© Cengage Learning 1
CHAPTER 17
SELLING RESIDENTIAL MORTGAGE LOANS
OBJECTIVES OF CHAPTER
Upon successful completion of this chapter, the students should be able to:
Discuss the various methods for selling mortgage production and
loans in portfolio
Explain the process and details involved in a mortgage sale
Complete different pricing and yield calculations for various standard
secondary market individual loan and pool sales
Compare the different business models used by companies active in
selling mortgage loans
Explain what is involved to become active in selling mortgage loans
and obtaining commitments from investors
Understand mortgage pipeline management risks and loan delivery
issues
© Cengage Learning 2
I. Introduction
II. Loan Sale Options
A. When is a Mortgage Loan Sold?
B. Flow Basis or Pooling
C. Whole Loans or Participations
D. Qualified Residential Mortgage
E. Recourse
III. Which Mortgage Loans are Sold?
A. Non-conforming Mortgages
B. “Seasoning” Cures All?
IV. Secondary Market Math
A. Yield Calculations
B. Net Yield
C. Weighted-Average Yield (Coupon)
D. Price for a Package
V. Pricing
A. Risk-Based Pricing Adjustments
B. Remittance Options
C. Strategic Options in Selling Mortgage
Loans
D. Mortgage Banking Business Model
VI. Selling Loan Production to Investors
A. Direct Sales to Private Secondary
Mortgage Market Entities
B. Directly Issuing Mortgage-Backed
Securities
C. Selling Loan Production to Conduits
for Packaging into MBSs
VII. Investor Approval and Loan Commitments
A. Becoming an Approved
Seller/Servicer
VIII. Secondary Mortgage Market Commitments
A. Details of Sale
B. Master Commitments
C. Mandatory Delivery Commitments
D. Pair-Off
E. Best Efforts
F. Standby Commitments
Teaching Tips
What is the benefit to selling a loan over
retention?
Do you think the mortgage industry changed for
the better or the worse once it became common
practice for all lenders to sell their loans?
Discuss the different types of risk a purchaser
should look at when pricing a mortgage pool.
When is a mortgage loan sold?
What is the difference between price and yield in
secondary market transactions?
What are the advantages of selling a pool of
mortgage loans vs. selling individual loans? What
are the disadvantages?
Discuss the different types of commitments used
in secondary market activity.
What should a lender be aware of when obtaining
a commitment from an investor to sell them
loans?
© Cengage Learning 3
IX. Loan Delivery
A. Documents Delivered to
Secondary Market Investors
B. Establishing Custodial Accounts
C. Uniform Documentation
D. Mortgage Electronic Registration
System (MERS)
X. Mortgage Pipeline Management
A. Fallout Risk
B. Delivery Risk
C. Investor Risk
D. Program Risk
E. Funding Risk
F. Repurchase Risk
G. Liquidity Risk
H. Price/Interest Rate Risk
I. Locking Rates at Application
J. Interest Rate Volatility
K. Pipeline Reports
With recent events in foreclosures and the amount of
work involved in the process, has MERS helped or hurt
the borrowers in need?
What pipeline management risks have increased since
the mortgage meltdown of 2007?
How much harder is it to maintain a solid mortgage
pipeline now? What steps would you suggest the lender
take in order to maintain a good portfolio mix?
© Cengage Learning 4
SUGGESTED TRUE/FALSE QUIZ
1. Sales to the secondary mortgage market have recently been over $3
trillion a year.
2. A conforming loan is one that is at or below the maximum loan
amount for sale in the secondary mortgage market.
3. A nonconforming mortgage loan is one that does not meet the
standard eligibility or underwriting guidelines of the secondary
market.
4. Ultimately all mortgage loans can be sold to some investor.
5. Interest rate risk is not considered a reason to sell loans in the
secondary market.
6. Because Fannie Mae and Freddie Mac were originally started by
the federal government, any mortgage lender can sell loans without
being approved to do so.
7. Written commitments are critical to successful secondary
marketing for those lenders that sell mortgages.
