Mortgage consultant » loan

Futures and forwards

admin — Fri, 25 Nov 2011 11:24:28 +0000

The key difference between futures and forwards is that the former are contracts intermediated through an exchange while the latter are agreements made directly between individual parties. Futures contracts are always standardized. Futures exchange operations are designed to eliminate direct counterparty risk. They do so by requiring all exchange members to contribute to an “insurance” fund that pays out in the event of the failure of a member. In addition those holders of futures contracts that have a paper loss are required to make a cash or security deposit equal to the net sum of their losses on all contracts with the exchange on a regular basis, usually at the end of the business day. Most forward contracts are also highly standardized but usually allow for more flexibility than futures contracts. Parties are also exposed to counterparty default risk.
Many people fail to recognize that although most of their day-to-day transactions are carried out through spot markets their most important transactions are actually in the form of forwards. An itinerant Mexican farm-worker in California is far more aware of the difference between the spot and forward markets for labor than the average salaried white-collar professional. Mortgages are a form of multiple-period forward rate agreement where the borrower is either a fixed or floating rate payer.

The impact of price ceilings

admin — Wed, 05 Oct 2011 18:10:48 +0000

At the lower price, the quantity supplied by producers decreases along the supply curve to Q , while the quantity demanded by consumers increases along the demand curve to Q,. A shortage ~(e,- Q,) of the good will result because the quantity demanded by consumers exceeds the quantity supplied by producers at the new controlled price. After the price ceiling is imposed, the quantity of the good exchanged declines from the equilibrium quantity to Qs, and the gains from trade (consumer and producer surplus) fall as well. Normally, a higher price would ration the good to the buyers most willing to pay for it. Because the price ceiling keeps this from happening, though, other means must be used to allocate the smaller quantity Q, among consumers wanting to purchase Q,. Predictably, nonprice factors will become more important in the rationing process. Sellers will be forced to discriminate on some basis other than willingness to pay as they ration their sales to eager buyers. They will be more inclined to sell their products to their friends, to buyers who do them favors, and even buyers willing to make illegal “under-the-table” payments. (The accompanying Applications in Economics box, “The Imposition of Price Ceilings During Hurricane Hugo,” highlights this point.) Time might also be used as the rationing device, with those willing to wait in line the longest being the ones able to purchase the good. In addition, the below-equilibrium price reduces the incentive of sellers to expand the future supply of the good. At the lower price, suppliers will direct resources away from production of the good and into other, more profitable areas. As a result, the product shortage will worsen through time.
What other secondary effects can be expected? In the real world, there are two ways that sellers can raise prices. First, they can raise their money price, holding quality constant. Or, second, they can hold the money price constant while reducing the quality of the good. (The latter might also include reducing the size of the product, say, for example, a candy bar or a loaf of bread.) Faced with a price ceiling, sellers will use quality reductions as a way to raise their prices. Because of the government-created shortage, many consumers will buy the lower quality good rather than do without it.
It is important to note that a shortage is not the same as scarcity. Scarcity is inescapable. Scarcity exists whenever people want more of a good than nature has provided. This means, of course, that almost everything of value is scarce. Shortages, on the other hand, are a result of prices being set below their equilibrium values prices are permitted to rise. Removing the price ceiling will allow the price to rise back to its equilibrium level. This will stimulate additional production, discourage consumption, and increase the incentive of entrepreneurs to search for and develop substitute goods. This combination of forces will eliminate the shortage.

Trend-Following Strategy

admin — Sat, 02 Jul 2011 18:05:30 +0000

The idea behind this strategy is to go long the currency pair when the price is above a moving average of a given length and to go short the currency pair when it is below. Currency managers can choose different moving averages depending on their trading approach to the benchmark. Lequeux and Acar (1998) showed that to be representative of the various durations followed by investors, an equally weighted portfolio based on three moving averages of length 32, 61 and 117 days may be appropriate. If the spot exchange rate is above all three moving averages,hedge the foreign currency exposure 100%. If above two out of the three, hedge one-third of the position. In all other cases, leaves the position unhedged. Trend-following strategies have shown consistent excess returns over sustained periods of time.

