Chapter 1: Mortgage Lending Overview

• Federal Home Loan Mortgage Corporation

(FHLMC/Freddie Mac)

• Federal National Mortgage Association

(FNMA/Fannie Mae)

• Government National Mortgage Association

(GNMA/Ginnie Mae)

Mortgage Broker services include:

• Collecting financial and other required information from borrowers • Analyzing income and debt to determine maximum mortgage amounts the borrower can afford • Advising borrowers on available loan programs • Explaining the loan process • Filling out a loan application • Providing required disclosures • Processing the loan file and submitting it to lenders • Assisting borrowers to understand and respond to lender decisions • Participating in the loan closing process

Functions and role of MORTGAGE BANKER include:

- Originates a mortgage loan - Processes a mortgage loan and collects information - Analyzes (underwrites) a mortgage loan - Creates and furnishes the loan documents and disclosures for the mortgage loan closing - Funds the mortgage banking loan closing with its own cash, corporate capital, or funds from a warehouse line of credit - Services the mortgage banking loan for the secondary market purchaser

Functions and role of MORTGAGE BROKER include:

- Originates a mortgage loan - Processes a mortgage loan and collects information Submits the loan to a mortgage banker (wholesale lender) who will complete the remaining functions beginning with analyzing/underwriting the loan file

Common types of mortgage-backed securities include:

- Pass-through securities - Stripped mortgage-backed securities (SMBS) - Collateralized mortgage obligations (CMOs)

Federal Reserve Act of 1913 created the Federal Reserve System

- This Act established a federal charter for banks that permitted them to make real estate loans - established the framework for government involvement with mortgage lending - implementing a system for the government to influence interest rates

A mortgage broker

- a company or individual who, for a fee, places loans with wholesale lenders, but does not service such loans. - act as a conduit in residential mortgages.

Federal Deposit Insurance Corporation (FDIC)

- a public corporation established by Congress in 1933 that insures up to $250,000 for each depositor for most member commercial banks and S & Ls. - maintains stability and public confidence in the nation's financial system by insuring deposits in banks and thrift institutions; examining and supervising financial institutions for safety, soundness, and consumer protection; and managing receiverships. - insures deposits only. It does not insure securities, mutual funds, or similar types of investments - This maximum amount (250K) was made permanent under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Mutual savings banks

- are state- or federal-chartered banks that are owned by depositors and operate for their benefit. - conservative by nature, and often hold a large portion of their assets in home mortgages. Their activities are usually oriented toward the communities they serve to maintain close supervision of their loans. - are known as thrifts.

Office of Comptroller of Currency (OCC)

- charters, regulates, and supervises all national banks and federal branches/agencies of foreign banks (the word "National" or the initials "N.A." appear in or after the bank's name). It is headed by the Comptroller, who is appointed by the President and is also a director of the FDIC.

Federal Housing Administration (FHA)

- created by the National Housing Act of 1934 with the intent of helping the housing industry recover from the Great Depression - not intended to fund loans; instead, provided mortgage insurance so banks would not have to incur losses for defaults on home loans. - designed to promote homeownership, regardless of income or home location area, by insuring mortgage loans were made according to established guidelines - Banks that followed FHA guidelines would be reimbursed for the insured amount of any borrower's default

Government National Mortgage Association (GNMA/Ginnie Mae)

- created in 1968 as a government-owned corporation, operating under HUD. - promotes investment by guaranteeing the payment of principal and interest on FHA, VA, Rural Housing Service, or HUD's Office of Public and Indian Housing federally insured or guaranteed mortgages through its mortgage- backed securities program. - Ginnie Mae's mortgage-backed securities are the only ones that carry the full faith and credit guarantee of the United States government --> which means regardless of whether the mortgage payment is made, investors will receive payments.

Federal Home Loan Mortgage Corporation (FHLMC/Freddie Mac)

- created in 1970 as a nonprofit, federally chartered institution controlled by the Federal Home Loan Bank System. - Like Fannie Mae, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. - Also like Fannie Mae, Freddie Mac was converted to a privately held stock corporation and is currently under the conservatorship of the Federal Housing Finance Agency. - actively sells the mortgage loans from its portfolio to investors throughout the world by issuing its own mortgage-backed securities, thus acting as a conduit for mortgage investments. - The funds generated by the sale of the mortgages are then used to purchase more mortgages. - While its mortgage-backed securities are not backed by the full faith and credit of the federal government, Freddie Mac, like Fannie Mae, has special authority to borrow from the U.S. Treasury in order to continue operating in the secondary market.