8. The price an investor will pay for a mortgage loan (i.e., the yield
on the mortgage) determines the value of that loan in the secondary
market.
© Cengage Learning 5
9. Once a loan has been sold to an investor the principle and interest
payment belong to the seller until the first of the month.
10. Weighted-average yield is a tool for calculating yield of a single
mortgage that is two or more years old.
MULTIPLE CHOICE QUESTIONS More than one answer may be
correct – select all correct answers. (Correct answers are
italicized.)
1. Which of the following loan factors are important to track to effectively
manage a secondary market pipeline?
d. None of the above
2. What are important risks to review while managing a mortgage pipeline?
d. All of the above
© Cengage Learning 6
3. MERS is defined as
a. A model for recording deeds in the federal archives rather than state
4. Which of the following is NOT a purchaser of mortgages in the
secondary market?
d. Ginnie Mae
5. Uniform documents for most closings include all but which of the
following:
d. Loan application
SUGGESTED SHORT ESSAY QUESTIONS
© Cengage Learning 7
1. List and briefly discuss the marketing alternatives mortgage lenders
have for loan production.
ANSWER: (1) Retaining production in portfolio – this may be the
best investment a lender can make, depending on the market. All
2. If the yield required in the secondary mortgage market is 10.12
percent on a lender’s package of $10,000,000 originated with a
weighted average yield of 9.9 percent, how would this package be
priced to deliver the required yield?
ANSWER: It would have to be discounted.
3. Describe five risks a lender must manage in its secondary mortgage market
pipeline.
ANSWER:
© Cengage Learning 8
1. Fallout Risk – the loan does not close as originated or committed
2. Delivery Risk – a closed loan cannot be funded by the investor
3. Investor Risk – the investor does not follow through on its commitment
to purchase a loan from a lender
4. Describe the different delivery commitments a lender can employ when
selling loans in the secondary mortgage market.
ANSWER: Mandatory commitments obligate the lender to deliver
(close and fund) a certain loan or loans in an interest rate range by a
5. Describe at least five of the important steps involved in becoming an
approved seller/servicer to a typical secondary market investor.
ANSWER: The approval process includes the following steps:
1. Applicant submitting application for approval
© Cengage Learning 9
4. Reviewing mortgage-lending experience of lender in:
a. Origination
5. Establishing whether applicant is properly licensed in jurisdiction
ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for oral
discussion in class. Suggested answers/points to emphasize to the
questions are found below.
1. Describe the business strategy of selling mortgage loans. Why is it the most
popular residential mortgage loan strategy today?
ANSWER: Mortgage bankers always had to sell loans, while other
© Cengage Learning 10
2. What alternatives does a mortgage originator have for the residential
mortgage loans that have been originated?
ANSWER: In today’s sophisticated mortgage market, all classifications of
mortgage lenders have the same strategic alternatives for placement of their
loan production. These alternatives include:
1. Retaining some or all loan production in own portfolio
3. Discuss the advantages and disadvantages to the different stages of the
application where lender will allow applicants to lock-in the interest
rate/points: at application; at loan commitment; at scheduling of a closing?
ANSWER: Locking in rates at application is most appealing to the
© Cengage Learning 11
applicant, but the lender will have to obtain a longer delivery period and
4. What steps must a mortgage lender go through before it can sell loans into
the secondary market?
ANSWER: Before any mortgage lender can sell mortgage loans to any
investor it must become an approved lender with that investor. Fannie Mae
5. What are loan commitments and why are they so important in secondary
mortgage market transactions?
ANSWER: Commitments are critical to successful mortgage lending for
those lenders that sell mortgages. A commitment is an undertaking by either
© Cengage Learning 12
© Cengage Learning 13
6. Explain the pricing options of par, premium, and discount that a lender has
when selling loans into the secondary mortgage market.
ANSWER: The secondary mortgage market players (meaning in this
context, Fannie Mae and Freddie Mac) through posted yields, establish the