Shortages and black markets will develop

admin — Tue, 19 Oct 2010 18:11:52 +0000

Because the quantity of housing demanded will exceed the quantity supplied, some people who value rental housing highly will be unable to find it. Frustrated by the shortage, they will try to induce landlords to rent to them. Some will agree to prepay their rent, including a substantial damage deposit. Others might agree to rent or buy the landlord’s furniture at exorbitant prices in order to get an apartment. Still others will make under-the-table (black market) payments to secure housing.

Auto loans

admin — Thu, 29 Jul 2010 11:29:29 +0000

Auto loan credit characteristics fall somewhere between those of mortgages and credit cards. They are secured but on a depreciating asset and are relatively short-term loans. Data on default rates is reasonably accessible where auto loan securitization issues are common.The main risk to all lenders comes from changes in tax policies that have a direct impact on the value of new and second-hand cars and a particular concentration on a particular class of vehicle or type of customer.
If a government acts to reduce taxes or import tariffs on new cars this will at a stroke lower the value of recently bought second-hand cars and the price of new cars. In cases where the reductions are extreme some people who have bought their vehicle on credit may simply return the keys for their original purchase and buy a new car.
Some lenders specialize in lending to taxi drivers or owner–drivers of coaches or trucks. The number of taxi licenses is frequently restricted and it is not uncommon for the cost of the license to be considerably more than the cost of the taxi itself. An increase in the number of licenses issued, a downturn in business or relaxation of licensing requirements will all have a negative impact on the value of the licenses and hence the lender’s collateral.

Mortgage characteristics

admin — Thu, 09 Jul 2009 11:27:21 +0000

Home mortgages are a relatively homogeneous product with the major difference being between fixed rate mortgages and those that are floating rate. Historical default rates across the world have generally been among the lowest of any asset class. There are a number of qualitative reasons why this is the case. Owner–occupiers have to live somewhere and their choice is usually between paying rent or making the mortgage payments; mortgages have a form of long-term option on property prices and given their typical term have significant time value. Mortgagors do not default simply because they have negative equity and this option is out-of-the-money. The personal consequences of defaulting on a mortgage are extreme and mortgagors will usually default only in extreme circumstances.
For default rates to rise sharply from their very low “normal” levels usually requires some combination of falling property prices, rising unemployment, falling wages and in the case of floating rate loans higher interest rates.
There are a few examples where mortgage default rates have soared and in recent years these have occurred in countries where there has been a form of managed foreign exchange system that has subsequently collapsed. Mortgagors who took out “cheaper” foreign currency loans found that the value and servicing costs of their loan in local currency terms shot up. Other factors such as falling property prices and higher unemployment also occurred in these cases but were of secondary importance.
In countries where mortgage securitization issues are common there is a wealth of data available on both default and loss rates. In the US these are available on a regional basis and can be analyzed by type of loan and borrower. Publicly available data in most other countries is either sparse or non-existent.
LIED rates vary with the remaining term on the loan and volatility of property prices. In the event of foreclosure banks usually act to sell the properties at auction.
Industry level statistics on home loans are less useful to specialist lenders focusing on segments where most lenders are not prepared to make loans. These include loans made where standard loan-to-value criteria are lowered (and this may be as a result of upfront subsidies on mortgagors’ legal and other costs), on older properties that are difficult to sell or to borrowers with an erratic earnings and employment history.
In some countries individuals may take out mortgages to purchase homes to let. These are riskier than loans to owner–occupiers and ability to meet payments is usually dependent on rental income. Such borrowers are at particular risk if they have taken out floating rate loans, interest rates rise and property prices and hence rental yields fall. Portfolio risks are particularly vulnerable to location concentration.