MORTGAGE MARKET OVERVUE
The mortgage market of a decade ago in no way resembles today’s world. With just a few key strokes, the lender can enter the borrower’s information into an automated underwriting system (AUS), taking light years off the application process. Savvy borrowers know their credit score as well as the importance it plays in obtaining a cost-effective mortgage loan. And more than 80 percent of borrowers first begin their home search via the Internet.
Yet the more things change, the more they remain the same. Many homebuyers are still confused about the requirements, the process, and the role of the myriad players involved. This chapter provides insight into how the borrowing process works and how technology has expanded the industry and, therefore, the consumer’s options. It serves as a template to help the borrower understand and more successfully navigate the mortgage process.
THE MORTGAGE LENDING PROCESS
Q. The mortgage loan process seems so complicated. ls there any way the consumer can make it easier?
The mortgage lending process can seem daunting. We fondly remember a first—time homebuying couple who received word that their loan closing would be delayed because of "a Fannie Mae underwriting glitch." The wife responded, "I don’t care who that Fannie Mae woman is, we just want to buy a housel” Had someone taken the time to explain to her that Fannie Mae (FNMA—Federal National Mortgage Association) and other players in the secondary market are vital for recycling lent funds (and in turn pass on greater loan affordability to buyers), she might have been a bit more patient! Thus, it’s important that buyers and sellers alike understand the delicate inner workings of the primary market, the secondary market, and the private mortgage insurer. We refer to this as the triple challenge. Understanding it can help clarify the mortgage process.
Q. Who are the three main players in the mortgage market and how do they work together?
The players in the triple challenge are (1) the primary lenders, (2) the secondary market, and (3) the private mortgage insurance market. The early years of mortgage lending found local lenders working alone, holding loans originated in ponfolio. This meant that when ABC Bank made a mortgage loan to the Brown family, the bank held that loan in its loan portfolio of investments, collecting the monthly payments until the loan was paid in full. This was actually beneficial for the Browns because they developed an ongoing business relationship with the lender. If hard times came and their loan payments fell behind, the Browns had a much better chance of negotiating with someone who was aware of their personal situation and perhaps more empathetic.
Q. Why did lenders change from the portfolio practice?
Keeping the loan in portfolio for 30 years was not necessarily in the lender’s best interests. As interest rates fluctuated (typically moving upward), it became increasingly evident to many lenders that they should recycle these mortgages to receive not only higher interest rates but also increased loan origination fees. Thus, in the late 1930s the secondary market was born. The first player in the secondary market was the Federal National Mortgage Association (F NMA), lovingly called Fannie Mae. She was soon followed by a sister, Ginnie Mae, the Government National Mortgage Association (GNMA), and later by a brother, Freddie Mac, the Federal Home Loan Mortgage Corporation (FHLMC). Although each of the siblings serves a particular market segment, the scope of their duties is very similar. They recycle lent funds from primary markets (e.g., banks) to return funds to circulation at the local level while creating additional collateral and investment vehicles for the secondary market. For example, ABC Bank’s $5 million in mortgage loans written to Ginnie Mae’s specihcations can be sold to Ginnie with the lender taking a slight reduction on the face value received for the privilege of converting the loans to immediate cash. Ginnie uses these loans, and their monthly payments received, as collateral for issuing GNMA pass-through securities to purchasers. In other words, if the Browns’ loan was sold into GNMA in the secondary market, and the Browns subsequently purchased some GNMA pass-through securities, they would actually be purchasing their own flow of cash! This is the mortgage-backed securitization process we hear so much about today.
Q. Was the addition of private mortgage insurance necessary to the secondary market?
Yes, over time. With more and more loans being sold into the secondary market, the players needed to hedge against potential losses on the loans purchased. So private mortgage insurance (PMI) became the third integral part of the triple challenge. PMI typically insures the top 20 percent of the new conventional loan against the borrower’s default. This was exactly the payment assurance needed by the secondary market. General guidelines of private mortgage insurance companies were added to the secondary market’s existing list of loan requirements. Local lenders then added these criteria to their buyers’ qualifying guidelines.
Q. If linking the three groups was so positive, why is it called a challenge?
Although the melding of primary lenders, secondary markets, and private mortgage insurance companies has greatly increased the options and scope of lending in the United States, it has its shortcomings. The lender, the secondary market, and the private mortgage insurance companies each have their own set of underwriting guidelines and costs, some. of which can prove too restrictive for borrowers. In an effort to qualify a borrower might leverage into an ill—fitting program that’s not financially feasible for the long run; This "challenge” was most recently played out in the mortgage market meltdown.
Living a debt free life is not impossible. But it requires determination, time, patience and discipline.
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