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Mortgage Lending: 1.5.12 Government Mortgage Guarantors

A number of government programs insure or guarantee mortgage loans made to homebuyers who meet certain criteria. Loans subject to these programs are sometimes called “agency loans.” These programs are offered by the Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development; the Rural Housing Service (RHS), which is part of the Department of Agriculture; and the Department of Veterans Affairs (VA). State housing finance agencies also insure home mortgages.

Mortgage Lending: 1.5.13 The Secondary Market

The secondary market is vital to the scale of the modern mortgage lending industry. It is not a place, but instead refers to the resale market for loans. The “primary market” is the market in which loan applicants shop for mortgages from lenders.399 Historically, financial institutions that originated loans would continue to own them until maturity.

Mortgage Lending: 1.5.15 The Regulators

When assisting a consumer or investigating a lender, it is important to determine who regulates and supervises that lender. Regulation means establishing rules for the lender’s operation.428 Supervision involves monitoring and examining a lender’s operations.429 But “regulation” is the catch-all term. Some lenders may have more than one regulator, depending on the nature of their business and the scope of the regulator’s authority.

Mortgage Lending: 1.5.1 Overview

The mortgage lending industry is a sea of confusing terminology that is sometimes duplicative or used inconsistently. This subsection and those that follow explain some of the most commonly used terms and describe some of the most important players in the mortgage market. But when examining a specific transaction, it is always important to be aware of how any relevant statute or regulation defines terms. These definitions do not always match how the mortgage industry—or even other laws—use them, and failure to be aware of such differences can produce embarrassing mistakes.

Mortgage Lending: 1.6.2 How Securitization Works

While the practical details of the modern securitization process vary, it typically involves the pooling of mortgages under the common ownership of an entity whose sole purpose is to hold the loans. This process begins with the lender who originates the loans. In some cases another entity will buy up the loans (sometimes from multiple lenders) and aggregate them.

Mortgage Lending: 1.6.3 Problems for Borrowers Related to Securitization

If there are no problems with the origination of the loan, and the borrower has no difficulty making regular payments according to the loan terms, securitization will not affect the borrower after the loan has been closed. For most borrowers, securitization’s biggest impact is likely to be found in how it influences which loan products lenders decide to market.

Mortgage Lending: 1.6.4 Securitization Players

Securitizations can be structured in many different ways and the parties involved can be given many different names. These different entities are often not unrelated or independent of each other. Instead, a complex web of relationships has been consciously worked out in an attempt to insulate various parties from the conduct of the originating lender. The players and structure also vary depending on whether the loans are securitized on the private-label securities market (in other words, Wall Street) or through one of the government sponsored enterprises.

Mortgage Lending: 1.6.5 Documentation

The primary contractual document underlying a securitization transaction is the pooling and servicing agreement. The pooling and servicing agreement establishes the trust that will hold the securitized loans, and it creates the various classes of bondholders. It defines the servicer’s obligations and the various “representations and warranties” of the parties to the transaction.

Mortgage Lending: 1.7.1 Introduction

This section provides a list of notable subjects which may arise in mortgage lending transactions, pinpointing the subsections where such topics are discussed in this and other NCLC treatises. The digital version of this checklist provides live weblinks to these related subsections, in both this book and the various other NCLC treatises.

Mortgage Lending: 1.2.1 A Quick Overview for Practitioners

The mortgage ecosystem is horribly complex. The government policies, banking practices, and contract terms underlying today’s residential mortgage loans are the product of a century of experience, trial, and plenty of error and misconduct. The knowledge required to represent a mortgagor in disputes over the origination, servicing, and foreclosure of a mortgage is broad enough to fill a book—three books, in fact.13 This one focuses on mortgage origination.

Mortgage Lending: 1.1.1.2 Topics Covered in This Treatise

Mortgage Lending examines federal and state restrictions on the origination and terms of mortgage loans, and federal preemption of the state restrictions. It addresses underwriting, appraisals, mortgage brokers, third-party fees, interest rates and other loan terms, reverse mortgages and other less common types of mortgages, and litigating mortgage lending claims.

Mortgage Lending: 1.1.1.3 Related Topics Covered in Other NCLC Treatises

Other NCLC treatises cover related topics or treat certain topics in greater depth. NCLC’s Mortgage Servicing and Loan Modifications2 examines issues arising after the loan’s origination concerning mortgage loan servicing and loan modification. Home Foreclosures covers foreclosure issues.3 A number of the federal substantive limits on mortgage loan originations are codified in the Truth in Lending Act, including restrictions on mortgage loan originator compensation.

Mortgage Lending: 1.3.2.1 The Federal Home Loan Bank System

Among the many tragic consequences of the Great Depression was the widespread foreclosure of many home mortgages. Early attempts to resolve foreclosures focused on encouraging banks and homeowners to renegotiate loan terms through mediation boards and other voluntary arrangements.37 Like similar efforts after the collapse of 2007, these attempts proved grossly inadequate.38

Mortgage Lending: 1.3.3.1 Rise of the Government Sponsored Entities

The secondary market for mortgage loans87 as it exists today is almost entirely the product of federal laws and regulation. The National Housing Act, in addition to boosting the construction industry,88 was also designed to encourage liquidity in the mortgage market. Lack of liquidity was a major reason for the high foreclosure rate during the Depression. When banks refused to refinance homeowners’ short-term loans, widespread foreclosures were inevitable.

Mortgage Lending: 1.3.3.2 Conservatorship of the Government Sponsored Entities

Through the last decades of the twentieth century and the first few years of the twenty-first, Freddie Mac and Fannie Mae purchased and securitized billions of dollars’ worth of conventional, conforming mortgages,124 as well as guarantying billions worth of mortgage-backed securities.125 The two GSEs benefited greatly from the often denied, but widely held, belief that all mortgage-backed securities they issued or guaranteed were, in turn, guaranteed by the full faith and credit of the United St

Mortgage Lending: 1.3.5.1 Overview

The surge in mortgage delinquencies that began in mid-2007 soon grew into a foreclosure crisis and severely weakened the economic security of the United States and millions of its residents.149 As more and more homes went into foreclosure, this disaster also triggered a broader financial crisis, both in the United States and abroad.150