Financing Residential Real Estate
Lesson 4:
The Mortgage Industry
Introduction
In this lesson, we will cover:
 steps in the residential mortgage process;
 participants in the process, including loan
originators and lenders;
 government intervention in the mortgage
industry during the Great Depression and the
S&L crisis; and
 the mortgage industry and the current
economic crisis.
Introduction
Note that terminology concerning the mortgage
industry isn’t always used consistently throughout
the industry.
 Definitions given here won’t necessarily match
the ones you encounter in the field.
 Terms such as loan origination, loan officer,
and mortgage broker are used differently in
different contexts and by different people.
Overview of the Mortgage Process
1. Home buyer applies for a loan.
2. Loan originator helps buyer with application
and submits it to lender(s).
3. Lender approves and funds loan.
After the loan has been made:
4. Lender may keep loan in portfolio or sell it on
secondary market.
5. Servicer (lender or another entity)
collects payments, handles other
administrative tasks.
Loan Origination
Loan originator who helps buyer apply may be:
 a loan officer, employed by a particular lender,
or
 a mortgage broker, an independent agent who
usually works with more than one lender.
Loan Origination
Loan originator who helps buyer apply may be:
 a loan officer, employed by a particular lender,
or
 a mortgage broker, an independent agent who
usually works with more than one lender.
Loan may be originated in:
 a retail transaction (direct lending), or
 a wholesale transaction (indirect).
Loan Origination
Retail transactions
Retail lending is the traditional way:
1. Buyer applies to Acme Bank.
2. Loan originator who works with buyer is a
loan officer employed by Acme.
3. Loan officer submits application to Acme’s
underwriting department.
4. If approved, Acme funds loan.
Loan Origination
Wholesale transactions
Wholesale lending came to the fore in the 1990s.
1. Buyer applies to Zenith Mortgage.
2. Zenith, acting as an intermediary, may be:
 a loan correspondent processing the
loan on behalf of a large national lender,
MegaBank, or
 a mortgage broker submitting the
application to one or more lenders,
including MegaBank.
Loan Origination
Wholesale transactions
By lending indirectly, through local loan
correspondents or mortgage brokers, wholesale
lenders reduce their overhead.
They don’t have to pay for office space or have
employees in every place they make loans.
Loan Origination
Loan correspondents
Loan correspondents make loans for large
investors, such as life insurance companies,
pension funds, or wholesale lenders.
 Correspondent may handle entire origination
process and underwriting, but loan funds
ultimately come from the investor or wholesale
lender.
 Local lending institutions and mortgage
companies often act as loan correspondents.
Loan Origination
Mortgage brokers
Mortgage broker is only a go-between, not a lender.
 Brings borrowers and lenders together in
exchange for a commission.
 Helps home buyer choose lender(s) and
submit application(s).
 May provide preliminary approval based on
lender’s underwriting rules.
 But doesn’t actually underwrite, approve,
or fund loan, as a general rule.
Loan Origination
Mortgage brokers
Table-funded loan creates the impression that the
mortgage broker is the lender.
 Mortgage broker designated as originating
lender in loan documents.
 Loan actually funded by wholesale lender “at
the closing table.”
 At closing, broker assigns loan rights to true
lender, receives service release premium.
 Raises consumer protection issues.
Loan Origination
Regulation of loan originators
Housing and Economic Recovery Act, 2008 law
addressing mortgage crisis, includes Secure and
Fair Enforcement for Mortgage Licensing Act.
S.A.F.E. is designed to prevent abusive, predatory
practices during loan origination.
Regulation of Loan Originators
S.A.F.E. licensing and registration rules
S.A.F.E. requires all loan originators to be either
federally registered or state-licensed.
 Registered loan originator: Employed by
depository institution or subsidiary.
 State-licensed loan originator: All others must
have state license.
 Registration or licensing required even for
those who perform clerical or support duties.
Regulation of Loan Originators
S.A.F.E. licensing and registration rules
Real estate agents:
generally exempt from S.A.F.E. licensing
rules;
but must have originator’s license if
compensated by a lender or mortgage
broker for helping to arrange a loan.
Regulation of Loan Originators
Other S.A.F.E. provisions
 Uniform license applications and reporting
requirements for states.
 Improved information tracking across state
lines (background checks, fingerprinting, etc.).
 Enhanced consumer protection and anti-fraud
measures.
 Fiduciary duties for loan originators.
Regulation of Loan Originators
Originator’s fiduciary duties to buyer
Traditionally, mortgage broker:
wasn’t buyer’s agent;
didn’t have duty to help buyer choose best
financing option or to act in buyer’s best
interests.
Regulation of Loan Originators
Originator’s fiduciary duties to buyer
Traditionally, mortgage broker:
wasn’t buyer’s agent;
didn’t have duty to help buyer choose best
financing option or to act in buyer’s best
interests.
 But some states have laws giving mortgage
brokers fiduciary duties to buyers.
 And now S.A.F.E. imposes fiduciary duties
as a matter of federal law.
Summary
Loan Origination
 Loan originator
 Loan officer
 Mortgage broker
 Retail lending
 Wholesale lending
 Loan correspondent
 Table-funded loan
 S.A.F.E.
Mortgage Lenders
After helping home buyer prepare loan application,
loan originator submits it to a mortgage lender.
