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Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The debt may be owed by sovereign state or country, local government, company, or an individual. Commercial debt is generally subject to contractual terms regarding the amount and timing of repayments of principal and interest. Loans, bonds, notes, and mortgages are all types of debt. In financial accounting, debt is a type of financial transaction, as distinct from equity.
In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient incurs a debt and is usually liable to pay interest on that debt until it is repaid, as well as to repay the principal amount borrowed.
Predatory lending refers to unethical practices conducted by lending organizations during a loan origination process that are unfair, deceptive, or fraudulent. While there are no internationally agreed legal definitions for predatory lending, a 2006 audit report from the office of inspector general of the US Federal Deposit Insurance Corporation (FDIC) broadly defines predatory lending as "imposing unfair and abusive loan terms on borrowers", though "unfair" and "abusive" were not specifically defined. Though there are laws against some of the specific practices commonly identified as predatory, various federal agencies use the phrase as a catch-all term for many specific illegal activities in the loan industry. Predatory lending should not be confused with predatory mortgage servicing which is mortgage practices described by critics as unfair, deceptive, or fraudulent practices during the loan or mortgage servicing process, post loan origination.
A mortgage-backed security (MBS) is a type of asset-backed security which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals that securitizes, or packages, the loans together into a security that investors can buy. Bonds securitizing mortgages are usually treated as a separate class, termed residential; another class is commercial, depending on whether the underlying asset is mortgages owned by borrowers or assets for commercial purposes ranging from office space to multi-dwelling buildings.
A collateralized debt obligation (CDO) is a type of structured asset-backed security (ABS). Originally developed as instruments for the corporate debt markets, after 2002 CDOs became vehicles for refinancing mortgage-backed securities (MBS). Like other private label securities backed by assets, a CDO can be thought of as a promise to pay investors in a prescribed sequence, based on the cash flow the CDO collects from the pool of bonds or other assets it owns. Distinctively, CDO credit risk is typically assessed based on a probability of default (PD) derived from ratings on those bonds or assets.
A commercial mortgage is a mortgage loan secured by commercial property, such as an office building, shopping center, industrial warehouse, or apartment complex. The proceeds from a commercial mortgage are typically used to acquire, refinance, or redevelop commercial property.
In relation to a mortgage, PITI is the sum of the monthly principal, interest, taxes, and insurance, the component costs that add up to the monthly mortgage payment in most mortgages. That is, PITI is the sum of the monthly loan service plus the monthly property tax payment, homeowners insurance premium, and, when applicable, mortgage insurance premium and homeowners association fee. For mortgagers whose property tax payments and homeowners insurance premiums are escrowed as part of their monthly housing payment, PITI therefore is the monthly "bottom line" of what they call their "mortgage payment".
Mortgage fraud refers to an intentional misstatement, misrepresentation, or omission of information relied upon by an underwriter or lender to fund, purchase, or insure a loan secured by real property.
A mortgage loan or simply mortgage, in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".
In finance, subprime lending is the provision of loans to people in the United States who may have difficulty maintaining the repayment schedule. Historically, subprime borrowers were defined as having FICO scores below 600, although this threshold has varied over time.
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the collapse of a housing bubble, leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities. Declines in residential investment preceded the Great Recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.
American Freedom Mortgage, Inc. (AFM) was a private S Corporation incorporated on February 2, 2001, according to the Georgia Secretary of State, and headquartered in Marietta, Georgia. AFM conducted business as a multi-state direct-to-consumer correspondent lender and mortgage broker specializing in the origination of subprime and Alt-A mortgage loans. AFM also operated a wholesale mortgage lending division that originated loans via approved mortgage brokers and which used the fictitious name AFMI Funding. As a correspondent lender, AFM sold the mortgage loans on the open market to larger investors.
In the mortgage industry of the United States, A-paper is a term to describe a mortgage loan for which the asset and borrower meet the following criteria:
Mortgage underwriting is the process a lender uses to determine if the risk of offering a mortgage loan to a particular borrower under certain parameters is acceptable. Most of the risks and terms that underwriters consider fall under the three C's of underwriting: credit, capacity and collateral.
An Alt-A mortgage, short for Alternative A-paper, is a type of U.S. mortgage that, for various reasons, is considered riskier than A-paper, or "prime", and less risky than "subprime," the riskiest category. For these reasons, as well as in some cases their size, Alt-A loans are not eligible for purchase by Fannie Mae or Freddie Mac. Alt-A interest rates, which are determined by credit risk, therefore tend to be between those of prime and subprime home loans, although there is no single accepted definition of Alt-A. Typically Alt-A mortgages are characterized by borrowers with less than full documentation, average credit scores, higher loan-to-values, and more investment properties and secondary homes. A-minus is related to Alt-A, with some lenders categorizing them the same, but A-minus is traditionally defined as mortgage borrowers with a FICO score of below 680 while Alt-A is traditionally defined as loans lacking full documentation. Alt-A mortgages may have excellent credit but may not meet underwriting criteria for other reasons. During the past decade, a significant amount of Alt-A mortgages resulted from refinancings, rather than property purchases.
A No-Doc or Low-doc loan refers to loans that do not require borrowers to provide documentation of their income to lenders or do not require much documentation. It is a financial product commonly offered by a mortgage lender to consumers who cannot qualify for normal loan products because of fluctuating or hard-to-verify incomes, such as the self-employed, or to serve long time customers with strong credit. Applicants are often required to provide a substantial down payment, i.e. a larger deposit either through equity in security or personal savings.
This article provides background information regarding the subprime mortgage crisis. It discusses subprime lending, foreclosures, risk types, and mechanisms through which various entities involved were affected by the crisis.
The mortgage industry of the United States is a major financial sector. The federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
The Mortgage Choice Act of 2013 is a bill that would direct the Consumer Financial Protection Bureau (CFPB) to amend its regulations related to qualified mortgages to reflect new exclusions made by this bill. The CFPB released new regulations regarding the definition of a Qualified Mortgage that took effect in January 2014, a definition that this bill would modify.
The Making Home Affordable program of the United States Treasury was launched in 2009 as part of the Troubled Asset Relief Program. The main activity under MHA is the Home Affordable Modification Program.
References
- ↑ Agency Sounds Warning On Stated-Income And Interest-Only Mortgages, Realty Times, January 10, 2005
- ↑ Paul Muolo and Mathew Padilla (2 February 2010). Chain of Blame. John Wiley & Sons, 2008, 2010. p. 86. ISBN 978-0-470-55465-4.
- ↑ 'Liar Loans' Contribute to Mortgage Problems, NPR, March 17, 2007
- ↑ Steven Krystofiak, , statement at a Federal Reserve, August 1, 2006, cited in Mark Gimein, Inside the Liar Loan: How the Mortgage Industry Nurtured Deceit, Slate Magazine, April 24, 2008
- ↑ Section 1411 of Financial Reform Bill, , August 2010