From the 1930s mortgages have been in existence in the United States in a move to provide affordable housing. Mortgages are sometimes confused for loans but there are major differences between loans and mortgages. Loans are given out as financial aid given aid looking forward to repayment with interest on real and private property. However, a mortgage is the securing of funding on real property investment using the property to be invested in as the security for the funding (Griswold, 2017). For secondary mortgage, it is where specific specialized firms bring together a group of loans from the primary direct market and sell them as mortgage-backed securities (MBS). Unlike primary mortgages, secondary mortgages will involve both buying and selling of the loans. Secondary mortgage loans are offered in three classes namely true conforming, jumbo conforming, and true jumbos (Peek, 2006). Secondary mortgage and the mortgages industry, on the whole, have a great impact on the real estate buying and selling in a move to provide affordable housing in the United States.
For a better understanding of the mortgage loan industry, the history of it all has to be first understood. The mortgage can be traced to the early 1930s when the united state's lenders would require a down payment of 20-40 percent on the value of the mortgage loan (Griswold, 2017). Their terms of payment were a period of between 1-7 years. An end to this term will result in auctioning or in some instances new loan terms agreement. This led to many people opting for renting due to these unfavourable mortgage terms and the government had to come up with a solution for this. In response, the government formed the FHA which insured loans on behalf of lenders. The FHA would normally verify the borrower’s employment, conduct property appraisal, and finally verify the title of the property. With the FHA as a loan insurer, monthly loan payment was introduced to reduce the risk of loan on lenders and long terms of about 30 years being introduced for repayment. This process experienced challenges with slow repayment leading to lenders having no money to give out loans during the thirty years repayment period. This then saw the introduction of the federal national mortgage insurer commonly known as the Fannie Mae. This mortgage body was involved with loan repayment joint grouping to provide loans to new potential property owners. Later there is the introduction of the full government-owned Gennie Mae. Since then, there has been a lot of upcoming trends in the real estate secondary mortgage market.
According to (Peek, 2006) the resale of loans by the federal government has to be well understood. Fannie Mae and Gennie Mae do not offer loans directly but only offer insurance. Property owners do not go to these federal organizations to get loans. The Fannie Mae and Gennie Mae only insure on loans given out to property owners. These two help in the liquification process to ensure cash flow is maintained. The two main types of loans offered are jumbo loans and conforming loans. With jumbo loans offering an exceeded maximum of the permissible loan limit. The true conforming loans also known as the traditional loans offer up to a maximum of $424,100. In jumbo loans, this maximum is exceeded with jumbo loans being offered in high-cost areas of the United States. The jumbo loans are in two categories; the jumbo-conforming loans and the true jumbo loans. Jumbo conforming loans offer between $424,100-636,150. The true jumbo loans which are the highest class on secondary mortgage loans are offered for loans above $636,150.
In the event where the amount of $636,150 is not enough, one may go for senior mortgages for a loan. This will involve what is called the second mortgage and if not enough the property owner may go for the third mortgage (Griswold, 2017) any other mortgage loans offered after the first mortgage will be referred to as a senior mortgage. Senior mortgage loans are seen are risks on the lender’s s side. In case of need for auction of the property, the law demands that the loans be paid in order from the first mortgage, then the balance from this be given consequently to other remaining lenders. This would mean that the third mortgage lender is at the greatest risk. For this reason, considering not many lenders are willing to risk out greatly, senior mortgage loans are not so common.
The interest rates charged on the mortgage is a great factor that would encourage or discourage property owners to take mortgage loans (Peek, 2006). The interest rate is generally what the lender will charge you for use of their product money. It is accumulative overtime on the remaining balance over the given term. The term is the time given for the financial repayment, with small sums of loans with short term repayment while large sums of loans will have long term repayment periods. With these two factors put into mind, they greatly influence real estate buying and selling. With proper mathematics, it shows with long term loans the mortgage property owners end up paying more money than short term repayment of the same amount of money. This is because with long term loans the remaining balance used as the new principal amount for calculation is always higher than that in short term loans Therefore, long term repayment should not trick property owners into viewing it as a suitable way for mortgage loan securing. With informed property owners seeking mortgage loans out there, the interest rate and repayment term will truly have a great influence on buying and selling real estate with the Fannie Mae and Gennie Mae insurers enabling favourable rates.
