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Industry
Overview |
The purchase of a home is generally the largest
acquisition consumers make in their lifetime. Most consumers do not
have the financial wherewithal to purchase a home outright and must
obtain a real estate loan to finance the transaction. There are a
wide range of loan products available to meet the varied financial
needs of consumers.
The real estate lending industry has grown
substantially over the past years and is approaching $4 trillion
in outstanding loan balances. The total real estate debt in the
country is the largest in the world, second only to the United States
government. The residential real estate lending industry is comprised
of two distinct areas: the primary market and the secondary mortgage market; there are a host
of other ancillary entities that service and support the real estate
lending process as well. We will discuss each of these areas below.
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Primary Mortgage Market |
The primary mortgage market covers the
entire process a consumer encounters in obtaining a real estate loan.
The process includes the consumer's completion of a loan application
form, validation of the credit and property information, loan underwriting
by the lender and closing of the mortgage loan. Generally, the consumer's
primary contact throughout this process is the loan officer. The loan officer acts as the
consumer's navigator through the primary market "maze" and provides
assistance in:
Identifying appropriate loan programs, based on the consumer's needs;
Completion of the loan application form;
Obtaining documentation necessary to validate credit and
property value;
Compiling supporting information in a package suitable to
submit to lenders;
Communications between the lender and the consumer.
Historically, the process of obtaining
a loan has taken several weeks to complete. In the future, this
time frame is expected to improve dramatically as the application
process, credit validation and loan underwriting become more automated.
Some industry experts believe that in the near future, the primary
market process will be completed in hours and days rather than weeks
and months.
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Financing Sources |
A major player in the primary market are depository
financial institutions, such as your credit union.
Financial Depository Institutions:
Historically, the dominant sources of mortgage loans have come from
depository institutions, such as credit unions, savings banks and
commercial banks. Credit unions, in particular, have provided a
growing number of mortgage loans to consumers over the years. Credit
unions receive deposits from their members through checking, share
accounts and share certificates. These funds are then used to make
loans, including real estate, auto, or personal loans. Federal credit
unions are regulated by the National Credit Union Administration
(NCUA), a government agency and deposits are insured through the
National Credit Union Share Insurance
Fund (NCUSIF).
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Secondary Mortgage Market |
The secondary market revolves around the acquisition
and sale of newly closed and seasoned mortgage loans between sophisticated
investors and/or mortgage lenders. Before the development of the secondary
mortgage market, savings and loan associations and regional banks
were the dominant sources of mortgage loans. The development of the
secondary mortgage market was the result of government sponsored insuring
and guarantee programs, such as the Federal
Housing Administration (FHA) and the Veterans
Administration (VA), created during the Great Depression. In 1938,
the Federal National Mortgage Association (FNMA), a subsidiary
of the Reconstruction Finance Corporation, was developed to provide
a secondary mortgage market for FHA loans; it subsequently purchased
VA loans, as well.
Over the past 20 years, the secondary mortgage
market has changed significantly. With the creation of these entities
as well as the Federal Home Mortgage Corporation(FHLMC),
liquidity for residential mortgage loans has increasingly come from
sophisticated investors, such as pension funds, insurance companies,
and investors in the national capital markets. The total dollar
amount of outstanding residential mortgage loans exceeds any public
or private financing type in the domestic United States, except
the federal government.
Mortgage loans are sold individually or
in pools of loans, such as mortgage backed securities. When loans
are sold in the secondary market, monthly payments are made to the
original mortgage lender or to a designated mortgage servicer. Sometimes
the loan servicing is sold simultaneously with the sale of the mortgage
loan or at a later time.
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Ancillary Services |
There are many ancillary services that support
the mortgage lending process. Some of the more visible are:
Real Estate Broker and Real Estate Sales
Associate:
These professionals assist consumers in the buying and selling of
real estate. The real estate professional is usually the first contact
consumers have when deciding on a real estate loan, who in turn
will refer their clients to a mortgage professional.
Title Company:
Title companies perform a title search on the property and issue
a title policy for the lender and the purchaser to insure that there
is a valid mortgage lien against the property and title is clear.
Closing Agent:
This entity facilitates the closing of a mortgage loan by acting
as an impartial third party. The closing agent can be an escrow
company, an attorney or title company agent depending on the region.
Appraiser:
This professional evaluates the market value of real estate for
the buyer and the lender.
Credit Reporting Agency:
These companies research the credit records of consumers and memorialize
the findings in a factual credit report. They have access to databases
that store credit information on most consumers in the country.
Additionally, they search the public records for derogatory items
that may have been filed against a consumer such as judgments, bankruptcies,
and liens. Frequently, credit reporting agencies will research other
items, such as place of employment, banking relationships and previous
residency.
Private Mortgage Insurance Company (PMI):
When the loan exceeds 80% of the value of the property, lenders
usually require private mortgage insurance that insures the lender
in the event a borrower defaults and the property ends up in foreclosure.
There are a small number of companies that provide this insurance.
Usually, borrowers pay for this insurance as part of the monthly
payment.
Hazard Insurance Company:
Lenders require hazard insurance that covers the outstanding loan
on the property. There are many casualty insurance companies that
provide hazard insurance In most cases, the lender is the loss payee
on the policy and will receive the proceeds on a claim. The proceeds
will then be used to pay for the repairs.
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