7 7.

1
MORTGAGES
Mortgage Lending
7.2 Mortgage Loan Processing
7.3 Mortgages and the Law
7.4 Government-Backed Loans

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 Lesson 7.1
MORTGAGE LENDING
GOALS
Define the term mortgage
Identify several types of mortgages

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WHAT
WHAT IS
IS A
A MORTGAGE?
MORTGAGE?

 Today, a mortgage is a note, usually long-term,

secured by real property.
 Essentially, a mortgage places a lien on the
property that is not released until the debt is paid.
 If the mortgage is not paid, the creditor seeks a
court-ordered sale of the property called a
foreclosure, and the debt is paid from those funds.

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FIXED
FIXED RATE
RATE MORTGAGES
MORTGAGES

 Fixed rate mortgages, also called conventional

mortgages, are loans with a fixed rate of interest
for the life of the loan.
 Payments on the loan are set for the life of the
loan.
 Terms are set for the life of the loan.
 The most common terms are 30- and 15-year
terms.

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BALLOON
BALLOON MORTGAGE
MORTGAGE

In a balloon mortgage, the interest rate and

payment stay fixed, but at some specified point,
the entire remaining balance of the loan is due in
one single “balloon” payment.

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ADJUSTABLE
ADJUSTABLE RATE
RATE MORTGAGES
MORTGAGES

 Adjustable rate mortgages (ARMs) are those with rates

that change over the course of the loan.
 Usually the interest rate and payments are fixed for some
period of time at the outset but then change according to
some index value.
 Some of the things that can vary are:
 Interest rate  Adjustment interval
 Payment  Periodic cap
 Index  Lifetime cap
 Formula

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BUY-DOWN
BUY-DOWN MORTGAGE
MORTGAGE

 In a buy-down mortgage, the borrower buys

down, or prepays, part of the interest in order to
get a lower rate.
 The borrower pays points to the lender at the
outset, and the lender agrees to lower the rate
so much per point.
 A point is a value equal to 1 percent of the loan.

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SHARED
SHARED APPRECIATION
APPRECIATION MORTGAGE
MORTGAGE (SAM)
(SAM)

 A shared appreciation mortgage can lower

interest rates for borrowers who agree to share
later with the lender some part of the amount the
house appreciates.
 Appreciation is the amount that a house
increases in value.

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REFINANCING
REFINANCING

 Refinancing is starting over with an entirely new

loan, using part or all of the loan funds to pay off
the old mortgage.
 If interest rate are low, consumers save money
by getting new mortgages at lower rates.
 Banks and other lenders earn money on fees,
points, and closing costs of the new loan.

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HOME
HOME EQUITY
EQUITY LOANS
LOANS

 Equity is the difference between what an item is

worth and what is owed on it.
 Homeowners can use the difference between
what they owe and what their homes are worth
to secure a loan.

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REVERSE
REVERSE MORTGAGES
MORTGAGES

 A reverse mortgage is not used to purchase a home.

 It is a form of consumer loan tied to the appreciated
value of a property.
 In most cases, reverse mortgages are limited to
homeowners 62 years or older.
 With a reverse mortgage, a homeowner receives a sum
from the lender secured by the value of a home and does
not pay the loan back as long as he or she lives there.
The lender is repaid, including fees and interest, when
the borrower sells or dies.

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 Lesson 7.2
MORTGAGE LOAN
PROCESSING
GOALS
Describe the components involved in
obtaining a mortgage
Explain the mortgage approval process

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OBTAINING
OBTAINING A
A MORTGAGE
MORTGAGE

 Lenders typically require a down payment of 5,

10, or 20 percent for a mortgage.
 A larger down payment lowers the cost of the
monthly payment and may affect how the lender
views the borrower.
 Most lenders do not want a person’s housing cost
to exceed 25 to 28 percent of gross monthly
income.
 Total debt should not exceed 36 percent.
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MONTHLY
MONTHLY PAYMENTS
PAYMENTS

Monthly payments to the lender usually consist of

PITI or Principal, Interest, Taxes, and Insurance.

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PITI
PITI

 Principal is the remaining unpaid balance of the mortgage.

 Interest is the amount that goes toward interest.
 Taxes include local real estate taxes.
 Most lenders require an amount to be paid to them in advance,
called escrow, from which they pay the real estate taxes.
 Insurance refers to property insurance and sometimes
private mortgage insurance.
 Almost all mortgages require the homeowner to maintain
adequate property insurance.
 Private mortgage insurance (PMI) protects the lender against
loan default.
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THE
THE APPROVAL
APPROVAL PROCESS
PROCESS

 Application
 Documentation
 Underwriting
 Drawing documents
 Closing
 Recording

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 Lesson 7.3
MORTGAGES AND
THE LAW
GOALS
Describe consumer protection laws that
apply to mortgage lending
Describe laws directly related to mortgage
lending

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CONSUMER
CONSUMER PROTECTION
PROTECTION LEGISLATION
LEGISLATION

 Truth in Lending Act (TILA)

 Equal Credit Opportunity Act (ECOA)
 Fair Credit Reporting Act (FCRA)
 Fair Debt Collection Practices Act (FDCPA)
 Gramm-Leach-Bliley Act

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MORTGAGE
MORTGAGE LEGISLATION
LEGISLATION

 In addition to consumer legislation, other laws

exist that relate directly to mortgage lending.
 Complying with this legislation and documenting
compliance requires considerable effort and
expense on the part of the financial institutions.

