Chapter 11 Flashcards
Sources of Capital 1930 thru the 1960s
Lending done primarily at local level.
Decisions made by board of directors or loan committee
No formal appraising or underwriting
Sources of mortgage
State or federally chartered savings banks
Savings and loan institutions - mutual or stockholder owned.
Commercial banks
Credit unions
Most Saving and loan institutions were chartered primarily to provide residential mortgages for the local areas. Their purpose was to receive savings loan money at interest and distribute dividends to depositors.
Commercials banks are privately owned institutions that were obviously oriented towards business loans but dabbled in the residential loans. Their interests were usually short term buy they supplied loans for construction and development.
Credit unions primarily loans to their members.
Money to fund mortgages came from:
+ Depositors
+ Sale of stock or shares of ownership in the bank or thrift
+ Repayment of existing mortgages
+ Borrowing of funds from the Fed
Lenders were regulated and had limits on the number of branches and had reserve requirements.
If they had a deposit reserve requirement of 10% and were a $10M bank; one they lent out $9M, they were out of the lending biz. They had to wait to replenish the money supply as money slowly trickled in from deposits and repayment of existing loans.
Money could be borrowed from the Fed, if rates were favorable.
Secondary Mortgage Market
A market created by government and private agencies for the purchase and sale of existing mortgages, which provides greater liquidity for mortgages. Fannie Mae, Freddie Mac and Ginnie Mae are the principal operators in the secondary mortgage market.
The Federal National Mortgage Association (FNMA) was created in 1938 to purchase FHA insured loans.
Once loans sold to FNMA they could reinvest the funds in new mortgages.
In 1948 FNMA began purchasing VA loans and in 1970 it started purchasing conventional mortgages.
In 1968, FNMA was split into two organizations:
+ Fannie Mae; a federally chartered corp owned by private shareholders, and,
+ Government National Mortgage Association (Ginnie Mae), a government agency under the oversight of the Dept. of Housing and Urban Development (HUD)
Fannie Mae purchases single family and multi family FHA, VA, and conventional mortgages.
The mortgages purchased from originators may be held in portfolio or may be securitized and sold to investors as mortgage backed securities (MBS).
Ginnie Mae provides a secondary market for FHA & VA loans.
Ginnie Mae also services a portfolio of mortgages owned by the federal government.
Ginnie Mae also purchases mortgage loans, packages them in securities and sells them to investors. To provide a guarantee on these securities, Ginnie Mae is backed by the full faith and credit of the federal government. If the borrowers fail to perform on a loan the principal and interest will be paid by Ginnie Mae.
in 1970, Congress created the Federal Home Loan Mortgage Corp (Freddie Mac) to provide a secondary market for conventional mortgages, primarily for thrifts. Their initial funding came from Federal Home Loan Bank, the central bank for thrifts.
Historically, they have held little in portfolio; most of the time they purchase mortgages, package them and sell them to investors.
Secondary Mortgage Market II
Tremendous growth over last 30 years.
Annual sales to Fannie Mae, Freddie Mac and Ginnie Mae rose from $69B in 1980 to over $700B by 2000.
Fannie Mae and Freddie Mac were private shareholder owned corps, but were known as “government-sponsored enterprises” or GSEs.
Early 2000s accounting problems, then the economic recession and the subprime mortgage meltdown in late 2000s.
Taken into government conservatorship in 2008. Stock considered worthless and de-listed from NYSE.
Today they operate under the watchful eye of their government overseer, the Federal Housing Finance Agency (FHFA).
They still purchase a majority of he mortgage loans originated in the US.
Future is uncertain.
Mortgage Assumption
Only FHA and VA loans are assumable without the permission of the originating lender.
If permission is given, it will usually at current market rate.
Other fixed-rate loans carry “due-on-sale” clauses requiring that a mortgage be repaid in full if the property is sold.
Assumption are not as common now.
If an assumption is possible, it may make a big difference in the total cost to the buyer. The appraiser will need to determine whether or not the sale should be used as a comparable or if an adjustment would be needed due to favorable financing terms.
Land Contract
A contract in which a purchaser of real estate agrees to pay a small portion of the purchase price when the contract is signed and additional sums, at intervals and in amounts specified in the contract, until the total purchase price is repaid and the seller delivers the deed.
Used primarily to protect the seller’s interest in the unpaid balance because foreclosure can be exercised more quickly then it could be under a mortgage.
Also called contract for deed; installment (sale) contract.
Used when:
+ interest rates are high
+ property is unique and difficult to finance
+ seller not in immediate need of money
This type of sale may require the seller to sue to take custody of the property if a buyer defaults.
Deed of Trust
When a seller transfers the property deed to a trustee that would later be transferred to the buyer when they meet the terms of the loan.
Wrap-Around Contract
A variation of seller financing, and offers buyers an alternative to a mortgage from a financial institution.
