(a) The monthly payment for the loan would be $1264.14. (b) The effective interest rate assuming the mortgage is paid off after 30 years would be 4.5%. (c) If the borrower plans to repay the loan after three years, the effective interest rate would be 5.39%. (d) The 90% loan would have a higher interest rate of 5.5% and a higher monthly payment of $1368.75, so it would likely not be recommended for the borrower to take on the higher loan amount with a higher interest rate. (e) The homebuilder would need to sell the home for $265,217.17 in order to earn the market rate of interest on the loan of 4.5%.
- If there is no default in the mortgage pool over the four year period:
- The senior class would have a return of 32%
- The subordinated class would have a return of 40%
- The residual tranche would have a return of 20%
- If the value of the properties associated with the mortgage pool at the end of the fourth year is only 80% of the outstanding loan balance:
- The senior class would have a return of -6%
- The subordinated class would have a return of -2%
- The residual tranche would have a return of -30%
a) The price of the MBS would be $24,958,927.41. b) MBS is considered “callable” because the underlying mortgages in the pool may be prepaid by the borrowers, resulting in the return of the principal to the MBS holder before the maturity of the security. This callable feature can affect MBS pricing because if interest rates decrease, more borrowers may choose to refinance their mortgages, leading to higher prepayment rates and potentially lower returns for the MBS holder.