Chapter 13 - Sources of Financing Flashcards
Primary Market
Where lenders originate loans and make funds available to borrowers
Savings and Loan Assocations
Primary source of residential real estate loans
Disintermediation
- The result create when lenders are required to pay high rates of interest for deposits while receiving long-term income from low-interest rate mortgage loan
- Results when depositors take money out of their saving accounts and invest directly in government securities, corporate bonds and money market farms
Life insurance companies
- Not federally regulated but they are state regulated
- Source of money is the premiums paid by policy holders
- Long-term investing
-Channel funds into government and corporate bonds and real estate - Do not invest in personal property loans
Secondary Market
A market in which mortgage loans can be sold to investors
- Provides a way for a lender to sell a loan
Participation Loans
- One that requires interest plus a percentage of the profits
- Provides insurance company with more inflation protection than a fixed rate of interest
Mortgage Companies (Mortgage Bankers)
- A firm that makes mortgage loans and then sells them to investors - Will continue to service the loan
Mortgage Broker
One who brings together borrowers and lenders
- Does not lend money
- Mortgage broker’s fee is expressed in points
Municipal Bonds
- A Source of home loans that in turn is financed by the sale of municipal bonds
- Borrowers pay interest free from federal income tax
- Accept lower rate of interest
Basic functions of a Computerized Loan Origination (CLO)
1) Provides information on current mortgage loan terms and loan types available on the market
2) Coveys loan application information electronically
3) Monitors the loan approval process so that practitioners can check on the progress of the loan application at any time
Private Investors
- Commercial banks, Savings & Loans, Pension plans, Trust funds and other investors who are looking for low risk, long term returns on their investments
Investment Pools or Poolers
Looking for more security in their investment
Primary Investors
1) The pure portfolio purchasers who are looking for the initial investments with an attractive return
2) The poolers who are looking for longer-term more stable returns
Federal National Mortgage Association (FNMA) aka Fannie Mae
- Buys mortgage loans from smaller banks or credit unions and guarantees these loans on the mortgage market for low and median-income borrowers
-Standardized the terms of adjustable rate mortgages it will purchase
Mortgage Backed Securities
- Agency guarantee repayment home seller program
- Secondary market for sellers who carry back mortgages
- A plan whereby the FNMA will buy mortgages from home sellers
Federal Home Loan Mortgage Corporation (FHLMC) aka Freddie Mac
- Deal Primarily in conventional mortgages
- Increases the availability of financing for residential mortgages
Participation Certificates (PCs)
- A certificate representing an undivided interest in a Freddie Mac Pool
- Popular investment for Saving & Loan Associations, Pension funds, and other institutional investors looking for high yield investments
- Individuals who can meet the $25,000 minimum can invest
Government National Mortgage Association (GNMA) aka Ginnie Mae
Best known for mortgage back securities (MBS)
—Guarantees timely repayment of privately issued securities backed by pools of these mortgages
- Government guarantee of repayment
- Limited to HUD/FHA, VA and certain other loans
Federal Agricultural Mortgage Corporation (FAMC) aka Farmer Mac
- Separate agency within Farm Credit System
- Purchase loans directly from originators
- Issue it own 100% guarantee securities
Farmer Mac Qualifications
- Home cost no more than $100K
- Located in a rural community with a population less than 25,000
- LTV ratio less than 80%
Commercial Mortgage-Backed Securities (DMBA)
Organizations = Conduits
- Originate commercial and multifamily housing loan
Automated Underwriting System
- Computerized system for loan approval communication between a loan originator and the investor
Desktop Originator/Desktop Underwriter (DO/DU) Government Underwriting Service
Fannie Mae
- Used by broker or practitioner to submit info to lender
DO/DU
Used by lender to submit application directly to FNMA
Real Savings
Individual & business spending less earnings
Fiat Money
- Government created
-Printing press money
Usury
Charging an interest rate that is in excess of the legal rate
Due-on-Sale Clause
-Alienation clause
-Most loans contain this
The place where a real estate borrower makes a loan application, received a loan and makes loan payments describes the
Primary mortgage market
Federal Secure and Fair Enforcement Act (SAFE)
- All states have passed similar acts
- Affects residential mortgage loan originators
Passed in 2008
When savings are removed from thrift institutions in large amounts for investment in Treasury securities
Disintermediation occurs
- Results in a decrease in activity in the real estate market
Savings and loan associations combat the problems of rising interest rates by
Encouraging borrowers to accept adjustable rate loans and enforcing due-on-sale clauses in mortgages
The reasons for the decline in residential loans made by the S&Ls include
- Deregulation of the lending industry
- Proliferation of saving and loan organizations
- New laws which allowed higher risk loans
- The FSLIC was placed under the control of the FDIC to help restore the savings and loan system
If the nations commercial banks are considered as a whole, what is true?
