Chapter 11 - Sources of Capital Flashcards
From the 1930s through the 1960s, mortgage lending was done primarily at the ______ level.
local
From the 1930s through the 1960s, primary sources (institutions) of mortgage capital were: (4)
State or federally chartered savings banks
Savings and loan institutions
Commercial banks
Credit unions
Most savings and loan institutions were chartered primarily to provide residential mortgages for borrowers in their local areas. Their purpose was to receive savings, loan money at interest, and distribute dividends to depositors.
Commercial banks are privately-owned institutions that were oriented towards business loans but dabbled in residential loans. Their loans were usually short-term, but they played an important role - they supplied loans to builders and developers for construction and development.
Credit unions primarily loaned to their members. In subsequent years, many opened their doors to all borrowers.
From the 1930s through the 1960s, savings banks were either ______or ______owned.
mutual, stockholder
Mutual savings banks are similar to savings and loans and invest large amounts of their depositor’s money in residential mortgages. Around ____ (year), many mutual savings banks went public and converted into stockholder-owned institutions.
1990
From the 1930s through the 1960s, If banks wanted to loan out funds for mortgages, the sources were limited to: (4)
Depositors
Sale of stock or shares of ownership in the bank or thrift
Repayment of existing mortgages
Borrowing of funds from the Federal Reserve
“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…..” is the definition of?
Secondary Mortgage Market
President Franklin D. Roosevelt and Congress created Federal National Mortgage Association (FNMA) in 1938 in order to to purchase ____________________ loans from lenders, freeing up capital that could go to other borrowers.
Once lenders sold mortgages to FNMA, they could reinvest the funds by writing new mortgages. In 1948, FNMA began purchasing _____loans, and in 1970, it started purchasing ___________.
The Housing and Urban Development Act of 1968 (the 1968 HUD Act) reorganized Fannie Mae from a mixed ownership corporation to a for- profit, shareholder-owned company. 20 This reorganization removed Fannie Mae from the federal budget,21 and Fannie Mae began funding its operations through the stock and bond markets.
1938 - to purchase FHA (Federal Housing Administration) insured loans.
1948 - began purchasing VA loans
1970 - started purchasing conventional mortgages.
In ______ (year), FNMA was split into two organizations: _____________
1968
Fannie Mae
* FNMA - Federal National Mortgage Association
* a federally chartered corporation owned by private shareholders
* to purchase conventional mortgages that conformed to specific underwriting standards
Ginnie Mae
* Government National Mortgage Association (GNMA), or Ginnie Mae
* a government agency under the oversight of the Department of Housing and Urban Development (HUD)
*Ginnie Mae guarantees securities that are backed by government-guaranteed or government-insured loans (e.g, VA, USDA, and FHA). Ginnie Mae also services a portfolio of mortgages owned by the federal government.
Who purchases single family and multifamily FHA, VA and conventional mortgages.
Fannie Mae (FNMA)
Who guarantees securities that are backed by government-guaranteed or government-insured loans (e.g, VA, USDA, and FHA).
Ginnie Mae
Ginnie Mae does not purchase mortgage loans, hold a portfolio of loans, or sell mortgage-backed securities. 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.
(MBS - Mortgage Backed Security - bonds secured by home and other real estate loans. )
In 1970, Congress created ________ to 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.
Note: “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.
Freddie Mac
FHLMC - Federal Home Loan Mortgage Corporation
Over the last 30 years or so, the secondary market has grown tremendously in importance and has revolutionized the mortgage lending process. Annual sales of mortgages to Fannie Mae and Freddie Mac rose from $69 billion in 1980 to over $700 billion by 2000. Fannie Mae and Freddie Mac were private shareholder-owned corporations, but were known as “government-sponsored enterprises”, or GSEs.
Of course, it hasn’t always been smooth sailing. In the early 2000s, Fannie and Freddie became embroiled in controversies regarding their accounting practices, and there were unsuccessful attempts to reform them. Then, the economic recession and the subprime mortgage meltdown of the late 2000s hit, and Fannie and Freddie teetered on the brink of collapse. Considered by many as “too big to fail”, the twin mortgage giants were taken into government conservatorship in ______, where they remain today. Their stock became virtually worthless overnight, and they were de-listed from the New York Stock Exchange as a result.
Today, Fannie and Freddie continue to operate under the watchful eye of their government overseer, the Federal Housing Finance Agency (FHFA). They still purchase a majority of the mortgage loans originated in the U.S. Nevertheless, their future is uncertain; there are some within the federal government who want them to continue to operate, while others believe they should be wound down and closed.
2008
When mortgage rates are going up or in a state of flux (constantly changing), it may be attractive for a buyer to purchase a house and take over its existing mortgage, rather than getting a new one at a higher or less stable rate. What is this called?
Mortgage Assumption (All the mortgage obligations are then transferred to the qualified buyer.)
In the past, properties with FHA and VA loans could be purchased “subject to” those loans, meaning the buyer could assume the loan without the express permission of the lender.
Today, FHA and VA loans may not be assumed by a buyer in this manner, and most conventional loans also prohibit assumptions. In the current market, a buyer purchasing a property and assuming the seller’s existing mortgage without the lender’s approval is very rare. Most fixed-rate loans carry “due-on-sale” clauses requiring that a mortgage be repaid in full if the property is sold.
What type of loans are assumable without the permission of the lender?
- VA loans only
- FHA loans only
- VA and FHA loans
- Very few loans of any type are assumable without lender permission
Very few loans of any type are assumable without lender permission
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
Contract for deed
In the Contract for Deed, the buyer receives legal title after the last payment is made on the installment sale.
One example of “Installment Sale”
In a seller-financed ______________transaction, a seller is financing the sale for the buyer; 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.
Note and Trust Deed
In the seller-financed Note and Trust Deed sale, the buyer receives legal title at the original closing of the purchase transaction, then begins making the payments on the installment sale.
Example of “Installment Sale”
A ________________ is a variation of seller financing, and offers buyers an alternative to a 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.
Wrap around contracts
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 to make the monthly payments on his current mortgage.
But the attractive return also comes at a significant risk - for both parties. If the buyer is late making payments (or stops paying entirely), the seller still has to make his or her payments. And if market values drop, the buyer has little incentive in maintaining the property, since he has so little equity at stake. If a comparable property is sold with this type of financing, the appraiser must evaluate the actual terms of the financing to determine if an adjustment for financing terms needs to be made.
The principal operators in the secondary mortgage market include
- pension funds, insurance companies, corporate investors
- Fannie Mae, Freddie Mac, Ginnie Mae
- Fannie Mae, Sallie Mae, Ginnie Mae
- FHA, VA, USDA
Fannie Mae, Freddie Mac, Ginnie Mae
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions.
Mortgage
