Over time different types of mortgage financing models have been identified in the financial market. The common types includes:
1. Bundled mortgage finance system.
In this system, a single sector or a player performs all the roles in the mortgage process acting as the loan originator, tender service providers and the risk manager amongst others. As the sole investor, the portfolio lender has deposit as its major cost of funding. He creates a close and long term relationship with his client which gives him the opportuinity to enter transactions with other financial products. This model of mortgage financing is however characterized by liquidity and interest rate as borrowers often expect long term funding. But depository funds are traditionally short-term. The single entity under this system makes effectiveness and efficiency very difficult to achieve.
2. Unbundled mortgage finance system.
Here all the players in the system play different roles in the execution of a mortgage process. The borrower goes through a mortgage banker to source funds from investors, other depository institutions and the secondary markets. The key benefits of this system is the assurance of specialization. Every loan goes through the necessary due diligence of underwriting, marketing, packaging and risk management. The procedure minimizes cost and promotes market discipline.
3. Depository mortgage finance system.
The depository based mortgage financing is where deposit money bank enters into mortgage lending. This system becomes popular in Nigeria after the recapitalization in 2005. Banks with excess liquidity began to consider setting up mortgage desks in their branches, others went further to diversify by adding mortgage banking to their investment portfolios. The major challenge finance has to do with mismatch of tenure and interest offered whereas depository institution(money market) offers long term loans.
4. Secondary mortgage finance system.
This is believed to be the system that best suits the long term liquidity needed of the housing markets. This market is regarded as an organized system that involves loan origination, warehousing, securitization and sales to investors. Funds realized from sale of mortgage thereby depending the system and increasing housing stock in the economy. The secondary market begins with the borrower who takes decision to access a mortgage loan and approaches a mortgage institution(primary market) to express its intention. The mortgage firm determines the loan affordability based in the borrower diaclosure and standardized underwriting criteria.
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