Georgia Real Estate - Section 15 Unit 3

Borrower Eligibility

--Homebuyer education: This may be required for first time buyers, buyers purchasing multi-unit dwellings, or those using non-traditional financing. --Debt to income ratios: This looks at the borrowers debt load, including the potential housing payment, compared to the income. --Down payment: How much is the borrower putting down to obtain the loan, and was that money a gift? --Credit (FICO) score: This number is an indication of how creditworthy a borrower is. Borrowers with lower credit scores may be required to make higher down payments. Borrowers obtaining loans with higher LTVRs may need to have a higher credit score to qualify.

Click on the loan types that may be eligible for purchase by Fannie Mae.

-Adjustable-rate mortgages -Fixed-rate mortgages -Renovation loans -Refinancing loans

Freddie Mac is ______.

A government-sponsored enterprise

Which of the following acronyms is used to represent Fannie Mae?

FNMA

Which of these are possible outcomes? Loan originators would have less funds available for lending.

Yes

Secondary Mortgage market

(Fannie Mae, Freddie Mac, Ginnie Mae, Farmer Mac, Fed Home Loan Bank) Loans are packaged into Mortgage-Backed Securities (MBSs) to sell to investment banks and Real Estate Mortgage Investment Conduits (REMICs) >>> Investors >>> Money to issue more loans helps keep: -Credit flowing -Cost of borrowing DOWN -Ease of borrowing UP

Property Eligibility

--Location: must be in the U.S., Puerto Rico, U.S. Virgin Islands, or Guam --Form of ownership: fee simple, leasehold estate, or co-op ownership --Type of dwelling: Residential building (attached, detached, semi-detached) on a lot, or in a condo, co-op, or subdivision or planned unit development (PUD) project. Ineligible properties include vacant lots, inaccessible properties (can't readily reach them by road), agricultural properties, boarding houses, units in a condo or co-op hotel, and bed and breakfast properties, among others.

Mortgage Eligibility

--Property type used to secure the loan: primary residence, second home, residential investment property --Loan-to-value ratios (LTVRs): this is the amount being financed compared to the value of the property. This ratio is dependent on credit score, type of mortgage product, number of units in the property, and how the property will be held ( e.g., owner occupied, rental, or vacation property) --Purpose of the loan: purchase vs. refinance --Amortization type: fixed rate vs. adjustable rate

Consumers approach lending institutions in the primary market when they need a loan. After that institution issues the loan, it approaches the secondary market. Order the steps showing the process a loan goes through to get from the primary to the secondary mortgage market.

1-Lending institutions market their loan to the secondary market 2-A secondary mortgage market situation purchases the loan 3-Loans are packaged into a mortgage-backed security (MBS) 4-Investors purchase shares of the MBS 5-Money received from investors is used to purchase additional loans

The Secondary Mortgage Market Process Video Transcript

A consumer wants to purchase a home and applies for a loan through a local bank. Local banks want to grant lots of loans but have a limited amount of money. So they sell their loans on the secondary mortgage market to an institution like Fannie Mae. This allows local banks to keep giving out loans, making it easier and cheaper for consumers to borrow. Fannie Mae, who now owns a bunch of loans from different small banks, packages them into a mortgage-backed security or MBS and sells the security to an investment bank like JP Morgan. Investors can then buy shares in the MBS. When the consumer pays a monthly premium, everyone gets a cut: the local bank that made the loan, Fannie Mae, and JP Morgan all take a small percentage and the remainder is paid out to whomever invested in the security.

Which of the following is Fannie Mae most likely to purchase?

A conventional fixed-rate mortgage issued by a commercial bank

Which of the following describes a Ginnie Mae investment?

A safe investment

Which of the following types of properties may be eligible for purchase by Freddie Mac?

A triplex purchased as a primary residence

Which of the following is considered an ineligible property type for a Fannie Mae-purchased loan?

Agricultural property

Market Players (Primary mortgage market)

Bank Thrift Credit union Mortgage co.

When Fannie Mae purchases a loan, they pay the loan originator a(n) ______ fee.

Collection

Synergy National Bank issued a conventional loan that is eligible for purchase by Fannie Mae. When Fannie Mae purchases the loan, what will Synergy National Bank receive in return?

Collection fee

Fannie Mae purchases loans most often from which type of financial institution?

