INTRODUCTION TO THE

U.S. RESIDENTIAL MORTGAGE MARKET

1
 INDEX
• U.S. History and its Significance in the U.S. Mortgage Market
ALOK SHARMA

• Mortgage Industry: The Basics

VIPIN
VIJAYARAGHAVAN

• Mortgage Lending Players, Secondary Markets and Warehouse Lending

SHEETAL ZUTTA

• Ratios, Interest Rates and Benchmark Indices applicable in U.S. Mortgage Market
DEEPSHIKHA SAXENA

• Government Sponsored Entities

ATUL TIWARI

• Regulations & Statutory Compliances Applicable In U.S. Mortgage Market

SHWETA NANDAN

• Emergence of Sub-Prime Lending in U.S. Mortgage Market

RAJAT KHANNA

• Trends of the Emerging U.S. Mortgage Market

KUMAR SAURAV
2
U.S. HISTORY AND ITS SIGNIFICANCE
IN THE U.S. MORTGAGE MARKET

Alok Sharma

3
 US ECONOMY: HISTORY & EVOLUTION
• Post World War I: 1918 onwards…

 “Own Your Own Home” campaign launched in 1918 by US Dept of labor and a
wide network of industry groups
 National Association Real Estate Boards
 National Federation of Construction Industries
 Mortgage lending institutions
 Savings and Loans (S&Ls) or Thrift initially called as Building and Loan Association
 For member-depositors only
 Offered much longer duration up to 12 years
 Loans offered for at least 60% of the property value
 Higher interest rates offered on deposits to attract members
 Commercial Bankers were fair-weather friends of builders and brokers

 Surplus production

 Population growth

 Women employment

 Lead to Roaring Twenties…

4
 ROARING TWENTIES & THE CRASH

• War time taxes abolished

• Govt. emphasized on …
 Rationalize business practices
 Reduce regulation
 Promote faster growth
• Mortgage debt tripled since 1920
• Financing consisted of second and third mortgages, high interest
rates & loan fees, short terms, balloon payments and many other
high risk practices

• October 1928 Wall Street Crash

• Only wealthy class benefited
• Smoot-Hawley tariff lead to retaliation by industrialized countries
• Interest rates high
• Sharp drop in money supply

5
 CONSEQUENCES OF CRASH
• Commercial bank suffered liquidity crisis
• Real estate plummeted in value as market demand disappear
• By 1933 Half of all home loans mortgages were in default and
approximately thousand foreclosures a day
• New housing start had dropped over 90% from the peak of 937,000 units
in 1925 to lowest by 1933
• Many commercial banks, saving banks and life insurance companies had
withdrawn from home mortgage lending in the face of liquidity problems
and falling property values
• Many S&Ls crashed in the early 1930

6
 THE GREAT DEPRESSION, REFORM & RECOVERY 1933-39
• Federal Home Loan Bank System Merged and reorganized the
bankrupt S&Ls and helped by providing liquidity

• The Federal Savings and Loan Insurance Corporation formed in

1934
– To strengthened the attractiveness of S&Ls to savers by insuring the
deposits
– To standardize S&Ls management

• Home Owners’ Loan Corporation (HOLC) in 1933 and Federal

Housing Administration (FHA) in 1934 were formed

• HOLC refinanced more three billion dollars of shaky and defaulted

mortgages largely held by commercial banks and introduced long-
term (15years) self-amortizing loans.

7
 THE GREAT DEPRESSION, REFORM & RECOVERY 1933-39
• HOLC was temporary operation and it stopped making loans in
1936

• FHA a permanent program and brought revolution in housing

finance
– FHA’s mutual mortgage insurance system reduced the investment risk
for lenders and enabled them to make longer term, and higher-
leverage loans at lower interest rates

– Establishment of Federal Deposit Insurance corporation (FDIC) in 1933

enabled commercial banks to to participates in FHA program and
become major home mortgage lender

– Life Insurance Companies and Mutual Savings Bank also took the
advantages of FHA

8
 THE REFORM & RECOVERY after 1936
• Federal National Mortgage Association (Fannie Mae) was formed in 1938
• Veterans Administration Home loan guarantee program provided more
affordable schemes to the world war II veterans
• Fannie Mae initiated strong secondary market for FHA-VA mortgages
helping to smooth out real estates business cycles as well as geographic
differences unavailability of funds and providing greater degree of liquidity
for lenders
• By early 1940, US pulled itself out of Great Depression
• Changing Population

9
 DURING WORLD WAR II

• During the war again economy has taken different path like
– Massive spending, price controls, bond campaign, control over raw
material
– Prohibition on new housing, new automobiles, consumer goods

10
 PROSPEROUS FIFTIES & SIXTIES
• Wall Street’s longest bull run in the history, stock market climbed
almost uninterrupted from 1949 to 1957

• Baby boomer generation 1946 to 1964, birth rate soared and

peaked in 1957

• Under “termination” policy thousands of acres of tribal land given

to native American for the real estate developments
• Huge Government spending plus consumer demand boosted the
gross national product (GNP).

