FDIC QUARTERLY 51 2019 • Volume 1 3 • Number 4
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Underwriting, Mortgage Lending, and House Prices: 1996-2008
June 2009 Underwriting, Mortgage Lending, and House Prices: 1996-2008 James A. Wilcox University of California, Berkeley Abstract: Lowering of underwriting standards may have contributed much to the unprecedented recent rise and subsequent fall of mortgage volumes and house prices. Conventional data don’t satisfactorily measure aggregate underwriting standards over the past decade: The easing and then tightening of underwriting, inside and especially outside of banks, was likely much more extensive than they indicate. Given mortgage market developments since the mid 1990s, the method of principal components produces a superior indicator of mortgage underwriting standards. We show that the resulting indicator better fits the variation over time in the laxity and tightness of underwriting. Based on a VAR, we then show how conditions affected underwriting standards. The results also show that our new indicator of underwriting helps account for the behavior of mortgage volumes, house prices, and GDP during the recent boom in mortgage and housing markets. Keywords: Underwriting, standards, mortgages, house prices, LTV. 1 I. Introduction Underwriting standards for residential mortgages (henceforth: underwriting) are now generally regarded as having been unusually lax during the middle of the 2000s. Underwriting then tightened up again during the financial crisis that began in 2007. The laxity of underwriting and its ensuing tightness since the middle of the 1990s likely contributed considerably to the unprecedented rise and subsequent fall of mortgage volumes and house prices. Conventional data do not satisfactorily measure aggregate underwriting over the past decade: Easing of underwriting, inside and especially outside of banks, was likely much more extensive than they indicate. -
Guide to Predatory Lending Occurs When a Mortgage Loan Between and Gets a Fee Or Other Compensation
What is Know the Don’t Predatory Terms Become a Lending? Mortgage Lender: A bank, savings institution, or mortgage company that offers home loans. Victim: Mortgage Broker: An individual or firm that matches borrowers to lenders and loan programs for a fee. Anyone who acts as a go- A Guide to Predatory lending occurs when a mortgage loan between and gets a fee or other compensation. with unwarranted high interest rates and fees is set Annual Percentage Rate (APR): Cost of the credit, which Predatory up to primarily benefit the lender or broker. The includes the interest and all other finance charges. If APR is more Lending loan is not made in the best interest of the borrower, than .75 to 1 percentage point higher than the interest rate you often locks the borrower into unfair loan terms and were quoted, there are significant fees being added to the loan. tends to cause severe financial hardship or default. Points: Fees paid to the lender to obtain the loan. One point is equal to 1% of the loan amount. Points should be paid at the time of the loan. If your lender insists on prepayment of these fees, find To determine if a loan is predatory in nature, ask a new lender or broker. yourself these questions: Prepayment Penalty: Fees required to be paid by you if the Does your past credit history justify the loan is paid off early. Try to avoid any prepayment penalty that lasts more than 3 years or is for more than 1-2% of the loan high rate and fees charged? amount. -
Loan Originator (LO) Compensation II. Purpose, Coverage and Overview; “Loan
Loan Originator (LO) Compensation II. Purpose, Coverage and Overview; “Loan 1 Originator” and “Compensation” Defined Major Components of Rule . Prohibits steering a consumer into a loan that generates greater compensation for the loan originator, unless the consummated loan is in the consumer's interest. Prohibits loan originator compensation based on the terms of a mortgage transaction or a proxy for a transaction term. Prohibits dual compensation (i.e., loan originator being compensated by both the consumer and another person, such as a creditor). Prohibits mandatory arbitration clauses and waivers of certain causes of action. 