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.
