Primary Mortgage Market Where loans are originated placed to make sure you property qualify for loan Retail market or street market Dominant Players o Commercial banks Credit unions Thrifts Mortgage bankers Mortgage brokers Mortgage documents say that if you don t make payments on the loan the bank may take your house collateral Generally the lender does not make any money on interest paid on the mortgage they sell mortgage to the secondary market to service the loan ie Fannie Mae Freddie Mac etc The Lenders charge a service fee for processing the mortgage Secondary Mortgage Market Where existing home loans are resold Wholesale market among lenders Government sponsored enterprises GSEs Fannie Mae Freddie Mac Government National Mortgage Association Ginnie Mae GNMA Loan securitization and its role o Get money for loans from investors banks insurance companies pension funds Other loan securitizers Conventional Mortgage Loans Standard home mortgage loan o Oldest and most dominant loan form 80 of loans o Key is that it is not insured by FHA nor guaranteed by Department of Veterans Affairs and meets requirements to be purchased in the secondary market Will typically require the borrower to purchase private mortgage insurance PMI if less than 20 down o i e 200 000 home purchase requires 40 000 down with 160 000 mortgage to avoid paying payment on purchase PMI Conforming conventional home loan Meets the requirements for purchase by Freddie Mac or Fannie Mae o Standard note language may be fixed rate adjustable rate or some alternative mortgage o Standard mortgage language o Standard appraisal form o Size limit Currently 417 000 higher for high cost areas o Interest rate advantage due to liquidity at least 25 over 1 00 percent since mid 2007 Nonconforming conventional home loan Does not meet GSE requirements in some respect Jumbo Nonconforming in terms of size pay more above 417 000 Fixed rate mortgage Banks take more risks Adjustable Rate Borrower takes more risk Private Mortgage Insurance PMI o Protects lender against losses due to default o Generally required for loans over 80 of value o Protects lender for losses up to 20 of loan Example terms o 2 5 percent of loan in single up front premium o 0 5 percent annual premium 0 041 per month e g 1 000 annual premium on 200 000 loan amount or approx 83 per month o Insurer may allow termination of the insurance if loan falls below 80 of current value of the home and borrower is in good standing o Must allow termination when loan falls to 80 of original value Homeowner s Insurance Act of 1999 o Must terminate when loan falls to 78 of original value Private Mortgage Insurance Example o House price 100 000 o Loan amount 95 000 o PMI insuring top 20 First 19 000 in losses o Borrower pays until loan balance is 94 000 o Defaults Foreclosure sale at 90 000 o Lender s loss 94 000 90 000 4 000 o With loss less than 19 000 PMI covers it completely FHA Mortgages Federal Housing Admin Chose by those with lower income Established to Fulfill the Goals of the National Housing Act of 1949 o To encourage homeownership and suitable living environments FHA loans are implemented with two primary features o Implemented as loan insurance program through the private market o Loan qualification requirements relaxed due to insurance provided Less down lower payment larger loans Insurance covers more of the loan How FHA Insurance Works o Insures 100 of loan o Premiums Up front premium 1 75 which can be included in loan Annual premium based on average balance 0 25 for loans of 15 years or less 0 50 for loans over 15 years but under 95 of value 0 55 for loans over 15 years and 95 of value Veterans Affairs VA Mortgage Loan Limited to qualified veterans of military service Loan can be up to 100 of value no down payment needed Guarantee limits to lender in event of default o Loans under 45 000 50 percent o Loans over 144 000 25 percent o Maximum guarantee One fourth of the GSE loan limit Fee is based on loan to value ratio and service can be added to value of loan o Over 95 Loan To Value 2 15 for active duty 2 4 for other o Over 90 95 LTV 1 5 for active duty 1 75 for other o Up to 90 LTV 1 25 for active duty 1 5 for other Mortgage Types by type payment Fixed Rate Level Payment Mortgage fully amortizing with equal periodic payments o Noted interchangeably as Fixed Rate Mortgage FRM or Level Payment Mortgage LPM o Typically amortized over 30 year or 15 year period interest less on less years Ex Assume 200 000 loan at 4 5 annual rate paid monthly o Determine the monthly payment if amortized over 30 years PMT 1 013 37 Disadvantage higher interest Advantage can hold onto more capital o Determine the monthly payment if amortized over 15 years PMT 1 529 99 Disadvantage must be more liquid Advantage lower interest Adjustable Rate Mortgage ARM Interest rate can be changed each year o Payments are typically amortized over 30 years o Interest rate is typically adjusted each year relative to an index e g 1 yr t bill o Initial interest rate may include a teaser rate for the first year offered at lower than market rate o The index plus the margin determines the market index rate however Annual interest rate changes are typically capped Interest rates over the life of the ARM are typically capped Ex Adjustable Rate Mortgage ARM o Determine the contract interest rate applied in years 2 3 and 4 on an ARM with a 1 annual cap and a 5 lifetime cap i e ARM with 1 5 caps given the following index changes Cannot go up to market rate b c of 1 cap Yr 1 contract rate set with teaser rate i e market contract Yr 2 contract rate increase capped at 1 Yr 3 contract rate must not be higher than market Yr 4 contract rate increase capped at 1 Hybrid ARM o Interest rate fixed for some years then becomes adjustable 5 1 3 1 ARM Fixed 5 yr Adjustable 1 yr Fixed 3 Adjustable 1 o Payment always fully amortizing o Fixed rate period ranges from 3 to 10 years o Fixed rate higher as its term is longer longer fixed higher interest because lender is taking on more o Successfully blends the need of borrowers for predictable payments w the need of lenders for risk market level interest rates o Became unfortunately tainted in recent years due to association w sub prime lending Other Mortgage Types Alt A Loans o More standard in type than sub prime o Usually relaxed one standard loan underwriting requirement Low or no cash down payment Weak credit score No documentation of borrower s finances o Majority were no doc or