Class notes/September 30

Underwriting
Borrower Credit Worthiness
Borrower NOI
Asset Value

Credit is cheap and underwriters focus only on future asset values (in this case, real estate). The next level, the rating agents, should have looked and seen the standards falling and corrected them.

By amortizing fixed rate mortgage for $100,000, 5% anual rate

PMT formula = monthly rate!!!


1970s we started allocating adjustable rate mortgages
lenders didn't want to make a 5% interest rate commitment for 30 years. they stopped making loans and negotiated adjustable loans to borrowers. the risk is more evenly split between borrower and lenders in this model. ARMs are a little more complicated and there are a few more terms.

Life-time Cap: Maximum interest rate that the loan can take.
Periodic Cap/Adjustment limit: max annual or monthly cap the mortgage can adjust to (i.e. 1%)
Index: What the mortgage interest rate is keyed to (these are money market rates that are international) (e.g. federal funds rate (federal reserve rate charge + 3% from bank, nist stavke), 6 month treasury bill (most volatile), 11th district cost of funds, libor (rate quoted in london that is quickly becoming the international rate)
teaser rate: initial rate that is different than your qualifying rate


Amortization rate calculations differ in two ways:
First you need to forecast the interest rate
Recompute the monthly interest rate based on the annual balance in column D.

After finding the value of all of those payments over the life of the loan, (NPV(rate,the whole payment column)

NPV allows you to see which one is a better loan over its term http://www.investopedia.com/terms/p/presentvalue.asp.


The shortest loan you can afford is the best loan
The lowest rate is better
A bigger loan is better when asset values are rising but not preferable when asset values are falling.
If you don't have any money then lower down payment is best.
If you are income strained you go for the lowest monthly payment.
Risk adverse
If you are a homebuyer and you expect to make no other deductions, you can care less about interest rate but care more about rate (you can claim the interest on your taxes).
Affordable home buyer/developer-->biggest loan and lowest payment

Private debt is from


Public: mutual funds, public backed securities, etc. it is held by private companies, commercial mortgage backed securities,

Equity-private investors and REITs

debt- savings and loans, mortgage backed security.
Look at Chapter 7 in text