primary Mortgage

After completing this chapter, you will be able to:
- Explain how the monetary system is structured.
- Understand the source of funds in the mortgage market.
- Grasp the importance of these sources in real estate financing options.

The primary mortgage market is where mortgage lenders and borrowers come together
- This market facilitates the negotiation and creation of new mortgages.
Businesses that meet the consumer need for mortgages are called loan originators.

Various parties are involved in the primary mortgage market, including:
- Dedicated lenders
- Organizations that play significant roles in providing funds for real estate purchases

Also known as thrift lenders.
Originally established by the government to offer long-term single-family home loans.
Historically, most conventional mortgage lending was done by S&Ls.
Funding Mechanism: S&L banks fund mortgages primarily with deposits from savings accounts.
Current Functionality:
- S&Ls now resemble commercial banks and offer a wide variety of financial services.
- Still chartered by the government; must meet the Qualified Thrift Lender (QTL) test to retain their charter and benefits from the Federal Home Loan Bank System.
QTL Requirements:
- At least 70% of an S&L's assets must be housing-related.
- Examples of qualifying assets: home mortgages, home equity loans, mortgage-backed securities.

Provide financial services to the public and businesses.
Roles and Importance:
- Ensures stability in the economy and supports sustainable economic growth.
- Largest source of investment funds in the U.S.
Services Offered:
- Demand deposits, time deposits, savings accounts, and various types of loans.
Mortgage Operations:
- Most mortgages created by commercial banks are sold in the secondary market,
- Some mortgages are kept as portfolio loans.

Intermediation:
- The process of creating a go-between in the economic process.
- In finance, commercial banks act as intermediaries by collecting and holding funds between the government and consumers.
Disintermediation:
- Refers to the flow of money out of banks, potentially leading to a financial crisis (historically linked with events like the stock market crash preceding the Great Depression).

Thousands of insurance companies operate in the U.S.
Premium Payments: Customers pay premiums in exchange for insurance policies, typically monthly or annually.
Investment of Premiums:
- Insurance companies invest premiums to ensure they have funds available for claims and withdrawals.
- Long-term investments like mortgages are preferred due to the nature of life insurance policies.
Real Estate Financing:
- Most life insurance company's real estate exposure comes through financing commercial and multifamily real estate.
- They rank among the top commercial real estate lenders in major cities.

Many retirees depend on Social Security and pension payouts, often struggling to qualify for mortgages due to debt-to-income ratios.
Using Retirement Funds:
- Seniors can leverage income from 401(k) and IRA to qualify for mortgages without cashing out.
Real Estate Investment by Seniors:
- Some seniors choose to invest in real estate by purchasing homes in need of repair, rehabilitating them, and renting or reselling.
- Can use Self-Directed IRAs to invest in real estate, which is more common during economic recovery phases.

A credit union is a financial cooperative serving members.
- Also known as cooperative banks, credit associations, and people's banks.
Services Offered:
- Provide essential financial services comparable to banks, including mortgages.
Advantages:
- Members may benefit from lower rates, flexible qualification standards, and better chances of loan consistency with their originating lenders.

Focused solely on mortgage lending without the diverse services of traditional banks or credit unions.
Funding Sources:
- Obtains funds from various sources, often borrowed from warehouse lenders or financial institutions.
Functions:
- Primary business is earning origination fees from mortgages.
- Not depository institutions; act as intermediaries.
Dominates the primary lending market by managing capital from large investors like insurance companies and retirement funds.

Licensed professionals who originate mortgage loans financed by lenders with whom they have relationships.
Specialty:
- Many focus on residential loans, providing valuable services to borrowers.

A REIT owns and operates commercial real estate and must meet federal rules for pass-through tax status.
Investor Appeal:
- Allows investment in real estate without the challenges of direct ownership and management.
REIT Characteristics:
- Majority are traded on stock markets and offer liquidity.
- Help spread risk through ownership interest in multiple properties.

A type of REIT focused on buying and selling real estate mortgages.
Income Generation:
- Derived from origination fees, interest earnings, and profits from mortgage transactions.

A less common financing option where sellers provide financing to home buyers, either fully or partially.
Advantages, especially in situations where traditional loans are difficult to obtain (e.g., high-interest rates).
Process:
- Typically involves a down payment of 20-25%, followed by amortized monthly payments.
- Sellers may establish an escrow for taxes and insurance.

An alternative funding source for buyers having trouble with traditional financing.
Loan Structure:
- Can provide wins for both borrower and lender, with borrowers gaining necessary funds and lenders earning interest rates that may be higher than traditional investments.
Rights of Borrowers and Lenders:
- Both parties retain rights; lenders may foreclose for legitimate defaults, similar to traditional loans.

Homebuyers may receive down payment assistance in the form of gifts from relatives.
Regulations:
- Gifts can help homebuyers but are subject to maximum amounts that may vary by loan type.
- Acceptable for primary residences and sometimes second homes, but not for investment properties.