Mortgage – The Process and Industry An Overview
Srikanth G
Mortgage – The Process and Industry An Overview
Srikanth G
Mortgage – The Process and Industry – An Overview
Mortgage – Dead Pledge (in Law French)
® In simple terms - A method of using property as security for the payment of debt ® Mostly associated with Real Estate, in some cases Ships and Land as well
Parties involved…
® Creditor/Mortgagee/Lender – The financial Institution which funds the Loans ® Debtor/Mortgagor/Borrower – The individual who borrows the loan ® Other Participants such as Financial advisor, Mortgage broker, Solicitor, etc..
Legal Aspects…
Two kinds of Mortgages:
® Mortgage by demise – where creditor becomes the owner of property under mortgage
until loan is repaid
® Mortgage by Legal charge – where creditor gains sufficient rights over property in
case of irregularities
Repayment of Capital…
Basically four types depending on locality, tax laws and prevailing culture
® Capital and Interest ® No Capital, Only interest ® Interest Only ® Interest and Partial Capital
Mortgage Loan Types in United States of America
Basically two types of amortized Loans
® Fixed Rate Mortgage (FRM) ® Adjustable Rate Mortgage (ARM) ® Other types include Bridge, Blanket, Budget, Commercial, Equity, Hard Money, Package
Loans, etc..
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Mortgage – The Process and Industry – An Overview
United States Mortgage Process
The Life Cycle of a Loan…
® Origination – involves the application and documentation (related to financial history)
submission by the borrower
® Underwriting – Decision process where the terms and conditions of loans are decided
based on borrower’s credit history
® Funding – Payment made by the Lender after the loan is approved ® Post Closing – Refers to tracking of Legal docs to make sure that the loan can be
sold to secondary market like FNMA (Fannie Mae), GNMA (Ginnie Mae) and FHLMC (Freddie Mac)
® Selling – The loans are pooled together based on certain criteria and then sold in the
secondary market to GNMA, FNMA, FHLMC or private investors
® Servicing – This includes the payment processing such as monthly mortgage state-
ments, receiving payments from the borrower, Escrow analysis, etc.
HMDA – Home Mortgage Disclosure Act
® An act passed in 1975, designed by Federal Reserve Board ® Requires financial institutions to maintain and annually disclose data about home
purchases, home purchase pre-approvals, home improvement, and refinance applications
® Identify whether there are discriminatory lending practices ® Discover if financial institutions are serving housing needs of communities
United States Mortgage Finance Industry
® Mortgage Lending is a major category of business ® The Federal Govt. has many programs/sponsored entities that encourage home
ownership
® The Govt. agencies such as Ginnie Mae, Fannie Mae and Freddie Mac buy a large
number of mortgages from banks and issue them to investors as MBS
® This allows banks/financial institutions to re-lend money to other borrowers and thereby
create more mortgages. The public in turn use these mortgages to purchase home
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Copyright 2007 by Tata Consultancy Services. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of Tata Consultancy Services.
Mortgage – The Process and Industry – An Overview
Amortization and Negative Amortization
® Amortization is distribution of single lump-sum cash flow into many smaller cash flow
installments as determined by an Amortization Schedule
® Amortization Calculator formula:
A = P [i(1+i)n]/[(1+i)n -1] A = Periodic payment, P= Principal Amount borrowed, i = Interest Rate, n = Number of periods
® Negative Amortization is a method in which the borrower pays back less than the full
amount of interest to the lender. The shorted Amount is then added to the total amount owed to the lender along with the interest
Mortgage-Backed Securities (MBS)
® Similar to bonds whose cash flows are backed by Mortgage payments ® Asset backed securities where assets are mortgages ® As the Mortgage loans may usually be prepaid in whole or in part at any time, the
duration of cash flows is unknown which makes an MBS more interesting than regular bonds
Risks and Facts of MBS
® MBS has a third risk “Early Redemption” (prepayment) apart from two risks of ordinary
bonds like Credit Risk and IR exposure
® The number of Home owners who pre-pay the loans goes up when Interest Rate falls
as they can Refinance the loans at a lower Fixed Interest Rate
® Market value of all outstanding MBS (at end of 2005) is over $2.75 trillion much larger
than Asset backed securites
Lock – In
® A lender’s promise to hold a certain Interest rates and certain Number of Points for a
specific period of time while Loan Application is being processed
® Point is an additional charge imposed by Lender and is equal to 1% of the Loan
Amount
® Also called Rate-Lock/Rate Commitment
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TCS Confidential
Copyright 2007 by Tata Consultancy Services. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of Tata Consultancy Services.
Mortgage – The Process and Industry – An Overview ® Protects against increases while application is being processed ® Amount of fee charged depends on the duration of Lock-In Period
Different Options Available for Lock-Ins
® Locked-In Interest Rates, Locked-In Points (True Lock-In) ® Locked-In Interest Rates, Floating Points ® Floating Interest Rates, Floating Points
Trivial but Interesting facts…
® The nation’s (USA) median current median current interest rate was 6.7% down from
7.5% in 2001
® The US Government Sponsored Enterprises (GSEs) namely Ginnie Mae, Fannie Mae
and Freddie Mae have a debt to the tune of $1 trillion
® The median value of owner occupied homes was $140000 ® About 3.8 Million homeowners had lump-sum home equity mortgages, down nearly
20% from 2001, when there were 4.7 Million such loans
® Homeowners occupied more than 72 Million homes. Overall in US, there were 106
Million occupied housing units
® Renters occupied 33.6 Million housing units ® On a scale of 1 – 10 with 10 being the best, 75% homeowners rated their neighborhood
Copyright 2007 by Tata Consultancy Services. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of Tata Consultancy Services.