2 FEDERAL DEPOSIT INSURANCE CORPORATION Major Components of Rule Con’t. Prohibits the financing of credit insurance (this prohibition does not include mortgage insurance). Requires depository institutions have written policies and procedures. Imposes qualification requirements on loan originators. Requires name and NMLSR identification information of loan originator with primary responsibility appear on the credit application, note, and security instrument. Permits, within limits, paying loan originators compensation based on profits derived from a bank’s mortgage-related activities. (“bank” includes an affiliate of the bank and/or a business unit within the bank or affiliate). 3 FEDERAL DEPOSIT INSURANCE CORPORATION Key Compensation Prohibition No loan originator can receive and no person can pay to a loan originator, directly or indirectly… . Compensation in an amount that is based on terms of transactions (or proxies for terms of transactions): • a single loan originator, or • multiple loan originators (limited exception: some profits- based compensation). 4 FEDERAL DEPOSIT INSURANCE CORPORATION Covered Transactions A covered transaction is a consumer- purpose, closed-end transaction secured by a dwelling, whether by a first or subordinate lien. -
H0209-I-128.Pdf
Ohio Legislative Service Commission Bill Analysis Daniel M. DeSantis H.B. 209 128th General Assembly (As Introduced) Reps. Lundy, Foley, Murray, Hagan, Phillips, Skindell, Stewart, Harris, Fende, Newcomb, Okey, Celeste, Harwood BILL SUMMARY • Prohibits licensees under the Small Loan Law (R.C. 1321.01 to 1321.19) and registrants under the Mortgage Loan Law (R.C. 1321.51 to 1321.60) from making a loan of $1,000 or less that will obligate the borrower to pay more than 28% APR unless the term of the loan is greater than three months or the loan contract requires three or more installments. • Provides that whoever ʺwillfullyʺ violates the prohibition against loans of $1,000 or less with a 28% APR (1) must forfeit to the borrower twice the amount of interest contracted for (Small Loan Law) or the amount of interest paid by the borrower (Mortgage Loan Law), and (2) will be subject to a fine of not less than $500 nor more than $1,000. • Increases the fine for certain other violations regarding the Mortgage Loan Law of not less than $100 nor more than $500 to not less than $500 nor more than $1,000. • Specifies that the current prohibition on licensees under the Small Loan Law and registrants under the Mortgage Loan Law from conducting business in a place where any ʺother businessʺ is solicited or engaged in if the nature of that business is to conceal evasion of those lending laws, includes any business conducted by a registered credit services organization, a licensed check‐cashing business, a person engaged in the practice of debt adjusting, or a person who is involved in offering lease‐purchase agreements. -
To-Distribute Model and the Role of Banks in Financial Intermediation
Vitaly M. Bord and João A. C. Santos The Rise of the Originate- to-Distribute Model and the Role of Banks in Financial Intermediation 1.Introduction banks with yet another venue for distributing the loans that they originate. In principle, banks could create CLOs using the istorically, banks used deposits to fund loans that they loans they originated, but it appears they prefer to use collateral Hthen kept on their balance sheets until maturity. Over managers—usually investment management companies—that time, however, this model of banking started to change. Banks put together CLOs by acquiring loans, some at the time of began expanding their funding sources to include bond syndication and others in the secondary loan market.2 financing, commercial paper financing, and repurchase Banks’ increasing use of the originate-to-distribute model agreement (repo) funding. They also began to replace their has been critical to the growth of the syndicated loan market, traditional originate-to-hold model of lending with the so- of the secondary loan market, and of collateralized loan called originate-to-distribute model. Initially, banks limited obligations in the United States. The syndicated loan market the distribution model to mortgages, credit card credits, and rose from a mere $339 billion in 1988 to $2.2 trillion in 2007, car and student loans, but over time they started to apply it the year the market reached its peak. The secondary loan to corporate loans. This article documents how banks adopted market, in turn, evolved from a market in which banks the originate-to-distribute model in their corporate lending participated occasionally, most often by selling loans to other business and provides evidence of the effect that this shift has banks through individually negotiated deals, to an active, had on the growth of nonbank financial intermediation. -
