Mlpp3e C01 Overview
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Real Estate School of SC
Mortgage Lending Principles and Practices
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
1
Course Description Today’s consumer-focused and more heavily regulated mortgage industry requires consummate professionals to facilitate one of the biggest financial commitments most people will make in a lifetime. To this end, mortgage professionals must be knowledgeable and ethical when it comes to providing home loans and services. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
2
Course Contents • A primer on the primary and secondary mortgage markets • A complete review of the economic, legal, and valuation aspects of the real estate market • A thorough overview of federal lending laws • Types of loan products and finance instruments —including conventional and alternative financing tools • The fundamentals of the residential mortgage lending process—from pre-qualifying to closing a loan • A discussion of ethical issues Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
3
Course Objectives • Demonstrate a broad foundation of knowledge in mortgage lending including: – Federal mortgage lending laws – Loan application and underwriting processes – Secondary market for mortgage loans – Closing process – Mortgage financing concepts and terms • Understand what is expected of mortgage loan professionals • Act ethically and provide good customer service
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
4
Chapter 1
An Overview of Mortgage Lending
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
5
Chapter 1: An Overview of Mortgage Lending
Mortgage Lending • Mortgage lending is a profession that requires knowledge of many disciplines, including: – Real estate – Finance – Appraisal – Others
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
6
Chapter 1: An Overview of Mortgage Lending
Chapter Overview • The primary mortgage market and how it is sustained and renewed by the secondary mortgage market • The role the mortgage professional plays in the industry and how that is complemented—and challenged—by automation
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
7
Chapter 1: An Overview of Mortgage Lending
Key Terms • Federal National Demand Deposits Mortgage Association Disintermediation (Fannie Mae) Equity • Government National Federal Home Loan Mortgage Association Mortgage Corporation (Ginnie Mae) (Freddie Mac) • Government • Federal Housing Finance Agency (FHFA) Sponsored Enterprise • • • •
(GSE)
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
8
Chapter 1: An Overview of Mortgage Lending
Key Terms • Mortgage • Mortgage Backed Securities (MBS) • Mortgage Banker • Mortgage Broker • Mortgage Lender
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• The Office of Federal Housing Enterprise Oversight (OFHEO) • Primary Mortgage Markets (or simply primary markets) • Secondary Mortgage Markets (or simply secondary markets)
9
Chapter 1: An Overview of Mortgage Lending
A Brief History of Mortgage Lending • Almost every part of the mortgage industry influenced the current state of affairs: – Political leaders and housing advocates – Wall Street and investors – GSEs
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
– Appraisers – Loan originators – Consumers – Mortgage products
10
Chapter 1: An Overview of Mortgage Lending
Seeds of Today’s Mortgage Industry Buying a home from the 1900s-1930s • Banks required a down payment as much as 50% of the purchase price • Loans had a balloon payment due after a very short term (as short as 1 or 2 years, but usually never more than 5) • Borrowers were forced to refinance often, with no interest rate security
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
11
Chapter 1: An Overview of Mortgage Lending
Federal Reserve System • • • •
Created by the Federal Reserve Act of 1913 Allowed banks to make real estate loans Involved the government in mortgage lending Government influence of interest rates
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
12
Chapter 1: An Overview of Mortgage Lending
1930s Significant Banking Legislation • Federal Home Loan Bank Act of 1932—The basis for the primary mortgage market • The Banking Act of 1933—Created the Federal Deposit Insurance Corporation (FDIC) • The National Housing Act of 1934—Created Federal Savings and Loan Insurance Corporation (FSLIC) and Federal Housing Administration (FHA)
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
13
Chapter 1: An Overview of Mortgage Lending
Federal Housing Administration (FHA) • Introduced in 1934 to help housing industry recover from Great Depression • Provided mortgage insurance to banks • Purpose: To get banks to commit more of their funds to home mortgage loans while at the same time improving quality of home mortgage loans by requiring them to conform to FHA standards
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
14
Chapter 1: An Overview of Mortgage Lending
Federal Housing Administration (FHA) Under the FHA program: • • • •
No income limits on borrowers Government limits the mortgage amount that can be insured Only first mortgages are insured Insured loan amount is based on a sound appraisal
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
15
Chapter 1: An Overview of Mortgage Lending
Federal Housing Administration (FHA) Innovative programs and terms under FHA: • 20% down payment • 20-year maturities—eventually grew to 30 or 40 years • Amortized loans
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
16
Chapter 1: An Overview of Mortgage Lending
Federal Housing Administration (FHA)
Today, the FHA is the largest insurer of mortgages in the world • Over 34 million properties since its inception in 1934
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
17
Chapter 1: An Overview of Mortgage Lending
Factors That Limited Mortgage Growth • Quality of loans varied by bank, city, region, etc. • Banks did not always have money to lend due to saving habits of their depositors
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
18
Chapter 1: An Overview of Mortgage Lending
Federal National Mortgage Association (Fannie Mae) • Established by the federal government in 1938 and privatized in 1968 • 2008—Moved back under government control • Federal Housing Finance Agency appointed as conservator • Original purpose: To provide a place for banks and other lenders to sell their FHA-insured loans
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
19
Chapter 1: An Overview of Mortgage Lending
Federal National Mortgage Association (Fannie Mae) • Process encouraged more banks to make FHA loans and allowed those banks to get more money to make the additional loans • Secondary market accomplished two things: 1. More money available for mortgage loans 2. Loan qualifications and terms made more consistent across the country
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
20
Chapter 1: An Overview of Mortgage Lending
Federal National Mortgage Association (Fannie Mae) • Banks and lenders didn’t want to jeopardize their chances to sell on the secondary market • Fannie Mae (and later other similar institutions) nationalized loan qualifications and other lending procedures • Present-day Mortgage Lending: Its creation was the birth of today’s mortgage industry Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
21
Chapter 1: An Overview of Mortgage Lending
Primary Mortgage Markets
•Lenders who make mortgage loans directly to borrowers •Comprised of the various lending institutions in local communities (commercial banks, Savings and Loans, mortgage companies) •Source of funds largely from savings deposits of individuals and businesses in the local area
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
22
Chapter 1: An Overview of Mortgage Lending
Commercial Banks • Financial institutions that provide a variety of financial services, including loans • Until recently, residential mortgages were not a major part of their business – Mainly due to government limitations on the amount of long-term investments they could make
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
23
Chapter 1: An Overview of Mortgage Lending
Commercial Banks Have increased their participation in home mortgage lending for several reasons: • To take advantage of existing customer relationships • Anticipation that mortgage borrowers will become bank customers for other services • Fewer funds are needed on reserve to cover losses for mortgage loans than for other types of loans
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
24
Chapter 1: An Overview of Mortgage Lending
Financial Institutions Fall under the oversight of various government agencies: • Office of Thrift Supervision (OTS): Savings associations and federally chartered savings banks • Comptroller of Currency (OCC): National banks and federal branches/agencies of foreign banks
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
25
Chapter 1: An Overview of Mortgage Lending
Savings and Loan Associations (S & Ls)
• Financial institutions specializing in savings deposits and mortgage loans • Mid 1940s - late 1970s—Expanded mortgage operations aggressively • Believed their knowledge of the local market and ability to attract long-term deposits meant success in long-term conventional loans Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
26
Chapter 1: An Overview of Mortgage Lending
Savings and Loan Associations (S & Ls)
• Suffered when interest rates surged in the late ’70s and early ’80s • Resulted in widespread disintermediation • S & Ls unable to sell these mortgages on the secondary market—did not conform to Fannie Mae standards
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
27
Chapter 1: An Overview of Mortgage Lending
Savings and Loan Associations (S & Ls)
• Remain leading home mortgage lenders—now follow Fannie Mae qualifying standards • Required to keep 70% of assets in mortgagerelated activities or change federal charter to bank charter • With fewer S & Ls and more mortgage companies, likely the mortgage industry will soon replace S & Ls as leading provider of residential mortgages
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
28
Chapter 1: An Overview of Mortgage Lending
Mortgage Companies • Mortgage companies are institutions that function as intermediaries between borrowers and lenders. • Mortgage banker—One who originates mortgage loans, usually funding loans with the company's own funds. • Mortgage broker—One who, for a fee, places loans with lenders, but typically does not service such loans.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
29
Chapter 1: An Overview of Mortgage Lending
Mortgage Companies • Resources of service and expertise rather than actual sources of lending capital. • Because they invest little of their own money, their activities are largely controlled by the availability of investment capital in the secondary market.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Other Financial Institutions Other types of financial institutions that make loans directly to borrowers for residential first or second mortgages include: • • • •
Credit unions Finance companies Portfolio lenders Mutual savings banks
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Credit Unions A type of cooperative organization whose members: • • • •
share something in common (e.g., an employer) pool their deposits receive better interest rates loan money to fellow members
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Finance Companies • Specialize in higher-risk loans at higher interest rates • Sources of second mortgages and home equity loans made directly to borrowers.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
33
Chapter 1: An Overview of Mortgage Lending
Portfolio Lenders • Make real estate loans they keep and service in house, instead of selling on the secondary markets • REO is property acquired by a lending institution through foreclosure. – REO property is held in inventory and then sold to recoup all or part of the lender's investment.
