US mortgage finance is a huge business domain in United States of America as it is the mortgage financing market of the country.
Mortgage Finance is the field, which deals with the commercial borrowers of loan, lenders of national level and brokers who act simultaneously for making a fruitful deal for a new real estate production. This has materialized the building up of the high rises. Mortgage finance refers to the different avenues of financing instruments used for the purpose of acquiring a real estate property.
Mortgage is a legal agreement, which conveys conditional ownership of home as a form of security for a financial obligation. The terms of the debt gives the lender the right to use the assets till the debt is cleared and the money is refunded. This agreement becomes void as soon as the financial obligation is repaid. Generally, mortgage is a debt instrument of long-term nature (normally 25 to 30 years) and involves real estates. Mortgages are executed according to the formalities of the laws of the land where the property is located.
Federal Housing Administration (FHA) of USA promotes and encourages construction and ownership of real estate properties through mortgage lending. FHA does this program through the Government Sponsored Entities (GSEs) namely: -
- Fannie Mae
- Ginnie Mae
- Freddie Mae
FHA buys large amounts of mortgages from the banks and issues Mortgage Backed Securities (MBS) to the investors.
In USA, banks give loans that are security in nature and these loans are salable as bonds. Thus, government has created two enterprises, (1) Freddie Mac and (2) Fannie Mae, for assisting it by stamping the bonds with guarantee of timely payment, even if the owner is running late on his/her timely payment. These two enterprises actually lend their own money and then they themselves securitize the bonds and are now the dominant lenders of the apartment lending market. These two enterprises are basically agents, and that is why this form of lending is known as the Agency Lending.
Federal National Mortgage Association
US mortgage finance constitutes of Federal National Mortgage Association (or simply, Fannie Mae) is the largest corporation, a profit oriented private corporation, whose main function is to buy home mortgages, guaranteed by the federal government, from the secondary market. Fannie Mae thus helps the financial institutions to acquire more funds so that they would be able to forward more mortgages to the middle and lower income group homebuyers. Fannie Mae buys loans, insured by Federal Housing Administration (FHA), from the lenders of the mortgages and consequently helps to increase the mortgage fund supply for lending purpose.
Government National Mortgage Association
US mortgage finance, which constitutes of the Government National Mortgage Association (popularly known as Ginnie Mae) is a federal government owned corporation. It promotes mortgage credit and makes funds available to the homebuyers of low to middle income homebuyers. Ginnie Mae, in association of other government sponsored entities, sell mortgage in the secondary market. The investors buy these mortgages from the mortgage secondary market. This leads to the rise of price of the bonds and consequent fall in the interest rate of the same. Consequently, the interest rate of the mortgages in the primary market falls leading to the easy access to the potential buyers of the mortgage loans for real estate purposes. Ginnie Mae makes it possible by guarantee of timely payment of principal and interest on securities backed by mortgages.
There are different types of mortgage finance schemes in USA. Some of the US mortgage finance schemes and their various characteristics are given below: -
1. Fixed Rate Mortgages (FRM): - FRMs are the type of mortgages where the rate of interest of the loans remains fixed for the entire life span of the same.
Features: -
- Rate of interest remains fixed during the entire life of the loan
- Mortgage payments are higher.
- If there is an improvement in the interest rate then the rate does not drop.
- If interest rate decreases then one can refinance the mortgage.
- Life span is either fixed for 15 or 30 years.
- Monthly mortgage payment remains fixed for the entire life-span of the
loan.
2. Adjustable Rate Mortgages (ARM): - ARMs are the loans where the rates and mortgage payments could vary during the life span of the same.
Features: -
- Mortgage payment is lower over a shorter time period.
- If rate of interest increases then mortgage payments and rates may improve.
- There might be change of payments over the time.
- Higher Risk.
- ARMs are generally for 1month to 6 months to 1 year.
3. Balloon Mortgages :-
Features: -
- Generally have duration of 5or 7 years.
- At the end of the initial fixed period there is a risk of the interest rate becoming higher.
- Mortgage payment is lower over a shorter time period.
- If someone is not able to make balloon payment then there is foreclosure risk.
- There are options for converting the loan to a new one after the end of initial term.
4. First time buyer program :-
Features: -
- Down payment is lower
- Property and income value limitations may come into play.
- If someone sells the mortgaged house at a very early stage then he/she might have to cough-up
recapture tax provided the program concerned has any type of government subsidies.
Renowned US mortgage finance companies are: -
- NVR Mortgage Finance
- Citi Financial Mortgage
- Liberty Financial Mortgage
- Lennox Financial Mortgage
- American Financial mortgage
- Fairfield Financial Mortgage
- 1st financial mortgage
- Century financial mortgage