how mortgage backed securities work – dnj mortgage

September 8, 2009

Today I wanted to write up a brief explanation of how mortgage backed securities worked.  I was going to provide a graphical flow map so you could try and make sense out of the secondary market (ie. where your mortgage goes off to live and work after you’ve signed the papers).  But, before I dove into Photoshop for an hour, I took a quick run through what was already available on the net.  I found a great image from a wonderful post by Noah Rosenblatt on  His post provides a more detailed look at the secondary market, so check it out if you want to read more.  So now with a great graphic, let’s get going.

mortgage-backed-securities-cdo-cmo-bondsStep 1-2:  Let’s consider a fake bank for our example, Bank123, and let’s say it has been selling mortgages in the Raleigh area all quarter.  Bank123 has amassed quite a few loans and is ready to package them up for re-sale.  Why would they sell their mortgages?- I don’t get it.  [[ Think about what your mortgage actually is – it’s a promissory note that states that you’ll repay the bank $x over a certain time period at a certain %rate.  If you simply paid your mortgage for 30 years without taking any cash out and without refinancing, you’d be paying almost double what you borrowed.  Here’s a quick example – a 30yr fixed rate mortgage for $200k at 5%.  If you paid it off completely over the course of 30 years, you’d be paying a little over $185,500 in interest – meaning you’re borrowing $200k and paying back about $386.5k. ]] So your mortgage turns out to be quite a valuable long term investment that the bank has created.  But in order for Bank123 to keep providing mortgages, they’ll need some more money to lend.  Look at all those loans they’ve provided this quarter (step1).  If we say, for example, that all those mortgages are $200k loans, then they’ve given out about $3.8million.  So, to get new capital to lend, and to hedge some risk with regards to these loans defaulting, Bank123 needs to pool and sell them.

Step 3-4:  “So who’s going to buy these pools of loans?” – you must be asking by now.  It depends – it could be Fannie Mae or Freddie Mac or it could be a large bank.  The buyer, let’s say Fannie in this example, takes a solid look at the pool and chops it up into different pieces called tranches.  You’ll see in step 3 the different layers from AAA to b/b.  A super simplistic way of looking at this is to consider all the loans in that pool – they’re all different loan types, amounts, and have different risk levels.  Fannie considers what’s what and then sells these tranches as securities – the riskier tranches are expected to have better returns but are a much higher risk, and vice versa for the AAA rated section.  These securities are then bought up by investors and that’s that. Depending on what your investor puts your money into, there’s is a chance, albeit small, that you own part of your mortgage as an investment.

A very simple view of the secondary market and how your mortgage becomes an investment security.  It also provides some insight to how the secondary market affects you.  Let’s say for example that Fannie Mae decides it’s changing its buying guidelines for loans.  To make sure their loans are still marketable, the primary market players (your local banks/brokers/other lenders) adjust their underwriting criteria so their newly originated loans meet Fannie’s new guidelines.  This in turn affects the criteria that you must meet to qualify for a loan.  The old ‘from the top down’ effect.  This is what happened to sub-prime loans – at one point Fannie and Freddie were buying – then when problems started to arise, they ceased buying activities for these types of loans – now they’re pretty much off the market.  I’ll leave things here for now, maybe we’ll look back into the credit crisis and the secondary market at some other time.  Thanks for reading and I hope everyone enjoyed their long holiday weekend.

DNJ Mortgage
1350 Sunday Drive
Raleigh, NC 27607

FHA mortgage basics – raleigh nc

September 2, 2009

FHAToday I will provide you with a fun FHA fact filled post.  I can’t cover everything in one post but I’ll get to the most important items.  You can obtain an FHA loan for a single family residence up to a four-plex (where four families would be able to live) but to simplify things, we’ll stick with the single family unit guidelines for they’re the most common.

Ready to explore a FHA purchase? Let’s go.

1. Required Down payment- The minimum down payment for FHA loans is 3.5% of the purchase price.  This isn’t too bad considering that most conventional loans require anywhere from 10-20% down.

2. Loan Limits- Like I just stated, FHA loans are available for 1-4 unit homes/buildings.  Loan limits are determined on a county by county basis – you can find your specific county here.  In Wake County, you’re looking at a $295k limit which is fairly high; this basically means that if you want to get an FHA loan, the amount must be under $295k.  Most buyers looking to take advantage of an FHA loan are shopping in the $200s.

3. MI or Mortgage Insurance – A quick note on MI – this is the insurance that the lender pays to protect themselves against your loan defaulting.  Most conventional loans require you to pay mortgage insurance until you reach the 78% LTV point which they then deem you to be less of a risk and are satisfied with the amount of equity in the home and the MI requirement is dropped.  For FHA loans, the same basic situation exists – you’re required to pay MI unless you’re putting down 20% or more.  There are two items you need to consider about FHA MI – you’re charged a 1.75% upfront fee (which is rolled into the loan amount) and a .55% fee per year for the total loan amount.  That second part is what determines the amount that you’ll be paying every month.  A quick example would be if you had a $200k loan, your MI fee would be (200k x .0055)/12months= $91.67/month.  Get it? Good, we’re moving on.

