Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives

CHAPTER 9

Mortgages and Mortgage-Backed Securities

Introduction

In most developed countries, the right to own a home is largely considered a fundamental right. However, few people are in a position to pay the cost of buying a home from their own personal funds, so most of the money required to buy a home must be borrowed. A loan that is collateralized by real estate property is called a mortgage loan. The lender is called the mortgagee, and the borrower is called the mortgagor. In the event that the mortgagor defaults on the loan, the lender can seize the property and sell it to recover what is due him. This is called the right of foreclosure.

Market Participants

There are three categories of players in the mortgage market: (1) mortgage originators; (2) mortgage servicers; and (3) mortgage insurers.

Mortgage Originator

Who is a mortgage originator? The original lender or the party who first extends a loan to the acquirer of the property is called the mortgage originator. Originators include:

• Thrifts or savings-and-loan associations;
• Commercial banks;
• Mortgage bankers;
• Life insurance companies; and
• Pension funds.

Income for the Originator

The originator gets income from various sources. First, when a loan is granted, the originator will levy an origination fee. The fee is expressed in terms of points, with each point representing 1 percent of the borrowed funds. For example, if a lender charges 1.5 points on a loan of $200,000, the origination fee will amount to $3,000. Most originators ...