Default Option Exercise Over the Financial Crisis and Beyond*
Review of Finance, 2021, 153–187 doi: 10.1093/rof/rfaa022 Advance Access Publication Date: 17 August 2020 Default Option Exercise over the Financial Crisis and beyond* Downloaded from https://academic.oup.com/rof/article/25/1/153/5893492 by guest on 19 February 2021 Xudong An1, Yongheng Deng2, and Stuart A. Gabriel3 1Federal Reserve Bank of Philadelphia, 2University of Wisconsin – Madison, and 3University of California, Los Angeles Anderson School of Management Abstract We document changes in borrowers’ sensitivity to negative equity and show height- ened borrower default propensity as a fundamental driver of crisis period mortgage defaults. Estimates of a time-varying coefficient competing risk hazard model reveal a marked run-up in the default option beta from 0.2 during 2003–06 to about 1.5 dur- ing 2012–13. Simulation of 2006 vintage loan performance shows that the marked upturn in the default option beta resulted in a doubling of mortgage default inci- dence. Panel data analysis indicates that much of the variation in default option ex- ercise is associated with the local business cycle and consumer distress. Results also indicate elevated default propensities in sand states and among borrowers seeking a crisis-period Home Affordable Modification Program loan modification. JEL classification: G21, G12, C13, G18 Keywords: Mortgage default, Option exercise, Default option beta, Time-varying coefficient hazard model Received August 19, 2017; accepted October 23, 2019 by Editor Amiyatosh Purnanandam. * We thank Sumit Agarwal, Yacine Ait-Sahalia, -
Your Step-By-Step Mortgage Guide
Your Step-by-Step Mortgage Guide From Application to Closing Table of Contents In this Guide, you will learn about one of the most important steps in the homebuying process — obtaining a mortgage. The materials in this Guide will take you from application to closing and they’ll even address the first months of homeownership to show you the kinds of things you need to do to keep your home. Knowing what to expect will give you the confidence you need to make the best decisions about your home purchase. 1. Overview of the Mortgage Process ...................................................................Page 1 2. Understanding the People and Their Services ...................................................Page 3 3. What You Should Know About Your Mortgage Loan Application .......................Page 5 4. Understanding Your Costs Through Estimates, Disclosures and More ...............Page 8 5. What You Should Know About Your Closing .....................................................Page 11 6. Owning and Keeping Your Home ......................................................................Page 13 7. Glossary of Mortgage Terms .............................................................................Page 15 Your Step-by-Step Mortgage Guide your financial readiness. Or you can contact a Freddie Mac 1. Overview of the Borrower Help Center or Network which are trusted non- profit intermediaries with HUD-certified counselors on staff Mortgage Process that offer prepurchase homebuyer education as well as financial literacy using tools such as the Freddie Mac CreditSmart® curriculum to help achieve successful and Taking the Right Steps sustainable homeownership. Visit http://myhome.fred- diemac.com/resources/borrowerhelpcenters.html for a to Buy Your New Home directory and more information on their services. Next, Buying a home is an exciting experience, but it can be talk to a loan officer to review your income and expenses, one of the most challenging if you don’t understand which can be used to determine the type and amount of the mortgage process. -
The Problem of Predatory Lending: Price Lauren E
