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Unformatted text preview: e or she will want to hold as large a loan inventory as possible.
The mortgage banker might not want to enter into firm agreement for the resale of such loans. If rates do fall, the higher interest mortgages will be more valuable on the secondary mortgage market and should sell at a premium to face value. Dynasty School (www.dynastySchool.com) 4-11 REAL ESTATE FINANCE MORTGAGE WAREHOUSING
Some lenders want huge dollar packages of mortgages. One reason is that they might wish large packages in order to issue mortgage–backed securities. At other times, mortgage bankers might be speculating on falling interest rates which means the bankers will have a great deal of their own funds and borrowed funds tied up in loans. SCOPE OF MORTGAGE BANKERS
Mortgage bankers borrow from commercial banks using their mortgage inventory to obtain additional capital for loans (loans secured by other loans are collaterally secured). There is a risk in mortgage warehousing in a movement of interest rates contrary to expectations. If rates fall, the mortgage banker would have a large inventory of loans which has to be sold at a price that could not only wipe out profits but be a financial loss. PORTFOLIO LOANS
Portfolio loans are loans held by a lender as an investment. It is rare for a mortgage banker to tie up capital in a portfolio of loans. Lending is a capital intensive activity that requires a great deal of capital or the availability of such capital. CONFORMING LOANS
Some mortgage companies make only conforming loans. They sell to savings and loans, thrifts and other lenders who want the ability to readily resell the loans should a sale be desirable. The U.S. Congress sets the maximum loan amount on conventional loans purchased by Freddie Mac and Fannie Mae. The 2002 maximum for single–family loans was $300,700. Loans that meet these limits are called conforming loans. Interest rates for conforming loans are often lower than rates for nonconforming loans. NONCONFORMING LOANS
In many a...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10