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Definition
| lenders who lend money directly to borrowers. |
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Term
| secondary mortgage market |
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Definition
| Loans originated in the primary mortgage market can be bought, sold or traded in the secondary mortgage market. |
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Term
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Definition
| One institution can sell a part interest in a block of loans to another institution. This is called participation. Using our example from above, OK has $5,000,000 in loans to sell to Illinois. Instead of selling the entire block, OK could sell 90% interest, $4,500,000, and retain the other 10%. In this situation, OK would still service the loans and then pass 90% of the mortgage payments to the Illinois bank. |
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| what is a mortgage-backed security? |
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Definition
| A more common way of shifting funds is through the use of mortgage-backed securities (MBS), which are backed by a pool of mortgages. Governmental, quasi-governmental, or private entities purchase mortgage loans from banks, mortgage companies, and other originators and then assemble them into pools. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool. |
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| Important players in the secondary mortgage market are: |
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Definition
Ginnie Mae - Government National Mortgage Association (GNMA) - a government agency
Fannie Mae - Federal National Mortgage Association (FNMA) - a former government agency that became a private corporation in 1968
Freddie Mac - Federal Home Loan Mortgage Corporation (FHLMC) - a quasi-government agency
These agencies, collectively known as government-sponsored enterprises (GSE), purchase loans or guarantee mortgage-backed securities issued by lenders. |
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Ginnie Mae is a division within the Department of Housing and Urban Development (HUD). Its basic mission when it was established in 1968 was to create and operate a mortgage-backed security program for the Federal Housing Administration and Veterans Administration mortgages.
Ginnie Mae developed the first mortgage-backed security in 1970. This security was backed by a pool of FHA and VA mortgages. It was called a pass-through security because the monthly principal and interest payments were collected from the borrowers and then "passed through" to the investors.
Ginnie Mae doesn't purchase mortgages; it guarantees that the monthly payments will be made every month. Because Ginnie Mae is a government agency, its guarantee is backed by the "full faith and credit" of the United States government. In return for this guarantee, Ginnie Mae collects a small fee from the lender every month. |
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are based on single-family pools and are Ginnie Mae's most heavily-traded MBS product. The underlying mortgages generally have the same or similar maturities and the same interest rate on the mortgages. Ginnie Mae I payments are made to holders on the 15th day of each month. The minimum pool size is $1 million (but may be $25,000 if issued in connection with a local or state housing bond financing program).
A pool must consist of mortgages within one of these categories:
Single-family level payment mortgages
Single-family buydown mortgages
Single-family graduated payment mortgages
Single-family growing equity mortgages
Manufactured home loans
Project construction loans, including multifamily residential, hospital, nursing home, and group practice facility loans
Project (permanent) loans, including multifamily residential, hospital, nursing home, and group practice facility loans |
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Definition
are modified pass-through mortgage-backed securities. An issuer may participate in the Ginnie Mae II MBS either by issuing custom, single-issuer pools or through participation in the issuance of multiple-issuer pools. A custom pool has a single issuer that originates and administers the entire pool. A multiple-issuer pool typically combines loans with similar characteristics. Loans with different interest rates may be included in the same pool or loan package, except in the manufactured home loan program where a different rule is applicable. The Ginnie Mae II MBS have a central paying and transfer agent that collects payments from all issuers and makes one consolidated payment, on the 20th of each month, to each security holder.
Any one pool must consist of only one of the following mortgage types:
Single-family level payment mortgages (FHA, VA, or Rural Housing Service loans)
Single-family graduated payment mortgages (FHA or VA)
Single-family growing equity mortgages (FHA or VA)
Manufactured home loans (FHA or VA)
Single-family adjustable rate mortgages (FHA or VA)
The minimum pool size is $1 million for single-family pools, $350,000 for manufactured home pools and $500,000 for all other pool types. |
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Definition
Fannie Mae is a shareholder-owned company that works to make sure mortgage money is available for people across the country. Fannie Mae does not lend money directly to home buyers. They work with lenders to make sure the lenders don't run out of mortgage funds. Fannie Mae stock (FNM) is actively traded on the New York Stock Exchange and other exchanges and is part of the Standard & Poor's 500 Composite Stock Price Index. Fannie Mae operates under a congressional charter directing them to channel their efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans. Fannie Mae receives no government funding or backing.
