L13: Types Of Mortgages & Sources Of Financing

Question 1

Primary mortgage market

Answer 1

Where mortgage funds originate

Mortgage loans originators = businesses that create mortgages in the primary mortgage market

Most mortgages are sold to the secondary market

Question 2

Secondary mortgage market

Answer 2

Where mortgages are bought and sold (mortgage-backed securities)

It allows for mortgage liquidity = frees up money for primary lenders to lend again

Question 3

GSE

Answer 3

GOVERNMENT SPONSORED ENTERPRISES
It’s a state owned enterprise

Mortgages are fully backed by the US government

Expands affordable housing financing

Question 4

Fannie Mae and Freddie Mac

Answer 4

• are GSEs (Government Sponsored Enterprise)
• Work with non-government supported loans
• Issue and guarantee mortgage-backed securities in their names

A.k.a., Federal National Mortgage Association and Federal Home Loan Mortgage Corporation

Question 5

Farmer Mac

Answer 5

GSE for agricultural loans

A.k.a., Federal Agricultural Mortgage Corporation

Question 6

Ginnie Mae

Answer 6

• it’s a SOE (state owned enterprise)
  – deals exclusively with FHA (Federal Housing Agency), VA (Veterans Affairs) and other government sponsored mortgage loans
  – guarantees timely payment of mortgages with backing of US government

A.k.a., Government National Mortgage Association

Question 7

Mortgage-Backed Securities (MBS) and Securitization

Answer 7

Investment instruments that have mortgages as collateral

Mortgages are grouped together to create MBS and be sold to investors (who holds the notes to the loans and are paid directly from borrower through monthly payments).
Made by secondary market agencies

Securitization = notes to loans that are paid directly from borrower through monthly payments

Question 8

Non-Conforming Loans & Jumbo Loans

Answer 8

Loans that do not meet Fannie Mae and Freddie Mac standards

Are usually bought by hedge funds or private investors

Can we pulled together into MBS

Jumbo loans = loans above conventional loan limit with a high interest rate

Question 9

2 types of mortgages

Answer 9

1) Government Backed Loans

2) Conventional Loans

Question 10

Government Backed Loans (included or guaranteed)

Answer 10

• include FHA, VA and USDA
  – do not provide funds for the loans, but ensures or guarantees them through special government programs (funds come from private lenders)
  – have a mortgage insurance premium (MIP) that protects the lender
• Have a limited amount (varies from Agency to Agency)

Question 11

Conventional Loans

Answer 11

• Money is not insured by the government (considered high risk to lender)
• Normally requires a 20% down payment
• Adhere to underwriting of Fannie Mae and Freddie Mac
• Require property appraisal & borrower credit score on report
• Have less eligibility requirement than Government backed loans
• Can be:
  A) Conforming = conform or Fannie Mae/Freddie Mac guidelines & can be sold to secondary mortgage market to GSE. Loan limits up to $695k

B) Non-conforming = do not follow guidelines

Question 12

3 Types of amortization

Amortization = interest

Answer 12

1) Fully Amortized
2) Partially Amortized Loans
3) Negative Amortization

Question 13

Fully Amortized Loans

types of amortization 1/3

Answer 13

• have equal monthly payments that contribute to both principal and interest until loan is paid in full
  – payments credit interest first and rest to principal
  – tend to have higher payment amounts
  – if payments are made in full and on time, loan will be completed by due date

Question 14

Partially amortized loans

types of amortization 2/3

Answer 14

• equal payments go to principal and interest, but loan won’t be completed by last scheduled payment
  – loan can include a balloon payment at the end of the loan to pay off remaining balance

Question 15

Negative amortization
(types of amortization 3/3)

Answer 15

• A.k.a. deferred interest
  – payment is not large enough to cover the interest due on the loan
  – unpaid interest is added to principal balance

Question 16

Arrears

Answer 16

A payment that occurs at the end of a period to compensate for charges accrued during that time

Question 17

Types of rate in mortgages (2)

Answer 17

1) adjustable-rate mortgage

2) fixed-rate amortized mortgage

Question 18

Fixed-rate amortized mortgage

Type of rate in mortgage 1/2

Answer 18

• mortgage that has the same interest rate for the life of the loan and same monthly payments
  – change is on how much money is applied to interest vs. principal
  – interest rate is locked in unless mortgage gets refinanced

Total loan cost = monthly payments X number of payments
Total interest paid = total loan cost - original loan cost