- Total deposits exceed those in nations savings and loan associations
- The bulk of their deposits are in demand accounts
- Thar are active in construction loans
- They are less active in long-term real estate loans
State laws that prohibit lenders from overcharging interest on loans to individuals is known as
Usury laws
Life insurance companies are ideally suited to make long term investments because
Payoffs can be calculated from actuarial tables
What is one type of loan that life insurance companies will not invest premium dollars into
Loans secured by personal property
Generally, life insurance companies are LEAST LIKELY to be interested in originating what type of real estate loan?
Single -family housing loans
One kind of real estate loan calls for the lender to receive interest plus a percentage of any profits form the rental income from a property. What is true about these loans?
- That are designed to protect the lender from inflation
- They are known as participation loans
- They are likely to be utilized by life insurance companies
What do mortgage companies do?
They locate and qualify borrowers and then originate loans and service the loans which they have sold on the secondary market
Who normally does mortgage banking?
Commercial banks, S&Ls and mutual saving banks regularly carry on mortgage banking activities.
Do mortgage brokers service loans?
No.
Municipal bond issues as a source of funds for real estate loans provide
a good source of below market rate funds for low and middle income families
Much of the success of the secondary mortgage market is attributed to
Standardized loan procedures and government and private mortgage loan insurance programs.
- Lenders make higher LTV loans because of insurance programs.
The Federal National Mortgage Association is
(Fannie Mae) A Privately held corporation which is active in buying (primarily) VA and FHA mortgage loans. It is not managed by the federal government.
When Fannie Mae issues a commitment to purchase a specific dollar amount of mortgage loans within a fixed period of time,
It must purchase all loans delivered under the terms of the commitment, but participating lenders are not obligated to sell their loans
Fannie Mae will not purchase
3rd or 4th mortgages
Sidney sold his home to White and agreed to carry back a fixed rate loan on the property. The note and mortgage were prepared by a Fannie Mar approved lender using FNMA qualification procedures. Could this loan be sold to a lender for later resale at FNMA?
Yes, because it meets the criteria for the FNMA Home Seller Program
Under Ginnie Mae’s mortgage backed securities program
Principal and interest are passed through to investors and the pool as a while is guaranteed by Ginnie Mae
The Federal Home Loan and Mortgage Corporation
- Deals primarily in conventional mortgages
- Serves as a secondary market for members of the Federal Home Loan Bank System
- Issues securities on its own mortgage pools.
- Not an agency of the federal government
Participation certificates issued by Freddie Mac can
- Be sold for cash
- May be used as collateral for loans
- Are often held as investments
- Minimum investment is $25,000
A nearby Federal Savings and Loan Association owns a participation certificate issues by Freddie Mac. Should any of the mortgages in the pool represented by the certificate default, the losses are
retained by Freddie Mac
- Freddie Mac guarantees that interest and principal on participation certificates will be paid in full and on time. Any losses from a default are not passed on to investors
Basic problems experienced by investors in mortgage backed securities include unpredictable
Maturity
-Yields are predicable
The entry of private investment sources into the single family residential mortgage market resulted in
losing businesses to Fannie Mae, Freddie Mac & Ginnie Mae.
- The main problem with the real estate mortgage lending market was the private investors who encouraged loans results in predatory practices and value loss
Computerized mortgage networks serve as conduits between
lenders and real estate brokerage offices
In the arena of money and capital, homebuyers face strong competition for loan funds from
Business, government and consumer credit borrowers
The interest rate charge to borrowers for home loans are determined by
Cost of money to the lender, reserves for default and all loan servicing costs and available interest alternatives. Usury laws have little, if any, effect on the rate
Due-on-sale clauses in mortgages may be used by lenders to
refuse loan assumption by uncreditworthy borrowers. They are also used to increase the rate of interest when the property is sold by requiring repayment or renegotiations
Loan contracts sometimes contain a prepayment penalty in order to
Discourage borrowers from shopping for new loans at a lower interest rate unless there has been a substantial drop in rates
Individuals can invest in real estate by purchasing
Ginner Mae or Freddie Mac participation certificates or buying junior mortgages at a discount.
