Chapter 7 MORTGAGES

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Chapter 7 MORTGAGES Powered By Docstoc
					     7          MORTGAGES
          7.1   Mortgage Lending
          7.2   Mortgage Loan Processing
          7.3   Mortgages and the Law
          7.4   Government-Backed Loans


Slide 1                             Copyright South-Western, a division of Thomson, Inc.
          Lesson 7.1
          MORTGAGE LENDING
  GOALS
          Define the term mortgage
          Identify several types of mortgages




Slide 2                         Copyright South-Western, a division of Thomson, Inc.
WHAT IS A MORTGAGE?

     Today, a mortgage is a note, usually long-term,
      secured by real property.
     Essentially, a mortgage places a lien on the
      property that is not released until the debt is paid.
     If the mortgage is not paid, the creditor seeks a
      court-ordered sale of the property called a
      foreclosure, and the debt is paid from those funds.


Slide 3                               Copyright South-Western, a division of Thomson, Inc.
FIXED RATE MORTGAGES

     Fixed rate mortgages, also called conventional
      mortgages, are loans with a fixed rate of interest
      for the life of the loan.
     Payments on the loan are set for the life of the
      loan.
     Terms are set for the life of the loan.
     The most common terms are 30- and 15-year
      terms.

Slide 4                              Copyright South-Western, a division of Thomson, Inc.
BALLOON MORTGAGE

     In a balloon mortgage, the interest rate and
     payment stay fixed, but at some specified point, the
     entire remaining balance of the loan is due in one
     single “balloon” payment.




Slide 5                               Copyright South-Western, a division of Thomson, Inc.
ADJUSTABLE RATE MORTGAGES

      Adjustable rate mortgages (ARMs) are those with rates
       that change over the course of the loan.
      Usually the interest rate and payments are fixed for some
       period of time at the outset but then change according to
       some index value.
      Some of the things that can vary are:
           Interest rate          Adjustment interval
           Payment                Periodic cap
           Index                  Lifetime cap
           Formula

Slide 6                                   Copyright South-Western, a division of Thomson, Inc.
BUY-DOWN MORTGAGE

     In a buy-down mortgage, the borrower buys
      down, or prepays, part of the interest in order to
      get a lower rate.
     The borrower pays points to the lender at the
      outset, and the lender agrees to lower the rate
      so much per point.
     A point is a value equal to 1 percent of the loan.


Slide 7                               Copyright South-Western, a division of Thomson, Inc.
SHARED APPRECIATION MORTGAGE

     A shared appreciation mortgage (SAM) can
      lower interest rates for borrowers who agree to
      share later with the lender some part of the
      amount the house appreciates.
     Appreciation is the amount that a house
      increases in value.




Slide 8                             Copyright South-Western, a division of Thomson, Inc.
REFINANCING

     Refinancing is starting over with an entirely new
      loan, using part or all of the loan funds to pay off
      the old mortgage.
     If interest rate are low, consumers save money
      by getting new mortgages at lower rates.
     Banks and other lenders earn money on fees,
      points, and closing costs of the new loan.


Slide 9                                Copyright South-Western, a division of Thomson, Inc.
HOME EQUITY LOANS

    Equity is the difference between what an item is
     worth and what is owed on it.
    Homeowners can use the difference between
     what they owe and what their homes are worth
     to secure a loan.




Slide 10                           Copyright South-Western, a division of Thomson, Inc.
REVERSE MORTGAGES

     A reverse mortgage is not used to purchase a home.
     It is a form of consumer loan tied to the appreciated
      value of a property.
     In most cases, reverse mortgages are limited to
      homeowners 62 years or older.
     With a reverse mortgage, a homeowner receives a sum
      from the lender secured by the value of a home and
      does not pay the loan back as long as he or she lives
      there. The lender is repaid, including fees and interest,
      when the borrower sells or dies.
Slide 11                                 Copyright South-Western, a division of Thomson, Inc.
           Lesson 7.2
           MORTGAGE LOAN
           PROCESSING
  GOALS
           Describe the components involved in
           obtaining a mortgage
           Explain the mortgage approval process




