
Contents
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15.1 Introduction 15.1 Introduction
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15.2 Residential Mortgage Features 15.2 Residential Mortgage Features
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15.2.1 Mortgage Payments 15.2.1 Mortgage Payments
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15.2.2 The Credit-Extension Decision 15.2.2 The Credit-Extension Decision
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15.2.3 Foreclosure 15.2.3 Foreclosure
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15.2.4 Mortgage Servicing 15.2.4 Mortgage Servicing
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15.2.5 Industrial Organization of the Mortgage Market 15.2.5 Industrial Organization of the Mortgage Market
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15.3 Household Decision-Making 15.3 Household Decision-Making
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15.3.1 Household Choice of Mortgage Features 15.3.1 Household Choice of Mortgage Features
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15.3.2 Household Decisions to Refinance or Default 15.3.2 Household Decisions to Refinance or Default
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15.3.3 Evidence from US Mortgage Modification Programs 15.3.3 Evidence from US Mortgage Modification Programs
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15.4 Residential Mortgages as a Financial Asset 15.4 Residential Mortgages as a Financial Asset
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15.4.1 Valuing a Mortgage 15.4.1 Valuing a Mortgage
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15.4.2 Mortgage-Backed Securities 15.4.2 Mortgage-Backed Securities
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15.5 Regulation of Mortgages 15.5 Regulation of Mortgages
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15.6 Financial Stability and Residential Mortgages 15.6 Financial Stability and Residential Mortgages
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15.6.1 Residential Mortgages as a Vulnerability of the Financial System 15.6.1 Residential Mortgages as a Vulnerability of the Financial System
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15.6.2 Consequences of an Increase in Mortgage Credit Supply 15.6.2 Consequences of an Increase in Mortgage Credit Supply
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15.6.3 Macroprudential Policies and Mortgages 15.6.3 Macroprudential Policies and Mortgages
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15.7 Conclusion 15.7 Conclusion
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References References
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15 Residential Mortgages
Get accessAndreas Lehnert is the director of the Division of Financial Stability at the Federal Reserve Board in Washington, DC. He joined the Fed after earning his Ph.D in economics from the University of Chicago. He started in the household finance research group where he worked on a variety of topics in consumer and mortgage credit. During the financial crisis, he contributed to several projects including various mortgage modification initiatives, the TARP, the 2009 bank stress tests, and the TALF. In November 2010, he moved to the Board’s newly created financial stability group where he participates in a variety of ongoing initiatives to promote financial stability, including regulatory reform, the periodic assessment of financial vulnerabilities, the development of macroprudential tools, and the design and oversight of the bank stress tests; in addition, he supports the Federal Reserve’s role on the Financial Stability Oversight Council and the Financial Stability Board. His research focuses on financial stability, macroprudential policy, banking, and finance.
Alex Martin is a Senior Research Assistant at the Federal Reserve Board of Governors in the Division of Financial Stability. Previously, she served as a Research Intern at the US Department of the Treasury in the Office of Economic Policy. She is a graduate of the University of Mississippi with a B.A. in International Studies and Mathematics.
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Published:06 November 2019
Cite
Abstract
This chapter provides an overview of residential mortgages. Mortgages are loans to households secured by real property. Mortgage banking has historically comprised three functions: origination (the extension of credit), servicing (payment collection), and funding (financing the loans). When extending credit, lenders consider property value, leverage, the borrower’s payment-to-income ratio and the history of repaying debt. Laws regulating the seizure of the home affect the equilibrium provision of credit. Households choose how much to borrow, between fixed- and adjustable-rate mortgages, and an amortization schedule. After origination, households may refinance or default. Recent evidence supports the view that household default is driven by liquidity constraints rather than strategic considerations. Investors value mortgages like any other fixed income security with embedded options. Bank capital regulations seek to align regulatory capital with economic capital. Mortgage credit risk varies widely across mortgage types and is highly correlated with house prices. In several jurisdictions, residential mortgage underwriting standards can now be adjusted over time by the authorities as part of these jurisdictions’ macroprudential policy framework.
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