• (REO means “Real Estate Owned”)
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Mutual Savings Banks • State-chartered, owned by depositors, and operate for their benefit. • Found mostly in the northeastern United States.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
35
Chapter 1: An Overview of Mortgage Lending
Secondary Mortgage Markets
• Private investors and government agencies that buy and sell real estate mortgages • Originally established by the federal government in an attempt to moderate local real estate cycles
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
36
Chapter 1: An Overview of Mortgage Lending
Primary vs. Secondary Difference between primary and secondary markets: • Secondary markets buy real estate loans as investments from all over the country • Primary markets are usually local in nature, with local lenders making local loans
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
37
Chapter 1: An Overview of Mortgage Lending
Secondary Market’s Function
The buying and selling of mortgages from primary market lenders. • Loans are bought and sold for several reasons • The primary and secondary markets both are trying to maximize returns on their investment dollars
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Factors of Stable Local Real Estate Markets
• Secondary market buying mortgages from local banks • Local banks investing surplus funds in real estate investments in other regions of the country • Standardization of loan criteria due to secondary mortgage markets
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
39
Chapter 1: An Overview of Mortgage Lending
Flow of Mortgage Funds 1. Mortgage funds loaned to a homebuyer by a lending institution in the primary market 2. Mortgage then sold to secondary market agency, which may sell it to other investors in the form of mortgage-backed securities (MBSs)
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
40
Chapter 1: An Overview of Mortgage Lending
Flow of Mortgage Funds 3. Because the primary lender sold the mortgage on the secondary market, the lender can take the money from the sale and make another mortgage loan, then sell that new loan to the secondary market, and continue the cycle
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Flow of Mortgage Funds 4. The secondary market agency can pool the mortgages it buys to create MBSs, which the secondary market participant then sells to investors 5. As the secondary market agency sells the MBSs to investors, it now has more funds to buy more mortgages and create more MBS pools to sell to investors again, and the cycle continues Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
42
Chapter 1: An Overview of Mortgage Lending
MSB Types 1. Bond-type securities – Long term – Pay interest semiannually – Provide for repayment at a specified date
1. Pass-through securities – More common – Pay interest and principal payments on a monthly basis
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Secondary Market • The secondary market functions this way due to standardized underwriting criteria • A mortgage will be purchased by the secondary mortgage market only if the primary market lender conformed to the underwriting standards
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Secondary Mortgage Market Agencies
1. Federal National Mortgage Association (Fannie Mae) 2. Government National Mortgage Association (Ginnie Mae) 3. Federal Home Loan Mortgage Corporation (Freddie Mac)
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
45
Chapter 1: An Overview of Mortgage Lending
Federal National Mortgage Association (Fannie Mae) • Nation’s largest investor in residential mortgages • Funds its operation by securitization – The act of pooling mortgages, then selling them as mortgage-backed securities
• Buys mortgages or interests in a pool of mortgages from lenders
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
46
Chapter 1: An Overview of Mortgage Lending
Government National Mortgage Association (Ginnie Mae)
• Originally formed from part of Fannie Mae – Took over responsibility for liquidating lessdesirable Fannie Mae mortgages left over after the privatization in ‘68 • Primary function: To promote investment by guaranteeing the payment of principal and interest on FHA and VA mortgages through its mortgagebacked securities program Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
47
Chapter 1: An Overview of Mortgage Lending
Federal Home Loan Mortgage Corporation (Freddie Mac)
• Primary Function: To help savings and loans acquire additional funds for lending in the mortgage market by purchasing the mortgages they already held • Actively sells mortgage loans from its portfolio, acting as a conduit for mortgage investments
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Federal Home Loan Mortgage Corporation (Freddie Mac) Purchases mortgages one of two ways, through its: 1. Immediate delivery program—lender must deliver mortgages Freddie Mac has agreed to purchase within 60 days 2. Forward commitment purchase program— commitments are made for six- and eight-month periods, but sale and delivery of mortgages is at the option of the lender
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Secondary Market Standards
• Fannie Mae, Freddie Mac, and other secondary market agencies have been actively involved in developing underwriting standards for mortgage loans – Creates confidence in purchasers of the MBSs
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Secondary Market Standards
• The standards have a large influence on lending activities in the primary market • Agencies can refuse to purchase loans that don’t follow their guidelines • Can also request lenders to repurchase loans already sold if it’s later discovered that the lender violated underwriting guidelines
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Present Day Mortgage Lending • Fannie Mae was the birth of the mortgage industry we have today • As more loan options became available, the secondary mortgage market grew in importance
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
52
Chapter 1: An Overview of Mortgage Lending
Federal Housing Finance Agency (FHFA) • Made the conservator of Fannie Mae and Freddie Mac in 2008 • An independent federal agency created by the Federal Housing Finance Regulatory Reform Act of 2008 • Purpose: To promote a stronger, safer U.S. housing finance system
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Subprime Mortgage Crisis To meet demand, lenders created new programs, often with relaxed qualifying standards, such as: • Little to no required income or asset documentation • No consideration of credit or ability to pay • Waiving an appraisal • Requiring minimum to no down payment • Allowing borrowers to take out 1st and 2nd mortgages up to 100% of property value Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Subprime Mortgage Crisis • Risky loan programs offered to subprime borrowers frequently resulted in a high rate of delinquency and foreclosure • When these MBSs declined in value, credit tightened • As a result, many borrowers found it difficult to obtain mortgage loans
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Subprime Mortgage Crisis New federal and state laws passed to: • Prohibit predatory lending • Regulate high cost loans • Amend foreclosure procedures • Set national standards for mortgage professionals • Define suitability requirements for borrowers
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Summary 1.
