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Use the following setup to answer questions 1 – 9. SETUP: Four hundred households receive mortgage...

Use the following setup to answer questions 1 – 9.

SETUP: Four hundred households receive mortgage loans from Packer Bank to buy homes. The buyers have an annual gross income of $45,000 and borrow $100,000 on a 30-year fixed rate loan of 6 percent. The annual real estate taxes and annual homeowners insurance premiums are $2,400 and $900, respectively. The borrowers also receive guarantees from the Federal Housing Administration (FHA). Packer Bank securitizes all the loans and sells them as GNMA mortgage pass-through securities to Titan Investments.

1. What is the monthly loan principal & interest payment (to two decimal places)? Also, complete the timeline and financial calculator box needed to solve this problem.

|-------------|-------------|-------------|----------\/----------|

Enter
	N	I/Y	PV	PMT	FV
Solve for

2. What would be the PITI for each loan (to two decimal places)? Show your work.

3. What would be the front-end ratio for each loan (to two decimal places in percent)? Show your work and explain if the ratio is satisfactory.

4. What would be the principal amount of the loan after 10 years of payments have been made (to nearest dollar)? Also, complete the timeline and financial calculator box needed to solve this problem.

|-------------|-------------|-------------|----------\/----------|

Enter
	N	I/Y	PV	PMT	FV
Solve for

5. What would be the principal amount of the loan after 20 years of payments have been made (to nearest dollar)?

6. What would be the principal amount of the loan after 30years of payments have been made?

7. What participant(s) in the setup above holds the interest rate risk associated with mortgage loans? Explain your answer.

8. What participant(s) in the setup above holds the default rate risk associated with mortgage loans? Explain your answer.

What participant(s) in the setup above holds the prepayment rate risk associated with mortgage loans? Explain your answer.

Expert Solution

1. Inputs in the financial calculator , to solve this question----monthly payment on the mortgage--

N=360; I/Y=0.5%;PV=100000,FV=0 & Enter at PMT returns the value----- 599.55

2. Monthly PITI for each loan

ie. Principal,Interest, Taxes ,Insurance for each loan

599.55+((2400+900)/12)=

874.55

3. Front-end ratio= Monthly mortgage payment(PITI)/Monthly gross income

874.55/(45000/12)=

23.32%

We can calculate annually also.

Annual PITI=(599.55*12)+2400+900=10494.6

Annual gross income =45000

Front-end ratio=10494.60/45000=

23.32%

4. Inputs in the financial calculator , to solve this question----principal amount of the loan after 10 years of payments have been made

N=360-120=240 ; I/Y=0.5%,PMT=599.55 FV=0 returns PV= 83685.61

5.Inputs in the financial calculator , to solve this question----principal amount of the loan after 20 years of payments have been made

N=360-240=120 ; I/Y=0.5%,PMT=599.55 FV=0 returns PV= 54003.83

6.Inputs in the financial calculator , to solve this question----principal amount of the loan after 30 years of payments have been made

N=360-360=0 ; I/Y=0.5%,PMT=599.55 FV=0 returns PV= 0

7.Participant in the above setup above holds the interest rate risk associated with mortgage loans--

Mortgage borrowers----if the interest rate falls , they will be paying at the old higer rates --which will be a loss to them.

Titan investments-- who has purchased the mortgage pass thorugh, ie mortgage-backed secutities---as now , if the mortgage borrowers willl opt to prepay to re-finance at lower interest rates, and the former will be able to reap low returns only.

8.Participant in the above setup above holds the default rate risk associated with mortgage loans--

NONE--- as these mortgages are GNMA approved ---GNMA & FHA are federal government agencies---who step in , in the event of default by mortgage borrowers.GNMA mortgage pass-throughs are totally free of default risks.

9.Participant in the above setup above holds the prepayment rate risk associated with mortgage loans?

Titan investments-- who has purchased the mortgage pass thorugh, ie mortgage-backed secutities---as now , if the mortgage borrowers , prepay to re-finance , the former will be able to reap low returns only.

Prepayment risk & interest rate risks trigger one another.

jeff jeffy answered 1 year ago

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