Real Estate

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QUESTION April 2006, part B (question 1b) April 2009, part B (question 1b)

Briefly explain five sources of mortgage money in The Primary Mortgage Market. (10marks)

In the primary mortgage market, there are numerous participants involved. Briefly explain five (5) major participants in the primary mortgage market. (10 marks)

Answer There are five sources of mortgage market: Firstly is commercial bank. Commercial bank is the largest contributor in the primary mortgage market where they are usually have hold 40 percent mortgage portfolio. Normally their loan portfolios are in construction, real estate and housing. Basically commercial bank will pooled their money to reinvest them to the economy. They are also provide short term financing toward business especially construction industry, such as bridging loan. Secondly is financial institution. It is subsidiary for commercial bank where they are will providing a loan or financing to customer that want to buy land, real estate, house , car and so on. Basically, they will get the fund from deposit by customer or borrow it from another finance institution. By that, these finance companies will usually charge high interest of loan toward borrower. Thirdly are life insurance companies. They are also one of the institutions that play an important role in financing the commercial and residential properties in our country. They are usually will make a financing in mortgage market by use the premium by the policy holder because it is a huge and stable money resources that they will get in long term because they will not often meeting the policy holder claim.

Forth is saving institution. As we know saving institutions are one of the active investors in debt instrument. Thus mortgage market is one of them, so they will also engage with this market. Saving institution will get fund from the deposit by savers and reinvest it to buy debt instrument. Last but not least is pension fund, pension fund is usually use the money that people allocate to them to make an investment and this mortgage market is on of the investment that they use to do.

QUESTION April 2007, part B (question 1b) Differentiate between the activities between the primary and secondary markets? (8marks)

ANSWER There are different activities between the primary and secondary markets: Primary market Primary market will show the first hand loan financing. It is a first transaction that parties make and will create debt instrument. Secondary market Secondary market will show the second hand loan transaction. It is the other transaction that make by the origin or primary lender to secondary lender and secondary lender to investor. The party involve are borrowers, origin lender/primary lender and sometimes mortgage brokers. Debt instrument that will issue is mortgage. The parties that are involved are origin lenders, secondary lenders or government agencies and investors. Debt instrument that will issued is mortgage and Mortgage backed security (MBS) Lenders will backed or secured by property as a collateral. Secondary lender will backed by the properties and investor will backed by pool of mortgage.

QUESTION April 2008, part B (question 2a) April 2011, part B (question 2a) October 2006, part B (question 1b) Describe the interaction between the primary and secondary mortgage markets with the help of a diagram. (10marks)

ANSWER

Diagram below show the interaction that happen between primary mortgage market and secondary mortgage market:

In primary market, transaction will be making between borrower and primary lenders where primary lender basically will be presented by bank. Borrower usually makes a loan with bank to finance their purchases on real estate, housing and so on. In order to secure their money, banks will issue a mortgage and borrower needs to pledge their property as collateral and mortgage are originates. So lenders or banks will backed to the consumer property. The activity that are basically will be process in primary market are loan origination, loan processing, loan servicing, loan closing, underwriting and warehousing. A secondary mortgage market is one in which existing mortgage are bought and sold. To refund back their money, bank or primary lender will sell the mortgage to another investor as known as secondary lender or government agencies. Secondary lenders that purchase mortgage in the secondary market often raise their fund by issuing new debt instrument known as Mortgage backed Security (MBS). They will pledege the mortgages which will represent their asset as a collateral for the debt that their issue. Mortgage Backed Security will backed by the pool of mortgage as a security to the investor and this debt security also will traded at the secondary mortgage market. In Malaysia, Cagamas bond is the only mortgage backed security (MBS) that are traded. Fund that are being paid in the primary lenders are channeled to the secondary lender to pay to the MBS investor. Some of them will be secured by the government agencies or private mortgage investor.

QUESTION April 2007, part B (question 1c) Explain the importance of the secondary mortgage market in Malaysia? (4marks)

ANSWER There is two of the importance of the secondary. Firstly is primary lender and secondary lender will be able to refinance back their money that they have use in give a loan and purchases the mortgage. Primary lender will get the money to give a loan to other borrowers and the secondary lender will be able to get fund to finance their purchases of pool of mortgage. Secondly, investor will invest on more secure debt instrument. Compared to other debt instrument, mortgage and Mortgage Backed Security (MBS) are more secured and they are indirectly will involve with the inflation profit where they will get fixed-return which it is get full guarantee from the government compare to treasury bill.

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