Mortgage industry of the United States
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The mortgage industry of the United States is a major financial sector. The
federal government A federation (also called a federal state) is an entity characterized by a political union, union of partially federated state, self-governing provinces, states, or other regions under a #Federal governments, federal government (federalism) ...
created several programs, or government sponsored entities, to foster
mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...
lending, construction and encourage
home ownership Owner-occupancy or home-ownership is a form of housing tenure in which a person, called the owner-occupier, owner-occupant, or home owner, owns the home in which they live. The home can be a house, such as a single-family house, an apartment, c ...
. These programs include the Government National Mortgage Association (known as Ginnie Mae), the
Federal National Mortgage Association The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the Ne ...
(known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). The subprime mortgage crisis was one of the first indication of the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
, characterized by a rise in
subprime mortgage In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpr ...
delinquencies and
foreclosure Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has Default (finance), stopped making payments to the lender by forcing the sale of the asset used as the Collateral (finance), coll ...
s, and the resulting decline of securities backing said mortgages. The earlier
savings and loan crisis The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of approximately a third of the savings and loan associations (S&Ls or thrifts) in the United States between 1986 and 1995. These thrifts were b ...
of the 1980s and 1990s and the national mortgage crisis of the 1930s also arose primarily from unsound mortgage lending. The mortgage crisis has led to a rise in foreclosures, leading to the 2010 United States foreclosure crisis.


Mortgage lenders

Mortgage lending is a major sector
finance Finance refers to monetary resources and to the study and Academic discipline, discipline of money, currency, assets and Liability (financial accounting), liabilities. As a subject of study, is a field of Business administration, Business Admin ...
in the
United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...
, and many of the guidelines that loans must meet are suited to satisfy investors and mortgage insurers. Mortgages are debt securities and can be conveyed and assigned freely to other holders. In the U.S., the
Federal government A federation (also called a federal state) is an entity characterized by a political union, union of partially federated state, self-governing provinces, states, or other regions under a #Federal governments, federal government (federalism) ...
created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association (known as Ginnie Mae), the
Federal National Mortgage Association The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the Ne ...
(known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These programs work by offering a
guarantee A guarantee is a form of transaction in which one person, to obtain some trust, confidence or credit for another, agrees to be answerable for them. It may also designate a treaty through which claims, rights or possessions are secured. It is to ...
on the mortgage payments of certain
conforming loan In the United States, a conforming loan is a mortgage loan that both meets the underwriting guidelines of Fannie Mae and Freddie Mac (the ''Enterprises'' or GSE) and that does not exceed the conforming loan limit. The most well-known guideline is t ...
s. These loans are then securitized and issued at a slightly lower interest rate to investors, and are known as
mortgage-backed securities A mortgage-backed security (MBS) is a type of asset-backed security (an "Financial instrument, instrument") which is secured by a mortgage loan, mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals ( ...
(MBS). After securitization these are sometimes called "agency paper" or "agency bonds". Whether or not a loan is conforming depends on the size and set of guidelines which are implemented in an automated underwriting system. Non-conforming mortgage loans which cannot be sold to Fannie or Freddie are either "jumbo" or "subprime", and can also be packaged into mortgage-backed securities. Some companies, called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does not wish to originate. Securitization allows the banks to quickly relend the money to other borrowers (including in the form of mortgages) and thereby to create more mortgages than the banks could with the amount they have on deposit. This in turn allows the public to use these mortgages to purchase homes, something the government wishes to encourage. Investors in conforming loans, meanwhile, gain low-risk income at a higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than they could gain from most other bonds. Securitization has grown rapidly in the last 10 years as a result of the wider dissemination of technology in the mortgage lending world. For borrowers with superior credit, government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools of funds used to create new loans can be refreshed more quickly than in years past, allowing for more rapid outflow of capital from investors to borrowers without as many personal business ties as in the past. The increased amount of lending led (among other factors) to the
United States housing bubble The 2000s United States housing bubble or house price boom or 2000s housing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions a Real-estate bubble, real estate bubb ...
of 2000-2006. The growth of lightly regulated
derivative In mathematics, the derivative is a fundamental tool that quantifies the sensitivity to change of a function's output with respect to its input. The derivative of a function of a single variable at a chosen input value, when it exists, is t ...
instruments based on mortgage-backed securities, such as collateralized debt obligations and credit default swaps, is widely reported as a major causative factor behind the subprime mortgage crisis. As a result of the housing bubble, many banks, including Fannie Mae, established tighter lending guidelines which made it much more difficult to obtain a loan.


Predatory mortgage lending

There is concern in the U.S. that consumers are often victims of predatory mortgage lendingbr>
The main concern is that mortgage lenders and brokers, operating legally, are finding loopholes in the law to obtain additional profit. The typical scenario is that terms of the loan are beyond the means of the ill-informed and uneducated borrower. The borrower makes a number of interest and principal payments, and then defaults. The lender then takes the property and recovers the amount of the loan, and also keeps the interest and principal payments, as well as loan origination fees.


