you think 30-yr mortgages would be liquid without securitization?
Question 1c: To the extent that the US government backs (explicitly or implicity) mortgage backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, do you think that the 30-yr mortgage market could remain liquid without government intervention?
Question 2: Read the 2013 WSJ article entitled “Fannie, Freddie Future Finds a Focus.”
URL http://www.wsj.com/articles/SB10001424127887324021104578549682228860970?alg=y
Question 2a: In your opinion, should Congress replace Fannie Mae and Freddie Mac, should it fix them, or should it simply eliminate them? Explain.
Question 2b: Do you think the market for 30-year fixed-rate mortgages would remain liquid without government intervention? Why or why not?
Question 2c: Why do you think the terms of Freddie and Fannie’s bailout doesn’t allow them to pay off any of the $188 billion they owe? Should the $132 billion already paid as preferred dividends be allowed to count as repayment of the loans? Why or why not?
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