Mortgages are written instruments using real property to secure repayment of a debt. The Federal Reserve Act of 1913 created the Federal Reserve, established a federal charter for banks to make real estate loans, and set up a government system to influence interest rates. The National Housing Act of 1934 created the Federal Housing Administration (FHA) to insure banks against losses for defaults on home loans. The Federal National Mortgage Association (Fannie Mae) was created in 1938 as the first secondary market participant, making more money available for mortgage loans and standardizing loan quality.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
57
Chapter 1: An Overview of Mortgage Lending
Summary 2. The primary market consists of lenders making mortgage loans directly to borrowers. Primary lenders are commercial banks, Savings and Loans (S & Ls), and mortgage companies. Banks are a large source of funds and offer more mortgage loans now to existing customers. S & Ls were once the largest provider of home mortgage loans, but regulation and risky investments left many savings and loans insolvent. Disintermediation forced them to use secondary markets. Mortgage companies may be: Mortgage bankers who originate loans, usually fund loans with company’s funds, and may sell or service loans; or mortgage brokers who place loans with lenders, do not underwrite, fund, or service loans, but have access to different lenders and loan programs.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
58
Chapter 1: An Overview of Mortgage Lending
Summary 3. The secondary market consists of private investors and government agencies that buy and sell home mortgages. It was created to moderate local real estate cycles giving lenders new money to lend again by selling their mortgages, giving local lenders loans from other areas, and standardizing loan criteria for better quality loans. The Federal National Mortgage Association (Fannie Mae) is the largest investor in residential mortgages. Fannie Mae buys loans then sells securities backed by its pool of mortgages. The Federal Home Loan Mortgage Corporation (Freddie Mac) issues mortgage backed securities under the conservatorship of the FHFA. The Government National Mortgage Association (Ginnie Mae) is government owned and managed by HUD. Ginnie Mae guarantees payment of principal and interest on FHA/VA loans for its mortgage-backed securities. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Summary 4. In 2008, Fannie Mae and Freddie Mac came under the conservatorship of the Federal Housing Finance Agency (FHFA). The creation of the FHFA merged the powers and regulatory authority of the Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight (OFHEO), as well as the GSE mission office at the Department of Housing and Urban Development (HUD). Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Summary 5. Looser qualifications for home mortgages led to significant increases in borrower default on risky loans, resulting in the socalled subprime mortgage crisis. As a consequence, qualification standards are tightening, many laws have been passed related to predatory lending, higher risk loan programs are unavailable, and financing is more difficult to obtain. The impact of this situation will likely be felt for a long time. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Quiz 1. Which agency helped to even out the money supply for mortgage loans? a. Fannie Mae b. FHA c. HUD d. OFHEO
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Quiz 2. Commercial banks a. are oriented toward short-term commercial lending activities. b. focus on long-term investments. c. invest primarily in single-family residential housing. d. rely on savings deposits for most of their funds.
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
63
Chapter 1: An Overview of Mortgage Lending
Quiz 3. Which agency is conservator of Fannie Mae and Freddie Mac? a. b. c. d.
