Question

2. What are the four major categories of mortgages and what percentage of the overall market does each entail?

18. Describe a collateralized mortgage obligation. How is a CMO created?

4. You plan to purchase a $150,000 house using a 15-year mortgage obtained from your local credit union. The mortgage page 238rate offered to you is 5.25 percent. You will make a down payment of 20 percent of the purchase price.

1. Calculate your monthly payments on this mortgage.

2. Construct the amortization schedule for the first six payments.

Answer 1

(2) Four basic categories of mortgages are issued by financial institutions: home, multi-familydwelling, commercial, and farm.

Total mortgage debt outstanding at the end of 2018 was $15.419 trillion

Home mortgages ($10.882 trillion, or 70.58%) are used to purchase one-to-four family dwellings. Multifamily dwelling mortgages ($4.42 trillion, or 9.18%) are used to finance the purchase of apartment complexes, townhouses, and condominiums. Commercial mortgages, or nonfarm nonresidential mortgages ($2.87 trillion, or 18.62%) are used to finance the purchase of real estate for business purposes (e.g., office buildings, shopping malls). Farm mortgages ($0.25 trillion, or 1.62%) are used to finance the purchase of farms.

(18) A collateralized mortgage obligation (CMO) is a security that is tied to an underlying pool of mortgages.

It is created by lending institutions in this manner :

• Lenders typically lend to many different types of borrowers
• the mortgages owned by the lenders are pooled together
• the underlying pool is sub-divided into various tranches based on the borrower's risk
• each tranche is broken up into a large number of securities, each with a small face value
• these securities represent the principal and interest repayments of the borrowers
• these securities are now issued to investors, who buy them as per their risk appetite and return requirements
• the lenders acts as an intermediary between the borrowers and the CMO investors

(4)

Down payment is 20%. So the principal outstanding at the beginning of the mortgage is $150,000 * 80%, which is $120,000

The monthly payment is calculated using the PMT function in Excel with these inputs :

rate = 5.25%/12

nper = 15 * 12

pv = -120,000

We calculate PMT (the monthly payment) to be $964.65

Interest portion of payment = principal outstanding at beginning * 5.25% / 12

Principal portion of payment = payment minus interest portion

principal outstanding at end = principal outstanding at beginning minus principal portion of payment

Month	Principal outstanding at beginning	Payment	Interest	Principal	Principal outstanding at end
0					$120,000
1	$120,000	$964.65	$525.00	$440	$119,560
2	$119,560	$964.65	$523.08	$442	$119,119
3	$119,119	$964.65	$521.14	$444	$118,675
4	$118,675	$964.65	$519.20	$445	$118,230
5	$118,230	$964.65	$517.26	$447	$117,782
6	$117,782	$964.65	$515.30	$449	$117,333