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35 Cards in this Set
- Front
- Back
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What are the Mortgage Lenders' Rights and Limitations?
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1. Default
2. Redemption- lender can't simply "throw the borrower out onto the street" after a payment is missed, has to take legal action 3. Lien Theory vs Title Theory- ? is whether the lender receives title to the property or only has a potentially enforceable lien |
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Default
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-the failure to make a payment on the specified date.
-lender may have the borrower removed from the property so that the lender can be repaid by selling the property |
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Redemption
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- lender can't simply "throw the borrower out onto the street" after a payment is missed, has to take legal action
borrower has 2 chances to redeem 1. equitable right of redemption- repay amount owed before foreclosure (+ penalties and the lender's attorney fees) 2.statutory right of redemption- even if the borrower fails to pay amts owed and a foreclosure sale results, she can repay these amts during an additional period set by state law (6 mths in IL) **at that point, amts owed would include the price paid by the successful bidder at the foreclosure sale ***So the equitable right lets the borrower "set things straight" with the lender and if the borrower fails to do so, the statutory right permits him to regain title from whoever got title at the foreclosure sale--so buyer of sale wont have good title until after the statutory redemption period |
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Lien Theory vs Title Theory-
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question is whether the lender receives title to the property or only has a potentially enforceable lien
Title Theory- lender holds title until mortgage debt is repaid Lien Theory- borrower is owner, lender has only a lien |
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In Illinois, a variation on lien theory called intermediate theory is used which is?
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-mortgage is viewed as transferring "qualified title" to the lender.
-Between the lender and the borrower, the lender is considered to have title, but as far as 3rd parties are concerned, the borrower has title. |
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Features Found in a mortgage loan: Underwriting and reporting standards
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- lender checks the borrowers employment, income, and credit history, and verifies the value of the home through an appraisal and pest inspection, lender also must report the APR and other costs, in keeping with federal consumer protection laws
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Standards sometimes followed, especially in keeping with secondary mortgage market guidelines, include:
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-borrower can't borrow more than 80% of the home's appraised value unless the borrower provides insurance protection for the lender through the federal government's FHA (or guarantee form the VA) or a Private mortgage insurance co.
**Even with insurance- borrower down payment, even if only 2-5% of purchase price -borrowers total monthly expense toward housing shouldn't exceed 28% of household's gross income |
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What are some other features found in a mortgage loan?
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1. Underwriting and reporting standards
2. Documentation in general 3. note or promissory note 4. Mortgage 5. Acceleration clause 6. Alienation or "due on sale" clause 7. Prepayment clause 8. Subordination clause |
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promissory note (note)
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promise to repay the money borrowed
-entitles the lender to a stream of payments |
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mortgage
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the pledge or property as security, or collateral
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Acceleration clause
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stating that as soon as borrower is found to be in default, the entire loan balance becomes due
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Alienation or "due on sale" clause
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- stating that the borrower must repay the loan in full if the property is sold
- the borrower can't allow a new buyer to assume the loan w/o lender's permission |
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Subordination clause
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stating that the lender will allow another, future lender's claim to have a higher priority
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Prepayment clause
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-stating that a penalty is levied if the borrower repays the loan too soon
- lenders tend enforce this clause only if the borrower refinances through another lender |
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Primary mortgage market
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** new securities are issued
-Borrowers sign new notes -traditionally involved localized lending arrangements between property owners and lending institutions -For corporate securities: corporations create and issue new bonds or shares of stock; companies receive new money they did not have the use of before **Primary mortgage market participants (the borrowers who create the notes_ care deeply about secondary mortgage market activity even though the borrowing community gets no money directly form the secondary market |
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Do you buy the 1st and 2nd mortgage loans in Primary and Secondary markets?
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No; second mortgage loans are home equity loans
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the two types of Primary Mortgage Markets:
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Types of Institutions- Depository institutions, mortgage bankers and brokers, life insurance companies, pension funds, real estate investment trusts (REITs)
2. Mortgage Insurance -Borrowers needing mortgage insurance (typically those making down-payments of less than 20% of the purchase price) pay a fee to lenders when they obtain their loans, and continue to pay the insurance fee at least until some portion of the loan has been repaid |
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Secondary Mortgage Market
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-previously-issued stocks and bonds are bough and sold among individual and institutional investors
- no new money makes its way into the hands of the issuing companies - sold by local banks and other originators **its existence provides liquidity that allows the primary market to function |
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What is the role of the secondary mortgage market?
