Default risk strategy

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Course Outline

The American Housing Finance System

Course (63 videos)

Basic mortgage arithmetic
Guess and check method
Algebraic method
Inflation, equity buildup, and payment burden

Lowering the initial payment
GPMs and PLAMs
Teaser ARMs
Seller buy-downs

Housing as an investment
The real estate investment decision
Home ownership vs. landlord-tenant
Ownership psychology

Mortgage process part 1
Commitment
Application
Application processing

Basic mortgage underwriting
Three Cs
Capacity
Collateral
Conscientiousness

Mortgage process part 2
Decision analysis part 1
Decision analysis part 2
Quality control
Funding and pipeline management
Servicing

Risk management part 1
Default risk strategy
Risk management implementation
Loss mitigation
Financial intermediation
Allocating risk

Risk management part 2
Risks you manage
Risks you minimize
Security creation
Economies of scale

Mortgage process part 3
Business processes and mortgage relief
Skin in the game
Brokers and eligible sellers
Principal-agent problems and industry structure
Principal-agent problems and franchise value

Introduction to mortgage analytics
Option terminology
Option analytics put-call parity
Options and volatility
Insights from option pricing
Embedded options

Modeling the default option
Pricing the default option
Stochastic simulation of house prices
Other factors that affect risk
Loss reserves and capital adequacy

Modeling interest-rate risk
Callable debt, derivatives
Reporting (VAR)
Capital Adequacy

Varieties of mortgage securities
Pure pass-throughs
IO and PO strips
CMOs and residuals

Risk Management at Freddie Mac & Fannie Mae
Seller eligibility
Quality control, reps, warrants, and repurchase
Servicer management and loss mitigation

Private-label securities
Why they differ from agency securities
Risk tranches

Painful historical episodes & policy responses
The Great Depression
The S&L Crisis
The 2008 Financial Crisis

Policy Problems in Housing Finance
Special interests and housing finance policy
The impact of mortgage subsidies
Property title reform
Consumer protection
Advantages to the Canadian mortgage system

Default risk strategy

Instructor: Arnold Kling

The objective is to gain perspective on the strategic choices a mortgage lender must make concerning default risk.  What risks are our shareholders taking and how are they being compensated for taking those risks?

Teacher Resources

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