The Mortgage industry of the United States is a major financial sector. The 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).

The US subprime mortgage crisis was one of the first indicators of the 2007–2010 financial crisis, characterized by a rise in subprime mortgagedelinquencies and foreclosures, and the resulting decline of securities backing said mortgages. The earlier Savings and loan crisis of the 1980s and 1990s and National Mortgage Crisis of the 1930s also arose primarily from unsound mortgage lending. The mortgage crisis has led to a rise in foreclosures, leading to the 2010 United States foreclosure crisis.



The mortgage process in the US:

Origination

In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting a loan application and documentation related to his/her financial history and/or credit history to the underwriter, which is typically a bank. 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. Origination is regulated by laws including the Truth in Lending Act and Real Estate Settlement Procedures Act (1974). Credit scores are often used, and these must comply with the Fair Credit Reporting Act. Additionally, various state laws may apply. Underwriters receive the application and determine whether the loan can be accepted. If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations.

Documentation and credit history can be used to categorize loans into high-quality A-paper, Alt-A, and subprime. Loans may also be categorized by whether there is full documentation, alternative documentation, or little to no documentations, with extreme “no income no job no asset” loans referred to as “NINJA” loans. No doc loans were popular in the early 2000s, but were largely phased out following the subprime mortgage crisis. Low-doc loans carry a higher interest rate and were theoretically available only to borrowers with excellent credit and additional income that may be hard to document (e.g. self-employment income). As of July 2010, no-doc loans were reportedly still being offered, but more selectively and with high downpayment requirements (e.g., 40%).



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

Closing costs

In addition to the downpayment, the final deal of the mortgage includes closing costs which include fees for “points” to lower the interest rate, application fees, credit check, attorney fees, title insurance, appraisal fees, inspection fees, underwriting fee and other possible miscellaneous fees. These fees can sometimes be financed and added to the mortgage amount. In 2010, one survey estimated that the average total closing cost United States on a $200,000 house was $3,741.

Market indices

Common indices in the U.S. include the U.S. Prime Rate, the London Interbank Offered Rate (LIBOR), and the Treasury Index (“T-Bill”); other indices are in use but are less popular.

In the U.S., the fixed rate mortgage term is usually up to 30 years (15 and 30 being the most common), although longer terms may be offered in certain circumstances.

International comparisons

Fixed-rate mortgage are common in the United States, unlike most of Western Europe where variable-rate mortgages are more common.The United States has home ownership rates comparable to Europe, but overall default rates are lower in Europe than in the United States. Mortgage loan financing relies more on secondary mortgage markets and less on formal government guarantees backed by covered bonds and deposits. Prepayment penalties are discouraged by underwriting requirements of large organizations such as Fannie Mae and Freddie Mac. Mortgages loans are often nonrecourse debt, unlike the most of the world.

 

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