|
Mortgage
A mortgage is a method of using property as
security for the payment of a debt.
The term mortgage (from Law French, lit. dead
pledge) refers to the legal device used in securing the property,
but it is also commonly used to refer to the debt secured by the
mortgage.
In most jurisdictions mortgages are strongly
associated with loans secured on real estate rather than other property
(such as ships) and in some cases only land may be mortgaged. Arranging
a mortgage is seen as the standard method by which individuals or
businesses can purchase residential or commercial real estate without
the need to pay the full value immediately.
In many countries it is normal for home purchase
to be funded by a mortgage. In countries where the demand for home
ownership is highest, strong domestic markets have developed, notably
in Great Britain , Spain and the United States .
Contents
* 1 Participants and variant terminology
o 1.1 Creditor
o 1.2 Debtor
o 1.3 Other participants
* 2 Legal Aspects
o 2.1 Mortgage by demise
o 2.2 Mortgage by legal charge
* 3 History
* 4 Repaying the capital
o 4.1 Capital & interest
o 4.2 Interest only
o 4.3 No capital or interest
o 4.4 Interest and partial capital
* 5 Mortgages in the United States
o 5.1 Mortgage loan types
o 5.2 United States Mortgage Process
o 5.3 Predatory mortgage lending
o 5.4 Costs
o 5.5 The United States mortgage finance industry
* 6 Mortgage in the UK
o 6.1 Mortgage types
+ 6.1.1 Self Cert Mortgage
+ 6.1.2 100% Mortgages
o 6.2 UK Mortgage Process
* 7 Islamic mortgages
* 8 See also
o 8.1 General, or related to more than one
nation
o 8.2 Related to the United Kingdom
o 8.3 Related to the United States
o 8.4 Other nations
o 8.5 Legal details
* 9 References
* 10 External links
Participants and variant terminology
Each legal system tends to share certain concepts
but vary in the terminology and jargon they use.
In general terms the main participants in a
mortgage are:
Creditor
The creditor has legal rights to the debt secured
by the mortgage and often make a loan to the debtor of the purchase
money for the property. Typically, creditors are banks, insurers
or other financial institutions who make loans available for the
purpose of real estate purchase.
A creditor is sometimes referred to as the
mortgagee or lender.
Debtor
The debtor or debtors must meet the requirements
of the mortgage conditions (and often the loan conditions) imposed
by the creditor in order to avoid the creditor enacting provisions
of the mortgage to recover the debt. Typically the debtors will
be the individual home-owners, landlords or businesses who are purchasing
their property by way of a loan.
A debtor is sometimes referred to as the mortgagor,
borrower, or obligor
Other participants
Due to the complicated legal exchange, or conveyance,
of the property, one or both of the main participants are likely
to require legal representation. The terminology varies with legal
jurisdiction; see lawyer, solicitor and conveyancer.
Because of the complex nature of many markets
the debtor may approach a mortgage broker or financial adviser to
help them source an appropriate creditor typically by finding the
most competitive loan.
The debt is sometimes referred to as the hypothecation,
which may make use of the services of a hypothecary to assist in
the hypothecation.
Legal Aspects
There are essentially two types of legal mortgage.
Mortgage by demise
In a mortgage by demise, the creditor becomes
the owner of the mortgaged property until the loan is repaid in
full (known as "redemption"). This kind of mortgage takes
the form of a conveyance of the property to the creditor, with a
condition that the property will be returned on redemption.
This is an older form of legal mortgage and
is less common than a mortgage by legal charge. It is no longer
available in the UK , by virtue of the Land Registration Act 2002.
Mortgage by legal charge
In a mortgage by legal charge, the debtor remains
the legal owner of the property, but the creditor gains sufficient
rights over it to enable them to enforce their security, such as
a right to take possession of the property or sell it.
To protect the lender, a mortgage by legal
charge is usually recorded in a public register. Since mortgage
debt is often the largest debt owed by the debtor, banks and other
mortgage lenders run title searches of the real property to make
certain that there are no mortgages already registered on the debtor's
property which might have higher priority. Tax liens, in some cases,
will come ahead of mortgages. For this reason, if a borrower has
delinquent property taxes, the bank will often pay them to prevent
the lienholder from foreclosing and wiping out the mortgage.
