978-0324784640 Chapter 18 Solution Manual

CHAPTER 18

STRATEGIES FOR GENERATING

RESIDENTIAL LOANS

OBJECTIVES OF CHAPTER

Upon successful completion of this chapter, students should be able to;

 Identify those attributes which attract customers to mortgage

lenders

 Identify the requirements for successful mortgage lending

 Describe the importance of the origination function and what it

consists of

 Explain the reasons for some of the recent developments in

serving the public in the requests for mortgage loans

 Distinguish between the retail and wholesale methods of loan

origination

 Explain the advantages and disadvantages of the retail and

wholesale methods

 Understand some of the benefits and drawbacks to the different

mortgage origination channels

I. Introduction

II. The First Step-Focus on the Applicant

A. Measuring Customer Satisfaction

B. What Attracts Consumers?

C. The Most Effective “Tool” in Attracting

Mortgage Applications

D. Convenience for the Applicant

E. Consumer Stress in Applying for a Mortgage

Loan

F. Application Information Booklet

G. Tracking the Progress of the Application

H. How Loyal Are Mortgage Borrowers?

III. Requirements for a Successful Mortgage Lending

Operation

A. Trained Personnel

B. Program Offerings

C. Competitive pricing

D. Targeted Marketing

E. Loan Demand

F. Origination Channels

IV. Retail Loan Origination

A. Purchase vs. Refinance Transactions

B. Purchases—Importance of the Real Estate Agent

C. Refinances—Rates, Reputation, and

Convenience

D. Commission Loan Agents

E. Functions Performed by Retail Lenders

F. Origination Income

G. FASB Statement No. 91

H. Points and Interest Rate Trade-offs

I. Retail Branch Offices

J. Expected Mortgage Loan Volume

V. Wholesale Loan Origination

A. Advantages and Disadvantages of Wholesale

Lending

B. Mortgage Brokers and Loan Correspondents

C. Functions Performed

D. Table Funding

E. Yield Spread Premiums

F. What Motivates the Third-party Originator?

G. Fees and Premiums

H. Affinity Groups

I. Quality Control

VI. Internet Lending

Teaching Tips

Discuss how a new mortgage loan officer can best

prepare and educate themselves to be an effective

loan officer.

Which best practice listed in the J.D. Power survey

do you think is most important and why?

What aspect of the mortgage origination process do

you think is the most stressful to the consumer and

why? What would you do to alleviate this if you

were the loan officer?

What loan programs do you think are most

important to your market area at this time?

In what ways has wholesale lending helped the

mortgage industry?

How do you think the use of the Internet for loan

origination helps or hinders the industry?

What do you think the future holds for this

industry?

We covered so many aspects of the mortgage world.

What role in the industry could you best see

yourself?

SUGGESTED TRUE/FALSE QUIZ

1. In today’s market place, all a lender has to do is advertise that it

is offering mortgages and it will get all of the business it can

handle.

2. The largest originator of residential mortgages over the past

couple of years was thrifts

3. The realtor is considered among the most important factors in a

consumer’s selection of a mortgage lender for a purchase

transaction.

4. The retail method of loan origination is the traditional method

familiar to most consumers

5. A commissioned mortgage loan agent typically earns a 50 basis

points commission.

6. Loan demand is driven more by demographic issues than

interest rates.

7. The average percentage of yearly originations that are

refinancing is about 50 percent.

8. According to a J.D. Power survey, providing the applicant

proactive updates is a best practice by successful mortgage

originators.

9. Table funding occurs when a broker closes a mortgage loan

with funds belonging to an acquiring lender.

10. Yield spread premiums are illegal under RESPA.

SUGGESTED MULTIPLE CHOICE QUESTIONS More than one

answer may be correct, select all that are correct. (Correct answers are

italicized.)

1. For any residential mortgage lender to be successful, certain elements

must be in place including:

a. Loan demand

2. The highest loan origination volume in U.S. history is:

a. $1 trillion

3. Variable-rate first mortgage loan (ARMs) originations vary depending

on interest rates. The highest percent of total year originations for

ARMs was:

a. 20 percent

4. According to the Mortgage Bankers Association, all of the below

factors are important in attracting customers except:

a. Low interest rates

5. In today’s evolving primary mortgage market, the four strategies or

methods of origination include:

d. Real estate agent origination

SUGGESTED SHORT ESSAY QUESTIONS

1. Discuss the impact FASB #91 has on the pricing of residential

mortgage loans.

ANSWER: The students should understand what FASB #91 requires

1. An increase in secondary mortgage market activity

2. An increase in options available to borrowers that

2. Identify the various methods of loan origination. Discuss the pros and cons

of each method.

ANSWER: In today’s rapidly evolving primary mortgage market, four

strategies or methods of loan origination are used:

 Retail loan origination (Pro: traditional method still used by

 Wholesale loan origination (Pro: lower cost of production,

 Combination of retail and wholesale loan origination

 Internet or online is rapidly becoming a fourth strategy – at the

3. The Mortgage Bankers Association of America estimates that each

residential mortgage loan mortgage bankers originate has a cost of

about $1,700 per loan. Why is the cost so high? How can a mortgage

lender overcome this initial loss?

ANSWER: These figures apply specifically to mortgage bankers but

are also probably applicable to all mortgage lenders that pay loan

Lenders who face this situation are able to continue in business

because they are often able to make a slight profit on marketing the

loans when the loans are sold in the secondary mortgage market.

4. What features or attributes attract consumers to a particular mortgage lender?

ANSWER: The three “attributes” considered the most important by

mortgage lenders in this survey in attracting consumers who are new to an

area were: (1.) Referral by real estate sales agents, (2.) Low interest rates on

5. Using the information from the Demographic Forces in Housing section of

Chapter 3- Mortgage Lending and the Economy and information in this chapter,

develop a targeted marketing strategy for a group of your choice. Include loan

programs, marketing campaigns, and advertising points (features/benefits) which

target your group.

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. Discuss the five keys for a successful lending operation.

ANSWER: For any residential mortgage lender to have a successful first

mortgage program five elements must be in place. These five elements are:

 Loan demand

 Product offerings

2. List and discuss the advantages and disadvantages of retail versus

wholesale mortgage origination.

ANSWER: The students should list most of the following:

wholesale lending is generally a lower cost way of loan origination;

allows the lender to move quickly in and out of markets that are hot;

3. What functions are normally performed by a retail loan originator?

ANSWER: The retail mortgage lender directly performs the following

origination functions:

 Completes application with borrower

 Verifies all employment, income, and deposits

4. Many mortgage lenders compensate their originators by commission – what

is the typical commission for a loan officer – how is it calculated?

ANSWER: The commission normally given to a retail mortgage loan

originator is 1/2 of 1 percent of the loan amount (or, as normally stated, 50

basis points). This commission is payable of course, only if the loan can be

5. How do mortgage originators offset their expenses in producing a residential

mortgage loan? What are the expenses in originating a residential loan?

ANSWER: Most retail mortgage lenders charge an application fee or

origination points or both to offset some or all of the expenses incurred in

performing the various origination functions. If the lender is charging an

application fee, that fee is usually large enough to pay for the credit report,

Estimates for the cost of processing a residential mortgage loan (not