• With 6 percent of the world’s population, the United States

produced half the world’s goods.

• The nation’s five largest industries—autos, oil, aircraft, chemicals,

and electronics—shown a great jump in productivity.

• New middle-class families of postwar America became suburban

families, of 13 million new homes built in the 1950s, 85 percent
were in the suburbs.

11
 PROSPEROUS FIFTIES & SIXTIES
• By the early 1960s, suburbs surrounded every city this lead to
auto sales from 40million in 1950 to 60millin in 1960

• Between 1945 and 1960, the median family income almost

doubled.

• Before the Great Depression of the 1930s only one-third of

Americans qualified as middle class, but in postwar America two-
thirds.

• Kennedy passed largest tax cut

• $200 billion war bonds matured and GI bills financed new

initiatives and middle class became more wealthy

• Golden age of economic growth, youth movement, Hippy culture

12
 STABILIZATION IN MORTGAGE LENDING MARKET 1968
onwards

• Govt. National Mortgage Association (GNMA) Ginnie Mae formed in the

year 1968
• Federal Home Loan Mortgage Corporation (FHLMC) Freddie Mac was
established in 1970 to provide a secondary mortgage market for S&Ls

13
MORTGAGE INDUSTRY: THE BASICS

Vipin Vijayraghavan

14
 DEFINITION OF MORTGAGE

Mortgage= Mort (latin) + Gage (latin)

Mort = Death
Gage = Pledge

SIGNIFICANCE:
The property was forfeit or "dead" to the borrower if the loan wasn’t
repaid, and the pledge itself was dead if the loan was repaid.

DEFINITION:
A loan to finance the purchase of real estate, usually with specified
payment periods and interest rates. The borrower (mortgagor) gives the
lender (mortgagee) a lien on the property as collateral for the loan.

15
 COMPLETE MORTGAGE CYCLE

LOAN ORIGINATION

Credit Analysis Approval an

Pre Qualification Document Gen Application and Underwriti d Closing
eration Processing ng

Warehouse Transfer to S
Pipeline econdary Mar
Analysis ket

SECONDARY MARKET

Payment Process Collection

ing and Reportin Escrow Customer Bankruptcies
g Management Service and
Foreclosures

LOAN SERVICING

16
 MARKET SEGMENTATION

• BY BORROWER TYPE • BY MARKET TYPE

– Prime – Primary
– Non-Prime – Secondary
(Alt-A, Alt-B, Sub Prime)
• BY LOAN TYPE
• BY CHANNEL TYPE – Conventional
– Non Conventional
– Retail
– Conforming
– Wholesale – Non-Conforming
– Correspondent
– Portfolio • BY LOAN PRODUCT TYPE
– Fixed/ ARM
• BY SALE TYPE – Balloon
– Purchase – Payment Options
– Refinance

17
MORTGAGE LENDING PLAYERS,
SECONDARY MARKETS
AND
WAREHOUSE LENDING
Sheetal Zutta

29
 MORTGAGE LENDING PLAYERS

REGULATORS O L A L
INSURANCE COMPANIES R E C E
CUSTOMER SERVICING LENDER
I N Q N
G D U D
REAL ESTATE BROKER
I E I E
CLOSING AGENT
N R R R
SERVICE PROVIDER A I
MORTGAGE
T N INVESTOR
I G
N
G

LOAN PRODUCTION SYSTEM LOAN SERVICING SYSTEM

30
 SECONDARY MARKET

PUTTING THE PROCESS IN MOTION:

 Homebuyers apply for mortgages from primary market mortgage lenders.

 The primary market mortgage lender evaluates the homebuyer's ability to

repay the mortgage, and if the lender's criteria are met, arrangements are
made to make the loan.

 The transaction between the lender and the borrower culminates in what is
called "the closing.“

 By signing the closing documents, the lender agrees to fund the purchase of
the home and the homebuyer agrees to pay the mortgage as negotiated.

 Once the loan is closed, the funds are transferred from the primary lender to
the property seller.

 After the closing, the primary lender may either hold the mortgage in its
portfolio (along with other loans it has made) or sell it in the secondary
mortgage market.

31 Continued…
 SECONDARY MARKET (CONTD…)

 When primary mortgage lenders sell loans in the secondary market, they
generally sell them as loans to an institution like Freddie Mac etc.

 They then use the proceeds of the sale to make new loans to other
homebuyers in their community.

 The mortgages Freddie Mac etc. purchase are bundled or pooled together as
Mortgage-Backed Securities (MBS).

 Freddie Mac uses the funds from sales of these securities sales to purchase
more loans from primary lenders.

