© 2012 Cengage Learning

Residential Mortgage Lending: Principles and Practices, 6e Chapter 6 Conventional Lending

© 2012 Cengage Learning Objectives After completing this chapter, you should be able to: – Discuss how the standard fixed-rate mortgage developed and why it was an important tool for reviving real estate and mortgage lending after the Great Depression. – Understand that a self-amortizing (direct reduction) mortgage can save the mortgagor a meaningful amount of interest over a term loan. – Explain the dilemma mortgage lenders were in during the high interest period of the early 1980s and what the consequences of that dilemma were to profitability. – Describe the components of an adjustable-rate mortgage (ARM).

© 2012 Cengage Learning Objectives After completing this chapter, you should be able to: – Understand the various types of alternative mortgages and which is more beneficial to the borrower and lender at various times in the interest rate cycle. – Discuss how the typical adjustable-rate mortgage is priced and how that interest rate can change. – Understand the differences between what a loan program is and what a product is. – Explain what a conforming loan is and what a conventional mortgage is to a layperson.

© 2012 Cengage Learning History Evolution of the Standard Fixed-Rate Amortizing Mortgage Mortgage Lenders’ Dilemma Alternative Mortgage Instruments 1990 to 2010: Return of the Standard Fixed- Rate Fully-amortizing Mortgage

© 2012 Cengage Learning Conforming vs. Non-conforming

© 2012 Cengage Learning Adjustable Rate Mortgages (ARMs) The most popular form of alternative mortgage instrument is the adjustable-rate mortgage (ARM), or as it sometimes called, a variable-rate mortgage loan.

© 2012 Cengage Learning

ARM Programs Hybrid-- Hybrid ARMs programs represent the most recent evolution of this type of mortgage instrument, and have dominated the market for the past ten years. Buydowns--seller or builder will pay a lender so that a borrower can get a lower initial rate or have a lower initial payment.

© 2012 Cengage Learning ARM Programs--Continued Convertible Mortgages-- attempts to combine the best features of the fixed-rate and the adjustable-rate mortgage. Two-Step, or Reset, Mortgages--provides a borrower with the certainty of a fixed-rate mortgage for a period of time (usually five or seven years), and then the rate adjusts to a new fixed rate (indexed to the 10-year Treasury, weekly average) with the payment remaining at that rate for the remaining 25 or 23 years.

© 2012 Cengage Learning ARM Programs--Continued Graduated Payment Mortgages (GPMs)-- program that was specifically designed to provide borrowers with an opportunity to match their expected increase in income with a mortgage payment that is initially low but increases yearly.

© 2012 Cengage Learning Biweekly Mortgages Benefits A payment schedule that fits the budget of those who are paid on a weekly or biweekly basis. More frequent payment schedule substantially reduces the total interest paid over the life of the loan. The life of the loan is meaningfully shortened.

© 2012 Cengage Learning Conforming Mortgage Loans

© 2012 Cengage Learning What Do You Think? Discuss how the standard fixed-rate mortgage developed in the United States and why it was an important tool for reviving real estate and mortgage lending after the Great Depression. Explain why a self-amortizing (direct reduction) mortgage can save a mortgage borrower a substantial amount of interest over a term loan.

© 2012 Cengage Learning What Do You Think? Discuss the differences between conventional and conforming mortgage programs. Identify and discuss the components of an adjustable-rate mortgage. What must a mortgage lender do to attract consumers to an adjustable-rate mortgage when fixed-rate mortgages are attractively priced?

© 2012 Cengage Learning What Do You Think? What makes a mortgage loan “subprime” and what are some of the benefits and challenges in this area of lending? How do they differ from “non-prime” mortgages? What is the difference between an eligibility issue and an underwriting guideline? Explain the difference between mortgage instruments, programs, and products.

© 2012 Cengage Learning Check Your Understanding 1.Fixed-rate mortgage loans are the norm around the world. 2.Self-amortizing loans started in England about 400 years ago. 3.Over the past thirty years variable-rate loans originations have been as high as 60 percent. 4.The most popular form of alternative mortgage instrument is the adjustable-rate mortgage (ARM), or as it sometimes called, a variable-rate mortgage loan.

© 2012 Cengage Learning Check Your Understanding 5.A problem with most ARM loans is there is no limit on how much the interest rate may increase. 6.Discount ARM loan are illegal under most state laws. 7.A biweekly mortgage requires 26 payments are year. 8.Reverse Annuity Mortgages are only for people over 62.