The Mortgage Industry

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Lesson 4

• The Mortgage Industry

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Introduction

• In this lesson, we will cover
• steps in the residential mortgage process
• participants in the process, including loan
  originators and lenders
• government intervention in the mortgage
  industry during the Great Depression and the
  SL crisis and
• the mortgage industry and the current economic
  crisis.

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Introduction

• Note that terminology concerning the mortgage
  industry isnt always used consistently
  throughout the industry.
• Definitions given here wont necessarily match
  the ones you encounter in the field.
• Terms such as loan origination, loan officer,
  and mortgage broker are used differently in
  different contexts and by different people.

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Overview of the Mortgage Process

• Home buyer applies for a loan.
• Loan originator helps buyer with application and
  submits it to lender(s).
• Lender approves and funds loan.
• After the loan has been made
• Lender may keep loan in portfolio or sell it on
  secondary market.
• Servicer (lender or another entity) collects
  payments, handles other administrative tasks.

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Loan Origination

• Loan originator who helps buyer apply may be
• a loan officer, employed by a particular lender,
  
• or
• a mortgage broker, an independent agent who
  usually works with more than one lender.

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Loan Origination

• Loan originator who helps buyer apply may be
• a loan officer, employed by a particular lender,
  
• or
• a mortgage broker, an independent agent who
  usually works with more than one lender.
• Loan may be originated in
• a retail transaction (direct lending), or
• a wholesale transaction (indirect).

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Loan Origination
Retail transactions

• Retail lending is the traditional way
• Buyer applies to Acme Bank.
• Loan originator who works with buyer is a loan
  officer employed by Acme.
• Loan officer submits application to Acmes
  underwriting department.
• If approved, Acme funds loan.

8
Loan Origination
Wholesale transactions

• Wholesale lending came to the fore in the 1990s.
• Buyer applies to Zenith Mortgage.
• Zenith, acting as an intermediary, may be
• a loan correspondent processing the loan on
  behalf of a large national lender, MegaBank, or
• a mortgage broker submitting the application to
  one or more lenders, including MegaBank.

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Loan Origination
Wholesale transactions

• By lending indirectly, through local loan
  correspondents or mortgage brokers, wholesale
  lenders reduce their overhead.
• They dont have to pay for office space or have
  employees in every place they make loans.

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Loan Origination
Loan correspondents

• Loan correspondents make loans for large
  investors, such as life insurance companies,
  pension funds, or wholesale lenders.
• Correspondent may handle entire origination
  process and underwriting, but loan funds
  ultimately come from the investor or wholesale
  lender.
• Local lending institutions and mortgage
  companies often act as loan correspondents.

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Loan Origination
Mortgage brokers

• Mortgage broker is only a go-between, not a
  lender.
• Brings borrowers and lenders together in
  exchange for a commission.
• Helps home buyer choose lender(s) and submit
  application(s).
• May provide preliminary approval based on
  lenders underwriting rules.
• But doesnt actually underwrite, approve, or
  fund loan, as a general rule.

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Loan Origination
Mortgage brokers

• Table-funded loan creates the impression that the
  mortgage broker is the lender.
• Mortgage broker designated as originating
  lender in loan documents.
• Loan actually funded by wholesale lender at
  the closing table.
• At closing, broker assigns loan rights to true
  lender, receives service release premium.
• Raises consumer protection issues.

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Loan Origination
Regulation of loan originators

• Housing and Economic Recovery Act, 2008 law
  addressing mortgage crisis, includes Secure and
  Fair Enforcement for Mortgage Licensing Act.
• S.A.F.E. is designed to prevent abusive,
  predatory practices during loan origination.

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Regulation of Loan Originators
S.A.F.E. licensing and registration rules

• S.A.F.E. requires all loan originators to be
  either federally registered or state-licensed.
• Registered loan originator Employed by
  depository institution or subsidiary.
• State-licensed loan originator All others must
  have state license.
• Registration or licensing required even for
  those who perform clerical or support duties.

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Regulation of Loan Originators
S.A.F.E. licensing and registration rules

• Real estate agents
• generally exempt from S.A.F.E. licensing rules
• but must have originators license if
  compensated by a lender or mortgage broker for
  helping to arrange a loan.

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Regulation of Loan Originators
Other S.A.F.E. provisions

• Uniform license applications and reporting
  requirements for states.
• Improved information tracking across state
  lines (background checks, fingerprinting, etc.).
• Enhanced consumer protection and anti-fraud
  measures.
• Fiduciary duties for loan originators.

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Regulation of Loan Originators
Originators fiduciary duties to buyer

• Traditionally, mortgage broker
• wasnt buyers agent
• didnt have duty to help buyer choose best
  financing option or to act in buyers best
  interests.

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Regulation of Loan Originators
Originators fiduciary duties to buyer

• Traditionally, mortgage broker
• wasnt buyers agent
• didnt have duty to help buyer choose best
  financing option or to act in buyers best
  interests.
• But some states have laws giving mortgage
  brokers fiduciary duties to buyers.
• And now S.A.F.E. imposes fiduciary duties as a
  matter of federal law.

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Loan Origination

• Loan originator
• Loan officer
• Mortgage broker
• Retail lending
• Wholesale lending
• Loan correspondent
• Table-funded loan
• S.A.F.E.

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Mortgage Lenders

• After helping home buyer prepare loan
  application, loan originator submits it to a
  mortgage lender.
• Lender reviews application and decides whether
  to approve or reject it.
• If application approved, lender will fund the
  buyers loan.