 About half of all new single-family mortgages originated today are funded in
the secondary mortgage market. (Source- Freddie Mac)

32
 SECONDARY MARKET - TYPES OF SALES

• WHOLE LOAN POOLS

• PARTICIPATION LOAN SALES

• MORTGAGE BACKED SECURITIES

33 Next
 WAREHOUSE LENDING SYSTEM

 Warehouse Lending is a specialized type of lending that commercial banks

and other finance institutions provide to companies involved in the mortgage
banking business.

THE TOTAL CHAIN

 Borrower wants money to either purchase or refinance his property (house).

 Borrower approaches Mortgage Banker/Lender and after the settlement of the

Loan process, Mortgage Banker approaches Warehouse Lender for funds.

 At the same time, Mortgage Banker sells the loan to the Investor who buys it
by paying the amount to the Warehouse Lender who, in turn, releases the
lien on the Collateral to the Investor.

 The Collateral flows from borrower to Mortgage Banker to Warehouse Lender

and finally to Investor.

 First Lien is physically with the Mortgage Banker and rights are with the
Investor.

37
 WAREHOUSE LENDING CYCLE

2 $ Advance
Note
4
Shipped

1 Request
Closing Agent Mortgage WH Approved
e.g; Title Co. Banker Lender Investors

3 Note
5 $ Repaid

38
 LINES OF CREDIT

Warehouse Lines Of Credit are real estate secured short-term lines of credit
that allow mortgage bankers to fund loans into the secondary market until the
loans are purchased by the end institutional investors.

 DEMAND LINE OF CREDIT: Lender leaves the loan open until the lender calls it
due.

 REVOLVING LINE OF CREDIT: It involves a commitment from the lending

institution for a set amount of time "anywhere from 1 year to several years".

 ASSET BASED LINE OF CREDIT: Revolving line of credit where the amount
available for disbursement is governed by a formula, which is usually the sum
of the accounts receivable outstanding plus the inventory and multiplied by a
factor (usually around 80% for accounts receivable and 50% for inventory).

39
 RATIOS, INTEREST RATES AND
BENCHMARK INDICES
APPLICABLE IN U.S. MORTGAGE MARKET

Deepshikha Saxena

40
 APPLICABLE RATIOS

Mortgage Amount
• LOAN-TO-VALUE (LTV) LTV =
Appraised Value

• EXPENSE RATIOS

• DEBT-TO-INCOME (DTI) Total Debt (p.m.)

DTI =
Income (p.m.)

• HOUSING-TO-INCOME(HTI) Housing Expenses (p.m.)

HTI =
Income (p.m.)

41
 APPLICABLE INTEREST RATES

• FIXED RATE:
– Applied to FRMs
– Based on 10 year or 30 year Treasury Securities
– The payment is fixed for the life of the loan and pays it off over the term

• ADJUSTABLE RATE:
– Applied to ARMs
– Initial fixed-rate period, followed by rate changes at preset intervals
(e.g. 3/1 ARM)
– Based on various Indices e.g., LIBOR, CMT, COFI etc.
– E.g. Interest Rate = L + 0.5%
– Monthly payments keeps on fluctuating with respect to the changes in the
interest rate once the initial fixed-rate period is over.
– Rate Caps
• Periodic Rate Cap
• Lifetime Cap
• Payment Cap

42 Continued…
 APPLICABLE INTEREST RATES (CONTD…)

• ANNUAL PERCENTAGE RATE (APR):

– Reported by the lender
– Mandated Disclosure under Truth in Lending Regulations
– Measure of credit cost to the borrower
– Calculated Over the Term of the Mortgage
– Different from the Note Rate(actual rate used to calculate the monthly
payments)

– Fees Included:
• Origination Fees
• Points
• Prepaid Mortgage Interest
• Mortgage Insurance Premiums
• Other Lender Fees (Application, Underwriting, Tax Service, etc.)

– Fees Excluded:
• Title Insurance
• Appraisal
• Credit Score

43
 APPLICABLE BENCHMARK INDICES

• Following are some of the Indices against which the ARMs are generally
pegged:

– CONSTANT MATURITY TREASURY (CMT OR TCM)

– TREASURY BILL (T-BILL)

– 12-MONTH TREASURY AVERAGE (MTA OR MAT)
– CERTIFICATE OF DEPOSIT INDEX (CODI)

– 11TH DISTRICT COST OF FUNDS INDEX (COFI)

– COST OF SAVINGS INDEX (COSI)

– LONDON INTER BANK OFFERING RATE (LIBOR)

– CERTIFICATES OF DEPOSIT (CD) INDEXES

– BANK PRIME LOAN (PRIME RATE)

44 Continued…
 APPLICABLE BENCHMARK INDICES (CONTD…)
• LONDON INTER BANK OFFERING RATE (LIBOR)
– The rate of interest which the banks offer to each other, in the Londo
interbank market
– An average of the interest rates on dollar-denominated deposits
(or Eurodollars), traded between banks in London
– The most widely used benchmark for short term interest rates
– International Index that follows the world economic condition
– Protects borrowers from wide fluctuations in interest rates
– Usually do not have negative amortization
– Different LIBOR rates used as ARMs index: 1-month, 3-month, 6- mon
and 1-year LIBOR
– Lenders use either Fannie Mae LIBOR or WSJ LIBOR
– WSJ LIBOR:
• Posted by BBA
• Published by Wall Street Journal
• Wall Street Journal everyday publishes yesterday’s rates
– Fannie Mae LIBOR:
• Posted by Fannie Mae on its website
• Made available by the last business day of each month

