Chapter 9: Financing Section 2: Sources of Financing

Mortgage brokers

Are professionals who charge a fee to places loans with lenders but they typically do not service such loans. Mortgage brokers do not underwrite or fund their loans, but act as a conduit in residential mortgages. Often they have knowledge of and access to lenders who are able to supply a particular type of loan needed to purchase a property, for example, a loan from an investor for a buyer who was turned down by a traditional lender. However, mortgage brokers do not make lending decisions, which may limit the disclosures they are required to provide to borrowers.

Commerical banks

As a rule, commercial banks finance short term commercial needs of the business community and must maintain a high degree of liquidity in order to meet withdrawal requests of their depositors. However, in the last ten years, commercial banks have become very active in the home mortgage market. Federally chartered commercial banks include the initials "N.A" after their name. State chartered commercial banks are called trust companies.

Deposit Insurance

Because of the S&L crisis, in l989 congress passed the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). FIRREA created the Office of Thrift Supervision (OTS) to monitor and regulate the savings and loan industry and designated the Federal Deposit Insurance Corporation (FDIC): as the sole agency for insuring funds for both S&Ls and commercial banks. FIRREA also created the Resolution Trust Corporation (RTC) to liquidate the assets of failed savings and loan associations.

Cooperative banks

Cooperative banks were originally organized by local associations of prominent business people who sold "shares" to depositors. Because they were able to pay higher interest rates than most of the thrift institutions, they attracted a large number of depositors and were able to make lowinteresthomemortgageloans. TheyoperateinthesamefashionasS&Ls.

Finance Companies

Financial institutions are those 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. Although banks and other lenders also make these types of loans, finance companies are often in a position to loan higher percentages of the borrower's equity and more easily overlook less-than- perfect credit in a borrower's history, compared to banks.

Insurance Companies

Life insurance companies, nationally, rank fourth among institutional home mortgage lenders. Whilemostoftheirloansareonbusinessorlargecommercialproperties,theydohandle alargevolumeofhomemortgages. Theirlendingactivitiesareregulatedbythestatewherethey are incorporated and by the state where they do their lending.

King Companies

MBCs are institutions that function as intermediaries between borrowers and lenders. Mortgage banking companies originate mortgages with their own funds and sell them to investors, such as insurance companies, commercial banks, and retirement and pension funds. The mortgage banker assumes the risk of the loan and, for a fee, services it for the purchaser. Mortgage bankers also sell their mortgages in the secondary mortgage market and make a profit on the origination fee. Mortgage bankers differ from S&Ls because they loan their own money rather than other people'smoney. Theyalsodifferfromloancorrespondentswhonegotiateloansforconventional lending institutions.

Pension and Retirement Funds

Although they have traditionally invested conservatively in government bonds and blue chip corporate stocks and bonds, pension and retirement funds are a growing source of mortgage funds.

(FHLBB) Federal Home Loan Bank Board

The Federal Home Loan Bank Board (FHLBB) is the governing body and issues federal charters to member banks. The Board regulates and monitors the lending activities of member associations throughtwelveregionalFederalHomeLoanBanks. TheBoarddeterminesmembers'reserve requirements and discount rates, and provides deposit insurance through the Federal Deposit Insurance Corporation (FDIC).

The Federal Home Loan Bank System

The Federal Home Loan Bank System was created in l932 as a regulatory agency to charternationalsavingsandloanassociations(S&Ls)andtosupervisetheiroperations. The Federal Home Loan Bank Board (FHLBB) is the governing body and issues federal charters to member banks. The Board regulates and monitors the lending activities of member associations throughtwelveregionalFederalHomeLoanBanks. TheBoarddeterminesmembers'reserve requirements and discount rates, and provides deposit insurance through the Federal Deposit Insurance Corporation (FDIC). Federally chartered S&Ls are required to be members of the FHLB System. State chartered S&Ls may join at their option, provided they conform to federal requirements and insure their depositors' accounts through FDIC.

Federal Reserve System

The Federal Reserve System (The FED) is a central bank system, which serves each of the twelveFHLbankdistricts. TheFEDgreatlyinfluencesthenation'seconomythroughtheregulation of member banks' reserves (money available for lending), and by regulation of the discount rate, which the district banks charge member banks for the use of FED money.

Primary Mortgage Market

The primary mortgage market is where mortgage loans are originated with funds obtained from banks, mortgage companies, institutions, insurance companies, and individual lenders. The primary lender assumes the risk of the loan and continues to service the mortgage (collect the payments) when the mortgage is sold in the secondary mortgage market.

(FMHA) Farmer's Home Administration

This is an agency of the U.S. Department of Agriculture which guarantees loans made and serviced by private lenders for the purchase and improvement of single family homes in rural areas(populationlessthan10,000). TheFmHaalsohasadirectloanprogramwhenlocalfinancing is not readily available.

The Banking Act of 1933.

a. Created the Federal Deposit Insurance Corporation (FDIC) to insure depositors againstbankdefault. Thiswasanimportantstepinenticingpeopleto,onceagain, save their money in banks. b. This allowed the banks, then, to have a continued source of funds to make more home mortgage loans.

The National Housing Act of 1934.

a. Extended this protection to Savings and Loan depositors with the creation of the Federal Savings and Loan Insurance Corporation (FSLIC). b. Created the Federal Housing Administration (FHA). Please see page 9-8 for more information.

The Federal Home Loan Bank Act of 1932.

a. Passed during the height of the Great Depression. b. Established Federal Home Loan Banks, which had the authority to lend money to Savings and Loan Associations (S & Ls) so that they, in turn, could finance home mortgages in their neighborhoods. i. This process is where a lender loans money to a borrower and the borrower gives the lender a mortgage is called the primary mortgage market.