Slide 12                        Copyright South-Western, a division of Thomson, Inc.
OBTAINING A MORTGAGE

    Lenders typically require a down payment of 5,
     10, or 20 percent for a mortgage.
    A larger down payment lowers the cost of the
     monthly payment and may affect how the lender
     views the borrower.
    Most lenders do not want a person’s housing
     costs to exceed 25 to 28 percent of gross
     monthly income.
    Total debt should not exceed 36 percent.
Slide 13                          Copyright South-Western, a division of Thomson, Inc.
MONTHLY PAYMENTS

    Monthly payments to the lender usually consist of
    PITI or Principal, Interest, Taxes, and Insurance.




Slide 14                             Copyright South-Western, a division of Thomson, Inc.
PITI

     Principal is the remaining unpaid balance of the mortgage.
     Interest is the amount that goes toward interest.
     Taxes include local real estate taxes.
            Most lenders require an amount to be paid to them in advance,
             called escrow, from which they pay the real estate taxes.
     Insurance refers to property insurance and sometimes
      private mortgage insurance.
            Almost all mortgages require the homeowner to maintain
             adequate property insurance.
            Private mortgage insurance (PMI) protects the lender against
             loan default.
Slide 15                                         Copyright South-Western, a division of Thomson, Inc.
THE APPROVAL PROCESS

    Application
    Documentation
    Underwriting
    Drawing documents
    Closing
    Recording



Slide 16                 Copyright South-Western, a division of Thomson, Inc.
           Lesson 7.3
           MORTGAGES AND
           THE LAW
  GOALS
           Describe consumer protection laws that
           apply to mortgage lending
           Describe laws directly related to mortgage
           lending



Slide 17                         Copyright South-Western, a division of Thomson, Inc.
CONSUMER PROTECTION LEGISLATION

    Truth in Lending Act (TILA)
    Equal Credit Opportunity Act (ECOA)
    Fair Credit Reporting Act (FCRA)
    Fair Debt Collection Practices Act (FDCPA)
    Gramm-Leach-Bliley Act




Slide 18                          Copyright South-Western, a division of Thomson, Inc.
MORTGAGE LEGISLATION

    In addition to consumer legislation, other laws
     exist that relate directly to mortgage lending.
    Complying with this legislation and documenting
     compliance requires considerable effort and
     expense on the part of the financial institutions.




Slide 19                             Copyright South-Western, a division of Thomson, Inc.
COMMUNITY REINVESTMENT ACT

    Congress passed the Community Reinvestment Act
    (CRA) of 1977 in response to widespread complaints
    that some banks refused to lend to residents of
    certain neighborhoods, a practice called redlining.




Slide 20                           Copyright South-Western, a division of Thomson, Inc.
HOME MORTGAGE DISCLOSURE ACT

    The Home Mortgage Disclosure Act (HMDA) of
     1974 was a forerunner of the CRA.
    It requires banks and other financial institutions
     to record and report data on home lending in
     order to identify possible discriminatory patterns.




Slide 21                             Copyright South-Western, a division of Thomson, Inc.
HOME OWNERSHIP AND EQUITY PROTECTION ACT


    Congress passed the Home Ownership and
     Equity Protection Act (HOEPA) in 1994 to protect
     consumers against predatory lending.
    Provisions of this act also apply to second
     mortgages and refinancing.




Slide 22                           Copyright South-Western, a division of Thomson, Inc.
REAL ESTATE SETTLEMENT PROCEDURES ACT


    Congress enacted the Real Estate Settlement
     Procedures Act (RESPA) of 1974 to protect
     consumers from hidden costs or expensive
     surprises at closing time.
    The law requires disclosures to be provided to
     the borrower at various times during the
     transaction.



