CHAPTER 10: makes relatively small monthly payments
MORTGAGE MARKETS AND DERIVATIVES over the loan term. Then, pagdating ng
end of term, dito magkakaroon ng large
What distinguishes the mortgage from other payment si borrower to cover the
capital market? remaining principal balance.
[Mortgage is a capital market for it covers a long- - On the other hand, sa fully amortizing loan
term debt. The differences between mortgage and ito ‘yung familiar na tayong lahat. Dito
other capital markets are the following:] fixed payment of both the interest and
principal payment ang nangyayari kaya by
[SECURED BY REAL ESTATE] the end of the loan term, zero balance na
- In a mortgage market kasi, the property ‘yung loan ni borrower.
being financed or the property na bubuoin
through the loan becomes the collateral Give and explain briefly the three important
itself. Meaning to say, if the borrower factors that affect the interest rate on the loan.
defaults or fails to make repayments
according to the agreed terms, the lender [CURRENT LONG-TERM MARKET RATES]
now has the right to take possession of - These long-term market rates kasi are
the property through foreclosure. What is affected by the global, national, and even
foreclosure? Foreclosure is the legal regional factors. Therefore, mortgage
process wherein ‘yung amount na hindi being a long-term loan, it’s also affected
nabayaran ni borrower ay mababawi ni by those said factors.
lender by taking possession nga of the
financed property then, selling it. [TERM OR LIFE OF THE MORTGAGE]
- The interest rate risk falls as the term to
[THE BORROWERS] maturity decreases. Ang typical term ng
- Ang usual borrowers kasi ng other capital isang mortgage ranges from 15 to 30
markets ay corporations or businesses years. Ibig sabihin, ang interest rate ng 15
and national and local governments. years mortgage loan ay mas mababa
However, sa mortgage, ang usual kumpara sa 30 years, kasi diba kapag
borrowers ay individuals. Why? Because mas mababa ang interest rate mas
of its purpose. Specific kasi ang purpose mababa ang risk tapos kapag naman
ng mortgages which is to finance the mataas, mataas din ang risk.
purchase of a real property, most typically
ay houses. ‘Yung other capital markets [NUMBER OF DISCOUNT POINTS PAID]
kasi like bonds and stocks ay focus lang - Discount points are interest payments
sa ownership ng shares sa isang company made at the beginning of a loan. 1 point
or as in utang lang siya sa isang company, equals 1% interest. Paano ito
they are not tied talaga sa isang real nakakaapekto sa interest rate? A payment
property. of a discount point reduces the interest
rate na ipapatong sa buong loan.
[VARYING AMOUNTS AND MATURITIES]
- Mortgage loans are made for varying What features contribute to keeping long-term
amounts and maturities depending on the mortgage interest rates low?
needs of the borrower. Unlike sa other
capital markets, fixed lang ‘yung amount [A lot of factors affect the movement of mortgage
and maturities. interest rates, but to name a few: ]
Most mortgage loans once had balloon [CENTRAL BANK POLICIES]
payments: Now, most current mortgage loans - BSP being the central bank of our country,
are fully amortized. What is the difference I think ay familiar naman na ang lahat
between a balloon loan and a fully amortizing kung anong ginagawa nila. BSP sets
loan? benchmark for interest rates in the market
and is also the one that creates and
- In a balloon loan, the borrower is primarily implements monetary policies. Hence, isa
paying the interest in a way that he/she ito sa mga nagcocontribute sa
pagpapababa ng long-term mortgage
interest rates.
- For example, let’s say that the inflation
rate is stable and under control at the Describe briefly the following mortgage loans.
moment, kumbaga mababa lang. Then,
BSP is more likely to keep the interest [EQUITY PARTICIPATING MORTGAGE LOANS]
rates low to stimulate economic growth. [SHARED-APPRECIATION MORTGAGE
Domino effect lang kasi ‘yan eh. If the LOANS]
short-term mortgage interest rates ay [GROWING EQUITY MORTGAGE LOANS]
mababa, then for sure ay hindi rin nalalayo [GRADUATED-PAYMENT MORTGAGE LOANS]
nang sobra ang interest rates for long- [FIXED-RATE MORTGAGE LOANS]
term mortgages.
Give the largest providers of funds for
[GLOBAL ECONOMIC FACTORS] mortgage loans.
- If the global economy is declining,
investors and borrowers are likely to [page 167]
pursue safer investments and loans. Diba
kapag long-term, matic it’s risky kasi What is meant by “Securitization of
syempre a lot of things could happen in Mortgages”?
those years that could either affect the
parties negatively or positively. Also, if the ["Securitization of Mortgages" refers to the
risk is high so as the interest rate to process of pooling together a large number of
compensate nga for the affiliated risk. individual mortgage loans and converting them
What I’m trying to say is, since the global into a tradable financial instrument known as a
economy is declining, instead of pursuing mortgage-backed security (MBS). This process
long-term mortgages, syempre doon na involves bundling mortgages, which represent
lang sila sa mas safe. So, the remedy to debt obligations of homeowners, and then selling
restore the demand for long-term the rights to the future cash flows from these
mortgages is to lower their interest rates. mortgages to investors.]
Distinguish between conventional mortgage Describe the impact of securitized mortgage
loan and insured mortgage loan. on the mortgage market.
[The main difference of the two is the security of [DIVERSIFICATION OF RISKS]
the mortgage loan. In Conventional Mortgage, - By converting mortgages into mortgage-
this loan typically do not require any insurance IF backed securities (MBS) and selling them
the borrower pays a downpayment of 20% or to investors, the risk associated with
more. Pero, if the downpayment is less than 20%, individual mortgages is diversified across
PMI or Private Mortgage Insurance may be a broader investor base. This
required to protect the lender.] diversification makes it more attractive for
investors to participate in the mortgage
[What is Private Mortgage Insurance nga ba? market, as they can spread their risk
This is the type of insurance that protects the across various loans.
lender in case the borrower defaults on the loan.
Pinaka purpose nito is to mitigate the lender’s risk
kapag nagbibigay ito ng loan with a smaller
downpayment, usually kasi ay parang collateral
na ang dating ng downpayment, kaya kapag
malaki ang downpayment mo, mas trusted.]
[Now, on the other hand, ang Insured Mortgage
Loan naman, from the name itself, insured ito or
backed by government or government-controlled
entities. However, mas mababa ang nirerequire
nitong downpayment compared sa conventional.]