Federal Housing Administration Federal Housing Finance Agency Housing and Urban Development Office of Federal Housing Enterprise Oversight
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
64
Chapter 1: An Overview of Mortgage Lending
Quiz 4. Which is the largest secondary market participant? a. Federal Home Loan Mortgage Corporation b. Federal Housing Administration c. Federal National Mortgage Association d. Government National Mortgage Association
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
65
Chapter 1: An Overview of Mortgage Lending
Quiz 5. Mortgage bankers a. act as intermediaries between borrowers and lenders. b. generally invest little of their own money in the loans they arrange. c. originate and service loans for large investors. d. all of the above
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
66
Chapter 1: An Overview of Mortgage Lending
Quiz 6. Lenders making loans directly to real estate purchasers are part of the a. primary market. b. secondary market. c. tertiary market. d. all of the above
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Quiz 7.Which is NOT a primary lender for residential properties? a. commercial banks b. insurance companies c. mortgage companies d. savings and loan associations
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
68
Chapter 1: An Overview of Mortgage Lending
Quiz 8. Savings and loan associations a. are increasingly dependent on the secondary market for loan funds. b. are not regulated by any government agency. c. can apply their own guidelines to loans and still sell them to the secondary market. d. never sell their loans to the secondary market. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
69
Mortgage Lending Principles and Practices
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
1
Course Description Today’s consumer-focused and more heavily regulated mortgage industry requires consummate professionals to facilitate one of the biggest financial commitments most people will make in a lifetime. To this end, mortgage professionals must be knowledgeable and ethical when it comes to providing home loans and services. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
2
Course Contents • A primer on the primary and secondary mortgage markets • A complete review of the economic, legal, and valuation aspects of the real estate market • A thorough overview of federal lending laws • Types of loan products and finance instruments —including conventional and alternative financing tools • The fundamentals of the residential mortgage lending process—from pre-qualifying to closing a loan • A discussion of ethical issues Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
3
Course Objectives • Demonstrate a broad foundation of knowledge in mortgage lending including: – Federal mortgage lending laws – Loan application and underwriting processes – Secondary market for mortgage loans – Closing process – Mortgage financing concepts and terms • Understand what is expected of mortgage loan professionals • Act ethically and provide good customer service
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
4
Chapter 1
An Overview of Mortgage Lending
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
5
Chapter 1: An Overview of Mortgage Lending
Mortgage Lending • Mortgage lending is a profession that requires knowledge of many disciplines, including: – Real estate – Finance – Appraisal – Others
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
6
Chapter 1: An Overview of Mortgage Lending
Chapter Overview • The primary mortgage market and how it is sustained and renewed by the secondary mortgage market • The role the mortgage professional plays in the industry and how that is complemented—and challenged—by automation
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
7
Chapter 1: An Overview of Mortgage Lending
Key Terms • Federal National Demand Deposits Mortgage Association Disintermediation (Fannie Mae) Equity • Government National Federal Home Loan Mortgage Association Mortgage Corporation (Ginnie Mae) (Freddie Mac) • Government • Federal Housing Finance Agency (FHFA) Sponsored Enterprise • • • •
(GSE)
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
8
Chapter 1: An Overview of Mortgage Lending
Key Terms • Mortgage • Mortgage Backed Securities (MBS) • Mortgage Banker • Mortgage Broker • Mortgage Lender
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
• The Office of Federal Housing Enterprise Oversight (OFHEO) • Primary Mortgage Markets (or simply primary markets) • Secondary Mortgage Markets (or simply secondary markets)
9
Chapter 1: An Overview of Mortgage Lending
A Brief History of Mortgage Lending • Almost every part of the mortgage industry influenced the current state of affairs: – Political leaders and housing advocates – Wall Street and investors – GSEs
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
– Appraisers – Loan originators – Consumers – Mortgage products
10
Chapter 1: An Overview of Mortgage Lending
Seeds of Today’s Mortgage Industry Buying a home from the 1900s-1930s • Banks required a down payment as much as 50% of the purchase price • Loans had a balloon payment due after a very short term (as short as 1 or 2 years, but usually never more than 5) • Borrowers were forced to refinance often, with no interest rate security
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
11
Chapter 1: An Overview of Mortgage Lending
Federal Reserve System • • • •
Created by the Federal Reserve Act of 1913 Allowed banks to make real estate loans Involved the government in mortgage lending Government influence of interest rates
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
12
Chapter 1: An Overview of Mortgage Lending
1930s Significant Banking Legislation • Federal Home Loan Bank Act of 1932—The basis for the primary mortgage market • The Banking Act of 1933—Created the Federal Deposit Insurance Corporation (FDIC) • The National Housing Act of 1934—Created Federal Savings and Loan Insurance Corporation (FSLIC) and Federal Housing Administration (FHA)
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
13
Chapter 1: An Overview of Mortgage Lending
Federal Housing Administration (FHA) • Introduced in 1934 to help housing industry recover from Great Depression • Provided mortgage insurance to banks • Purpose: To get banks to commit more of their funds to home mortgage loans while at the same time improving quality of home mortgage loans by requiring them to conform to FHA standards
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
14
Chapter 1: An Overview of Mortgage Lending
Federal Housing Administration (FHA) Under the FHA program: • • • •
