MLPP3e C01 Overview

Real Estate School of SC
Mortgage Lending
Principles and
Practices
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 1

Course Description
Today’s consumer-focused and more
heavily regulated mortgage industry
requires consummate professionals to
facilitate one of the biggest financial
commitments most people will make in a
lifetime. To this end, mortgage
professionals must be knowledgeable and
ethical when it comes to providing home
loans and services.

Course Contents
• A primer on the primary and secondary
mortgage markets
• A complete review of the economic, legal, and
valuation aspects of the real estate market
• A thorough overview of federal lending laws
• Types of loan products and finance instruments
—including conventional and alternative financing
tools
• The fundamentals of the residential mortgage
lending process—from pre-qualifying to closing
a loan
• A discussion of ethical issues
Course Objectives
• Demonstrate a broad foundation of knowledge in
mortgage lending including:
– Federal mortgage lending laws
– Loan application and underwriting processes
– Secondary market for mortgage loans
– Closing process
– Mortgage financing concepts and terms
• Understand what is expected of mortgage loan
professionals
• Act ethically and provide good customer service

Chapter 1
An Overview of
Mortgage Lending

Chapter 1: An Overview of Mortgage Lending
Mortgage Lending
• Mortgage lending is a profession that requires knowledge of many

disciplines, including:
– Real estate
– Finance
– Appraisal
– Others

Chapter Overview
• The primary mortgage market and how it is sustained and renewed by

the secondary mortgage market
• The role the mortgage professional plays in the industry and how that
is complemented—and challenged—by automation

Key Terms
• Demand Deposits • Federal National

• Disintermediation Mortgage Association
• Equity (Fannie Mae)
• Federal Home Loan • Government National
Mortgage Corporation Mortgage Association
(Freddie Mac) (Ginnie Mae)
• Federal Housing • Government
Finance Agency (FHFA) Sponsored Enterprise
(GSE)

Key Terms
• Mortgage • The Office of Federal

Housing Enterprise
• Mortgage Backed
Oversight (OFHEO)
Securities (MBS)
• Primary Mortgage
• Mortgage Banker Markets (or simply
• Mortgage Broker primary markets)
• Mortgage Lender • Secondary Mortgage
Markets (or simply
secondary markets)

A Brief History of
Mortgage Lending
• Almost every part of the mortgage industry
influenced the current state of affairs:
– Political leaders and – Appraisers

housing advocates – Loan originators
– Wall Street and – Consumers
investors – Mortgage products
– GSEs

Seeds of Today’s
Mortgage Industry
Buying a home from the 1900s-1930s
• Banks required a down payment as much as
50% of the purchase price
• Loans had a balloon payment due after a very
short term (as short as 1 or 2 years, but
usually never more than 5)
• Borrowers were forced to refinance often, with
no interest rate security

Federal Reserve System
• Created by the Federal Reserve Act of 1913

• Allowed banks to make real estate loans
• Involved the government in mortgage lending
• Government influence of interest rates

1930s Significant
Banking Legislation
• Federal Home Loan Bank Act of 1932—The
basis for the primary mortgage market
• The Banking Act of 1933—Created the Federal
Deposit Insurance Corporation (FDIC)
• The National Housing Act of 1934—Created
Federal Savings and Loan Insurance Corporation
(FSLIC) and Federal Housing Administration
(FHA)

Federal Housing Administration

(FHA)
• Introduced in 1934 to help housing industry
recover from Great Depression
• Provided mortgage insurance to banks
• Purpose: To get banks to commit more of their
funds to home mortgage loans while at the
same time improving quality of home mortgage
loans by requiring them to conform to FHA
standards


(FHA)
Under the FHA program:
• No income limits on borrowers

• Government limits the mortgage amount that
can be insured
• Only first mortgages are insured
• Insured loan amount is based on a sound
appraisal


(FHA)
Innovative programs and terms under
FHA:
• 20% down payment
• 20-year maturities—eventually grew to 30
or 40 years
• Amortized loans


(FHA)
Today, the FHA is the largest insurer of
mortgages in the world
• Over 34 million properties since its
inception in 1934

Factors That Limited

Mortgage Growth
• Quality of loans varied by bank, city, region,
etc.
• Banks did not always have money to lend
due to saving habits of their depositors

Federal National Mortgage

Association (Fannie Mae)
• Established by the federal government in 1938
and privatized in 1968
• 2008—Moved back under government control
• Federal Housing Finance Agency appointed as
conservator
• Original purpose: To provide a place for banks
and other lenders to sell their FHA-insured loans


