II. Primary Mortgage Market Mortgage Origination –Mortgage Originators Savings and Loans Savings Banks Commercial Banks Credit Unions Mortgage Banks Life Insurance Companies Pension Funds
–Origination Process Application Criteria –Payment-to-Income Ratio (PTI) The ratio of monthly payment to monthly income. –Loan-to-Value Ratio (LTV) The ratio of the amount of the loan to the market (or appraised) value of the property. Credit Scoring Commitment Letter to the Applicant
–Fees Origination Fee A point represents 1% of the borrowed funds. Application Fee
Insurance –Conventional Mortgages –Insured Mortgages Federal Housing Administration (FHA) Veterans Administration (VA) Rural Housing Service (RHS)
Claim Priority –First Mortgage –Second Mortgage –Third Mortgage Maturity: 15 to 30 years
Mortgage Design –Fixed-Rate Mortgage (Traditional Mortgage) –Adjustable-Rate Mortgage (ARM) Rates to be reset every month, year, two years, or three years. –Balloon-Payment Mortgage (Balloon/Reset Mortgage, Rollover Mortgage) Rates to be renegotiated every 3 to 5 years.
–Graduated-Payment Mortgage (GPM) Nominal monthly repayment grows at a constant rate during a portion of the life of the contract, thereafter leveling off. –Price-Level-Adjusted Mortgage (PLAM) Monthly payments to be level in purchasing power terms rather than in nominal terms.
–Growing-Equity Mortgage The payments never level off but continue to increase throughout the life of the loan. –Shared-Appreciation Mortgage
Risk –Determinants Equity Invested (Loan-to-Value Ratio) Borrower’s Income Borrower’s Credit History
–Pipeline Risk The loan applications being processed and the commitments made by a mortgage originator together are called its pipeline. Pipeline risk refers to the risks associated with originating mortgages.
Price Risk The adverse effects on the value of the pipeline if mortgage rates rise. Fallout Risk The risk that applicants or those who were issued commitment letters will not close.
III. Secondary Mortgage Market Conduits –Federally Sponsored Agencies Federal Home Loan Mortgage Corporation Federal National Mortgage Association
–Private Institutions Residential Funding Corporation GE Capital Mortgage Services Countrywide Prudential Home Mortgage
Underwriting Standards –Conforming Mortgage A mortgage loan that meets the underwriting standards to be included in a pool of mortgages underlying a security that a conduit guarantees. Maximum PTI Maximum LTV Maximum Loan Amount –Nonconforming Mortgage
IV. Mortgage-Backed Securities Mortgage-Backed Bonds –FNMA –Freddie Mac Pass-Throughs: Government guaranteed mortgages –GNMA –Privately Issued Pass-Throughs (PIPs)
Participation Certificates (PCs): Conventional mortgages pooled by Freddie Mac Collateralized Mortgage Obligations (CMOs)
Unit Investment Trust A passively managed trust with units sold to investors.