Chapter 13 The Mortgage Market

Loan origination fee

A 1% or 2% fee charged by the lender for all expenses en-counted in obtaining credit reports, preparing loan documents, and processing a mortgage loan application.

Servicing fee

A fee that is 3/8 to 3/4 of 1% of the unpaid balance of loans serviced is charged by lenders who continue to service mortgages sold to agencies in the secondary market.

Take out commitment

A nonrefundable fee charged by a lender or a financial institution guaranteeing that they will become the permanent lender in the future.

Mortgage lender

A person or business entity that makes mortgage loans or services mortgage loans for others or, for compensation, sells or offers to sell mortgage loans to non institutional investors.

Mortgage broker

A person or business entity who conducts loan originator activities through one or more licensed loan originators employed by a broker or as an independent contractor to the broker. They do not make loans but instead arrange loans for prospective borrowers with various mortgage lenders.

Rural housing service

Agency of the U.S. Department of Agriculture that offers direct loans and other services to farmers, residents, and communities, enabling them to purchase and operate farms, homes, and businesses outside of the city.

The demand for mortgage money is increased or decreased by the following six major influences

Changes in the number and size of households. Shifts in geographic preference for holds. Existing inventory of structures. Changes in costs of real property services, taxes, and maintenance. Changes in construction costs.

National banks

Commercial banks that are chartered by either the state or the federal government. They are also supervised by the Office of the Comptroller of the Currency and are members of the Federal Reserve System.

Life insurance companies

Companies that generate enormous amounts of funds that represent huge amounts of the public's savings, mostly in the form of policy holders' reserves.

Mortgage companies

Companies that originate loans with either their own funds or or borrowed capital. They package the loans and sell them to institutional investors and secondary market participants.

Federal Reserve's duties

Conducting the nations monetary policy. Supervising and regulating banking institutions and protecting the credit rights of consumers. Maintaining the stability of the financial system.

Office of Thrift Supervision

Created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 to charter and regulate member federal savings associations.

Discount points

Extra, up front fee increased the real yield, or annual percentage rate to the lender.

Freddie Mac

Federal Home Loan Mortgage Corporation created by Congress in 1970. A government owned enterprise subject to regulatory oversight by both the secretary of HUD and the secretary or the Treasure Department. Provides a secondary market for loans originated by savings associations which are mostly conventional.

Fannie Mae

Federal National Mortgage Association established by Congress in 1938. It's goal was to stimulate the housing industry after the Great Depression. It also created the first secondary market for mortgage loans and keeps low cost capital flowing to mortgage lenders across the nation.

Ginnie Mae

Government National Mortgage Association part of Housing and Urban Development. It's mission statement is "to expand affordable housing in America by linking global capital markets to the nation's markets." The mortgages are mostly FHA and VA, this allows mortgage lenders to obtain a better price for their mortgage loans in the secondary market. Their mortgage backed securities are the only to carry full faith and credit guarantee by the U.S. government.

Federal Deposit Insurance Corporation

Independent agency of the federal government that insures deposits in banks and savings associations. It is funded by premiums that banks and savings associations pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.

Secure and Fair Enforcement of Mortgage Act

Intended to improve the accountability and tracking of residential mortgage loan originator, enhance consumer protection, reduce fraud, and provide consumers with easily accessible information regarding a mortgage loan originator's professional background.

Secondary mortgage market

Investor market that buys and sells existing mortgages.

Demand deposit

Known as checking accounts.

Conforming loans

Loans that meet Fannie Mae guidelines.

Warehousing

Mortgage lenders secure short term funds from other lenders that enable them to originate loans until they are sold on the secondary market or to large financial institutions. Mortgage lenders use the loans as security for short term financing and the loans are stored for a short period of time until they are sold as a package.

National capital market

Mortgages must compete directly with other long term claims for money. The long term claims are corporate stocks and bonds and long term bonds issued by the various federal, state, and local government. As a consequence, the mortgage, stock, and bond markets are all in competition for the overall supply of funds.

Mutual savings bank

Mutually owned with no stock holders, these banks are active investors in FHA and VA loans all over the nation. By using mortgage bankers and other representation in fast growing capital deficit areas they are able to extend their lending activities into such areas whenever they choose to do so.

Disintermediation

Occurs when funds are withdrawn from intermediary financial institutions, such as banks and savings associations, and are invested in instruments yielding a higher return. Process of bypassing the intermediary financial institutions.

Pass through security

Payments of the underlying mortgages such as principal and interest that are passed through to the investor.

Intermediation

Process practiced by financial thrift institutions that serve as financial intermediaries between depositors and borrowers.

Mortgage discounting

System created to make FHA and VA mortgage loans competitive with conventional mortgage loans.

Federal Home Loan Bank System

System created to provide the same regulatory and administrative services for the nation's savings associations that the Federal Reserve provides for commercial banks. They constitute a permanent pool of reserve credit for savings association member institutions and ensure a source of mortgage funds when local funds are insufficient.

Monetary policy

The actions undertaken by the Fed to influence the availability and cost of money and credit to promote national economic goals.

Reserve requirements

The amount of funds that an institution must hold in reserve against deposit liabilities. Institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks.

Federal Reserve system

The central bank of the United States which was established in 1913 to provide the nation with a safer and more stable monetary system. The board consist of 7 member Board of Governors and 12 banks located in major cities across the nation. The members of the Board of Governors are appointed by the President and confirmed by the U.S. Senate.

Discount rate

The interest rate charged to member banks for borrowing money from the Fed. If rates are increased, member banks have to pay higher interest rates for money borrowed from their district bank. The higher interest is passed on in the form of higher interest to consumers.

Primary mortgage market

The market where securities or goods are actually created. It is made up of lenders that originate new mortgage loans for borrowers.

Commercial banks

The primary reservoirs of commercial credit in the United States and the largest group of financial institutions in assets and numbers.

Open market operations

The purchase and sell of U.S. Treasury and federal agency securities. The purchase or sale of these securities results in an increase or decrease of money in circulation.

Interest

The rent paid for the use of money.

Savings associations

Thrifts and savings banks that invest the bulk of their assets in residential mortgages and home equity loans. These banks are experts in underwriting and making mortgage loans on single family houses, making conventional mortgage loans, FHA and VA loans.

Overall capital market

Thus, each geographical area is a component of the entire mortgage market. The entire mortgage market is, in turn, only one component of the vast financial system.

Easy money market

When money is plentiful and available from many sources, the supply of money exceeds the demand.

The mortgage market and money supply

When the amount of available mortgage money goes down, mortgage interest rates go up, and vice versa. The supply of mortgage money available at any given time depends on the continuous and orderly flow of money into various types of financial institutions; and on the amount borrowed by the federal government.

Tight money market

When the demand for funds exceeds the available supply, resulting in an increase in the interest charged for money.