US Mortgage

In this lecture, lets learn about what is Mortgage, what is Mortgage Banking? What all the different types of Risks involved in Mortgage Banking?

In this lecture, you will learn about what all the different types of mortgages available. Types of mortgages is depend on Interest Rate, Guarantee and Special Types.

There are various players who participate in the functioning of the mortgage banking. The two obvious players are the borrower and lender. Traditionally lenders have managed all the required functions of prospecting a customer, providing the loan, servicing the loan, and managing the risk by themselves. However, as the market matured, the functions of origination, servicing, risk management and funding are un-bundled and managed by different specialized entities.

Mortgage banking involves three major areas of activities: loan production, secondary marketing, and servicing. Each of these activities is normally performed in a separate unit or department of the bank or mortgage banking company.

○         The loan production unit originates processes, underwrites, and closes mortgage loans.

○         The secondary marketing unit develops, prices, and sells loan products and delivers loans to permanent investors also it is responsible for the pipeline and warehouse management which involves managing price risk from loan commitments and loans held-for-sale.

The servicing unit (sometimes referred to as loan administration) collects monthly payments from borrowers; remits payments to the permanent investor or security holder; handles contacts with borrowers about delinquencies, assumptions, and escrow accounts; and pays real estate tax and insurance premiums as they become due.

In this lecture, you will learn about what is loan production, scope of loan production, Process Flow, basics of topics like Loan Origination, Loan Processing, Loan Underwriting, Loan Closing & Funding, Entities involved in Loan Production,

In this lecture you will learn about different activities performed in loan origination such as Client prospecting, Pre-qualification, Initial Disclosures, Rate Locking also the sub-activities under each activity.

After rate lock, the loan goes for complete processing. During processing various kinds of statements are required and many other reports are fired. There are specialized agencies which specialize in one particular activity. Collectively all these may be called Settlement providers. Loan Processing consists of

a)    Verification of borrower information

b)    Property related information collection and validation

c)    Credit Scoring

d)    Title Search

e)    Regulatory tasks

You are gonna learn about all of this in this lecture.

Loan Underwriting consists of:

• Evaluation of 3C’s

      --Collateral

      --Capacity

      --Credit

• Validation & Review of Employment status, Income      & Appraisal status

• Loan Re-pricing

You are gonna learn about each one of these in detail in this lecture.

This is the last leg of the Mortgage Production cycle and consists of the following activities

·          Loan Closing

·          Loan Funding

·          Post Funding Quality Control

You will learn about each one of them in detail. Borrower has to pay various costs called closing costs during closing process. You will learn about them. Borrower has to sign various documents during closing and funding, you gonna learn about all of them in this lecture.

In this lecture you will learn about concept like predatory lending and the sub concepts like borrower being charged of Excessive fees, Excessive interest rates, Single Premium Credit Insurance, Lending without regard to ability to repay, Loan flipping, Fraud and deception, Balloon payments etc.

In this lecture you will get a brief idea on what is Loan Servicing and what all the entities involved in loan servicing.

Once the loan has been closed by the loan originator with the help of closing agents, the loan has to be set up by the servicer in its systems. The loan setup includes creating a loan-id with all the specific details regarding borrower, collateral, originator added to the servicer database. The loan setup also includes taking note of all the financial details (e.g. interest rate, payment period, cash inflow, amortization schedule) regarding the loan. The loan servicing process starts after the loan has been setup in the servicer’s systems.

As discussed in the previous sections, some originators sell the loan servicing rights to firms that specialize in this area so that the originators themselves may focus on origination and leave loan servicing to specialized entities. Some of these specialized entities are firms that are pure loan servicers who purchase pools of loan after origination and manage only the servicing function. Other firms perform this task in varying degrees and at varying geographical coverage. Given the variety of firms involved in Loan Servicing, it is worthwhile to discuss the various players involved in this area.

Banks raise deposits and use the money to provide loans & mortgages. So the ability of a bank to provide loans is limited by the extent to which it can raise deposits. This, on an aggregate scale, also limits the total demand that the mortgage market can manage.

 In order to increase this limit, the secondary market evolved. Unlike the primary market, which concerns all the processes required to bring a mortgage into existence, the Secondary Mortgage Market is that portion of the mortgage market in which lenders, government-sponsored agencies, private conduits and investors buy, sell and trade existing mortgages. This market serves as an outlet to sell the originated loans to help generate funds for continued lending.

 The secondary market plays a very important role in the national economy. For the home buyer, the secondary market makes funds and a wide array of financing alternatives available. For the lender, it can increase profits and help reduce the risks of mortgage lending by making available a liquid market for mortgages.

Participants in the secondary mortgage today include lenders, investors, and middlemen. Each fulfills many different roles including buying and selling mortgages or acting as middlemen. Most participants are companies and not individuals. The roles are not exclusive. Often participants in the mortgage market play more than one role, simultaneously buying and selling mortgages or acting in the capacity of a middleman. One loan may be sold several times from investor to investor. The secondary market consists of GSEs, private investors, banks, financial institutions, insurance companies, pension funds and mortgages investment trusts that buy and sell mortgages as an income stream for their portfolio.   

Secondary Marketing basically consists of the following processes -

a) Loan Sales - Sell whole loans, participations and mortgage-backed securities

b) Product & Pricing - Price loans in correlation to ever-changing market forces so that the company produces value from the loans it produces

c) Pipeline Management - Keep track of the warehouse line limits and requirements. Using the pipeline reports, estimate how many loans will close, when they will close, and how the company will fund those closings

d) Risk Management - Monitor and manage risks in the mortgage market such as interest rate fluctuation

e) Shipping & Delivery - Preparing and delivering documents to investors as quickly as possible to avoid interest rate risk, to meet commitments, and to release the warehouse line for new lending.

You will learn about all of this in details.

Selling closed loans to investors generates funds to continue making loans. Ideally, the mortgage banker accomplishes mortgage origination and sales at a profit or breaks even. Some loan sales, however, will cause the mortgage banker to incur a loss. Such losses are acceptable as long as they fall within the company's established guidelines and are minimal. Lenders, government-sponsored agencies and investors exchange mortgages in the secondary mortgage market in the following forms - Whole loans, Participation and mortgage-backed securities.