Mortgage industry of the United States

The Mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

industry of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

is a major financial sector. The federal government

Federal government of the United States

The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...

created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association

Government National Mortgage Association

The Government National Mortgage Association , or Ginnie Mae, was established in the United States in 1968 to promote home ownership. As a wholly owned government corporation within the Department of Housing and Urban Development , Ginnie Mae’s mission is to expand affordable housing in the U.S. by...

(known as Ginnie Mae), the Federal National Mortgage Association

Federal National Mortgage Association

The Federal National Mortgage Association , commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal. It is a government-sponsored enterprise , though it has been a publicly traded company since 1968...

(known as Fannie Mae) and the Federal Home Loan Mortgage Corporation

Federal Home Loan Mortgage Corporation

The Federal Home Loan Mortgage Corporation , known as Freddie Mac , is a public government sponsored enterprise , headquartered in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia....

(known as Freddie Mac).

The US subprime mortgage crisis

Subprime mortgage crisis

The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....

was one of the first indicators of the 2007–2010 financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosure

Foreclosure

Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...

s, and the resulting decline of securities backing said mortgages. The earlier Savings and loan crisis

Savings and Loan crisis

The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...

of the 1980s and 1990s and National Mortgage Crisis of the 1930s

National Mortgage Crisis of the 1930s

The National Mortgage Crisis of the 1930s was a Depression-era crisis in the United States characterized by high-default rates and soaring loan-to-value ratios in the residential housing market...

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

2010 United States foreclosure crisis

The 2010 United States foreclosure crisis, sometimes referred to as Foreclosure-gate or Foreclosuregate, is an ongoing and unresolved issue in the United States and refers to an apparently widespread epidemic of improper foreclosures initiated by large banks and other lenders...

Mortgage lenders

Mortgage lending is a major sector finance

Finance

"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...

in the United States, and many of the guidelines that loans must meet are suited to satisfy investors and mortgage insurers

Mortgage insurance

Mortgage insurance is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer...

. Mortgages are commercial paper

Commercial paper

In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or...

and can be conveyed and assigned freely to other holders. In the U.S., the Federal government

Federal government of the United States

created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association

Government National Mortgage Association

(known as Ginnie Mae), the Federal National Mortgage Association

Federal National Mortgage Association

(known as Fannie Mae) and the Federal Home Loan Mortgage Corporation

Federal Home Loan Mortgage Corporation

(known as Freddie Mac). These programs work by offering a guarantee on the mortgage payments of certain conforming loan

Conforming loan

In the United States, a conforming loan is a mortgage loan that conforms to GSE guidelines.In general, any loan which does not meet guidelines is a non-conforming loan...

s. These loans are then securitized

Securitization

Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...

and issued at a slightly lower interest rate to investors, and are known as mortgage-backed securities (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 a guidelines which are implemented in an automated underwriting system. Non-conforming mortgage

Non-conforming mortgage

A non-conforming mortgage is a term in the United States for a residential mortgage that does not conform to the loan purchasing guidelines set by the Federal National Mortgage Association /Federal Home Loan Mortgage Corporation...

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

United States housing bubble

The United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...

of 2000-2006. The growth of lightly regulated derivative

Derivative (finance)

A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...

instruments based on mortgage-backed securities, such as collateralized debt obligations and credit default swap

Credit default swap

A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...

s, is widely reported as a major causative factor behind the 2007 subprime mortgage financial crisis. As a result of the housing bubble, many banks, including Fannie Mae, established tighter lending guidelines making 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 lending http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/. The main concern is that mortgage lenders and brokers, operating legally, are finding loophole

Loophole

A loophole is a weakness that allows a system to be circumvented.Loophole may also refer to:*Arrowslit, a slit in a castle wall*Loophole , a short science fiction story by Arthur C...

s 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.