4. Closing Costs – For an FHA purchase you can expect to see the following costs: Origination Fee, Attorney’s Fees, Appraisal Fee, Title fees, Credit Report, and a Home Inspection Fee.

5. Credit Requirements – The credit requirement for FHA loans is usually 620 but each lender will have their own requirement overlays.  You must have at least two lines of credit, 2 revolving accounts, to be eligible for an FHA loan.  These accounts must have a pretty good history of on-time payments – your FHA loan will be inspected closely by underwriters and any questionable bill pay habits will be viewed quite negatively.  You can still obtain a FHA loan if you’ve gone through a chapter 7 bankruptcy in the past; you just have to wait a minimum of two years after the discharge date (not the filing date).  You do not have to wait, however, to apply if you’re currently paying off a chapter 13, as long as you’ve made on-time payments for the past year.  You will need a written letter of explanation and a letter from your appointed court trustee.  You’ll also have had to have rebuilt your credit to the required levels.

6.  Debt to Income Ratios – Every time you apply for a loan, there are debt ratio requirements.  For FHA, they’re a bit stricter; they want to make sure you’re getting yourself into a situation that you can afford.  Also, with regards to ratios, all lenders have their own requirement overlays that will affect these numbers.  You have two ratios that lenders are interested in:

1. your Mortgage Payment Ratio This is your monthly mortgage proposed payment over your overall monthly income.  So if your proposed mortgage payment is $700 and your overall gross income for the month is $2500 – you’re at $700/$2500=32%.   FHA requires a maximum ratio of 29% to qualify.

2. your Total Expenses Ratio This ratio is calculated by adding your monthly proposed mortgage payment to any monthly revolving debt (credit cards bills, car loan, etc) and dividing that by your total gross monthly income.  FHA requires a maximum ratio of 41% to qualify.

So that was a brief rundown on what to expect as far as requirements go – things change quite often so if you find conflicting information or you’re confused about a certain item, just give me a call.

DNJ Mortgage
1350 Sunday Drive
Raleigh, NC 27607

Mortgage Assistance Raleigh NC

August 31, 2009

I’ve been fielding quite a few calls lately from people wanting to get their mortgage modified.  Although we don’t provide loan modification services, I quickly realized that the majority of the callers really didn’t need their loans completely altered by their servicer/provider – they just needed to refinance.  The one problem that was preventing them from doing so was their value.  Either they experienced a drop in the home values in their specific area, or they had a higher rate and hadn’t been in the home long enough to accrue any equity.  Either way would prevent most people from refinancing, but through some not so new programs, the value obstacle is eliminated.  The programs at hand: the Freddie Mac Relief Refinance & the Fannie Mae DU Refi Plus.  fanniemae_bldEach has slightly different eligibility requirements but both will help you move down to a lower rate effectively lowering your monthly payments.  These are not standard transactions; much of the usually considered information may be ignored while lots of additional non-standard requirements will be weighed.

1. The main item that needs to be looked at before even considering either of the programs is the owner of your loan.  To qualify for either of these programs, your loan must be owned by either Fannie or Freddie – not sure about your loan?  Not a problem; you can check both entities on these two websites.

2. The next most important item is your current payment status. You must be up to date with regards to your payments and cannot have any late payments over the last 12 months.  This item really represents a simple risk evaluation on their part – up to date?~~not much of a risk , a couple lates?~~more likely (in theory) to default.

3. The loan to value considerations are quite lenient.  Both programs allow up to 105% loan to value and if you’re slightly over that, you’ll have to pay the balance down to 105% with your own funds and provide documentation to show that you did.

4. Neither of these programs offer much relief for those with run-away seconds.  Both do not allow new subordinate financing or replacement financing.  What this basically means is you’re not going to be able to roll both loans together and if you’re having trouble paying your mortgage because of a high rate second, these programs won’t be much help.  There are other ways to deal with situations like this – give us a ring and we’ll help you find a solution.

5. Some other limitations and items to note:

  • Mortgage Insurance is not always required
  • Unlimited CLTV
  • Limited Cash-Out

There are plenty of other requirements and caveats, but if you’re good on these first four – you’re definitely on the right track.  We’ll need to gather a full loan application from you in order to qualify you, but total time needed for that is around 30min (20 filling out the loan application on-line and about 10-15 minutes on the phone speaking with one of our loan consultants.

As with any of my blog posts, if you’ve got questions, I can help. (919)459.6533

DNJ Mortgage
1350 Sunday Drive
Raleigh, NC 27607