Maryland Law Review Volume 65 | Issue 3 Article 3 Decisionmaking and the Limits of Disclosure: The Problem of Predatory Lending: Price Lauren E. Willis Follow this and additional works at: http://digitalcommons.law.umaryland.edu/mlr Part of the Banking and Finance Commons, and the Property Law and Real Estate Commons Recommended Citation Lauren E. Willis, Decisionmaking and the Limits of Disclosure: The Problem of Predatory Lending: Price, 65 Md. L. Rev. 707 (2006) Available at: http://digitalcommons.law.umaryland.edu/mlr/vol65/iss3/3 This Article is brought to you for free and open access by the Academic Journals at DigitalCommons@UM Carey Law. It has been accepted for inclusion in Maryland Law Review by an authorized administrator of DigitalCommons@UM Carey Law. For more information, please contact [email protected]. MARYLAND LAW REVIEW VOLUME 65 2006 NUMBER 3 © Copyright Maryland Law Review 2006 Articles DECISIONMAKING AND THE LIMITS OF DISCLOSURE: THE PROBLEM OF PREDATORY LENDING: PRICE LAUREN E. WILLIS* INTRODUCTION ................................................. 709 I. PREDATORY LENDING AND THE HOME LOAN MARKET ...... 715 A. The Home Lending Revolution ........................ 715 1. The Twentieth Century Marketplace: Standardized Terms, Limited and Advertised Prices, and Low Risk. 715 2. The Brave New World of ProliferatingProducts, Price, and R isk ........................................ 718 3. Evidence of Predatory Home Lending ............... 729 B. A New Definition of Predatory Lending ................. 735 II. FEDERAL LAW REGULATING THE PRICING OF HOME- SECURED LOANS: DISCLOSURE AS PANACEA ................ 741 A. The Rational Actor Decisionmaker Model ............... 741 B. CurrentFederal Law .................................. 743 C. Even a Rational Actor Could Not Use the Federal Disclosures to Price Shop in Today's Marketplace ....... -
Minimum Property Standards for One- and Two- Family Dwellings
Part 1 Minimum Property Standards for One- and Two- Family Dwellings Part 1 of a Study of the HUD Minimum Property Standards for One- and Two- Family Dwellings and Technical Suitability of Products Programs Prepared for the U.S. Department of Housing and Urban Development Office of Policy Development and Research by the National Institute of Building Sciences March 2003 Acknowledgments The principal investigator for this study was William Brenner of the National Institute of Building Sciences. Background research was performed by Building Technology Inc. and Steven Spector. The Institute is grateful for the help and guidance of William Freeborne and David Engel of HUD’s Affordable Housing Research and Technology Division; Elizabeth Cocke, Rick Mendlen, Vincent Tang, and Jason McJury of HUD’s Office of Manufactured Housing Programs; and retired HUD employees Mark Holman, Robert Fuller, Sam Hakopian, and Leslie Breden. The Institute thanks the following reviewers for their thoughtful comments and insights: Liza Bowles, Newport Partners LLC; Ron Burton, BOMA International; David Conover; Rosemarie Geier Grant, State Farm Insurance Companies; Paul Heilstedt, BOCA International; Ron Nickson, National Multi Housing Council; Ed Sutton, National Association of Home Builders; and Gene Zeller, City of Long Beach, California. The National Institute of Building Sciences appreciates the opportunity to study these long-standing HUD programs and hopes the findings and recommendations herein will be helpful in addressing the needs the programs have traditionally served. Disclaimer The study’s findings are solely those of the National Institute of Building Sciences and do not reflect the views of the U.S. Department of Housing and Urban Development, the study’s participants, or its reviewers. -
Residential Real Estate Lending, Comptroller's Handbook
Comptroller’s Handbook A-RRE Safety and Soundness Capital Asset Sensitivity to Other Adequacy Quality Management Earnings Liquidity Market Risk Activities (C) (A) (M) (E) (L) (S) (O) Residential Real Estate Lending June 2015 RESCINDED Updated June 16, 2016, for This document and any attachments are Credit Underwriting Assessment System replaced by version 1.2 of the booklet of the Updated January 6, 2017, for same title published January 2017 Nonaccrual Status Office of the Comptroller of the Currency Washington, DC 20219 Contents Introduction ..............................................................................................................................1 Overview ....................................................................................................................... 1 Mortgage Products .................................................................................................. 3 Home Equity Loan and Line of Credit Products .................................................... 5 Subprime Mortgage ................................................................................................ 7 Reverse Mortgage Loans ...................................................................................... 10 Investor-Owned RRE ............................................................................................ 12 Manufactured Housing.......................................................................................... 12 Affordable Housing ............................................................................................. -
