Running head: RECYCLING CAN BE WORTH IT 1
Recycling Can Be Worth It, If We Focus Efforts
Student’s Name
University
RECYCLING CAN BE WORTH IT 2
Recycling Can Be Worth It, If We Focus Our Efforts
The Topic
For decades, people have expressed concern about the environment and how human
activity may impact it in a negative way. Conservation efforts have included global concerns
about production waste, water pollution, and endangered species. Because the scope of human
activity has an array of negative effects, many people feel somewhat powerless to affect any kind
of real change. As a result, ecologists and activists have attempted to educate the public about
ways that every individual might make small changes that will begin to alleviate long-term
effects. One of these methods is household recycling. Recently, however, some people have
begun to question the efficacy of recycling as a means for alleviating landfill waste.
The Controversy
An on-going concern is that recycling is not the solution that the U.S. government
thought it would be in the 1980s. While many people do not disagree that recycling is a good
idea, there is little to incentivize people to recycle. Further, some people even question whether
recycling bottles is better for the environment because of the shear amount of energy resources
used in the production of recycled bottles that still cause waste. There is increasing concern
about unsustainable resources and whether or not the human race can afford not to recycle.
Pro Side of the Controversy
While there are imperfections in the recycling process, those in favor of recycling
contend that investing in the process is worth it because of the positive impacts to the
environment. According to the Aluminum Association (as cited in Moss & Scheer, 2015),
aluminum cans are the most recycled material, which is good because recycling these cans saves
aluminum and only uses 8% of the energy to make a new can. Recycling prevents the release of
RECYCLING CAN BE WORTH IT 3
dangerous carbon dioxide. According to Moss and Scheer (2015), who interviewed the U.S.
Environmental Protection Agency in 2013, recycling and compositing saved nearly 186 million
metric tons of carbon dioxide from being released into the atmosphere. Szaky (2015) argues that
those against recycling fail to account for the current impacts of failing to recycle. For example,
a new study by the 5 Gyres Institute indicates that there are more than five trillion pieces of
plastic floating on the surface of the world’s oceans, which is roughly the weight of 134,500
average U.S. cars (Elks & Hower, 2014). While the statistics can be staggering, others are
concerned about the economic questions regarding recycling and sustainability.
Con Side of the Controversy
Those who question recycling do so on the basis of effectiveness and convenience.
Hutchinson (2008) contends that while a plastic wat.
Running head RECYCLING CAN BE WORTH IT 1 Recycling Can Be.docx
1. Running head: RECYCLING CAN BE WORTH IT 1
Recycling Can Be Worth It, If We Focus Efforts
Student’s Name
University
RECYCLING CAN BE WORTH IT 2
Recycling Can Be Worth It, If We Focus Our Efforts
The Topic
For decades, people have expressed concern about the
environment and how human
activity may impact it in a negative way. Conservation efforts
have included global concerns
about production waste, water pollution, and endangered
species. Because the scope of human
activity has an array of negative effects, many people feel
somewhat powerless to affect any kind
of real change. As a result, ecologists and activists have
attempted to educate the public about
2. ways that every individual might make small changes that will
begin to alleviate long-term
effects. One of these methods is household recycling. Recently,
however, some people have
begun to question the efficacy of recycling as a means for
alleviating landfill waste.
The Controversy
An on-going concern is that recycling is not the solution that
the U.S. government
thought it would be in the 1980s. While many people do not
disagree that recycling is a good
idea, there is little to incentivize people to recycle. Further,
some people even question whether
recycling bottles is better for the environment because of the
shear amount of energy resources
used in the production of recycled bottles that still cause waste.
There is increasing concern
about unsustainable resources and whether or not the human
race can afford not to recycle.
Pro Side of the Controversy
While there are imperfections in the recycling process, those in
favor of recycling
contend that investing in the process is worth it because of the
positive impacts to the
3. environment. According to the Aluminum Association (as cited
in Moss & Scheer, 2015),
aluminum cans are the most recycled material, which is good
because recycling these cans saves
aluminum and only uses 8% of the energy to make a new can.
Recycling prevents the release of
RECYCLING CAN BE WORTH IT 3
dangerous carbon dioxide. According to Moss and Scheer
(2015), who interviewed the U.S.
Environmental Protection Agency in 2013, recycling and
compositing saved nearly 186 million
metric tons of carbon dioxide from being released into the
atmosphere. Szaky (2015) argues that
those against recycling fail to account for the current impacts of
failing to recycle. For example,
a new study by the 5 Gyres Institute indicates that there are
more than five trillion pieces of
plastic floating on the surface of the world’s oceans, which is
roughly the weight of 134,500
average U.S. cars (Elks & Hower, 2014). While the statistics
can be staggering, others are
concerned about the economic questions regarding recycling
4. and sustainability.
Con Side of the Controversy
Those who question recycling do so on the basis of
effectiveness and convenience.
Hutchinson (2008) contends that while a plastic water bottle
might last in a landfill for centuries,
the petroleum reused is barely worth the diesel fuel burned by
the large trucks sent to collect the
bottles. While recycling aluminum is worth the energy,
recycling glass uses 21% less energy
(Hutchinson, 2008). There are further concerns about looking at
recycling as part of a larger
picture. For example, Chris Goodall calculates that “if you wash
plastic in water that was heated
by coal-derived electricity, then the net effect of your recycling
could be more carbon in the
atmosphere” (as cited in Tierney, 2015). While some cities are
attempting to convert to a “zero
trash” policy within the next 15 to 20 years, there is no
guarantee that these expensive measures
will have any positive impacts on the environment; in fact,
many speculate that the benefits are
few (Tierney, 2015).
5. RECYCLING CAN BE WORTH IT 4
Tentative Thesis Statement
Recycling efforts should continue because materials that are
recycled are often
unsustainable, there should be a more focused effort to recycle
materials that have a
reproduction-cost benefit.
RECYCLING CAN BE WORTH IT 5
References
Elks, J., & Hower, M. (2014, December 18). Reports find over 5
trillion pieces of plastic floating
in the world’s oceans…and 10,000 times more in the deep sea.
Retrieved from
http://www.sustainablebrands.com/news_and_views/waste_not/
mike_hower/report_5_tril
lion_pieces_plastic_floating_world%E2%80%99s_oceans
Hutchinson, A. (2008, November 12). Is recycling worth it? PM
6. investigates its economic and
environmental impact. Retrieved from
http://www.popularmechanics.com/science
/environment/a3752/4291566/
Moss, D., & Scheer, R. (2015, November 5). Is recycling worth
it? Retrieved from
http://www.scientificamerican.com/article/is-recycling-worth-it/
Szaky, T. (2015, October 13). 7 reasons why recycling is not a
waste: A response to “The Reign
of Recycling.” Retrieved from
http://www.sustainablebrands.com/
news_and_views/waste_not/tom_szaky/7_reasons_why_recyclin
g_not_waste_response_r
eign_recycling
Tierney, J. (2015, October 3). The reign of recycling. The New
York Times. Retrieved from
http://www.nytimes.com/2015/10/04/opinion/sunday/the-reign-
of-recycling.html?_r=0
CHAPTER 8 Searching for Mortgage Information Online
131
Chapter 8
7. IN THIS CHAPTER
» Looking at some safe surfing ideas
» Checking out mortgage sites
Searching for Mortgage
Information Online
Computers, tablets, and smartphones are amazing tools. Used
wisely, they may save you time and money. However, like other
tools (such as a ham-mer), used incorrectly (remember the last
time you whacked your finger
with a hammer?) or for the wrong purpose (tapping a glass
window comes to
mind), today’s technology can cause more harm than good.
