Mortgage notes

You wish to borrow 20,000 to build a home. The bank offers you a 20-year mortgage at 8% compounded monthly. What is your monthly payment What is the total interest that will be paid over 20 years Repeat the calculation for a IO-year and 30 year mortgage (note that the above is standard wording for the nominal interest). 

The year 1999 also witnessed, again due to a modification of legislation, the debut of the first international issue of the Spanish Cedulas Hipote-carias or Mortgage Notes. ... 

As Marc Shell notes, however, hypothesis is inherently bound up with money. To make a hypothesis is to ask for credit that may be called in later, when a conclusion is reached and meaning exhausted. When Plato criticized the sophists, he simultaneously expressed anxiety about coinage—that is, as a division between symbolic and material value Was not even Socratic dialectic. . . pervaded by the monetary form of exchange Was not dialectical division a kind of money changing, and dialectical hypothesizing a kind of hypothecation, or mortgaging (Shell 2). 

The problem of exploitation by taxation is discussed in 4.1.5. One should note that exploitation of the peasants through mortgages, while in one sense equivalent to the exploitation of wage labour, elsewhere in the same work is called one of "capital s secondary modes of exploitation", presumably because it is dissociated from the dynamic core of the capitalist mode of production. "Usurer s capital... paralyses the productive forces instead of developing them." In Capital III Marx extends the term "secondary exploitation" to cover credit for consumption purposes as... 

It is worthwhile noting that there has not been a bankruptcy proceeding against a mortgage bank since the enactment of the Mortgage Bank Act over 100 years ago. 

The final ratings assessment of the RMBS notes will reflect the ratings scenario under which the notes will continue to receive all amounts due. This assessment will also take into account the potential variations in the timing of the losses and uncertainty in the prepayment rate on the mortgages. 

The challenge facing the designers of RMBS transactions is to provide a structure that will provide an attractive investment while being able to handle the uncertain nature of the cash flows generated by the underlying mortgages. A transaction will usually be structured into several classes of notes with different expected maturities and different risk profiles to appeal to a variety of investors. 

European RMBS transactions contain a combination of various features designed to protect investors from the impact of defaults on mortgages in the underlying collateral pool, including excess spread, reserve fund, and subordination of any lower priority notes. 

Principal and interest are separated and the principal component may be used to redeem notes, to purchase additional collateral or returned to the mortgage originator depending on the type of structure involved. The nonprincipal amount, or revenue component, is used to pay any necessary fees and expenses for the transaction, the interest on the notes, and to cover losses. 

In a pass-through transaction, the notes will normally be split into a number of classes that will be redeemed in order of priority. The actual speed at which the notes are redeemed will depend on the underlying repayment schedule of the mortgages in the pool and the rate at which the borrowers prepay their mortgages. (See Exhibit 11.8 for a generic example.)... 

Transactions may include a substitution period during which the issuer is allowed to use principal receipts to purchase additional mortgages. This, in effect, allows the issuer to prevent the collateral pool (and therefore the notes) paying down, giving noteholders certainty of cash flows during this period. However, at the end of the substitution period, principal payments will be used to redeem notes in the normal manner. 

Prepayments are the most important factor in determining the redemption profile of the notes in a pass-through transaction. The prepayment rate is usually measured as an annualised Conditional Prepayment Rate (CPR), which is defined as the proportion of the outstanding balance of the mortgages that is paid down ahead of schedule during the period. Exhibit 11.10 illustrates the paydown profile for the same example transaction as in Exhibit 11.9, but with an increased prepayment rate of 35% CPR. 

There are two main types of reverse mortgage. The shared appreciation mortgage is structured so the mortgage lender receives back the original loan amount and a proportion of the increase in property value. This has certain advantages but does mean that the proceeds are entirely dependent on house prices. The Millshaw SAMS No.l transaction is backed by this type of mortgage collateral. The notes do not pay interest but pass these cash flows directly on to investors. 

