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Primary Market

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Financial arena in which home buyers apply for loans and lenders originate them. A local market, made up of lending institutions.

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Secondary Market

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National market in which mortgage loans are bought and sold. Lender may sell loans to other lenders or investors in another part of the country, or to a secondary market agency.

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Mortgage-backed securities

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secondary market agency buys many mortgages and pool them together; pool is a pledge as collateral for securities. Investors receive monthly payments of principal and interest as pooled loans are paid.

First mortgage backed securities program started by Ginnie Mae in 1970, backed by pools of FHA and VA loans. Fannie Mae and Freddie Mac soon followed, issuing MBSs backed by pools of conventional loans

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Functions of the secondary market

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*makes funds available for mortgage loans nationwide

*Promotes homeownership and real estate investments

*Moderates adverse effects of local real estate cycles

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Federal National Mortgage Association

AKA- Fannie mae

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*created by the US government in 1938

*Original purpose- buy FHA insured loans from lender.

*Reorganized as a private corporation in 1968, but remains a government-sponsored enterprise (GSE) supervised by FHA

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Government National Mortgage Association

AKA Ginnie Mae

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*Created in 1968 as a wholly owned government corporation to take Fannie Mae's place

*Buys FHA and VA loans ( not conventional)

*In 1970, started first mortgage-backed program

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Federal National Mortgage Corporation

AKA Freddie Mac

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*GSE created in 1970 to help savings and loans by buying conventional loans

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GSEs and sub prime loans

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GSE's used to purchase only prime loans. HUD encouraged looser underwriting standards and the purchase of A-minus subprime loans to meet affordable housing goals.

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Federal housing finance authority

AKA- FHFA

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In 2008, Congress put GSE's under regulation of the federal housing finance authority as part of a plan to address fallout of subprime mortgage crisis. Later that year, FHFA took control of both GSE's and put them under federal conservatorship until both are financially stable again.

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Federal Guaranty

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Perviously, FNMA and Freddie Mac guaranteed their MBS's, but federal government had no legal obligation to back up those guaranties.

Under conservatory power, federal government now guarantees all MBS's sold by Fannie Mae and Freddie Mac

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Secure and Fair enforcement for mortgage licensing act.

AKA SAFE ACT

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A federal law enacted in 2008 to implement a national system of licensing and registration for all loan originators. Requires all loan originators to be either state- licensed or federally registered, requires all states to comply with standard reporting requirements and use uniform license application forms for state-licensed loan originators, increase the tracking and reporting of loan originator information across state lines, impose fiduciary duties on all loan originators, and enhance consumer protection and anti-fraud measures.

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Financial institutions reform, recovery and enforcement act

AKA- FIRREA

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A federal law enact din 1989 in response to the savings and loan crisis; it reorganized the federal agencies that oversee financial institutions. Also imposed new rules on S&L lending to prevent high risk transactions. Placed the Federal Home Loan Bank Board with the Federal Housing Finance Board and the Office of Thrift Supervision. Reorganized the Federal Deposit Insurance Corporation (FDIC) to cover S&L deposits. Formed the Resolution Trust Corporation (RTC) to manage insolvent S&L's.

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Housing and economic recovery act

AKA- HERA

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A federal law enacted in 2008 to strengthen the housing market by funding neighborhood revitalization, providing capital to the secondary market agencies, adding mortgage disclosure requirements, and offering lower-cost financing to struggling homeowners.

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Troubled asset relief program

AKA- Tarp

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A federal law enacted in 2008 to address the US economic crisis, authorizing the expenditure of up to 700 billion in the taxpayer funds to buy loans that present a high risk of default from financial institutions, and also to provide financial aid to other sectors of the economy.

lass-Steagall AG

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Glass-Steagall Act

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A law adopted in 1933, requiring US banks to choose between commercial banking services and investment banking services, a bank was prohibited from providing both. This act also made it illegal for banks to be involved int he insurance business. This act was repealed in 1999 by the financial services modernization Act AKA Gramm-Leach-Bliley ACT

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Financial Services Modernization act

AKA- Gramm-Leach-Bliley ACT

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this act made it legal for a holding company to have a bank, a securities firm, and an insurance company as subsidiaries. A holding company is basically a corporate entity created for the purpose of owning the other companies

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Federal Financial Institutions Examination Council

AKA- FFIEC

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An interagency body that prescribes standardized examination procedures for federal regulators.