Some people have mistaken assumptions about using their
computers and tablet
or phone apps to help them make important financial decisions.
Some believe and
hope that fancy technology can solve their financial problems or
provide unique
insights and vast profits. Often, such erroneous musings
originate from propa-
ganda put forth through “fake news” or social media about how
all your problems
can easily be solved if you just have the right app, spend more
time on particular
websites, and so on.
As computers, technology, and apps continue to proliferate, we
take seriously our
task of explaining how, where, and when to use the Internet to
help you make
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132 PART 3 Landing a Lender
Obeying Our Safe Surfing Tips
Before we get to specific sites that are worthy of your time, in
this section we
provide an overview of how we suggest using (and not being
abused by) your
10. mortgage-related web surfing or cure-all app. Specific sites, and
especially apps,
will come and go, but these safe surfing tips should assist you
with assessing any
site or app that you may stumble upon.
Shop to find out about rates and programs
The best reason that we can think of to access the Internet when
you’re looking
for a mortgage is to discover more about the going rate for the
various types of
loans you’re considering. Despite all the cautions we raise in
this chapter, shop-
ping for a mortgage online has some attractions:
» No direct sales pressure: Because you don’t speak or meet
with a mortgage
officer (who typically works on commission) when you peruse
mortgage rates
online, you can do so without much pressure. That said, some
sites and apps
are willing to give out specific loan information only after you
reveal a fair
amount of information about yourself, including how to get in
touch with you.
However, on one site where you must register (with all your
contact informa-
tion and more) to list your loan desires, take a look at how the
site pitches
itself to prospective mortgage lenders: “FREE, hot leads! Every
lead is HOT,
HOT, HOT because the borrower has paid us a fee to post their
loan request.”
Although the advantages of online shopping are many, being
savvy and
11. discrete with who and how you contact prospective lenders is
worthy of a
cautionary reminder. You may think you’re the one shopping,
but on many
sites and apps, you are the one being “sold” to aggressive
marketers of loan
products that may not be what you need. Worse yet, many of
these unscrupu-
lous hucksters don’t even have the loan products and terms they
tease on
their website and their real goal is to lure you in and then turn
around and sell
your information to others. You’ll soon find yourself inundated
with unwanted
emails, texts, and even phone calls.
» Shop when you like: Because most people work weekdays
when lenders and
mortgage brokers are available, squeezing in calls to lenders is
often difficult.
Thus, another advantage of mortgage Internet shopping is that
you can do it
any time of any day when it’s convenient for you. Just be
careful that you don’t
provide personal information to anyone unless you’re sure you
want him to
contact you.
Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage
management for dummies. Retrieved from
http://ebookcentral.proquest.com
Created from apus on 2020-05-04 20:26:39.
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CHAPTER 8 Searching for Mortgage Information Online
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Quality control is often insufficient
Particularly at sites where lenders simply pay an advertising fee
to be part of the
program, you should know that quality control may be
nonexistent or not up to
your standards. “We make your loan request available to every
online lender in the
world,” boasts one online mortgage listing service. We don’t
know too many bor-
rowers willing to work with just any old mortgage company!
Some sites don’t
check to see whether a participating lender provides a high level
of service or
meets promises and commitments made to previous customers.
Again, if you’re going to go loan shopping on the Internet,
examine each site to
14. see how it claims to review listed lenders. One site we’re
familiar with claims to
demand strict ethics from the companies it lists — no
lowballing or bait-and-
switch tactics — and says it has removed several dozen lenders
from its list for
such violations. That makes us think that the site should do a
better job of screen-
ing lenders upfront!
Beware simplistic affordability calculators
Be highly skeptical of information about the mortgage amount
that you can afford.
Most online mortgage calculators simplistically use overall
income figures and the
current loan interest rate to calculate the mortgage amount a
borrower can
“afford.” These calculators are really spitting out the maximum
a bank will lend
you based on your income. As we discuss in Chapter 1, this
figure has nothing to
do with the amount you can really afford.
Such a simplistic calculation ignores your larger financial
picture: how much (or
little) you have put away for other long-term financial goals
such as retirement or
college educations for your children. Thus, you need to take a
hard look at your
budget and goals before deciding how much you can afford to
spend on a home;
don’t let some slick Java-based calculator make this decision
for you.
Don’t reveal confidential information
unless . . .
17. We applaud your instincts and concerns! Here’s what you
should do to protect
yourself:
» Do your homework on the business. In Chapter 7, we suggest
a variety of
questions to ask and issues to clarify before deciding to do
business with any
lender — online or offline.
» Review the lender’s security and confidentiality policies. On
reputable
lender websites, you’ll be able to find the lender’s policies
regarding how it
handles the personal and financial information you may share
with it. We
recommend doing business only with sites that don’t sell or
share your
information with any outside organization other than for the
sole purpose of
verifying your creditworthiness needed for loan approval. Be
sure to choose
secure sites that prevent computer hackers from obtaining the
information
you enter.
If you’re simply not comfortable — for whatever reason —
applying for a loan
online, know that most online mortgage brokers and lenders
offer users the abil-
ity to apply for their loan offline (at an office or via loan papers
sent through the
regular mail). They may charge a slightly higher fee for this
service, but if it makes
you feel more comfortable, consider it money well spent.
18. Be sure to shop offline
You may find your best mortgage deal online. However, you
won’t know it’s the
best unless and until you’ve done sufficient shopping offline as
well. Why shop
offline? You want to be able to see all your options and find the
best one. Online
mortgage options aren’t necessarily the cheapest or the best.
What good is a quote
for a low mortgage rate that a lender doesn’t deliver on or that
you won’t qualify
for because of your specific property, location, or financial
situation? Remember:
Personal service and honoring commitments is highly important.
You may be able to save a small amount of money by taking a
mortgage you find
online. Some online mortgage brokers are willing to take a
somewhat smaller slice
of commission for themselves if they feel they’re saving time
and money process-
ing your loan via an online application. As we discuss in
Chapter 7, mortgage
brokers’ fees do vary and are negotiable. Some online mortgage
brokers are will-
ing to take less than the industry standard cut (1-plus percent).
But just because you’ve been offered a slightly better rate
online, you shouldn’t
necessarily jump on it. Local lender or mortgage brokers may
negotiate with you
to make themselves competitive. However, you have to give
them the opportunity
to do so. Other things being equal, go back to the runner-up on
price and give
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CHAPTER 8 Searching for Mortgage Information Online
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them a chance to meet or beat your best offer. You may be
pleasantly surprised
with the results.
Mortgage websites and apps are best used to research the
current marketplace
rather than to actually apply for and secure a mortgage. The
reason: Mortgage
lending is still largely a locally driven and relationship-based
21. business that varies
based on nuances of a local real estate market.
Beware of paid advertising masquerading
as directories
Some sites on the Internet and apps offer “directories” of
mortgage lenders. Most
sites charge lenders a fee to be listed or to gain a more visible
listing. And, just as
with any business buying a yellow pages listing or Google ad,
higher visibility ads
cost more. Here’s how one online directory lured lenders to
advertise on its site:
Sure, our basic listing is free, but we have thousands of
mortgage companies in
our directory. A free listing is something like a five-second
radio advertisement at
2:00 a.m. on an early Sunday morning. To make your listing
really work for you, you
must upgrade your listing.
Upgrade, here, is a code word for pay for it! For example, a
“gold listing” on this site
costs $600 per year for one state and $360 for each additional
state. What does
that amount of money get the lender?
