Mortgage Markets - Essay Example

Mortgage Markets Prepared by Submitted to Word count 1485 (excluding contents, references and appendices) Contents Introduction 3 2. Trends in Financial Markets 3 3. Historical values of Markets and Metrics 5 4. Conclusions 7 1. Introduction In general the beliefs of the people on the mortgage bonds may affected by the interest rate shock. The interest rate shock can be absorbed when the bonds are backed by Government. The size of the GSE mortgage portfolios coupled with discipline in the market helped by interconnectivity of the international financial institutions, led to the possibility of a result that is not precedent. These bonds can become liquid when the firms unwind their positions due to losses. The other firms loss will create liquidity in the illiquid GSEs. The trends that affect the mortgage market is the losses and gains in the international markets as they are interconnected. The danger of long term investment that rely on the presumption of liquidity are important for transparency. These help in disclosure also. The complexity is considered as enemy of stability in case of mortgage bonds. The confidence in hedging strategies may lead to complacency and produces the opposite effect in the absence of liquidity. Yet times it is considered that the complexity also helps in stability of mortgage bonds and capital markets. The paper focuses on the trends of the market and the complexity that can result in stability. The mortgage bonds would be more stable when the financial markets and the guarantee of liquidity depend on the risk management also. As a single firm is considered it can be termed as complex. There will be a division of labor in the case of interest rate risk management. The portfolios can be comprised with fixed rate mortgages as loans or mortgage backed securities. 2. Trends in Financial markets The markets of major equity have resumed growth in 2006 as regaining levels reached before May June correction. This trend is due to the healthy corporate balance sheets and robust earnings growth. The low default rates and investor sentiment has remained positive. These are capable of increasing tension in the markets due to the turbulence and somewhat increased levels of historical and implied volatility. Name Value Change 100 6,649.3 -15.2 250 11,797.5 -39.7 techMk 1,601.8 -1.4 All Sh 3,435.1 -18.8 Sm Cap 4,095.5 -14.5 The above statistical chart is obtained from http://www.moneyweek.com/file/14905/how-us-mortgage-debt-could-cause-a-global-financial-crisis.html The central banks of different countries have withdrawn liquidity and short term interest rates are raised. These have not been matched at the long end. In case of mortgage bond markets regarding corporate organizations the past turbulence may spread to the 2007 or declined. These spreads have a chance of spreading in 2007 and these should be maintained at low levels. The major corrections in the equity markets internationally spread fears of increasing inflation in the concerned countries. As the higher interest rates decreased growth and increased inflation all over the globe, this can be termed as turbulence or liquidity in the mortgage or bond markets. In 2006 some major markets dropped back to levels of 2005 and implied losses. Though there are losses the steep gains in the previous market neutralized the present ones. These results are recorded in Japan or in Euro area. In the second half of 2006 the euro area broad market index fell back to January 2006 levels. In the same period the broad market index of US is slightly less than 9 percent. After that the volatility of major indices increased and continued to rise. This is in spite of regaining in the markets. The volatility decreased after July and remained at previous correction levels. This indicates the increased uncertainty on the part of investors. As all the major indices have remained below the stock market volatility, the forward looking measure can corroborate the view. 3. Historical Values of Markets and Metrics In general the mortgage market participants do not appreciate information on intangible assets. The professional mortgage markets generally remain small and may be hindered if there is no sufficient awareness. The demand in the market is making the mortgages to gradually gain their presence in mortgages market. It was recorded that the professional mortgages were worth GBP 749.6 million in 2001 and that increased in time to 3.6 million in 2005 and is still increasing. As a overall calculation, this recorded the growth rate of 47.7 percent in the seven year period in UK. This is limited and is based on historical behavior as long as the markets are responding to the central banks decisions and corporate companies' performance. The following time series chart can show the behavior of mortgage assets in a period of time. The above time series chart is adopted from http://www.moneyweek.com/file/14905/how-us-mortgage-debt-could-cause-a-global-financial-crisis.html The above time series chart is adopted from http://www.banking-business-review.com/article_researchwire.aspguid=772E9394-CA22-46ED-9D20-68BC8B127587 The above time based charts will reveal the situation in two countries: US and UK till 2005 