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FinancialMarketsChap23 - Chapter 23 Mortgage Market A...

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Chapter 23 - Mortgage Market: A collection of markets, which includes a primary market, or origination market, and a secondary market where mortgages are traded - Mortgage : Loan secured by real estate - Mortgagor : Borrower in a mortgage loan - Mortgagee : Lender/Investor in a mortgage loan - Conventional Mortgage: A mortgage loan based solely on the credit of the borrower and on the collateral for the mortgage - Mortgage Originator: The original lender - Origination Fee: A fee expressed in points that a mortgage originator charges the borrower for originating a loan - Servicing Fee: A fee charged for servicing a mortgage a lender originates – servicing includes collecting monthly payments, forwarding payments to owners of mortgage, payment notices, overdue notices, maintaining records and tax information, administering an escrow for real estate tax and insurance purposes, and foreclosure procedures. - Mortgage Banking: The activity of originating loans - Payment to Income (PTI): Ratio of monthly payments to monthly income, which measures ability of applicant to make payments – the lower the ratio, the greater the likelihood that an applicant will be able to meet mortgage payments - Loan to Value (LTV): The amount of the loan to the market (or appraised) value of the property – the lower this ratio, the greater the protection for the lender if the applicant defaults on the payments and the lender must repossess and sell the property. - Commitment Letter: An agreement that the mortgage lender sends to the applicant that commits him to provide funds - Adjustable Rate Mortgage: A mortgage design calling for the mortgage rate to reset periodically in accordance with some appropriately chosen index that reflects short-term rates - Conduits : Entities that pool mortgages and sell interests in these pools to investors - Conforming Mortgages: A mortgage loan that meets the underwriting standards allowing an agency to include it in a pool of mortgages that is collateral for a security (max PTI, max LTV, and max loan amount) - Nonconforming Mortgage: Does not meet underwriting standards, so cannot be included in a pool of mortgages used to back securities - Pipeline: The loan applications being processed and the commitments made by a mortgage originator (Pipeline Risk: Risk associated with originating Mortgages) - Fallout Risk: Risk that applicants receiving a commitment letter will not purchase property with funds borrowed from the mortgage originator Key Points #1: The mortgage originator is the original lender of mortgage funds, and the activity of originating mortgages is called mortgage banking The principal originators of residential mortgage loans are thrifts, commercial banks, and mortgage bankers.
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