Mortgage

What is a mortgage ?

It’s a pledge of property, as security for debt.

Emergence Of Mortgage Industry

Prior to 1930:

✒ Mortgage Industry did not exist

✒ Schedule for payment did not exist

✒ Shorter loan tenure

Emergence Of Mortgage Industry

Depression of 1930s

The depression had a catastrophic impact on the economy

✒Unemployment

✒Stock market crashed

✒Foreclosure
Emergence Of Mortgage Industry
Setup of Government Organizations

✒The Federal Housing Administration(FHA)

✒The Federal Deposit Insurance Corporation (FDIC)

✒The Federal Savings and Loan Insurance Corporation(FSLIC)

Goal of the Organizations

✒To establish a mortgage market to increase funds for lending

✒To encourage home ownership

 Mortgage Industry
The residential real estate lending industry comprises of two
distinct areas

✒ Primary Market- is that portion of mortgage market where

origination of mortgages take place

✒Secondary Market-is that portion of mortgage market where sale

and purchase of mortgages take place
Players in the Primary Market
 Borrower- Applies for and receives a loan in the form of a
mortgage with the intention of repaying the loan in full.

 Lender-Lends money to the borrower for a specified period of time

at a specified interest rate

 Seller-Sells the property to the borrower at the market value

 Broker-Assist the borrowers in the loan selection process,

completing the loan application and direct them to suitable lenders
to fund the mortgage
Players in the Secondary Market

Fannie Mae (Federal National Mortgage Association)

Ginnie Mae (Government National Mortgage Association)

Freddie Mac (Federal Home Loan Mortgage Corporation)

Private investors
Role of Secondary Market in the
Economy
✒Creates liquidity

✒Facilitates the movement of Capital from surplus

regions to low capital regions

✒Moderates regional differences in interest rates

Primary and Secondary Market
Primary and Secondary Market
Primary and Secondary Market
Type of Loan Programs
 Government Loans -Any loan that is guaranteed by the
government

➪FHA -A loan which is guaranteed by Federal Housing

Administration

➪VA ( Veterans Affairs )- A low-cost loan for U.S. veterans

that is partially guaranteed by the Department of Veterans
Affairs (VA)
Type of Loan Programs
 Conventional Loans- Loans granted by non-governmental
lenders.There are two types of conventional loans

➪Conforming loan- A loan that conforms to the guidelines

established by Fannie Mae and Freddie Mac. These guidelines
establish the maximum loan amount, down payment, borrower
credit & income requirements, and suitable properties.

➩Nonconforming loan- A loan that does conform to the

guidelines established by Fannie Mae or Freddie Mac is called a
non-conforming loan. A loan that is larger than the conforming loan
limit is called a Jumbo loan
 QUIZ TIME !!!

WHAT ARE THE TWO DISTINCT

AREAS THAT MORTGAGE INDUSTRY
IS COMPRISED OF ?
 QUIZ TIME !!!
TRUE OR FALSE

Freddie Mac insures FHA And VA

loans
 QUIZ TIME !!!

LOAN THAT MEETS THE MAXIMUM

LIMIT OF $322700 (single family
residence) IS CALLED __________
 QUIZ TIME !!!

WHICH MARKET IS IT ????????

MODERATES NEGATIVE EFFECTS

OF THE CAPITAL SHORTAGE
 QUIZ TIME !!!

CREDIT UNION IS A_________

IN THE PRIMARY MARKET
 QUIZ TIME !!!

WHAT IS A JUMBO LOAN ?

 QUIZ TIME !!!

LOANS WITH LTV GREATER THAN

80 % WOULD REQUIRE --------
 Types of Mortgage Products
Fixed Rate/Fixed Payment - A loan that has interest rate and
monthly payment fixed over the life of the loan
Fixed rate/Changing Payment Mortgage(Buydown)- A
loan where the buyer or seller contributes funds in return for a
lower interest rate e.g 2-1 buydown or 3-2-1 buydown
Balloon - Balloons are amortized like 30 year fixed rate
mortgages, but after first 5 or 7 years , the entire loan balance
has to be repaid
Adjustable Rate Mortgage (ARM) - A loan that has a
fluctuating interest rate and monthly payment E.g 1 year ARM, 2/1
ARM, 3/1ARM etc.
.
Type of Mortgage Products
Fixed Rate Fixed Payment - A loan that has interest rate and
monthly payment fixed over the life of the loan which fully
amortizes over the life of the loan.

Example
Loan Amount - $100,000
Time Period - 30 Years
Interest Rate - 7%
Monthly Payment - $665
Type of Mortgage Products
Fixed rate/Changing Payment Mortgage(Buydown)- A
loan where the buyer or seller contributes funds in return for a
lower payment rate e.g 2-1 buydown or 3-2-1 buydown
STEP 1 Loan Amount $250,000

Monthly Payment with

Year Buydown Rate Market Rate Monthly Payment
Buydown Rate
with Market Rate
1 5% $1445 7% $1732

2 6% $1587 7% $1732
3-30 7% $1732 7% $1732

STEP 2

Year Monthly Market Payment-Buydown Payment Result

1 ($1732 - $1445)x12 $3444

2 ($1732 - $1587)x12
$1740
3-30 ($1732 - $1732)x12 0

Amount contributed $5184

Type of Mortgage Products
• Balloon - Balloons are amortized like 30 year fixed rate
mortgages, but after first 5 or 7 years , the entire loan balance has
to be repaid
 Type of Mortgage Products
• Adjustable Rate Mortgage (ARM) - A loan that has a
fluctuating interest rate and monthly payment E.g 1 year ARM, 2/1
ARM, 3/1ARM etc.

Components of ARM
Index: An economic indicator that the lender’s use to set an
ARM’s interest rate (1 yr treasury, LIBOR, COFI, etc)
Margin: Amount added to the index to create
the interest rate for a specific period
Loan’s interest Rate 7%
Loan’s Index 5%
Margin 2%
 Components of ARM
• Fully Indexed Accrual Rate (FIAR): The index plus the
margin
• Discount Rate: A one time reduction to make the initial rate
competitive
• Initial Rate / Start Rate/Teaser Rate: It is the interest rate
charged for the first period of the ARM (FIAR-Discount Rate)
• Interim Rate Cap:Limits the amount of upward (and
sometimes downward) adjustment at the time of
adjustment, usually 1% or 2%
• Lifetime Cap: Limits the amount of upward adjustment
over the life of the loan, usually 5% or 6%
• Payment Cap: Limits the amount the PI payment can
adjust from one period to another
Components of ARM
Assume, the the mortgage allows for unlimited changes in the
interest rate but the loan has $50 per year cap on payment increase
Loan amount :$75,000
Interest Rate :11%
Monthly Payment : $714
New Index increases by 2%, therefore new interest rate is13%
New Monthly Payment :$828
Therefore, the increase in monthly payment : $114
However, because of the payment cap, the monthly payment
from 2nd year until the next adjustment period is limited to
$764 per month – Current payment $714 + Cap $50 = $764
 Components of ARM

What is Negative Amortization-Occurs when the monthly

payments are not large enough to pay all the interest due on the loan.
This unpaid interest is added to the unpaid balance of the loan.
The danger of negative amortization is that the home buyer ends up
owing more than the original amount of the loan. Also, in a stable or
declining property value market, the lender collateral position may be
compromised.
Example on ARM
Index : 5.625% Annual Adjustment Cap : 2%
Discount : 1.125% Lifetime Adjustment Cap : 5%
Margin : 2.5%

Calculate the Fully Indexed Rate

•Index + Margin = 8.125%
Calculate the Starter rate
•FIAR - Discount = 7%

Calculate the maximum rate at the end of the first year if the ARM
is 1 Year ARM

•Starter rate + Annual Adjustment = 9%

Example on ARM

Scenario 1

Assume that the interest at the time of adjustment is 6%

•Index + Margin = 6+2.5=8.5

Scenario 2
Assume that the interest at the time of adjustment is 7%

•Index + Margin = 7+2.5=9.5

The rate can only be adjusted to 9%, because the maximum

first year’s rate is 9%
 Type of Mortgage Products
InterestFirst - A 30-year fixed-rate, monthly payment mortgage
that begins as an “interest only” mortgage. At the end of the 15-
year “interest only” period, it becomes fully amortizing.

