Financial Markets, Banking, and Monetary Policy

CHAPTER 10 The Mortgage Market

WHAT YOU WILL LEARN IN THIS CHAPTER

• The connection between the availability of mortgage finance and home ownership rates.
• The difference between residential and commercial mortgages.
• The massive size of this market.
• Why mortgages tend to have long maturities and are amortized.
• Why home buyers tend to prefer FRMs over ARMs.
• The advantage to the home buyer of qualifying for a conforming (conventional) mortgage.
• The difference between first and second mortgages and how they are used and priced.
• How the prepayment option embedded in most home mortgages affects cash flows from mortgages and how it gets priced into mortgage interest rates.
• Why commercial mortgages have shorter maturities and are priced differently than home mortgages.
• How monetary policy gets transmitted through the mortgage market and onto residential and nonresidential investment.

BACKGROUND

Have you wondered why people tend to own their homes in the United States but rent in many other parts of the world? Might the availability of credit to finance home purchases play a part? Why do homeowners typically make monthly mortgage payments, instead of semiannual or annual payments? Why do mortgage payments cover both interest and principal, whereas bond coupon payments cover only interest? Why would a homeowner want a fixed-rate mortgage when payments are often lower on an adjustable-rate mortgage? Why are there so many mortgage refinancings—“refis”—especially when interest rates drop? ...