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MORTGAGES

This guide explores different types of mortgages, the mortgage approval process, and laws governing mortgage lending. Learn about fixed-rate, adjustable-rate mortgages, refinancing, home equity loans, reverse mortgages, and more. Understand the steps involved in obtaining a mortgage, including PITI, escrow, and loan-to-value ratio. Discover consumer protection laws like TILA, ECOA, and HMDA, which ensure fair lending practices. Stay informed about legislation such as the Community Reinvestment Act and the Home Ownership and Equity Protection Act to protect homeowners from predatory lending. Enhance your knowledge of mortgage lending to make informed decisions.

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MORTGAGES

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  1. MORTGAGES 7 7.1 Mortgage Lending 7.2Mortgage Loan Processing 7.3Mortgages and the Law 7.4Government-Backed Loans 7.5The Mortgage Crisis

  2. 7.1MORTGAGE LENDING GOALS Define a mortgage. Identify several types of mortgages.

  3. TERMS • Mortgage origination • Mortgage • Foreclosure • Fixed rate mortgage • Balloon mortgage • Adjustable rate mortgage • Buy-down mortgage • Point • Shared appreciation mortgage (SAM)

  4. WHAT IS A MORTGAGE? • Mortgage origination • New mortgages • Mortgage • A long-term note secured by real property • Foreclosure • When a creditor seeks a court-ordered sale of a property due to non-payment of a mortgage • The debt is paid from the funds generated by the sale

  5. checkpoint What is a mortgage?

  6. TYPES OF MORTGAGES • Fixed rate mortgage (conventional mortgage) • Loan with a fixed interest rate for the life of the loan • Balloon mortgage • The interest rate and payment stay fixed • At some specified point the entire remaining balance of the loan is due in one single “balloon” payment

  7. ADJUSTABLE RATE MORTGAGES • Adjustable rate mortgage • Loan with rates that change over the course of the loan • Teaser rate • Initial interest rates that may be extremely low • Adjusted at a later date to the normal rate • Including some addition to make up for an artificially low start

  8. OTHER FORMS OF FINANCING • Buy-down mortgage • The borrower buys down, or prepays, part of the interest in order to get a lower rate • Point • A value equal to 1 percent of the loan

  9. Shared appreciation mortgage (SAM) • Can lower interest rates for borrowers who agree to share profits with the lender when the house is sold • Appreciation • The amount that a house increases in value

  10. REFINANCING • Refinancing is starting over with an entirely new loan, using part or all of the loan funds to pay off the old mortgage. • Consumers can save money by getting mortgages at lower rates. • Lenders can earn money on fees, points, and closing costs.

  11. HOME EQUITY LOANS • Equity • The difference between the market value of an item and what is owed on it • When home values are appreciating, homeowners can use the difference between what they owe and what their homes are worth to secure a loan.

  12. REVERSE MORTGAGES • 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. • Homeowners are usually required to be 62 years or older.

  13. checkpoint What is the basic difference between conventional and adjustable rate mortgages?

  14. 7.2MORTGAGE LOAN PROCESSING GOALS Describe what is involved in obtaining a mortgage. Explain the mortgage approval process.

  15. TERMS • PITI • Escrow • Loan-to-value (LTV)

  16. OBTAINING A MORTGAGE • In a healthy lending environment, most lenders don’t want a person’s housing costs to exceed 25 to 28 percent of gross monthly income. • Total debt should not exceed 36 percent, including housing costs.

  17. PITI • PITI • Principal • The remaining unpaid balance of the mortgage • Interest • The amount of the monthly payment that goes toward interest

  18. Taxes • Include local real estate taxes • Escrow • An amount of money that lenders require be paid in advance • Used to pay real estate taxes • Insurance • Property insurance and sometimes private mortgage insurance • Private mortgage insurance (PMI) • Protects the lender against loan default • Waived if down payment exceeds 20 percent

  19. checkpoint What is private mortgage insurance?

  20. THE APPROVAL PROCESS • Application • Documentation • Loan-to-value • The value of the loan compared to the value of the asset • Underwriting • Drawing documents • Closing • Recording

  21. checkpoint What are the basic steps of the mortgage approval process?

  22. 7.3MORTGAGES AND THE LAW GOALS Describe consumer protection laws that apply to mortgage lending. Describe laws directly related to mortgage lending.