Requires DU Approve Eligible

Comparison to Fixed Rate/Fixed Payment Mortgage
Original Loan Amount: $100,000.00
Interest Rate: 7%
30-yr fixed rate

Interest Only Payment: $583.33

Principal balance after 15 years interest only payments:
$100,000

PI Payment: $665.30
Principal balance after 15 years PI payments: $74,019.59
 QUIZ TIME

WHAT IS AN ARM ?
 MORTGAGE QUIZ

WHICH IS THE LEAST RISKY

MORTGAGE PRODUCT ?
 QUIZ TIME

FIAR is______________
 QUIZ TIME

A 3/1 ARM WOULD HAVE THE SAME

PAYMENT FOR THE FIRST_______
MONTHS AND THEN WOULD
CHANGE EVERY ________
Purpose of Loan
• Purchase: Loan taken to purchase a residential property
from some other party and acquire a title to it.

• Refinance: Loan taken on a property already owned

to pay off an existing mortgage and/or liquidate equity.

Purpose of Refinance :

➪Take advantage of lower rates

➪To shorten the term of the loan

➪To pay off other debt obligations or make home

improvements
Types of Refinance
 No Cash-out(Freddie) / Limited Cash-out(Fannie)
When the money received from refinance is limited to the funds
needed to pay off the first mortgage, any subordinate liens used in
their entirety to acquire the subject property and reasonable closing
fees AND cash the borrower receives does not exceed the lesser of
$2000 or 2% of the loan amount..
Cash-out Refinance(Debt-Consolidation)
When the purpose of the mortgage loan is for a borrower to pay
off any existing first mortgage balance plus some other debts like
seconds, credit cards, auto loans, other mortgages etc.
Cash-out Refinance(Other)
When the purpose of the mortgage loan is for a borrower to pay off
any existing first mortgage balance (may or may not include any
seconds) plus obtain funds for some personal purpose like pay off
a loan taken from parents, make an investment, college tuition, etc.
Types of Refinance
(a) (b) ( C) (d)=[(b)+(C)]-(a) Type of
Loan Old Mortgage Closing Cost Cash from/to Refinance
Amount Borrower

$200,000 $198,000 $3000 $1000 Limited

Cash Out*

$200,000 $190,000 $3000 -$7000 Cash Out

$200,000 $198,000 $1000 -$1000 Limited

Cash Out*

*Both of these are rate/term refi’s

Purpose of Loan
• Construction to Permanent : Loan taken to payoff the
construction loan (interim financing)

Construction to Permanent could be either Purchase or Refinance

➞Purchase-Loan proceeds will pay off construction loan (interim
financing) taken to purchase the lot and build the house on it
➞Refinance- Loan proceeds will pay off construction loan (interim
financing) taken to build the house. Borrower must own the lot prior to
start of construction and construction loan must be in borrower’s name.
Occupancy Categories

Primary Residence
A residential property physically occupied by the owner for the major
portion of the year, usually more than 6 months

Second Home
These are vacation or weekend single-family homes that the borrower
occupies in addition to his or her principal residence

Investment Property
A property which is owned by the borrower, but not occupied by the
borrower.
Property Type Information
Detached Housing

 PUD(Planned Unit Development): A type of housing

project that has individually owned homes where each
owner has shared ownership of the common areas. A
monthly fee is assessed for upkeep and maintenance of
the common areas.
Manufactured Home : a structure built on a permanent
chassis designed to be used as a dwelling with or without a
permanent foundation
2-4 Unit Property:
•Duplex-Dwelling with 2 units
•Triplex-Dwelling with 3 units
•Quadruplex-Dwelling with 4 units
Property Type Information
Attached Housing :
Townhouse : A row house on a smaller land which has
exterior limits common to similar units (common walls).
And includes ownership of the land.
 Condominium : A building or housing development
where each person owns his or her unit and shares
ownership of common areas, including the land.
(Borrower has no individual ownership of the land)

Co-operative: A housing complex or building

where the borrower becomes a shareholder in
the corporation that owns the property
 QUIZ TIME

Rate /term refinance

Is the other name for ------------

 QUIZ TIME

What is the purpose of loan ???

Borrower takes the loan to purchase

the lot and construct a house on it
 QUIZ TIME

Factory built houses are

called_________
 QUIZ TIME
True or false

In condominium the borrower owns

both the house and the lot
 QUIZ TIME
What kind of property is it ???