• Process encouraged more banks to make
FHA loans and allowed those banks to get
more money to make the additional loans
• Secondary market accomplished two things:
1. More money available for mortgage loans
2. Loan qualifications and terms made more
consistent across the country


• Banks and lenders didn’t want to jeopardize
their chances to sell on the secondary
market
• Fannie Mae (and later other similar
institutions) nationalized loan qualifications
and other lending procedures
• Present-day Mortgage Lending: Its
creation was the birth of today’s mortgage
industry
Primary
Mortgage Markets
•Lenders who make mortgage loans directly to
borrowers
•Comprised of the various lending institutions
in local communities (commercial banks,
Savings and Loans, mortgage companies)
•Source of funds largely from savings deposits
of individuals and businesses in the local area

Commercial Banks
• Financial institutions that provide a variety of
financial services, including loans
• Until recently, residential mortgages were not
a major part of their business
– Mainly due to government limitations on the
amount of long-term investments they could
make

Commercial Banks
Have increased their participation in home
mortgage lending for several reasons:
• To take advantage of existing customer
relationships
• Anticipation that mortgage borrowers will
become bank customers for other services
• Fewer funds are needed on reserve to cover
losses for mortgage loans than for other types
of loans

Financial Institutions
Fall under the oversight of various

government agencies:
• Office of Thrift Supervision (OTS): Savings
associations and federally chartered savings
banks
• Comptroller of Currency (OCC): National
banks and federal branches/agencies of foreign
banks

Savings and Loan

Associations (S & Ls)
• Financial institutions specializing in
savings deposits and mortgage loans
• Mid 1940s - late 1970s—Expanded
mortgage operations aggressively
• Believed their knowledge of the local
market and ability to attract long-term
deposits meant success in long-term
conventional loans

Savings and Loan

• Suffered when interest rates surged in the late
’70s and early ’80s
• Resulted in widespread disintermediation
• S & Ls unable to sell these mortgages on the
secondary market—did not conform to Fannie
Mae standards

Savings and Loan

• Remain leading home mortgage lenders—now
follow Fannie Mae qualifying standards
• Required to keep 70% of assets in mortgage-
related activities or change federal charter to
bank charter
• With fewer S & Ls and more mortgage
companies, likely the mortgage industry will
soon replace S & Ls as leading provider of
residential mortgages

Mortgage Companies
• Mortgage companies are institutions that
function as intermediaries between borrowers
and lenders.
• Mortgage banker—One who originates
mortgage loans, usually funding loans with
the company's own funds.
• Mortgage broker—One who, for a fee,
places loans with lenders, but typically does
not service such loans.

Mortgage Companies
• Resources of service and expertise rather
than actual sources of lending capital.
• Because they invest little of their own
money, their activities are largely controlled
by the availability of investment capital in the
secondary market.

Other Financial Institutions
Other types of financial institutions that

make loans directly to borrowers for
residential first or second mortgages
include:
• Credit unions
• Finance companies
• Portfolio lenders
• Mutual savings banks

Credit Unions
A type of cooperative organization whose

members:
• share something in common (e.g., an employer)
• pool their deposits
• receive better interest rates
• loan money to fellow members

Finance Companies
• Specialize in higher-risk loans at higher
interest rates
• Sources of second mortgages and home
equity loans made directly to borrowers.

Portfolio Lenders
• Make real estate loans they keep and
service in house, instead of selling on the
secondary markets
• REO is property acquired by a lending
institution through foreclosure.
– REO property is held in inventory and then sold
to recoup all or part of the lender's investment.
• (REO means “Real Estate Owned”)

Mutual Savings Banks

• State-chartered, owned by depositors, and
operate for their benefit.
• Found mostly in the northeastern United
States.

Secondary
Mortgage Markets
• Private investors and government agencies
that buy and sell real estate mortgages
• Originally established by the federal
government in an attempt to moderate local
real estate cycles

Primary vs. Secondary
Difference between primary and secondary

markets:
• Secondary markets buy real estate loans as
investments from all over the country
• Primary markets are usually local in nature, with
local lenders making local loans

Secondary
Market’s Function
The buying and selling of mortgages from
primary market lenders.
• Loans are bought and sold for several
reasons
• The primary and secondary markets both are
trying to maximize returns on their investment
dollars

Factors of Stable
Local Real Estate Markets
• Secondary market buying mortgages from
local banks
• Local banks investing surplus funds in real
estate investments in other regions of the
country
• Standardization of loan criteria due to
secondary mortgage markets

Flow of Mortgage Funds
1. Mortgage funds loaned to a homebuyer by

a lending institution in the primary market
2. Mortgage then sold to secondary market
agency, which may sell it to other
investors in the form of mortgage-backed
securities (MBSs)

