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Mortgage Lending and Investing - Understanding Risks in a Changing Market.

Mortgage Lending and Investing - Understanding Risks in a Changing Market

Business One Irwin Publishing 1818 Ridge Road Homewood, Illinois 60430 1991, 397 pages, $50 (MBA members), $60 (nonmembers) Hard cover

Mortgage Lending and Investing is an appeal to lenders to seek a better understanding of the inherent risks of a volatile business environment and interest rate market. The authors suggest that this can be accomplished through improved communications and information processing to provide lenders with a more complete understanding of the mortgage lending business.

The authors' basic premise is that the mortgage lending business has become increasingly complex and, in order to manage business risks, a lender must have the capability to make informed and valid judgments about the cash flows of not only the business itself, but of each of the components of the business, i.e. servicing, pricing, hedging, and quality control.

Starke and Starke note the importance of developing analytical tools such as quantitative decision models. The authors' point is well taken that mortgage lending (whether portfolio or secondary market) generally runs more on "gut feel" than sound analytics, and there is much to be learned by taking the time to understand the basic cash flows and values of the products and processes required to originate, sell and service mortgages.

The presentation of Mortgage Lending and Investing ranges from patient and insightful discussion of mortgage lending products, business practices and secondary market operations to detailed formulas for the construction of electronic worksheets to value cash flows, price mortgage products and manage pipeline risks. Starke and Starke ably use the financial worksheets they have developed to help readers climb the learning curve toward an understanding of mortgage lending processes and risk analysis.

Chapter one is introductory, followed by the presentation in chapter two of cash flow models for both portfolio lenders and mortgage bankers and an explanation of the sources of profits and risks. Chapters three, four, and five develop pricing models for mortgages, mortgage servicing and mortgage-backed securities to include derivative securities, participations, strips, and collateralized mortgage obligations (CMOs). A version of the monte carlo interest rate simulation model provides pricing for ARMs. Chapters six and seven discuss pipeline risks and hedging theory to avoid risk. The Black-Shoales option pricing model is also introduced. Statistical quality control is covered in chapter eight and the book concludes by addressing the costs of loan policy.

I highly recommend the book's wealth of information to mortgage lenders and portfolio lenders - for the skilled veteran and for those of us just smart enough to know we are not, and never will be.
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Baldwin, Doc
Publication:Mortgage Banking
Article Type:Book Review
Date:Mar 1, 1991
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