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Banking Systems, 2e Cengage/South-Western Slide 1 MORTGAGES 7.1 7.1 Mortgage Lending 7.2 7.2 Mortgage Loan Processing 7.3 7.3 Mortgages and the Law 7.4 7.4 Government-Backed Loans 7.5 7.5 The Mortgage Crisis 7 Slide 2 Banking Systems, 2e Cengage Learning/South-Western Slide 2 WHAT IS A MORTGAGE? Mortgage origination New mortgages Mortgage A long-term note secured by real property Foreclosure When a creditor seeks a court-ordered sale of a property due to non-payment of a mortgage The debt is paid from the funds generated by the sale Slide 3 Banking Systems, 2e Cengage Learning/South-Western Slide 3 TYPES OF MORTGAGES Fixed rate mortgage (conventional mortgage) Loan with a fixed interest rate for the life of the loan Balloon mortgage The interest rate and payment stay fixed At some specified point the entire remaining balance of the loan is due in one single balloon payment Slide 4 Banking Systems, 2e Cengage Learning/South-Western Slide 4 ADJUSTABLE RATE MORTGAGES Adjustable rate mortgage Loan with rates that change over the course of the loan Teaser rate Initial interest rates that may be extremely low Adjusted at a later date to the normal rate Including some addition to make up for an artificially low start Slide 5 Banking Systems, 2e Cengage Learning/South-Western Slide 5 OTHER FORMS OF FINANCING Buy-down mortgage The borrower buys down, or prepays, part of the interest in order to get a lower rate Point A value equal to 1 percent of the loan Slide 6 Banking Systems, 2e Cengage Learning/South-Western Slide 6 Appreciation The amount that a house increases in value Slide 7 Banking Systems, 2e Cengage Learning/South-Western Slide 7 REFINANCINGREFINANCING Refinancing is starting over with an entirely new loan, using part or all of the loan funds to pay off the old mortgage. Consumers can save money by getting mortgages at lower rates. Lenders can earn money on fees, points, and closing costs. Slide 8 Banking Systems, 2e Cengage Learning/South-Western Slide 8 HOME EQUITY LOANS Equity The difference between the market value of an item and what is owed on it When home values are appreciating, homeowners can use the difference between what they owe and what their homes are worth to secure a loan. Slide 9 Banking Systems, 2e Cengage Learning/South-Western Slide 9 REVERSE MORTGAGES Reverse mortgage A homeowner receives a sum from the lender secured by the value of a home and does not pay the loan back as long as he or she lives there. Homeowners are usually required to be 62 years or older. Slide 10 Banking Systems, 2e Cengage/South-Western Slide 10 7.2 MORTGAGE LOAN PROCESSING Describe what is involved in obtaining a mortgage. Explain the mortgage approval process. GOALS Slide 11 Banking Systems, 2e Cengage Learning/South-Western Slide 11 OBTAINING A MORTGAGE In a healthy lending environment, most lenders dont want a persons housing costs to exceed 25 to 28 percent of gross monthly income. Total debt should not exceed 36 percent, including housing costs. Slide 12 Banking Systems, 2e Cengage Learning/South-Western Slide 12 PITIPITI PITI Principal The remaining unpaid balance of the mortgage Interest The amount of the monthly payment that goes toward interest Slide 13 Banking Systems, 2e Cengage Learning/South-Western Slide 13 Taxes Include local real estate taxes Escrow An amount of money that lenders require be paid in advance Used to pay real estate taxes Insurance Property insurance and sometimes private mortgage insurance Private mortgage insurance (PMI) Protects the lender against loan default Waived if down payment exceeds 20 percent Slide 14 Banking Systems, 2e Cengage Learning/South-Western Slide 14 THE APPROVAL PROCESS Application Documentation Loan-to-value The value of the loan compared to the value of the asset Underwriting Drawing documents Closing Recording Slide 15 Banking Systems, 2e Cengage/South-Western Slide 15 7.3 MORTGAGES AND THE LAW Describe consumer protection laws that apply to mortgage lending. Describe laws directly related to mortgage lending. GOALS Slide 16 Banking Systems, 2e Cengage Learning/South-Western Slide 16 MORTGAGE LEGISLATION Community Reinvestment Act (CRA) Redlining Requires that banks document their lending decisions and demonstrate an effort to serve their local communities Slide 17 Banking Systems, 2e Cengage Learning/South-Western Slide 17 HOME MORTGAGE DISCLOSURE ACT (HMDA) Requires banks and other financial institutions to record and report data on home lending in order to identify possible discriminatory patterns Slide 18 Banking Systems, 2e Cengage Learning/South-Western Slide 18 HOME OWNERSHIP AND EQUITY PROTECTION ACT (HOEPA) Congress passed the Home Ownership and Equity Protection Act in 1994 to protect consumers against predatory lending. Also applies to second mortgages and refinancing Pyramiding When a loan servicing company continues to charge late fees