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Fixed Income Securities, 4th Edition
book

Fixed Income Securities, 4th Edition

by Bruce Tuckman, Angel Serrat
September 2022
Beginner content levelBeginner
560 pages
17h 36m
English
Wiley
Content preview from Fixed Income Securities, 4th Edition

CHAPTER 15Mortgages and Mortgage‐Backed Securities

A mortgage is a loan collateralized by property. This chapter focuses on residential mortgages, through which prospective homeowners borrow money to purchase a home on the collateral of that home.

The most common mortgage loans in the United States are for 30 years and carry fixed rates of interest. They require equal monthly payments, with each allocated in part to interest (which in many cases is tax deductible) and in part to paying down principal. Mortgages also give homeowners the option to pay off or prepay all or part of the outstanding balance at any time. An implication of these contractual features is that, when mortgage rates fall, homeowners can profitably refinance their existing, high‐rate mortgages by prepaying them with money raised from new, lower‐rate mortgages. Homeowners also have to prepay when they sell a property, because the property is the collateral behind the mortgage. Details are discussed throughout the chapter, but the extent to which homeowners prepay is a key risk factor for lenders and investors: mortgages that carry an above‐market rate lose value when homeowners prepay, while those that carry a below‐market rate gain value with prepayments.

Another key risk factor is default. While mortgages are collateralized by homes, lenders can lose principal if a homeowner defaults when the value of the home is less than the outstanding balance on the mortgage. Lenders protect themselves against this ...

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ISBN: 9781119835554Purchase Link