This type of mortgage is common in U.S. and,
since 1925, it has been the usual form of mortgage in England and
Wales (it is now the only form - see above).
In Scotland , the mortgage by legal charge
is also known as standard security.
History
At common law, a mortgage was a conveyance
of land that on its face was absolute and conveyed a fee simple
estate, but which was in fact conditional, and would be of no effect
if certain conditions were not met --- usually, but not necessarily,
the repayment of a debt to the original landowner. Hence the word
"mortgage," Law French for "dead pledge;" that
is, it was absolute in form, and unlike a "live gage",
was not conditionally dependent on its repayment solely from raising
and selling crops or livestock, or of simply giving the fruits of
crops and livestock coming from the land that was mortgaged. The
mortgage debt remained in effect whether or not the land could successfully
produce enough income to repay the debt. In theory, a mortgage required
no further steps to be taken by the creditor, such as acceptance
of crops and livestock, for repayment.
The difficulty with this arrangement was that
the lender was absolute owner of the property and could sell it,
or refuse to reconvey it to the borrower, who was in a weak position.
Increasingly the courts of equity began to protect the borrower's
interests, so that a borrower came to have an absolute right to
insist on reconveyance on redemption. This right of the borrower
is known as the "equity of redemption".
This arrangement, whereby the mortgagee (the
lender) was on theory the absolute owner, but in practice had few
of the practical rights of ownership, was seen in many jurisdictions
as being awkwardly artificial. By statute the common law position
was altered so that the mortgagor would retain ownership, but the
mortgagee's rights, such as foreclosure, the power of sale and the
right to take possession would be protected.
In the United States , those states that have
reformed the nature of mortgages in this way are known as lien states.
A similar effect was achieved in England and Wales by the Law of
Property Act 1925, which abolished mortgages by the conveyance of
a fee simple.
In the United States , mortgages became widely
used starting in 1934. In that year, the Federal Housing Administration
(FHA) lowered the down payment requirements by offering 80% loan-to-value
loans. Next, banks, insurance companies, and other lenders followed
the example. The FHA also lengthened loan terms by first introducing
15-year loans to supplant 3, 5, and 7-years loans which ended with
a balloon payment. Until the 1930s only 40% of U.S. households owned
homes; the rate today is nearly 70%. In 2003, total U.S. residential
mortgage production reached a record level of $3.8 trillion through
record low interest rates (though these continue to vary according
to credit rating.)
Repaying the capital
There are various ways to repay a mortgage
loan; repayment depends on locality, tax laws and prevailing culture.
Capital & interest
The most common way to repay a loan is make
regular payments of the capital (also called principal) and interest
over a set term. This is commonly referred to as (self) amortization
in the U.S. and as a repayment mortgage in the UK . Depending on
the size of the loan and the prevailing practise in the country
the term may be short (10 years) or long (50 years plus). In the
UK and U.S. , 25 to 30 years is typical. Mortgage repayments, which
are typically made monthly, contain a capital element and an interest
element. The amount of capital included in each repayment varies
throughout the term of the mortgage. In the early years the repayments
are largely interest and a small part capital. Towards the end of
the mortgage the repayments are mostly capital and a small part
interest. In this way the repayment amount determined at outset
is calculated to ensure the loan is repaid at a specified period
in the future. This gives borrowers assurance that by maintaining
repayment the loan will definitely be cleared at a specified date.
Interest only
The main alternative to capital and interest
mortgage is an interest only mortgage, where the capital is not
repaid throughout the term. This type of mortgage is common in the
UK , especially when associated with a regular investment plan.
With this arrangement regular contributions are made to a separate
investment plan designed to build up a lump sum to repay the mortgage
at maturity. This type of arrangement is called an investment-backed
mortgage or is often related to the type of plan used: endowment
mortgage if an endowment policy is used, similarly a Personal Equity
Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or
pension mortgage. Historically, investment-backed mortgages offered
various tax advantages over repayment mortgages, although this is
no longer the case in the UK . Investment-backed mortgages are seen
as higher risk as they are dependent on the investment making sufficient
return to clear the debt.
