In America - the largest and most developed in the world of the mortgage market, both in organization and in the number of financial instruments. To take a leading position of the USA managed by forming a transparent liquid secondary market and the effective interaction between its participants.
The main participants in the American mortgage market are:
Borrower - acquiring a mortgage loan to purchase housing.
The lender (a bank or other lending institutions) - providing the borrower a loan against the acquired property.
Mediator - Mortgage Agency, to raise capital for borrowers and provide liquidity in the market.
The investors (mainly institutional) purchasing securities issued by mortgage loans.
The primary and secondary mortgage market
Interaction on the level of the borrower - the bank - is the primary mortgage market. His instrument is traditionally a mortgage (Mortgage). The most popular types of mortgages in the US are:
The loan with a fixed interest rate (Fixed-rate Mortgage, FRM).
The loan with a variable interest rate (Adjustable-rate Mortgage, ARM).
On ARM loans fixed rate for an initial period (usually 3, 5 or 10 years), after which the rate becomes variable and is adjusted depending on the market situation. The frequency of review of the interest rate determined by the terms of the contract. Also under the agreement the borrower has the right to early repayment of the loan (Mortgage Prepayment) any amounts at any time.
Typical mortgage loans issued in the amount of US $ 200 thousand. Under the terms of up to 28% PTI and up to 80% LTV, where:
PTI (Payment-to-Income Ratio) - the ratio of the monthly payment on the loan to the borrower's monthly income.
LTV (Loan-to-Value Ratio) - the ratio of the loan amount to the market value of the collateral.
A prerequisite for obtaining a mortgage in the US is the insurance of the mortgaged property and title (the risk of loss of ownership of the object). Life insurance and disability is at the discretion of the borrower.
Interaction on the level of the bank - the mediator - the investor - is a secondary mortgage market. His instrument is issued by mortgage agencies securities (Mortgage Securities), secured by a mortgage of the primary market. It is this two-level mortgage lending (Two-level Mortgage) operates in the United States. Due to the fact that she was born there, it is called American model mortgage. In practice, it looks like.
The two-level model of mortgage lending
When you contact the borrower in a mortgage bank for a loan, the bank enters into a contract with him while the requirement of drawing up and signing of the mortgage.
Mortgage (Mortgage) - registered security certifying the right of the mortgagee and guarantees to creditors receive payments on the loan. At default by the borrower obligations shall be returned through the sale of collateral.
After the registration of ownership of the property the bank becomes the legal owner of the mortgage. Such mortgages as they accumulate bank integrates the "mortgage pools" and sell to intermediaries - a specialized mortgage agencies. In the US, these are supported by the government organizations as "Ginnie Mae", "Fannie Mae" and "Freddie Mac".
Mortgage pool (Mortgage Pool) - package of similar mortgage loans with similar maturities, payments and interest rates.
This is one of the key differences between the American model of mortgage lending from the European. In the US, lenders are not allowed to mortgage loans on its balance sheet and do not let them backed mortgage securities, and pass this function mortgage agencies.
The Agency shall reimburse the bank paid funds to the borrower, and in return receive a stream of future payments from the borrower on the loan, net of bank commissions. As a result, the banks get the money to issue new loans, and mediators - the ability to make a mortgage.
To do this, mortgage agencies use rights to the mortgages as collateral and release them under the debt - through mortgage-backed securities (Pass-Through Mortgage Backed Securities, MBS), also known as Agent (Agency MBS). This process is known as securitization.
Securitization - the mechanism of converting illiquid credit (mortgage, non-emission paper) in traded on the OTC market and security.
Issued securities agency implemented on the stock exchange, handing the paper to investors who bought the flow of payments from borrowers minus his commission. That is, the agency itself mediate similar mortgage bank. At the same time sent to the investor payments on MBS guaranteed by the pledge is not real estate, and mortgage agency.
The state support of mortgage agencies equates MBS for reliability in government bonds. This makes them available to institutional investors, ensuring liquidity of the secondary mortgage market. Along with conservative investors in agency MBS are investing their money and mortgage real estate investment funds (Real Estate Investment Trust, REIT).
P.S. March 12, 2014 was aware of the impending reform of the mortgage market, which implies the elimination of Fannie Mae and Freddie Mac. Instead, they will have a system of mortgage-backed securities with a federal guarantee, it will hold banks issuing mortgage loans. They will be the first 10% of losses before the cause will enter a new structure - the Federal Insurance Corporation mortgage.
It is also assumed that the securitization of certain standards must be met, for example, repackaged bonds can only loan with a 5% down payment, and for first-time buyers - 3.5%.
The risks of the mortgage market
Credit risk. Mortgage loans are used by borrowers to purchase real estate, which is also the key to them. The presence of such a pledge, along with compulsory insurance risk of loss of property rights, allows to evaluate the credit risk as insignificant.
The most serious impact on the mortgage market has interest rate risk arising from a change in interest rates.
Interest rate risk. High interest rate risk for mortgage lending is associated with the right of the borrower at any time to repay the balance of the debt. This is beneficial to the borrower, but not profitable for lenders and investors, as depriving them of certainty in evaluating the flow of future payments.
As a result, there is a risk of early redemption (Prepayment Risk). As realized this risk? Suppose an investor holding mortgage securities, getting them 5% coupon interest when the market rate is 5%. What happens when interest rates change?
If the rate begins to fall, the price of mortgage-backed securities will begin to grow (the price of debt securities moves in the opposite direction of interest rates). The value of mortgage-backed securities will grow smaller because of the increased risk of early redemption.
At decrease in market interest rates, new mortgage loans issued to begin at lower interest rates. And the borrower is more profitable repay the loan ahead of the current due to the opening of a new a lesser rate.
If the rate of the market will begin to grow, increase, for example, up to 8% per annum, the price of mortgage-backed securities will decline. This drop in its price will be higher than that of a simple bond, due to the decline in loans to be paid early.
This additional risk of mortgage-backed securities called negative duration or negative "convexity".
The borrower is more profitable to put free money for a deposit at 8% and earn an income due to the difference in interest rates between 3% of accommodation (8%) and loans (5%). The investor, on the contrary, is interested in early repayment and return on investment in the purchase of mortgage securities, to place them at higher interest rates.
The risks arising from the expected increase in the risk of treatment called MBS extension (Extension Risk).
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