Copyright South-Western, a division of Thomson, Inc. Slide 1 MORTGAGES Mortgage Lending Mortgage Loan Processing Mortgages and the Law Government-Backed Loans 7

Copyright South-Western, a division of Thomson, Inc. Slide 2 Lesson 7.1 MORTGAGE LENDING Define the term mortgage Identify several types of mortgages GOALS

Copyright South-Western, a division of Thomson, Inc. Slide 3 WHAT IS A MORTGAGE? Today, a mortgage is a note, usually long-term, secured by real property. Essentially, a mortgage places a lien on the property that is not released until the debt is paid. If the mortgage is not paid, the creditor seeks a court-ordered sale of the property called a foreclosure, and the debt is paid from those funds.

Copyright South-Western, a division of Thomson, Inc. Slide 4 FIXED RATE MORTGAGES Fixed rate mortgages, also called conventional mortgages, are loans with a fixed rate of interest for the life of the loan. Payments on the loan are set for the life of the loan. Terms are set for the life of the loan. The most common terms are 30- and 15-year terms.

Copyright South-Western, a division of Thomson, Inc. Slide 5 BALLOON MORTGAGE In a balloon mortgage, the interest rate and payment stay fixed, but at some specified point, the entire remaining balance of the loan is due in one single “balloon” payment.

Copyright South-Western, a division of Thomson, Inc. Slide 6 ADJUSTABLE RATE MORTGAGES Adjustable rate mortgages (ARMs) are those with rates that change over the course of the loan. Usually the interest rate and payments are fixed for some period of time at the outset but then change according to some index value. Some of the things that can vary are: Interest rate Payment Index Formula Adjustment interval Periodic cap Lifetime cap

Copyright South-Western, a division of Thomson, Inc. Slide 7 BUY-DOWN MORTGAGE In a buy-down mortgage, the borrower buys down, or prepays, part of the interest in order to get a lower rate. The borrower pays points to the lender at the outset, and the lender agrees to lower the rate so much per point. A point is a value equal to 1 percent of the loan.

Copyright South-Western, a division of Thomson, Inc. Slide 8 SHARED APPRECIATION MORTGAGE A shared appreciation mortgage (SAM) can lower interest rates for borrowers who agree to share later with the lender some part of the amount the house appreciates. Appreciation is the amount that a house increases in value.

Copyright South-Western, a division of Thomson, Inc. Slide 9 REFINANCINGREFINANCING Refinancing is starting over with an entirely new loan, using part or all of the loan funds to pay off the old mortgage. If interest rate are low, consumers save money by getting new mortgages at lower rates. Banks and other lenders earn money on fees, points, and closing costs of the new loan.

Copyright South-Western, a division of Thomson, Inc. Slide 10 HOME EQUITY LOANS Equity is the difference between what an item is worth and what is owed on it. Homeowners can use the difference between what they owe and what their homes are worth to secure a loan.

Copyright South-Western, a division of Thomson, Inc. Slide 11 REVERSE MORTGAGES A reverse mortgage is not used to purchase a home. It is a form of consumer loan tied to the appreciated value of a property. In most cases, reverse mortgages are limited to homeowners 62 years or older. With a 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. The lender is repaid, including fees and interest, when the borrower sells or dies.

Copyright South-Western, a division of Thomson, Inc. Slide 12 Lesson 7.2 MORTGAGE LOAN PROCESSING Describe the components involved in obtaining a mortgage Explain the mortgage approval process GOALS

Copyright South-Western, a division of Thomson, Inc. Slide 13 OBTAINING A MORTGAGE Lenders typically require a down payment of 5, 10, or 20 percent for a mortgage. A larger down payment lowers the cost of the monthly payment and may affect how the lender views the borrower. Most lenders do not want a person’s housing costs to exceed 25 to 28 percent of gross monthly income. Total debt should not exceed 36 percent.

Copyright South-Western, a division of Thomson, Inc. Slide 14 MONTHLY PAYMENTS Monthly payments to the lender usually consist of PITI or Principal, Interest, Taxes, and Insurance.

Copyright South-Western, a division of Thomson, Inc. Slide 15 PITIPITI Principal is the remaining unpaid balance of the mortgage. Interest is the amount that goes toward interest. Taxes include local real estate taxes. Most lenders require an amount to be paid to them in advance, called escrow, from which they pay the real estate taxes. Insurance refers to property insurance and sometimes private mortgage insurance. Almost all mortgages require the homeowner to maintain adequate property insurance. Private mortgage insurance (PMI) protects the lender against loan default.

Copyright South-Western, a division of Thomson, Inc. Slide 16 THE APPROVAL PROCESS Application Documentation Underwriting Drawing documents Closing Recording

Copyright South-Western, a division of Thomson, Inc. Slide 17 Lesson 7.3 MORTGAGES AND THE LAW Describe consumer protection laws that apply to mortgage lending Describe laws directly related to mortgage lending GOALS

Copyright South-Western, a division of Thomson, Inc. Slide 18 CONSUMER PROTECTION LEGISLATION Truth in Lending Act (TILA) Equal Credit Opportunity Act (ECOA) Fair Credit Reporting Act (FCRA) Fair Debt Collection Practices Act (FDCPA) Gramm-Leach-Bliley Act

Copyright South-Western, a division of Thomson, Inc. Slide 19 MORTGAGE LEGISLATION In addition to consumer legislation, other laws exist that relate directly to mortgage lending. Complying with this legislation and documenting compliance requires considerable effort and expense on the part of the financial institutions.