45 Continued…
 APPLICABLE BENCHMARK INDICES(CONTD…)
• CONSTANT MATURITY TREASURY (CMT) INDICES
– Weekly or monthly average yields on U.S. Treasury Securities
– Yields on Treasury Securities are interpolated by the U.S. Treasury from t
daily yield curve,
– Daily yield curve is based on the yields on actively traded Treasury securi
in the over-the counter market.
– Reported by Federal Reserve board
– Highly volatile, respond quickly to economic changes
– Reflect the state of the economy
– Different CMT Indices used as ARMs index: 1-year, 3-year, and 5-year CM
Indices
– E.g., Monthly 1-year CMT:
• The most commonly used Index,
• Based on 1-year Constant Maturity Treasury,
• Changes once a month,
• Calculated by averaging the past month’s daily rates of 1-year CMT

46 Continued…
 APPLICABLE BENCHMARK INDICES (CONTD…)

• 11TH DISTRICT COST OF FUNDS INDEX (COFI)

– The Weighted-average interest rate paid by 11 th Federal Home Loan Bank

District savings institutions for savings and checking accounts, Advances
from FHLB and other sources of funds.
– Index of interest paid on savings accounts
– The 11th District COFI is a 2-month lagging index: the index value f
a particular month is not reported until the end of the next month.
– So, this index generally reacts slowly in fluctuating markets,
– Hence, the adjustments in ARM interest rate lag behind another market
indicators.
– COFI is primarily used for ARMs with monthly interest rate adjustments
– Used by many lenders because of the belief that an index that moves wit
the cost of funds reduces the risk
– ARMs based on COFI are adjusted monthly, biannually and annually

47 Continued…
 APPLICABLE BENCHMARK INDICES (CONTD…)

• TREASURY SECURITIES
– Government bonds issued by the United States Department of the Treas
through the Bureau of the Public Debt.
– The debt financing instruments of the U.S. Federal government
– TYPES OF TREASURY SECURITIES
•Treasury Bills
•Treasury Notes
•Treasury Bonds
•Savings Bonds
– All of the Treasury securities (besides savings bonds) are very liquid and
are heavily traded on the secondary market.
– Treasury Securities are considered by many the most risk free investmen
– The yield on the 10-year Treasury note is used as a benchmark for settin
mortgage interest rates

48
GOVERNMENT SPONSORED ENTITIES

Atul Tiwari

49
 FANNIE MAE

• In 1938 under the Federally charted corporation, Fannie Mae (FNMA)

came into being.

• It was response to President Franklin D Roosevelt new initiative to

rescue the economy from great depression.

• The idea was to foster the Great American Dream “shelter for every
citizen” by imparting loans to lenders.

50 Continued…
 FANNIE MAE (CONTD..)
• It actually buys FHA (federal housing administration) insured
mortgage loans .

• Fannie Mae enjoyed lot of privileges of tax exemptions and security

oversight.

• In 1968 it was privatized Fannie Mae and removed it from the

national budget.

• In order to prevent the monopoly of Fannie Mae a new institution

came into being .It was called Freddie Mac (FHLMC)

51
 FREDDIE MAC

• It was born in 1970 charted by congress .

• It is a stock holder corporation.

• Its purpose is similar to Fannie Mae “to provide continuous low

cost credit to fund American housing”

• It does not imparts loan directly , it does through the lenders

• In the process of buying loans from the lender they have a direct
impact on the interest rate to the borrowers.

52
 PURPOSE OF FANNIE MAE AND FREDDIE MAC

• Provide stability to secondary market for residential purpose

• Respond appropriately to capital market

• Provide assistance to secondary market providing securities to low and

moderate income families

• Promote access to mortgage credit across the nation by increasing the

liquidity

• They buy confirming loans up to $417,000. (sources mortgage 101)

53
 RIGHTS OF FANNIE MAE AND FREDDIE MAC

• Fannie Mae and Freddie Mac are not govt. back bodies nor they receive
any subsidy by the government .

• They are shareholder owned

• They are exempted from State and local income taxes

• They are exempted from filing of securities exchange commission

• Both have line of credit with US treasury in tune of 2.25 billion

• Rights to buy conventional loans and non govt. mortgages from

secondary market

54
 HOW DOES FANNIE MAE OPERATES

• Initially Fannie Mae (FNMA) operated like national saving and loan
disbursing body

• They allow Local Banks , Mortgage Lending Institution to charge low

interest to the loan borrowers and eventually it gave birth to secondary
market .