3. Because the primary lender sold the mortgage

on the secondary market, the lender can take
the money from the sale and make another
mortgage loan, then sell that new loan to the
secondary market, and continue the cycle

4. The secondary market agency can pool the

mortgages it buys to create MBSs, which
the secondary market participant then sells
to investors
5. As the secondary market agency sells the
MBSs to investors, it now has more funds
to buy more mortgages and create more
MBS pools to sell to investors again, and
the cycle continues

MSB Types
1. Bond-type securities
– Long term
– Pay interest semiannually
– Provide for repayment at a specified date
1. Pass-through securities
– More common
– Pay interest and principal payments on a
monthly basis

Secondary Market
• The secondary market functions this way

due to standardized underwriting
criteria
• A mortgage will be purchased by the
secondary mortgage market only if the
primary market lender conformed to the
underwriting standards

Secondary Mortgage
Market Agencies
1. Federal National Mortgage Association

(Fannie Mae)
2. Government National Mortgage
Association (Ginnie Mae)
3. Federal Home Loan Mortgage
Corporation (Freddie Mac)


• Nation’s largest investor in residential

mortgages
• Funds its operation by securitization
– The act of pooling mortgages, then selling
them as mortgage-backed securities
• Buys mortgages or interests in a pool of
mortgages from lenders

Government National Mortgage

Association (Ginnie Mae)
• Originally formed from part of Fannie Mae

– Took over responsibility for liquidating less-
desirable Fannie Mae mortgages left over after
the privatization in ‘68
• Primary function: To promote investment by
guaranteeing the payment of principal and interest
on FHA and VA mortgages through its mortgage-
backed securities program

Federal Home Loan Mortgage

• Primary Function: To help savings and

loans acquire additional funds for lending in
the mortgage market by purchasing the
mortgages they already held
• Actively sells mortgage loans from its
portfolio, acting as a conduit for mortgage
investments

Federal Home Loan Mortgage

Purchases mortgages one of two ways, through

its:
1. Immediate delivery program—lender must
deliver mortgages Freddie Mac has agreed to
purchase within 60 days
2. Forward commitment purchase program—
commitments are made for six- and eight-month
periods, but sale and delivery of mortgages is at
the option of the lender

Secondary
Market Standards
• Fannie Mae, Freddie Mac, and other
secondary market agencies have been
actively involved in developing
underwriting standards for mortgage
loans
– Creates confidence in purchasers of the MBSs

Secondary
Market Standards
• The standards have a large influence on
lending activities in the primary market
• Agencies can refuse to purchase loans that
don’t follow their guidelines
• Can also request lenders to repurchase
loans already sold if it’s later discovered
that the lender violated underwriting
guidelines

Present Day
Mortgage Lending
• Fannie Mae was the birth of the mortgage

industry we have today
• As more loan options became available,
the secondary mortgage market grew in
importance

Federal Housing
Finance Agency (FHFA)
• Made the conservator of Fannie Mae and
Freddie Mac in 2008
• An independent federal agency created by
the Federal Housing Finance Regulatory
Reform Act of 2008
• Purpose: To promote a stronger, safer
U.S. housing finance system

Subprime Mortgage Crisis
To meet demand, lenders created new programs,

often with relaxed qualifying standards, such as:
• Little to no required income or asset
documentation
• No consideration of credit or ability to pay
• Waiving an appraisal
• Requiring minimum to no down payment
• Allowing borrowers to take out 1st and 2nd
mortgages up to 100% of property value

• Risky loan programs offered to subprime

borrowers frequently resulted in a high rate of
delinquency and foreclosure
• When these MBSs declined in value, credit
tightened
• As a result, many borrowers found it difficult to
obtain mortgage loans

New federal and state laws passed to:

• Prohibit predatory lending
• Regulate high cost loans
• Amend foreclosure procedures
• Set national standards for mortgage
professionals
• Define suitability requirements for borrowers

Summary
1. Mortgages are written instruments using real property to
secure repayment of a debt. The Federal Reserve Act of
1913 created the Federal Reserve, established a federal
charter for banks to make real estate loans, and set up a
government system to influence interest rates. The
National Housing Act of 1934 created the Federal
Housing Administration (FHA) to insure banks against
losses for defaults on home loans. The Federal National
Mortgage Association (Fannie Mae) was created in 1938
as the first secondary market participant, making more
money available for mortgage loans and standardizing
loan quality.

