Chapter 13

Loan Origination, Processing, and Closing

© OnCourse Learning

Chapter 13 Learning Objectives

Understand the steps involved in processing of a loan application and closing a mortgage

Understand the operation of mortgage bankers

© OnCourse Learning 2

Loan Processing

Involves several steps including property appraisal, analysis of application, submission for credit approval, and closing the loan

Appraisal – Three stages Ordering the appraisal; since 1995 Uniform Residential Appraisal Report used for nearly all

loans

Monitoring the appraisal

Evaluating the appraisal

© OnCourse Learning 3

Loan Processing Appraisal valuation section – generally accepted

appraisal standards require the use of three approaches for determination of value: Market Approach Cost Approach Income Approach

Appraisal reconciliation phase – arriving at final estimate for value

4© OnCourse Learning

Loan Processing - Analysis of Application

Complete analysis of the financial position of the borrower and the disclosure of information required by the Real Estate Settlement Procedure, Regulation Z and the ECOA

RESPA requires lenders to: Provide, in advance, general information on the settlement costs Provide within 3 days after receiving the application estimated

closing costs and monthly payments Provide within 3 days after receiving the application good-faith

estimate of the cost of the loan over its term, including APR

The lender verifies the credit standing of the applicant

5© OnCourse Learning

Loan Processing – Submission of Insurance

Applying for Mortgage Insurance FHA, VA, or PMI

Common form for submission for FHA and VA Mortgage insurance is in addition to homeowners

insurance Paid along with homeowners insurance

May be paid by the borrower or through escrow

6© OnCourse Learning

Loan Processing – Submission of Insurance

Many lenders participate in FHA’s direct endorsement program The lender performs the underwriting process A lender that is a direct endorser is essentially an agent of

the FHASaves processing time

If the application for insurance is accepted FHA issues mortgage insurance certificate

7© OnCourse Learning

Loan Processing – Submission of Insurance

For FHA approval, lender submits a package containing:1. Mortgage Credit Analysis Worksheet

2. Application for commitment of insurance

3. Copy of sales contract

4. All verifications of deposits

5. All verifications of employment

6. Credit reports

7. Verification of indebtedness

8. Other documents

8© OnCourse Learning

Loan Closing

Two distinct transactions: Transferring title

Signing documents (e.g. promissory note)

Standard mortgage or deed-of-trust form for FNMA and FHLMC; similar form for FHA and VA

Mortgage or deed-of-trust includes same information as the note and also provide description of the property

Settlement statement – record of what went on at the closing

Truth-in-lending disclosure must be given to the borrower and must include major financial terms

© OnCourse Learning 9

Loan Closing Disbursement

Lender may give separate checks to the closing agent payable to each party (title company, mortgage insurer, real estate agent, etc.)

Lender gives one check to the closing agent for the full amount of the loan

Recording Gives public notice that the buyer is the new owner of the property

and the mortgage has a lien on the property Serves as a protection of the owner/lender against others that may

claim to have a valid deed

Mortgage insurance payment

10© OnCourse Learning

Mortgage Banking

The origination, servicing, and the sale of mortgage loans by a firm or a individual

Mortgage bankers: Non-depository institutions

Do not hold loans in portfolio

Retain servicing rights

© OnCourse Learning 11

Mortgage Brokers Alternative to mortgage bankers Licensed companies that offer mortgages from variety

of lenders Can provide borrowers with their best loan options

12© OnCourse Learning

Mortgage Banking – Sources of Funds Two principal sources of funds:

Commercial paper – short term (180 to 720 days) obligation with rate approx. equal to the prime rate

Warehousing loans – short term loans from commercial banks; structured as line of credit; mortgage loans used as collateral

13© OnCourse Learning

Mortgage Banking - Revenues Four main sources for revenues

Origination fee – 1% of the amount of mortgage Servicing fee – 0.25 – 0.5% of the outstanding mortgage

balance Warehousing rate difference – Income from the differential

between the rate on the mortgage loan and the rate on credit line

Marketing rate difference – The difference between the amount originated and the amount received from the sale

14© OnCourse Learning