TODAY’S STRUCTURE:

• Primary market consists of lenders, Bankers, mortgage companies,

Credit unions, Housing financing agencies. They give loan to borrowers.

• These lenders sell mortgage into Secondary Market which has Fannie
Mae, Security Funds, Pension Funds, Insurance Companies, Financial
Institutions.

55
 FANNIE MAE’S OPERATIONS

• Fannie Mae buys mortgage loans and it operates as publicly traded corp.

• It buys only those loans which comply to their own guidelines and loan
limits.

• They follow guideline because of the mission “to help low and
moderate income segment” .

• The mortgage that they buy either they hold in their portfolio or they sell
further in capital market by bundling it in MBS (Mortgage Based Security).

• MBS are highly liquid investment and are traded in Wall street by security
dealers

56
 GINNIE MAE

• Ginnie Mae is wholly backed by government

• It is under full faith on the credit of US govt.

• It is a link between the US govt. and Federal housing market

• It operates exclusively for the government loans insured by the FHA

• It buys loans which are guaranteed by VA or insured by FHA

• GNMA is lending arm of HUD and it ensure the lending is non

discriminatory

• Ginnie Mae does not directly issues MBS it does that through approved
issuers (Banks, Credit Unions )

• Pooling of mortgages and securitization takes place to create a Ginnie

Mae MBS.

57
 REGULATIONS

• Federal housing enterprise security and soundness act 1992 creates

regulations .

• USHUD has the oversight responsibilities for housing mission .

• OFHEO (office of federal housing enterprise oversight)

• OFHEO is located within HUD, it monitors, implements and enforces

capital standards on Fannie and Freddie.

• This is arrangement is similar with OCC over US Dept. of treasury

• There is no regulating body for Ginnie Mae

58
 REGULATORY BODIES

• The Department of Housing and Urban Development (which oversees

the Federal National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac)).

• The Farm Credit Administration (which supervises the Farm Credit

System and the Federal Agricultural Mortgage Corporation (Farmer
Mac)

• The newly- created Federal Housing Finance Board which oversees the
Federal Home Loan Bank System

• The Student Loan Marketing Association (Sallie Mae), has no overseer.

59
 VETERANS

• Veterans are defined by either Veterans Preference or Veterans Status.

VETERANS PREFERENCE indicates an employees entitlement to statutory

types of preference in the Federal service based on active military
service that ended honorably.

VETERANS STATUS indicates whether an employee is a veteran as

defined by 38 U.S.C. 101 (i.e., a person who served in the active
uniformed military service of the United States and who was discharged
or released from service under conditions other than dishonorable).

Individuals can be recognized as veterans under the Veterans Status

authority even though they may not qualify for Veterans Preference
under 5 U.S.C. 2108.

60
 VETERAN’S ASSOCIATION

• Dept of Veteran affairs guarantees loans for the veterans .

• Veterans can easily get mortgage loans from the lenders with no down
payment.

• They do not have a maximum loan amount sealing but generally limit
for single family is of $417,000 with few exception (in Hawaii $615000)

• Veteran do not have to qualify for credit rating.

61
 SALLIE MAE

• Originally created in 1972 a GSE

• In 1997 it became private agency

• It is a national lenders which primarily provides loans for education

purposes .including (Federal, Private Student, Consolidation, Parent,
Undergraduate, Graduate) Loans.

• Today it provides Home Loans, Health Insurance, Life Insurance, Auto

Loans

• It has no overseer or federal regulator

• Its SLMA is only exempted not the other services (i.e. Auto, Car etc.)

• Its real property is subjected to excise tax

62
 FARMERS MAC

• Established in 1988 for secondary market for agricultural , real estate,

rural housing mortgage loans

• Increase the level of long term credit for farmers, rural home owners,
ranchers

• It operates by purchasing eligible mortgage loans from lenders

• Issues long term standby purchase commitment

• Issues MBS guaranteed by Farm Mac (USDA) in exchange to mortgage

loans that back those securities

• Also sell the MBS to third party

• To secure the loan one must be rated by USDA, or have a rural house,
land .

• The MBS are guaranteed by Farm Mac in tune of $1.5 billion

63
REGULATIONS & STATUTORY COMPLIANCES
APPLICABLE IN
U.S. MORTGAGE MARKET

Shweta Nandan

64
 GLASS STEAGALL ACT

Two separate laws are known as the Glass-Steagall

Act.
THE GLASS-STEAGALL ACT OF 1932
It included the following provisions:
• Permitted Federal Reserve banks to use government securities as
collateral for the issue of Federal Reserve notes.

THE BANKING ACT OF 1933

It included the following provisions:
• Separated the activities of commercial banks and securities firms and
(prohibited commercial banks from owning brokerages).

• Introduced Federal Deposit Insurance Corporation insurance.

65 Continued…
 GLASS STEAGALL ACT (CONTD..)

Four sections of the Banking Act of 1933 referred to as the Glass-

Steagall Act:

• SECTION 16 - Restricted commercial national banks from engaging in

most investment banking.