Summary
2. The primary market consists of lenders making mortgage
loans directly to borrowers. Primary lenders are
commercial banks, Savings and Loans (S & Ls), and
mortgage companies. Banks are a large source of funds
and offer more mortgage loans now to existing customers.
S & Ls were once the largest provider of home mortgage
loans, but regulation and risky investments left many
savings and loans insolvent. Disintermediation forced
them to use secondary markets. Mortgage companies
may be: Mortgage bankers who originate loans, usually
fund loans with company’s funds, and may sell or service
loans; or mortgage brokers who place loans with
lenders, do not underwrite, fund, or service loans, but
have access to different lenders and loan programs.

Summary
3. The secondary market consists of private investors and
government agencies that buy and sell home mortgages. It
was created to moderate local real estate cycles giving
lenders new money to lend again by selling their mortgages,
giving local lenders loans from other areas, and
standardizing loan criteria for better quality loans. The
Federal National Mortgage Association (Fannie Mae) is
the largest investor in residential mortgages. Fannie Mae
buys loans then sells securities backed by its pool of
mortgages. The Federal Home Loan Mortgage
Corporation (Freddie Mac) issues mortgage backed
securities under the conservatorship of the FHFA. The
Government National Mortgage Association (Ginnie Mae)
is government owned and managed by HUD. Ginnie Mae
guarantees payment of principal and interest on FHA/VA
loans for its mortgage-backed securities.

Summary
4. In 2008, Fannie Mae and Freddie Mac came

under the conservatorship of the Federal
Housing Finance Agency (FHFA). The
creation of the FHFA merged the powers and
regulatory authority of the Federal Housing
Finance Board (FHFB) and the Office of
Federal Housing Enterprise Oversight
(OFHEO), as well as the GSE mission office at
the Department of Housing and Urban
Development (HUD).

Summary
5. Looser qualifications for home mortgages

led to significant increases in borrower
default on risky loans, resulting in the so-
called subprime mortgage crisis. As a
consequence, qualification standards are
tightening, many laws have been passed
related to predatory lending, higher risk
loan programs are unavailable, and
financing is more difficult to obtain. The
impact of this situation will likely be felt for
a long time.
Quiz
1. Which agency helped to even out the

money supply for mortgage loans?
a. Fannie Mae
b. FHA
c. HUD
d. OFHEO

Quiz
2. Commercial banks
a. are oriented toward short-term commercial
lending activities.
b. focus on long-term investments.
c. invest primarily in single-family residential
housing.
d. rely on savings deposits for most of their
funds.

Quiz
3. Which agency is conservator of Fannie

Mae and Freddie Mac?
a. Federal Housing Administration
b. Federal Housing Finance Agency
c. Housing and Urban Development
d. Office of Federal Housing Enterprise
Oversight

Quiz
4. Which is the largest secondary market

participant?
a. Federal Home Loan Mortgage Corporation
b. Federal Housing Administration
c. Federal National Mortgage Association
d. Government National Mortgage Association

Quiz
5. Mortgage bankers
a. act as intermediaries between borrowers
and lenders.
b. generally invest little of their own money in
the loans they arrange.
c. originate and service loans for large
investors.
d. all of the above

Quiz
6. Lenders making loans directly to real

estate purchasers are part of the
a. primary market.
b. secondary market.
c. tertiary market.
d. all of the above

Quiz
7.Which is NOT a primary lender for

residential properties?
a. commercial banks
b. insurance companies
c. mortgage companies
d. savings and loan associations

Quiz
8. Savings and loan associations

a. are increasingly dependent on the
secondary market for loan funds.
b. are not regulated by any government
agency.
c. can apply their own guidelines to loans and
still sell them to the secondary market.
d. never sell their loans to the secondary
market.

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Real Estate School of SC

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 1

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 2

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 4

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 5

• Mortgage lending is a profession that requires knowledge of many

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 6

• The primary mortgage market and how it is sustained and renewed by

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 7

• Demand Deposits • Federal National

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 8

• Mortgage • The Office of Federal

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 9

– Political leaders and – Appraisers

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 10

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 11

Federal Reserve System

• Created by the Federal Reserve Act of 1913

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 12

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 13

Federal Housing Administration

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 14

Federal Housing Administration

• No income limits on borrowers

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 15

Federal Housing Administration

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 16

Federal Housing Administration

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 17

Factors That Limited

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 18

Federal National Mortgage

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 19

Federal National Mortgage

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 20

Federal National Mortgage

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 22

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 23

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 24

Fall under the oversight of various

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 25

Savings and Loan

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 26

Savings and Loan

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 27

Savings and Loan

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 28

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 29

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 30

Other Financial Institutions

Other types of financial institutions that

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 31

A type of cooperative organization whose

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 32

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 33

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 34

Mutual Savings Banks

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 35

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 36

Primary vs. Secondary

Difference between primary and secondary

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 37

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