7 MORTGAGES 7.1 Mortgage Lending 7.2 Mortgage Loan Processing Banking 4/20/2018 MORTGAGES 7 7.1 Mortgage Lending 7.2 Mortgage Loan Processing 7.3 Mortgages and the Law 7.4 Government-Backed Loans 7.5 The Mortgage Crisis Chapter 1

Banking Define a mortgage. Identify several types of mortgages. 4/20/2018 7.1 MORTGAGE LENDING GOALS Define a mortgage. Identify several types of mortgages. Chapter 1

TERMS Mortgage origination Mortgage Foreclosure Fixed rate mortgage Balloon mortgage Adjustable rate mortgage Buy-down mortgage Point Shared appreciation mortgage (SAM)

WHAT IS A MORTGAGE? Mortgage origination Mortgage Foreclosure New mortgages Mortgage A long-term note secured by real property Foreclosure When a creditor seeks a court-ordered sale of a property due to non-payment of a mortgage The debt is paid from the funds generated by the sale

checkpoint What is a mortgage?

Fixed rate mortgage (conventional mortgage) TYPES OF MORTGAGES Fixed rate mortgage (conventional mortgage) Loan with a fixed interest rate for the life of the loan Balloon mortgage The interest rate and payment stay fixed At some specified point the entire remaining balance of the loan is due in one single “balloon” payment

ADJUSTABLE RATE MORTGAGES Loan with rates that change over the course of the loan Teaser rate Initial interest rates that may be extremely low Adjusted at a later date to the normal rate Including some addition to make up for an artificially low start

OTHER FORMS OF FINANCING Buy-down mortgage The borrower buys down, or prepays, part of the interest in order to get a lower rate Point A value equal to 1 percent of the loan

Shared appreciation mortgage (SAM) Can lower interest rates for borrowers who agree to share profits with the lender when the house is sold Appreciation The amount that a house increases in value

REFINANCING Refinancing is starting over with an entirely new loan, using part or all of the loan funds to pay off the old mortgage. Consumers can save money by getting mortgages at lower rates. Lenders can earn money on fees, points, and closing costs.

HOME EQUITY LOANS Equity The difference between the market value of an item and what is owed on it When home values are appreciating, homeowners can use the difference between what they owe and what their homes are worth to secure a loan.

REVERSE MORTGAGES Reverse mortgage A homeowner receives a sum from the lender secured by the value of a home and does not pay the loan back as long as he or she lives there. Homeowners are usually required to be 62 years or older.

checkpoint What is the basic difference between conventional and adjustable rate mortgages?

7.2 MORTGAGE LOAN PROCESSING Banking 4/20/2018 7.2 MORTGAGE LOAN PROCESSING GOALS Describe what is involved in obtaining a mortgage. Explain the mortgage approval process. Chapter 1

TERMS PITI Escrow Loan-to-value (LTV)

OBTAINING A MORTGAGE In a healthy lending environment, most lenders don’t want a person’s housing costs to exceed 25 to 28 percent of gross monthly income. Total debt should not exceed 36 percent, including housing costs.

PITI PITI Principal Interest The remaining unpaid balance of the mortgage Interest The amount of the monthly payment that goes toward interest

Taxes Insurance Include local real estate taxes Escrow An amount of money that lenders require be paid in advance Used to pay real estate taxes Insurance Property insurance and sometimes private mortgage insurance Private mortgage insurance (PMI) Protects the lender against loan default Waived if down payment exceeds 20 percent

checkpoint What is private mortgage insurance?

THE APPROVAL PROCESS Application Documentation Underwriting Loan-to-value The value of the loan compared to the value of the asset Underwriting Drawing documents Closing Recording

checkpoint What are the basic steps of the mortgage approval process?

Banking 4/20/2018 7.3 MORTGAGES AND THE LAW GOALS Describe consumer protection laws that apply to mortgage lending. Describe laws directly related to mortgage lending. Chapter 1

TERMS Redlining

CONSUMER PROTECTION LEGISLATION The Truth in Lending Act (TILA) The Equal Credit Opportunity Act (ECOA) The Fair Credit Reporting Act (FCRA) The Fair Debt Collection Practices Act (FDCPA) The Gramm-Leach-Bliley Act

checkpoint How do consumer protection laws apply to mortgage lending?

Community Reinvestment Act (CRA) MORTGAGE LEGISLATION Community Reinvestment Act (CRA) Redlining Requires that banks document their lending decisions and demonstrate an effort to serve their local communities

HOME MORTGAGE DISCLOSURE ACT (HMDA) Requires banks and other financial institutions to record and report data on home lending in order to identify possible discriminatory patterns

HOME OWNERSHIP AND EQUITY PROTECTION ACT (HOEPA) Congress passed the Home Ownership and Equity Protection Act in 1994 to protect consumers against predatory lending. Also applies to second mortgages and refinancing Pyramiding When a loan servicing company continues to charge late fees until all late fees have been paid (even if payments made after the late payments were made in full and on time)

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) Requires disclosures to be provided to the borrower at various times during the transaction A booklet explaining various real estate settlement services A good faith estimate of what closing costs are likely to be A mortgaging service disclosure statement

At closing An itemized list of actual closing costs An initial escrow statement

checkpoint What is redlining and what legislation was enacted to address it?