Question 19

Adjustable-rate mortgage

types of rate on mortgage 2/2

Answer 19

• loan with interest rate that can increase and decrease periodically through the lifetime of the loan
  – interest rate is usually based off of market index
  – introductory interest rate (initial rate period) is usually lower than market rate but tend to be less predictable than fixed rate mortgages
• normally if index tends to be low, the margin will be higher and vice versa
  – rate is written in fraction, first number is years on fixed rate

Question 20

Margin & Fully Indexed Rate

Adjustable rate mortgage

Answer 20

Margin = fixed percentage above the index (it moves) which the borrower will pay

Fully indexed rate = index + margin

Question 21

Rate Cap (and types, 2)
(adjustable rate mortgage)

Answer 21

• it is the “stopping point“ for the interest
  – it determines how high the rate can be and how much of a difference between old and new rate it can be
• Average: 1% to 2%

– Types, can be:
A) Periodic (limits change of interest rate between adjustment period)
B) lifetime (limits the increase of interest over life of the loan)

Question 22

Payment cap

Adjustable rate mortgage

Answer 22

Limit the amount of monthly loan payment for the borrower

Question 23

Other types of home loans (6)

Answer 23

1) Straight Loans (interest-only)
2) Balloon-Payment Mortgage
3) Reverse Mortgages
4) Home Equity Loan
5) Purchase-Money Mortgages
6) Package Mortgage

Question 24

Straight loans (interest only)
(Other types of loans 1/6)

Answer 24

• payment goes towards paying interest only
  – principal payment is due on its entirety when term is due

– most common for second mortgages, home-improvement loans and investor loans
– used as residential loan went borrower expects strong appreciation of the property over short loan period and property will be sold

– Fannie Mae requirements: 30% down, 720 credit and 24 month cash cushion

Question 25

Balloon-payment mortgage | Other types of loans 2/6

Answer 25

- partially amortizing loan – tends to be short-term (5 to 7 years) but payments are based on longer term (ie.30 years) – large remaining balance is due as a lump sum at the end of the term (dependent can be refinanced as fixed rate mortgage at higher interest rate) – interest rate tends to be .25% 2.5% lower than fixed rate

Question 26

Reverse mortgages | Other types of loans 3/6

Answer 26

- A.k.a. reverse annuity mortgages (RAMs) – for people 62+ – doesn’t require qualification (property as protection) – no monthly payments – when borrower passes away, house is sold and loan is paid off —> if the house is worth more, heirs keep the rest of the money, if the house is worthless, difference is not owed – if borrower leaves the home permanently, balance is due in full

Question 27

Home equity loan | Other types of loans 4/6

Answer 27

– Loan in which funds are borrowed using home owners equity for collateral - Limit: 80% of property value (normally)

Question 28

Purchase-money mortgages | Other types of loans 5/6

Answer 28

- loan given by a seller - borrower can borrow from the seller in addition to the lender - it’s a note and deed of trust created at the time of the purchase - the seller “takes back” a note from the buyer as a second mortgage

Question 29

Package Mortgage | Other types of loans 6/6

Answer 29

- includes real estate and all personal property & appliances installed on the premises.

Question 30

Government Sponsored Loans (2)

Answer 30

1) FHA Loans | 2) VA Loans

Question 31

FHA Loans and Overlay | Government Sponsored Loans 1/2

Answer 31

-Federal housing administration loans – loans are usually for 15 to 30 years – requires 3.5% minimum down payment – Mortgage Insurance Premium is mandatory – data income ratio: 45% max (preferably) – requires two years of steady employment and 580 credit score – might have overlay = when lender requires stricter requirements

Question 32

VA Loan | Government Sponsored Loans 2/2

Answer 32

-VA guarantees the loan (limited or unlimited – limited loans have entitlement = the amount guaranteed by the VA in case of default – cannot be used for investment property – no required minimum payment due (in this case, usually only 25% of loan is guaranteed) - Main qualification: debt-to-income ratio (max 41%) – requires a funding fee (can be financed into loan)

Question 33

5 Points to Loan Qualification

Answer 33

1. Income (normally 2 years of employment history and others) 2. Credit (credit history & credit report) 3. Assets 4. Debt: * short term = usually taken care with 1 payment or few * long term = usually in installments over years * revolving debt = ongoing line of credit (ex. CC) 5. Net Worth (assets - debt)

