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How Mortgages Facilitate the Flow of Funds

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Criteria Used to Measure Creditworthiness

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Classifications of Mortgages

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Fixed Rate Mortgages

locks in the borrower's interest rate over the life of the mortgage.

Adjustable- Rate Mortgages

allow the mortgage interest rate to adjust to market conditions.

Graduated- Payment Mortgages

allows the borrower to initially make small payments on the mortgage and eventually the payments level off.

Growing- Equity Mortgage

is similar to graduated- payment mortgages in that the monthly payments are initially low and increase over time. Unlike the GPM, however, the payments never level off but continue to increase (typically about 4 percent per year) throughout the life of the loan.

Second Mortgage

can be used in conjunction with the primary or first mortgage. Some financial institutions may limit the amount of the first mortgage based on the borrower's income. Other financial institutions may then offer a second mortgage, with a maturity shorter than on the first mortgage. In addition, the interest rate on the second mortgage is higher because its priority claim against the property in the event of default is behind that of the first mortgage.

Shared- Appreciation Mortgage

allows a home purchaser to obtain a mortgage at a below-market interest rate. In return, the lender providing the attractive loan rate will share in the price appreciation of the home.

Mortgage Maturities

30 years used to be the most common, now it's 15 years because of the money saved in interest.

Amortizing Mortgages

Given the maturity and interest rate on a mortgage, an amortization schedule can be developed to show the monthly payments broken down into principal and interest.

Fannie Mae Mortgage- Backed Securities

Federal National Mortgage Association. It issues debt securities and uses the proceeds to purchase mortgages in the secondary mortgage market. >$800M securities outstanding. A private company with no gov't funding, state income tax exempt, and gets credit lines from the treasury.

Ginnie Mae Mortgage- Backed Securities

Government National Mortgage Association.

Freddie Mac

Federal Home Loan Mortgage Association

Mortgage- Backed Securites Within CDOs

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Publically Issued Pass- through Securities

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Participation Certificates

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Collateralized Mortgage Obligations (CMOs)

developed in 1983, semiannual interest payments and separated into classes.

class 1: quickest payback; receive repaid principle

Securitization

the pooling and repackaging of loans into securities. The securities are then sold to investors who become the owners of the loans represented by those securities. This process allows for the sale of smaller mortgage loans that could not easily be sold in the secondary market on an individual basis.

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