No income limits on borrowers Government limits the mortgage amount that can be insured Only first mortgages are insured Insured loan amount is based on a sound appraisal
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
15
Chapter 1: An Overview of Mortgage Lending
Federal Housing Administration (FHA) Innovative programs and terms under FHA: • 20% down payment • 20-year maturities—eventually grew to 30 or 40 years • Amortized loans
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
16
Chapter 1: An Overview of Mortgage Lending
Federal Housing Administration (FHA)
Today, the FHA is the largest insurer of mortgages in the world • Over 34 million properties since its inception in 1934
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
17
Chapter 1: An Overview of Mortgage Lending
Factors That Limited Mortgage Growth • Quality of loans varied by bank, city, region, etc. • Banks did not always have money to lend due to saving habits of their depositors
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
18
Chapter 1: An Overview of Mortgage Lending
Federal National Mortgage Association (Fannie Mae) • Established by the federal government in 1938 and privatized in 1968 • 2008—Moved back under government control • Federal Housing Finance Agency appointed as conservator • Original purpose: To provide a place for banks and other lenders to sell their FHA-insured loans
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
19
Chapter 1: An Overview of Mortgage Lending
Federal National Mortgage Association (Fannie Mae) • Process encouraged more banks to make FHA loans and allowed those banks to get more money to make the additional loans • Secondary market accomplished two things: 1. More money available for mortgage loans 2. Loan qualifications and terms made more consistent across the country
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
20
Chapter 1: An Overview of Mortgage Lending
Federal National Mortgage Association (Fannie Mae) • Banks and lenders didn’t want to jeopardize their chances to sell on the secondary market • Fannie Mae (and later other similar institutions) nationalized loan qualifications and other lending procedures • Present-day Mortgage Lending: Its creation was the birth of today’s mortgage industry Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
21
Chapter 1: An Overview of Mortgage Lending
Primary Mortgage Markets
•Lenders who make mortgage loans directly to borrowers •Comprised of the various lending institutions in local communities (commercial banks, Savings and Loans, mortgage companies) •Source of funds largely from savings deposits of individuals and businesses in the local area
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Commercial Banks • Financial institutions that provide a variety of financial services, including loans • Until recently, residential mortgages were not a major part of their business – Mainly due to government limitations on the amount of long-term investments they could make
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Chapter 1: An Overview of Mortgage Lending
Commercial Banks Have increased their participation in home mortgage lending for several reasons: • To take advantage of existing customer relationships • Anticipation that mortgage borrowers will become bank customers for other services • Fewer funds are needed on reserve to cover losses for mortgage loans than for other types of loans
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Chapter 1: An Overview of Mortgage Lending
Financial Institutions Fall under the oversight of various government agencies: • Office of Thrift Supervision (OTS): Savings associations and federally chartered savings banks • Comptroller of Currency (OCC): National banks and federal branches/agencies of foreign banks
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Chapter 1: An Overview of Mortgage Lending
Savings and Loan Associations (S & Ls)
• Financial institutions specializing in savings deposits and mortgage loans • Mid 1940s - late 1970s—Expanded mortgage operations aggressively • Believed their knowledge of the local market and ability to attract long-term deposits meant success in long-term conventional loans Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
Savings and Loan Associations (S & Ls)
• Suffered when interest rates surged in the late ’70s and early ’80s • Resulted in widespread disintermediation • S & Ls unable to sell these mortgages on the secondary market—did not conform to Fannie Mae standards
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Chapter 1: An Overview of Mortgage Lending
Savings and Loan Associations (S & Ls)
• Remain leading home mortgage lenders—now follow Fannie Mae qualifying standards • Required to keep 70% of assets in mortgagerelated activities or change federal charter to bank charter • With fewer S & Ls and more mortgage companies, likely the mortgage industry will soon replace S & Ls as leading provider of residential mortgages
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Chapter 1: An Overview of Mortgage Lending
Mortgage Companies • Mortgage companies are institutions that function as intermediaries between borrowers and lenders. • Mortgage banker—One who originates mortgage loans, usually funding loans with the company's own funds. • Mortgage broker—One who, for a fee, places loans with lenders, but typically does not service such loans.
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Chapter 1: An Overview of Mortgage Lending
Mortgage Companies • Resources of service and expertise rather than actual sources of lending capital. • Because they invest little of their own money, their activities are largely controlled by the availability of investment capital in the secondary market.
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Chapter 1: An Overview of Mortgage Lending
Other Financial Institutions Other types of financial institutions that make loans directly to borrowers for residential first or second mortgages include: • • • •
Credit unions Finance companies Portfolio lenders Mutual savings banks
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Chapter 1: An Overview of Mortgage Lending
Credit Unions A type of cooperative organization whose members: • • • •
share something in common (e.g., an employer) pool their deposits receive better interest rates loan money to fellow members
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Chapter 1: An Overview of Mortgage Lending
Finance Companies • Specialize in higher-risk loans at higher interest rates • Sources of second mortgages and home equity loans made directly to borrowers.