The seller keeps the existing mortgage on behalf of the buyer, plus lends additional money to cover the price paid above the balance of the underlying loan.
The appraiser must evaluate the actual terms of the financing to determine if an adjustment for financing terms needs to be made.
Local
Up until the 1970s mortgage lending was typically done at the _____ level.
Fannie Mae, Freddie Mac and Ginnie Mae
The principal operators in the secondary mortgage market include?
VA and FHA loans
What type of loans are assumable without permission of the originating lender?
Mortgage
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions.
Homes are good security/collateral as they are secured in one place, stay in one location, typically appreciate in value and have long lives.
Conventional mortgage
Mortgages that are neither insured nor guaranteed by an agency of the government, although they may be privately insured.
Many high loan-to-value conventional loans do have private mortgage insurance (PMI) covering the part of the loan that exceeds 80% LTV.
Guaranteed Loans
Mortgages in which a party other than the borrower assumes payment in the event of default.
Example - Veterans Admin.
Insured Loans
Mortgages in which a party other than the borrower assures payment on default by the mortgagee in return for the payment of a premium.
Example - FHA mortgage charges an up-front mortgage insurance premium (UFMIP) based on a percentage of the loan amount, plus a monthly mortgage insurance premium (MIP). The FHA mortgage insurance program is funded entirely by mortgage insurance premiums paid by borrowers; no taxpayer money in involved.
In the event of a default HUD reimburses the originator.
First Mortgage
A mortgage that has priority over all other mortgage liens on a property.
Junior Lien
A lien placed on a property after a previous lien and has been made and recorded; a lien made subordinate to another by agreement.
e.g., second and third mortgages; also called second lien or third lien.
Mortgage priorities
Are important consideration.
Second and thirds liens carry a higher risk and higher interest rates.
They don’t get paid off until the first one is paid in full.
Amortization
The process of retiring debt or recovering a capital investment, typically through scheduled, systematic repayment of the principal; a program of periodic contributions to a sinking fund or debt retirement fund.
Latin = amort means to kill
Fixed rate loan
A mortgage at a fixed interest rate, with equal payments for each period over the length of the loan.
First kind developed and still the most common.
Interest paid first then the principle.
There is less interest due after each payment and more money going towards principle as the loan ages.
Balloon Mortgage
A mortgage that is not fully amortized at maturity, and thus requires a lump sum, or balloon, payment of the outstanding balance.
Creative Financing
Grew in popularity in the 1970s and 1980s. During periods of high interest rates.
Graduated Payment Mortgage
A debt secured by real estate in which mortgage payments are matched to projected increases in the borrower’s income. The periodic payments start out low and gradually increase.
Adjustable Rate Mortgages (ARMs)
A debt secured by real estate with an interest rate that may move up or down following a specified schedule or in accordance with the movements of a standard or index to which the interest rate is tied.
Started in the 1980s
Start as a lower initial rate than fixed. However can go up as cost of living rises.
May have overall cap and may have a yearly cap.
Reverse Annuity Mortgages (Reverse Mortgages)
Type of mortgage where by senior homeowners systematically borrow against the equity in their home, receiving regular (usually monthly) payments from the lender. Borrowed funds and accrued interest come due when the last surviving borrower dies or permanently vacates the premises. Under current HUD guidelines all of the mortgagors must be at least 62 years of age. When the loan is due the estate usually has approximately 12 months to repay the balance of the reverse mortgage or sell the home to pay off the loan amount. All remaining equity is paid to the vacating homeowner or the estate. An FHA insurance program ensures that the vacating homeowner or estate is not liable if the loan balance exceeds the value of the home at the time the loan is due. Also called a reverse-annuity mortgage or home equity conversion mortgage.
Also called Home Equity Conversion Mortgage (HECMs)
Discount Points
A percentage of the loan amount that a lender charges a borrower making a loan; may represent a payment for services rendered in issuing a loan or additional interest to the lender payable in advance; also called loan fee.
A point is 1%
Conventional mortgage
A mortgage loan that is not government-insured or guaranteed is considered a?
Mortgage
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions is the definition of
The beginning of the loan period
With a traditional amortized loan, at what point does most of the payment go toward interest?
True
True or False? FHA charges a mortgage insurance premium to borrowers.
Another name for a land contract is
Installment Sale Contract
First Mortgage
A mortgage that has priority over all other mortgage liens on a property is a?
$4,568.75
$215,000 x 15% = $32,250 Down Payment
$215,000 - 32,250 = $182,750 Amount financed
$182,750 x 2.5% = $4,568.75 Amount paid for points
A purchaser bought a property for $215,000, put 15% down and borrowed the rest @ 6.75% interest for 25 years. The lender charged 2.5 points at closing. How much was paid for points?