It is not uncommon for interest only mortgages
to be arranged without a repayment vehicle, with the borrower gambling
that the property market will rise sufficiently for the loan to
be repaid by trading down at retirement (or for other less well
thought-out reasons.)
No capital or interest
For older borrowers (typically in retirement),
it is possible to arrange a mortgage where neither the capital nor
interest is repaid. The interest is rolled up with the capital,
increasing the debt each year.
These arrangements are variously called reverse
mortgages, lifetime mortgages or equity release mortgages, depending
on the country. The loans are typically not repaid until the borrowers
die, hence the age restriction. For further details, see equity
release.
Interest and partial capital
In the U.S. a partial amortization or balloon
loan is one where the amount of monthly payments due are calculated
(amortized) over a certain term, but the outstanding capital balance
is due at some point short of that term. In the UK , a part repayment
mortgage is quite common, especially where the original mortgage
was investment-backed and on moving house further borrowing is arranged
on a capital and interest (repayment) basis.
Mortgages in the United States
Mortgage loan types
There are many types of mortgage loans. The
two basic types of amortized loans are the fixed rate mortgage (FRM)
and adjustable rate mortgage (ARM).
In a FRM, the interest rate, and hence monthly
payment, remains fixed for the life (or term) of the loan. In the
U.S. , the term is usually for 10, 15, 20, or 30 years. The only
increase a consumer might see in their monthly payments would result
from an increase in their property taxes or insurance rates (paid
using an escrow account, if they've opted to use an escrow). But
payments for principal and interest will be consistent throughout
the life of the loan using an FRM.
In an ARM, the interest rate is fixed for a
period of time, after which it will periodically (annually or monthly)
adjust up or down to some market index. Common indices in the U.S.
include the Prime Rate, the London Interbank Offered Rate (LIBOR),
and the Treasury Index ("T-Bill"). Other indexes like
11th District Cost of Funds Index, COSI, and MTA, are also available
but are less popular.
Adjustable rates transfer part of the interest
rate risk from the lender to the borrower, and thus are widely used
where unpredictable interest rates make fixed rate loans difficult
to obtain. Since the risk is transferred, lenders will usually make
the initial interest rate of the ARM's note anywhere from 0.5% to
2% lower than the average 30-year fixed rate.
In most scenarios, the savings from an ARM
outweigh its risks, making them an attractive option for people
who are planning to keep a mortgage for ten years or less.
Additionally, lenders rely on credit reports
and credit scores derived from them. The higher the score, the more
creditworthy the borrower is assumed to be. Favorable interest rates
are offered to buyers with high scores. Lower scores indicate higher
risk to the lender, and lenders require higher interest rates in
such scenarios to compensate for increased risk.
A partial amortization or balloon loan is one
where the amount of monthly payments due are calculated (amortized)
over a certain term, but the outstanding principal balance is due
at some point short of that term. This payment is sometimes referred
to as a "balloon payment". A balloon loan can be either
a Fixed or Adjustable in terms of the Interest Rate. Many Second
Trust mortgages use this feature. The most common way of describing
a balloon loan uses the terminology X due in Y, where X is the number
of years over which the loan is amortized, and Y is the year in
which the principal balance is due. A contract could be written
up so there would be more than one "balloon payment" required
to be paid during the life of the loan.
Other loan types:
* blanket loan
* bridge loan
* budget loan
* Commercial Loan
* deed of trust
* equity loan
* hard money loan
* package loan
* participation mortgage
* piggyback loan
* reverse mortgage
* repayment mortgage
* seasoned mortgage
* term loan or interest-only loan
* wraparound mortgage
* Negative amortization loan
United States Mortgage Process
In the U.S. , the process by which a mortgage
is secured by a borrower is called origination. This involves the
borrower submitting an application and documentation related to
his/her financial history to the underwriter. Many banks now offer
"no-doc" or "low-doc" loans in which the borrower
is required to submit only minimal financial information. These
loans carry a slightly higher interest rate (perhaps 0.25% to 0.50%
higher) and are available only to borrowers with excellent credit.