Predatory Lending Questions and Answers
Attachment A Predatory Lending Questions and Answers 1) What is the difference between subprime lending and predatory lending? Subprime Lending The prime lending market offers loans to persons with excellent credit and employment history, and an income sufficient to support the loan amount. It generally offers borrowers many loan choices and the lowest mortgage rates. Prime lenders include banks, thrifts and credit unions that are subject to extensive oversight and regulation by federal and state governments. According to HUD, nine out of ten families take out prime loans when purchasing or refinancing their mortgages.1 Subprime lenders serve high-risk borrowers who would otherwise have difficulty obtaining a loan. Subprime loans usually have higher interest rates and fees than prime loans to compensate the lender for taking on higher repayment risk. Subprime lenders adjust their interest rates and fees according to the risk of the individual loan applicant and any additional loan origination costs. The subprime market is an important part of the financial system because it provides credit to consumers who would otherwise be unable to borrow money, and allows high-risk borrowers to repair their credit rating by paying back their new loan on schedule. Through home equity lines of credit and refinances, the subprime market can also provide consumers in difficult situations the ability to access part of their housing wealth to get them through bad financial periods. Predatory Lending Although there is no set definition for predatory lending, it is generally used to describe a set of practices through which a broker, lender or other participant takes unfair advantage of a borrower, often through deception, fraud or manipulation to make a loan that has terms that are a disadvantageous to the borrower. -
EBRD Mortgage Loan Minimum Standards Manual
EBRD Mortgage Loan Minimum Standards Manual Updated June 2011 TABLE OF CONTENTS ACKNOWLEDGEMENTS ..II INTRODUCTION .. .3 1........... LENDING CRITERIA (MS 01) ..4 2............MORTGAGE DOCUMENTATION (MS 02) ..13 3........... MORTGAGE PROCESS AND BUSINESS OPERATIONS (MS 03) ...17 4...........PROPERTY VALUATION (MS 04) ..21 5.......... PROPERTY OWNERSHIP AND LEGAL ENVIRONMENT (MS 05) .26 6.......... INSURANCE (MS 06) .29 7.......... CREDIT AND RISK MANAGEMENT STANDARDS (MS 07) 33 8..........DISCLOSURES (MS 08) .42 9..............BASEL II AND III REQUIREMENTS (MS09) .43 10. SECURITY REQUIREMENTS. ......................................................................................50 11. .......MANAGEMENT INFORMATION, IT & ACCOUNT MANAGEMENT (MS 11) ...52 APPENDICES A1. LOAN APPLICATION FORM A2. LOAN APPROVAL OFFER LETTER A3. UNDERSTANDING SECURITISATION A4. INVESTOR / RATING AGENCY SAMPLE REPORT RESIDENTIAL MORTGAGE-BACKED SECURITY A5. INVESTOR / RATING AGENCY SAMPLE REPORT COVERED MORTGAGE BOND A6. BIBLIOGRAPHY A7. GLOSSARY A8. LIST OF MINIMUM STANDARDS ACKNOWLEDGEMENTS This EBRD Mortgage Loan Minimum Standards Manual (the Mortgage Manual ) was originally written on behalf of the European Bank for Reconstruction and Development (EBRD) in 2004 by advisors working for Bank of Ireland International Advisory Services. It was updated in 2007. In June 2011, ShoreBank International Ltd. (SBI) updated further the Manual, which was funded by the EBRD - Financial Institutions Business Group. The 2011 List of Minimum Standards ( LMS ) provides guidance for those lending institutions that will receive mortgage financing from EBRD. This was produced based on the EBRD Minimum Standards and Best Practice July 2007 outlined in the Mortgage Loan Minimum Standards Manual. In addition to supporting the primary market, the application of these guidelines should also ensure that the mortgage loans will meet requirements for the possible future issuance of Mortgage Bond ( MB ) or Mortgage- Backed Securities ( MBS ).