chapter 11: Sources of Funds for Residential Mortgages Flashcards
total mortgage debt in 2011 totaled
13.6 trillion
what percent of the mortgage market is residential
76%
what percent of the mortgage market is commercial
17%
thrifts
depository institutions that evolved primarily to collect and invest household savings.
-used to be the backbone of home mortgage finance for the US
disintermedation
reference to the occurrence of conditions when the growth of deposits in banks and savings associations becomes negative, due to other, more attractive, direct investment opportunities
commercial banks
depository institutions primarily engaged in the business of making short term loans to businesses for inventory financing and other capital needs
- real estate needs of business clients
- “warehouse” credit lines for mortgage bankers
warehousing
the provision by commercial banks of short term funds to mortgage banking companies to enable them to originate and fund mortgage loans, “store them” until they can be sold in the secondary mortgage market
portfolio lenders
fund mortgage loans and then hold the loans as investments
- banks
- thrifts
- large credit unions
non-portfolio lenders
- mortgage bankers
- mortgage brokers
- may include credit unions and small banks
mortgage bankers
not a bank, accepts no deposits
- originates loans to sell
- retains right to service the loan for a fee
- sell loans “whole”
- pool and securitize loans
- servicing is core profit center
- 3 step process
1. issue mortgage commitment to borrower
2. close or originate loan (funding loan)
3. sell loan - collects monthly payments, remits to investor
- manages late payments, defaults, foreclosures
- receives fee of .25% to .44%
- highly leveraged
mortgage broker
brings borrower and lender together for a fee; never owns the loan
pipeline risk
risk between loan commitment and loan sale
mortgage pipeline
a term used to describe loans from the time a lender has made a commitment to lend through the time loans are sold to an investor
fallout risk
risk that the loan applicant backs out
interest rate risk
the threat that the contract rate at closing will be less than the current market rate and the mortgage banker will have to sell the newly originated loan at a discount
(risk that closed loans will fall in value before sold)
forward commitment
sale of loan at a preset price for future delivery
- price set now
- delivery and payment are 60-90 days away
- analogous to future contracts
mortgage banking creates two financial assets
slide 62
standby forward commitments
optional forward sale
- same as forward commitment except that mortgage banker has option to use or not
- more costly than forward commitment
- give them the right but not the obligation to sell a certain dollar amount of a certain loan type to the issuer of the standby commitment
3 mortgage banking pipeline risk situations
slide 66
loan servicing
includes collecting the monthly payment from the borrower and remitting principal and interest payments to the investors
-also includes ensuring that the borrowers monthly escrow payments for hazard insurance and property taxes are sufficient to allow the servicer to pay in full the annual insurance premium and property taxes on behalf of the borrower when they are due
megamortgage banking
- cyberelectronics
- traditional face to face or retail lending
- wholesale mortgage banking
- internet lending
- lending through brokers
- tremendous consolidation in last decade
credit union
depository institutions that are restricted by their charters to serving a group of people who can show a common bond such as employees of a corporation, gov unit, labor union or trade association
government national mortgage association
ginnie mae
1968, empowered to guarantee “pass through” mortgage backed securities based on FHA and VA loans
-2 years later freddie mac was created
mortgage backed securities
multiple mortgage loans in a single pool or fund
- security entitles investors to pro rata share of all cash flows
- loans in a given pool will be similar
- nearly 2/3 of all new home loans have been securitized in recent years
conduits
agencies and private companies that pool mortgages and sell mortgage backed securities, using the pool of mortgages originated or purchased as the collateral for the mortgage backed security
the Ginnie Mae mortgage-backed security process
mortgage banker-7.5
FHA/VA fixed rate pool-7.0
GNMA guarantee spray coat- 7.0
wall street investment bank
role of Ginnie Mae in the secondary mortgage market
- created first major pass-through MBS program
- does not buy mortgages
- guarantees timely payment of interest and principal to holders of ginnie mae securities
- guarantees only securities based on FHA/VA loans
Fannie Mae
original mission: secondary market for FHA/VA
- became privately owned but still US chartered
- surpasses freddie mac in buying conventional loans
- funded through both debt issues and mortgage securitization
- has securitized and sold, or owns, about 23% of outstanding home loans
- taken into conservatorship by US in 2008
freddie mac
- originally designed to create secondary market for mortgages originated by savings and loan associations
- chartered by congress
- deals exclusively in conventional loans
- securitized all loans purchased until recent years
- owns about 15% of outstanding home loans
- taken into conservatorship by US in 2008
importance of fannie mae and freddie mac
- have brought about standardization in mortgages and mortgage notes, appraisal, underwriting, and influence standards in nonconforming mortgage markets
- increased liquidity of mortgage markets
- heavily influence what type loans lenders make
what was wrong with fannie and freddie
- not capitalized to withstand declining home values
- too much political influence
- unsuccessfully mixed private enterprise and housing subsidy programs
- divert the benefits of their efficiency advantage into the pockets of management
- unnecessary in a financial world now dominated by a few giant banks
- part of an unnecessary mortgage lending system- for the LPM fixed rate mortgage
private mortgage conduits
- grew out of the market for non conforming “jumbo loans”
- small market share until sub primes emerged
- grew explosively post 2000,mainly for subprimes
- diminishing rapidly as subprime diminish
- likely to continue as a conduit for jumbos
federal home loan banks
- originally the banking system for thrifts
- now a banking system for small banks and thrifts
- provide loans to fund home mortgage lending
4 channels of the US Home Mortgage System today
- local depository lending (very limited)
- FHA/VA- GNMA securitization process
- conforming conventional - GSE process
- . non-conforming conventional- private security process
- page 294
where do you get a mortgage loan in todays complex system
- you have to shop around
- portfolio lenders
- brokers
- depository lenders
- non depositories
loan underwriting
process of determining whether the risks of a loan are acceptable
- collateral : URAR appraisal
- creditworthiness: credit report
- capacity: ability to pay (payment ratios)
credit scoring
the statistical evaluation of borrower creditworthiness that has largely replaced the use of credit reports and the subjective examination of payment punctuality and debt balances
housing expense ratio
PITI / GMI
PITI= principal, interest, property taxes, and insurance
GMI= gross monthly income
- 28% for conventional loans
- 29% for FHA
- known as “front end ratio”
total debt ratio
(PITI + LTO) / GMI
LTO= long term obligation
36% for conventional loans
43% for FHA
-known as back-end ratio
automated underwriting
a loan underwriting approach that exploits the combination of cyber-technology and the vast lending experience imbedded in the giant loan portfolios of freddie mac and fannie mae, etc
-instantaneous and has much lower marginal cost
Qualified mortgage
home mortgage class from the Dodd-Frank act that focuses on ability to repay
Requirements:
-fully amortizing
-no longer than 30 years
-fees of no more than 3%
-debt to income ratio no more than 43%
-strong verification of borrower income and assets
-if ARM, must underwrite to highest possible rate in first 5 years
Qualified residential mortgage
a sub category of qualified mortgages
-must have a loan-to-value ratio no higher than some maximum level
affordable housing loan
allowing override of one of traditional underwriting guidelines
-house value
-credit score
-payment ratio
-targeted to different underwriting deficiencies
Programs are enabled by :
-automated underwriting and accumulated knowledge base on affordable lending
subprime lending
- lack of income documentation
- weak credit
- seeking financing for 100% LTV or higher
- more expensive than standard home loans