until all late fees have been paid (even if payments made after the late payments were made in full and on time) Slide 19 Banking Systems, 2e Cengage Learning/South-Western Slide 19 REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) Requires disclosures to be provided to the borrower at various times during the transaction A booklet explaining various real estate settlement services A good faith estimate of what closing costs are likely to be A mortgaging service disclosure statement Slide 20 Banking Systems, 2e Cengage Learning/South-Western Slide 20 At closing An itemized list of actual closing costs An initial escrow statement Slide 21 Banking Systems, 2e Cengage/South-Western Slide 21 7.4 GOVERNMENT- BACKED LOANS Explain the concept of government- backed loans. Identify government-backed programs to encourage home lending. GOALS Slide 22 Banking Systems, 2e Cengage Learning/South-Western Slide 22 WHAT IS A GOVERNMENT-BACKED LOAN? Numerous government programs help banks help people get loans they need. Sometimes the banks provide funding and the government absorbs some of the risk. Slide 23 Banking Systems, 2e Cengage Learning/South-Western Slide 23 FEDERAL MORTGAGE PROGRAMS The Federal Housing Administration Established in 1934 Replenished funds available for home lending Slide 24 Banking Systems, 2e Cengage Learning/South-Western Slide 24 FEDERAL HOUSING ADMINISTRATION (FHA) Loan guarantees Mortgage insurance Long-term loans The FHA is now the Office of Housing. Slide 25 Banking Systems, 2e Cengage Learning/South-Western Slide 25 FHASECUREFHASECURE FHASecure was developed in 2007. Homeowners who are struggling to meet their ARM payments can participate in FHASecure to refinance their homes with a government- insured mortgage. Slide 26 Banking Systems, 2e Cengage Learning/South-Western Slide 26 FANNIE MAE Fannie Mae Federal National Mortgage Association (FNMA) Helps lenders find funds to make available for mortgages A government-chartered corporation that buys mortgages from the originating institutions and keeps them or exchanges them for securities that it guarantees Slide 27 Banking Systems, 2e Cengage Learning/South-Western Slide 27 FREDDIE MAC Freddie Mac The Federal Home Loan Mortgage Corporation Buys home mortgages from banks and other lending institutions and combines them into large groups, selling interest in the groups to investors Slide 28 Banking Systems, 2e Cengage Learning/South-Western Slide 28 THE COMBINED IMPACT OF FANNIE MAE AND FREDDIE MAC Government-sponsored enterprise (GSE) A business that receives some legal exemptions and privileges from the federal government, which, in effect, lowers its operating costs Can charge lower interest rates Has an implicit guarantee of the government as a backer Slide 29 Banking Systems, 2e Cengage Learning/South-Western Slide 29 VETERANS ADMINISTRATION (VA) Veterans may get loans with No down payment No prepayment penalties Negotiable interest rates Slide 30 Banking Systems, 2e Cengage Learning/South-Western Slide 30 NCSHANCSHA The National Council of State Housing Agencies (NCSHA) At the state level Provides and administers programs for lower-income and other people who seek help to buy or renovate a home Slide 31 Banking Systems, 2e Cengage Learning/South-Western Slide 31 OTHER GOVERNMENT-BACKED LOANS U.S. Department of Agricultures (USDA) Rural Housing Service The Farm Service Agency The Catalog of Federal Domestic Assistance Slide 32 Banking Systems, 2e Cengage/South-Western Slide 32 7.5 THE MORTGAGE CRISIS Describe why mortgages are a sound investment. Explain the causes and consequences of the mortgage crisis. GOALS Slide 33 Banking Systems, 2e Cengage Learning/South-Western Slide 33 MORTGAGES AS AN ATTRACTIVE INVESTMENT Historically, mortgages represented a secure, steady investment for lenders. Interest rates are predetermined. The payment schedule is predetermined. Lenders could count on a steady flow of revenue from mortgages. Buyers were prequalified. Housing prices typically appreciated. Slide 34 Banking Systems, 2e Cengage Learning/South-Western Slide 34 THE MORTGAGE CRISIS Many countries had increasing levels of wealth. Easy access to mortgage loans drove up the demand for houses. Increased housing demand caused housing prices to continue to escalate. Slide 35 Banking Systems, 2e Cengage Learning/South-Western Slide 35 LOWERING LENDING CRITERIA Interest-only loans Stated Income Verified Assets loans (SIVA) Stated Income State Assets loans (SISA) No Income No Asset loans (NINA) No Income, No Asset, No Employment Slide 36 Banking Systems, 2e Cengage Learning/South-Western Slide 36 THE FALLOUT Negative equity When the amount owed on a home is more than the current value of the home Estimates vary regarding the status of homeownership at the conclusion of the crisis 25 percent of U.S. homes will have negative equity 3 million to 4 million homeowners are expected to experience foreclosure