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Residential Mortgage Lending: Principles and Practices, 6e

Residential Mortgage Lending: Principles and Practices, 6e. Chapter 17 Selling Residential Mortgage Loans. Objectives. After completing this chapter, you should be able to: Discuss the various marketing alternatives for loan production Explain the details required in a mortgage sale

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Residential Mortgage Lending: Principles and Practices, 6e

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  1. Residential Mortgage Lending:Principles and Practices, 6e Chapter 17 Selling Residential Mortgage Loans

  2. Objectives • After completing this chapter, you should be able to: • Discuss the various marketing alternatives for loan production • Explain the details required in a mortgage sale • Calculate the increased yield to the originator from participation sales • Explain how yield is calculated • Calculate the weighted average yield and how to discount a mortgage package

  3. When Is A Mortgage Loan Sold? • Technically, the actual sale of a mortgage loan is completed when a lender closes a loan in its own name, then endorses its note and assigns its mortgage to another entity, delivers all the required documentation to the investor, & then receives investor funding for the loan.

  4. When Is A Mortgage Loan Sold? • Endorsement and assignment may be at, or well after, closing. • Funding can be immediate, or take several days to weeks if due diligence uncovers documentation or other issues in perfecting a lien or in following underwriting guidelines.

  5. Marketing Alternatives A. Retaining production in portfolio B. Selling production to FNMA/FHLMC C. Directly Issuing MBS D. Direct sales to permanent investors E. Selling production to conduits

  6. Managing Risks • Credit risk • Interest rate risk • Prepayment risk • Liquidity risk

  7. Advantages of Selling Loans • No portfolio risk from changing interest rates • Increased ability to meet local housing demand • Instant liquidity • Increased servicing volume and income • Potential for marketing profit • Participation leverage

  8. Types of Loans Sold • 1-4 family first mortgages • 1-4 family second mortgages • Reverse mortgages • Rural housing mortgages • Cooperative mortgages • Rehabilitation loans • Multifamily mortgages, among others

  9. The Approval Process 1. Submitting application for approval 2. Paying non-refundable fee 3. Examination of financial condition a. Fannie Mae requires min net worth $2.5 million b. Freddie Mac makes reference to having an “acceptable” net worth based on the proposed duties and obligations with Freddie Mac 4. Reviewing mortgage lending experience of lender in: a. Origination b. Secondary market operations c. Servicing 5. Establishing whether properly licensed in jurisdiction 6. Establishing if staff has sufficient experience in: a. Originating investment quality mortgage loans b. Servicing loans for investors 7. Reviewing fidelity bond and errors and omissions coverage 8. Reviewing acceptability of: a. Quality control plan b. Loan servicing systems in place

  10. Calculating Yield $90,000 annualized income ______________________ = 9 percent yield $1,000,000 invested $90,000 ________ = $1,000,000 9 percent

  11. What Do You Think? • Describe the business strategy of selling mortgage loans. Why is it the most popular residential mortgage loan strategy today? • What alternatives does a mortgage originator have for the residential mortgage loans that have been originated? What are the pros and cons of each?

  12. What Do You Think? • Identify and discuss the inherent risk of residential mortgage origination. • What are the major benefits that a mortgage lender derives from selling loans into the secondary mortgage market?

  13. What Do You Think? • What steps must a mortgage lender go through before it can sell loans into the secondary market? • What are loan commitments and why are they so important in secondary mortgage market transactions? • Explain the pricing options that a lender has when selling loans into the secondary mortgage market.

  14. Check Your Understanding • Sales to the secondary mortgage market have recently been over $3 trillion a year. • A conforming loan is one that is at or below the maximum loan amount for sale in the secondary mortgage market. • A nonstandard mortgage loan is one that does not conform to the processing/underwriting standards of the secondary market. • Ultimately all mortgage loans can be sold to some investor. • Interest rate risk is not considered a reason to sell loans in the secondary market.

  15. Check Your Understanding • Because Fannie Mae and Freddie Mac were originally started by the federal government, any mortgage lender can sell loans without being approved to do so. • Commitments are critical to successful mortgage lending for those lenders that sell mortgages. • The price an investor will pay for a mortgage loan (i.e., the yield on the mortgage) determines the value of that loan in the secondary market. • One a loan has been sold to an investor the principle and interest payment belong to the seller until the first of the month. • Weighted-average yield is a tool for calculating yield of a single mortgage that is two or more years old.

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