Nontraditional Mortgage Loan Products Flashcards
What is the Guidance on Nontraditional Mortgage Product Risks?
A guidance document issued by the federal government in 2006 that generally applies to all residential mortgage loan products that allow the borrower to defer repayment of the loan’s principal or interest.
Why was the guidance delveoped?
The Guidance was developed in an effort to address the risks stemming from growing use of nontraditional mortgage products in the market at the time.
What do nontraditional loan products allow borrowers to do?
Nontraditional products allow borrowers to take lower payments during an initial period and face higher payments later.
What underwriting issues does the guidance address?
- Qualifying borrowers
- Collateral-dependent loans
- Risk layering
- Reduced documentation
- Simultaneous second-lien loans
- Introductory interest rates
- Lending to subprime borrowers
- Non-owner-occupied investor loans
According to the guidance what should analysis of the borrower’s repayment ability include?
- Determination of ability to repay the debt by maturity
- Stated Income should not be used as apart of that determination
What are some examples of nontraditional loan products?
- Subprime mortgages
- Construction loans
- Reverse mortgages
What are some charachteristics of a subprime borrower?
- Two or more 30-day delinquencies in the last 12 months
- Debt-to-income ratios of 50% or greater
- Relatively high default probability
- A bankruptcy in the last five years
- A judgment, foreclosure, repossession, or charge-off in the past 24 months
- One or more 60-day delinquencies in the past 24 months
What are some charachteristics of predatory lending?
- A loan made based predominantly on the value of the property
- Inducing a borrower to repeatedly refinance a loan
- The use of fraud or deception to conceal the characteristics of a loan from a borrower
What is a contruction loan?
Construction loans are temporary loans used to finance the construction of a dwelling.
How do construction loans work?
Construction loans are typically lines of credit from which funds are drawn as construction progresses and expenses are incurred.
When is interest on a contruction loan charged?
Interest is charged on the funds as they are withdrawn.
What happens to the contruction loan once the property is complete?
Once the property is complete, a long-term, permanent loan is obtained to pay off the construction loan.
What is a reverse mortgage?
A reverse mortgage is a loan product that allows borrowers who have substatial equity in their homes to take funds in the form of a lump sum for monthly fixed advance.
What group are reverse mortgages geared towards?
Older borrowers who have a lot of equity in their homes
What events cause the loan to become due?
- The sale of the property
- The death of the borrower
- A permanent move from the property by the borrower
- Failure on the part of the borrower to live in the property for 12 consecutive months without notice to the lender
- A failure to comply with the terms of the loan (e.g., failure to pay property taxes or maintain hazard insurance)