Commercial banks

In a loan to purchase which of the following property types is NOT eligible for purchase by Fannie Mae?

Commercial space

What type of loan meets certain criteria that are accepted by Fannie Mae and Freddie Mac?

Conforming loan

Identify whether these items are criteria Fannie Mae uses in its underwriting process. Type of dwelling

Criteria

Which of the following is a guideline used by Freddie Mac when determining if a loan is conforming?

Down payment

Freddie Mac only purchases loans used to finance or refinance the purchase of certain types of properties. Which of these property types are eligible? Duplex

Eligible

Freddie Mac only purchases loans used to finance or refinance the purchase of certain types of properties. Which of these property types are eligible? Manufactured home

Eligible

The secondary mortgage market buys loans from the primary market. How does this aid the lending market?

Ensure funds are available to borrowers

Fannie Mae only purchases FHA-insured and VA-guaranteed loans.

False

Freddie Mac issues conventional loans and mortgage-backed securities.

False

Of the institutions listed, which of these is viewed only as a secondary mortgage market player?

Fannie Mae

Which institution was created as the Federal National Mortgage Association in 1938?

Fannie Mae

In terms of function and purpose, which of the following is most similar to Fannie Mae?

Freddie Mac

Amortization type

Freddie Mac criteria

Loan term

Freddie Mac criteria

Loan-to-value ratio (LTVR)

Freddie Mac criteria

Purpose of loan

Freddie Mac criteria

Total debt-to-income ratio

Freddie Mac criteria

The Government National Mortgage Corporation was created in 1968 under the Department of Housing and Urban Development (HUD) and is more commonly known as ______.

Ginnie Mae

Which institution guarantees mortgage-backed securities with the full faith and credit of the United States?

Ginnie Mae

Federal Housing Administration (FHA) insured loans

Guaranteed

Loans from the Departmemt of Housing and Urban Development (HUD) Office of Public and Indian Housing

Guaranteed

Loans guaranteed by the Department of Veterans Affairs (VA)

Guaranteed

Loans originated by the Department of Agriculture's Rural Housing Service (RHS)

Guaranteed

What activity or activities does Ginnie Mae perform?

Guarantees MBSs with the full faith and credit of the U.S.

Ginnie Mae only guarantees mortgage-backed securities that contain loans ______.

Insured or guaranteed by U.S. government agencies

How does Ginnie Mae function differently than Fannie Mae and Freddie Mac?

It doesn't buy loans or issue mortgage-backed securities

Which of the following statements about Freddie Mac is correct?

It sells participation certificates to investors to raise funds to purchase additional loans from lenders.

What could be a consequence if there were no secondary mortgage market?

Lenders might not have funds available to make new loans to the public

Freddie Mac's mission is to provide ______, stability, and affordability in the U.S. housing market.

Liquidity

Which outcome would be likely if the secondary mortgage market didn't exist?

Loan originators would have fewer funds available for lending.

Which of these are possible outcomes? Borrowing money would be cheaper.

No

Which of these are possible outcomes? It would be easier for consumers to obtain a loan.

No

Freddie Mac only purchases loans used to finance or refinance the purchase of certain types of properties. Which of these property types are eligible? Single-unit commercial space

Not Eligible

Freddie Mac only purchases loans used to finance or refinance the purchase of certain types of properties. Which of these property types are eligible? Six-unit residential investment property

Not Eligible

Several actions take place on the secondary mortgage market. Which of these is a common activity?

Packaging loans into mortgage-backed securities

A ______ is a mortgage-backed security issued by Freddie Mac.

Participation certificate

Commercial banks

Primary Market

Which of the following is one of the desired outcomes of Freddie Mac's activities?

Provide stability in the U.S. housing market

What are some reasons a lender would originate a loan just to turn around and sell it on the secondary market? Access to additional mortgage credit

Reason

Fannie Mae

Secondary Market

Freddie Mac

Secondary Market

Investors in MBSs

Secondary Market

Institutions that purchase loans, package them into mortgage-backed securities, then sell these to investors may commonly be referred to as ______.

Secondary market players

Let's see how the Ginnie Mae mortgage process plays out. Match the steps.

Step 1- Lending institution packages mortgages. Step 2- Lending institution issues on MBS. Step 3- Ginnie Mae guarantees the MBS. Step 4- Investors purchase shares of the MBS. Step 5- Mortgage payments from borrowers flow through loan servicer to MBS to investors.