Government sponsored enterprises (GSEs)

- entities established by Congress to improve the efficiency of markets and enhance the flow of credit to targeted sectors of the economy. - serve as financial intermediaries to assist lenders and borrowers, primarily in housing and agriculture, or create a secondary market where loans may be sold. - The Federal Home Loan Banks are government sponsored enterprises, as are secondary market leaders Fannie Mae and Freddie Mac.

Federal Financial Institutions Examination Council (FFIEC)

- is a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). - makes recommendations to promote uniformity in the supervision of financial institutions.

Federal Housing Finance Agency (FHFA)

- is an independent federal agency created by the Federal Housing Finance Regulatory Reform Act of 2008 - The purpose is to promote a stronger, safer U.S. housing finance system. - has broad powers similar in function and structure to federal banking regulators, including expanded legal and regulatory authority over the secondary mortgage markets and oversight of the 14 housing-related government sponsored enterprises—including Fannie Mae and Freddie Mac—and oversight of the twelve FHL Banks. - The creation of the FHFA merged the powers and regulatory authority of the former Federal Housing Finance Board (FHFB) and the Office of Federal Housing Enterprise Oversight (OFHEO), as well as the GSE mission office at HUD.

Federal National Mortgage Association (FNMA/Fannie Mae)

- nation's largest investor in residential mortgages. - made a private shareholder-owned company in 1968 and remains in that structure today - in 2008, it was placed in conservatorship under the Federal Housing Finance Agency because of severe financial and cash flow problems resulting from the declining real estate market and mortgage foreclosure epidemic. - buys mortgages (conventional, FHA, or VA) or interests in pools of mortgages from lenders. - The lender, who must own a certain amount of stock in Fannie Mae, assembles a pool of loans, and then a participation interest in that pool (usually 50% to 95%) is sold to Fannie Mae. - Loans are usually serviced by the originating lender or another mortgage servicing company (called a subservicer) for which Fannie Mae pays a service fee. - pools loans that conform to its standards and converts them into mortgage-backed securities, for which it guarantees timely payment of principal and interest. In this way, both the lender and Fannie Mae own an interest in the loans.

Finance companies

- organizations that specialize in making higher-risk loans at higher interest rates. - Finance companies are sources of second mortgages and home equity loans made directly to borrowers. - loan higher percentages of the borrower's equity and work with borrowers who have blemished credit, by pricing loans accordingly.

• Pass-through securities, which are most common,

- pay interest and principal payments on a monthly basis. - Some types pay even if payments aren't collected from the borrower. - The investor owns a proportionate interest in the cash flow generated by the entire pool. - The payments of interest, principal, and sometimes prepayment penalties are passed through to the investor.

FHA Assistance - Insured Mortgages

- required only a 20% down payment - fully amortizing (level payments allowed the loan to be paid in full at the end of the term of the loan) - 30 years - innovated amortizing loans, where monthly payments would retire the debt over the life of the loan instead of leaving the borrower with a large balloon payment due at the end. - In 1965, FHA became part of (HUD).

An important by-product of secondary mortgage markets is the ___ of loan criteria.

- standardization Any changes implemented by secondary mortgage markets become requirements around the country for those wanting to sell mortgages in the secondary market.

An important reason why the secondary market is able to function as it does is that

- standardized underwriting criteria are used to qualify borrowers and property. - underwriting guidelines— such as loan-to-value and income expense ratios - Both Fannie Mae and Freddie Mac rely on the automated underwriting systems (AUS) they have developed to further streamline and standardize the underwriting process. - Fannie Mae uses Desktop Underwriter® (DU®) - Freddie Mac uses Loan Prospector® (LP®).