A Gold Listing sorts your company name to the top of all
listings. In addition, the
Gold Listings receive a higher typeface font and a Gold Listing
icon next to their
name.
Then there is the “diamond listing,” the “platinum listing,” the
“titanium list-
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136 PART 3 Landing a Lender
find out how the site attracts lenders and you may also find the
amount lenders
are paying to be listed.
Perusing Our Recommended
Mortgage Websites
In addition to seeking only the highest-quality sources for you,
dear reader, we
don’t want you wasting your time on a wild goose chase for
some unreliable
website or app that’s here today and gone tomorrow. In this
section, we recom-
mend a short list of our favorite mortgage sites. Yes, many more
sites and apps are
out there, but we don’t want to bore you with a huge laundry
list of mortgage-
related sites. And, please remember as we discuss in Chapter 7,
mortgages are
distributed through numerous types of mortgage lenders and
brokers. The Inter-
net and the app craze are just simply another way that these
players can reach
25. prospective customers.
Useful government sites
Various government agencies provide assistance to low-income
homebuyers as
well as veterans. The U.S. Department of Housing and Urban
Development’s web-
site (see Figure 8-1) at www.hud.gov provides information on
the federal govern-
ment’s FHA loan program as well as links to listings of HUD
and other government
agency–listed homes for sale (foreclosed homes for which the
owners had FHA
loans; see
https://portal.hud.gov/hudportal/HUD?src=/topics/homes_for_
sale). On this site, you can also find links to other useful federal
government
housing–related websites.
Also, if you’re a veteran, check out the VA’s website (see
Figure 8-2; www.
benefits.va.gov/homeloans) operated by the U.S. Department of
Veterans
Affairs. In addition to information on VA loans, veterans and
nonveterans alike are
eligible to buy foreclosed properties on which there was a VA
loan (see the website
http://listings.vrmco.com).
The Federal Citizen Information Center
(www.pueblo.gsa.gov/housing.htm)
offers numerous free and low-cost pamphlets on home financing
topics such as
securing home equity loans, avoiding loan fraud, finding
mortgages and home
improvement loans to make your home more energy efficient,
28. http://www.pueblo.gsa.gov/housing.htm
CHAPTER 8 Searching for Mortgage Information Online
137
FIGURE 8-1:
The U.S.
Department of
Housing and
Urban Develop-
ment website
provides
information on
FHA loan
programs and
HUD homes
for sale.
Source: U.S. Department of Housing and Urban Development
FIGURE 8-2:
Visit the
U.S. Department
of Veterans
Affairs website
for information
on VA loans.
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138 PART 3 Landing a Lender
Fannie Mae (www.fanniemae.com) has many resources for
mortgage borrowers
and homebuyers. In addition to helping you find mortgage
lenders for home pur-
chases, improvements, or refinances, the site can also turn you
onto helpful
worksheets and counseling agencies. Freddie Mac
(www.freddiemac.com) offers
31. similar (although not as extensive) resources.
Finally, if you’re trying to fix your problematic credit report,
don’t waste your
money on so-called credit-repair firms, which often
overpromise — and charge
big fees for doing things that you can do yourself. In addition to
following our
credit-fixing advice in Chapters 2 and 3, also check out the
Federal Trade Com-
mission’s website (www.ftc.gov) for helpful credit-repair and
other relevant
advice regarding borrowing.
Mortgage information and shopping sites
HSH Associates (www.hsh.com) is the nation’s largest collector
and publisher of
mortgage information. If you’re a data junkie, you’ll enjoy
perusing the HSH site,
which includes up-to-date mortgage rates and graphs showing
recent trends (see
Figure 8-3).
Some lenders do choose to advertise online at HSH’s website
and you can obtain
their rates through the website’s ad links.
FIGURE 8-3:
The website of
HSH Associates,
publisher of
mortgage
information.
38. REAL ESTATE
ECONOMICS
A Tale of Two Tensions: Balancing Access
to Credit and Credit Risk in Mortgage
Underwriting
Marsha J. Courchane,* Leonard C. Kiefer** and Peter M.
Zorn***
Over the years 2000–2007, mortgage market underwriting
conditions eased in
response to public policy demands for increased
homeownership. This eas-
ing of acceptable credit risk in order to accommodate increased
access to
credit, when coupled with the unanticipated house price
declines during the
Great Recession, resulted in substantial increases in
delinquencies and fore-
closures. The response to this mortgage market crisis led to
myriad changes in
the industry, including tightened underwriting standards and
new market regu-
lations. The result is a growing concern that credit standards are
now too tight,
restricting the recovery of the housing market. Faced with this
history, policy an-
alysts, regulators and industry participants have been forced to
consider how
best to balance the tension inherent in managing mortgage
credit risk without
unduly restricting access to credit. Our research is unique in
providing explicit
consideration of this trade-off in the context of mortgage
underwriting. Using
recent mortgage market data, we explore whether modern
40. 994 Courchane, Kiefer and Zorn
higher and lower income families.1 Relaxation of underwriting
standards, ac-
companied by a surge in subprime lending and an attendant
proliferation of
new products, resulted in many borrowers who could not meet
traditional un-
derwriting standards being able to obtain home mortgages and
achieve home
ownership.
However, the environment changed with the mortgage market
crisis of 2007
and 2008 when the subprime sector collapsed nearly entirely
and delinquency
and foreclosure rates increased throughout the country. In
response, underwrit-
ing standards tightened and legislation was passed imposing
more stringent
regulations on the mortgage industry, particularly the Dodd-
Frank Act reg-
ulations, which introduced both Qualified Mortgage (“QM”) and
Qualified
Residential Mortgage (“QRM”) standards. While providing
assurance that
the performance of recent mortgage originations will reduce the
likelihood of
another housing crisis, this tightening of standards comes at a
significant cost
in terms of access to credit. Balancing the tension between
access to credit
and the management of credit risk remains an ongoing concern.
The rich history of mortgage performance data over this period
offers an
41. opportunity to better distinguish mortgage programs and
combinations of
borrower and loan characteristics that perform well in stressful
economic en-
vironments from those that do not. The relaxed underwriting
standards of the
2000s provide plentiful performance information on borrowers
who stretched
for credit, but then experienced the stressful post-origination
environment of
declining house prices and rising unemployment. While many of
these loans
performed poorly, a large number performed well. Our goal is to
identify the
characteristics that distinguish between these two groups.
We specifically examine whether the recent data can be used to
create a mod-
ern automated underwriting scorecard that effectively and
responsibly extends
mortgage credit to the general population, and to underserved or
targeted bor-
rowers who reside in low-income communities, make low down
payments
and have poorer credit histories. Our analysis focuses on
mortgage under-
writing, rather than mortgage pricing. This reflects the two-
stage approach
to mortgage lending broadly practiced in the United States—
originators first
underwrite applications to determine whether they qualify for
origination, and
then price the loans that are originated successfully.
1For example, former United States Department of Housing and
Urban Development
42. (HUD) Secretary Mel Martinez states in 2002 that “The Bush
Administration is
committed to increasing the number of Americans, particularly
minorities, who own
their own homes.”
A Tale of Two Tensions 995
There are four steps necessary to complete this exercise. First,
we empirically
estimate a mortgage delinquency model. Second, we convert the
estimated
delinquency model to an underwriting scorecard for assessing
risk, where
higher scores signify higher risk. Third, we determine a
scorecard value (a
“cutpoint” or risk threshold) that demarcates the marginal risk
tolerance—
score values equal to or below the cutpoint are viewed as
acceptable risk;
score values above the cutpoint are not. Fourth, we process
borrowers through
this prototype of an automated underwriting system. We then
determine the
proportion of the population of mortgage applicants that is
within acceptable
risk tolerances, and the historic performance of these
“acceptable” loans.
