Ch.11 Flashcards
Thesecondary mortgage marketis defined as:
A market created by government and private agencies for the purchase and sale of existing mortgages, which provides greater liquidity for mortgages. In the United States, Fannie Mae, Freddie Mac, and Ginnie Mae are the principal operators in the secondary mortgage market.”
The Federal National Mortgage Association (FNMA)
The Federal National Mortgage Association (FNMA) was created in 1938 to purchase FHA insured loans. It was felt that lenders would be more willing to originate long-term loans if they didn’t have to hold them in their portfolio.
Once lenders sold mortgages to FNMA, they could reinvest the funds by writing new mortgages. In 1948, FNMA began purchasing VA loans, and in 1970, it started purchasing conventional mortgages.
In 1968, FNMA was split into two organizations:
Fannie Mae; a federally chartered corporation owned by private shareholders
Government National Mortgage Association (Ginnie Mae), a government agency under the oversight of the Department of Housing and Urban Development (HUD)
Fannie Mae does what?
Fannie Mae purchases single family and multifamily FHA, VA and conventional mortgages. The mortgages purchased from originators may be held in portfolio or may be securitized and sold to investors as mortgage-backed securities (MBS).
Ginnie Mae does what?
Ginnie Mae does not purchase mortgage loans, hold a portfolio of loans, or sell mortgage-backed securities. Nevertheless, Ginnie Mae plays an important role in the secondary mortgage market. They provide a guarantee on mortgage-backed securities that are issued by approved issuers. Ginnie Mae is backed by the full faith and credit of the federal government. If the borrowers fail to perform on a loan, and the issuer of the MBS cannot pay the returns promised to the investor, Ginnie Mae will make the investor whole.
In 1970, Congress created the Federal Home Loan Mortgage Corporation (Freddie Mac) to do what?
provide a secondary market for conventional mortgages, primarily for thrifts. Their initial funding came from the Federal Home Loan Bank, the central bank for thrifts.
What are “Thrifts”
Thrifts” is an abbreviation for a Savings & Loan Association which is a local lending institution whose primary function is originating and servicing residential mortgages in the local market. Most “thrifts” were taken over by the federal government (Resolution Trust Corporation) after the financial crisis in 1987 so there are a relatively small number of “thrifts” still operating.
AContractfor Deedis defined as:
A contract in which a purchaser of real estate agrees to pay a small portion of the purchase price when the contract is signed and additional sums, at intervals and in amounts specified in the contract, until the total purchase price is paid and the seller delivers the deed; used primarily to protect the seller’s interest in the unpaid balance because foreclosure can be exercised more quickly than it could be under a mortgage. Also called land contract orinstallment (sale) contract.”
A Note and Trust Deedtransaction is:
Is a seller-financed transaction which is permitted in many states. In a seller-financed Note and Trust Deed transaction, a seller is financing the sale for the buyer, just as in the Contract for Deed sale, except that in this case, the seller delivers a warranty deed and legal title is passed right away to the buyer and the seller holds a Deed of Trust on the property in the same manner as a third-party institutional lender. Where a Contract for Deed is a two-party document (buyer and seller), a Deed of Trust is a three-party document: lender, borrower, and trustee. If the buyer (borrower) defaults on the payments, the trustee can take action and foreclose on the property with a trustee’s auction without the need for action by a court. This makes the foreclosure process in the case of a default by the buyer much easier.
a variation of seller financing, and offers buyers an alternative toa new mortgage from a financial institution. The seller keeps the existing mortgage on behalf of the buyer, plus lends additional money to cover the price paid above the balance of the underlying loan.
This kind of seller financing is also called an “All Inclusive Deed of Trust” or “All Inclusive Mortgage.”
wrap-around contract” is a:
The basic concept is that the seller carries back a mortgage on the property which is in “second position” in priority because the “first” mortgage that the seller originally took out on the property remains in place. The seller then receivesthe larger monthly payments on the All Inclusive Mortgage from the buyer and uses those funds to make the smaller monthly payments on the first mortgage and keeps the difference. When the buyer eventually pays off the All Inclusive Mortgage, the proceeds are first used to pay off the first mortgage and the seller keeps the balance. Payments are typically paid to a third-partyescrow holder who receives payments from the buyer, makes the payments on the underlying first mortgage, then sends the difference to the seller. That way the buyer isprotected from the possibility of the seller not continuing to make the payments on the first mortgage and just keeping the total payment from the buyer.
As an example, let’s say you are buying a home for $220,000, with a $20,000 down payment. The property has an existing mortgage with a balance of $120,000 at 5%. The best rate you can find is 8% for a new first mortgage. So it might make sense for you to convince the seller to loan you $200,000 at 7%, and have him continue tomake the monthly payments on his current mortgage. It’s essentially a win-win. The seller wins because he receivesa 7% return on$80,000,plus he will make 2% on the$120,000 current mortgage balance. You win because you get a loan at a below-market rate, which means youwould have a lower monthly payment.
The difference between a wrap-around contract and a first mortgage scenario is that with a first mortgage, the original mortgage is paid off. With a wrap, it is not.
Fannie Mae purchases ______ loans on the secondary market.
Conventional, VA, FHA LOANS
True or False? Fannie Mae and Freddie Mac are now defunct.
False
Up until the 1970s, mortgage lending was typically done at the ______ level.
Local level
A mortgageis defined as:
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions.”
(A long term loan).
conventional loan is defined as:
A mortgage that is neither insured nor guaranteed by an agency of the federal government, although it may be privately insured.”
have private mortgage insurance (PMI) covering the part of the loan that exceeds 80% LTV.
A guaranteed mortgage is defined as
“Amortgagein which a party other than the borrower assures payment in the event of default, e.g., a VA-guaranteed mortgage or a SBA-guaranteed mortgage.”
Ex: VA loan
Aninsured mortgageisdefined as
A mortgage in whicha party other than the borrower assures payment on default by the mortgagor in return for the payment of a premium, e.g., FHA-insured mortgages, private mortgage insurance(PMI).”
An example of an insured mortgage would be an FHA mortgage. FHA is the name of the mortgage insurance program that is operated by the U.S. Department of Housing and Urban Development (HUD). HUD/FHA does not lend money; instead they charge the borrower an up-front mortgage insurance premium (UFMIP) based on a percentage of the loan amount, plus a monthly mortgage insurance premium (MIP). The FHA mortgage insurance program is funded entirely by mortgage insurance premiums paid by borrowers; no taxpayer money is involved. In the event of a default on an FHA loan, HUD reimburses the originating lender for losses incurred.
Afirst mortgageis:
A mortgage that has priority over all other mortgage liens on a property.”
Ajunior lienis defined as
A lien placed on property after a previous lien has been made and recorded; a lien made subordinate to another by agreement; e.g., second and third mortgages; also called second lien or third lien.“
Amortization: amort, in Latin, to kill, to kill a loan
Paying only interest on a loan, and nothing goes to the balance of the loan.
Amortizationis defined as
The process of retiring a debt or recovering a capital investment, typically through scheduled, systematic repayment of the principal; a program of periodic contributions to a sinking fund or debt retirement fund