In 1938, the Federal government established Fannie Mae to increase the flow of mortgage money by creating a secondary market to purchase Federal Housing Administration (FHA)-insured mortgages. After World War II, Fannie Mae's authority was expanded to include VA-guaranteed mortgage loans. At that time, Fannie Mae purchased FHA and VA loans at par - meaning at full face value.
The Charter Act of 1954 "rechartered" Fannie Mae by removing government backing for money borrowed to fund Fannie Mae's secondary market operations and allowing Fannie Mae to finance through private capital. Fannie Mae could now sell its mortgages in addition to purchasing new loans. Where previously Fannie Mae had purchased at par, now purchases could be made at whatever discounted price would give a reasonable rate of return. In addition, Fannie Mae could now establish its own criteria for accepting a mortgage that was submitted to it for sale; it did not have to purchase every submitted mortgage. |
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| what did the 1968 charter act due for fannie mae? |
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Definition
Under the 1968 Charter Act, Fannie Mae became a fully private company operating with private capital on a self-sustaining basis. As a separate, privately-owned corporation, Fannie Mae became subject to federal corporate income tax, but it was exempt from state income taxes.
Its role was expanded to buy mortgages beyond traditional government loan limits, reaching out to a broader cross-section of Americans. Fannie Mae could purchase mortgages at premium, which is in excess of par, and was given the authority to issue mortgage-backed securities. The 1968 act also provided for continuing HUD oversight of Fannie Mae to ensure Fannie Mae's adherence to its public purpose. |
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Loan limits - Fannie Mae sets loan limits which are linked to the Federal Housing Finance Board's October single-family price survey. These loan limits are adjusted each year in accordance with the results of this housing survey.
Debt-to-income ratio - A borrower's monthly debt payments cannot exceed 28% of the monthly income.
PMI - Any loan made that has a loan-to-value ratio of more than 80% must carry private mortgage insurance. (We'll explain loan-to-value ratios on an upcoming page.)
Gifts - Funds from gifts may be used as all or part of the 20% down payment.
Seller down payment - If the borrower has a 5% down payment, a seller can contribute up to 3% of the closing costs. Seller contribution goes up to 6% if the down payment is 10%. |
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| what is a conforming loan? |
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Definition
| Fannie Mae sets limits for its loans. Any loan that falls within these limits and meets other Fannie Mae guidelines is called a conforming loan |
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Definition
| Loans that don't meet the Fannie Mae guidelines, including the loan limits above, are called nonconforming loans. Even though Fannie Mae sets loan limits, a purchaser may pay any price for a property and make up the difference in cash. Any loan that exceeds the conforming loan limits is called a jumbo loan |
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| What is the role of the secondary mortgage market? |
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Definition
| The secondary mortgage market consists of holding warehouse agencies that purchase a number of mortgage loans and assemble them into one or more packages of loans for resale to investors. |
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Term
| What was the first mortgage-backed security called and why was it called this? |
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Definition
| It was called a pass-through security because the monthly principal and interest payments were collected from the borrowers and then "passed through" to the investors. |
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| Why did the Federal government establish Fannie Mae? |
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Definition
| The Federal government established Fannie Mae to increase the flow of mortgage money by creating a secondary market to purchase Federal Housing Administration (FHA)-insured mortgages. |
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Definition
In 1971, the Federal Home Loan Mortgage Corporation, known as Freddie Mac, introduced the first security backed by conventional loans.
Similar to Ginnie Mae and Fannie Mae, Freddie Mac buys conventional loans from savings banks, commercial banks and mortgage companies, assembles the loans into a pool of mortgages and issues a security backed by the mortgages. This security is called a Participating Certificate or Guaranteed Mortgage Certificate. |
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| what is the truth in lending act? |
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Definition
When comparing loans, it's not enough to just look at the interest rates. The buyers must also consider the loan fees and other charges. There is a federal law in force, the Truth in Lending Act, to help buyers make those comparisons.