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Types of Mortgage Lenders

• Main sources of residential mortgage financing in
  the primary market
• Depository institutions
• Commercial banks
• Thrift institutions (savings banks and savings
  and loan associations)
• Credit unions
• Mortgage companies

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Types of Mortgage Lenders
Mortgage companies

• First U.S. mortgage companies were established in
  the 1930s.
• Not depository institutions
• Business focused exclusively on mortgage
  lending and related services
• Also called mortgage banking companies or
  mortgage bankers

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Mortgage Companies
Independent vs. associated

• Original mortgage companies were private
  businesses unconnected with banks or other
  depository institutions.
• Now some are associated with depository
  institutions as direct subsidiaries or
  affiliates.
• Companies not associated with a depository
  institution are called independent mortgage
  companies.

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Mortgage Companies
Independent vs. associated

• Independent mortgage companies are regulated much
  less than depository institutions.
• Not subject to same rules as depository
  institutions.
• Not subject to periodic examinations to
  determine compliance with financial
  requirements and consumer protection laws.
• Generally investigated only if complaint filed
  with FTC or state agency.

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Mortgage Companies
Business activities

• Some mortgage companies engage in mortgage
  brokerage activities as well as mortgage banking
  activities.

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Mortgage Companies
Business activities

• Some mortgage companies engage in mortgage
  brokerage activities as well as mortgage banking
  activities.
• Zenith Mortgage could be a
• mortgage banker (a lender),
• mortgage broker (a go-between), or
• combination of the two.

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Mortgage Companies
Business activities

• Some mortgage companies engage in mortgage
  brokerage activities as well as mortgage banking
  activities.
• Zenith Mortgage could be
• a mortgage banker (a lender),
• a mortgage broker (a go-between), or
• a combination of the two.
• Some companies also service loans.

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Mortgage Companies
Sources of funds for lending

• Mortgage companies arent depository
  institutions, so they cant use depositors
  savings to fund loans.

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Mortgage Companies
Sources of funds for lending

• Mortgage companies arent depository
  institutions, so they cant use depositors
  savings to fund loans.
• Instead, a mortgage company may
• act as a loan correspondent for large investors
  or wholesale lenders, or

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Mortgage Companies
Sources of funds for lending

• Mortgage companies arent depository
  institutions, so they cant use depositors
  savings to fund loans.
• Instead, a mortgage company may
• act as a loan correspondent for large investors
  or wholesale lenders, or
• draw on a line of credit from a commercial
  bank, then sell the loans and use the sale
  proceeds to pay off bank and make more loans.

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Mortgage Companies
Sources of funds for lending

• Mortgage companies keep few if any loans in
  portfolio.
• Loans are either made on behalf of a large
  investor or sold on the secondary market.

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Types of Mortgage Lenders
Alternative sources of financing

• Sometimes a private individual makes mortgage
  loans to home buyers on a small scale.
• A private lending business
• may be legal, or
• may violate state licensing laws, usury laws,
  disclosure laws, or predatory lending laws.

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Types of Mortgage Lenders
Alternative sources of financing

• Most important alternative source of financing
  for home buyers is the home seller.
• Seller may provide some or all of the
  financing.
• Common when institutional loans are hard to
  get or interest rates are high.

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Mortgage Companies Alternatives

• Mortgage company
• Mortgage banker
• Independent mortgage company
• Private lenders
• Home sellers

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Government Intervention
Mortgage and financial crisis

• Crisis in mortgage industry led to larger credit
  crunch and crisis in financial markets, spreading
  to entire U.S. economy and to global economy.
• Many factors and events came together to create
  the crisis in the mortgage industry.

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Mortgage and Financial Crisis
Housing bubble

• Housing bubble Artificial inflation of home
  prices.
• In U.S., housing bubble began developing in
  early 2000s.

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Mortgage and Financial Crisis
Housing bubble

• Factors contributing to creation of bubble
  included
• Policies promoting homeownership for all home
  as investment
• Growth of subprime market, with increase in
  predatory lending
• Relaxation of underwriting standards
• Nontraditional loans like option ARMs
• Looser rules, lax oversight for lenders,
  financial institutions, financial markets

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Mortgage and Financial Crisis
Foreclosure crisis

• When bubble burst, home values dropped.
• Owners found themselves underwater, owing
  more than value of home.
• With no equity, couldnt refinance to prevent
  payment shock when ARM or interest-only loan
  payment increased sharply.
• Foreclosure rate began to climb.

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Mortgage and Financial Crisis
Foreclosure crisis

• Mounting foreclosures led to
• Toxic mortgage-backed securities
• Bankrupt mortgage lenders
• Failure of investment banks

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Mortgage and Financial Crisis
Government response

• Housing and Economic Recovery Act (HERA)
• Home buyer tax credit
• Programs to purchase foreclosed homes and
  revitalize neighborhoods
• Increased conventional and FHA loan limits
• Hope for Homeowners refinancing program
• New regulatory agency to oversee Fannie Mae and
  Freddie Mac

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Mortgage and Financial Crisis
Government response

• Takeover of Fannie Mae and Freddie Mac
• Troubled Asset Relief Program (TARP) 700
  billion emergency bailout for financial
  institutions and other companies

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Mortgage and Financial Crisis

• Housing bubble
• Subprime loans
• Predatory lending
• Nontraditional mortgages
• Underwater homeowner
• Toxic securities
• HERA
• Hope for Homeowners program
• TARP