The main data we use for this analysis are loan-level
observations from
CoreLogic on mortgages originated in the conventional (prime
and subprime)
and government sectors from 1999 through 2009. For each of
43. the three market
sectors, we separately estimate the probability that borrowers
will become
90-days or more delinquent on their loans within the first three
years after
origination. Included in the model are standard controls for
borrower and loan
characteristics, as well as for key macroeconomic factors
affecting mortgage
performance post-origination (specifically, changes in house
prices, interest
rates and unemployment rates).
Underwriting scorecards provide ex ante assessments of
mortgage risk at
origination, so creating scorecards requires appropriate
treatment of the
post-origination variables in our estimated models. Two broad
approaches are
possible. One approach attempts to forecast post-origination
variables across
borrower locations and over time. The other approach sets post-
origination
variables to constant values for all borrowers and all time
periods. We use
the latter approach. Specifically, we create two separate
scorecards. The first
scorecard sets post-origination values of house prices, interest
rates and un-
employment rates to their constant long run average levels (a
“through-the-
cycle” scorecard). The through-the-cycle scorecard is inherently
“optimistic”
with respect to credit risk, and therefore reflects a focus on
access to credit.
The second scorecard sets post-origination values of house
44. prices, interest
rates and unemployment rates to the varying ex post values
defined by the
Federal Reserve in an adverse scenario (a “stress” scorecard) as
defined in the
2014 supervisory stress test for very large banking
organizations.2 The stress
scorecard focuses on “tail” events that are unlikely to occur and
is meant to
prevent crisis outcomes such as those observed during the Great
Recession.
This scorecard therefore represents a focus on credit risk
management.
2See http://www.federalreserve.gov/bankinforeg/stress-
tests/2014-appendix-a.htm.
996 Courchane, Kiefer and Zorn
The next challenge requires choosing appropriate scorecard
cutpoints for
delimiting loans within acceptable risk tolerances. This, in
combination with
the choice of scorecard, is where much of the tension between
credit access
and credit risk resides. Higher cutpoints provide greater access
at the cost of
increasing credit risk; lower cutpoints limit credit risk but
restrict access.
As the choice of a cutpoint is a complicated policy/business
decision, we
provide results for a variety of possible cutpoints, ranging from
a low of a
45. 5% delinquency rate to a high of a 20% delinquency rate. In an
effort to put
forward a possible compromise between access and credit risk,
we explore in
more detail results for alternative cutpoints that are market-
segment-specific;
5% for prime loans, 15% for subprime loans and 10% for
government loans.
We argue that these values represent reasonable risk tolerances
by approxi-
mating the observed delinquency rates in these segments
between 1999 and
2001.
The combination of scorecards and cutpoints creates working
facsimiles of
modern AUS, and we apply these systems to both the full and
target pop-
ulations.3 For this exercise, our “target” population is defined
as borrowers
with loan-to-value (“LTV”) ratios of 90% or above, with FICO
scores of 720
or below or missing, and who are located in census tracts with
median in-
comes below 80% of area median income. This group is
generally reflective
of “underserved” borrowers for whom there is particular policy
concern.
We find that automated underwriting, with a judicious
combination of score-
card and cutpoint choice, offers a potentially valuable tool for
balancing the
tensions of extending credit at acceptable risks. One approach
entails using
scorecards that mix the through-the-cycle and stress scorecard
46. approaches
to post-origination values of key economic variables. Moving
closer to a
through-the-cycle scorecard provides more focus on access to
credit. Moving
closer to a stress scorecard provides more focus on the control
of risk. The
second approach is to adjust the cutpoint—more relaxed
cutpoints allow for
higher levels of default while providing more access, tighter
cutpoints have
accept fewer borrowers while allowing less credit risk.
Previous Literature
A considerable body of research has examined outcomes from
the mortgage
market crisis during the past decade. Of particular relevance for
this research
3We weight the data using weights based on the proportion of
the target population in
the Home Mortgage Disclosure data (“HMDA”) to ensure that
the target population
in our data is representative of the target population in HMDA.
This allows us to draw
inferences to the full population.
A Tale of Two Tensions 997
are studies that examine specific underwriting standards and
products that
may be intended for different segments of the population, or
that address the
47. balancing of access to credit and credit risk.
A recent paper by Quercia, Ding, and Reid (2012) specifically
addresses the
balancing of credit risk and mortgage access for borrowers—the
two tensions
on which we focus. Their paper narrowly focuses on the
marginal impacts of
setting QRM product standards more stringently than those for
QM.4 They
find that the benefits of reduced foreclosures resulting from the
more stringent
product restrictions on “LTV” ratios, debt-to-income ratios
(“DTI”) and credit
scores do not necessarily outweigh the costs of reducing
borrowers’ access
to mortgages, as borrowers are excluded from the market.
Pennington-Cross and Ho (2010) examine the performance of
hybrid and ad-
justable rate mortgages (ARMs). After controlling for borrower
and location
characteristics, they find that high default risk borrowers do
self-select into
adjustable rate loans and that the type of loan product can have
dramatic im-
pacts on the performance of mortgages. They find that interest
rate increases
over 2005–2006 led to large payment shocks and with house
prices declin-
ing rapidly by 2008, only borrowers with excellent credit
history and large
amounts of equity and wealth could refinance.
Amromin and Paulson (2009) find that while characteristics
such as LTV,
48. FICO score and interest rate at origination are important
predictors of defaults
for both prime and subprime loans, defaults are principally
explained by house
price declines, and more pessimistic contemporaneous
assumptions about
house prices would not have significantly improved forecasts of
defaults.
Courchane and Zorn (2012) look at changing supply-side
underwriting stan-
dards over time, and their impact on access to credit for target
populations
of borrowers.5 They use data from 2004 through 2009,
specifically focusing
on the access to and pricing of mortgages originated for
African-American
and Hispanic borrowers, and for borrowers living in low-income
and minor-
ity communities. They find that access to mortgage credit
increased between
2004 and 2006 for targeted borrowers, and declined
dramatically thereafter.
The decline in access to credit was driven primarily by the
improving credit
mix of mortgage applicants and secondarily by tighter
underwriting standards
4For details of the QRM, see Federal Housing Finance Agency,
Mortgage Market Note
11-02. For details of the QM, see
http://files.consumerfinance.gov/f/201310_cfpb_qm-
guide-for-lenders.pdf.
5See also Courchane and Zorn (2011, 2014) and Courchane,
Dorolia and Zorn (2014).
49. 998 Courchane, Kiefer and Zorn
associated with the replacement of subprime by FHA as the
dominant mode
of subprime originations.
These studies all highlight the inherent tension between access
to mortgage
credit and credit risk. They also stress the difficulty in finding
the “cor-
rect” balance between the two, and suggest the critical
importance of treat-
ing separately the three mortgage market segments—prime,
subprime and
government-insured (FHA)—because of the different borrowers
they serve
and their differing market interactions. The research also
provides some op-
timism that a careful examination of recent lending patterns will
reveal op-
portunities for responsibly extending credit while balancing
attendant credit
risks.