U.S. mortgage process


Origination

In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting a loan application and documentation related to his/her financial history and/or credit history to the underwriter, which is typically a
bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
. Sometimes, a third party is involved, such as a
mortgage broker A mortgage broker acts as an intermediary who brokers mortgage loans on behalf of individuals or businesses. Traditionally, banks and other lending institutions have sold their own products. As markets for mortgages have become more competitive, ...
. This entity takes the borrower's information and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer. Origination is regulated by laws including the Truth in Lending Act and Real Estate Settlement Procedures Act (1974). Credit scores are often used, and these must comply with the
Fair Credit Reporting Act The Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681 ''et seq.'', is federal legislation enacted to promote the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies. It was intended ...
. Additionally, various
state law State law refers to the law of a federated state, as distinguished from the law of the federation of which it is a part. It is used when the constituent components of a federation are themselves called states. Federations made up of provinces, cant ...
s may apply. Underwriters receive the application and determine whether the loan can be accepted. If the
underwriter Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liability ...
is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. Documentation and credit history can be used to categorize loans into high-quality A-paper,
Alt-A An Alt-A mortgage, short for Alternative A-paper, is a type of U.S. Mortgage loan, mortgage that, for various reasons, is considered riskier than A-paper, or "prime", and less risky than "subprime lending, subprime," the riskiest category. For thes ...
, and
subprime In finance, subprime lending (also referred to as near-prime, subpar, non-prime, and second-chance lending) is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subpr ...
. Loans may also be categorized by whether there is full documentation, alternative documentation, or little to no documentations, with extreme " no income no job no asset" loans referred to as "NINJA" loans. No doc loans were popular in the early 2000s, but were largely phased out following the subprime mortgage crisis. Low-doc loans carry a higher interest rate and were theoretically available only to borrowers with excellent credit and additional income that may be hard to document (e.g. self-employment income). As of July 2010, no-doc loans were reportedly still being offered, but more selectively and with high
down payment In accounting, a down payment (also called a deposit in British English) is an initial up-front partial payment for the purchase of expensive goods or services such as a car or a house. It is usually paid in cash or equivalent at the time of fin ...
requirements (e.g., 40%). The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of documentation required from many borrowers. Such automated underwriting engines include
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
's "Desktop Underwriter". For borrowers who have excellent credit and very acceptable debt positions, there may be virtually no documentation of income or assets required at all. Many of these documents are also not required for no-doc and low-doc loans. * Credit Report * 1003 — Uniform Residential Loan Application * 1004 — Uniform Residential Appraisal Report * 1005 — Verification Of Employment (VOE) * 1006 — Verification Of Deposit (VOD) * 1007 — Single Family Comparable Rent Schedule * 1008 — Transmittal Summary * Copy of deed of current home * Federal income tax records for last two years * Verification of Mortgage (VOM) or Verification of Payment (VOP) * Borrower's Authorization * Purchase Sales Agreement * 1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) - used if borrower is self-employed


Closing costs

In addition to the down payment, the final deal of the mortgage includes closing costs which include fees for "points" to lower the interest rate, application fees, credit report fees, attorney fees, title insurance, appraisal fees, inspection fees, underwriting fee and other possible miscellaneous fees. These fees can sometimes be financed and added to the mortgage amount. In 2010, one survey estimated that the average total closing cost United States on a $200,000 house was $3,741.


Market indices

Common indices in the U.S. include the U.S. Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index (" T-Bill"); other indices are in use but are less popular. In the U.S., the
fixed rate mortgage A fixed-rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float". As a result, payment amounts and the duration of ...
term is usually up to 30 years (15 and 30 being the most common), although longer terms may be offered in certain circumstances.
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia.points A point is a small dot or the sharp tip of something. Point or points may refer to: Mathematics * Point (geometry), an entity that has a location in space or on a plane, but has no extent; more generally, an element of some abstract topologica ...
for the most popular mortgage products.


International comparisons

Fixed-rate mortgage A fixed-rate mortgage (FRM) is a mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or "float". As a result, payment amounts and the duration of ...
are common in the United States, unlike most of Western Europe where
variable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the mortgage note, note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the cre ...
s are more common. The United States has home ownership rates comparable to Europe, but overall default rates are lower in Europe than in the United States. Mortgage loan financing relies more on secondary mortgage markets and less on formal government guarantees backed by covered bonds and deposits.
Prepayment penalties Prepayment is the early repayment of a loan by a borrower, in part (commonly known as a curtailment) or in full, often as a result of optional refinancing to take advantage of lower interest rates.Lemke, Lins and Picard, ''Mortgage-Backed Securit ...
are discouraged by underwriting requirements of large organizations such as
Fannie Mae The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New ...
and
Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia. Mortgages loans are often
nonrecourse debt Nonrecourse debt or a nonrecourse loan (sometimes hyphenated as non-recourse) is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. If the borrower def ...
, unlike most of the world.


See also

* Mortgage underwriting in the United States *
Glossary of US mortgage terminology Terms pertaining to American mortgages include: Main two types Origination and Re-Financing *Origination: starting from the scrap, Ex, A person wants to buy a home and goes to the bank for the same will get loan of 80% of their LTV. *Re-financ ...
*
Savings and loan association A savings and loan association (S&L), or thrift institution, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans. While the terms "S&L" and "thrift" are mainly used in the United States, ...


References


External links

{{US housing by state Housing in the United States