Collateralized mortgage obligations (CMOs) are

--> bonds that represent claims to specific cash flows from large pools of home mortgages. -The streams of principal and interest payments on the mortgages are distributed to the different classes of CMO interests, known as tranches, according to a complicated deal structure. - Each tranche may have different principal balances, coupon rates, prepayment risks, and maturity dates. - CMOs may be highly sensitive to changes in interest rates and any resulting change in the rate at which homeowners sell their properties, refinance, or otherwise prepay their loans. - Investors in these securities may not only be subjected to this prepayment risk, but also exposed to significant market and liquidity risks.

S & Ls are required to keep ___ % of their assets in mortgage-related activities or will be required to change their charter

65%

Mortgage-Backed Security (MBS)

A Fannie Mae security that represents an undivided interest in a group of mortgages. Principal and interest payments from the individual mortgage loans are grouped and paid out to the MBS holders.

Government-Sponsored Enterprise (GSE)

A group of financial services corporations created by the United States Congress to enhance the flow of credit to targeted sectors of the economy and to make those segments more efficient and transparent.

Correspondent

A mortgage banker who originates mortgage loans that are sold to other mortgage bankers or financial institutions

Federal Deposit Insurance Corporation (FDIC)

A public corporation, established in 1933, that insures up to $250,000 for each depositor for most member commercial banks and S & Ls. FDIC has its own reserves and can also borrow from the U.S. Treasury

Matching: A. FDIC B. FHA C. Fully Amortizing D. Jumbo Loans E. Mortgage Insurance 1. Covers loss due to default and property value decline 2. Insures bank deposits 3. Largest mortgage loan insurer 4. Level loan payments 5. Non-conforming loan

A. FDIC - 2. Insures bank deposits B. FHA - 3. Largest mortgage loan insurer C. Fully Amortizing - 4. Level loan payments D. Jumbo Loans - 5. Non-conforming loan E. Mortgage Insurance - 1. Covers loss due to default and property value decline

Securitization

Act of pooling mortgages and then selling them as mortgage-backed securities. - Mortgage loans purchased from the primary mortgage market are assembled into pools by a government/quasi-governmental entity or a private investor who operates in the secondary mortgage market. - Securities are then issued that represent claims on the principal and interest payments made by borrowers on the loans in the pool

Mortgage

An instrument that creates a voluntary lien on real property to secure repayment of a debt. The parties to a mortgage are the mortgagor (borrower) and mortgagee (lender).

Mortgage Loan Originator (MLO)

As defined by the SAFE Act, an individual who either takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan for compensation or gain

The ____________________ was created in 1933 to insure consumer deposits.

FDIC

Government-sponsored enterprises, securitize and keep loans and mortgage-backed securities in their portfolios. They both have substantially similar charters and regulatory structures.

Fannie Mae and Freddie Mac

A wholly-owned government corporation, not a GSE. does not purchase mortgages from lenders, nor does it buy, sell, or issue securities.

Ginnie Mae, on the other hand, is a wholly-owned government corporation, not a GSE. Also, unlike Freddie Mac and Fannie Mae, Ginnie Mae does not purchase mortgages from lenders, nor does it buy, sell, or issue securities.

Federal Housing Finance Agency (FHFA)

Government agency that 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); the conservator of Fannie Mae and Freddie Mac.

Government National Mortgage Association (Ginnie Mae)

Government- owned corporation that guarantees payment of principal and interest to investors who buy its mortgage backed securities on the secondary market

jumbo loans

Loans which are those not meeting conforming loan limit guidelines set by secondary market leaders Fannie Mae and Freddie Mac.

Demand Deposits

Money that is immediately accessible and a customer may elect to withdraw from the bank at any time

Do mortgage brokers make underwriting decisions.

NO

Do mortgage brokers make underwriting decisions?

NO

Federal Home Loan Mortgage Corporation (Freddie Mac)

Nonprofit, federally chartered institution (now privately owned) that functions as buyer and seller of residential mortgages

Mortgage Banker

Party who originates, sells, and services mortgage loans, and usually acts as the originator and servicer of loans on behalf of large investors, such as insurance companies, pension plans, or Fannie Mae

Disintermediation

The loss of deposits to competing investments that offer higher returns

Federal National Mortgage Association (Fannie Mae)

The nation's largest, privately owned investor in residential mortgages

Service Release Premium (SRP)

The payment received by a lending institution, such as a bank or retail mortgage lender, on the sale of the right to service a closed mortgage loan

Secondary Mortgage Markets

The private investors and government agencies that buy and sell real estate mortgages. Also called Secondary Markets.