• SECTION 20 - Prohibited any member bank from affiliating in specific

ways with an investment bank.

• SECTION 21 - Restricted investment banks from engaging in any

commercial banking.

• SECTION 32 - Prohibited investment bank directors, officers, employees,

or principals from serving in those capacities at a commercial member
bank of the Federal Reserve System.

66 Continued…
 GLASS STEAGALL ACT (CONTD..)

Provisions of the Glass-Steagall Act were directed at these abuses:

• Banks were investing their own assets in securities with consequent risk
to commercial and savings deposits.

• Unsound loans were made in order to shore up the price of securities or

the financial position of companies in which a bank had invested its own
assets.

• A commercial bank's financial interest in the ownership, price, or

distribution of securities inevitably tempted bank officials to press their
banking customers into investing in securities which the bank itself was
under pressure to sell because of its own pecuniary stake in the
transaction

67 Continued…
 GLASS STEAGALL ACT (CONTD..)

Rationale leading up to the enactment of the Glass Steagall Act

• Risk of loses (safety and soundness)

• Conflicts of interest and other abuses

• Improper banking activity

• The Federal “safety net” should not be extended more than necessary

• Unfair Competition

• Concentration of power and less-than-competitive performance

68
 GRAMM-LEACH-BLILEY ACT (GLBA)

• Also known as Gramm-Leach-Bliley Financial Services

Modernization Act.
• A federal law enacted in 1999 that repealed many of the provisions of
the Glass Steagall Act.
• Among other things, the act permits banks, securities firms and
insurance companies to become affiliated through financial holding
companies. 
• The act also permits dealer banks to engage in a broader range of
municipal securities activities than under the Glass-Steagall Act. 
• GLBA compliance is not voluntary.

• Major Components put into place to govern the collection, disclosure,

and protection of consumers’ nonpublic personal information; or
personally identifiable information:
 Financial Privacy Rule
 Safeguards Rule
 Pretexting Protection

• Violation of the GLBA may result in a civil action.

69
 PROBLEMS WITH THE GLBA

• The GLBA does not protect consumers.

• The GLBA notices are confusing and limit the transparency of

information practices.

• The GLBA fails to enhance consumers' control over affiliate information

sharing.

• Financial institutions can evade opt-out requirements by exploiting the

exceptions in the GLBA.

• The GLBA has weak enforcement and compensation mechanisms.

70
 HOW THE GLBA COULD BE IMPROVED

• Financial institutions should implement an opt-in approach to the use of

personal information because this minimizes any unwanted or
unknowing disclosure of information and places the burden of
responsibility on those actors who will gain from the disclosure of
information.

• If an opt-out framework is maintained, financial institutions should be

obligated to give and accept alternative opt-out methods.

• In order to ensure greater transparency and accountability, financial

institutions should include in their privacy reports what information is
going to be used for.

• Financial institutions should provide simply stated and clear privacy

policies.

71 Continued…
 HOW THE GLBA COULD BE IMPROVED (CONTD..)

• Expand enforcement authority to give states concurrent jurisdiction to

enforce the provisions of GLBA in order to ensure a more efficient
enforcement program.

• Individuals should have the right to protect their privacy and seek
remedies and redress under GLBA.

• Individuals should be given the right to review information that is

disclosed or to correct inaccurate or incomplete data.

72
 SARBANES-OXLEY ACT

• An act passed by U.S. Congress to protect investors from the

possibility of fraudulent accounting activities by corporations.

• It is administered by the Securities and Exchange Commission (SEC).

• It regulates corporate financial records and provides penalties for their

abuse.

• It defines the type of records that must be recorded and for how long.

• Also deals with falsification of data.

73
 BASIC OUTLINE :SOX

1. Establishment of a Public Company Accounting Oversight Board,

where public companies must now be registered

2. Strict auditor regulation and control by means of auditing committees

and inspecting accounting firms.

3. Heightened corporate responsibility for any fraudulent actions taken.

4. Stricter disclosure within company financial statements, and ethical

guidelines to which senior financial officers must adhere.

5. Guidelines for analyst conflicts of interest.

6. Authorities available to the Commission and the Federal Court, as well

as required broker and dealer qualifications.

7. Enforcement methods available for punishment of activities deemed

criminal by the Act.

74
 SECTION 404 OF SARBANES OXLEY ACT

To address the requirements of Section 404, companies must be able to

address the following objectives:

• Access Control

• Configuration Control

• Malicious Software Detection

• Policy Enforcement

• User Monitoring & Management

• Environment & Transmission Security

75
 THE REAL ESTATE SETTLEMENT PROCEDURES ACT

The Real Estate Settlement Procedures Act (RESPA) is a consumer

protection statute, first passed in 1974. The purposes of RESPA are:

1. To help consumers become better shoppers for settlement services.

2. To eliminate kickbacks and referral fees that unnecessarily increase

the costs of certain settlement services.