  23. TERMS • Redlining

  24. CONSUMER PROTECTION LEGISLATION • The Truth in Lending Act (TILA) • The Equal Credit Opportunity Act (ECOA) • The Fair Credit Reporting Act (FCRA) • The Fair Debt Collection Practices Act (FDCPA) • The Gramm-Leach-Bliley Act

  25. checkpoint How do consumer protection laws apply to mortgage lending?

  26. MORTGAGE LEGISLATION • Community Reinvestment Act (CRA) • Redlining • Requires that banks document their lending decisions and demonstrate an effort to serve their local communities

  27. HOME MORTGAGE DISCLOSURE ACT (HMDA) • Requires banks and other financial institutions to record and report data on home lending in order to identify possible discriminatory patterns

  28. HOME OWNERSHIP AND EQUITY PROTECTION ACT (HOEPA) • Congress passed the Home Ownership and Equity Protection Act in 1994 to protect consumers against predatory lending. • Also applies to second mortgages and refinancing • Pyramiding • When a loan servicing company continues to charge late fees until all late fees have been paid (even if payments made after the late payments were made in full and on time)

  29. REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) • Requires disclosures to be provided to the borrower at various times during the transaction • A booklet explaining various real estate settlement services • A good faith estimate of what closing costs are likely to be • A mortgaging service disclosure statement

  30. At closing • An itemized list of actual closing costs • An initial escrow statement

  31. checkpoint What is redlining and what legislation was enacted to address it?

  32. 7.4GOVERNMENT-BACKED LOANS GOALS Explain the concept of government-backed loans. Identify government-backed programs to encourage home lending.

  33. TERMS • Fannie Mae • Freddie Mac • Ginny Mae

  34. WHAT IS A GOVERNMENT-BACKED LOAN? • Numerous government programs help banks help people get loans they need. • Sometimes the banks provide funding and the government absorbs some of the risk.

  35. checkpoint How do banks and the government work together to provide loans?

  36. FEDERAL MORTGAGE PROGRAMS • The Federal Housing Administration • Established in 1934 • Replenished funds available for home lending

  37. FEDERAL HOUSING ADMINISTRATION (FHA) • Loan guarantees • Mortgage insurance • Long-term loans • The FHA is now the Office of Housing.

  38. FHASECURE • FHASecure was developed in 2007. • Homeowners who are struggling to meet their ARM payments can participate in FHASecure to refinance their homes with a government-insured mortgage.

  39. FANNIE MAE • Fannie Mae • Federal National Mortgage Association (FNMA) • Helps lenders find funds to make available for mortgages • A government-chartered corporation that buys mortgages from the originating institutions and keeps them or exchanges them for securities that it guarantees

  40. FREDDIE MAC • Freddie Mac • The Federal Home Loan Mortgage Corporation • Buys home mortgages from banks and other lending institutions and combines them into large groups, selling interest in the groups to investors

  41. THE COMBINED IMPACT OF FANNIE MAE AND FREDDIE MAC • Government-sponsored enterprise (GSE) • A business that receives some legal exemptions and privileges from the federal government, which, in effect, lowers its operating costs • Can charge lower interest rates • Has an implicit guarantee of the government as a backer

  42. GINNIE MAE • Ginnie Mae • The Government National Mortgage Association • Backs securities issued by holders of pools of mortgages

  43. VETERANS ADMINISTRATION (VA) • Veterans may get loans with • No down payment • No prepayment penalties • Negotiable interest rates

  44. NCSHA • The National Council of State Housing Agencies (NCSHA) • At the state level • Provides and administers programs for lower-income and other people who seek help to buy or renovate a home

  45. OTHER GOVERNMENT-BACKED LOANS • U.S. Department of Agriculture’s (USDA) Rural Housing Service • The Farm Service Agency • The Catalog of Federal Domestic Assistance

  46. checkpoint How do the FHA and VA make more loans available?

  47. 7.5THE MORTGAGE CRISIS GOALS Describe why mortgages are a sound investment. Explain the causes and consequences of the mortgage crisis.

  48. TERMS • Mortgage-backed securities • Negative equity

  49. MORTGAGES AS AN ATTRACTIVE INVESTMENT • Historically, mortgages represented a secure, steady investment for lenders. • Interest rates are predetermined. • The payment schedule is predetermined. • Lenders could count on a steady flow of revenue from mortgages. • Buyers were prequalified. • Housing prices typically appreciated.

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