You get hired by a residential mortgage lender to help them revamp their mortgage pricing models. They ask you to start by exploring three common client scenarios. First, they give you the “Second Lien Scenario.” In this scenario, a borrower goes to one of your competitors with the intention to buy a $1.2 million house. Your competitor gives them two options: • A 30-year, fully amortizing FRM with 80% LTV and an interest rate of 6.1%; or • A 20-year, fully amortizing FRM with 90% LTV and an interest rate of 6.8%. Next, the borrower comes to you and asks for a quote on a second lien (i.e. a junior loan) worth 10% LTV for 30 years. They want to price a scenario where they get the 80% LTV loan from your competitor and the 10% LTV loan from you instead of the 90% LTV loan from your competitor (in other words, paying for the same amount with two loans instead of one). 1. In order to be competitive, (a) what monthly payment and (b) what interest rate should you charge on this second lien? You can use the incremental cost of borrowing approach.
You get hired by a residential mortgage lender to help them revamp their mortgage pricing models. They ask you to start by exploring three common client scenarios.
First, they give you the “Second Lien Scenario.” In this scenario, a borrower goes to one of your competitors with the intention to buy a $1.2 million house. Your competitor gives them two options:
• A 30-year, fully amortizing FRM with 80% LTV and an interest rate of 6.1%; or
• A 20-year, fully amortizing FRM with 90% LTV and an interest rate of 6.8%.
Next, the borrower comes to you and asks for a quote on a second lien (i.e. a junior loan) worth 10% LTV for 30 years. They want to price a scenario where they get the 80% LTV loan from your competitor and the 10% LTV loan from you instead of the 90% LTV loan from your competitor (in other words, paying for the same amount with two loans instead of one).
1. In order to be competitive, (a) what monthly payment and (b) what interest rate should you charge on this second lien? You can use the incremental cost of borrowing approach.
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