and after it. In the recent years the US home ownership rate reached nearly 70 percent and the internationally there was a hope to replicate the success of the country. This results increase of mortgage markets on an international basis and is happening even in developing economies. This can be decided by the fact that the affordable mortgage can become un hedged bet that can be placed optimistically by the consumer. To bail out the home owner, the adjustable rates on mortgages can be ret to higher payment levels at the same time the recession is taking hold. The sharp spike in mortgage defaults can be absorbed by the secondary market that can now own the majority of home mortgages. This finally has the discloser of risk that is adequate or the secondary market may feel that the risks assumed cannot be contemplated. This makes the people or investors to know about the loans that are the part of the securitizations. This makes the market operate with the sufficient transparency and can remain viable. This results in strong readership or understanding in mortgage markets. This model can define a map of assets that can add new form of assets in addition to conventional traditional assets. This is made possible by supplementing the financial value of an asset or a firm based on historical values. 1 The bankers are accustomed to consider the issues like mortgage markets with an eye towards the marketable securities that are accurately reflect the risks. These can be done on the disclosures. The banks and regulator are concerned with the systemic issues, safety and soundness. This can be done by depending on the historical values and trends. In 2000 the New York state Banking Department was engaged in discussions with the bond market association. NYBD is today's Securities industry and financial markets association. This is over the role of securities underwriters regarding to sub prime RMBS. The banks emphasizes on the increased role of underwriters as they have to exercise greater level of diligence to assure the issuers about conducting of business. The issuers can conduct the business in accordance with applicable state federal laws and this can be termed as consistent to have a reasonable appreciations and depreciations in the mortgage market. This also creates healthy competition in the business practices in the mortgage markets. The unrecognized risks need to be identified in every review regarding the mortgage business and those must be recorded in the list to avoid them in the future. This will concentrate on present lending practices and financial strength of originators and the nature of the real collateral. This results in more care in disclosure about the risks from which the market should be protected. 4. Conclusions The American market is alive with the hope of being all time high with the home ownership as there is still 30 percent of the people to have home. The existence of lower interest rates and the historical measures can be combined with new mortgage markets. This makes the efforts of the investor more affordable. The growth in the secondary market can liberate the originators of new mortgage loans. This makes the loans not constrained with the balance sheets. This is capable of resulting in the long term home price appreciation that can self fulfill the need of mortgage market appreciation. The US stock mutual funds have seen outflows in 2006. The above figure is adopted from http://investing.businessweek.com/research/stocks/snapshot/snapshot.aspsymbol=AVALX This is according to AMG data services. One more factor that has to be considered in case of mortgage market is the increase of fraud in a rapid rate. This is due to the easy to perpetrate them. The common type of mortgage fraud is the collusion between originators and appraisers. This can appreciate or depreciate the mortgage market and the measures should be taken in the form of setting the standards to avoid the frauds of the above mentioned form. The frauds are also found in connection with property flipping. The mortgages brokers, appraisers, borrowers and real estate agents and brokers are capable of perpetrate the fraud. As long as the values of the property hold the markets stay hot and there is every chance of making fraud related to them. Statistical appendices The above statistical figures are adopted from http://www.1stmillionat33.com/2006/09/charts-on-housing-markets-us-economy/ References: 1. Dan Denning, 2007, How US mortgage debt could cause a global financial crisis, Money week, ,electronic, 20-06-07, http://www.moneyweek.com/file/14905/how-us-mortgage-debt-could-cause-a-global-financial-crisis.html 2 Mouritsen, Jan(Editor). Intellectual Capital and the Capital Markets : Reflections on the EAA 2002 Symposium. Bradford, , UK: Emerald Group Publishing Limited, 2003. p 18. http://site.ebrary.com/lib/nulibraries/Docid=10052786&ppg=17 3 Gary, 2007, Between the Hedges, Hedge Actuarial jobs, ,electronic, 20-06-07, http://hedgefundmgr.blogspot.com/2007/06/market-week-in-review_16.html. 4. Elizabeth McCaul, 2007, What's Ahead for the US Residential Mortgage Market, What's Ahead for the US Residential Mortgage Market, SIFMA, ,electronic, 21-06-07, http://archives1.sifma.org/story.aspid=2777 Read More