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Practice of Mortgage Brokerage > Module 2.1 > Flashcards

Module 2.1 Flashcards

1
Q

Why do lenders publish underwriting guidelines

A
  • To evaluate whether it is prudent to make a loan to a particular applicant
  • In mortgage brokering, to find out whether their deals are an appropriate fit with a particular lender
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2
Q

Where can you find lender policies

A
  • Lenderspotlight.ca

- Individual lender/insurer websites

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3
Q

What are some different compensating factors for lenders risks

A
  • Large down payments
  • long term job stability
  • history of saving money
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4
Q

What are the general types of lenders

A
  • Prime Lenders
  • Near-prime lenders
  • Sub-prime lenders
  • Private lenders
  • Other lenders (commercial mortgages)
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5
Q

Significance of the term prime

A

prime being the best (lowest) lending rate, near-prime being slightly higher, and sub-prime being even higher.

Each is associated with degree of risk associated with deal

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6
Q

What is a prime lender

A

include orgs such as chartered banks (the big six), plus other domestic banks and certain foreign banks, credit unions, ATB Financial branches, and certain trust and loan companies

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7
Q

Main functions of prime lenders

A
  • accept and safeguard deposits from people who want to save money, and pay interest on those deposits
  • lend out money and charge interest on the money loaned
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8
Q

Services of prime lenders

A
  • managing personal and corp deposits and loans
  • allowed to provide a variety of personal, retail, and commercial fin services to include:
  • credit cards
  • mortgages
  • investment instruments (products)
  • investment management
  • estate planning and management
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9
Q

Who are prime lenders regulated and monitored by

A
  • fed and prov regs

- The office of the superintendent of financial institutions (OSFI)

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10
Q

What is the office of the superintendent (OSFI)

A
  • Independant agency of the gov of canada, est in 1987.
  • contribute to safety and soundness of canadian fin system.
  • supervises and regulate prime lenders as well as pension plans subject to fed oversight
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11
Q

What is the provincial regulator in AB

A

Alberta Superintendent of Financial Institutions (AFSI)

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12
Q

What does ASFI do

A

Oversees deposit taking institutions marketplace in AB, including corp incidents of fin inst and the regs of prov regulated fin inst operating in AB

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13
Q

Where do prime lenders get their money

A
  • use deposited money and their own funds from profits generated through interest, service fees, and interest from investments to make loan investments
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14
Q

Where do prime lenders mainly act

A
  • act directly (as mortgage originators) in primary mortgage market.
  • also indirectly (as investors) in secondary mortgage market to include bond market
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15
Q

Example of prime lender qualifying factors

A
  • Min income and credit rating
  • Particular type of employment history
  • Min down payment amount
  • Min property value, property age, property description
  • Min payment amounts
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16
Q

What types of loans and rates to prime lenders offer

A

offer conventional mortgage loans (20% down) and insured high ration loans (under 20%)

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17
Q

Insured Mortgages

A

Insured mortgages make up a large portion of the mortgage market, and the rules governing insured mortgages can have an impact on buying power. To qualify for an insured mortgage, you need to have a minimum 5% down payment and less than a 20% down payment. The subject property may also have restrictions in place, like square footage, land zoning and property construction types. Rental properties are not eligible unless the property is between 2-4 units. However, in this case, you may be subject to a higher minimum down payment to meet insurer qualifications. Maximum amortizations for an insured mortgage are 25 years and the maximum purchase price is 1 M. All insured mortgages are qualified on the Stress test/BOC qualifying rate.

In addition, meeting stress test requirements as outlined by the government must be satisfied to ensuring the mortgage is affordable should interest rates rise. For example, when applying for a fixed mortgage with a term of five years or more you need to qualify for the Bank of Canada’s posted rate, which is almost always higher than the rate homeowners apply for. It is also important to note for interest rates, there may be variance when you look to qualify for an insured, insurable, or uninsured mortgage as this may define the amount of interest you pay within the mortgage.

While those looking to secure an insured mortgage must adhere to more stringent borrowing rules, they actually pay the lowest interest rates. Because these mortgages are insured, they are less risk for the lender with respect to default loss, and, as a result borrowing rates may be preferred. For insured mortgages, the insurance premiums are paid by the consumer, and typically added to the mortgage loan however a borrower would have the ability to pay insurer premiums out of pocket. Visit the Insurer websites to find a premium table. Premiums will decrease at loan to value increments of 5% (IE: At 5% down payment, premium is higher then at 10% down and 15% down)

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18
Q

Insurable Mortgages

A

An insurable mortgage is similar to an insured mortgage with exception that the borrower has saved up greater than 20% for a down payment. At present, the property must be valued at less than $1 million, the maximum amortization period is 25-years, and may be limited the product type the mortgage is suited to. Please consult lender/insurer guidelines to confirm eligibility. Interest rates on insurable mortgages also vary and may be higher than insured rates. Typically, insurable premiums are paid by the lender, rather than the consumer.