76
 RESPA REQUIRED DISCLOSURES
AT THE TIME OF LOAN APPLICATION

When borrowers apply for a mortgage loan, mortgage brokers and/or

lenders must give the borrowers:

• A Special Information Booklet

• A Good Faith Estimate (GFE) of settlement costs

• A Mortgage Servicing Disclosure Statement

DISCLOSURES BEFORE SETTLEMENT/CLOSING OCCURS

• Affiliated Business Arrangement (AfBA) Disclosure

• HUD-1 Settlement Statement

• Initial Escrow Statement (At Settlement)

DISCLOSURES AFTER SETTLEMENT

• Annual Escrow Statement

• Servicing Transfer Statement

77
 RESPA’S STATUTES EXPLAINED
CONSUMER PROTECTIONS AND PROHIBITED PRACTICES

SECTION 8: KICKBACKS, FEE-SPLITTING, UNEARNED FEES

• Prohibits anyone from giving or accepting a fee, kickback or any thing of value
in exchange for referrals of settlement service business involving a federally
related mortgage loan.

SECTION 9: SELLER REQUIRED TITLE INSURANCE

• Prohibits a seller from requiring the home buyer to use a particular title
insurance company, either directly or indirectly, as a condition of sale

SECTION 10: LIMITS ON ESCROW ACCOUNTS

• Sets limits on the amounts that a lender may require a borrower to put into an
escrow account for purposes of paying taxes, hazard insurance and other
charges related to the property

78
 PREDATORY LENDING ACT

• Predatory lending refers to unconscionable lending practices that take

advantage of vulnerable borrowers.

• The term also refers to the practice of convincing borrowers to agree

to unfair and abusive loanterms.

• Such loans could take place either through outright deception or

through aggressive sales tactics, taking advantage of borrowers' lack
of understanding of extremely complicated transactions.

SOME ABUSIVE OR UNFAIR LENDING PRACTICES ARE:

• Risk-Based Pricing

• Any situation where the loan price is negotiable, but the buyer is not
aware of this

79
 HOME MORTGAGE DISCLOSURE ACT (HMDA)

• The regulations implementing HMDA require that lenders disclose

aspects of their home mortgage application and lending activities,
including the applicant's or borrower's race, ethnicity, sex, and
income.

• Also reported are characteristics of the loan, such as the amount

and purpose, and the location of the property securing the loan.

• The HMDA was designed by the Federal Reserve Board :

 In determining whether financial institutions are serving the housing
needs of their communities.

 Public officials in distributing public-sector investments so as to attract

private investment to areas where it is needed.

 In identifying possible discriminatory lending patterns.

80
 SAVINGS ASSOCIATION INSURANCE FUND (SAIF)

• The fund that provides deposit insurance for savings institutions.

• SAIF was authorized by Congress in 1989 to take over the thrift

deposit insurance role held by the former Federal Savings and Loan
Insurance Corporation (FSLIC).

• SAIF is administered by the Federal Deposit Insurance Corporation

(FDIC).

81
 FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)

• It is a United States Government Corporation created by the

Glass- Steagall Act of 1933

• In order to receive this benefit member banks must follow certain

liquidity and reserve requirements:

 Well Capitalized: 10% or higher

 Adequately Capitalized: 8% or higher

 Undercapitalized: less than 8%

 Significantly Undercapitalized: less than 6%

 Critically Undercapitalized: less than 2%

82 Continued…
 (FDIC) (CONTD..)

COVERED BY FDIC INSURANCE ARE:

• Checking Accounts
• Negotiable Order of Withdrawal
• Money Market Deposits Accounts
• Savings Accounts
• Certificates of deposits

NOT INSURED BY FDIC:

• Stocks, Bonds, Mutual Funds, Money Market Funds
• US Treasury Securities
• Contents of Safe Deposit Boxes
• Loses due to Theft or Fraud

83
EMERGENCE OF SUB-PRIME LENDING
IN U.S. MORTGAGE MARKET

Rajat Khanna

84
 SUBPRIME LENDING – AN INTRODUCTION

DEFINITION
• Not a Prime Lending
• Involves Elevated Risk

CHARACTERISTICS OF SUB-PRIME BORROWERS:

• Have Relatively Poor Credit History
• Have Mortgages With very high Loan-To-Value (LTV) Ratios
• Are Unable to Document All Information of Loan Application

They Represent a Relatively Bad Credit Risk to the Lender

85
 REASONS FOR EMERGENCE AND GROWTH

• Represents a natural Evolution of Credit markets

• Prime Market is getting saturated

• Lenders realized that they can make money in this market

• Cheaper source of credit than unsecured debt, such as revolving credit

cards

• Subprime loans can be sold off to investors in the forms of Mortgage

Backed Securities (MBS), which provides the industry’s liquidity

86
 TRENDS IN SUB-PRIME LENDING MARKET
Subprime Mortgage Originations, 1994-2004
Billions of Current Dollars

350 4000

3500
300

3000
250

2500
Subprime Lending

200

2000

150
1500

100
1000

50
500

0 0
1994
1 1995
2 1996
3 1997
4 1998
5 1999
6 2000
7 2001
8 2002
9 2003
10 2004
11

