Mortgage

Definition

Mortgage (Mortage Loan) denotes a loan securitized against some real estate. It is one of the most widely used financial products worldwide. In it simplest form it is a loan secured by the property being financed. The property is thus mortgaged and in the extreme case where the borrower cannot or will not repay the loan, the lender typically has legal rights on the property.

This asset class includes on-balance sheet loans for specific consumer purposes, namely the purchase and refinance of residential property, including individual homes and multi-family housing with a small number of units. The definition implies that the property is used only for residential purposes and not to conduct income-generating activities.

Mortgage Types

There is a large variety of mortgage types according to:

• Duration: Mortgages are typically loans of long duration (e.g. 30 years or more) but can be of any duration
• Interest Rate calculation: can be fixed or variable (floating) and reference various rates, even foreign currency rates
• The nature of the claim on the property, e.g., First or second mortgage

Mortgage Related Risks

• Credit Risk, the risk that the borrower will not be able or willing to repay part or the whole of the loan
• Prepayment Risk, the risk that funds will be repaid earlier than expected, thereby reducing anticipated income

These two risk types are called "competing" risks, because a prepayment precludes default and vice versa

Credit Risk

Mortgage credit risk is a type of retail credit risk, namely the legal entity that may default on the loan contract is a Natural Person. Correspondingly the obligations and legal framework that is applicable in such a case is determined by the laws governing the responsibilities of natural persons for honouring their financial contracts. These laws vary considerably from country to country

In common with other credit risk types, mortgage credit risk can be decomposed into Default Risk and Recovery Risk.

Issues and Challenges

• US subprime mortgages have been implicated in starting the largest recent financial crisis
• Foreign currency denominated mortgages in Eastern Europe

External links

• Description of Mortgage Loans

Disclaimer

This entry annotates a FIBO Ontology Class. FIBO is a trademark and the FIBO Ontology is copyright of the EDM Council, released under the MIT Open Source License. There is no guarantee that the content of this page will remain aligned with or correctly interprets the concepts covered by the FIBO ontology.