Question

Assume you are looking to buy a house $200,000 with a 20 year mortgage at 12%, estimate the monthly mortgage payment, first months interest, total amount to be repaid and the total interest.

Explain why some financial institutions prefer to sell the mortgages they originate. Research and provide an example either current or historical.

Why do you think it is difficult for investors to assess the financial condition of a financial institution that has purchased a large amount of mortgage-backed securities? Provide an example.

Answer 1

Given :

Principle Amount (P) =200000

Period (N)=20 year

total no. of periods(n) = 20*12=240 month periods

Rate (R)=12% per year i.e. (r)= 12/12=1% per month

Therefore, Monthly Repayment = P * (r (1+r)^n) / ((1+r)^n - 1)

Monthly repayment = 2201.85

First Month Interest= Monthly repayment - Monthly Principal

=2201.85 - 200000/12

=1368.51

Total Repayment =2201.85 * 240

Total Repayment =528446

Interest payment = Total repayment - P

=528446 - 200000

Interest Payment =328446

Financial institutions prefer to sell mortgages mostly if they became non- performing assets NPAs.

NPAs are nothing but the mortgages orginated by banks which are not paying their interest for certain period of time that might be 3 months or a year.

Therefore such NPAs has high probability to not pay their interests or repayment therefore this became problem for financial institutions and they try to manage their risk and get their money by selling mortgages.

I'm not sure about why it is difficult for investors to assess the financial condition of a financial institution that has purchased a large amount of mortgage-backed securities,but different factors decides the stabilty of such financial institution like economy growth, employment,purchasing power and Inflation.These are all external factors affecting these institutions therefore it might be difficult to assess their financial performance.