Borrower becomes the

shareholder in the corporation
Identify the type of refinance
(a) (b) ( C) (d)=[(b)+(C)]-(a) Type of
Loan Old Mortgage Closing Cost Cash from/to Refinance
Amount Borrower

$100,000 $98,000 $3000 $1000

$100,000 $98,000 $1000 -$1000

$100,000 $90,000 $3000 -$7000

 Loan File Terminology
 Borrower - One who receives funds in the form of a loan with
the obligation of repaying the loan in full with interest

Co-Borrower - Second or additional person equally responsible

for payments of the mortgage

Loan Amount : Funds to be borrowed and repaid as per terms of the

note

Down Payment : The part of the purchase price which the buyer pays in
cash and does not finance with the mortgage
 Loan File Terminology
 Mortgage Banker- Mortgage Bankers are lenders that are large
enough to originate loans and create pools of loans which they sell directly
to Fannie Mae, Freddie Mac, Ginnie Mae, jumbo loan investors, and others.
Any company that does this is considered to be a mortgage banker.
Portfolio Lender -An institution which is lending their own money and
originating loans for itself is called a "portfolio lender." Usually these institutions
are larger banks and savings & loans.
Correspondent -Refers to a company which originates and closes home
loans in their own name, then sells them individually to a larger lender, called
a sponsor. The sponsor acts as the mortgage banker, re-selling the loan to
Ginnie Mae, Fannie Mae, or Freddie Mac as part of a pool.
The correspondent may fund the loans themselves or funding may take place
from the larger company.
Broker -An institution which is closes loans in the investor name using the
investor funds.
 Loan File Terminology
 Retail Lender-A retail lenders has loan officers who take borrower’s
application, processors who process the application and underwriters who
approve/decline the loan. A retail lender could be a bank, savings and loan,
or a mortgage banker.

Wholesale Lender - A wholesale lender only works with mortgage

brokers. They take completed loan packages and underwrite
them. They offer mortgage brokers a fee in return for the upfront work done
by the mortgage broker.

Servicer :The servicer of the loan collects monthly

payments from the borrower, collects and disburses
escrow funds (pays insurance, taxes, etc.).
 Loan File Terminology

 Sales Price - Price paid for property as per sales contract

 Appraised Value -Market value of the property determined by
appraiser

 LTV : Expressed as a percentage, the loan amount in relation to the

lower of the sales price or appraised value

 PITI - Principal, Interest, Taxes, Insurance

 Escrow Account-Amount of money that the lender requires the

borrower to keep in “Escrow Account” for payment of taxes and
insurance
Loan File Terminology

 Loan Term- Period between commencement date and termination

date of the mortgage note

 Amortization- Paying out a predetermined sum (the principal)

plus interest over a fixed period of time, in equal periodic payments,
so that the principal is completely eliminated by the end of the term.

 Bridge Loan - A loan secured by a currently owned property for

buyers who need money to close on a new home before they can
sell their present home.
Loan File Terminology
 Subordinate Financing -A loan that is in second lien position and
in the event of foreclosure is paid off after the first mortgage

 CLTV/TLTV-It is the ratio of the combination of the loan amounts for

the first & second mortgage plus any drawn portion of a HELOC
divided by the lower of the sales price or appraised value of the
subject property
 Home equity Loan-A loan that allows home owners to borrow
against the equity in their property
 Guaranteed Mortgage-loan guaranteed by someone other than the
lender or borrower. E.g Government Loan
 HCLTV/HTLTV – is the ratio of the combination of the loan amounts
for the first & second plus the credit limit for the HELOC divided by
the lower of the sales price or appraised value of the subject
property .
 Loan File Terminology
Sales Contract / Purchase & Sale Agreement - A written
agreement between a buyer and seller stating terms and conditions of a
sale or exchange of property. Such a contract will contain information
about

➩Sales Price : Price paid for the subject property as per the
sales contract
➩Earnest Money : A deposit made to bind the conditions of the
sale
➩Contributions : Typical buyer costs being paid by the seller or
other interested party to the sale
Alimony- Is the payment made to a spouse under a divorce or
separation agreement.
 Loan File Terminology
Bankruptcy-When an individual/corporation seeks financial protection
under a court order due to their inability to meet their financial obligations.
Three types of Bankruptcy
Chapter 7- wipes out most of the debts, except for taxes, alimony and
student loans and protects the borrower from his creditors
Chapter 11-The borrower comes up with a plan to repay his creditors and
if the court approves his plan, he can retain his assets.
Chapter 13 -This is typically for a company, which needs court approval
on its plan to reorganize its finances and repay creditors
Loan File Terminology
Closing Cost
Fees that the borrower pays to obtain a mortgage. E.g, origination fees,
appraisal fees, discount points etc.

Origination Fee-A service fee charged by a lender/broker, typically 1%

of the loan amount.
Appraisal Fee- Fee charged by the appraiser to complete the
appraisal.

Title Fees/Insurance-Fees charged by the title company to research

the title to the subject property and to insure clear title to the
borrower/mortgage holder

Discount Points-A fee charged to obtain a lower interest rate on a

loan
Loan File Terminology
Prepaid items
Fees collected at closing to be held in escrow by the mortgage servicer
to fund future costs like property taxes, interest, mortgage insurance
and hazard insurance

Hazard Insurance-An insurance policy to protect home owners

and the mortgage holder against property damage.

Prepaid Interest- Between the closing date and the end of the
month, the borrower accrues interest on the loan. This interest is paid
at closing

Mortgage Insurance-Insurance that protects the lender against

loss in the event of borrower default
Mortgage Cycle
Mortgage Process
• Origination : Applicant applies for a loan for purchase /
refinance of a property

• Processing : Lender compiles/validates the loan application

package of the applicant

• Underwriting : Lender analysis of the applicants credit package

to determine creditworthiness

• Closing : Signing and recording of loan documentation, and

disbursement of loan funds
Mortgage Process
• Delivery: Process of packaging and delivering the loan to the
investor

• Servicing : Process of collecting monthly mortgage payment from

the borrower and disbursing the funds to pay the investors, tax
collection and insurance companies

• Secondary Market : A system where existing mortgages are

bought and sold. It contrasts with the primary mortgage market
where mortgages are originated.
Origination
Who is an originator-The company that takes the loan application

Role of the originator

➞Educates the borrower on different types mortgages, financing tools

➞Assists the borrower in completing the loan application form

➞Collects initial documentation

➞Provides the borrower with the legally required lending disclosures

Regulatory Compliance
Equal Credit Opportunity Act(ECOA) Regulation B-

Truth in Lending Act (TIL)

RESPA (Real Estate Settlement Procedures Act)

Home Mortgage Disclosure Act Regulation C (HMDA)

Fair Credit Reporting Act

Processing
Role of the Processor

Ensures that all the necessary documents are included in the

application package

Reviews the application and supporting documents in the file to ensure

completeness and consistency documents

Obtains an appraisal on the property and ensures

its completeness

Submits the loan application package to the underwriter

Processing
Verification of Assets - Establishes that the applicant has sufficient
cash to make downpayment and meet closing costs
Received directly from the Applicant:
• Bank Statement- Statement of account generated by the
depository institutions reflecting the opening and the closing
balance and details of other transactions
• Gift Letter-
Obtained from third party:
• VOD Form -Form filled by the depository institution and the
lender to verify the liquid assets disclosed by the borrower on the
loan application
 Processing
Verification of Employment - Verifies employment and income
information supplied by the borrower on the loan application
Received directly from the Applicant:
• Pay stub-Is Employer issued statement of earnings reflecting
current and YTD income of the borrower

• W2-Is the annual summary statement provided by the employer

showing borrower’s earning for a specific year.
Obtained from third party:
VOE Form -Standard form of documentation filled in by the
employer and the lender to verify the employment and income
details provided by the borrower on the loan application
Processing
Verifications received from Vendors

• Credit Report : Summarized information of

borrower's credit profile

• Appraisal Report : A report from an appraiser

indicating the value and condition of the property
Underwriting
3 C’s of Underwriting
• Capacity- Ability to repay the mortgage

• Credit- History of the borrower

• Collateral- Adequacy of property as collateral

• Common Sense
Underwriting
Capacity
Housing Debt Income Ratio(HDI): Ratio of borrower’s proposed housing
expenses(PITI) to total gross monthly income

