Real Estate Principles, Ch 11

Front 1

Thrifts

Back 1

Local savings associations that made home mortgage loans in the 1970s. Held almost 60% of all mortgages.

Front 2

Disintermediation

Back 2

Occurred when short-term savings started to receive decent returns from Wall Street, instead of thrifts.

Front 3

Commercial banks

Back 3

Core business has been to make short-term loans to businesses for inventory financing and other working capital needs.But also making mortgages to customers is a big part of business.

Front 4

Warehousing

Back 4

Where commercial banks provide short-term funds to mortgage banking companies. These mortgage bankers put up originated loans as security for the bank financing and the loans are "stored" for a relatively short time.

Front 5

Portfolio lenders

Back 5

Thrifts and banks that use savings deposits to fund and hold mortgage loans as investments

Front 6

Mortgage bankers

Back 6

Originate mortgages,providing origination services and initial funding, and then sell them as quickly as possible.

Front 7

Mortgage brokers

Back 7

Bring borrowers and lenders together, but never own resulting loans nor fund them.

Front 8

Pipeline risk

Back 8

Mortgage bankers are exposed to this risk that comes during period between loan commitment and loan sale.

Front 9

Mortgage pipeline

Back 9

A term used to describe loans from the time a lender has made a commitment to lend through time loans are sold to an investor.

Front 10

Fallout risk

Back 10

Potential loss of borrowers that come during the closing period (45-60 days) when interest rates can decline and borrowers can choose not to close the loan.

Front 11

Interest rate risk

Back 11

The threat of interest rates declining and forcing mortgage banker to have to sell newly originated loan at a discount.

Front 12

Forward commitment

Back 12

One hedging technique for mortgage banking firms. Can purchase this commitment from a secondary market investor at a prespecified future selling price. Usually for a limited time (30 days to 6 months)

Front 13

Standby forward commitment

Back 13

Mortgage bankers purchase these commitments from secondary investors that give them the right, but not the obligation, to sell a certain dollar amount of a certain loan type to issuer. Good for times when interest rates fall over commitment period and unexpectedly large amount of pipeline fallout occurs--doesn't make banker obligated to deliver mortgage that are not in hand.

Front 14

Loan servicing

Back 14

Primary source of revenue in mortgage banking. Includes collecting monthly payment from borrower and remitting principal/interest payments to the investor. Manage default/foreclosure should it arise. Receive monthly servicing fees (.25 to .44 percent of total loan balance). Market value is between .75 and 1.25 percent of loan.

Front 15

Credit union

Back 15

One type of mortgage broker

Front 16

Government National Mortgage Association (GNMA)

Back 16

AKA Ginnie Mae, a unit of HUD. Guarantee mortgage-backed securities based on pools of FHA, VA, and Rural Housing Service loans. Due to lack of a good secondary market.

Front 17

Conduits

Back 17

Agencies and private companies that pool mortgages and sell MBSs

Front 18

"Prime"

Back 18

Casual term referring to conforming conventional home loans an jumbo loans written to similar underwriting quality.

Front 19

Loan underwriting

Back 19

Lender's process of determining whether to make a mortgage loan.

Front 20

Collateral

Back 20

To evaluate this, an appraisal is required (important for LTV ratio).

Front 21

Credit scoring

Back 21

A statistical method of measuring credit. Began in mid-1990s.

Front 22

Housing expense ratio

Back 22

AKA "front-end" ratio. Equal to PITI divided by GMI (Gross monthly income)

Front 23

PITI

Back 23

Monthly payment of principal an interest on a loan plus monthly payments into an escrow account toward property taxes and hazard insurance. Conventional loans - standard maximum was 28%

Front 24

Total debt ratio

Back 24

AKA "back-end" ratio. Equal to (PITI + LTO) divided by GMI. LTO is long-term obligations (sum of payments for other obligations that extend more than 10 months, including car payments and child support). Standard maximum for conventional loans is 36%.

Front 25

Automated underwriting

Back 25

Has virtually replaced traditional approach. Combines cybertechnology and the vast lending experienced in giant GSE loan portfolios and new megamortgage lenders. System classifies loan applications according to computed risk index. If favorable, application is classified as accepted. Used in almost all home mortgage lending. Credit evaluation accomplished through a credit score.

Front 26

Affordable housing loan

Back 26

Usually have low requirements for down payments and allow unusual flexibility in one of "three C's" of underwriting while maintain other two at normal standards.