Mortgage Overview

When I start this Hub about Mortgage Overview, I begin to feel sorry for all of the good people who have either lost their home or, are about to. I can say that some of this could have been avoided if mortgage loan applicants had been more informed, better prepared and knew the questions to ask and what to avoid. Of course when a Mortgage Loan Applicant goes to the Bank Mortgage Department, Mortgage Company or Broker's office, they expect certain things. I think, no I know, that this is one of the main issues that has lead us down this horrible path of the Mortgage Meltdown. Expecting professionals to know what they are doing and in turn be conscious of the applicants (your) needs, not their own need for profit. This Mortgage Overview is going to tell you the truth, not sugar coat what happened. Sorry, the truth will set us free!

Let me give you a quicky about my experience. I worked 30+ years in the business, before the bad loans were made, I learned the right way to do business and I was successful in working my way from the bottom up, to underwriter approving loans and then to management. I say the good, the not so good and some of the bad, I regret. I also worked at Freddie Mac in Atlanta, but this was also before they started taking loans which were not of the best quality.

Let me give you a synopsis of what happened and then I will spell out some things that "you" should know, later. The old way to making sound mortgage loans was pretty simple and no one argued, the guidelines were just followed and that was it and it went something like this: (I will mainly address Conventional Loans- not insured by the government like FHA, I will throw in some FHA guidelines and a glossary of the end),

• the applicant had to have 5% downpayment from their own money-could not be gifted for conventional loans. Applicant's applying for FHA loans needed only 3% and part of it could be gifted, initially.
• their credit had to indicate no late payments (30 day lates) for at least the past 3 years, sometimes 2 years, with extenuating circumstances, they might have a 30 day late with a manuel underwrite, but not a dozen and actually all loans were manually underwritten then.
• they needed a minimum of 2 years working on the same job, in the same profession. FHA would allow the borrower's college years as part of the history and deviated some from the Conventional guidelines, if all else was good.
• they had to have a minimum of 3 months reserves saved from their own funds...
• the collateral (the home) had to meet certain guidelines and the appraiser's were not influenced by the Real Estate Agents or others...never.

This is only the basic criteria that applicants had to meet when applying for a mortgage loan and in this Mortgage Overview there is not any way I can give all of the details, I will have to spread it out for you.

What really happened is this; the Regulatory Agencies started looking at who could get a mortgage loan and it seemed that some people were being left out. One of the first programs that came to light to help this situation was the CRA (Community Reinvestmetn Act) and this was imposed upon the Banks primarily to begin with. They had to make loans to certain applicants, in certain area of their city, under guidelines that were lacking the normal approval basics. Meaning that equal opportunity was given to those who could qualify under regular guidelines.

In the late 90's Fannie Mae and Freddie Mac came out with the automated underwriting systems. The applicant's financial information was plugged in and these systems would spit out an approval or a caution or out of scope, listing all the required documentation needed, and then the physical underwriter had to fill in the pieces. This was really an adjustment for most of us Underwriter's who had been in the business for awhile.

It seems that the Subprime Mortgage loans actually started around the 1980,( not in a big way, that was yet to come) and this is what has been called due to deregulations of the systems which regulate mortgage lending. These loans were not the primary loan Industry and I did not know much about them (except they were not good loans)at all until later because I worked exclusively for Banks, who's main catagory was selling loans to FNMA and FHLMC. Eventually, after the regulations were changed, Subprime Mortgage Companies started poping up across the Country. They stated growing and Broker's Office became a highly competitive force in the Mortgage Industry. These kinds of loans with poor credit, no assets, borrowed funds, high debt to income ratios, nothing actually in line with much standard at all (sorry but that is what it amounted to) became the way most people wanted to go....Why? The guidelines were less stressed, you could borrow funds for closing, you could have lots of debt and very weak credit and sometimes horrible credit, but it was a way for all people to have a chance at owning a home. If I remember correctly, I believe that someone in Congress argued that "Everybody deserves a home". Yes, they do deserve one, but they also have to be able to make the payment on time, everytime...and most could not.

What happened was that this became the easiest route to take for so many people because they had problems getting the loan with Mortgage Banking Industry approved for one reason or the other but in the long what they received was the following:

• higher interest loan *sometimes 10% and higher
• 100% financing
• sale price with 6% closing cost added in that the seller paid for them (meaning the house price was raised to include all the closing cost..and this was over and above the Real Estate Agents 6 -7% **the bank could probably close the loan with 3% or less Closing Cost
• higher than normal PITI (principal, interest, taxes and insurance)
• an appraisal that was inflated so that the closing cost could be paid by the seller
• they then had a property that was really not worth what they paid for it
• their debt way exceeded their income when they received the loan therefore making the payment was almost not possible from the beginning

This is a Mortgage Overview of how we got to the housing market crash and people loosing their homes. It is actually not the applicant's fault, because everybody does deserve a home and if they were passing them out like hotcakes when why not go get one! The guidelines changed, people bought into this because it makes people happy to have something new and something they can call their own....Everybody got greedy, the Agencies, the Investors, the Banks, Mortgage Companies...and everybody failed...

Be assured, it will never happen again and it will not take you long to realize that if you go to apply for a mortgage loan any time soon. This Mortgage Overview is not to make the entire Industry look bad, it is to show you that when regulations get deregulated, bad things can happen and that guidelines are made for obvious reasons.. in all actuality they are made to protect the consumer from disastor.Everyone should know about Equity loansbefore they get one also.