The second type of reverse mortgage, securitised in Equity Release Funding (ERF) transactions, accrue interest at a rate set out in the mortgage agreement. The notes in these transactions pay interest, but in the early stages of the transaction these payments are met by borrowing... 

The combination of this redemption profile with a substitution period and/or a cash accumulation account would allow the creation of bullet securities, although at the time of writing this has not been done for a European issuer. This is not the only way to create notes that expect to have a bullet redemption profile. In the Delphinus 2002-11 transaction, the substitution period extended up to the step-and-call date, so the notes are likely to be redeemed on that date. However, if for any reason the issuer is not able or willing to call the notes, they will redeem as in a standard pass-through transaction, and so the legal maturity is dependent on the term of the underlying mortgages. 

The structure of a mortgage master trust is essentially identical to a credit card master trust except that credit card receivables are replaced with mortgage collateral (see Exhibit 11.13). The originator sells an equitable interest in a specified group of mortgages to the master trust. This can then be used as collateral for a number of securitisations. Over time, additional mortgages may be added to the trust, subject to various constraints to protect the quality of the collateral. The same pool of mortgages will support all the series of notes issued by all issuers, with... 

Mortgage master trusts require the seller to maintain a certain minimum interest in the collateral pool held by the master trust. In credit card transactions this is used to absorb the monthly fluctuations in the balance outstanding on the credit cards and ensure there is always sufficient collateral to support the notes. In RMBS transactions the minimum seller s interest tends to be smaller as the mortgages have a more stable repayment profile, and this is primarily available to cover set-off risk in the event of originator insolvency. In existing transactions it is the minimum trust size rather than the minimum seller s share that has been the key constraint. 

The trust will tend to reduce in size as principal payments are received on the mortgages, and this principal can be used in one of three ways. Outside an accumulation period and when there are no amortising notes being redeemed, the principal receipts will be paid to the seller. In an accumula-... 

An asset performance trigger event would occur if a principal deficiency is recorded in the Class A Principal Deficiency Ledger. This means that the total balance of realised losses that have not been covered by either the reserve fund or with excess spread exceed the aggregate outstanding amount of the subordinate notes. If this occurs, all receipts on the mortgages will be allocated to the issuers and the seller on a pro rata basis. The notes will start to redeem early with all the Class A notes being redeemed on a pro rata basis. When all the Class A notes have been redeemed in full, the Class B notes would be redeemed, and so on for all other classes of notes until all the notes are redeemed or the trust no longer has any assets. 

The calculation of credit enhancement for notes in a master trust transaction seems more complicated than in a traditional pass-through transaction because subordinated notes from an earlier series are expected to be redeemed before the senior notes of later series. However, if the mortgages were to perform poorly, the trigger events ensure that all outstanding junior notes would only be repaid after all the senior notes. So the credit enhancement can be calculated as the aggregate balance of subordinate notes as a proportion of the total notes outstanding. 

There are two basic forms of pooled commercial mortgage transactions the true sale and the synthetic structures. The true sale mechanism, as its name suggests, involves the sale of assets from the originator s balance sheet to an SPV, which are then used as security for the issue of notes to investors. Synthetic structures, by contrast, involve the creation of a credit derivative linked to the performance of a pool of loans. The loans themselves remain on the balance sheet of the originator but the credit risks associated with these loans are transferred through the credit derivative to investors. Synthetic structures can simplify the issuance process and avoid many of the complexities (and costs) associated with the sale of assets in many jurisdictions. 

Double credit risk is a particular feature of such synthetic transaction structures. Not only are investors exposed to the performance of the reference pool of commercial mortgages, but also to the performance of the collateral the issuer is holding. If this includes notes issued by the originator itself then this will also include exposure to the credit rating of the originator. 

A CDO is a bond issued by an SPV that is secured by a pool of debt put by the issuer into a portfolio. As in the ABS, this pool is usually the sole recourse the investors will have for repayment of the notes. The pool may be composed of loans, securities, mortgaged backed securities or other ABSs. 

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