Ch10.doc - CHAPTER 10 RESIDENTIAL MORTGAGE LOANS CHAPTER...

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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
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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.
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  • Spring '10
  • gandhidev
  • Mortgage loan

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