Data
Our analysis uses CoreLogic data for mortgages originated
between 1999
and 2009. The CoreLogic data identify prime (including Alt-A),
subprime
and government loans serviced by many of the large, national
mortgage
servicers. These loan-level data include information on
borrower and loan
50. product characteristics at the time of origination, as well as
monthly updates
on loan performance through 2012:Q3. Merged to these data are
annual
house price appreciation rates at a ZIP code level from the
Freddie Mac
Weighted Repeat Sales House Price Index, which allow us to
update borrower
home equity over time.6 We prefer this house price index to the
FHFA’s,
as the latter are not available at the ZIP code level. The
CoreLogic data
do not provide Census tract information, so we use a crosswalk
from ZIP
codes to 2000 Census tracts.7 We also merge in county-level
unemployment
rates from the Bureau of Labor Statistics, which are seasonally
adjusted by
Moody’s Analytics.8 Finally, we include changes in the
conventional mortgage
market’s average 30-year fixed mortgage (“FRM”) rate reported
in Freddie
Mac’s Primary Mortgage Market Survey.9
The CoreLogic data are not created through a random sampling
process and
so are not necessarily representative of the overall population,
or our target
6While these data are not publicly available, the metro/state
indices can be found
which are available at:
http://www.freddiemac.com/finance/fmhpi/.
7Missouri Census Data Center, available at:
http://mcdc.missouri.edu/
websas/geocorr12.html.
51. 8The unemployment rate is from the BLS Local Area
Unemployment Statistics
(http://www.bls.gov/lau/).
9These data are available publicly at:
http://www.freddiemac.com/pmms/pmms30.htm.
A Tale of Two Tensions 999
population. This is not a problem for estimating our
delinquency model, but it
does create concern for drawing inference with our scorecards.
To address this
potential concern, we apply appropriate postsample weights
based on HMDA
data to enhance the representativeness of our sample. We
develop weights by
dividing both the HMDA and the CoreLogic data into
categories, and then
weight so that the distribution of CoreLogic loans across the
categories is the
same as that for HMDA loans. The categories used for the
weighting are a
function of loan purpose (purchase or refinance), state, year of
origination and
loan amount. Because we rely on a postsample approach and
cannot create
categories that precisely define our target population, our
weighting does not
ensure representativeness of the CoreLogic data for this group.
Nevertheless,
it likely offers a significant improvement over not weighting.
We also construct a holdout sample from our data to use for
inference. This
52. ensures that our estimated models are not overfitted. The
holdout sample was
constructed by taking a random (unweighted) sample of 20% of
all loans in
our database. All summary statistics and estimation results
(Tables 1 and 2
and Appendix) are reported based on the unweighted 80%
estimation sample.
Consistent with our focus on identifying responsible credit
opportunities, we
restrict our analysis to first lien, purchase money mortgage
loans. Summary
statistics for the continuous variables used in our delinquency
estimation are
found in Table 1. Table 2 contains summary statistics for the
categorical
variables.
As shown in Table 1, the average LTV at origination is 97% for
government
loans. This is considerably higher than for the prime market,
where first
lien loans have LTVs less than 80%, on average.10 We also
observe the
expected differences in FICO scores, with an average FICO
score in the prime
sector of 730, 635 for subprime and 674 for government loans.
The prime
market loan amount (i.e., unpaid principal balance, or UPB, at
origination)
averages $209,000 with the government loan amount the lowest
at a mean of
$152,000. The mean value in the subprime population is below
that for prime
at $180,000. DTI ratios do not differ much between prime and
government
53. loans, and the DTI for subprime is unavailable in the data. As
DTI is a key
focus in the efforts of legislators to tighten underwriting
standards, we use it
when available for estimation. The equity measures post-
origination reflects
the LTV on the property as house prices change in the area.
All three markets faced significant house price declines, as
captured by the
change in home equity one, two or three years after origination.
For all three
10The mean LTV for subprime mortgages is surprisingly low at
83%, although this
likely reflects the absence of recording second lien loans, which
would lead to a higher
combined LTV.
1000 Courchane, Kiefer and Zorn
T
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le
1
�
S
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ar
95. ev
.
2.
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2.
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2.
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2.
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1002 Courchane, Kiefer and Zorn
Table 2 � Summary statistics for categorical (class) variables
(80% estimation
sample)—statistics not weighted.
All Prime Subprime Government
ARM 12.60% 48.50% 4.72% 14.91%
Balloon 0.39% 4.91% 0.05% 0.82%
FRM-15 7.68% 1.61% 1.16% 5.63%
FRM-30 68.25% 22.31% 90.14% 67.79%
96. FRM-Other 4.48% 1.71% 2.73% 3.81%
Hybrid 6.59% 20.97% 1.20% 7.04%
Other 41.05% 33.13% 43.57% 40.71%
Retail 33.70% 21.20% 22.12% 29.87%
Wholesale 25.25% 45.67% 34.31% 29.42%
Full Documentation 29.83% 49.38% 41.80% 34.52%
Missing 38.89% 18.44% 42.30% 37.35%
Not Full Documentation 31.27% 32.19% 15.90% 28.13%
Owner Occupied 83.43% 85.88% 91.84% 85.48%
Not Owner Occupied 16.57% 14.12% 8.16% 14.52%
Condo 13.82% 7.75% 6.97% 11.70%
Single Family 86.18% 92.25% 93.03% 88.30%
mortgage market segments, post-origination equity measures
(post-origination
estimated LTV) averaged over 90%. Post-Origination
unemployment rates are
highest, on average, in the geographies with government loans,
although the
differentials among market segments fell after three-year post-
origination.
Table 2 presents the summary statistics for the categorical
(class) variables
in our sample. Some expected results emerge. The subprime
segment has the
largest share of loans originated through the wholesale channel
at 45.7%,
while the wholesale share for the prime segment was only
25.2%. Nearly half
(48.5%) of subprime loans were “ARM” loans, while only
22.3% of subprime
loans were the standard 30-year FRM product. In contrast,
69.1% of prime
loans were 30-year FRMs and an additional 7.8% were 15-year
FRMs. Nearly
97. all of the government loans (91.2%) were 30-year FRMs. The
documentation
figures are somewhat surprising, with nearly half (49.4%) of
subprime loans
indicating full documentation. The low share of full
documentation loans in
the prime sector (about 30%) likely reflects the inclusion of
Alt-A loans,
which are defined to be prime loans in the CoreLogic data.11
In our analyses, we focus on access to credit and credit risk
outcomes for all
borrowers. However, many homeownership and affordable
lending programs
11Historically, Alt-A loans were originated through prime
lenders, offering their more
credit worthy customers a simpler origination process.
A Tale of Two Tensions 1003
focus more narrowly on assessing opportunities for responsibly
extending
mortgage credit to borrowers with low down payments and poor
credit his-
tories, or who are otherwise underserved by the prime market
(“target pop-
ulation”). As a result of long standing public policy objectives
focused on
the value of homeownership, both government insured mortgage
programs
(such as FHA) and the GSEs have long held missions to meet
the needs of
underserved borrowers, including low income, minority and
98. first-time home-
buyers.12 Programs meeting this mission are tasked with
balancing access to
credit for borrowers with any attendant increases in credit risk.
Therefore, aside from our focus on the opportunities provided to
the full pop-
ulation of borrowers, we also provide an analysis of scorecard
outcomes for a
specific target population. We define this target population as
borrowers who
receive first lien, purchase money mortgages on owner-occupied
properties
located in census tracts with median incomes below 80% of the
area median
income, with FICO scores less than or equal to 720 and with
LTV ratios
greater than or equal to 90%.
Limiting our analysis to borrowers who live in lower income
census tracts is
especially constraining, as many borrowers with high LTVs and
lower FICO
scores live elsewhere. However, our data lack accurate income
measures, and
public policy considerations encourage us to include an income
constraint in
our definition of the target population.13 As a consequence,
loans to target
borrowers account for a small percentage of the total loans
made during our
period of study (roughly 4%). We can be assured, however, that
our target
population is composed of borrowers who are an explicit focus
of public
policy.
99. Figure 1 provides a graphical illustration of the HMDA-
weighted distribution
of target population loans in our sample across the three market
segments.
The dramatic shift over time in the share going to the
government sector is
obvious, as is the reduction in the number of loans originated to
the target
population by all three segments, combined, post-crisis.
12Both the Community Reinvestment Act (CRA) and the
Federal Housing Enterprises
Financial Safety and Soundness Act of 1992 (the 1992 GSE Act)
encouraged mortgage
market participants to serve the credit needs of low- and
moderate-income borrowers
and areas.
13For example, GSE affordable goals are stated with respect to
low- and moderate-
income borrowers and neighborhoods.
1004 Courchane, Kiefer and Zorn
Figure 1 � Target population by year and market segment
(weighted).
Analysis
Our analysis begins with the estimation of mortgage
performance models over
the crisis period. We use loan-level origination data from 1999
through 2009
to estimate models of loans becoming 90-days or more
100. delinquent in the first
three years after origination. These models include standard
borrower and loan
characteristics at origination, as well as control variables
measuring changes
in house prices, unemployment rates and interest rates post-
origination. They
also include several interaction terms for the borrower, loan and
control
variables.
We then use our estimated delinquency models to specify two
underwrit-
ing scorecards—a through-the-cycle scorecard and a stress
scorecard.14 We
next apply various cutpoints (risk thresholds) to our scorecards
to define
levels of acceptable risk. By definition, loans with risk scores
(delinquency
probabilities) at or below the cutpoint are assumed to be within
appropriate
(acceptable) risk tolerances.
The scorecard and cutpoint combinations provide working
prototypes of an
AUS. Our final step applies these prototypes to the full and
target populations
and assesses the results.
Estimating the Models
We estimate three separate delinquency models based on an
80% sample
of first-lien, purchase money mortgage loans in our data.
Separate models
101. 14Additional scorecards constructed using “perfect foresight”
and macroeconomic
forecasts are available from the authors upon request.
A Tale of Two Tensions 1005
were estimated for prime loans (including Alt-A loans),
subprime loans and
government loans, using an indicator provided in the CoreLogic
data to as-
sign each loan to its appropriate segment.15 We estimate
separate models for
each market sector because we believe that there is clear market
segmenta-
tion in mortgage lending. In the conventional market the
lenders, industry
practices, market dynamics and regulatory oversight have
differed between
the prime and subprime segments.16 A similar distinction exists
between the
conventional and government segments—the latter focuses on
first-time bor-
rowers and lower income households. Moreover, acceptable risk
tolerances
will necessarily vary across segments, as may concerns
regarding access to
credit.
Our process differs from the typical construction of
underwriting …
CHAPTER 4 Fathoming the Fundamentals 65
102. Chapter 4
IN THIS CHAPTER
» Understanding the basic building
blocks of mortgages
» Looking at mortgage terminology
» Finding out about prepayment
penalties and private mortgage
insurance
Fathoming the
Fundamentals
Like brain surgeons, nuclear physicists, pizza makers, and all
other highly skilled professionals, financial wizards have
developed their own weird customs, practices, and terminology
over the centuries. If you want to do
business with financiers, knowing how to speak their language
helps, because
they rarely bother to speak yours. A steady diet of jumbo loan
with points au gratin
on the side and the infamous house specialty, prepayment
penalty flambé, for des-
sert leaves even the hardiest borrower intellectually constipated.
Worse, some unscrupulous lenders may use your fiscal
ignorance to maneuver you
into getting a loan that’s good for them but bad for you. Even
though an assort-
ment of loans may outwardly appear to be equally attractive,
they’re usually
not — not by a long shot.
105. Money isn’t magical. It’s a commodity or consumer product like
HDTVs and toast-
ers. Lending institutions such as banks, savings and loan
associations (S & Ls),
and credit unions get their raw material (money) in the form of
deposits from
millions of people just like you. Then they bundle your cash
into neat little pack-
ages called loans, which they sell to other folks who use the
money to buy cars,
college educations, and cottages. Lenders make their profit on
the spread (differ-
ential) between what they pay depositors to get money and what
they charge bor-
rowers to use the money until the lender is fully repaid.
All loans have the following four basic components:
» Principal: Even though both words are spelled and
pronounced the same
way, the principal we’re referring to isn’t that humorless old
coot who ruled
your high school with an iron fist. We’re talking about a sum of
money owed
as a debt: the dollar amount of the loot you borrow to acquire
whatever it is
that your heart desires.
» Interest: No linguistic confusion here — interest is what
lenders charge you to
use their product: money. It accumulates over time on the
unpaid balance of
money you borrowed (the outstanding principal) and is
expressed as a
percentage called the interest rate. For instance, you may be
106. paying an interest
rate of 19.8 percent or more on the unpaid balance of your
credit card debt.
(We recommend that you pay off credit card balances as soon as
possible!)
Consumer interest for outstanding balances such as credit card
debt and a car
loan is not deductible on your federal or state income tax return.
Interest paid
on a home loan, conversely, can be used to reduce your state
and federal
income tax burdens. There’s a major difference in how you
borrow money.
Understanding these income tax write-off rules can save you big
bucks.
» Term: All good things come to an end sooner or later. A
loan’s term is the
amount of time you’re given by a lender to repay money you
borrow.
Generally speaking, small loans have shorter terms than large
loans. For
instance, your friendly neighborhood credit union may give you
only four
years to pay back a $20,000 car loan. That very same lender
will graciously
fund a loan with a 30-year term so you have plenty of time to
repay the
$200,000 you borrow to buy your dream home.
Lenders allow more time to pay back large loans to make the
monthly
payments more affordable. For example, you’d spend $568 a
month to repay
a $100,000 loan with a 5.5 percent interest rate and a 30-year
108. s,
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CHAPTER 4 Fathoming the Fundamentals 67
payment is $250 per month higher, you’d pay far less interest
on it over the
life of the loan:
$818/month × 180 months for a $100,000 loan repayment =
$47,240 in
109. interest over 15 years
versus
$568/month × 360 months for a $100,000 loan repayment =
$104,480
interest over 30 years
Don’t let a seemingly low monthly payment (with a longer-term
loan) fool you
into paying a lot more interest over the long haul.
» Amortization: Amortization is an ominous word lenders use
to describe the
tedious process of liquidating a debt by making periodic
installment payments
throughout the loan’s term. Loans are amortized (repaid) with
monthly
payments consisting primarily of interest during the early years
of the loan
term and principal, which the lender uses to reduce the loan’s
balance. If your
loan is fully amortized, it will be repaid in full by the time
you’ve made your
final loan payment. You’ll gasp in astonishment and sadness
when you read
Appendix B and see with your own eyes how long it takes to
repay half of the
original loan amount.
Deciphering Mortgage Lingo
Just for the heck of it, ask the next thousand people you meet
what a mortgage is.
Approximately 999 of them will tell you that it’s a loan used to
buy a home.
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68 PART 2 Locating a Loan
In case you’re curious, anything that isn’t real property is
classified as personal
property. Moveable or impermanent possessions such as stoves,
refrigerators,
dishwashers, washers and dryers, window treatments, flooring,
chandeliers, and
fireplace screens are examples of personal property items that
are frequently
included in the sale of real property.
