The Residential Mortgage Market
The previous chapter illustrated that a mortgage is a long-term debt instrument that is originated to provide the necessary financing for the borrower to purchase a house. It also pointed out that the purchase of a house is, in general, the most important and the largest transaction for the borrower. For that reason, the underwriting of a mortgage needs to be prudent and careful to ensure that the borrower is financially qualified to borrow the money to purchase the house. This financial qualification points to the ability and willingness of the borrower to carry out the responsibility of paying the monthly payment, or in other words, servicing the mortgage debt. The underwriter also needs to make sure that the house used as collateral to secure the mortgage has a sufficient market value in relation to the size of the mortgage. Once the mortgage is underwritten, there is also a mechanism for the originator to insure against the ultimate default on the mortgage.
This chapter describes the process of originating a residential mortgage, the various types of mortgage originators, the mortgage servicers, and the mortgage insurers. To wrap up the discussion, this chapter presents the history of the 40-year development of the primary residential mortgage market.
The Origination of a Residential Mortgage
The residential mortgage origination process (otherwise called the underwriting process) begins with a prospective homeowner submitting an application ...