Delinquency

At the start of 2008, 5.6% of all mortgages in the United States were delinquent. By the end of the first quarter that rate had risen, encompassing 6.4% of residential properties. This number did not include the 2.5% of homes in foreclosure.

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

Bank

A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

. Sometimes, a third party is involved, such as a mortgage broker

Mortgage broker

A mortgage broker acts as an intermediary whose brokers mortgage loans on behalf of individuals or businesses.Traditionally, banks and other lending institutions have sold their own products. However as markets for mortgages have become more competitive, the role of the mortgage broker has become...

. 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

Truth in Lending Act

The Truth in Lending Act of 1968 is United States federal law designed to promote the informed use of consumer credit, by requiring disclosures about its terms and cost to standardize the manner in which costs associated with borrowing are calculated and disclosed...

and Real Estate Settlement Procedures Act

Real Estate Settlement Procedures Act

The Real Estate Settlement Procedures Act , was an act passed by the United States Congress in 1974. It is codified at Title 12, Chapter 27 of the United States Code, .- Purpose :...

(1974). Credit scores are often used, and these must comply with the Fair Credit Reporting Act

Fair Credit Reporting Act

The Fair Credit Reporting Act is a United States federal law that regulates the collection, dissemination, and use of consumer information, including consumer credit information. Along with the Fair Debt Collection Practices Act , it forms the base of consumer credit rights in the United States...

. Additionally, various state law

State law

In the United States, state law is the law of each separate U.S. state, as passed by the state legislature and adjudicated by state courts. It exists in parallel, and sometimes in conflict with, United States federal law. These disputes are often resolved by the federal courts.-See also:*List of U.S...

s may apply. Underwriters receive the application and determine whether the loan can be accepted. If the underwriter 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

A-paper

A-paper is a term to describe a mortgage loan for which the asset and borrower meet the following criteria:* In the United States, the borrower has a credit score of 680 or higher* The borrower fully documents his income and assets...

, Alt-A

Alt-A

An Alt-A mortgage, short for Alternative A-paper, is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or "prime", and less risky than "subprime," the riskiest category. Alt-A interest rates, which are determined by credit risk, therefore tend to be between...

, and subprime. 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

No Income No Asset

No Income No Asset , No Income No Job or Asset or simply Nina Loan is a term used in the United States mortgage industry to describe one of many documentation types which lenders may allow when underwriting a mortgage....

" 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

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 downpayment 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's "Loan Prospector" and Fannie Mae'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
Uniform Residential Appraisal Report
A Uniform Residential Appraisal Report or URAR is one of the most common forms used in real estate appraisal which was created to allow for standard reporting and analysis of single family dwellings or single family dwellings with an "accessory unit"...
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 downpayment, the final deal of the mortgage includes closing cost

Closing cost

Real property in most jurisdictions is conveyed from the seller to the buyer through a real estate contract. The point in time at which the contract is actually executed and the title to the property is conveyed to the buyer is known as the "closing"...

s which include fees for "points" to lower the interest rate, application fees, credit check, attorney fees, title insurance, appraisal fees, inspection fees, 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

U.S. Prime Rate

In general, the prime rate runs approximately 300 basis points above the federal funds rate. The Federal Open Market Committee meets eight times per year wherein they set a target for the federal funds rate...

, the London Interbank Offered Rate

London Interbank Offered Rate

The LIBOR rate is the average interest rate that leading banks in London charge when lending to other banks. It is an acronym for London Interbank Offered Rate Banks borrow money for one day, one month, two months, six months, one year etc. and they pay interest to their lenders based on...

(LIBOR), and the Treasury Index ("T-Bill"); other indices are in use but are less popular.

In the U.S., the fixed rate mortgage

Fixed rate mortgage

A fixed-rate mortgage is a mortgage loan first developed by the Federal Housing Administration 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." Other forms of mortgage loan include interest only...

term is usually up to 30 years (15 and 30 being the most common), although longer terms may be offered in certain circumstances.