Professional Documents
Culture Documents
Mortgage Lending
Principles and
Practices
An Overview of
Mortgage Lending
Mortgage Lending
Chapter Overview
Key Terms
Key Terms
A Brief History of
Mortgage Lending
• Almost every part of the mortgage industry
influenced the current state of affairs:
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
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)
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
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
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
Financial Institutions
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 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.
Credit Unions
Finance Companies
• Specialize in higher-risk loans at higher
interest rates
• Sources of second mortgages and home
equity loans made directly to borrowers.
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”)
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
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
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
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
Secondary Market
Secondary Mortgage
Market Agencies
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
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
Present Day
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
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.
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.
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.
Summary
Summary
Quiz
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.
Quiz
Quiz
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
Quiz
Quiz
Quiz