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Chapter 1: An Overview of Mortgage Lending
Portfolio Lenders • Make real estate loans they keep and service in house, instead of selling on the secondary markets • REO is property acquired by a lending institution through foreclosure. – REO property is held in inventory and then sold to recoup all or part of the lender's investment.
• (REO means “Real Estate Owned”)
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Chapter 1: An Overview of Mortgage Lending
Mutual Savings Banks • State-chartered, owned by depositors, and operate for their benefit. • Found mostly in the northeastern United States.
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Chapter 1: An Overview of Mortgage Lending
Secondary Mortgage Markets
• Private investors and government agencies that buy and sell real estate mortgages • Originally established by the federal government in an attempt to moderate local real estate cycles
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Chapter 1: An Overview of Mortgage Lending
Primary vs. Secondary Difference between primary and secondary markets: • Secondary markets buy real estate loans as investments from all over the country • Primary markets are usually local in nature, with local lenders making local loans
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Secondary Market’s Function
The buying and selling of mortgages from primary market lenders. • Loans are bought and sold for several reasons • The primary and secondary markets both are trying to maximize returns on their investment dollars
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Factors of Stable Local Real Estate Markets
• Secondary market buying mortgages from local banks • Local banks investing surplus funds in real estate investments in other regions of the country • Standardization of loan criteria due to secondary mortgage markets
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Chapter 1: An Overview of Mortgage Lending
Flow of Mortgage Funds 1. Mortgage funds loaned to a homebuyer by a lending institution in the primary market 2. Mortgage then sold to secondary market agency, which may sell it to other investors in the form of mortgage-backed securities (MBSs)
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Flow of Mortgage Funds 3. Because the primary lender sold the mortgage on the secondary market, the lender can take the money from the sale and make another mortgage loan, then sell that new loan to the secondary market, and continue the cycle
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Flow of Mortgage Funds 4. The secondary market agency can pool the mortgages it buys to create MBSs, which the secondary market participant then sells to investors 5. As the secondary market agency sells the MBSs to investors, it now has more funds to buy more mortgages and create more MBS pools to sell to investors again, and the cycle continues Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Chapter 1: An Overview of Mortgage Lending
MSB Types 1. Bond-type securities – Long term – Pay interest semiannually – Provide for repayment at a specified date
1. Pass-through securities – More common – Pay interest and principal payments on a monthly basis
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Secondary Market • The secondary market functions this way due to standardized underwriting criteria • A mortgage will be purchased by the secondary mortgage market only if the primary market lender conformed to the underwriting standards
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Chapter 1: An Overview of Mortgage Lending
Secondary Mortgage Market Agencies
1. Federal National Mortgage Association (Fannie Mae) 2. Government National Mortgage Association (Ginnie Mae) 3. Federal Home Loan Mortgage Corporation (Freddie Mac)
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Federal National Mortgage Association (Fannie Mae) • Nation’s largest investor in residential mortgages • Funds its operation by securitization – The act of pooling mortgages, then selling them as mortgage-backed securities
• Buys mortgages or interests in a pool of mortgages from lenders
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Government National Mortgage Association (Ginnie Mae)
• Originally formed from part of Fannie Mae – Took over responsibility for liquidating lessdesirable Fannie Mae mortgages left over after the privatization in ‘68 • Primary function: To promote investment by guaranteeing the payment of principal and interest on FHA and VA mortgages through its mortgagebacked securities program Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Federal Home Loan Mortgage Corporation (Freddie Mac)
• Primary Function: To help savings and loans acquire additional funds for lending in the mortgage market by purchasing the mortgages they already held • Actively sells mortgage loans from its portfolio, acting as a conduit for mortgage investments
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Federal Home Loan Mortgage Corporation (Freddie Mac) Purchases mortgages one of two ways, through its: 1. Immediate delivery program—lender must deliver mortgages Freddie Mac has agreed to purchase within 60 days 2. Forward commitment purchase program— commitments are made for six- and eight-month periods, but sale and delivery of mortgages is at the option of the lender
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Secondary Market Standards
• Fannie Mae, Freddie Mac, and other secondary market agencies have been actively involved in developing underwriting standards for mortgage loans – Creates confidence in purchasers of the MBSs
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Secondary Market Standards
• The standards have a large influence on lending activities in the primary market • Agencies can refuse to purchase loans that don’t follow their guidelines • Can also request lenders to repurchase loans already sold if it’s later discovered that the lender violated underwriting guidelines
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Present Day Mortgage Lending • Fannie Mae was the birth of the mortgage industry we have today • As more loan options became available, the secondary mortgage market grew in importance
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Federal Housing Finance Agency (FHFA) • Made the conservator of Fannie Mae and Freddie Mac in 2008 • An independent federal agency created by the Federal Housing Finance Regulatory Reform Act of 2008 • Purpose: To promote a stronger, safer U.S. housing finance system
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Subprime Mortgage Crisis To meet demand, lenders created new programs, often with relaxed qualifying standards, such as: • Little to no required income or asset documentation • No consideration of credit or ability to pay • Waiving an appraisal • Requiring minimum to no down payment • Allowing borrowers to take out 1st and 2nd mortgages up to 100% of property value Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Subprime Mortgage Crisis • Risky loan programs offered to subprime borrowers frequently resulted in a high rate of delinquency and foreclosure • When these MBSs declined in value, credit tightened • As a result, many borrowers found it difficult to obtain mortgage loans
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Subprime Mortgage Crisis New federal and state laws passed to: • Prohibit predatory lending • Regulate high cost loans • Amend foreclosure procedures • Set national standards for mortgage professionals • Define suitability requirements for borrowers
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Summary 1.
