Residential Mortgage Lending: Principles and Practices, 6e

© 2012 Cengage Learning

© 2012 Cengage Learning© 2012 Cengage Learning

Residential Mortgage Lending:Principles and Practices, 6e

Chapter 17 Selling Residential Mortgage Loans


Objectives• After completing this chapter, you should be able to:

– Discuss the various marketing alternatives for loan production– Explain the details required in a mortgage sale– Calculate the increased yield to the originator from participation

sales– Explain how yield is calculated– Calculate the weighted average yield and how to discount a

mortgage package


• Technically, the actual sale of a mortgage loan is completed when a lender closes a loan in its own name, then endorses its note and assigns its mortgage to another entity, delivers all the required documentation to the investor, & then receives investor funding for the loan.

When Is A Mortgage Loan Sold?


• Endorsement and assignment may be at, or well after, closing.

• Funding can be immediate, or take several days to weeks if due diligence uncovers documentation or other issues in perfecting a lien or in following underwriting guidelines.

When Is A Mortgage Loan Sold?


Marketing AlternativesA. Retaining production in portfolioB. Selling production to FNMA/FHLMCC. Directly Issuing MBSD. Direct sales to permanent investorsE. Selling production to conduits


Managing Risks• Credit risk• Interest rate risk• Prepayment risk• Liquidity risk


Advantages of Selling Loans• No portfolio risk from changing interest rates• Increased ability to meet local housing

demand• Instant liquidity• Increased servicing volume and income• Potential for marketing profit• Participation leverage


Types of Loans Sold• 1-4 family first mortgages• 1-4 family second mortgages• Reverse mortgages• Rural housing mortgages• Cooperative mortgages• Rehabilitation loans• Multifamily mortgages, among others


The Approval Process1. Submitting application for approval2. Paying non-refundable fee3. Examination of financial condition

a. Fannie Mae requires min net worth $2.5 million b. Freddie Mac makes reference to having an “acceptable” net worth

based on the proposed duties and obligations with Freddie Mac4. Reviewing mortgage lending experience of lender in:

a. Origination b. Secondary market operationsc. Servicing

5. Establishing whether properly licensed in jurisdiction6. Establishing if staff has sufficient experience in:

a. Originating investment quality mortgage loansb. Servicing loans for investors

7. Reviewing fidelity bond and errors and omissions coverage 8. Reviewing acceptability of:

a. Quality control planb. Loan servicing systems in place


Calculating Yield

$90,000 annualized income ______________________ = 9 percent yield

$1,000,000 invested

$90,000________ = $1,000,000

9 percent



What Do You Think?

• Describe the business strategy of selling mortgage loans. Why is it the most popular residential mortgage loan strategy today?

What alternatives does a mortgage originator have for the residential mortgage loans that have been originated? What are the pros and cons of each?


What Do You Think?• Identify and discuss the inherent risk of

residential mortgage origination.

What are the major benefits that a mortgage lender derives from selling loans into the secondary mortgage market?


What Do You Think?• What steps must a mortgage lender go

through before it can sell loans into the secondary market?

What are loan commitments and why are they so important in secondary mortgage market transactions?

Explain the pricing options that a lender has when selling loans into the secondary mortgage market.


Check Your Understanding1. Sales to the secondary mortgage market have recently

been over $3 trillion a year. 2. A conforming loan is one that is at or below the

maximum loan amount for sale in the secondary mortgage market.

3. A nonstandard mortgage loan is one that does not conform to the processing/underwriting standards of the secondary market.

4. Ultimately all mortgage loans can be sold to some investor.

5. Interest rate risk is not considered a reason to sell loans in the secondary market.


Check Your Understanding6. Because Fannie Mae and Freddie Mac were originally started by the

federal government, any mortgage lender can sell loans without being approved to do so.

7. Commitments are critical to successful mortgage lending for those lenders that sell mortgages.

8. The price an investor will pay for a mortgage loan (i.e., the yield on the mortgage) determines the value of that loan in the secondary market.

9. One a loan has been sold to an investor the principle and interest payment belong to the seller until the first of the month.

10. Weighted-average yield is a tool for calculating yield of a single mortgage that is two or more years old.

Documents

Residential Mortgage Lending: Principles and Practices, 6e