You will see below in the glossary, there was actually no rhime or reason for the neglect of making sure that customers were protected as there are many agencies that the Mortgage Industry has to answer to. In this Mortgage Overview I hope that you can at least have some comperhension of how our Country got into such a terrible financial situation.

FNMA -Federal Home Loan Mortgage Association *Fannie Mae

FHLMC- Federal Home Loan Mortgage Corporation *Freddie Mac

Regulator Agencies:

CRA: Regulates the Banks re-inforcing the making of loans within the lower and middle class areas of their banking facility without discrimination yet with a due diligence method that does not cause the institution to substain losses. Which means those borrowers that may need more help than others in qualifying.

OCC: The Office of the Comptroller of the Currency a bureau of the United States Department of the Treasury. The OCC charters, regulates and supervises and presides over nations banksand their operating subsidiaries to ensure safe, sound and competitive national banking system that supports the citizens, communities and economy of the United States.

The Fair Credit Reporting Act: This law governs credit-reporting agencies, whose regulatoris the Federal Trade Commission. However, the law requires credit unions and other creditors to notify cumsumers when they take adverse action on the basis of information found in their credit report and supply customers with the name and address of the consumer-reporting agency used.

The Federal Reserve Board: they handle complaints and regulates State-chartered banks and trusts. They also edministers the Truth-In-Lening , Equal Credit Opportunity and Fair Credit Reporting Acts.

FDIC: handles questions about deposit insurance coverage and complaints about FDIC insured state banks that are not members of the Federal Reserve System

Office of the Thrift Supervision: OTC takes care of complaints about federal savings and loans and federal savings banks.

HUD - Department of Housing and Urban Development: prohibits housing discrimination based upon race, color,national origin, religion, sex, family status or disability.

RESPA: is about closing cost and settlement procedures and charges. RESPA requires that consumers receie disclosures at various times in the transaction and outlaws kickbacks that increase the cost of settlement services. RESPA is a HUD consumer protection statue designed to help homebuyers be better shoppers in the home buying process. RESPA is enforced by HUD.

The Truth in Lending Act: the Federal Reserve Board's Regulation Z. This law promotes the informed use of the consumer credit by requiring disclosures about its terms and cost. The regulation also gives consumers the right to cancel transactions secured by a lien (a refinance loan) on a consumer's principal dwelling.

The Truth in Savings Act: requires financial institutions to disclose fees, dividend rates, and other terms concerning accounts to members or potential members before they open their share accounts.

Other Mortgage Definitions:

Conventional Loans:  These loans are not guaranteed by the Federal Government.  The terms are normally for the applicants who have a financial position for less assistance in obtaining a mortgage.

FHA:  Federal Housing Adminstration:  Partially guaranteed by the Feds, with less restrictive guidelines regarding downpayment, debt to income ratios and financial status. These loans have an upfront MIP (mortgage insurance premium) and a monthly premium of MI.  These loans are always escrowed.

VA:  Veterans Administration:  These loans are for our Military personnel which has since I can remember offered 100% financing with a VA funding fee added in the loan.  This is offered for their service to their Country. 

Escrow:  Taxes and Insurance payment held in escrow, paid monthly with the mortgage payment and the mortgage company will pay the payment on an annual basis when they are due.

Mortgage Banker: A bank that has a mortgage department; originates, underwrites and closes their own loans and funds the transaction and services the loans. They may sell the loan or keep in their portfolio.

Mortgage Company: Can be part of a Bank or outside of a bank but is regulated some differently if not a Bank. They can also originate, underwrite and fund the loan and sometimes serivce the loan also.

Broker: Originates the loan, does not underwrite the loan, does not fund the loan and does not service the loan. The Broker is the middle man that a customer uses and usually get loan rate quotes from more than one Mortgage Banker or Mortgage Company, will use their guidelines and their funds to close the transaction and then submit the loan to that Company.

Loan Officer: Originates the loan; takes the application and gathers the required documentation. Explains the mortgage terms and condition of the loan. Must be licensed through the state individually if they work in a Broker Office in most States.

Account Executive: The same

Processor: Usually processes the mortgage loan speaking with the customer on a regular basis to gather information needed.

Underwriter: After the loan is fully processed the file is submitted to the Underwriter to be approved or denied or for additional information that was not provided. The Underwriter makes the final credit decision on the loan.

Appraiser: He/she evaluates the property which is the collateral for the loan. They consider the surrounding houses in the subjects immediate area, the lot or land it is situated on, and the purchase prices of the houses within the subjects immediate area helps to determine the value of the house being used as collateral. There are guidelines and regulations which they have to follow about proximity, acreage, location, square footage, number of bedrooms, bath etc.

PITI : Principal, Interest, Taxes, Insurance

Fully Amortized Payment: Principal and Interest of a payment

Mortgage Insurance: Loan which have a loan to value greater than 80%, must carry default insurance; some of those companies are: MGIC, GE, RMIC, PMI (not conclusive)

Loan to Value: Loan amount is divided by the lower of the Sales Price or Appraised Value

Debt to Income Ratio: housing, installment, revolving debt, open end debt and any other debt an applicant has on their credit report and any other debt must be verified and all divided by the gross income for the borrower(s). This is the over all debt versus income.

This glossary is not conclusive and we will add as needed. The Mortgage Industry is very detailed and can be complicated to most if you do not work in and around the business.