Slide 23                           Copyright South-Western, a division of Thomson, Inc.
THE HOMEOWNERS’ PROTECTION ACT OF 1998


    The Homeowners’ Protection Act of 1998 requires
    that lenders drop PMI when equity reaches 22
    percent in loans closed after July 29, 1999.




Slide 24                          Copyright South-Western, a division of Thomson, Inc.
           Lesson 7.4
           GOVERNMENT-
           BACKED LOANS
  GOALS
           Explain the concept of government-backed
           loans
           Identify government-backed programs to
           encourage home lending



Slide 25                        Copyright South-Western, a division of Thomson, Inc.
WHAT IS A GOVERNMENT-BACKED LOAN?


    Numerous government programs help banks
     help people get loans.
    In most of these programs, the banks provide
     funding and the government absorbs some of
     the risk.




Slide 26                          Copyright South-Western, a division of Thomson, Inc.
FEDERAL MORTGAGE PROGRAMS

    The Federal Housing Administration (FHA),
     established in 1934, supported both homebuyers
     and banks by replenishing funds available for
     home lending.
    Today, there are many such programs with
     varying missions, services, and operations, but
     the twin benefits of both supporting homeowners
     and backing the banking industry continues.

Slide 27                          Copyright South-Western, a division of Thomson, Inc.
FEDERAL HOUSING ADMINISTRATION

    During the Great Depression
    Established to help the housing industry get
      back on its feet
    Guaranteed loans and provided mortgage
      insurance
    Pioneered long-term loans



Slide 28                           Copyright South-Western, a division of Thomson, Inc.
OFFICE OF HOUSING

    Today, what was once the FHA is now the Office
     of Housing and is part of the Department of
     Housing and Urban Development (HUD).
    The Office of Housing continues to guarantee
     FHA loans and provide mortgage insurance.




Slide 29                          Copyright South-Western, a division of Thomson, Inc.
FANNIE MAE

    The Federal National Mortgage Association
     (FNMA) was created in 1938 as part of the FHA.
    Fannie Mae is a government-chartered
     corporation that buys mortgages from the
     originating institutions and either keeps them or
     exchanges them for securities which it
     guarantees.
    Fannie Mae is now an independent corporation.

Slide 30                            Copyright South-Western, a division of Thomson, Inc.
FREDDIE MAC

    The Federal Home Loan Mortgage Corporation
     was created in 1970 as a fully independent
     corporation.
    Freddie Mac buys home mortgages from banks
     and other lending institutions and combines
     them into large groups, selling interest in the
     groups to investors.



Slide 31                           Copyright South-Western, a division of Thomson, Inc.
GINNIE MAE

    The Government National Mortgage Association
     is part of the Department of Housing and Urban
     Development.
    Ginnie Mae neither buys nor sells mortgages.
    It backs securities issued by holders of pools of
     mortgages.




Slide 32                            Copyright South-Western, a division of Thomson, Inc.
VETERANS ADMINISTRATION (VA)

    Loans from the Department of Veterans Affairs
     (DVA) have helped millions of service men and
     women get government-backed loans with low
     down payments.
    VA loans allow qualified veterans to buy, build,
     remodel, or refinance a home.




Slide 33                            Copyright South-Western, a division of Thomson, Inc.
NCHSA

     The National Council of State Housing Agencies (NCHSA)
      is a national organization of Housing Finance Agencies
      (HFAs) throughout the states that provide and administer
      programs for lower-income and other people who seek
      help at the state level to buy or renovate a home.
     There are also 350 affiliated profit and nonprofit agencies
      that work in this field.
     These agencies and firms have a variety of programs for
      affordable housing.


Slide 34                                 Copyright South-Western, a division of Thomson, Inc.
OTHER GOVERNMENT-BACKED LOANS

    There are many other government-backed loan
     programs.
    It is not easy to find every government loan
     program.
    The Catalog of Federal Domestic Assistance is
     available in government depository libraries and
     online at www.cfda.gov.


Slide 35                           Copyright South-Western, a division of Thomson, Inc.

				
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