Total Debt Income ratio(TDI): Ratio of borrower’s total monthly debt

expense to total gross monthly income

(a) Principal and Interest, Taxes and Insurance $800

(b) Credit Card Payment $200
(C) Car Loan $400
(d) Gross Monthly Income $6000
HDI Ratio 13.33%
TDI Ratio 23.33%
Underwriting
Sources of Income

 Gross Monthly Income - The monthly income of the borrower

before taxes and other withholdings. It includes :
• Base Income
• Self-employed income
• Overtime/Bonuses/Commissions
• Rental Income :- Net Rental Income =
Gross Rental Income * .75 - Monthly Mortgage PITI
• Non-earned Income (SSI, Div/Int,/Notes Receivable,etc.)
Underwriting
Character
What is a Credit Report -A credit report is summarized information of
borrower's credit profile

Who provides credit information ?

Three national credit repositories

•Equifax
•TransUnion

•TRW/ Experian

What is a Credit Reporting Agency/Bureau- a company which

gathers and sells consumers' credit histories to credit-grantors, such
as banks, retailers or credit-card companies.
What kind of information do credit bureaus provide?

General information, such as name, Social Security Number, address

(both past and present)
Employer name and address

Debtors and payment history

Inquiries of the credit file

Public record information, such as bankruptcies, foreclosures or
judgments
☛Credit reporting agencies DO NOT gather or disseminate information
regarding the applicant’s race, religious preference or medical history
 Types of Liabilities

✏ Mortgages
✏ Lines of Credit
✏ Revolving debts
✏ Installment debts
✏ Open/30 day accounts
✏ Leases
Why review the credit reports ?
☛Calculate monthly debts
☛Review borrower’s credit history
☛Cross check data provided by borrower on the application
☛Scores(FICO) to assess borrower’s overall credit profile
What is a Credit Score ?

A credit score is an evaluation of a borrower's credit data. It is a

statistical model that predicts likely future performance, which
has been tested, proven and validated.

Why use the score ?

• Achieve consistency and objectivity in underwriting

• Identify high risk loans from a credit perspective.
• Bring efficiency, consistency and profitability to all aspects of the
industry
Types Of Credit Reports
•Residential Mortgage Credit Report
✓A Residential Mortgage Credit Report (RMCR) is a detailed
account of the credit, employment and residence history as well as
public records information prepared by a consumer reporting agency
for an individual Borrower or two Borrowers that are married to each
other.
✓Contains merged credit information provided by TRW, Equifax,and
Trans Union.
•Tri-merged Credit Report
✓A three-in-file merged credit report contains the credit information
that resides at each credit repository.
•Infile Credit report
✓An in-file credit report is issued by a credit repository and contains
"as-is" information which is information that has not been updated or
reverified as a result of a credit inquiry
 Types Of Credit Reports

•Nontraditional Mortgage Credit Report

✓Prepared for applicants who have not established a traditional

credit history.
✓Applicants either pay for everything by cash or check or they do not use
the type of credit that is reported to repositories.

✓Payment letters from the applicant’s creditor’s form non traditional credit
history

✓Alternative references: Any credit where the borrower makes periodic

payments on a regular basis, no longer than three months apart
Closing
The loan closing is the point in the loan transaction where the loan
request becomes a mortgage lien

➪In case of a purchase transaction, title is legally transferred

from the seller to the borrower

➪In case of a refinance, the old loan is paid off and the new loan
is created

At the time of closing

✓Closing Conditions are met

✓Documents are signed

✓Closing costs are collected

✓Funds are disbursed

Closing
Some examples of Documents Executed at Closing :
• Note
• Deed
• Mortgage/deed Of Trust
• HUD 1 - Uniform Settlement Statement Note
Deed
• Final Truth In Lending (TIL) Disclosure Mortgage
HUD1
• Final 1003 TIL
Final 1003
Post Closing
Lenders review complete loan package for accuracy after the loan
closing, but before the sale of the loan to the investor

Typical errors that occur may include

☛Borrower signs the document incorrectly and/or does not sign all
of the documents required

☛The HUD-1 was incorrectly completed

☛Conditions are not met