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COMMUNITY
COMMUNITY REINVESTMENT
REINVESTMENT ACT
ACT

Congress passed the Community Reinvestment Act

(CRA) of 1977 in response to widespread
complaints that some banks refused to lend to
residents of certain neighborhoods, a practice called
redlining.

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HOME
HOME MORTGAGE
MORTGAGE DISCLOSURE
DISCLOSURE ACT
ACT

 The Home Mortgage Disclosure Act (HMDA) of

1974 was a forerunner of the CRA.
 It requires banks and other financial institutions
to record and report data on home lending in
order to identify possible discriminatory patterns.

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HOME
HOMEOWNERSHIP
OWNERSHIPAND
ANDEQUITY
EQUITYPROTECTION
PROTECTIONACT
ACT

 Congress passed the Home Ownership and

Equity Protection Act (HOEPA) in 1994 to
protect consumers against predatory lending.
 Provisions of this act also apply to second
mortgages and refinancing.

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REAL
REAL ESTATE
ESTATE SETTLEMENT
SETTLEMENT PROCEDURES
PROCEDURES ACT
ACT

 Congress enacted the Real Estate Settlement

Procedures Act (RESPA) of 1974 to protect
consumers from hidden costs or expensive
surprises at closing time.
 The law requires disclosures to be provided to
the borrower at various times during the
transaction.

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THE
THE HOMEOWNERS’
HOMEOWNERS’ PROTECTION
PROTECTION ACT
ACT OF
OF 1998
1998

The Homeowners’ Protection Act of 1998 requires

that lenders drop PMI when equity reaches 22
percent in loans closed after July 29, 1999.

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 Lesson 7.4
GOVERNMENT-
BACKED LOANS
GOALS
Explain the concept of government-backed
loans
Identify government-backed programs to
encourage home lending

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WHAT
WHAT IS
IS A
A GOVERNMENT-BACKED
GOVERNMENT-BACKED LOAN?
LOAN?

 Numerous government programs help banks

help people get loans.
 In most of these programs, the banks provide
funding and the government absorbs some of
the risk.

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FEDERAL
FEDERAL MORTGAGE
MORTGAGE PROGRAMS
PROGRAMS

 The Federal Housing Administration, established

in 1934, supported both homebuyers and banks
by replenishing funds available for home
lending.
 Today, there are many such programs with
varying missions, services, and operations, but
the twin benefits of both supporting homeowners
and backing the banking industry continues.

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FEDERAL
FEDERAL HOUSING
HOUSING ADMINISTRATION
ADMINISTRATION (FHA)
(FHA)

During the Great Depression

 Established to help the housing industry get
back on its feet
 Guaranteed loans and provided mortgage
insurance
 Pioneered long-term loans

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HUD
HUD OFFICE
OFFICE OF
OF HOUSING
HOUSING

 Today, what was once the FHA is now the Office

of Housing and is part of the Department of
Housing and Urban Development (HUD).
 The Office of Housing continues to guarantee
FHA loans and provide mortgage insurance.

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FANNIE
FANNIE MAE
MAE

 The Federal National Mortgage Association

(FNMA) was created in 1938 as part of the FHA.
 Fannie Mae is a government-chartered
corporation that buys mortgages from the
originating institutions and either keeps them or
exchanges them for securities which it
guarantees.
 Fannie Mae is now an independent corporation.

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FREDDIE
FREDDIE MAC
MAC

 The Federal Home Loan Mortgage Corporation

was created in 1970 as a fully independent
corporation.
 Freddie Mac buys home mortgages from banks
and other lending institutions and combines
them into large groups, selling interest in the
groups to investors.

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GINNIE
GINNIE MAE
MAE

 The Government National Mortgage Association

is part of the Department of Housing and Urban
Development.
 Freddie Mac neither buys nor sells mortgages.
 It backs securities issued by holders of pools of
mortgages.

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VETERANS
VETERANS ADMINISTRATION
ADMINISTRATION (VA)
(VA)

 Loans from the Department of Veterans Affairs

(DVA) have helped millions of service men and
women get government-backed loans with low
down payments.
 VA loans allow qualified veterans to buy, build,
remodel, or refinance a home.

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NCHSA
NCHSA

 The National Council of State Housing Agencies (NCHSA)

is a national organization of Housing Finance Agencies
(HFAs) throughout the states that provide and administer
programs for lower-income and other people who seek
help at the state level to buy or renovate a home.
 There are also 350 affiliated profit and nonprofit agencies
that work in this field.
 These agencies and firms have a variety of programs for
affordable housing.

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OTHER
OTHER GOVERNMENT-BACKED
GOVERNMENT-BACKED LOANS
LOANS

 There are many other government-backed loan

programs.
 It is not easy to find every government loan
program.
 The Catalog of Federal Domestic Assistance is
available in government depository libraries and
online at www.cfda.gov

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