Chapter 12 - Real Estate Financing

Question 1

The Federal Reserve is responsible for…

Answer 1

our monetary policy. It seeks to adjust the availability and cost of money so there is steady economic growth with minimum unemployment and inflation in check.

Question 2

The Federal Reserve has three basic controls:

Answer 2

Discount Rate
Reserve Requirements
Open Market Transaction

Question 3

Discount Rate (federal reserve basic control)

Answer 3

By raising and lowering the discount rate charged to member banks to borrow funds, the Federal Reserve affects long-term rates charged by lenders. Lower rates fuel the economy, but higher rates are a contractionary economic policy.

Question 4

Reserve Requirements (federal reserve basic control)

Answer 4

By raising and lowering reserve requirements of banks, the amount of available funds to loan is regulated. Less funds for lending means higher interest based on supply and demand factors.

Question 5

Open Market Transactions (federal reserve basic control)

Answer 5

The Federal Reserve can buy government securities on the open market to put money into the economy or sell government securities to take money from the economy to slow growth.

Question 6

Lower interest rates mean…

Answer 6

lower payments - which in turn means that more people become qualified for loans. With more buyers, we tend to have a seller’s market and see real estate prices increase.

Question 7

When interest rates increase…

Answer 7

real estate sales tend to decrease.

Question 8

Loan Points…

Answer 8

are percentages of the loan. They are charged to the borrower at the time the loan is made. One point would be one percent of the loan amount.

Question 9

What are Discount Points?

Answer 9

Discount points are monies paid at the time of loan origination that allow the borrower a rate of interest less than originally offered by the lender. Therefore, discount points could be considered prepaid interest.

Question 10

As a rule of thumb, a lender considers eight points equivalent to

Answer 10

One percent difference in a fixed rate loan. So a lender would want two points on a 6¼ percent loan if the lender wanted a 6½ percent yield.

Question 11

What are Origination Points?

Answer 11

Origination points are fees to cover administrative loan costs and lender compensation. As an example, a mortgage broker may want one point to make the loan even though the lender intends to sell the loan at face amount to another lender.

Question 12

What is primary financing?

Answer 12

Primary financing refers to the first loan recorded against the property. Because interest rates are related to risk, primary financing generally has lower interest rates than other loans in which the security interest is secondary (i.e., second trust deeds).

Question 13

What is an example of a junior trust deed?

Answer 13

Any junior trust deed is secondary financing. Holders of a second trust deed bear a greater risk than holders of a first trust deed; therefore, second trust deeds customarily bear a higher rate of interest.

Question 14

The secondary mortgage market refers to

Answer 14

the resale of existing mortgages and trust deeds.

Question 15

What 4 agencies are responsible for creating and establishing a viable secondary mortgage market?

Answer 15

Fannie Mae (FNMA) 
Ginnie Mae (GNMA) 
Freddie Mac (FHLMC)
Farmer Mac

Question 16

Fannie Mae

Answer 16

was established in 1938 to stimulate the secondary mortgage market by buying FHA-insured and VA-guaranteed mortgages made by private lenders. In 1968, Fannie Mae evolved into a private, profit-oriented corporation that markets its own securities and handles a variety of real estate loans. These loans are purchased (sometimes at a discount) and can be resold to other lenders or investors.

Question 17

Freddie Mac

Answer 17

was founded with money provided by the 12 Federal Home Loan Banks when new mortgage loans could not be made because money was flowing out of the savings and loan associations (S&Ls). Freddie Mac created needed funds by floating its own securities backed by its pool of mortgages and guaranteed by Ginnie Mae.

Question 18

Ginnie Mae

Answer 18

is presently a wholly government-owned agency, but privatization is being considered. Higher-risk-but important-programs, such as urban renewal, low-income housing, and other special-purpose government-backed programs, are financed through this agency. Ginnie Mae participates in the secondary mortgage market through its mortgage-backed securities programs

Question 19

Farmer Mac

Answer 19

is a government-chartered, but now private, corporation that provides a secondary mortgage market for farm property and rural housing.

Question 20

Conforming Loans

Answer 20

Are conventional loans that meet the underwriting standards for purchase by Fannie Mae or Freddie Mac.

Question 21

Which loans are written for 15-year or 30-year terms and are not assumable? They have strict guidelines regarding down payments and maximum amounts.

Answer 21

Conforming Loans

Question 22

Name 3 Institutional lenders

Answer 22

Commercial Banks
Savings Associations
Life Insurance Companies

Question 23

Commercial Banks

Answer 23

are familiarly known as the “department stores” of financial institutions because of the variety of operations in which they engage. A principal activity of commercial banks is lending money.