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19
Q

Uninsured Mortgages/conventional mortgages

A

An uninsured mortgage is any mortgage outside of the scope of definitions above for insured/insurable mortgages. Some lenders refer to this as a conventional mortgage. For example, this currently includes properties valued at over $1 million, refinances, and amortization periods greater than 25 years. Note, this is not an exhaustive list.

As these mortgages are not insured through an insurer, (noting default insurance protects the banks not the mortgagee) the risk is greater for the lender as they are required to hold more capital in reserves on their book in the event of default. As a result, the interest rates charged on uninsured mortgages may often be higher. Ultimately these mortgages are backed by the lender or big bank which provides their control over the qualifying criteria and interest rates.

An uninsured mortgage may cost the borrower more, however there are some benefits, such as in some cases the option for longer amortization periods, they do not have to pass a stress test, and borrowers may qualify at the lower contract rate. There could also be more leniency on providing extended ratios or net-worth programs but again the Lender guidelines will dictate. They generally offer “market” interest rates (that is, close to the prime rate for the best qualified borrowers) and a variety of term lengths.

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20
Q

Terms for near-prime lenders

A
  • Monoline
  • broker-friendly
  • non-institutional lenders
  • non traditional lenders
  • non-conventional lenders
  • non-bank lenders
  • alternative lenders
  • B lenders
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21
Q

What kind of companies do near-prime lenders include

A
  • Certain trust companies
  • finance and loan companies
  • life insurance companies
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22
Q

What serices do near-prime lenders offer

A
  • specialize in one particular area of financial business
  • Mortgages
  • credit cards
  • specific type of insurance

Note
They have no other financial products or services to sell and they cannot accept deposits

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23
Q

How are near-prime lenders accessed

A

Another significant difference from banks is that monoline or near-prime lenders are NOT directly accessible by individual or corporate consumers; these lenders must be accessed via professional brokers (hence the term broker-friendly lenders).

In order for a consumer (individual or corporate) to take advantage of the products or services offered by a monoline lender, s/he must use the services of a broker as an intermediary.

Part of the reason for this is that many individuals are not knowledgeable enough to understand that taking out a mortgage with a near-prime lender is, in effect, making an investment in the secondary mortgage market. This does entail somewhat more risk than taking out a mortgage with a prime lender who “owns” the mortgage directly. A professional broker or associate is able to explain the risks to the borrower.

24
Q

How are near-prime lenders regulated and monitored

A

Licensed and regulated provincially. However if they operate in multiple provinces they are also subject to federal regulations.

25
Q

Where do near-prime lenders get their money

A

Unlike banks and other prime lenders, monoline lenders securitize their mortgages rather than financing them directly with their own money. This involves grouping or “packaging” many mortgage debts together, with the associated real estate as collateral, and selling the “package” as an investment. This is known as selling mortgage-backed securities and is the kind of business that characterizes the secondary mortgage market.

Some monolines are independently owned but receive their funding through institutional investors, many of which have direct ties to banking-based prime lenders.

In fact, to a large degree, near-prime lenders exist so that prime lending institutions can capitalize on investment opportunities in the secondary mortgage market without endangering the savings deposits upon which the prime lenders are founded.

26
Q

what kind of mortgage business do near-prime lenders accept

A
  • typically focus on low-to-medium risk loans and borrowers.
  • Offer near-prime rates, as long as the borrower can qualify.
27
Q

How do near prime lenders sell products

A
  • accessed through mortgage brokers

- offer variety of products that support new to canada, self employed and others

28
Q

How to qualify for near prime lenders

A

Because they are regulated differently than banking-based lenders and because they offer specialized services and products that are only accessible via professional brokers, monoline or near-prime lenders offer somewhat more flexibility in their qualification guidelines than do prime lenders.

They still require proof but may allow more flexibility in substantiating it than a prime lender would. Some may accept “stated” income such as 12 months of deposit records instead of official or typical documentation such as a job letter from the employer.

29
Q

Types of loans and rates near prime lenders offer

A

Monoline or near-prime lenders offer many of the same kinds of conventional and insured high-ratio mortgages as banks, but they may also fund some loans that fall outside standard underwriting guidelines, such as loans with a loan to value ratio (LTV) of up to 85% and uninsured high-ratio loans.

