Training Day 2: Understanding Mortgage Basics and Key Industry Players
Introduction
Welcome to Training Day 2 of the Boots 2 Loans program. Today, we will delve into the basics of the mortgage industry, exploring the roles of various industry players and the factors that affect mortgage rates. We will also discuss the primary and secondary mortgage markets and the concept of rate lock.
What is a Mortgage: Primary and Secondary Markets
A mortgage is a loan secured by real property, such as a home or land, allowing individuals to finance the purchase of that property. Mortgages typically have long terms, often 15 or 30 years, and are repaid through monthly payments. The primary market refers to the origination and issuance of mortgages to borrowers by lenders, such as banks and mortgage companies. The secondary market involves the buying and selling of existing mortgages, which are often bundled into mortgage-backed securities (MBS) and traded among investors.
The Difference Between a Broker, Lender, and a Bank
Mortgage brokers: Brokers act as intermediaries between borrowers and lenders, helping borrowers to find the best mortgage product based on their needs and financial situation. They do not directly lend money but rather work with multiple lenders to find the most competitive loan terms.
Mortgage lenders: Lenders are financial institutions that directly provide mortgage loans to borrowers. They may be banks, credit unions, or other non-bank entities specializing in mortgage lending.
Banks: Banks are financial institutions that offer various financial services, including mortgage loans. They may have their mortgage divisions or work with other lenders to offer mortgage products to their customers.
What Happens to a Mortgage After it Closes: Servicers, MBS, and Tranches
Servicers: After a mortgage is originated, a servicer is responsible for managing the loan, including collecting payments from borrowers, managing escrow accounts, and handling issues such as loan modifications or foreclosures.
Mortgage-backed securities (MBS): Mortgages are often bundled together and sold to investors as MBS, which provides lenders with additional liquidity to issue new loans.
Tranches: MBS are divided into different tranches, or segments, based on the risk level and expected return. Investors can choose which tranches they want to invest in depending on their risk tolerance and investment objectives.
Factors Affecting Mortgage Rates: Bond Markets and the Federal Reserve
Bond market: Mortgage rates are closely tied to the performance of the bond market, particularly U.S. Treasury bonds. As Treasury yields increase, mortgage rates generally follow suit.
Federal Reserve: The Fed influences mortgage rates through its monetary policy, which includes setting the federal funds rate, conducting open market operations, and adjusting reserve requirements. Changes in Fed policy can directly or indirectly impact mortgage rates.
ABA Required Training
As part of your training, you will be required to complete the American Bankers Association (ABA) training modules by Training Day 6. This training is essential in providing you with the foundational knowledge necessary to excel in the mortgage industry.
What is a "Locked Rate"
A locked rate is a guarantee from a lender to hold a specific interest rate for a certain period, typically between 30 and 60 days, while a borrower’s mortgage application is processed. Locking in a rate can protect borrowers from potential rate increases during the loan processing period, providing peace of mind and allowing for more accurate budgeting.
Conclusion
Today’s training has provided a solid foundation in understanding the mortgage industry’s key components and players. This knowledge will be essential as you navigate your career as a Relationship Lender, enabling you to provide your clients with accurate information and guidance on the complex world of mortgage lending.
