Chapter 16: Structure of the U.S. Housing Finance System REI 330

Primary Mortgage Markets The market where the loan is originated between the lender and the borrower.

Secondary Mortgage Markets Allows originators to replenish funds Facilitates geographic flow of funds Provides an investment option for savers Early buyers of mortgages Mortgage companies and thrifts FHA insurance and VA guarantees Minimum underwriting standards

Fannie Mae 1954 Charter Act: FNMA Enhance secondary market operations FHA and VA mortgages Manage prior direct loans Manage special assistance programs FNMA transforms into a private organization FNMA issues securities

Ginnie Mae HUD Act 1968: GNMA GNMA manages and liquidates FNMA loan portfolio Special assistance functions Guarantee timely payment of principal and interest for FHA-VA mortgage pools Eliminated any default delay in payments to investors

Freddie Mac Emergency Home Finance Act 1970: FHLMC Provide a secondary market for conventional loans Allowed FNMA to purchase conventional mortgages FHLMC allowed to purchase FHA and VA mortgages Fannie Mae and Freddie Mac compete for all mortgage loans

Fannie Mae and Freddie Mac Freddie Mac became a publicly traded company in 1989, and Fannie Mae became a publicly traded company in In response to the housing crisis, the U.S. government once again took control over both companies in September 2008.

Term Loans Require only interest payments until maturity, at which point the full amount borrowed is due (interest only loan). Until 1930 the term loan was the standard way of financing real estate in the U.S. This became a problem during the Great Depression of the 1930s. The problems with the real estate market then bear a strong resemblance to the problems in real estate market today.

Amortized Loan Require periodic payments that include both interest and principal. The Home Owner’s Loan Corporation (HOLC) was created in 1933 and started offering amortizing loans rather than term loans.

Conventional Mortgage Real estate loans not insured by the FHA or guaranteed by the VA. Follow the guidelines and underwriting standards set forth for purchase by Fannie Mae and Freddie Mac in the secondary market. Together, Fannie Mae and Freddie Mac hold about 40% of the residential mortgages in the U.S.

Insured Conventional Mortgage When less than 20% equity is put down on a mortgage, lenders are likely to require a private mortgage insurance policy (PMI). PMI insures the top 20-25% of the loan and not the whole loan amount. PMI adds about 0.8% annually to the mortgage interest rate in the first 10 years and 0.2% for the remaining life of the loan.

FHA Insurance Programs Federal Housing Authority established by Congress in 1934 to encourage new construction and create new jobs. FHA insured lenders against loss for providing 20-year fully amortizing loans with loan-to- value ratios up to 80% rather than then customary term loans. The FHA establishes its own guidelines for underwriting and appraisal.

FHA Insurance Programs Current underwriting standards: % for properties of $50,000 or less % for properties over $50,000 3.Maximum amount insurable varies by geographic area and is dependent upon the mean home price. 4.Loans made prior to December 15, 1989 are assumable. 5.Insurance premium is 1.5% of loan balance up front and % of the outstanding loan balance annually.

Contributions of the FHA The role of the FHA has been broadened in the current real estate crisis (will be covered in later lectures). Established loan application review procedures that have been mirrored throughout the real estate industry. Led to the way to bring 20- and 30-year amortized mortgages as the new market standard.

Department of Veterans Affairs In 1944 the U.S. government offered a no fee guaranteed mortgage to servicemen returning from WW II. The VA using a sliding scale to set the amount of the guarantee they will offer. For the lender, the guarantee is like putting cash down because it has the same power of asset protection.

Department of Veterans Affairs Entitlement to VA loans is based on current length of service requirements. While the VA loans were originally provided at no cost to the borrower, in 1982 the VA started charging a funding fee anywhere from %. VA loans are assumable according to current loan assumption standards.

Mortgage Originators and Investors Mortgage bankers Borrow money from commercial banks to lend Typically sell loan to Fannie or Freddie but continue to service the loan Originate over half of all residential mortgages Mortgage brokers Commercial banks Savings institutions Credit unions

Federal Legislation Affecting Mortgage Lending Equal Credit Opportunity Act Prohibits discriminatory lending practices Applicants must be notified of loan acceptance status within 30 days

Federal Legislation Affecting Mortgage Lending Consumer Credit Protection Act (Regulation Z or Truth-in-Lending Law) Lenders are required to disclose the true cost of credit within 3 days of application. Cost of credit must be reported as the Annual Percentage Rate (APR) If refinancing, the offer can be rescinded within 3 business days of origination. Real Estate Settlement and Procedures Act (RESPA) – covered in chapter 6

Federal Legislation Affecting Mortgage Lending Flood Disaster Protection Act Lenders must disclose to borrowers if the property they are purchasing is in a flood zone and they need to purchase flood insurance through the Federal Emergency Management Administration (FEMA). Fair Credit Reporting Act Lenders must get approval to investigate a borrower’s credit history Both good and bad payment history to creditors must be reported to credit bureaus.