Some monoline or near-prime lenders are self-insuring, meaning that they can insure loans themselves as opposed to having their loans insured by CMHC, Sagen, or another mortgage insurer. Note that this can only be considered from a lender when the LTV is 80% or less.

30
Q

Terms for sub prime lenders

A
  • alternative lenders
  • private lenders
  • equity lenders
31
Q

What is a sub prime lender

A

organizations such as certain trust companies, finance companies, and equity lending companies.similar to the list of organizations associated with near-prime lending.

do not differentiate themselves in name or appearance from any other lender. The difference is apparent only in their clientele and lending practices.

In many cases, sub-prime lenders are actually an arm or subsidiary of near-prime or monoline lenders.

32
Q

What services do sub prime lenders offer

A

tend to specialize in one kind of business with one kind of product and cannot accept deposits. They also securitize their mortgages as opposed to financing them directly with their own funds.

33
Q

Who can access sub prime lenders

A

can be accessed directly by individual consumers. Tend to be smaller orgs that advertise directly on the internet or in the newspaper. Larger sub prime lenders are accesible via brokers

34
Q

How are sub prime lenders regulated and monitored

A

same as near prime, provincially and federally if in more than one province

35
Q

Where do sub prime lenders get their money

A

subsidiary of near prime or monoline. take money as per their specific lending or investment areas

36
Q

what kind of deals do sub prime lender accept

A

typically focus on borrowers and loans that represent a higher risk than near prime lenders would consider. offer higher rates becuase borrowers are higher risk.

37
Q

How can sub prime get customers

A

brokers or through individual customers

38
Q

Sub prime qualifications

A

Most sub-prime mortgage loans fall outside of standard underwriting guidelines, although not always for the reasons one might assume.

As property is the cornerstone of all approvals in the sub prime market. Property is main focus, then client qualifications as marketability and liquidity of the property is key to assessing the risk.

It is possible to look like a poor credit risk without actually being a bad risk. Sometimes it is just that the applicant has no credit history (like a new immigrant or a young person just starting out), has no current credit history, or has a low income (like a retired, elderly, or handicapped person, perhaps). People in these kinds of situations might be considered to have credit or income problems which can be overcome in the future. Other times, of course, people look like a poor credit risk because they truly are a poor credit risk.

39
Q

Sub prime lenders types of loans and rates

A
  • sometime referred to as second chance or lst chance lenders.
  • customers that have difficult time applying elsewhere
  • higher interest rates due to higher risk
  • may have high penalties to paying off loans
  • shorter term loans
40
Q

Other names for private lenders

A
  • alternative lenders
  • equity lenders
  • private money
  • private mortgages
  • syndicate mortgages
  • mortgage investment entities
41
Q

Definition of MIE

A

MIE refers to a person or company whose purpose is to directly or indirectly invest substantially all of its assets in debts owing to it that are secured by mortgages, hypothecs or in any other manner on real property (collectively, mortgages for purposes of this guidance), and whose other assets are limited to:

deposits with a bank or other financial institution;
cash;
certain debt securities;
real property which is directly or indirectly held on a temporary basis as a result of action taken to enforce its rights as a secured lender; or
instruments intended solely to hedge specific risks relating to the debts owing to it that are secured by mortgages, hypothecs or in any other manner on real property.

42
Q

What is a private lender

A

Private lenders are investors: individuals or groups of individuals with “extra” money and a desire to invest in high-return deals. They may also be business organizations that are funded by groups of private investors, such as mortgage investment entities (MIEs) and syndicated mortgages.

43
Q

What services do private lenders offer

A

The services of a private lender are shaped by the priorities of the investors who fund them. Because the individual or corporate investors may be different for different deals, the services of the lender may also vary from deal to deal.

44
Q

Who can access private lenders

A

Private lenders can be difficult to find because not all of them advertise. They tend to be location and market specific, often funding only certain kinds of deals in a particular market.

Some private lenders can be accessed directly by individual consumers. These tend to be small investors looking for one-off opportunities, and they sometimes advertise directly on the Internet and/or in newspapers, magazines, and free publications.

Larger private investors tend to work with brokers because they can access a greater number and variety of borrowers in less time than waiting for direct market requests.

Note that Equifax now requires lenders to be signed up with them before they will produce and release a report from a broker. Refer to section on Credit Bureaus for further detailed information.