The secondary mortgage market serves a very important role in real estate finance. Which of these statements best describes that role?

The secondary market purchases loans from primary lenders and helps keep credit available to loan originators.

At the risk of hurting Fannie Mae's feelings, let's imagine a world without Freddie Mac for a moment. What would that world look like?

There'd be less funds available for real estate financing.

Fannie Mae packages the loans they purchase into mortgage-backed securities (MBS).

True

Fannie Mae was established as the Federal National Mortgage Association in 1938.

True

Fannie Mae's goal is to help ensure that all communities have access to mortgage credit.

True

Freddie Mac is a government-sponsored enterprise.

True

Freddie Mac was created as the Federal Home Loan Mortgage Corporation (FHLMC) in 1970.

True

Which of the following is considered an ineligible property type for which a loan to purchase or refinance wouldn't be purchased by Fannie Mae?

Vacant lot

If Freddie Mac didn't exist, which of the following would be a likely effect?

A decrease in the amount of credit available to loan originators

What's a participation certificate?

A mortgage-backed security issued by Freddie Mac

Identify whether these items are criteria Fannie Mae uses in its underwriting process. Debt-to-income ratio

Criteria

Identify whether these items are criteria Fannie Mae uses in its underwriting process. Down payment

Criteria

Identify whether these items are criteria Fannie Mae uses in its underwriting process. Loan-to-value ratio (LTVR)

Criteria

Identify whether these items are criteria Fannie Mae uses in its underwriting process. Location

Criteria

Identify whether these items are criteria Fannie Mae uses in its underwriting process. Property type

Criteria

Freddie Mac only purchases loans used to finance or refinance the purchase of certain types of properties. Which of these property types are eligible? Single-family primary residence

Eligible

Freddie Mac only purchases loans used to finance or refinance the purchase of certain types of properties. Which of these property types are eligible? Single-unit secondary home

Eligible

A Closer Look at Fannie Mae

Established as the Federal National Mortgage Association (FNMA) in 1938, Fannie Mae is a government-sponsored enterprise (GSE) regulated by the Federal Housing Finance Agency (FHFA). Fannie Mae's goal is to help expand consumer access to mortgage credit, and the way it meets that goal has evolved over time: --1938: Began by purchasing FHA-insured loans --1944: Began purchasing VA-guaranteed loans as well --1970: Emergency Home Finance Act expanded Fannie Mae's buying options to include conventional loans By purchasing primary loans (primarily from commercial banks), Fannie Mae provides lenders with additional capital to make additional loans. It also pays a collection fee to these lenders when purchasing the loans. These fees, as well as loan origination fees collected when issuing the loans, provide lenders with income. The more loans a lender originates and sells to Fannie Mae, the more income the lender can generate. Fannie Mae, through a complex system of commitments and pricing, guarantees lenders that it will buy a specific dollar amount of mortgage loans within a certain period of time. This commitment usually also states the monetary yield it guarantees the lender. This is a unilateral agreement because the bank isn't required to sell loans based on this commitment, but Fannie Mae is required to purchase loans the bank decides to sell under the terms of the commitment. So, what does Fannie Mae do after purchasing the loans? It packages them into mortgage-backed securities, which are then sold on the open market.

Fannie Mae Underwriting Guidelines

Fannie Mae only purchases loans that conform to its underwriting standards. Fannie Mae's products range from adjustable rate mortgages to fixed rate mortgages to renovation loans to refinancing. Lenders provide information about the loan and their borrower to Fannie Mae, most commonly using Desktop Underwriter® (DU) an automated underwriting system. In some cases, information can be provided manually. Following are some items considered as part of Fannie Mae's underwriting guidelines, which may vary depending on the type of loan or product:

Freddie Mac

Freddie Mac was created as the Federal Home Loan Mortgage Corporation (FHLMC) in 1970 with a stated mission to "provide liquidity, stability and affordability to the U.S. housing market." As a government-sponsored enterprise, Freddie Mac is regulated by the Federal Housing Finance Agency, and does not issue loans. Freddie Mac purchases conventional mortgages from thrifts and mortgage-related securities, and then packages these into mortgage backed-securities they call participation certificates (PCs). PCs are sold to investors. The money received from investors provides capital for Freddie Mac to purchase additional loans from originators. Originators receive money from Freddie Mac and can continue to make loans in their communities. Freddie Mac purchases loans that conform to its underwriting standards, which largely mirror Fannie Mae guidelines. These include items such as: --Property type: Primary residence that is a single family home, condo, or manufactured home, or residential properties with up to four units, a single-unit second home, or residential investment properties --Loan-to-value ratio (LTVR): Varies depending on product --Amortization type: Fixed or adjustable rate --Purpose of loan: Purchase or refinance --Loan term: 15, 20, 30, or 40 years --Down payment: Varies depending on product --Borrower credit score Lenders can enter information about the loan, property, and borrower on Freddie Mac's automated underwriting system, Loan Prospector®. A primary difference between the underwriting guidelines used by Freddie Mac and Fannie Mae relates to debt to income ratios. Fannie Mae considers total debt-to-income as well as the housing debt-to-income ratios for borrowers. Freddie Mac focuses on total debt-to-income.

Ginnie Mae continued

Ginnie Mae doesn't guarantee all MBS products, however. It only guarantees MBSs that contain loans insured or guaranteed by a U.S. government agency, including the Federal Housing Agency (FHA), Department of Veterans Affairs (VA), Department of Agriculture's Rural Housing Service, and HUD's Office of Public and Indian Housing. Securities guaranteed by Ginnie Mae include: --Single class securities, which are MBSs called Ginnie Mae I and Ginnie Mae II. Investors in these products receive principal and interest payments pro rata (based on how many shares of the MBS they own). --Multiple class securities, such as: ---Platinum, which combines Ginnie Mae I and Ginnie Mae II, allowing investors who own shares of both to receive a single payment ---Real Estate Mortgage Investment Conduits, which pay investors according to the class or tranche they're invested in, rather than pro rata.

Which statement most accurately describes the role and function of Ginnie Mae in the secondary mortgage market?

Ginnie Mae insures MBSs made up of government-insured or -guaranteed loans.

Ginnie Mae

Ginnie Mae was created as the Government National Mortgage Corporation in 1968 under the Department of Housing and Urban Development (HUD). Ginnie Mae's stated mission is to "help make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets." Specifically, the Ginnie Mae guaranty allows mortgage lenders to obtain a better price for their mortgage loans in the secondary mortgage market. The lenders can then use the proceeds to make new mortgage loans available. Ginnie Mae functions a bit differently in the secondary market than Fannie Mae and Freddie Mac. For instance, it doesn't buy loans or issue mortgage-backed securities. Instead, Ginnie Mae explicitly guarantees certain MBSs with the "full faith and credit of the United States." This guarantee makes these MBSs a very safe investment, and assures investors that they'll receive timely principal and interest payments from the MBS.

Which of the following loan types can be packaged into a mortgage-backed security eligible for guarantee by Ginnie Mae?

Loans insured or guaranteed by U.S. government agencies

Housing debt-to-income ratio

Not Freddie Mac criteria

Loans issued by subprime mortgage lenders

Not Guaranteed

What are some reasons a lender would originate a loan just to turn around and sell it on the secondary market? Select all that apply. Because primary lenders aren't licensed to hold and serviced their own loans.

Not a Reason

While Fannie Mae considers total and housing debt-to-income ratios in its underwriting process, Freddie Mac considers ______.

Only total debt-to-income

After a loan passes Freddie Mac's underwriting process, the institution may purchase the loan. It will then package it into a mortgage-backed security (MBS) to be sold to investors. What term does Freddie Mac use to describe its MBS product?

Participation certificate (PC)

Credit unions

Primary Market

Thrifts

Primary Market

The Secondary Mortgage Market Process

Primary Mortgage Market >>> Secondary Mortgage Market >>>

What are the types of institutions that issue loans directly to consumers commonly called?

Primary market players

What are some reasons a lender would originate a loan just to turn around and sell it on the secondary market? Select all that apply. For the collection fees

Reason

The Ginnie Mae MBS Process

Step 1: Lending institution packages mortgages Step 2: Lending institution issues an MBS Step 3: Ginnie Mae guarantees the MBS Step 4: Investors purchase shares of the MBS Step 5: Mortgage payments from borrowers flow through loan servicer to MBS to investors