Chapter 12

Georgia Real Estate An Introduction to the Profession Eighth Edition Chapter 2 chapter title

Key Terms alienation clause automated underwriting system computerized loan origination disintermediation Fannie Mae Freddie Mac Ginnie Mae mortgage broker mortgage company participation certificate primary market secondary mortgage market usury © 2015 OnCourse Learning

Primary Market The primary market is where lenders originate loans. © 2015 OnCourse Learning

Primary Market Primary lenders often sell their loans in the secondary market. Insurance companies, pension funds, and individual investors buy these loans for cash. This makes more money available to the primary lenders. © 2015 OnCourse Learning

Disintermediation Disintermediation results when depositors take money out of their savings accounts and invest directly in government securities, corporate bonds and money market funds. © 2015 OnCourse Learning

Commercial Banks Commercial banks have realized that first-lien residential loans are very secure, low-risk loans. © 2015 OnCourse Learning

Life Insurance Companies Generally, life insurers specialize in large-scale investments such as shopping centers, office and apartment buildings. © 2015 OnCourse Learning

Mortgage Companies A mortgage company makes a mortgage loan and then sells it to a long-term investor. The mortgage company will usually continue to service the loan. © 2015 OnCourse Learning

Mortgage Companies Mortgage bankers typically receive 1% - 3% of the amount of the loan when it is originated, and from 0.25% - 0.5% of the outstanding balance each year thereafter for servicing. © 2015 OnCourse Learning

Mortgage Companies Commercial banks, savings and loan associations and mutual savings banks often originate more real estate loans than they can hold themselves, and these are sold on the secondary market. © 2015 OnCourse Learning

Mortgage Brokers Mortgage brokers specialize in bringing together borrowers and lenders. The mortgage broker does not lend money and usually does not service loans. © 2015 OnCourse Learning

Computerized Loan Origination Computerized loan origination (CLO) enables borrowers to obtain preliminary loan approval immediately from the loan originator. © 2015 OnCourse Learning

Other Lenders Pension funds and trust funds are placing more money into real estate loans. Pension funds are an often-overlooked source of primary market financing. © 2015 OnCourse Learning

Other Lenders Credit unions have branched out into first and second mortgage loans. © 2015 OnCourse Learning

Secondary Market The secondary mortgage market provides a way for a lender to sell a loan. It also permits investment in real estate loans without the need for loan origination and servicing facilities. © 2015 OnCourse Learning

Secondary Market The secondary market is a pipeline for loan money. © 2015 OnCourse Learning

Secondary Market Delivery System Primary lenders can make loans from the secondary market funds instead of their own deposits. © 2015 OnCourse Learning

Secondary Market Delivery System With the secondary market system, the borrower obtains a loan from a mortgage originator. © 2015 OnCourse Learning

Secondary Market Delivery System This includes mortgage companies, banks and thrifts that originate loans they intend to sell. © 2015 OnCourse Learning

Secondary Market Delivery System The mortgage originator packages the loan with other loans and then sells the package as a whole or keeps the package and sells securities that are backed by the loans in the package. © 2015 OnCourse Learning

Secondary Market Delivery System There are two sources for this secondary market: Private investors such as commercial banks, savings and loans, pension plans, trust funds and other investors Investment pools who are looking for more security in their investments © 2015 OnCourse Learning

Mortgage Loan Delivery Systems © 2015 OnCourse Learning

Standardized Loan Procedures Loan forms and procedures have become standardized: loan application forms appraisal forms credit report forms © 2015 OnCourse Learning

Standardized Loan Procedures Loan forms and procedures have become standardized: closing statements loan approval criteria promissory notes, mortgages and trust deeds © 2015 OnCourse Learning

Standardized Loan Procedures Loan terms have been standardized into categories: fixed-rate 15 year loans, fixed-rate 30 year loans, etc. © 2015 OnCourse Learning

Standardized Loan Procedures Nearly all loans must be insured. This can be FHA, PMI or a VA guarantee. © 2015 OnCourse Learning

FNMA The Federal National Mortgage Association (FNMA or Fannie Mae) was organized by the federal government to buy FHA loans from lenders. © 2015 OnCourse Learning

FNMA This made it possible for lenders to grant more loans to consumers. It also purchases VA loans. © 2015 OnCourse Learning

FNMA Fannie Mae buys FHA, VA and conventional home loans from lenders across the United States. © 2015 OnCourse Learning

FNMA Fannie Mae must purchase all loans delivered to it under the terms of the commitments. The largest loan Fannie Mae would was is $417,000 for a single-family home. © 2015 OnCourse Learning

GNMA The Government National Mortgage Association (GNMA or Ginnie Mae) is a federal agency entirely within the Department of HUD. © 2015 OnCourse Learning

GNMA Ginnie Mae has some low-income housing functions. It is best known for its mortgage-backed securities. © 2015 OnCourse Learning

GNMA Ginnie Mae offers a government guarantee of repayment. GNMA issues guarantee certificates. The purpose of Ginnie Mae is to guarantee the timely payment of the principal and interest to the investor, backed by the US government. © 2015 OnCourse Learning

FHLMC The goal of the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) is to increase the availability of financing for residential mortgages. © 2015 OnCourse Learning

FHLMC Freddie Mac deals primarily in conventional mortgages. They issue their own securities against their own mortgage pools. © 2015 OnCourse Learning

Farmer Mac The Federal Agricultural Mortgage Corporation (Farmer Mac) is a separate agency within the Farm Credit System to establish the secondary market needed for farm real estate loans. © 2015 OnCourse Learning

Farmer Mac Farmer Mac purchases loans directly from originators and issues their own 100% guaranteed securities backed by the loans. © 2015 OnCourse Learning

Usury Usury laws were originally enacted to prohibit lenders from overcharging interest on loans to individuals. © 2015 OnCourse Learning

Price to the Borrower The rate of interest the borrower must pay to obtain a loan is dependent on the cost of money to the lender, reserves for default, loan servicing costs and available investment alternatives. © 2015 OnCourse Learning

Due-on-Sale Most loans contain a due-on-sale clause also known as an alienation clause. If a borrower sells the property to someone considered uncreditworthy by the lender could call the loan balance due. © 2015 OnCourse Learning

Due-on-Sale Also, when interest rates increase, lenders can use this clause to increase the rate of interest on the loan when the property changes hands by threatening to accelerate the balance of the loan unless the new owner accepts a higher rate of interest. © 2015 OnCourse Learning

Prepayment Loan contracts sometimes contain a prepayment penalty. The penalty varies from loan to loan and from state to state. © 2015 OnCourse Learning

Prepayment By federal law, prepayment penalties are not allowed on FHA and VA loans. © 2015 OnCourse Learning