87 Source: Mortgage Statistical Annual

 OWNERSHIP TOTALS AND RATES BY RACE

Numbers in Millions

1994 2003
Characteristics Households Owners Rate Households Owners Rate
(%) (%)
Total 98.7 63.1 63.9 105.6 72.0 68.2

Race

White 76.6 53.6 70.0 76.5 57.7 75.4

Black 11.6 4.9 42.2 12.6 6.1 48.4

Hispanic 7.7 3.2 41.6 11.0 5.1 46.4

Other 2.9 1.5 51.7 5.5 3.1 56.4

Others includes other races and households indicating more than one race

88 Source: U.S. Census Bureau

 SUB-PRIME LENDING BY INSTITUTION TYPE

Subprime Lending by Type of Institution & Volume of Lending, 2003

Type of Institution No. of Share of No. of loans

Institutions Lenders
Commercial bank 5 2.7 27.0

Thrift 11 6.0 13.8

Independent 113 61.8 11.8

Mortgage Company
Subsidiary of Bank 19 10.4 4.4

Affiliate of Financial 35 19.1 43.0

holding co
Total 183 100 100

Source: Lenders classified according to Department of Housing and Urban Development (HUD) list of sub-prime lenders

89
 LOAN DELINQUENCY RATES - 2003

Overdue
Type of Foreclosure Serious
mortgages 30 days 60 days 90 days Status Delinquency

Prime 2.26 0.58 0.64 0.48 1.12

Subprime 6.75 2.12 3.98 3.38 7.36

Serious Delinquency: Defined as in foreclosure status or ninety or more days delinquent

90
TRENDS OF THE EMERGING
U.S. MORTGAGE MARKET

Kumar Saurav

91
 INNOVATIVE MORTGAGE PRODUCTS
Click The Product For Detailed Information

INTEREST-ONLY
LOANS

OPTION ADJUSTABLE
HYBRID ARMS
RATE MORTGAGES

ADJUSTABLE-RATE
MORTGAGES BALOON MORTGAGES
(ARMS)

92
 IMPACT OF TECHNOLOGY IN MORTGAGE INDUSTRY

CURRENT STATE OF TECHNOLOGY IN THE MORTGAGE INDUSTRY

• Electronic Payment Technologies which improve the speed and

efficiency of mortgage payments.

• The Internet and Wide Area Networks and Local Area

Networks which have become a powerful means of
communication to provide new channels for finding new borrowers
and improve information flow among the multiple parties involved
in the mortgage process.

• Statistical Programs for Credit Scoring as means to analyze

and summarize the credit risk of borrowers.

98
 IMPACT OF BPO IN MORTGAGE INDUSTRY
• The Offshore addressable BPO market size for the US residential
mortgage ecosystem is in the range of $6-$7.4 billion.

• Existing mortgage processing BPO market in India is approximately $

150 million, employing about 7500 people.

• US mortgage banking BPO market in India will grow to approximately

$1 billion over the next 5 years.

• Offshore based outsourcing is expected to generate cost

savings in the range of 30-50% with the following benefits:
– Enhanced productivity and reduced cycle times leading to more efficient
operations

– Competitively positioned organizations that will be able to manage capacity

in line with market fluctuations via an extended offshore back-office

– As of December 2005, 15 of the top 20 US mortgage lenders have captive

or BPO offshore operation in India, Philippines or elsewhere

99
 MORTGAGE MARKET TRENDS

 DEMAND PULL FROM BORROWERS

Demand from borrowers for products that extend their purchasing
power and lower initial monthly payments.

 LENDERS WILLING TO EXPERIMENT WITH LOAN OFFERINGS

Mortgage Lenders working to create innovative mortgage products
that meet consumer demand and retain their share of the market pie.

 CHANGE IN THE TRADITIONAL BORROWER’S DNA

Borrowers willing to take on additional risk in the form of increased
variability in future payments in order to lower their payments today.

100 Continued…
 MORTGAGE MARKET TRENDS (CONTD..)

 GROWTH OF THE ALTERNATIVE-A (ALT-A) MARKET

This market is designed for Self-Employed and Other Individuals
who want a quick mortgage decision and are willing to pay a slight
premium. They are credit worthy (Credit Score:-600-700) and are
comfortable with the mortgage obligation they are taking on.

 EMERGENCE OF PIGGYBACK MORTGAGES

Use of a simultaneous Second Mortgage for the purchase of a
property. An important motivation for using a piggyback is that it
replaces mortgage insurance on a high-LTV first mortgage, potentially
lowering payments.

 ENTER THE SMART BROKERS

The brokers or lenders provide “coaching” to qualify the borrowers,
who would not qualify under standard underwriting.

101
Thank You

102