7.17.1 Mortgage Lending7.2 Mortgage Loan Processing7.3 Mortgages and the Law7.4 Government-Backed Loans
Define the term mortgage
Identify several types of mortgages
WHAT IS A MORTGAGE?WHAT IS A MORTGAGE?WHAT IS A MORTGAGE?WHAT IS A MORTGAGE?
Today, a mortgage is a note, usually long-term, secured by real property.
Essentially, a mortgage places a lien on the property that is not released until the debt is paid.
If the mortgage is not paid, the creditor seeks a court-ordered sale of the property called a foreclosure, and the debt is paid from those funds.
FIXED RATE MORTGAGESFIXED RATE MORTGAGESFIXED RATE MORTGAGESFIXED RATE MORTGAGES
Fixed rate mortgages, also called conventional mortgages, are loans with a fixed rate of interest for the life of the loan.
Payments on the loan are set for the life of the loan.
Terms are set for the life of the loan.The most common terms are 30- and 15-year
BALLOON MORTGAGEBALLOON MORTGAGEBALLOON MORTGAGEBALLOON MORTGAGE
In a balloon mortgage, the interest rate and payment stay fixed, but at some specified point, the entire remaining balance of the loan is due in one single “balloon” payment.
ADJUSTABLE RATE MORTGAGESADJUSTABLE RATE MORTGAGESADJUSTABLE RATE MORTGAGESADJUSTABLE RATE MORTGAGES
Adjustable rate mortgages (ARMs) are those with rates that change over the course of the loan.
Usually the interest rate and payments are fixed for some period of time at the outset but then change according to some index value.
Some of the things that can vary are:Interest ratePaymentIndexFormula
Adjustment intervalPeriodic capLifetime cap
BUY-DOWN MORTGAGEBUY-DOWN MORTGAGEBUY-DOWN MORTGAGEBUY-DOWN MORTGAGE
In a buy-down mortgage, the borrower buys down, or prepays, part of the interest in order to get a lower rate.
The borrower pays points to the lender at the outset, and the lender agrees to lower the rate so much per point.
A point is a value equal to 1 percent of the loan.
SHARED APPRECIATION MORTGAGE (SAM)SHARED APPRECIATION MORTGAGE (SAM)SHARED APPRECIATION MORTGAGE (SAM)SHARED APPRECIATION MORTGAGE (SAM)
A shared appreciation mortgage can lower interest rates for borrowers who agree to share later with the lender some part of the amount the house appreciates.
Appreciation is the amount that a house increases in value.
Refinancing is starting over with an entirely new loan, using part or all of the loan funds to pay off the old mortgage.
If interest rate are low, consumers save money by getting new mortgages at lower rates.
Banks and other lenders earn money on fees, points, and closing costs of the new loan.
HOME EQUITY LOANSHOME EQUITY LOANSHOME EQUITY LOANSHOME EQUITY LOANS
Equity is the difference between what an item is worth and what is owed on it.
Homeowners can use the difference between what they owe and what their homes are worth to secure a loan.
REVERSE MORTGAGESREVERSE MORTGAGESREVERSE MORTGAGESREVERSE MORTGAGES
A reverse mortgage is not used to purchase a home.It is a form of consumer loan tied to the appreciated
value of a property.In most cases, reverse mortgages are limited to
homeowners 62 years or older. With a reverse mortgage, a homeowner receives a sum
from the lender secured by the value of a home and does not pay the loan back as long as he or she lives there. The lender is repaid, including fees and interest, when the borrower sells or dies.
MORTGAGE LOAN PROCESSING
Describe the components involved in obtaining a mortgageExplain the mortgage approval process
OBTAINING A MORTGAGEOBTAINING A MORTGAGEOBTAINING A MORTGAGEOBTAINING A MORTGAGE
Lenders typically require a down payment of 5, 10, or 20 percent for a mortgage.
A larger down payment lowers the cost of the monthly payment and may affect how the lender views the borrower.
Most lenders do not want a person’s housing cost to exceed 25 to 28 percent of gross monthly income.
Total debt should not exceed 36 percent.
MONTHLY PAYMENTSMONTHLY PAYMENTSMONTHLY PAYMENTSMONTHLY PAYMENTS
Monthly payments to the lender usually consist of PITI or Principal, Interest, Taxes, and Insurance.
Principal is the remaining unpaid balance of the mortgage.Interest is the amount that goes toward interest.Taxes include local real estate taxes.
Most lenders require an amount to be paid to them in advance, called escrow, from which they pay the real estate taxes.
Insurance refers to property insurance and sometimes private mortgage insurance.Almost all mortgages require the homeowner to maintain
adequate property insurance.Private mortgage insurance (PMI) protects the lender against
THE APPROVAL PROCESSTHE APPROVAL PROCESSTHE APPROVAL PROCESSTHE APPROVAL PROCESS
MORTGAGES AND THE LAW
Describe consumer protection laws that apply to mortgage lendingDescribe laws directly related to mortgage lending
CONSUMER PROTECTION LEGISLATIONCONSUMER PROTECTION LEGISLATIONCONSUMER PROTECTION LEGISLATIONCONSUMER PROTECTION LEGISLATION
Truth in Lending Act (TILA)Equal Credit Opportunity Act (ECOA)Fair Credit Reporting Act (FCRA)Fair Debt Collection Practices Act (FDCPA)Gramm-Leach-Bliley Act
MORTGAGE LEGISLATIONMORTGAGE LEGISLATIONMORTGAGE LEGISLATIONMORTGAGE LEGISLATION
In addition to consumer legislation, other laws exist that relate directly to mortgage lending.
Complying with this legislation and documenting compliance requires considerable effort and expense on the part of the financial institutions.