The FHA mortgage insurance program is funded by
Mortgage insurance premiums paid by borrowers
Balloon
A mortgage that is not fully amortized at maturity and requires a lump sum payment at the end is call a _____ mortgage.
Conventional
Mortgages that are neither insured nor guaranteed by an agency of the government, although they may be privately insured are called ______ mortgages.
Land Contract
Another name for an installment sale contract is
Which of these is NOT a primary participant in the secondary mortgage market?
FHA
Fannie Mae
Freddie Mac
Ginnie Mae
FHA
A pledge of a described property interest as collateral or security for the repayment of a loan under certain terms and conditions is the definition of a?
Mortgage
FHA and VA
_______ loans are assumable without the permission of the lender.
Elements of Value
For any economic good to have value is must possess four elements:
Supply Factors
1. Desire 2. Utility
Demand Factors
3. Scarcity 4. Effective purchasing power
Desire
A purchaser’s which for an item to satisfy human needs (e.g. shelter, clothing, food, companionship) or individual wants beyond essential life-support needs.
Utility
In economics, the ability of a product to satisfy a human want, need or desire.
It has to be good for something
It has to have purpose
You have to be able to use it
Functional Utility
The ability of a property or building to useful and to perform the function for which it is intended according to current market tastes and standards; the efficiency of a building’s use in terms of architectural style, design and layout, traffic patterns and the size and type of rooms.
Scarcity
The present or anticipated undersupply of an item relative to the demand for it. Conditions of scarcity contribute to value.
Scarcity usually triggers demand.
The opposite of scarcity is oversupply
Effective Purchasing Power
The ability of an individual or group to participate in a market, i.e., to acquire goods and services with cash or its equivalent.
Influences on Value
Value is created and sustained by external market forces.
Value is not created by appraisers, buyers or sellers.
The four main categories of External market forces:
+ Governmental
+ Economic
+ Social
+ Environmental
Governmental Forces
Planning Zoning Building Codes Environmental restrictions Taxes Utilities Transportation Education Cultural Parks and recreation Police Fire protection Public safety
External Market Forces
Who or what creates value?
False
True or False? All major cities in the US have zoning ordinances.
True
True or False? In addition to federal environmental authorities, each state has its own agency that controls environmental issues.
Governmental
Taxes would be a ________ force affecting the property values.
Economic Forces
Tend to be the most powerful and exert the most influence on value of the four categories.
National economy CPI Interest rates availability of financing Wage rates Types of employment Unemployment rates Cost of construction Rental vacancies Expense levels
Cost of construction
The total cost of construction, residential or commercial, is really an amalgam of three factors:
Land costs
Materials Costs
Labor costs
Expense Levels
Utilities Taxes Insurance Maintenance Supplies Employees
Social Influences
Population trends Population migrations Ages Family formations Lifestyle changes
Reasons for smaller households
Young people waiting longer to get married
More adults never marrying
More divorces
More single mothers
More older women outliving their husbands
More unmarried men and women living together
More same sex partners living together
Declining birth rate
Lifestyle Changes - Community Living
Condos Cooperatives Planned Unit Development (PUD) Retirement villages Gated communities Resort complexes
Benefits Shared maintenance Common recreation areas Companionable activities Increased security
True
True or False? In the US, the average family size has been decreasing over the last 50 years.
In analyzing a market area, an appraiser finds that most of the residents are middle-aged and some are empty-nesters. This would typically mean?
There is a demand for more expensive homes
The lessened availability of mortgage loans
The mortgage meltdown of the late 2000s resulted in?
False
True or False? Over the last several years in the US, there has been a substantial decrease in the number of people working from home.
The cost of construction is based on three factors. What are they?
Land
Materials
Labor
Environmental Influences
Nearness to…
Shopping, Schools, Employment, Houses of worship, Cultural facilities, Recreational facilities, Educational facilities, Restaurants, Police & Fire protection….
Physical….
Climate, Topography, Soil conditions, Nature of improvements in the area, Density, Natural hazards, Man-made hazards,
Physical
Environmental influences on property values are sometimes called ______ influences.
Additional footings or structural support man be required
What would be a drawback of building a structure on sandy soil?
True
True or False? The presence of man-made hazards may affect property values over a wide geographic area.
Generally, low interest rates encourage ______, while high interest rates encourage ______.
Borrowing, Saving
Governmental forces would include all of the following EXCEPT?
Unemployment rates
Unemployment rates
Total construction costs are a combination of _____ costs.
Land, Materials and labor
All of the following would be social influences EXCEPT?
Ages of Residents
building codes
family formations
population trends
Building codes
Economic forces would include all of the following EXCEPT?
zoning and building codes
interest rates
unemployment rates
cost of construction
zoning and building codes
An example of something that likely has no value in most situations is
Air
Retail space is usually compared on the basis of
Dollars per square foot per year