The American government plays a major role in ensuring that affordable housing is achieved in the united states. The government is surely one of the biggest mortgage providers in the united states. This exposes the government as a lender to the risk of losses. This is the surest reason why the government came up with mortgage insurance providers (Courchane, 2015). This category of government loans is composed of the federal housing administration (FHA), department of veterans (VA), U.S department of agriculture (USDA), and the farmers' home association (FmHA). The FHA, formed in 1934 was aimed to solve the problem of unaffordable housing with a term of 30 years repayment time. The FHA was formed to suppress the great depression in the US housing sector at that time. The only problem faced by the FHA was the long repayment time that led to a lack of resources for lending continuity. The VA which was formed in 1944 aimed at helping the veterans of war acquire affordable homes with no down payment being charged. It is an excellent program for those who qualify under this category. The USDA oversees the rural housing program for owner-occupied homes outside the metropolitan area. Besides the VA loans, USDA loans also offer zero down payment and therefore favourable. The only restriction to these loans is based on location, the individual income, and the assets. Unlike the others, the farmers association is not a direct lender. The people to benefit under this program do not particularly have to be farmers like the suggestion brought about by the name. All that one needs is land ownership in the rural areas and is eligible to benefit from this housing program
This whole issue on the federal mortgage organization is to ensure insurance for the lender. With the Federal housing association, veteran’s association, Fannie Mae, and the Gennie Mae being public mortgage insurance. The public insurers only provide mortgage insurance on government loans. In addition to this, there are also private insurance companies that offer insurance on all loans.
The 1 percent insurance payment is paid by the buyer to the insurer body. The mortgage insurance companies offer major security to the lenders on the mortgage. Secondary markets, in other words, are markets that offer resale of loans for lenders. The secondary mortgage markets have been a great breakthrough for the American real estate market and have helped a lot in ensuring citizens secure their own homes. The main aim of these secondary markets is to offer affordable long-term housing to citizens while ensuring that the lenders are protected and there is continuous lending.
Mortgage information is readily available online and many online institutions offer mortgage loans. However, technology comes with its challenges and there have been a lot of negative impacts associated with online mortgage loans. Considering many people may be working during weekdays when the mortgage loan lending facilities are open, this may make online mortgage lending an option. However, one should be extremely keen when performing such transactions as they may look extremely appealing and favourable. Most online lenders may also lack to give clear information on loan conditions. This may tend to create a heavier burden to the property owners during loan repayment when they realize the kind of deals they made. When carrying out online mortgage deals one should not give out important information unless they meet your security conditions. Here one should check the confidentiality and security policies of the lender. This is to ensure they have policies in place to protect the property owner’s information and not giving it out to anyone else out there. According to (Griswold, 2017), one should also be aware of paid advertisements that tend to act as directories. This may give the wrong mortgage loan information to property owners while making it look credible. Online shopping of mortgage loans should be carried out with a lot of caution especially on private websites.
However, to deal with the risk involved with online mortgage shopping the government also comes in. There exist recommended government sites on mortgage loans online shopping that is reliable and can be trusted. An example is the United States department of housing and urban development website www.hud.gov (Griswold, 2017). Using this website, one can be able to access FHA, VA, and all other public insured mortgage loans. However, one can also use the major HSH associate’s website that gives information on credible online mortgage shopping sites (Griswold, 2017). This is the information collector and publisher of mortgage-related information. They carry out the most credible advertisements on legitimate mortgage firms. Despite all these challenges involved with online shopping, it also comes with some advantages. One of the major advantages of online mortgage shopping is that there is no direct sales pressure. This enables one to make a credible decision after being able to sample out a few mortgage loan offers. There is also an advantage of efficiency, being able to shop whenever you want. With the right precautions in hand, online mortgage loan shopping can be extremely efficient considering the advantages it also has. This whole secondary mortgage issue greatly affects the real estate sector, considering financing as a major influence on real estate.
Reference:
Courchane, M. J., Kiefer, L. C., & Zorn, P. M. (2015). A tale of two tensions: Balancing access to credit and credit risk in mortgage underwriting. Real Estate Economics, 43(4), 993-1034.
Griswold, R. S., Tyson, E., & Tyson, E. (2017). Mortgage management for dummies. Retrieved from http://ebookcentral.proquest.com
Peek, J., & Wilcox, J. A. (2006). Housing, credit constraints, and macro stability: The secondary mortgage market and reduced cyclicality of residential investment. American Economic Review, 96(2), 135-140
z06jl
busn220Week5Assignment2.docx
0