Mortgages encumber (burden) real property by making it
security for the repay-
ment of a debt. A first mortgage ever so logically describes the
very first loan
secured by a particular piece of property. The second loan
secured by the same
property is called a second mortgage, the third loan is a third
mortgage, and so on.
You may also hear lenders refer to a first mortgage as the senior
mortgage. Any
subsequent loans are called junior mortgages. Money imitates
life.
This type of financial claim on real property is called a lien.
113. Proper liens invariably
have two integral parts:
» Promissory note: This note is the evidence of your debt, an
IOU that specifies
exactly how much money you borrowed as well as the terms and
conditions
under which you promise to repay it.
» Security instrument: If you don’t keep your promise, the
security instrument
gives your lender the right to take steps necessary to have your
property sold
to satisfy the outstanding balance of the debt. The legal process
triggered by
the security device is called foreclosure. We sincerely and
fervently hope that
the closest you ever get to foreclosure is reading about it in this
book (see
Chapter 14 for details).
From a lender’s perspective, each junior mortgage (subsequent
mortgage after the
first loan on the property) is increasingly risky, because in the
event of a foreclo-
sure, mortgages are paid off in order of their numerical priority
(seniority). In
plain English, the second mortgage lender doesn’t get one cent
until the first
mortgage lender has been paid in full. If a foreclosure sale
doesn’t generate
enough money to pay off the first mortgage, that’s tough luck
for the second
lender. Due to the added risk, lenders charge higher interest
rates for junior
mortgages.
116. Mortgages as security instruments
As a legal concept, mortgages have been around centuries
longer than deeds of
trust, their relatively newfangled siblings. That’s why folks
nearly always refer to
real property loans as mortgages even if they live in one of the
many states where
a deed of trust is the dominant security instrument. The other
states use mort-
gages as security instruments.
The seniority of mortgages explains why they’re the prevalent
security instru-
ment in many states east of the Mississippi River, the first part
of the country to
be settled. Check with your real estate agent or lender to find
out which kind of
security instrument is used where your property is located.
Here’s how mortgages operate:
» Type of instrument: A mortgage is a written contract that
specifies how your
real property will be used as security for a loan without actually
delivering
possession of the property to your lender.
» Parties: A mortgage has two parties — the mortgagor (that’s
you, the
borrower) and the mortgagee (the lending institution). You
don’t get a
mortgage from the lender. On the contrary, you give the lender
a mortgage on
your property. In return, the mortgage holder (lender) loans you
the money
you need to purchase the property.
117. » Title: Title refers to the rights of ownership you have in the
property. A
mortgage requires no transfer of title. You keep full title to your
property.
» Effect on title: The mortgage creates a lien against your
property in favor of
the lending institution. If you don’t repay your loan, the lender
usually has to
go to court to force payment of your debt by instituting a
foreclosure lawsuit.
If the judge approves the lender’s case against you, the lender is
given
permission to hold a foreclosure sale and sell your property to
the highest
bidder.
Deeds of trust as security instruments
Mortgages and deeds of trust are both used for exactly the same
purpose: They
make real property security for money you borrow. However,
mortgages and deeds
of trust use significantly different methods to accomplish that
same purpose. The
following list highlights the features of a deed of trust:
» Type of instrument: The security given isn’t a written
contract. It’s a special
kind of deed called a trust deed.
Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage
management for dummies. Retrieved from
http://ebookcentral.proquest.com
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70 PART 2 Locating a Loan
» Parties: The trust deed involves three parties: a trustor (you,
the borrower), a
beneficiary (the lender), and a trustee (a neutral third party such
as a title
insurance company or lawyer who won’t show any favoritism to
you or the
lender).
» Title: The trust deed conveys your property’s naked legal
title to the trustee,
who holds it in trust until you repay your loan. Don’t worry,
dear reader; you
retain possession of the property. Your lender holds the actual
trust deed and
note as evidence of the debt.
120. » Effect on title: Like a mortgage, a trust deed creates a lien
against your
property. Unlike a mortgage, however, the lender doesn’t have
to go to court
to foreclose on your property. In most states, the trustee has
power of sale,
which can be exercised if you don’t satisfy the terms and
conditions of your
loan. The lender simply gives the trustee written notice of your
default and
then asks the trustee to follow the foreclosure procedure
specified by the
deed of trust and state law. Most lenders prefer having their
loans secured by
a deed of trust. Why? Compared to a mortgage, the foreclosure
process is
much faster and less expensive.
For simplicity’s sake in this book, we use mortgage, deed of
trust, and the loan you
get to buy a home as interchangeable terms. You, however, must
promise us that
you’ll always remember the difference and who explained it to
you!
Eyeing Classic Mortgage Jargon Duets
Just because you can speak mortgage fluently doesn’t mean
you’ll be able to com-
municate with lenders. The following sections offer more
essential loan jargon.
Consider these dynamic duos: mortgage loan options such as
fixed or adjustable
rate, government or conventional, primary or secondary,
conforming or jumbo,
and long- or short-term.
123. CHAPTER 4 Fathoming the Fundamentals 71
Even though you have a fixed-rate mortgage, your monthly
payment may vary
if you have an impound account (for folks who put less than 20
percent cash
down when purchasing their homes). In addition to the monthly
loan pay-
ment, some lenders collect additional money each month for the
prorated
monthly cost of property taxes and homeowners insurance. The
extra money
is put into an impound account by the lender, who uses it to pay
the borrow-
er’s property taxes and homeowners insurance premiums when
they’re due.
If either the property tax or the insurance premium happens to
change (and
they do typically increase annually), the borrower’s monthly
payment is
adjusted accordingly.
» Adjustable: Either the interest rate or the monthly payment or
both interest
rate and monthly payment change (adjust) with this kind of
loan. The follow-
ing are examples of adjustable mortgages:
• An adjustable-rate mortgage (ARM) is a loan whose interest
rate can vary
during the loan’s term.
• A hybrid loan merges an FRM and an ARM. The hybrid loan’s
124. interest rate
and monthly payment are fixed for a specific period of time,
such as five
years, and then the mortgage converts into an ARM for the
remainder of
the loan term.
Just because a mortgage’s monthly payment is fixed doesn’t
mean the loan is a
good one. For instance, some ARMs have monthly payments
that don’t always
change, even though the loan’s interest rate can change and
increase. This can
lead to negative amortization, an unpleasant situation where the
loan balance
increases every month, even though you faithfully make the
monthly loan pay-
ments. After the subprime crisis, few lenders offer negative
amortization loans.
You can find an in-depth analysis of ARMs and negative
amortization in Chapter 5.
For now, be advised that we strongly urge you to avoid loans
that have the poten-
tial for negative amortization.
Government or conventional loans
Through either insuring or guaranteeing home loans by an
agency of the federal
government, Uncle Sam is a major player in the residential
mortgage market. Such
mortgages are called, you guessed it, government loans. The
remaining residential
mortgages originated in the United States are referred to as
conventional loans.
Here’s a quick recap of government loans:
127. FHA is not a moneylender. Borrowers must find an FHA-
approved lender such
as a credit union, bank, or other conventional lending institution
willing to
grant a mortgage that the FHA then insures. Not all commercial
lenders
choose to participate in FHA loan programs due to their
complexities.
Depending on which county within the United States the home
you want to
buy is located, you may be able to get an FHA-insured loan of
up to $636,150.
The minimum loan amount under this program is $275,665 with
a $636,150
maximum as of 2017. The loan limit varies based on the cost of
housing in each
area. (For current, up-to-date lending limits by area, visit the
FHA Mortgage
Limits web page at
https://entp.hud.gov/idapp/html/hicostlook.cfm.)