The Truth in Lending Act, Title I of the Consumer Credit Protection Act, is implemented by Regulation Z. This law requires lenders to disclose to buyers the true cost of obtaining credit, so that borrowers can compare the costs of various lenders. |
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true or false:Regulation Z applies to all loans that are secured by a residence. It does not apply to:
Commercial loans
Agricultural loans over $25,000 |
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Definition
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| what is the right to rescind? |
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Definition
| In most cases the borrower has a right to cancel the transaction by notifying the lender within three days. This does not apply to residential first mortgage loans, but does apply to refinancing and home equity loans. |
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Term
| how does regulation z affect advertising? |
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Definition
Any advertising is subject to Regulation Z disclosure of it contains any of the following items:
Amount or percentage of down payment
Installment payment or amount
Specific finance change
Number of installments
Period of repayment
Indication that there is no charge for credit
If an ad includes any of the above items, all of the following items must be disclosed:
The amount or percentage of down payment
Terms of repayment
Annual percentage rate and if increase is possible
Total finance charge
Total number of payments and due dates |
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| penalties for violating regulation Z |
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Definition
Penalties
It is especially important that licensees not violate the advertising requirements of Regulation Z. The penalty for violation is twice the amount of the finance charge or a minimum of $100, up to a maximum of $1,000. The violator could also be liable for court costs, attorney fees and any actual damages.
Willful violation of regulation Z is a misdemeanor that is punishable by a fine of up to $5,000 or one year in prison or both. |
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| Why was Freddie Mac created and what is its mission? |
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Definition
| Freddie Mac was created in 1971 to develop a mortgage-backed security for conventional loans. Freddie Mac's mission is to provide stability, affordability and opportunity to the housing market by putting homeownership within reach for minority populations and making rental housing more affordable. |
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| What is the basic purpose of Truth in Lending - Regulation Z? |
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Definition
| Give buyers information about the true cost of obtaining credit, so that borrowers can compare the costs of various lenders. |
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Term
| What is the right to rescind and what is not covered by this rule? |
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Definition
| The borrower has a right to cancel the transaction by notifying the lender within three days. This does not apply to residential first mortgage loans. |
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| Jake and Myra Smith are purchasing a $150,000 home. They are making a $15,000 down payment and getting a loan for the balance. What's the loan-to-value ratio |
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Definition
| The loan-to-value ratio is 90%. They are making a 10% down payment and getting a 90% loan. |
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Term
| what is the income ratio? |
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Definition
| The income ratio establishes the borrower's capacity to pay by limiting the percent of gross income a borrower may spend on housing costs. Housing costs include the principal, the interest, the taxes and homeowner's insurance and may also include some monthly assessments for mortgage insurance and utilities. Conventional loans typically require this ratio to be under 36%, but FHA guidelines require the income ratio to be no more than 41%. |
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Definition
| The evaluation process used to determine the borrower's ability to repay a loan and estimate the value of the property being used as collateral. |
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| What kinds of income are considered stable income? |
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Definition
ermanent employment
Self-employment under certain conditions
Employment that has generated a regular income for at least one to two years, such as bonuses or commissions
Some income from secondary sources, such as rental income or investments |
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| How does a lender determine if the buyer's income is enough to pay the loan? |
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Definition
| By establishing an income ratio and a debt ratio. |
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| Why is information about net worth important? |
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Definition
| It gives an indication of the borrower's ability to keep up the payments on the loan in the event that the borrower would lose his or her job. |
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Term
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Definition
| Encouraging a borrower to refinance a loan so that the lender can charge high points and fees for the new loan. This is called loan flipping. Sometimes the borrower also pays a higher interest rate than with the original loan. |
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Definition
| When lenders provide loans to unqualified homebuyers - those who have poor credit and whose ability to repay the loan is risky because of their income |
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