How Do American Mortgages Work? Part 3: Mortgage Origination

The first part of the Secondary Mortgage Market is the banks, mortgage broker, or mortgage lender. This is the only time borrower will interact with the Secondary Market without possibly even knowing it. The lender will go through all the requirements with you of what you need in order to obtain the mortgage- credit score, income requirement, length of the mortgage, etc. These requirements are decided by the government identities, Fannie Mae and Freddie Mac. This allows the mortgage to be sold to the government identities if they follow their guidelines. So chances are the lending company a person obtains their mortgage from will not be the same one their making payments to for the life of the loan.

To initially make the loan they need money to close the mortgage before they sell it off to the government entities. Bankers typically use their own capital to fund the closing of the loans. Mortgage bankers use a warehouse line of credit to initially fund these loans. A mortgage broker will search to find you the best mortgage option throughout all …

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The ESRI and the Central Bank butt heads.

This headline appeared in the Indo today. We agree with the idea of a safer market, but also agree with the ESRI on this, that it was badly timed, inappropriate and will actually cause more problems than it fixes due to being badly timed.

We would agree, our submission on the subject was one of the few that articulated the problems, why the moves wouldn’t prevent boom-bust and gave empirical evidence supporting same. Meanwhile many others were falling over themselves to commend Patrick Honohan and the Central Bank for being such good regulators.

They may have insulated the banks, but it’s at the expense of a market that will not provide for all of the people that need housing, in doing this it also helps to encourage speculation as one by-product is higher yields which re-attract investors into a market.

The ESRI have articulated this better than we did, and we support their findings. Oddly, the person behind the statements was the best economist the Central …

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Only 2,800 first time buyers would have been affected…

Patrick Honohan told the Oireachtas committee a few days ago that “2,800 mortgages issued in 2013 would have been affected by the proposed new lending rules”.

There are a few reasons why this is bad use of data. For a start, in 2013 in gross numbers there were 14,984 mortgages drawn down. If you strip out re-mortgages, switchers, top ups and investment loans to get an idea of the actual ‘home purchase’ group it comes down to 12, 875 which means 22% of all loans.

Secondly, 2013 is a low level year in lending, the charts below show the draw-downs and the number of loans, they are at anaemic levels and don’t show any sign of a credit bubble in a country that is still rapidly deleveraging.

How can this be interpreted as a rising risk? The rising prices are a separate issue, but that some wave of credit is ready to swamp down on limited supply denies the fact that most of the market is in cash …

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The Dublin property market in a word… Farcinating

I looked up ‘farcinating’ because it’s a mash of ‘farcical’ and ‘fascinating’. Thankfully the internet always delivers.

How prices in Dublin can go up 8% YoY when the market is half cash beggars belief. It’s a false signal, if and when we are wrong about this we’ll apologise, but let’s take a look at some key issues that support this view.

1. Put a blank county & address search into the Property Price Registry for 2013 and you’ll find that there were 13,320 transactions this year. At the same time the IBF/PWC data indicate that there was 5,297 mortgages drawn down this year. That would indicate a market that is transacting in cash to the tune of 60% or more. (clear issue being late registration could mean some 2012 transactions crept into 2013 but probably not enough to fundamentally change this point).

2. Something that mainstream commentary has missed out on is that the ‘low supply’ in Dublin is …

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Mortgage approvals up, lending figures down.

According to the IBF mortgage approvals report the numbers for April are up significantly, the figures stated that mortgage approvals are up 22.8% in a month on month basis and that it is primarily for the purchase of a house. This comes shortly after showing that in the first quarter of the year that mortgage lending is down year on year.

The activity being focused on first home buyers and movers (all looking for non apartment stock in the main) has already been well flagged on this blog.

In year on year terms this April is also up 8.7% on April 2012. A total of 1,433 mortgages to a value of €240m were approved by lenders here during the month of April. The next big question is whether or not they draw down, we have been watching this happen for a while, un-requisitioned loan facilities are common.

Another thing happening is that we are already seeing that the idea of doubling credit this year is unlikely, despite claims from the banks. If 2012 was a wash out then …

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FSA Mortgage Lending Data published

While mortgage lending in the UK is not exactly of Irish interest, it is worth looking at to see the challenges that our nearest neighbours face and in some ways to see if their lending data is reflective of our own.

