Transcript Predatory Lending Review and Update

Funding the Mortgage Pipeline
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Where does all that money come from?
-- and --
Whose money is it anyway?
Jack Konyk
Senior Vice President
Regulatory and Compliance Management
National City®
- - - - for
American Association of Residential Mortgage Regulators
Examiner Training School: Fundamentals of Mortgage Banking
April 5, 2006
Funding the Mortgage Pipeline
 What “Funding the Pipeline” means to:
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Mortgage Broker
“Table-Funded” Mortgage Broker
Portfolio Lender
Mortgage Banker
 Funding Terms and Concepts
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Table Funding
Warehouse Line
Rate Locks versus Floating Rates
Hedging
Funding the Mortgage Pipeline
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“Simple” Mortgage Broker Perspective
 Get approval and pricing from Lender
 Get borrower acceptance
 Advise Lender when ready to close
 Wait for closing to occur and lender to pay out
 Get income
Funding the Mortgage Pipeline
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What is “Table Funding” ?
 “Simple” Broker
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Loan closes with Lender’s funds
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Loan documents are in Lender’s name
 “Table-Funded” Broker
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Loan closes with Lender’s funds
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Loan documents are in Broker’s name
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Loan is immediately assigned to Lender
Funding the Mortgage Pipeline
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“Table-Funded” Mortgage Broker Perspective
 Get approval and pricing from Lender
 Get borrower acceptance
 Advise Lender when ready to close
 Set up closing with settlement agent
 Wait for closing to occur and lender to pay out
 Get income
Funding the Mortgage Pipeline
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Portfolio Lender Perspective
 Make loan offer to borrower
 Get borrower acceptance
 Set up closing with settlement agent
 Send money to closing
 “Book” loan
 Get income
Funding the Mortgage Pipeline
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What is a “Warehouse Line” ?
 Line of Credit extended to a Mortgage Banker
 Used by Mortgage Banker to get money to make loans
 Secured by the loans made with the proceeds
 Repaid when the Mortgage Banker sells the loans to
the ultimate investor
Funding the Mortgage Pipeline
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Mortgage Banker Perspective
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Make loan offer to borrower
Get borrower acceptance
Set up closing with settlement agent
Draw against Warehouse Line to send money to closing
Deliver documents to Warehouse Lender or Custodian
Get Investor approval and pricing (unless already done)
Deliver loan to Investor
Investor sends payment to Warehouse Lender
Warehouse Lender repays Warehouse Line advance
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Releases loan documents to Investor
Releases excess Investor payment to Mortgage Banker
 Get Income
Funding the Mortgage Pipeline
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Risks, and How To Manage Them
Pipeline Risks
 Interest Rate Risks
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Management Strategy
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Hedging
“Locked” rates
“Floating” rates
 Product Risk
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 Investor / Credit Risk
 Underwriting Discipline
 Fallout Risk
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Product Discipline
Trend Monitoring
Funding the Mortgage Pipeline
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Risks, and How To Manage Them
Risk Management Strategies
Hedging
 “Hedging is avoiding risk in the secondary mortgage market. It provides
the primary strategy for offsetting interest rate risk. Hedging involves the
deliberate acceptance of one risk, calculated to offset the effect of interest
rate changes. Hedging is also balance, compensating one risk with another,
more predictable risk.”
Source: Mortgage Bankers Association of America
 Common Hedging Instruments
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Forward Sales Commitments
Substitute Sales Commitments
Futures and Options
Funding the Mortgage Pipeline
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Risks, and How To Manage Them
Risk Management Strategies
 Product Discipline
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Don’t originate products you don’t already have a buyer for
Don’t deviate from standard products
 Underwriting Discipline
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Choose Investors carefully
Stay within Investor’s guidelines
 Trend Monitoring
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Know your “pull-through”
Anticipate effects of market developments
Securitization of Mortgages
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What is it? How does it work?
-- and --
What’s all the fuss about?
Jack Konyk
Senior Vice President
Regulatory and Compliance Management
National City®
- - - - for
American Association of Residential Mortgage Regulators
Examiner Training School: Fundamentals of Mortgage Banking
April 5, 2006
Securitization of Mortgages
 What is it?
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Definition: Process by which mortgage loans with common
features and maturity are “converted” into interest-bearing
securities with marketable investment characteristics.
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In plain language:
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Investment security (like a bond) is created for sale to investors
Loans are grouped together into a “pool” and “given” to issuer
Issuer “gives” security to lender in return for loans
Lender then has an investment security instead of loans on the books
– They can sell it on to other investors
– They can hold it themselves
Securitization of Mortgages
 How does it work? (Creation)
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Identify closed loans with common features
Create the security (legal contract)
Obtain rating (if private security)
Obtain or create required credit enhancements
Determine issue date and pass through rate
Place individual loans into security pool
Deliver documents to custodian
Security is issued
Service for master issuer (or place servicing)
Securitization of Mortgages
 How does it work? (Ongoing)
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Servicer receives payments on loans in pool
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Servicer remits principal and interest (less fee) to issuer
• Servicer remits only what was actually collected
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Issuer sends full principal and interest payment to investor
• Issuer remits full principal and interest regardless of amt. collected
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Default risk may be assumed by servicer or issuer
Securitization of Mortgages
 Why do it?
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Converts mortgages to “better” asset
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More readily saleable, increases liquidity
Increases fee income by converting what would have been interest into fees
Better accounting treatments on carry and on sale
Provides more flexibility in fiscal management
Accesses alternative, often lower costs, sources of capital funding
 What are the risks?
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Delinquency and default assumptions too low; compromises profitability
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Security does not sell as anticipated; compromises liquidity
Securitization of Mortgages
QUESTIONS?
COMMENTS?
DISCUSSION?
DISAGREEMENTS?