» Department of Veterans Affairs (VA): Congress passed the
Serviceman’s
Readjustment Act, commonly known as the GI Bill of Rights, in
1944. One of its
provisions enables the VA to help eligible people on active duty
and veterans
buy primary residences. Like the FHA, the VA has no money of
its own. It
guarantees loans granted by conventional lending institutions
that participate
in VA mortgage programs. This can be an excellent program if
you qualify.
» U.S. Department of Agriculture (USDA): The USDA oversees
128. the Rural
Housing program. This is a popular program for owner-occupied
homes
outside metropolitan areas. The loans offer $0 down and
affordable mortgage
insurance. However, there are restrictions on location, income,
and assets. If
you qualify, this is usually your best $0 down option, besides a
VA loan.
» Farmers Home Administration (FmHA): Like the FHA, VA,
and USDA, the
FmHA isn’t a direct lender. Despite its name, you don’t have to
be a farmer to
get a Farmers Home Administration loan. You do, however,
have to buy a
home in the sticks. The FmHA insures mortgages granted by
participating
lenders to qualified buyers who live in rural areas.
FHA, VA, and FmHA mortgages have more attractive
features — little or no cash-
down payments, long loan terms, no penalties if you repay your
loan early, and
lower interest rates — than conventional mortgages. However,
these loans aren’t
for everyone. Government loans are targeted for specific types
of homebuyers,
have maximum mortgage amounts established by Congress, and
may require an
inordinately long time to obtain loan approval and funding. In a
desirable urban or
hot market where homes generate multiple offers, buyers using
government loans
often lose out to people using conventional mortgages that can
be funded quicker.
131. funds, insurance companies, and other private investors as well
as certain gov-
ernment agencies in the secondary mortgage market. Why do
mortgage lenders sell
mortgages they originate? They want to make a profit and to
obtain more funds
to lend.
Uncle Sam is an extremely important force in the secondary
mortgage market
through two federally chartered government organizations —
the Federal National
Mortgage Association (FNMA, or Fannie Mae) and the Federal
Home Loan Mortgage
Corporation (FHLMC, endearingly known as Freddie Mac). One
of the primary
missions of Fannie Mae and Freddie Mac is to stimulate
residential housing con-
struction and home purchases by pumping money into the
secondary mortgage
market.
Fannie Mae and Freddie Mac boost home purchases and
construction by purchas-
ing loans from conventional lenders and reselling them to
private investors.
These government programs are far and away the two largest
investors in U.S.
mortgages.
These programs aren’t meant to subsidize rich folks. To that
end, Congress estab-
lishes upper limits on mortgages Fannie Mae and Freddie Mac
are authorized to
purchase. Table 4-1 shows the 2017 maximum mortgage
amounts for one- to
132. four-unit properties. Note: These are the general loan limits for
most areas, but if
you’re buying a property in a so-called “high-cost” area, the
maximum mortgage
amounts are 50 percent higher than those in Table 4-1.
Congress periodically readjusts these maximum mortgage
amounts to reflect
changes in the prevailing average price of property. Any good
lender can fill you
in on Fannie Mae’s and Freddie Mac’s current loan limits.
TABLE 4-1 2017 Fannie Mae and Freddie Mac Maximum
Mortgage
Amounts for One- to Four-Unit Properties
# of Units Continental U.S.
Alaska, Hawaii, Guam &
U.S. Virgin Islands
1 $424,100 $636,150
2 $543,000 $814,500
3 $656,350 $984,525
4 $815,650 $1,223,475
Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage
management for dummies. Retrieved from
http://ebookcentral.proquest.com
Created from apus on 2020-05-04 20:27:27.
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74 PART 2 Locating a Loan
Conforming or jumbo loans
This delicious tidbit of information can save you big bucks:
Conventional mort-
gages that fall within Fannie Mae’s and Freddie Mac’s loan
limits are referred
to as conforming loans. Mortgages that exceed the maximum
permissible loan
amounts are called jumbo loans or nonconforming loans.
When Congress passed the Economic Stimulus Act of 2008 (The
Act), it also cre-
ated a brand-new type of mortgage neatly notched between a
conforming loan
and a jumbo loan. We now have three tiers of mortgages:
» True conforming loans include loan amounts up to $424,100.
These loans,
also called traditional conforming loans, have the lowest
135. interest rates.
» Jumbo conforming loans encompass loan amounts from
$424,100 up to a
maximum of $636,150 and are designed for high-cost areas (the
precise
amount varies by area). Some lenders call these conforming
jumbos, super
conforming, or jumbo light loans. Whatever. Loans of this size
generally have
interest rates anywhere from half a percent to a full percent (or
more) higher
than the true conforming loan.
» True jumbos are loans that exceed $636,150. As you’d
expect, the largest
loans are also the most expensive. Their interest rates usually
run a full
percent point or more above jumbo conforming loans.
Fannie Mae and Freddie Mac both imposed tougher qualifying
standards on jumbo
conforming loans than they have for true conforming loans.
Some examples of
these tougher standards: Jumbo conforming loans are limited to
single-family
dwellings, require that you have at least a 700 FICO score if
your loan-to-value
(LTV) ratio exceeds 75 percent (for Freddie Mac) or 80 percent
(for Fannie Mae),
and specify that monthly payments on your combined total debt
can’t exceed
45 percent of your income.
Fannie’s and Freddie’s jumbo conforming loan programs were
originally sched-
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CHAPTER 4 Fathoming the Fundamentals 75
conforming and jumbo FRMs is higher; when mortgage money
is plentiful, the
spread decreases.
If you find yourself slightly over Fannie Mae’s and Freddie
Mac’s limit for either
true conforming loans or the jumbo conforming loans, don’t
despair. You can
either buy a slightly less expensive home or increase your cash
down payment
just enough to bring your mortgage amount under their loan
limits or possibly use
a small second mortgage. In Chapter 2, we include a lengthy
list of financial
resources you may be able to tap for additional cash.
Long-term or short-term mortgages
Any loan that’s amortized more than 30 years is considered to
be a long-term
mortgage. Reversing that guideline, short-term mortgages are
loans that must be
repaid in less than 30 years. Wow. Definitions that actually
make sense.
These standards harken back to less complicated times before
139. the late 1970s when
people could get any kind of mortgage they wanted as long as it
was a 30-year,
fixed-rate loan. Back then, choices for a short-term mortgage
were nearly as
limited. Homebuyers could have an FRM with either a 10- or
15-year term or a
balloon loan with, for example, a 30-year amortization schedule
and a 10-year due
date. They made the same monthly principal and interest
payments for ten years
and then got hammered with a massive balloon payment to pay
off the entire
remaining loan balance. (The reality was that homeowners
simply had to refi-
nance the remaining loan balance through a new loan either with
their current
lender or another lender.)
The total interest charges on short-term mortgages are less than
total interest
paid for equally large long-term loans at the same interest rate
because you’re
borrowing the money for less time. Because a lender has less
risk with a short-
term loan, such loans usually have lower interest rates than
comparable long-term
mortgages. For instance, the interest rate on a conforming 15-
year, fixed-rate
mortgage is generally about ½ a percentage point lower than a
comparable
30-year FRM.
In our prior example (see the section “Grasping Loan Basics:
Principal, Interest,
Term, and Amortization”), we say that you’d spend $568 a
140. month to repay a
$100,000 FRM with a 5.5 percent interest rate and a 30-year
term. The same FRM
with a …
