Chapter 13 - The Mortgage Market Flashcards
The rent paid for the use of money is called:
Interest
What is an easy money market?
When money is plentiful and available from many sources, the supply of money exceeds the demand
What is a tight money market?
Exists when demand for funds exceeds the available supply, resulting in an increase in the interest charged for money
The demand for mortgage money is increased or decreased by the following six major influences:
- Changes in the number and size of households
- Shifts in geographic preferences for households
- Existing inventory of structures
- Changes in employment rates and income
- Changes in cost of real property services, taxes, and maintenance
- Changes in construction costs
What is monetary policy?
Refers to the actions undertaken by the Fed to influence the availability and cost of money and credit to promote national economic goals
What are the 3 economic tools (or methods) of monetary policy that the Fed uses?
Open-market operations
Discount rate
Reserve requirements
What are open-market operations?
Involve the purchase and sale of US Treasury and federal agency securities
The purchase or sale of theses securities results in an increase or decrease of money in circulation
What is discount rate?
The interest rate charged member banks for borrowing money from the Fed
What is reserve requirements?
The amount of funds that an institution must hold in reserve against deposit liabilities
Who created the Office of Thrift Supervision?
The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)
What is the purpose of the Office of Thrift Supervision (OTS)?
To charter and regulate member federal savings associations
Savings, checking, and other deposit accounts are generally insured to $________ per depositor in each bank or thrift the FDIC insures.
$250,000
What is a primary market?
The market where securities or goods are actually created
What is the role of the mortgage broker?
Limited to acting as an agent (go between borrower and lender and hooks them up with each other)
What is the role of the mortgage banker?
Originate loans with either their own funds or with money borrowed from financial institutions
What is intermediation?
A process practiced by financial institutions that serve as intermediaries between depositors and borrowers
Savers deposit funds into commercial banks, savings, associations, and mutual savings banks, which then lend the funds to homebuyers and other borrowers
What is disintermediation?
Occurs when funds are withdrawn from intermediary financial institutions, such as banks and savings associations, and are invested in instruments yielding a higher return
Process of bypassing the intermediary financial instutions
What are commercial banks?
Primary reservoirs of commercial credit in this country and the largest group of financial institutions in both assets and numbers
What are savings associations?
Provide mortgage loans on single-family houses
What are mortgage companies?
Originate loans with either their own funds or borrowed capital; they package the loans and sell them to institutional investors and secondary market participants
What are mortgage companies not?
Financial intermediaries; they do not accept savings deposits
What is the secondary mortgage market?
An investor market that buys and sells existing mortgages
What is Fannie Mae?
Its initial goal was to stimulate the housing industry following the Great Depression; also created the first secondary market for mortgage loans
In 1968, Fannie Mae became:
A private, stockholder-owned government-regulated corporation; its shares are traded on the New York Stock Exchange (NYSE) under the ticket symbol FNM
What is Freddie Mac?
Provides a secondary market for loans originated by SAs
In 1989, Freddie Mac was made:
A private stockholder-owned company
Its shares are traded on the NYSE under the ticket symbol FRE
What is Ginnie Mae?
A government-owned and financed corporation
Part of the Department of Housing and Urban Development
The only true government owned and operated agency
What is discount rate?
The amount of interest the Federal Reserve charges to lend money to its eligible banks
What is the lender’s effect percentage?
1 point = 1/8% interest
What is the buyer’s effect percentage?
1 point = 1% of the loan amount
Rebecca and Tony purchased their home for $125,000. They financed the purchase with an 80% conventional loan. The mortgagee charged 2.5 points. Calculate the actual cost in dollars of the points.
$2,500
What entity does not function as a primary lender?
Mortgage brokers
What entities or individuals do function as a primary lender?
Commercial banks
Mortgage bankers
Savings associations
When the Fed increases the reserve requirement:
The supply of money decreases
A commercial bank sold a group of 2,000 mortgages directly to Fannie Mae. This is an example of:
Secondary market activity
Fannie Mae currently buys and sells:
FHA mortgages
VA mortgages
Conventional mortgages
Fannie Mae does not deal directly with:
Homebuyers
Loans that meet Fannie Mae guidelines are called:
Conforming loans
Fannie Mae provides ________________________ for large real estate projects.
Master commitments
Fannie Mae created the first _______________ for mortgage loans.
Secondary market
Which entity originates loans and typically services the loans, but is not a financial intermediary?