Question 34

2 Loan Qualifying Ratios

Answer 34

1) Payment-to-income ratio 2) Debt-to-income ratio —> borrower must qualify under both ratios and ratio with smaller qualifying amount will be used

Question 35

Payment-to-income Ratio | Loan qualifying ratio 1/2

Answer 35

- a.k.a. front-end ratio or housing expense ratio – compares the monthly house payment (PITI) to borrower’s monthly income – conventional loans require a maximum of 28% of borrower’s income in monthly PITI – primarily used to pre-qualify borrower and income information is taken at face value (no proper checking) Payment-to-income ratio = monthly payment/monthly income

Question 36

Debt-to-income ratio | Loan qualifying ratio 2/2

Answer 36

- A.k.a. back-end ratio - measures borrower’s credit worthiness and their ability to take the loan – includes all debts (not just BITI) – Fannie Mae’s ratio limit: 36% - FHA ratio limit: 43% Debt-to-income ratio = (monthly payment PITI + other debt)/monthly income

Question 37

Collateral

Answer 37

Something pledged a security for repayment of the loan

Question 38

Loan to value (LTV)

Answer 38

- Loan to value is the maximum amount a lender will land based on the value of the property – LTV exists to protect the lender from a possible wrong appraisal and loaning above the real value of the property – conventional LTV: 80% of value (this is why 20% down as needed) – maximum LTV for conventional loan: 95% (requires a private mortgage insurance) - FHA LTV: 96.5% - VA LTV: 100% Loan to Value Ratio is the proportion of the outstanding mortgage balance to the current value of a home.

Question 39

Debt service coverage ratio (DSCR)

Answer 39

- determines how profitable a commercial property is – most lenders look for a minimum 1.2 DSCR, but minimum requirements can range from 1.15 to 1.5 DSCR = Net Operating Income / Debt Service

Question 40

Mortgage Fraud

Answer 40

When borrower deceives a lender Examples: * property flipping with false appraisal * nominee loan/straw buyer (loan under someone else) * false identity * foreclosure schemes * air loans (collateral property doesn’t exist) * chunking (multiple fraudulent applications to same property) * silent second (second mortgage without disclosing)

Question 41

Prime Rate & Federal Funds Rate

Answer 41

- interest rate that is issued for mortgage borrowers that are deemed to have good credit – normally 3% above federal funds rate Federal funds rate = interest rate banks charge other banks for overnight loans

Question 42

Subprime mortgages/loans

Answer 42

Mortgage is made to borrowers with lower credit ratings – lender offers higher interest rates than those for prime rates – assessments: credit score (main one), size of down payment, number of delinquencies on credit report and types – watch out for pre-payment penalties and interest rate cap/adjustments

Question 43

Predatory lending & Predatory Inclusion

Answer 43

When lender deceives or takes advantage of borrower Are usually backed by some other kind of collateral Examples: * equities Trippin (loan is given knowing borrower won’t be able to pay) * bait and switch (lender advertises better rate/product than real) * loan flipping (lender refinances loan with new long-term high cost loan) * parking (charging borrower for services they don’t need) * hidden balloon payments Predatory Inclusion = Targeting minority neighborhoods for high cost loans —> if borrowers understand, know and willingly agree to terms it is not predatory

Question 44

Usury Laws

Answer 44

State laws that protect against predatory lending | Limit the maximum amount of interest rate a lender can legally charge

Question 45

TILA

Answer 45

Truth in Lending Act, 1968 - Protects consumers against inaccurate, unfair credit billing & credit card practices - Only applies to real estate loans, personal, family or household purposes & consumer loans under $25K - Doesn’t cover business loans

Question 46

APR

Answer 46

Annual Percentage Rate - it is the total cost of getting the loan (annually) expressed in percentage – includes interest paid, discount points and loan fees – allows for borrowers to compare true cost of each loan

Question 47

RESPA

Answer 47

Real Estate Settlement Procedures Act, 1974 - requires disclosures that spell out the costs associated with closing – prohibits kickbacks and unearned referral fees – loan has to be federally related mortgage loan Exceptions to RESPA: properties 25+ acres, business, commercial and agricultural loans, temporary construction, vacant land, transfer of loan to secondary market, etc.

Question 48

ECOA

Answer 48

Equal Credit Opportunity Act, 1974 - prohibits lending discrimination on the basis of race, color, religion, national origin, sex, marital status, age or use of public assistance – applies to anyone who regularly participates in a credit decision