Fundamentals of Financial Instruments, 2nd Edition

CHAPTER 9Mortgages and Mortgage-backed Securities

INTRODUCTION

In most developed countries the right to own a home is considered to be virtually a fundamental right. But few people are in a position to pay the cost of acquisition of a home from their own personal funds. Consequently, most of the funds 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 of default on the part of the mortgagor, the lender can seize the property and sell it to recover the amount that is owed to it. This is called the right of foreclosure.

MARKET PARTICIPANTS

There are three categories of players in the mortgage market. These are:

• Mortgage originators
• Mortgage servicers
• Mortgage insurers

MORTGAGE ORIGINATION

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 & Loan Associations
• Commercial Banks
• Mortgage Bankers
• Life Insurance Companies
• Pension Funds

Income for the Originator

Originators get income from various sources. First, when a loan is granted, they will levy an origination fee. The fee is expressed in terms of points where each point is 1% of the borrowed funds. For example, if a lender were to charge 1.5 points on a loan of $200,000, the origination fee will amount to $3,000. Most ...