Sometimes, a third party is involved, such
as a mortgage broker. This entity takes the borrower's information
and reviews a number of lenders, selecting the ones that will best
meet the needs of the consumer.
Loans are often sold on the open market to
larger investors by the originating mortgage company. Many of the
guidelines that they follow are suited to satisfy investors. Some
companies, called correspondent lenders, sell all or most of their
closed loans to these investors, accepting some risks for issuing
them. They often offer niche loans at higher prices that the investor
does not wish to originate.
If the underwriter is not satisfied with the
documentation provided by the borrower, additional documentation
and conditions may be imposed, called stipulations. The meeting
of such conditions can be a daunting experience for the consumer,
but it is crucial for the lending institution to ensure the information
being submitted is accurate and meets specific guidelines. This
is done to give the lender a reasonable guarantee that the borrower
can and will repay the loan. If a third party is involved in the
loan, it will help the borrower to clear such conditions.
The following documents are typically required
for traditional underwriter review. Over the past several years,
use of "automated underwriting" statistical models has
reduced the amount of documentation required from many borrowers.
Such automated underwriting engines include Freddie Mac's "Loan
Prospector" and Fannie Mae's "Desktop Underwriter".
For borrowers who have excellent credit and very acceptable debt
positions, there may be virtually no documentation of income or
assets required at all. Many of these documents are also not required
for no-doc and low-doc loans.
* Credit Report
* 1003 — Uniform Residential Loan Application
* 1004 — Uniform Residential Appraisal Report
* 1005 — Verification Of Employment (VOE)
* 1006 — Verification Of Deposit (VOD)
* 1007 — Single Family Comparable Rent Schedule
* 1008 — Transmittal Summary
* Copy of deed of current home
* Federal income tax records for last two years
* Verification Of Mortgage (VOM) or Verification
Of Payment (VOP)
* Borrower's Authorization
* Purchase Sales Agreement
* 1084A and 1084B (Self-Employed Income Analysis)
and 1088 (Comparative Income Analysis) -- used if borrower is self-employed
Predatory mortgage lending
There is concern in the U.S. that consumers
are often victims of predatory mortgage lending [1]. The main concern
is that mortgage brokers and lenders, operating legally, are finding
loopholes in the law to obtain additional profit.
Costs
Lenders may charge various fees when giving
a mortgage to a mortgagor. These include entry fees, exit fees,
administration fees and lenders mortgage insurance. There are also
settlement fees (closing costs) the settlement company will charge.
In addition, if a third party handles the loan, it may charge other
fees as well.
The United States mortgage finance
industry
Mortgage lending is a major category of the
business of finance in the United States of America . Mortgages
are commercial paper and can be conveyed and assigned freely to
other holders. In the U.S. , Federal government created several
programs, or government sponsored entities, to foster mortgage lending,
construction and encourage home ownership. These programs include
the Government National Mortgage Association (known as Ginnie Mae),
the Federal National Mortgage Association (known as Fannie Mae)
and the Federal Home Loan Mortgage Corporation (known as Freddie
Mac). These programs work by buying a large number of mortgages
from banks and issuing (at a slightly lower interest rate) "mortgage-backed
bonds" to investors, which are known as Mortgage Backed Securities
(MBS).
This allows the banks to quickly relend the
money to other borrowers (including in the form of mortgages) and
thereby to create more mortgages than the banks could with the amount
they have on deposit. This in turn allows the public to use these
mortgages to purchase homes, something the government wishes to
encourage. The investors, meanwhile, gain low-risk income at a higher
interest rate (essentially the mortgage rate, minus the cuts of
the bank and GSE) than they could gain from most other bonds.
Securitization is a momentous change in the
way that mortgage bond markets function which has grown rapidly
in the last 10 years as a result of the wider dissemination of technology
in the mortgage lending world. For borrowers with superior credit,
government loans and ideal profiles, this securitization keeps rates
almost artificially low, since the pools of funds used to create
new loans can be refreshed more quickly than in years past, allowing
for more rapid outflow of capital from investors to borrowers without
as many personal business ties as the past.
|
