Finance
A Florida lender 'securitizes' a pool of mortgages by issuing mortgage-backed securities (MBS). The primary benefit to the lender is:
AEarning additional servicing fees
BReceiving cash proceeds that can be used to originate new loans✓ Correct
CRetaining all interest income from the mortgages
DEliminating all credit risk
Explanation
Securitization allows lenders to sell pools of mortgages to investors as mortgage-backed securities, receiving cash that enables them to originate new loans. This is the foundation of the secondary mortgage market and provides liquidity to mortgage lenders.
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Key Terms to Know
Private Mortgage Insurance (PMI)
Insurance required by lenders on conventional loans with less than 20% down payment, protecting the lender — not the borrower — against default.
Adjustable-Rate Mortgage (ARM)A mortgage with an interest rate that changes periodically based on a financial index, usually after an initial fixed-rate period.
Debt-to-Income Ratio (DTI)A lender's measure of a borrower's monthly debt obligations relative to their gross monthly income, used to evaluate loan eligibility.
Discount PointsPrepaid interest paid to a lender at closing to reduce the mortgage interest rate, with each point equal to 1% of the loan amount.
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