Today the Financial Services Authority (FSA) today published its latest Mortgage Lending Data for the United Kingdom covering the period Q3 2012.

Key statistics for Q3 2012 are as follows:

·The total value of outstanding loans at the end of Q3 was £1,227bn, an increase of 0.3% on last quarter.

·New advances in the quarter amounted to £40bn, a 7% increase on Q2 but 9% below Q3 last year.

·The overall average interest rate on new advances increased from 3.78% last quarter to 3.89% in Q3. There was an increase in the rates for both variable rate lending and for fixed rate lending.

·New commitments totalled £36bn in the quarter, down 10% from last quarter and 14% lower than in the same quarter of last year.

·Lending for house purchase accounted for the highest proportion of new advances seen …

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Capital and interest mortgage, annuity, repayment – defined

There are four main types of loans, these differ in the way the capital is repaid to the lenders.

Capital & Interest, the most popular type of housing loan, where the borrower makes regular repayments – part interest / part capital. These are usually for an agreed term, typically 25 years however in recent times the term can be as long 30 -35 years.

C&I loans are also know as Repayment mortgage, Standard mortgage and Annuity mortgage. In the early years of a C&I loan the majority of the repayment is used repaying the interest, so the capital reduces slowly.

So as the capital reduces with each repayment, so does the amount of interest payable on that capital.

The other types of loans are interest only repayments with the capital sum been paid at the end of the term from, a:An Endowment Mortgage b:A Pension Mortgage c:The sale of the property / asset.

This means that the borrower pays interest only for the term of the agreement and only repays the capital sum at the end by means of a …

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Banks are lending (while standards tighten)

I often complain that banks are ‘not lending’, they say this isn’t true. The Central Bank then says that lending criteria is tightening (report here). This at first seems to support the first statement, but could it be that they are lending and reining in on underwriting criteria at the same time?

It could be, AIB stated that they wanted to lend €800m this year (that was said at the end of 2011 at an in house conference), they are on track to lend €1,050m which is about 25% higher than previously expected. Bank of Ireland/ICS are saying the same thing, at the same time, the main lenders have jacked up rates and made more conservative estimations of who does or doesn’t get loans.

With the fall out in lending from 06/07′ to now, it means that there are plenty of borrowers of a high quality who are seeking finance, when you raise interest rates the stress-testing gets harder to pass, so that cuts out a lot of borrowers, as …

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No credit? Try some dodgy tax incentives (they work)

The recent Central Bank report on a property market that has ‘overshot’ is front page news on the broadsheets. This phenomena has been well observed in other jurisdictions and the question now is whether we will be more ‘European’ in our property market or if we’ll turn Japanese.

A key issue pointed out consistently is the role of credit. Cheap credit is often cited as one of the drivers of the property bubble, an NBER paper suggests it is only a component of about 20% of prices. The absence of credit is equally being seen as a downward driver of prices.

One of my minor hobbies is the history of Irish banking from an operational perspective, and on rare occasions it offers a nugget of insight.

In the late 1970’s Irish banks were not involved in mortgages, and only a few years before that they were not involved in hire purchase, they didn’t …

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Mortgage Market Trend Outlook 2012

We have made a few more bold predictions in our ‘Mortgage Market Trend Outlook 2012’ and reviewed how wrong many of our 2011 forecasts were as well.

Some of the main points thus far are:

1. That mortgage lending bottomed out in 2011. 2. That IBRC may take on some tracker loan portfolios to de-risk state owned banks (as the state already owns these loans entirely anyway). 3. That rates for existing AIB borrowers will have to go up but that for new borrowers rates may come down with changes to how prices are charged depending on risk of the proposed loan. 4. That deposit rates will start to drop. 5. That up to 25,000 mortgages will be deemed ‘unsustainable’ and that the ‘won’t pay’ contingent of arrears cases may be as high as 1 in 5.

We hope you enjoy this report, we in turn hope that we get some of the calls right!

Many thanks,

Irish Mortgage Brokers

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