Federal Home Loan Bank Act of 1932, passed during the height of the Great Depression, established Federal Home Loan Banks

This ACT established the ___, which had the authority to lend money to thrifts—savings and loan associations (S & Ls), credit unions, and savings banks—so that they could finance home mortgages in their neighborhoods

Banking Act of 1933, also known as the Glass-Steagall Act

This Act created the Federal Deposit Insurance Corporation (FDIC) to insure depositors against bank default

FHL Banks contribute 10% of their net income to the Affordable Housing Program (AHP).

This grant program is the largest source of private sector grants for housing and community development in the country.

True or False. Today, the FHA is the largest insurer of mortgages in the world, insuring over 34 million properties since its inception

True

True or False: Because the secondary market performs such an important function in providing liquidity of mortgage funds, the standards set by the secondary market have a great influence on lending activities in the primary market.

True

True or False: Under the FHA program, there are no income limits on borrowers who can take advantage of the program.

True. However, the government limits the mortgage amount that can be insured, based on a sound appraisal and the median price of homes in a particular area

True or False: underwriting standards create some degree of confidence in purchasers of the mortgage-backed securities

True: - helped reduce or eliminate much of the variation in loan quality, types of loan programs offered, and aspects of home loans that were made in different parts of the country. - Purchasers know that the mortgages backing the securities must be of a minimum quality, lessening their risk in investing in properties they can't view or assess.

Primary Mortgage Market

When lenders make mortgage loans directly to borrowers. Also called Primary Market.

Credit unions

are cooperative financial institutions owned and controlled by their members in order to pool their deposits, receive better interest rates, and loan money to fellow members

Commercial banks

are financial institutions that provide a variety of financial services, including loans.

Stripped mortgage-backed securities (SMBS)

are pass-through securities that are created by separating—or stripping apart—the principal and interest payments from the underlying mortgages that back standard mortgage-backed securities.

Federal Home Loan Banks (FHL Banks), established in 1932 by the Federal Home Loan Banking Act,

are twelve regional cooperative banks that U.S. lending institutions use to finance housing and economic development in their communities. - largest source of funding for community lending for eight decades - The purpose is to use their collective resources to expand credit opportunities throughout all markets - More than 8,000 lenders are members of the FHL Bank System, representing approximately 80% of the insured lending institutions in the country.

Mortgage-backed securities (MBSs) are

debt obligations that represent claims to the cash flows from pools of mortgage loans

Portfolio lending

is a term to describe the strategy where financial institutions that make real estate loans keep and service those loans in-house as part of their investment portfolios, instead of selling on the secondary market. - can make lending decisions based on many factors; for example, to customers who need a loan amount larger than can be sold to the secondary market or as an investment because the lender likes the project, rate of return, or possible future profit sharing in a particular real estate venture.

National Credit Union Administration (NCUA)

is the independent federal agency that charters and supervises federal credit unions. - operates the National Credit Union Share Insurance Fund (NCUSIF), which insures the savings of 80 million account holders in all federal credit unions and many state-chartered credit unions.

The National Housing Act of 1934 extended protection to savings and loan depositors with the creation of the Federal Savings and Loan Insurance Corporation (FSLIC). However after the savings and loans crisis of the 1980s exhausted FSLIC reserves ...

it was abolished by the federal Financial Institutions Reform Recovery and Enforcement Act (FIRREA) in 1989. FIRREA transferred all assets previously held by FSLIC to the Savings Association Insurance Fund (SAIF), a division of the FDIC

acceleration

or "due on sale clause", allowing for the non-qualifying assumption of a mortgage loan at lower mortgage rates. The use of an acceleration clause became commonplace in the late 1980s.

Mortgage Broker Party

who, for a fee, places loans with investors, but typically does not service such loans

Savings and loan associations (S & Ls)

—sometimes called thrifts—are financial institutions that specialize in taking savings deposits and making mortgage loans