Lender reviews application and decides whether
to approve or reject it.
If application approved, lender will fund the
buyer’s loan.
Types of Mortgage Lenders
Main sources of residential mortgage financing in
the primary market:
Depository institutions
 Commercial banks
 Thrift institutions (savings banks and
savings and loan associations)
 Credit unions
Mortgage companies
Types of Mortgage Lenders
Mortgage companies
First U.S. mortgage companies were established in
the 1930s.
Not depository institutions
Business focused exclusively on
mortgage lending and related services
Also called mortgage banking companies
or mortgage bankers
Mortgage Companies
Independent vs. associated
Original mortgage companies were private
businesses unconnected with banks or other
depository institutions.
 Now some are associated with depository
institutions as direct subsidiaries or affiliates.
 Companies not associated with a depository
institution are called independent mortgage
companies.
Mortgage Companies
Independent vs. associated
Independent mortgage companies are regulated
much less than depository institutions.
 Not subject to same rules as depository
institutions.
 Not subject to periodic examinations to
determine compliance with financial
requirements and consumer protection laws.
 Generally investigated only if complaint filed
with FTC or state agency.
Mortgage Companies
Business activities
Some mortgage companies engage in mortgage
brokerage activities as well as mortgage banking
activities.
Mortgage Companies
Business activities
Some mortgage companies engage in mortgage
brokerage activities as well as mortgage banking
activities.
Zenith Mortgage could be a:
mortgage banker (a lender),
mortgage broker (a go-between), or
combination of the two.
Mortgage Companies
Business activities
Some mortgage companies engage in mortgage
brokerage activities as well as mortgage banking
activities.
Zenith Mortgage could be:
a mortgage banker (a lender),
a mortgage broker (a go-between), or
a combination of the two.
Some companies also service loans.
Mortgage Companies
Sources of funds for lending
Mortgage companies aren’t depository institutions,
so they can’t use depositors’ savings to fund loans.
Mortgage Companies
Sources of funds for lending
Mortgage companies aren’t depository institutions,
so they can’t use depositors’ savings to fund loans.
Instead, a mortgage company may:
 act as a loan correspondent for large investors
or wholesale lenders, or
Mortgage Companies
Sources of funds for lending
Mortgage companies aren’t depository institutions,
so they can’t use depositors’ savings to fund loans.
Instead, a mortgage company may:
 act as a loan correspondent for large investors
or wholesale lenders, or
 draw on a line of credit from a commercial
bank, then sell the loans and use the sale
proceeds to pay off bank and make more
loans.
Mortgage Companies
Sources of funds for lending
Mortgage companies keep few if any loans in
portfolio.
Loans are either made on behalf of a large investor
or sold on the secondary market.
Types of Mortgage Lenders
Alternative sources of financing
Sometimes a private individual makes mortgage
loans to home buyers on a small scale.
A private lending business:
 may be legal, or
 may violate state licensing laws, usury laws,
disclosure laws, or predatory lending laws.
Types of Mortgage Lenders
Alternative sources of financing
Most important alternative source of financing for
home buyers is the home seller.
 Seller may provide some or all of the
financing.
 Common when institutional loans are hard
to get or interest rates are high.
Summary
Mortgage Companies & Alternatives
Mortgage company
Mortgage banker
Independent mortgage company
Private lenders
Home sellers
Government Intervention
Mortgage and financial crisis
Crisis in mortgage industry led to larger credit
crunch and crisis in financial markets, spreading to
entire U.S. economy and to global economy.
Many factors and events came together to create
the crisis in the mortgage industry.
Mortgage and Financial Crisis
Housing bubble
Housing bubble: Artificial inflation of home prices.
 In U.S., housing bubble began developing
in early 2000s.
Mortgage and Financial Crisis
Housing bubble
Factors contributing to creation of bubble included:
 Policies promoting homeownership for all;
home as investment
 Growth of subprime market, with increase in
predatory lending
 Relaxation of underwriting standards
 Nontraditional loans like option ARMs
 Looser rules, lax oversight for lenders,
financial institutions, financial markets
Mortgage and Financial Crisis
Foreclosure crisis
When bubble burst, home values dropped.
 Owners found themselves “underwater,” owing
more than value of home.
 With no equity, couldn’t refinance to prevent
payment shock when ARM or interest-only loan
payment increased sharply.
 Foreclosure rate began to climb.
Mortgage and Financial Crisis
Foreclosure crisis
Mounting foreclosures led to:
 “Toxic” mortgage-backed securities
 Bankrupt mortgage lenders
 Failure of investment banks
Mortgage and Financial Crisis
Government response
 Housing and Economic Recovery Act (HERA)
Home buyer tax credit
Programs to purchase foreclosed homes
and revitalize neighborhoods
Increased conventional and FHA loan limits
Hope for Homeowners refinancing program
New regulatory agency to oversee
Fannie Mae and Freddie Mac
Mortgage and Financial Crisis
Government response
 Takeover of Fannie Mae and Freddie Mac
 Troubled Asset Relief Program (TARP):
$700 billion emergency bailout for financial
institutions and other companies
Summary
Mortgage and Financial Crisis
Housing bubble
Subprime loans
Predatory lending
Nontraditional mortgages
Underwater homeowner
Toxic securities
HERA
Hope for Homeowners program
TARP