7.4 GOVERNMENT- BACKED LOANS Banking 4/20/2018 7.4 GOVERNMENT- BACKED LOANS GOALS Explain the concept of government-backed loans. Identify government-backed programs to encourage home lending. Chapter 1

TERMS Fannie Mae Freddie Mac Ginny Mae

WHAT IS A GOVERNMENT-BACKED LOAN? Numerous government programs help banks help people get loans they need. Sometimes the banks provide funding and the government absorbs some of the risk.

checkpoint How do banks and the government work together to provide loans?

FEDERAL MORTGAGE PROGRAMS The Federal Housing Administration Established in 1934 Replenished funds available for home lending

FEDERAL HOUSING ADMINISTRATION (FHA) Loan guarantees Mortgage insurance Long-term loans The FHA is now the Office of Housing.

FHASECURE FHASecure was developed in 2007. Homeowners who are struggling to meet their ARM payments can participate in FHASecure to refinance their homes with a government-insured mortgage.

FANNIE MAE Fannie Mae Federal National Mortgage Association (FNMA) Helps lenders find funds to make available for mortgages A government-chartered corporation that buys mortgages from the originating institutions and keeps them or exchanges them for securities that it guarantees

FREDDIE MAC Freddie Mac The Federal Home Loan Mortgage Corporation Buys home mortgages from banks and other lending institutions and combines them into large groups, selling interest in the groups to investors

THE COMBINED IMPACT OF FANNIE MAE AND FREDDIE MAC Government-sponsored enterprise (GSE) A business that receives some legal exemptions and privileges from the federal government, which, in effect, lowers its operating costs Can charge lower interest rates Has an implicit guarantee of the government as a backer

GINNIE MAE Ginnie Mae The Government National Mortgage Association Backs securities issued by holders of pools of mortgages

VETERANS ADMINISTRATION (VA) Veterans may get loans with No down payment No prepayment penalties Negotiable interest rates

The National Council of State Housing Agencies (NCSHA) At the state level Provides and administers programs for lower-income and other people who seek help to buy or renovate a home

OTHER GOVERNMENT-BACKED LOANS U.S. Department of Agriculture’s (USDA) Rural Housing Service The Farm Service Agency The Catalog of Federal Domestic Assistance

checkpoint How do the FHA and VA make more loans available?

GOALS Describe why mortgages are a sound investment. Banking 4/20/2018 7.5 THE MORTGAGE CRISIS GOALS Describe why mortgages are a sound investment. Explain the causes and consequences of the mortgage crisis. Chapter 1

TERMS Mortgage-backed securities Negative equity

MORTGAGES AS AN ATTRACTIVE INVESTMENT Historically, mortgages represented a secure, steady investment for lenders. Interest rates are predetermined. The payment schedule is predetermined. Lenders could count on a steady flow of revenue from mortgages. Buyers were prequalified. Housing prices typically appreciated.

checkpoint Historically, why have lenders considered mortgages a good investment?

THE MORTGAGE CRISIS Many countries had increasing levels of wealth. The Federal Funds rate was about 1%. Easy access to mortgage loans drove up the demand for houses. Increased housing demand caused housing prices to continue to escalate.

MORTGAGE-BACKED SECURITIES Securities comprised of pools of mortgages Individual risk becomes collective risk Demand for mortgage-backed securities increased.

LOWERING LENDING CRITERIA Interest-only loans Stated Income Verified Assets loans (SIVA) Stated Income State Assets loans (SISA) No Income No Asset loans (NINA) No Income, No Asset, No Employment

RATING MORTGAGE-BACKED SECURITIES A number of investments received an AAA bond rating even though they were backed by subprime mortgages. An AAA bond rating is the highest rating a security can receive. The repayment of interest and principal is expected to be stable and reliable. Many of the mortgage-backed securities that received AAA bond ratings lost a substantial amount of their value.

WHO OWNS MY LOAN? Homeowners who have loans that have been sold multiple times and whose loans are now part of some large pool of mortgage backed securities often have a difficult time determining who owns their mortgage. If they cannot determine who is holding their mortgage, they cannot negotiate new interest rates.

THE FALLOUT Negative equity When the amount owed on a home is more than the current value of the home Estimates vary regarding the status of homeownership at the conclusion of the crisis 25 percent of U.S. homes will have negative equity 3 million to 4 million homeowners are expected to experience foreclosure

checkpoint List five loan products that were developed to support loosened loan qualification standards.