Sources of Financing
Chapter 13

Financing
•	Primary Market – 
◦	Where lenders ____________________ loans
◦	Where  ____________________  obtain loans 
•	Secondary Market
◦	Where lenders  ____________________ existing loans
◦	Where investors ____________________ existing loans, or pools of loans
Primary Loan Sources
Unregulated Lenders
•	Commercial Finance Companies
•	Investment Bankers
•	Life Insurance Companies
•	Finance Companies
•	Municipal Bonds
Regulated Lenders
•	Commercial Banks
•	Savings and loan Associations
•	Savings Banks
•	Mortgage Bankers

Primary Loan Sources
•	A. Savings and loan Associations
•	B. Commercial Banks
•	C. Life Insurance Companies
•	D. Mortgage Companies
•	E. Mortgage Brokers

(MATCH from the above list)
•	____________________ Bring lenders/borrowers together
•	____________________ Often makes loans for single family homes
•	____________________ Commercial buildings rarely residential
•	____________________ Construction loans (interim financing)
•	____________________ Most of the home loans

Broker vs. Banker
•	Mortgage Broker
◦	Brings borrower and lender together
◦	____________________ of their own
◦	Finds mortgage company, bank or investor to ____________________  loan
•	Mortgage Banker
◦	Makes ____________________ to borrower
◦	Sells loan on secondary market or investor
◦	May or may not _______________________________________ _
•	Collect monthly payments
•	Pay taxes and insurance
•	Deal with delinquencies

Secondary Loan Sources
•	Federal National Mortgage Association FNMA
•	    “Fannie Mae
•	Government National Mortgage Association GNMA
    “Ginnie Mae”
•	Federal Home Loan Mortgage Corporation FHLMC
    “Freddie Mac”
•	Federal Agricultural Mortgage Corporation
•	Farmer Mac

Secondary Loan Sources
Fannie Mae
•	Fannie Mae originally government run, now private, shareholder owned, back to government run.
•	____________________, FHA, VA and conventional loans
•	First and second mortgages
•	Single family, duplex through 
four-plex housing
•	Raises money through sale of stock, bonds and notes
•	Pools loans with long-term return
•	NO CHATTEL mortgages
•	fanniemae.com

Secondary Loan Sources (cont)
Ginnie Mae
•	Spun off of FNMA in 1968, Federal agency within HUD (Housing and Urban Development)
•	Basic role is to ____________________  capital to primary lenders
•	Guarantees timely repayment of security pools.  A “government guarantee” backed by full faith and credit in the U.S. government.
•	Underwrites primarily HUD/FHA and VA loans
•	ginniemae.gov

Secondary Loan Sources (cont)
Freddie Mac
•	Created in 1970
•	Originally formed to provide secondary market for Federal Home Loan Bank Board
•	Deals primarily in conventional loans
•	Issues securities against mortgage pools
•	Sells pools on Wall Street
•	Guarantees that interest and principal will be paid in full and on time
•	freddiemac.com

Secondary Loan Sources
Other Participants
•	Commercial Mortgage Backed Securities (CMBS)
•	Conduits to sell pools of commercial mortgages
◦	Subsidiaries of commercial banks
◦	MGIC Investment Corp.
◦	Residential Funding Corporation

Usury
•	State legislation that imposes an interest rate ceiling on loans.
•	U.S. Congress passed legislation that exempts from state usury limits most first lien home loans made by institutional lenders.

Other Financing Conditions
•	Due-on-Sale – call clause. Included to allow the lender to increase the rate of return when the property sells.
•	Prepayment - penalty for the right to repay a loan early. When interest rates drop, borrowers will be tempted to re-finance unless penalized.

Underwriting Systems
•	In-house: Committee approves loan
•	Traditional: investors set rates and loan/collateral requirements, published and circulated weekly
•	Automated: computer handles publication of rates, computer analyzed, approval (sent to private mortgage insurer) or “refer” or “caution” 

Key Terms
Alienation clause
Automated underwriting system
Computerized loan origination
Disintermediation
Fannie Mac
Freddie Mac
Mortgage broker
Mortgage company
Participation certificates
Primary market
Secondary market
Usury