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Garn-St. Germain Depsitory Institutions act of 1982

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This legislation loosened regulatory restrictions on savings and loan associations. It allowed S& L's to pay higher interest rates than before to attract depositors and they are now able to make more consumer loans and non-residential loans.

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Depository Institutions Deregulation and Monetary control actof 1980

(DISMCE)

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Gave the Federal Reserve greater control over non-member banks. Forced all banks to abide by Fed's riles allowed banks to merge, removed the power of the Federal Reserve Board of Governor's under the Glass-Steagall Act to set interest rates of savings accounts, allowed credit unions and S&L's to offer checkable deposits and allowed institutions to charge any interest rate they choose.

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Alternative Mortgage Transaction Parity Act

(AMPTA)

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An act of 1982 that over-rode many state laws that prevented banks from using mortgages other than conventional fixed-rate mortgages. This act allowed for the total costs of loans to become obscured and led to the availability of various new mortgages such as ARMS, interest-only mortgages and balloon payment mortgages. Many believe that this act is the axis for the subprime crisis in 2007

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Loan officer

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a employe of the lender who helps a buyer decide what type of financing they want and helps them prepare their application.

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Loan originator

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May or may not be the lender's employee;an individual who takes a residential mortgage loan application and offers or negotiates terms of a residential mortgage loan for compensation or gain.

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Wholesale Lender

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Large lenders who have vast quantities of funds available for lending, but who use outside entities to find their borrowers

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Mortgage broker

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Usually an independent contractor who often works with multiple lenders. Not an actual lender but rather an intermediary, a go-between who brings borrowers together with lenders in exchange of a commission.

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Registered Loan originator

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Loan originator employed by a depository institution or its subsidiary

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State-Licensed Loan originators

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All other loan originators. Although a real estate agent is generally excluded from the requirements of there SAFE act, they will be considered a loan originator if they are compensated by a lender or a mortgage broker for helping to arrange a loan

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Mortgage banker

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Originates loans- includes processing borrower's application, underwriter decision and funding the loan

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Loan Correspondent

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Make loans for large investors, such as life insurance companies, pension funds or wholesale lenders. May handle entire origination process and underwriting, but loan funds come from the investor or lender. Local lending institutions and mortgage companies often act as loan correspondents.

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Commercial Banks

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Originally developed to serve commercial enterprises. Later they began paying interest on deposits and using those funds to make loans. Eventually offering what are now called checking accounts to facilitate commercial transactions

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Investment banks

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Securities firms, commonly know as stock brokerages. They raise capital from corporations, arrange for the issuance of government and corporate bonds, manage corporate finances, and handle mergers and acquisitions. They also provide investment advice to clients and manage their investments.

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Thrift Institutions

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Savings banks and saving and loan associations are generally grouped together and referred to as thrift institutions or simply as thrifts. Like commercial banks, thrifts are governed by either a federal or a state charter.

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Savings Banks

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Started out in early nineteenth century by offering financial services to small depositors, especially immigrants and members of the new industrial working class. They are sometimes called mutual savings banks.

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Savings and Loan associations

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Developed in the ninetieth century. Originally called building and loan associations, S&L's were ford in local communities to finance the construction of homes. An association was formed to see only its members.

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Credit Unions

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Started in the US in the early twentieth century. They are nonprofit cooperative organizations designed to serve the members of a particular group, such as a labor union or a professional association or the employees of a large company.

