This preview shows page 1 - 3 out of 11 pages.

CHAPTER 10 RESIDENTIAL MORTGAGE LOANS CHAPTER SUMMARY When purchasing a home, the major portion of the funds must be borrowed. The market where these funds are borrowed is called the mortgage market. This chapter and the two that follow describe residential mortgage loans and the various securities created by using mortgage loans as collateral. This chapter concentrates on the characteristics of mortgage loans, the participants in the mortgage market, the more popular mortgage loan designs, and the market for mortgage loans. WHAT IS A MORTGAGE? A mortgage is a loan secured by the collateral of specified real estate property, which obliges the borrower to make a predetermined series of payments. The mortgage gives the lender (the mortgagee) the right of foreclosure on the loan if the borrower (the mortgagor) defaults. When the lender makes the loan based on the credit of the borrower and on the collateral for the mortgage, the mortgage is said to be a conventional mortgage . The lender also may take out mortgage insurance to provide a guarantee for the fulfillment of the borrower’s obligations. The types of real estate properties that can be mortgaged are divided into two broad categories: residential and nonresidential properties. The former category includes houses, condominiums, cooperatives, and apartments. Nonresidential property includes commercial and farm properties. PARTICIPANTS IN THE MORTGAGE MARKET In addition to the ultimate lenders of funds and the government agencies, there are three groups involved in the market: mortgage originators, mortgage servicers, and mortgage insurers. Mortgage Originators 1
Image of page 1

Subscribe to view the full document.

The original lender is called the mortgage originator . Mortgage originators include thrifts, commercial banks, mortgage bankers, life insurance companies, and pension funds. Originators may generate income for themselves in one or more ways. First, they typically charge an origination fee. The second source of revenue is the profit that might be generated from selling a mortgage at a higher price than it originally cost. This profit is called secondary marketing profit . Third, the mortgage originator may hold the mortgage in its investment portfolio. A potential homeowner who wants to borrow funds to purchase a home will apply for a loan from a mortgage originator. The two primary factors in determining whether the funds will be lent are the payment-to-income (PTI) ratio and the loan-to-value (LTV) ratio. The PTI is the ratio of monthly payments (both mortgage and real estate tax payments) to monthly income. It is a measure of the ability of the applicant to make monthly payments. The LTV is the ratio of the amount of the loan to the market (or appraised) value of the property. It is a measure of the protection the lender has if the property must be repossessed and sold.
Image of page 2
Image of page 3
  • Spring '10
  • gandhidev
  • Mortgage loan

{[ snackBarMessage ]}

Get FREE access by uploading your study materials

Upload your study materials now and get free access to over 25 million documents.

Upload now for FREE access Or pay now for instant access
Christopher Reinemann
"Before using Course Hero my grade was at 78%. By the end of the semester my grade was at 90%. I could not have done it without all the class material I found."
— Christopher R., University of Rhode Island '15, Course Hero Intern

Ask a question for free

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern