Mortgage market in the USA

FEDERAL STATE BUDGETARY INSTITUTION OF HIGHER EDUCATION

“FINANCIAL UNIVERSITY UNDER THE GOVERNMENT OF THE RUSSIAN FEDERATION”

(Financial University)

Department of World Economy and International Finance

Scientific Research

«Mortgage market in the USA»

Students:

Maksimets Nikita

Professor: A. S. Fedyunin

“28” March 2022

Moscow – 2022

Contents

I. Introduction  -p.3                                                                    

II. US Mortgage Market  -p.3-14

1. Mortgage credit characteristics   -p.3-5

2. Мortgage originations  -p.5-8

3. Types of Mortgages in the US  -p.8-9

4. Government vs. private securitization  -p.9-11

5. Trends of the US mortgage industry  -p.11-14

III. Green Mortgages  -p.15-18

1.  Types of Green Mortgages  -p.15-17

2. Energy-Efficient vs. Energy-Improvement Mortgages  -p.17-18

3. How Do Green Mortgages Differ from Regular Mortgages?  -p.18

IV. Conclusion  -p.19

1. References  -p. 20
2. Appendix  -p.21-23

1. Introduction

The purpose of this paper is to examine the mortgage market of the US and its rightfully distinct types, the mortgages’ originations and their characteristics. The report considers a topical issue of the economic activities in the field of American mortgages. The research and analysis are based on theoretical and empirical research methodologies. We, as authors of the work, analyze the perspective on American mortgage market values, relevant issues, including a special distinctive type of mortgage known as ‘the green mortgage’, potential future development, given the present-day world economic situation and the situation on the US mortgage market.

II. US. Mortgage Market

1. Mortgage credit characteristic

A mortgage is a pledge of any real estate. A mortgage loan means a kind of loan from a bank at an interest rate, where the guarantee that you will return the money becomes a pledge of your real estate, whether it is an apartment, a house, a land plot or other types of real estate. Mortgages, for the most part, are perceived as a loan for the purchase of housing. Purchased real estate with the money of the state, with their subsequent return in a larger equivalent. Also, you can mortgage real estate to take money from the bank for a new apartment or house. Moreover, you can take a mortgage not only for the purchase of housing, but also for its repair, construction and other purposes that relate to interaction with real estate. A mortgage loan is issued by one or two agreements: a loan agreement or a mortgage agreement, that is, the transfer of real estate as collateral to the bank.

Mortgage, as a rule, is taken with a down payment, which is prescribed in the contract, on average it is 30% of the total value of the property, where the remaining 70% is a loan issued by the bank.

How to calculate the monthly amount of debt repayment based on your earnings? Firstly, the loan is issued only to those persons who are able to repay this debt in the future, the savings and annual income of the person taking the mortgage are taken into account. Secondly, loan payments should amount to less than half of the annual salary of the person taking the mortgage, because there is a risk of not coping with the loan disbursed. Starting from January 30, 2020, all mortgage agreements must contain a table that specifies individual loan terms for each client, in particular, the amount, currency, loan term, interest rate, amount of fines and other parameters.

Types of mortgage interest rates:

Constant- fixed in the contract. Agreed individually.

Variable - May decrease or increase, depending on the variable specified in the contract. Agreed individually.

Combined - combines both bets.

If the amount of payments changes, the bank is obliged to send you an updated schedule. Payments will be the same size as before, until you receive information about their change.

How to repay the loan? Mortgage loan payments consist of two parts: Payment of part of the loan amount (Initial payment) and subsequent repayment interest. The mortgage is repaid by differential or annuity payments.

Differential is a monthly repayment of a fixed part of the principal debt with interest for the outstanding part of the debt. Every month, the payment decreases and for the entire term of the loan you spend less on interest than with annuity payments. At the beginning, the payments will be significantly larger compared to the payments at the end of the term.

Annuity – monthly payment, in the form of equal amounts. Phased repayment of the principal debt, where the share in the annuity payment increases every month, and the amount of interest decreases. With a constant loan repayment amount, it is more convenient to plan and distribute the budget.

One of the above payment methods is offered and specified in the contract by the bank.

As of November 2020, the average FICO score for newly issued mortgages was 786.6. Although the credit rating required for mortgage approval varies, this high average score can largely be explained by the tightening of lending standards after the COVID-19 pandemic.

The increase in median scores means that more borrowers with a credit rating of 760 or higher have gained access to mortgages since the financial crisis of 2007. For example, as of the third quarter of 2020, about two-thirds of all mortgage loans issued were issued to borrowers with a credit rating in this range.

2.  Mortgage originations
        Mortgage origination, a specialized subset of loan origination in consumer lending, is the process by which a lender collaborates with a borrower to complete a mortgage transaction that results in a mortgage loan. A mortgage loan is a loan that uses real estate or property as security. Borrowers must provide a mortgage lender with several sorts of financial information and paperwork, such as tax returns, payment history, credit card information, and bank balances, during this procedure. This information is used by mortgage lenders to evaluate the type of loan and interest rate that the borrower is eligible for. Due to the development of loan products and consumer protection legislation in the United States, the process has gotten more complicated.
        Mortgage origination, which is a subset of loan origination, is a complicated and evolving process with numerous processes that differ from lender to lender. The fundamental steps are as follows:
        Take an application: A borrower initiates this stage, which results in an application to borrow money to buy a real estate property that includes mortgage product specifics, property specifications, borrower information, and supporting documentation. The borrower fills out the application either on their own or with the assistance of a loan officer.
        Processing: loan processors ensure that the loan is packaged correctly, including that all loan documentation is complete, checked, and compliant for underwriting. After that, the loan processor places service orders and manages loan paperwork.
        Underwriting: verification, appraisal, title search and insurance, flood certification, and surveying are all used to determine whether the risk of granting a mortgage loan to a certain borrower within given criteria is acceptable.
        Closing/funding: a settlement agent oversees the mechanics of delivering final loan documents to borrowers for review and signature, releasing and wiring monies, and recording the mortgage, at which time it becomes official.
        Shipping and delivery: documents are checked for auditing and quality control purposes, copies are delivered to investors, and purchase notifications are issued to other departments throughout shipping and delivery.
Mortgage Origination tools: