20.2 - Mortgage Underwriting & Institutions Flashcards
(25 cards)
What is the primary mortgage market?
The marketplace where borrowers obtain loans directly from lenders (originators) to purchase property.
Flow of funds in the primary market
Lender → Borrower: Lump-sum loan proceeds.
Borrower → Lender: Stream of scheduled debt repayments (P&I).
Who are the two main parties in the primary market?
Borrower (homebuyer) and Lender/Originator (e.g., bank, credit union, mortgage company).
What is the secondary mortgage market?
A market in which existing mortgage loans are sold by originators to investors (e.g., banks, pension funds, GSEs).
Flow of funds in the secondary market
Investor → Originator: Cash payment for the loan.
Originator passes → Investor: Future stream of borrower repayments.
Why does a secondary mortgage market exist?
To create liquidity for originators and investment opportunities for investors; it decouples loan origination from long-term ownership.
Benefit #1 of a secondary market (for lenders)
Lets originators focus on new lending and underwriting rather than holding assets for 30 years.
Benefit #2 of a secondary market (for lenders)
Provides a quick liquidity outlet—mortgages can be sold if the bank needs cash fast, lowering balance-sheet risk.
Benefit #3 of a secondary market (for investors/borrowers)
Enables investors to hold geographically diversified pools of mortgages, linking local borrowers to a wider pool of capital.
Key government-sponsored enterprises (GSEs) in U.S. mortgage markets
Fannie Mae, Freddie Mac, Federal Home Loan Bank System.
Federal Housing Administration (FHA) – purpose & year founded
Created 1934 to provide public mortgage insurance on loans meeting higher underwriting standards, reducing lender risk.
Veterans Affairs (VA) home-loan guarantee program – year & purpose
Started 1944 to insure mortgages for U.S. veterans, encouraging favorable loan terms for military borrowers.
Other government or regulatory bodies influencing mortgages
• FHFA – regulates Fannie & Freddie
• Federal Reserve – monetary policy & MBS purchases
• CFPB – consumer protection & mortgage rules
What is often called the “American” mortgage? (4 core features)
30-year, fixed-rate, fully amortizing, free prepayment without penalty.
Public vs. private mortgage insurance (PMI)
Public: FHA/VA guarantees funded or overseen by government; Private: PMI from private insurers (dominant today for >80 % LTV loans).
Definition of public mortgage insurance
Insurance that protects a lender against borrower default losses; insurer reimburses unpaid balance if borrower fails to pay.
How did FHA standards shape modern mortgages?
Their underwriting rules popularized the 30-year, fixed-rate, full-amortization structure still common today.
Conventional mortgage – definition
A mortgage not insured or guaranteed by FHA, VA, or other public programs.
Historical downside of FHA’s early underwriting standards
Some guidelines facilitated discriminatory practices (e.g., redlining), producing harmful social outcomes.
Liquidity – Why crucial to originators?
Quickly converting loans to cash lowers interest-rate risk, credit-risk exposure, and frees capital for new lending.
Investor motivation for buying mortgages/MBS
Steady stream of interest and principal payments; ability to diversify across many geographic markets.
How does the secondary market indirectly lower borrower rates?
By broadening the pool of capital and spreading risk, it typically lowers funding costs that lenders pass to borrowers.
Role of Fannie Mae & Freddie Mac in liquidity
They purchase, pool, and securitize conforming mortgages into mortgage-backed securities (MBS) with implicit gov’t backing, boosting market depth.
Federal Home Loan Bank (FHLB) System function
Provides low-cost advances (loans) to member banks, boosting liquidity for housing finance.