Federal Deposit Insurance Corporation (FDIC)

as the sole agency for insuring funds for both S&Ls and commercial banks. FIRREA also created the Resolution Trust Corporation (RTC) to liquidate the assets of failed savings and loan associations.

Savings and Loan Associations (S&Ls)

(S & Ls) are financial institutions that specialize in taking savings deposits and making mortgageloans. Traditionally,S&Lswerethemajorrealestatelendinginstitutions,investing roughly75%oftheirassetsinsingle-familymortgages. Theywereabletodominatelocal mortgage markets, even though commercial banks had more assets to invest, mainly because deposits placed with S & Ls were savings deposits less frequently subject to immediate withdrawal than demand deposits (checking) held by banks. From the mid-1940s to the late 1970s, S & Ls expanded their mortgage operations aggressively. While other lenders feared the risks inherent in long-term conventional loans, S & Ls believed they could succeed by virtue of their knowledge of the local market and ability to attract long-term deposits. • Remain leading home mortgage lenders—now follow Fannie Mae qualifying standards • Required to keep 70% of assets in mortgage-related 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 State and federally chartered S&Ls nationally account for the greatest share of home loan mortgages among institutional lenders. Federally chartered S&Ls must use the word "Federal" in their name. Suffered when interest rates surged in the late '70s and early '80s. esulted in widespread disintermediation. • S & Ls unable to sell these mortgages on the secondary market—did not conform to Fannie Mae standards despite this crisis; S & Ls still remain as leading home mortgage lenders (and now follow Fannie Mae qualifying standards). • S & Ls are now required to keep 70% of their assets in mortgage-related activities or change their federal charter to a bank charter. • But with fewer S & Ls and more mortgage companies, it's likely the mortgage industry will soon replace S & Ls as the leading provider of residential mortgages.

Mortgage bankers

Bankers who originates mortgage loans, usually funding loans with the company's own funds. Mortgage brokers act as intermediaries, for a fee, between borrowers and lenders. They locate potential borrowers and process applications, which are submitted to lenders for final approval. Mortgage brokers do not originate loans or service them. Mortgage bankers may sell the loans or do the servicing. Mortgage bankers often act as originators and servicers of loans on behalf of large investors such as insurance companies, pension plans, or Fannie Mae. Since these large investors operate on a national scale, they do not take the time to familiarize themselves with local markets, or to deal with the day-to-day management of their loans. Even if loans are sold on the secondary market, mortgage bankers may continue to act as agents and service loans for a fee.

Credit Unions

Credit unions are non-profit organizations composed of members of a particular profession, trade union, club, society or civil service, etc. They are financial institutions that are a type of cooperative organization whose members share something in common (e.g., an employer), pool their deposits together, receive better interest rates, and loan money to fellow members. Traditionally, credit unions only made home improvement loans and other types of consumer loans. Morerecently,somecreditunionshavebegunmakingmortgageloans. Thesemortgageloansare often second mortgages in the form of home equity loans, and even first mortgages since credit unions can sell qualifying, standardized loans to the secondary market. Supposedly they pay higher interest to depositors and specialize in short term consumer loans. Most states have changed their banking laws to allow credit unions to participate and compete with other lending institutionsinthehomemortgagemarket. TheFederalCreditUnionActallowscreditunionsto makethirty-yearrealestateloanstomemberstofinancetheirprincipalresidence. Theycanalso make FHA Credit Unions may be state or federally chartered. 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

Portfolio Lenders

Financial institutions that make real estate loans they keep and service in-house, instead of selling on the secondary market. Portfolio lenders can be major financial institutions, such as banks, orothertypesofnon-traditionallendersorinvestors. Portfoliolendersmakethesetypesofloans as a service to customers who may 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. If a lender is holding a loan that is foreclosed on, the lender takes possession of the property and it becomes real estate owned (REO). 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. 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.

real estate owned (REO)

If a lender is holding a loan that is foreclosed on, the lender takes possession of the property and it becomes real estate owned (REO). 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. 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.

Private Individual Lenders

Individuals are a good source of funds for financing since they are not subject to the strict regulationsofinstitutionallenders. Theyareusuallywillingtotakeslightlygreaterriskssincemost of their activity is in the second or junior mortgage market. Under a federal program, home mortgages may be sold in the secondary mortgage market provided they meet the HUD requirements.

Mutual Savings Banks

MSBs are state-chartered banks that are owned by depositors and operate for their benefit. Theyareconservativebynature;theyoftenholdalargeportionoftheirassetsinhome mortgages. Theiractivitiesareusuallyorientedtowardthecommunitiestheyservetomaintain close supervision of their loans, but modern economic realities have forced mutual savings banks to increase their pool of funds and diversify their mortgage holdings via the secondary market. While they are found mostly in the northeastern United States, there are a number of savings institutions in other areas that continue to operate as mutual, as well as a number or stock-owned savings banks. Mutual savings banks are owned by the depositors who share in the profit. Interest paid on savings is based upon the success or failure of the bank's lending operations. Deposits are generally less subject to withdrawal and are thus well suited for mortgage loan investment purposes. Themajorityofmutualsavingsbanksarelocatedinthenortheast,principallyinNew YorkandMassachusetts. TheyoperateinthesamefashionasS&Ls,buttheirlendingareaislimited to their own state and contiguous states. State-chartered, owned by depositors, and operate for their benefit. Found mostly in the northeastern United States.

Loan Correspondents

Mortgage bankers differ from S&Ls because they loan their own money rather than other people'smoney. Theyalsodifferfromloancorrespondentswhonegotiateloansforconventional lending institutions.