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Mortgage Companies

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They are not depository institutions , and their business is focused exclusively on mortgage lending and affiliated services. Mortgage companies are also called mortgage banking companies or mortgage bankers.

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Independent Mortgage Companies

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These are not associated with a bank or a thrift. Not as strictly regulated or supervised as banks and thrifts.

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Government influences on finance

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The government influences real estate fin ace by influencing the cost of mortgage funds. Market interest rates represent the cost of borrowing money. The federal government affects the cost of borrowing through fiscal and monetary policy.

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Fiscal Policy

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Determined by both the legislative and executive branches- is carried out by the US Treasury Department If the federal government spends more money than it receives in a year, a deficit occurs, so the government sells interest-bearing securities to investors to finance the shortfall

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Monetary Policy

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Refers to the governments control over the money supply, which is the implement by the Federal Reserce System- the "FED"

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National Bank Act

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The first to regulate banks in 1863

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Feral Reserve System Act of 1913 and 1916

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Created the modern banking system

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Federal Reserve System

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Imposes reserve requirements, specifying what amount of a banks deposits must be kept in reserve to be available for withdrawal

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Federal Reserve

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Acts as a lender of last resort, providing short term loans to banks running low on funds

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Federal Deposit Insurance Corporation

AKA FDIC

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bolstered the stability of the banking industry in the 1930's

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Federal Reserve

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Actas as a lender of last resort, providing short term loans to banks running low on funds.

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Federal Reserve System

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Decentralized into 12 regains Federal Reserve Banks, controlled by the seven-member board of Governors, each chosen for 14 yea terms from different Federal Reserve Districts. Each regional Federal Reserve bank if an incorporated bank owner by the member commercial banks in its district. Each regional bank is controlled by a nine-member board of directors.

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Implementing Monetary Policy

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Reserve requirements: a percentage of deposits that each bank must maintain either in its own vaults or on deposit with the Federal Reserve Bank. Allow the Fed to control the money supply.

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Interest Rates

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The FED controls two key interest rates:

Federal discount rate-rate charged to member banks when they borrow money from the Fed to cover shortfall in funds.

Federal funds rate- rate banks charge each other for loans to cover shortfalls.

Lenders market interest rates will usually rise or fall in response to changes in the federal rates, although long-term rates- such as mortgages- are not immediately affected.

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Open Market Operations

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The Fed controls the money supply by:

*buying securities-puts more money into the money supply.

*selling government securities-takes money from investors out of the money supply, which will increase interest rates

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Changes in monetary policy

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The Fed will modify its monetary policy in response to changing economic indicators.

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Alienation Clause

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Limits the borrower's rights to transfer the property without the lenders permission unless the loan is paid off first.

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Purchase money mortgage

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A mortgage that a buyer gives to a seller in a seller-financed transaction

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Budget Mortgage

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Payments include principal and interest and also taxes and insurance

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Package mortgage

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covers the purchase of both real property and personal property.

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Participaiton Mortgage

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Lender receives percentage of earnings generated by the property, in addition to interest payments

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Shared Appreciation Mortgage

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Lender is entitled to a portion of any increase in property value

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Arm

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Allows lender to adjust the interest rate on a loan periodically

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Note Rate

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Initial rate

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Margin

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Difference between the ARM interest rate and the index rate

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Hybrid ARM

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An ARM with an initial fixed-rate period.

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Housing Ratio

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PITI / income

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Program Ratios

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Conventional 28/36

FHA 31/43

VA total debt 41

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Characteristics of income

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Quantity, quality, durability

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Quantity

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income must be enough to cover total monthly mortgage payment in addition to all other expenses

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Quality

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Dependable.

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Homeowner's protection act

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Passed in 1998- lenders must cancel a loan's PMI under certain conditions.

*PMI is to be canceled once the loan has been paid down to 80% of the property's original value-at borrowers request.

*Automatic cancellation- w/o borrower request- it is required once the loan balance reaches 78% of the property's original value.