45
Q

How private lenders are regulated and monitored

A

In Alberta, syndicated mortgages and mortgage investment corporations are licensed and regulated through the Alberta Securities Commission (ASC). This is because the source of funding for private lenders is private investors, and investors are regulated differently than banks and other more conventional kinds of lenders.

46
Q

Where do private lenders get their money

A

Private lenders are 100% funded by private individuals and/or private companies. Private lenders do not securitize their mortgages: they invest their own money in mortgages the same way that other investors might invest in stocks, bonds, and mutual funds—in order to earn a high rate of return (profit) on their investment.

Private syndicated mortgages are funded by a group of investors for a single borrower (individual or corporate). Investors in syndicated mortgages are often assembled on a case-by-case basis. Mortgage investment corporations are similar in that the funds of several private investors are pooled together; however, the money may be used to fund several deals at any given time.

47
Q

What kind of mortgage business do private lenders accept

A
  • Location and market specific

- Deals that might be considered unique or unusual that do not fit within typical underwriting guidelines

48
Q

Private lending qualification guidelines

A

All private mortgage loans fall outside of standard underwriting guidelines for one reason or another. Because all private lending money comes from private investors, they are regulated differently than other lenders, and there is somewhat less administrative policy and details involved in their loans. Therefore, these lenders can offer a fast turnaround time and a great deal more flexibility than a bank or other more conventional lender can.

49
Q

What types of loans do private lenders do

A

Private investors/lenders can specify the kinds of borrowers and deals that they are willing to fund and can also specify the interest rate to be charged. They may choose to fund only low LTV ratio loans, where borrowers have a higher stake in the property and are less likely to default, or they may choose to fund higher-risk borrowers in order to earn higher rates of return.

There is a price for the flexibility and fast turnaround time of a private mortgage loan, of course, in the form of high interest rates, short terms (as short as several days to about a year), and high fees. A borrower working with a private lender often has to pay a lender fee and a brokerage fee and pay for an appraisal and any legal fees. The fee types and rates differ from lender to lender.

In addition, private lenders/investors offset their risk by insisting upon superior loan security, so they place a high emphasis on the value and marketability of the property and on the amount of borrower equity. Unless the property is of high quality and/or the borrower has significant equity in it (or a large down payment), a private lender will not likely consider funding the deal.

Private lenders are also concerned that a borrower has what is referred to as a clear exit strategy. In other words, the borrower needs to provide a clear and reasonable plan to show how s/he intends to repay the loan at or by the end of the specified term.

50
Q

Types of other lenders

A
  • governement lending programs
  • farm credit corps
  • agri-financial services
  • CMHC occasional praticipates in direct lending for social housing projects and housing projects on first nations reserves
51
Q

Prime security versus secondary/Collateral security

A

Real property (the land and buildings being mortgaged) is referred to as primary security, and personal assets or personal belongings are referred to as secondary or collateral security. Some lenders accept collateral security as a reinforcement of the primary security.

52
Q

Security for borrowers: insurance

A

Although the idea of lender security generally refers to the property being mortgaged, it also refers to another kind of lender security: insurance. There are several types of insurance related to mortgages. Some insurance is designed to protect lenders, and some insurance is designed to protect borrowers/homeowners.

53
Q

How do insurance companies calculate prices for premiums

A
  • statisics
  • premium taken from large enough market compared to the number of foreclosures to justify paying out.
  • More defaults will increase mass premiums
54
Q

Two different types of mortgage insurance

A
  • Mortgage default insurance (protects a lender against a borrower default)
  • mortgage life insurance (protects borrowers by covering the mortgage in the event of disability, illness, or death
55
Q

Mortgage life insurance

A

Mortgage life insurance (also known as mortgage creditor insurance or mortgage protection insurance) is an optional product that protects a homeowner against property foreclosure in the event of death, disability, critical illness, or terminal illness.

Mortgage life insurance pays the outstanding mortgage balance to the lender, in full, at the time a claim is made, approved, and processed by the insurance company. It will be paid out even if the borrower has the means to pay off the outstanding balance him- or herself.

It is important to be aware that the payout amount decreases as the mortgage balance is paid down. The payout is always equal to the remaining balance of the mortgage at the time a claim is made, not the original amount of the mortgage loan.

56
Q

What are the two types of title insurance policies

A
  • loan policies (protect lenders against title-related issues)
  • Owner policies (protect borrowers against title-related issues)
57
Q

What is the purpose of new home warranty certificates

A
  • provides buyers with a one-year warranty on minor items such as scratched paint, broken drywall and chipped tiles.
  • policies based off specific builders
  • All new homes must have

Practice of Mortgage Brokerage (17 decks)

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