Chapter 13 Loan Origination, Processing, and Closing © OnCourse Learning

Chapter 13 Learning Objectives  Understand the steps involved in processing of a loan application and closing a mortgage  Understand the operation of mortgage bankers © OnCourse Learning 2

Loan Processing  Involves several steps including property appraisal, analysis of application, submission for credit approval, and closing the loan  Appraisal – Three stages  Ordering the appraisal; since 1995 Uniform Residential Appraisal Report used for nearly all loans  Monitoring the appraisal  Evaluating the appraisal © OnCourse Learning 3

Loan Processing  Appraisal valuation section – generally accepted appraisal standards require the use of three approaches for determination of value:  Market Approach  Cost Approach  Income Approach  Appraisal reconciliation phase – arriving at final estimate for value 4 © OnCourse Learning

Loan Processing - Analysis of Application  Complete analysis of the financial position of the borrower and the disclosure of information required by the Real Estate Settlement Procedure, Regulation Z and the ECOA  RESPA requires lenders to:  Provide, in advance, general information on the settlement costs  Provide within 3 days after receiving the application estimated closing costs and monthly payments  Provide within 3 days after receiving the application good-faith estimate of the cost of the loan over its term, including APR  The lender verifies the credit standing of the applicant 5 © OnCourse Learning

Loan Processing – Submission of Insurance  Applying for Mortgage Insurance  FHA, VA, or PMI  Common form for submission for FHA and VA  Mortgage insurance is in addition to homeowners insurance  Paid along with homeowners insurance  May be paid by the borrower or through escrow 6 © OnCourse Learning

Loan Processing – Submission of Insurance  Many lenders participate in FHA’s direct endorsement program  The lender performs the underwriting process  A lender that is a direct endorser is essentially an agent of the FHA Saves processing time  If the application for insurance is accepted FHA issues mortgage insurance certificate 7 © OnCourse Learning

Loan Processing – Submission of Insurance  For FHA approval, lender submits a package containing: 1.Mortgage Credit Analysis Worksheet 2.Application for commitment of insurance 3.Copy of sales contract 4.All verifications of deposits 5.All verifications of employment 6.Credit reports 7.Verification of indebtedness 8.Other documents 8 © OnCourse Learning

Loan Closing  Two distinct transactions:  Transferring title  Signing documents (e.g. promissory note)  Standard mortgage or deed-of-trust form for FNMA and FHLMC; similar form for FHA and VA  Mortgage or deed-of-trust includes same information as the note and also provide description of the property  Settlement statement – record of what went on at the closing  Truth-in-lending disclosure must be given to the borrower and must include major financial terms © OnCourse Learning 9

Loan Closing  Disbursement  Lender may give separate checks to the closing agent payable to each party (title company, mortgage insurer, real estate agent, etc.)  Lender gives one check to the closing agent for the full amount of the loan  Recording  Gives public notice that the buyer is the new owner of the property and the mortgage has a lien on the property  Serves as a protection of the owner/lender against others that may claim to have a valid deed  Mortgage insurance payment 10 © OnCourse Learning

Mortgage Banking  The origination, servicing, and the sale of mortgage loans by a firm or a individual  Mortgage bankers:  Non-depository institutions  Do not hold loans in portfolio  Retain servicing rights © OnCourse Learning 11

Mortgage Brokers  Alternative to mortgage bankers  Licensed companies that offer mortgages from variety of lenders  Can provide borrowers with their best loan options 12 © OnCourse Learning

Mortgage Banking – Sources of Funds  Two principal sources of funds:  Commercial paper – short term (180 to 720 days) obligation with rate approx. equal to the prime rate  Warehousing loans – short term loans from commercial banks; structured as line of credit; mortgage loans used as collateral 13 © OnCourse Learning

Mortgage Banking - Revenues  Four main sources for revenues  Origination fee – 1% of the amount of mortgage  Servicing fee – 0.25 – 0.5% of the outstanding mortgage balance  Warehousing rate difference – Income from the differential between the rate on the mortgage loan and the rate on credit line  Marketing rate difference – The difference between the amount originated and the amount received from the sale 14 © OnCourse Learning