Mortgage company
When the Fed purchases securities:
Loanable funds are released into circulation
Who competes for the available supply of funds?
Corporate stock
Long-term bonds issued by governmental entities
Financing the national debt
The market where mortgage loans are created, supplying funds to finance real estate purchases directly to borrowers is referred to as the:
Primary market
The primary purpose of Fannie Mae is to:
Purchase real estate loans to replenish the supply of mortgage money
The demand for residential real estate mortgage money is influenced by:
Household formations
Shifts in geographic preference for housing
Household income
The Office of Thrift Supervision regulates:
Savings associations
The discount rate is:
The interest rate charged member banks for borrowing funds from the Federal Reserve Bank
The primary purpose of Freddie Mac is to:
Purchase conventional loans from savings associations
When investors bypass thrift institutions for direct investment elsewhere, the process is called:
Disintermediation
What provides a source of income to lenders?
Discount points
Origination fees
Servicing fees
The rule of thumb used to convert discount points to annual percentage rate is that each discount point increases the yield by approximately:
1/8 of 1%
A lender charged 7% plus 3 points. What is the approximate yield on this loan?
7 3/8%
The most commonly used method of controlling the national money supply is for the Fed to:
Engage in open-market activities
What mortgage allows a person to buy a home with no money down?
VA
A developer would most likely obtain which type of mortgage on a new subdivision?
Blanket mortgage
Buyer Carr went to get an FHA loan because rates were significantly below the current market rate for conventional loans. The loan requires 3 discount points because it is below market rates. Which best describes this situation?
Points can be charged to either the buyer or the seller
The amount of a loan expressed as a percentage of the value of the real estate offered as security is:
Loan to value ratio
A lender generally charges discount points on an FHA loan to:
Provide greater interest yield to the investor
A man had a loan for $60,000 and he had to pay 2.5 points. How much would he have to pay in cash?
$1,500
In making a home mortgage loan, a lender would consider all except:
Financial need of the borrower
A final payment of a mortgage loan that is considerably larger than the other monthly payments because the loan was not fully amortized is called:
Balloon mortgage
The basic difference between an FHA and a VA loan is:
FHA insures loans, VA guarantees them
For a veteran to obtain a VA loan, the VA must issue a certificate of
Eligibility
What are the three things needed to assess the buyer’s price range?
Stable income
Net worth
Credit history
A veteran had a VA loan using his full entitlement. He allows another veteran to assume the loan without VA approval. Could he immediately get another VA loan?
No, he is still liable for the loan
An FHA mortgage is obtained through:
Any qualified lending institution
The primary distinction(s) between the primary and secondary mortgage market is:
The secondary market is fundamentally a holding or warehouse process
Which is not an agency that deals (buys loans) in the secondary market?
Federal Housing Administration
What are the major warehousing agencies in the secondary mortgage market?
Federal National Mortgage Association (Fannie Mae) (FNMA)
Government National Mortgage Association (Ginnie Mae) (GNMA)
Federal Home Loan Mortgage Association
What kind of loan would be fully paid out over the life of the loan?
Fully amortized
A loan with a balance of $21,000 prior to the June 1st payment was figured at 11% annually with monthly principal and interest payments of $571.80. There was a 1% prepayment penalty. The owner paid the June 1st payment and then paid off the balance of the loan. How much was the prepayment penalty?
$206.20
_______ mission is to increase homeownership, support community development, and increase access to affordable housing free from discrimination.
HUD’s
The VA benefit from the Department of Veteran’s Affairs for a veteran approved home loan guarantees that:
The loan, or a portion of it, made by an approved lending institution will be paid
This organization’s public mission and defining goal is to help more families achieve the American Dream of homeownership:
Federal National Mortgage Association
_________ guaranty allows mortgage lenders to obtain a better price for their mortgage loans in the secondary market. The lenders can then use the proceeds to make new mortgage loans available.
Government National Mortgage Association (GNMA)
_______ ensures that all consumers are given an equal chance to obtain credit. This doesn’t mean all consumers who apply for credit get it; factors such as income, expenses, debt, and credit history are considerations for creditworthiness.
The Equal Credit Opportunity Act (ECOA)
The Mortgage Servicing Disclosure statement:
Tells the buyer that the bank will be servicing the loan
Discloses if the bank will not be servicing the loan
A Federal Mortgage Fraud indictment could lead to a prison term of up to:
Up to 30 years