COMMUNITY REINVESTMENT ACTCOMMUNITY REINVESTMENT ACTCOMMUNITY REINVESTMENT ACTCOMMUNITY REINVESTMENT ACT
Congress passed the Community Reinvestment Act (CRA) of 1977 in response to widespread complaints that some banks refused to lend to residents of certain neighborhoods, a practice called redlining.
HOME MORTGAGE DISCLOSURE ACTHOME MORTGAGE DISCLOSURE ACTHOME MORTGAGE DISCLOSURE ACTHOME MORTGAGE DISCLOSURE ACT
The Home Mortgage Disclosure Act (HMDA) of 1974 was a forerunner of the CRA.
It requires banks and other financial institutions to record and report data on home lending in order to identify possible discriminatory patterns.
HOME OWNERSHIP AND EQUITY PROTECTION ACTHOME OWNERSHIP AND EQUITY PROTECTION ACTHOME OWNERSHIP AND EQUITY PROTECTION ACTHOME OWNERSHIP AND EQUITY PROTECTION ACT
Congress passed the Home Ownership and Equity Protection Act (HOEPA) in 1994 to protect consumers against predatory lending.
Provisions of this act also apply to second mortgages and refinancing.
REAL ESTATE SETTLEMENT PROCEDURES ACTREAL ESTATE SETTLEMENT PROCEDURES ACTREAL ESTATE SETTLEMENT PROCEDURES ACTREAL ESTATE SETTLEMENT PROCEDURES ACT
Congress enacted the Real Estate Settlement Procedures Act (RESPA) of 1974 to protect consumers from hidden costs or expensive surprises at closing time.
The law requires disclosures to be provided to the borrower at various times during the transaction.
THE HOMEOWNERS’ PROTECTION ACT OF 1998 THE HOMEOWNERS’ PROTECTION ACT OF 1998 THE HOMEOWNERS’ PROTECTION ACT OF 1998 THE HOMEOWNERS’ PROTECTION ACT OF 1998
The Homeowners’ Protection Act of 1998 requires that lenders drop PMI when equity reaches 22 percent in loans closed after July 29, 1999.
Explain the concept of government-backed loansIdentify government-backed programs to encourage home lending
WHAT IS A GOVERNMENT-BACKED LOAN?WHAT IS A GOVERNMENT-BACKED LOAN?WHAT IS A GOVERNMENT-BACKED LOAN?WHAT IS A GOVERNMENT-BACKED LOAN?
Numerous government programs help banks help people get loans.
In most of these programs, the banks provide funding and the government absorbs some of the risk.
FEDERAL MORTGAGE PROGRAMSFEDERAL MORTGAGE PROGRAMSFEDERAL MORTGAGE PROGRAMSFEDERAL MORTGAGE PROGRAMS
The Federal Housing Administration, established in 1934, supported both homebuyers and banks by replenishing funds available for home lending.
Today, there are many such programs with varying missions, services, and operations, but the twin benefits of both supporting homeowners and backing the banking industry continues.
FEDERAL HOUSING ADMINISTRATION (FHA)FEDERAL HOUSING ADMINISTRATION (FHA)FEDERAL HOUSING ADMINISTRATION (FHA)FEDERAL HOUSING ADMINISTRATION (FHA)
During the Great DepressionEstablished to help the housing industry get
back on its feet Guaranteed loans and provided mortgage
insurancePioneered long-term loans
HUD OFFICE OF HOUSINGHUD OFFICE OF HOUSINGHUD OFFICE OF HOUSINGHUD OFFICE OF HOUSING
Today, what was once the FHA is now the Office of Housing and is part of the Department of Housing and Urban Development (HUD).
The Office of Housing continues to guarantee FHA loans and provide mortgage insurance.
FANNIE MAEFANNIE MAEFANNIE MAEFANNIE MAE
The Federal National Mortgage Association (FNMA) was created in 1938 as part of the FHA.
Fannie Mae is a government-chartered corporation that buys mortgages from the originating institutions and either keeps them or exchanges them for securities which it guarantees.
Fannie Mae is now an independent corporation.
FREDDIE MACFREDDIE MACFREDDIE MACFREDDIE MAC
The Federal Home Loan Mortgage Corporation was created in 1970 as a fully independent corporation.
Freddie Mac buys home mortgages from banks and other lending institutions and combines them into large groups, selling interest in the groups to investors.
GINNIE MAEGINNIE MAEGINNIE MAEGINNIE MAE
The Government National Mortgage Association is part of the Department of Housing and Urban Development.
Freddie Mac neither buys nor sells mortgages.It backs securities issued by holders of pools of
VETERANS ADMINISTRATION (VA)VETERANS ADMINISTRATION (VA)VETERANS ADMINISTRATION (VA)VETERANS ADMINISTRATION (VA)
Loans from the Department of Veterans Affairs (DVA) have helped millions of service men and women get government-backed loans with low down payments.
VA loans allow qualified veterans to buy, build, remodel, or refinance a home.
The National Council of State Housing Agencies (NCHSA) is a national organization of Housing Finance Agencies (HFAs) throughout the states that provide and administer programs for lower-income and other people who seek help at the state level to buy or renovate a home.
There are also 350 affiliated profit and nonprofit agencies that work in this field.
These agencies and firms have a variety of programs for affordable housing.
OTHER GOVERNMENT-BACKED LOANSOTHER GOVERNMENT-BACKED LOANSOTHER GOVERNMENT-BACKED LOANSOTHER GOVERNMENT-BACKED LOANS
There are many other government-backed loan programs.
It is not easy to find every government loan program.
The Catalog of Federal Domestic Assistance is available in government depository libraries and online at www.cfda.gov