Mortgages are written instruments using real property to secure repayment of a debt. The Federal Reserve Act of 1913 created the Federal Reserve, established a federal charter for banks to make real estate loans, and set up a government system to influence interest rates. The National Housing Act of 1934 created the Federal Housing Administration (FHA) to insure banks against losses for defaults on home loans. The Federal National Mortgage Association (Fannie Mae) was created in 1938 as the first secondary market participant, making more money available for mortgage loans and standardizing loan quality.
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Summary 2. The primary market consists of lenders making mortgage loans directly to borrowers. Primary lenders are commercial banks, Savings and Loans (S & Ls), and mortgage companies. Banks are a large source of funds and offer more mortgage loans now to existing customers. S & Ls were once the largest provider of home mortgage loans, but regulation and risky investments left many savings and loans insolvent. Disintermediation forced them to use secondary markets. Mortgage companies may be: Mortgage bankers who originate loans, usually fund loans with company’s funds, and may sell or service loans; or mortgage brokers who place loans with lenders, do not underwrite, fund, or service loans, but have access to different lenders and loan programs.
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Summary 3. The secondary market consists of private investors and government agencies that buy and sell home mortgages. It was created to moderate local real estate cycles giving lenders new money to lend again by selling their mortgages, giving local lenders loans from other areas, and standardizing loan criteria for better quality loans. The Federal National Mortgage Association (Fannie Mae) is the largest investor in residential mortgages. Fannie Mae buys loans then sells securities backed by its pool of mortgages. The Federal Home Loan Mortgage Corporation (Freddie Mac) issues mortgage backed securities under the conservatorship of the FHFA. The Government National Mortgage Association (Ginnie Mae) is government owned and managed by HUD. Ginnie Mae guarantees payment of principal and interest on FHA/VA loans for its mortgage-backed securities. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Summary 4. In 2008, Fannie Mae and Freddie Mac came under the conservatorship of the Federal Housing Finance Agency (FHFA). The creation of the FHFA merged the powers and regulatory authority of the Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight (OFHEO), as well as the GSE mission office at the Department of Housing and Urban Development (HUD). Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Summary 5. Looser qualifications for home mortgages led to significant increases in borrower default on risky loans, resulting in the socalled subprime mortgage crisis. As a consequence, qualification standards are tightening, many laws have been passed related to predatory lending, higher risk loan programs are unavailable, and financing is more difficult to obtain. The impact of this situation will likely be felt for a long time. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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Quiz 1. Which agency helped to even out the money supply for mortgage loans? a. Fannie Mae b. FHA c. HUD d. OFHEO
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Quiz 2. Commercial banks a. are oriented toward short-term commercial lending activities. b. focus on long-term investments. c. invest primarily in single-family residential housing. d. rely on savings deposits for most of their funds.
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Quiz 3. Which agency is conservator of Fannie Mae and Freddie Mac? a. b. c. d.
Federal Housing Administration Federal Housing Finance Agency Housing and Urban Development Office of Federal Housing Enterprise Oversight
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Quiz 4. Which is the largest secondary market participant? a. Federal Home Loan Mortgage Corporation b. Federal Housing Administration c. Federal National Mortgage Association d. Government National Mortgage Association
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Quiz 5. Mortgage bankers a. act as intermediaries between borrowers and lenders. b. generally invest little of their own money in the loans they arrange. c. originate and service loans for large investors. d. all of the above
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Quiz 6. Lenders making loans directly to real estate purchasers are part of the a. primary market. b. secondary market. c. tertiary market. d. all of the above
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Quiz 7.Which is NOT a primary lender for residential properties? a. commercial banks b. insurance companies c. mortgage companies d. savings and loan associations
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Quiz 8. Savings and loan associations a. are increasingly dependent on the secondary market for loan funds. b. are not regulated by any government agency. c. can apply their own guidelines to loans and still sell them to the secondary market. d. never sell their loans to the secondary market. Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009
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