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to channel money from where it is abundant to where it is needed thereby providing liquidity to the real estate financing function
-reducing liquidity risk reduces the rate of return that money providers must receive for making real estate loans--so borrowers can get loans at lower interest rates **banks sell notes to other banks & works out by Fannie & Freddie-backing the notes |
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Mortgage lending as being characterized by 3 activities:
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1. Brokerage- getting those who want to borrow together w potential lenders, and doing the initial paper work
2. Intermediation- taking money from surplus saving units and channeling it to borrowers 3. Servicing- collecting pmts and handling any post loan problems |
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What are some Secondary Mortgage Market Agencies and Firms?
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1. Federal Housing Administration (FHA)
2. Department of Veterans' Affairs (VA) 3. Federal National Mortgage Association(Fannie) 4. Federal Home Loan Mortgage Corporation (freddie) 5. Government National Mortgage Association (GNMA) 6. US Department of Agriculture's Rural Development Guaranteed Loan Program- (like FHA) 8. Private firms also create mortgage loan pools |
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1. Federal Housing Administration (FHA)-
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providing payment insurance (borrowers pay a premium) so lenders will make loans with low down-payments (as little as 3.5%) on moderately -priced homes
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2. Department of Veterans' Affairs (VA)
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- providing payment guarantees so that military veterans can obtain loans for moderately-priced homes with low down-payments
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3. Federal National Mortgage Association (Fannie Mae)
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- organization that buys loans from originators, then bundles together a group of notes and then sells to investors the rights to collect payments on these loan "pools"
-privatized but retains ties to the govt. |
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4. Federal Home Loan Mortgage Corporation (freddie)
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- organization that buys loans from originators, bundles together a group of loans, then sells investors the rights to collect the more predictable payments on the loan "pools"
-provide a secondary market for conventional loans -smaller but more innovative than fannie mae |
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Government National Mortgage Association (GNMA)
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-federal government agency that provides payment guarantees on securities backed by FHA and VA loans
-carry the full faith and credit of the United States -guarantees full amount of the loan |
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US Department of Agriculture's Rural Development Guaranteed Loan Program-
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(like FHA) but for low down-payment buyers with moderate incomes buying homes in communities that lie outside metropolitan areas and have populations less than 25,000
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8. Private firms also create mortgage loan pools
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-often backed by "nonconforming loans"
-must have private guarantees if they are to be attractive to investors - includes: Mortgage Guaranty Insurance Corporation (MGIC or Maggie Mae) |
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types of Mortgage-backed securities
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1. Pass-throughs
2. Collateralized mortgage obligations (CMOs) |
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important characteristics of mortgage related securities
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-rearrangement of cash flows
-credit enhancement -guarantees -overcollateralization - more in assets than is issued in securities |
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**Pass-Throughs
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the investor has an undivided interest in a pool of mortgage loans: receives periodic interest and principal as they are received
- the servicer simply passes through anything received (minus a small servicing fee) - not viewed at "risk-free" just cuz they are backed by Ginnie Mae -Prepayments will be received just when the investor doesn't want them, so there is considerable reinvestment risk -essentially no default risk - tremendous amount of interest rate risk (cuz borrowers prepay when the interest rate they can get by refinancing with a new loan is lower than the interest rate on the existing loan) ** cash flows are very uncertain |
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What is Collaterlized Mortgage Obligations (CMOs)?
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rearrange the cash flows, which are very uncertain overall into individual "slices" called tranches, to allow for more certainty, at least to some providers of funds
**provide sequential distribution **allows parties that traditionally wouldn't have invested in mortgage loans to do so |
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What is the special type of CMO? Interest only/Principle Only strip-
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-one investor group gets all the interest on a pool of loans while another investor group gets to collect all the principal.
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Interest Only
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has:
negative duration- when rates go down, interest payments go down -wants interest to go up, more debt outstanding => more interest builds => worth more to him |
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What is Prinicipal Only
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has:
super positive duration- when rates go down, principal payments go up -wants interest rates to go down, bc repaid faster. (wants people to refinance) |