Copyright South-Western, a division of Thomson, Inc. Slide 20 COMMUNITY REINVESTMENT ACT Congress passed the Community Reinvestment Act (CRA) of 1977 in response to widespread complaints that some banks refused to lend to residents of certain neighborhoods, a practice called redlining.

Copyright South-Western, a division of Thomson, Inc. Slide 21 HOME MORTGAGE DISCLOSURE ACT The Home Mortgage Disclosure Act (HMDA) of 1974 was a forerunner of the CRA. It requires banks and other financial institutions to record and report data on home lending in order to identify possible discriminatory patterns.

Copyright South-Western, a division of Thomson, Inc. Slide 22 HOME OWNERSHIP AND EQUITY PROTECTION ACT Congress passed the Home Ownership and Equity Protection Act (HOEPA) in 1994 to protect consumers against predatory lending. Provisions of this act also apply to second mortgages and refinancing.

Copyright South-Western, a division of Thomson, Inc. Slide 23 REAL ESTATE SETTLEMENT PROCEDURES ACT Congress enacted the Real Estate Settlement Procedures Act (RESPA) of 1974 to protect consumers from hidden costs or expensive surprises at closing time. The law requires disclosures to be provided to the borrower at various times during the transaction.

Copyright South-Western, a division of Thomson, Inc. Slide 24 THE HOMEOWNERS’ PROTECTION ACT OF 1998 The Homeowners’ Protection Act of 1998 requires that lenders drop PMI when equity reaches 22 percent in loans closed after July 29, 1999.

Copyright South-Western, a division of Thomson, Inc. Slide 25 Lesson 7.4 GOVERNMENT- BACKED LOANS Explain the concept of government-backed loans Identify government-backed programs to encourage home lending GOALS

Copyright South-Western, a division of Thomson, Inc. Slide 26 WHAT IS A GOVERNMENT-BACKED LOAN? Numerous government programs help banks help people get loans. In most of these programs, the banks provide funding and the government absorbs some of the risk.

Copyright South-Western, a division of Thomson, Inc. Slide 27 FEDERAL MORTGAGE PROGRAMS The Federal Housing Administration (FHA), established in 1934, supported both homebuyers and banks by replenishing funds available for home lending. Today, there are many such programs with varying missions, services, and operations, but the twin benefits of both supporting homeowners and backing the banking industry continues.

Copyright South-Western, a division of Thomson, Inc. Slide 28 FEDERAL HOUSING ADMINISTRATION During the Great Depression Established to help the housing industry get back on its feet Guaranteed loans and provided mortgage insurance Pioneered long-term loans

Copyright South-Western, a division of Thomson, Inc. Slide 29 OFFICE OF HOUSING Today, what was once the FHA is now the Office of Housing and is part of the Department of Housing and Urban Development (HUD). The Office of Housing continues to guarantee FHA loans and provide mortgage insurance.

Copyright South-Western, a division of Thomson, Inc. Slide 30 FANNIE MAE The Federal National Mortgage Association (FNMA) was created in 1938 as part of the FHA. Fannie Mae is a government-chartered corporation that buys mortgages from the originating institutions and either keeps them or exchanges them for securities which it guarantees. Fannie Mae is now an independent corporation.

Copyright South-Western, a division of Thomson, Inc. Slide 31 FREDDIE MAC The Federal Home Loan Mortgage Corporation was created in 1970 as a fully independent corporation. Freddie Mac buys home mortgages from banks and other lending institutions and combines them into large groups, selling interest in the groups to investors.

Copyright South-Western, a division of Thomson, Inc. Slide 32 GINNIE MAE The Government National Mortgage Association is part of the Department of Housing and Urban Development. Ginnie Mae neither buys nor sells mortgages. It backs securities issued by holders of pools of mortgages.

Copyright South-Western, a division of Thomson, Inc. Slide 33 VETERANS ADMINISTRATION (VA) Loans from the Department of Veterans Affairs (DVA) have helped millions of service men and women get government-backed loans with low down payments. VA loans allow qualified veterans to buy, build, remodel, or refinance a home.

Copyright South-Western, a division of Thomson, Inc. Slide 34 NCHSANCHSA The National Council of State Housing Agencies (NCHSA) is a national organization of Housing Finance Agencies (HFAs) throughout the states that provide and administer programs for lower-income and other people who seek help at the state level to buy or renovate a home. There are also 350 affiliated profit and nonprofit agencies that work in this field. These agencies and firms have a variety of programs for affordable housing.

Copyright South-Western, a division of Thomson, Inc. Slide 35 OTHER GOVERNMENT-BACKED LOANS There are many other government-backed loan programs. It is not easy to find every government loan program. The Catalog of Federal Domestic Assistance is available in government depository libraries and online at