Mortgage Lending and Securitization Legal Issues
Securitization can be described as the pooling of different types of debts, like home mortgages, commercial mortgages, car loans, and credit car debts, and selling them to independent investors. The debts are packaged as securities and sold as bonds and collateralized debt obligations (CDOs). The debtors of each individual obligation pay back their debts to the investors who purchase the pooled securities over time. A security comprised of mortgages is called a mortgage-backed security, while other securities are referred to as asset-backed securities. Current estimates suggest that there is an outstanding $10.24 trillion worth of securitized assets in the United States and $2.25 trillion in Europe.
Most individuals have experience dealing with real estate mortgages. When an individual wishes to purchase a home, he or she may not have enough cash on hand to pay the purchase price in full. In a mortgage, a bank provides a loan to the buyer, and the buyer agrees to use the home as a security for the loan. In the event the buyer is unable to repay his or her mortgage, the bank can take possession of the home and sell it in order to pay off the balance. This is known as foreclosure or repossession.
In many cases, an individual or business will take out multiple mortgages against the same piece of property. Typically, the lender that first provided financing against the security will have priority in the event the debtor is unable to repay the loan. Creditors that provided financing based on the security after the initial mortgage was made are usually called secondary or tertiary creditors. The rules regarding how creditors must go about establishing their rights to repayment on a secured loan vary depending on the state. For example, some localities require a lender to record the mortgage in order to receive first-party rights or face losing its place in line to a secondary lender who records its loan first. Other jurisdictions allow lenders to record their loans at any time and provide priority based on the date the loan was made.
The terms of a mortgage can vary depending on the security, the amount of money sought, and the lifetime of the loan. Common variables in a mortgage arrangement include the interest rate, the method of payment, the size of the loan, and the maturity of the loan. In most cases, mortgages are long-term loans requiring monthly payments over a set period of time. Most homeowners provide a down payment for their home. The repayment of the loan is then calculated based on the amount remaining to be paid, the frequency that payments must be made, and the lifetime of the loan.
A common type of mortgage loan is an interest loan. In an interest mortgage, the interest that is charged on the amount loaned is either fixed or variable over the lifetime of the loan. There are also some banks that offer mortgage contracts featuring a combination of fixed and variable interest rates. Most mortgages are subject to a set time limit. In some cases, the loan contract will provide restrictions against early repayment of the loan, or restrict total repayment of the loan before the date the loan is set to expire. Other loans permit early repayment but impose a financial penalty on the borrower for paying the loan off before the time period ends.
