The mortgage market
Mortgage loan originators
The mortgage market Mortgage loans provide borrowers with funds to purchase real estate. Money for mortgages primarily comes from cash savings of individuals, government, and businesses. This money may become available through the process of intermediation, in which funds on deposit with financial institutions are loaned out to borrowers, or disintermediation, in which the owners of the savings invest their money directly by making loans or other investments. Government actions and investor activities affect the supply of money for mortgage loans and encourage or discourage the market for mortgage loans as an investment.
Supply and demand for money. Money is a limited commodity subject to the effects of supply and demand. The federal government’s monetary policy controls the supply of money in order to achieve the country’s economic goals. An excessive supply of money usually causes interest rates to fall and consumer prices to rise. Conversely, an excessive demand for money, such as for mortgage loans, causes interest rates to rise and prices to fall. Regulation of the money supply addresses these fluctuations with the aim to control and limit wide swings in the supply and demand cycle. These efforts, in turn, help to buffer the economy from severe inflationary or recessionary trends.
- selling or re-purchasing government securities, primarily Treasury bills
- changing the reserve requirement for member banks. The reserve is a percentage of depositors’ funds that banks and other regulated financial institutions may not lend out.
- changing the interest rate, or discount rate, the system charges member institutions for borrowing funds from the Federal Reserve System central banks
When the Federal Reserve sells Treasury bills, the money paid for the securities is removed from the economy’s money supply. Conversely, when it repurchases Treasury bills, the cash paid out to investors puts money back into the economy.
The second control, regulating reserve requirements, effectively restricts how much money banks can put into the economy through the disbursement of loans. When the Federal Reserve raises reserve requirements, banks have less money to lend, decreasing the money supply. When the Fed lowers reserve requirements, banks have more money to lend, increasing the money supply.
The third control, and perhaps the most effective, is regulation of the discount rate which member banks must pay to borrow money. If the discount rate goes up, it becomes more cost-prohibitive to borrow. Therefore the money supply tightens. If the discount rate is lowered, banks have an incentive to borrow more money to lend to customers.
Primary mortgage market. The primary mortgage marketconsists of lenders who originate mortgage loans directly to borrowers. Primary mortgage market lenders include:
- savings and loans—residential mortgages and home equity loans; conventional, FHA, and VA loans
- commercial banks—construction loans; conventional, FHA, and VA loans
- mutual savings banks—residential and home improvement loans; conventional, FHA, and VA loans
- life insurance companies—commercial loans, especially for apartment, office, retail, industrial properties
- mortgage bankers—mortgage loan originations; FHA and VA loans
- credit unions—residential and home improvement loans; conventional, FHA, and VA loans
Mortgage brokers. Mortgage brokersare also part of the primary mortgage market, even though they do not lend to customers directly. Rather, they are instrumental in procuring borrowers for primary mortgage lenders.
The primary lender assumes the initial risk of the long-term investment in the mortgage loan. Primary lenders sometimes also service the loan until it is paid off. Servicing loans entails collecting the borrower’s periodic payments, maintaining and disbursing funds in escrow accounts for taxes and insurance, supervising the borrower’s performance, and releasing the mortgage on repayment. In many cases, primary lenders employ mortgage servicing companies, which service loans for a fee.
Portfolio lenders. A primary mortgage market lender may or may not sell its loans into the secondary market. Many lenders originate loans for the purpose of retaining the investments in their own loan portfolio. These loans are referred to as portfolio loans, and lenders originating loans for their own portfolio are called portfolio lenders. Portfolio lenders are less restricted by the standards and forms imposed on other lenders by secondary market organizations. In retaining their portfolio loans, portfolio lenders may vary underwriting criteria and hold independent standards for down payment requirements and the condition of the collateral.
Mortgage loan originators
Mortgage loan originators (MLOs) work for banks, credit unions, and savings and loan institutions, receiving and processing mortgage loan applications, negotiating loan terms and conditions, and selling existing mortgage loans to investors. An MLO license is necessary in Florida and requires a prescribed number of hours of education and passing of a test. The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) sets minimum standards for MLO licensing and registration. The Nationwide Mortgage Licensing System (NMLS) is the provider and registrar of MLO licenses.
The seller may provide some or all of the financing for the buyer’s purchase. Some of the most common methods of seller financing are purchase money mortgages, including the wraparound, and the contract for deed.
Purchase money mortgage. With a purchase money mortgage, the borrower gives a mortgage and note to the seller to finance some or all of the purchase price of the property. The seller in this case is said to “take back” a note, or to “carry paper,” on the property. Purchase money mortgages may be either senior or junior liens.
Wraparound. In a wraparound loan arrangement, the seller receives a junior mortgage from the buyer, and uses the buyer’s payments to make the payments on the original first mortgage. A wraparound enables the buyer to obtain financing
with a minimum cash investment. It also potentially enables the seller to profit from any difference between a lower interest rate on the senior loan and a higher rate on the wraparound loan. A wraparound is possible only if the senior mortgagee allows it.
Contract for deed. Under a contract for deed arrangement, the seller retains title and the buyer receives possession and equitable title while making payments under the terms of the contract. The seller conveys title when the contract has been fully performed.