Banking and Mortgage industry

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MORTGAGES
7.1 Mortgage Lending
7.2 Mortgage Loan Processing
7.3 Mortgages and the Law
7.4 Government-Backed Loans
7

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Lesson 7.1
MORTGAGE LENDING
Define the term mortgage
Identify several types of mortgages
GOALS

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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.

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FIXED 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
terms.

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BALLOON 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.

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ADJUSTABLE 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 rate
 Payment
 Index
 Formula
 Adjustment interval
 Periodic cap
 Lifetime cap

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BUY-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.

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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.

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REFINANCING
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.

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HOME 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.

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REVERSE 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.

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Lesson 7.2
MORTGAGE LOAN
PROCESSING
Describe the components involved in
obtaining a mortgage
Explain the mortgage approval process
GOALS

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OBTAINING 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.

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MONTHLY PAYMENTS
Monthly payments to the lender usually consist of
PITI or Principal, Interest, Taxes, and Insurance.

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PITI
 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
loan default.

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THE APPROVAL PROCESS
Application
Documentation
Underwriting
Drawing documents
Closing
Recording

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

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CONSUMER 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

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MORTGAGE 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.

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COMMUNITY 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.

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HOME 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.

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HOME 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.

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REAL 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.

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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.

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

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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.

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FEDERAL 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.

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FEDERAL HOUSING ADMINISTRATION (FHA)
During the Great Depression
Established to help the housing industry get
back on its feet
Guaranteed loans and provided mortgage
insurance
Pioneered long-term loans

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HUD 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.

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FANNIE 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.

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FREDDIE 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.

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GINNIE 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
mortgages.

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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.

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NCHSA
 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.

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OTHER 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