Question 24

Savings Associations

Answer 24

formerly accounted for more home loans than any other source. After deregulation in the 1980s, they branched into other higher-yielding but higher-risk loans, which led to a great many S&L failures. Like banks, savings associations are state or federally chartered.

Question 25

Name some Non-Institutional lenders

Answer 25

Private Individuals
Mortgage Companies (mortgage bankers)
Real Estate Trusts

Question 26

Mortgage bankers can be licensed in California by either

Answer 26

the Department of Real Estate or the Department of Corporations.

Question 27

How do mortgage bankers make loans?

Answer 27

Mortgage bankers make loans using a line of credit from another lending institution and usually resell the loans on the secondary mortgage market. This resale of existing loans allows the mortgage banker to free up capital on their line of credit in order to make new loans.

Question 28

What is a mortgage loan broker?

Answer 28

A mortgage loan broker is a person who acts for compensation in negotiating a new loan and is required to be licensed as a real estate broker or salesperson. No separate license is required. Mortgage brokers are strictly middlemen who bring lenders and borrowers together.

Question 29

True or False:

Real estate brokers who negotiate mortgage loans under the Mortgage Loan Brokerage Law are limited in the amount that they may charge as a commission for arranging the loan and for costs and expenses of making the loan

Answer 29

True

Question 30

Maximum Commissions for Mortgage Loan Brokers are:

Answer 30

First trust deeds (less than $30,000)-5 percent of the loan if less than three years; 10 percent if three years or more

Second trust deeds (less than $20,000)-5 percent of the loan if less than two years; 10 percent if at least two years but less than three years; 15 percent if three years or more

Question 31

Mortgage bankers are regulated primarily by

Answer 31

State laws. Mortgage bankers are regulated by two state agencies, the Department of Real Estate and the Department of Corporations, depending on which license the mortgage banker is operating under.

Question 32

What is a hard money loan?

Answer 32

a cash loan rather than an extension such as seller financing.

Question 33

Why was the real estate investment trust (REIT) created?

Answer 33

was created in 1960 to encourage small investors to pool their resources with others to raise venture capital for real estate transactions. To qualify as a REIT, the trust must have at least 100 investors, and 90% of the trust’s income must be distributed annually to its investors.

Question 34

Anyone who accepts compensation for taking a loan application offers or negotiates terms of a 1-4 residential-unit mortgage loan or whose compensation by a mortgage originator must have …

Answer 34

an MLO endorsement on their license. The endorsement requires education, testing, and reporting.

Question 35

What is a Conventional loan?

Answer 35

any loan that does not involve government participation. The advantages of conventional over government-backed loans are that conventional loans involve less red tape and shorter processing time. Government loans do not have equivalent flexibility.

Question 36

What are the two types of FHA loans available?

Answer 36

Title I—loans for modernization, repairs, or alterations on existing homes
Title II—loans for purchase or construction of residential structures

(Title II accounts for most loans for 1-4-unit residences. FHA loans provide high LTVs based on appraisal)

Question 37

Does the VA (Department of Veteran affairs) make loans?

Answer 37

The VA does not make loans, but it guarantees a portion of the loan.

Question 38

VA loans can be used to:

Answer 38

buy or build an owner-occupied home;
alter, repair, or improve real estate;
purchase a mobile home; and
refinance existing mortgage loans for dwellings owned and occupied by veterans.

Question 39

To qualify for a VA-guaranteed loan, an individual must have had

Answer 39

181 days of active service

Question 40

Open End Trust Deed vs. Blanket Trust Deed

Answer 40

An open-end trust deed allows the borrower to receive additional loan money up to an agreed amount, using the same trust deed or mortgage as security. (It is like having a credit card with a set limit.)

With a blanket trust deed, the borrower uses more than one parcel of property as security.

Question 41

What is a wrap around trust deed?

Answer 41

A wraparound trust deed also is called an all-inclusive trust deed. There are times when it is almost impossible for buyers to refinance an existing loan on investment real estate to raise additional capital. With a wraparound mortgage the existing loan is not disturbed. The seller continues the payments on the existing mortgage or trust deed while giving the borrower a new, increased loan, usually at a higher interest rate.

Question 42

Why do lenders make fixed-rate long-term amortized loans?

Answer 42

Lenders will make fixed-rate long-term amortized loans because they must to be competitive, but they generally prefer adjustable-rate or shorter-term loans. The reason is that they were hurt in the past by long-term fixed-rate loans.