Chapter 14 Real Estate Financing Flashcards
Federal Reserve System
*maintain sound credit conditions
*help counteract inflationary and deflationary
trends
*create favorable economic climate
12 Federal Reserve Districts
Reserve Requirements:
each member bank must keep a certain amount of assets on hand as reserve funds that are not available for loans or any other use.
- protects customer deposits
- means of manipulation for the flow of cash in
money market.
Open Market Operation: Federal Reserve
Fed controls reserve requirements and discount rates of member banks.
Federal Open Market Committee
- buys and sells US govt securities ont he open
market.
Discount Rates: Federal Reserve
Rate charged by the Fed when it lends to its member banks.
Fed Reserve banks are permitted to borrow money from the district reserve banks to expand their lending operations.
*influences Prime Rate
Primary Mortgage Market
Lenders that originate mortgage loans
* make money available directly to borrowers
Income from loan
- Finance charges collected at closing
loan origination fees
discount points
-Recurring income
interest collected during the term of the loan.
Major Lenders *Savings Associations or Thrifts and Commercial Banks *Insurance Companies *Credit Unions *Pension Funds *Endowment Funds *Investment Group Financing *Mortgage Banking Companies *Mortgage Brokers
Loan Servicing
Collecting Payments
accounting
bookkeeping
preparing insurance and tax records
processing payments of taxes and insurace
following up on loan payment and delinquency
Savings Associations, thrifts, commercial banks
Fiduciary lenders
must follow
-FDIC
-OTC Office of Thrift Supervision
Insurance Companies
not considered primary lenders but tend to invest money in large, long term loans that finance commercial, industrial, and larger multifamily properties rather than single family homes.
Credit Unions
Cooperative organizations that have savings accounts with higher interest rates.
Pension Fund
have large amounts of money available for investment. Like real estate investments because of high yields and low risks
Fannie Mae
Federally owned enterprise
- Provides secondary market for conventional, FHA, and VA loans.
- buys a block or pool of mortgages from a lender in exchange for mortgage backed securities that the lender may keep or sell.
Ginnie Mae
Corporation without capital stock
- Division of HUD
- administers special assistance programs and with with Fannie Mae in secondary market.
- tandem plan with Fannie Mae
- pass through certificate lets small investors buy shares in a pool of mortgages that provides fro a monthly pass through of principal and interest payments directly to certificate holders.
Tandem Plan: Ginnie Mae, Fannie Mae
Fannie Mae can purchase high risk, low yield (FHA) loans at full market rates, with Ginnie Mae guaranteeing payment and absorbing the difference between the low yield and current market prices
Freddie Mac
government owned enterprise similar to Fannie Mae
- provides secondary market for mortgage loans, primarily conventional loans originated by savings associations.
- Can purchase mortgages, pool them, and sell bonds in open market with mortgages as security.
Conventional Mortgage Loan
- not backed, not insured, nor guaranteed by any government agency.
- lender bears all the risk
- most secure loan = Low LTV ratio = high down payment= more secure loan
Conforming loan
Higher loan limits in high cost areas as determined by Federal Housing Finance Agency. Definition was expanded in Housing and Economic Recovery Act of 2008.
- most need 5% down payment, and PMI
- maximum contributions from seller or third party are capped at 6% of sales price.
Non Conforming Loan
example Subprime loans that do not meet the qualifications of a conforming loan.
Include loans that exceed the maximum loan limits for conforming loans and are called JUMBO loans
Jumbo Loans : non conforming
*loans that exceed the maximum loan limits for conforming loans
Private Mortgage Insurance
Allows a borrower to obtain a conventional loan with a smaller down payment
- allows for additional security to insure the lender against borrower default.
- Allows LTVs of up to 95 percent of appraised value
- protects 20-30 % of the loan against borrower default
- borrowers avoided PMI in recent times by utilizing piggy back loans (1st and 2nd loan taken out at same time)
PMI terminates according to Homeowners Protection Act of 1999
if borrower
- has accumulated at least 22% equity in the home
- is current on mortgage payments
- good payment history
FHA Insured Loan
Created in 1934 under National Housing Act
- insures lenders on “loans” on real property made by approved lending institutions.
- FHA LOAN is not a loan made by the agency but refers to a loan that is insured by it.
- encourage improvement in housing standards and conditions
- provide an adequate home financing system through insurance of housing credit
- exert a stabilizing influence on the mortgage market
- INSURES loans on real property made by approved “lending institutions” it does NOT insure actual property themselves.
FHA Operates under the Department of Housing and Urban Development (HUD)
- does NOT build homes
- Does NOT lend money to purchase single family housing
Title II Section 203b: FHA loan
most popular FHA program
* fixed interest loans for 10 years to 30 years on
one family to four family residences.
* FHA does NOT fix interest rates on these Title II
Section 203b loans
*lower rates than conventional loans due to protection of FHA mortgage insurance = less risk to lenders
*3 congressional requirements must be met.
Congressional Requirements of Title II Section 203b FHA Loan
1) in addition to paying interest the borrower pays a one time mortgage insurance premium for FHA insurance
* 1.5 to 3% of loan amount depending on loan
requirements
* borrower is charged an annual renewal premium
of one half of 1 percent of the loan amount.
2) Mortgaged real estate must be appraised by an approved FHA appraiser
* loan amount cannot exceed either of the
following
- 98.75% of loans over $50,000
(loans less than $50,000 buyer must contribute
3 % of sales price to down payment and
closing costs.)
- 97.75 % of sales price or appraised value
whichever is less.
3) FHA regulations set standards for type and construction of building, quality of neighborhood, and credit requirements for borrowers
Assumption Rules : FHA loan prior to Dec 15th 1989
- no restriction on their assumption.
- Anyone can assume these loans with no
qualifications
Assumption Rules : FHA loan AFTER Dec 15th 1989
no assumptions are allowed without complete buyer qualifications, and investor loan are no longer allowed. All FHA loans made under the 203b program are for owner occupied properties only.
Title I : FHA Loan
- Home Improvement loans
- low amounts and have repayment terms of no
longer than 7 years and 32 days
Title II Section 234: FHA Loan
- purchase condominiums
* similar to basic 203b program
Title II Section 245 : FHA Loan
- Graduated payment mortgages
- LTV ratio of such loans might range from
87%-93%
Title II Section 251 : FHA Loan
- ARM allowed
- Interest rate cannot change more than 1 percent
per year or more than 5 % over the life of the
loan.
POINTS : FHA Loan
- Lender of an FHA Loan can charge discount
points in addition to 1% loan origination fee. - if seller pays more than 3% of closing costs the
lender must treat it as sales concessions and the
price of the property must be reduced.
Lead Paint Notification : FHA
- HUD requires lead paint notification form be given
to residential buyers to sign on or before the date
the purchaser signs the sales contract, otherwise
contract must be re-executed. - FHA requires the lender be provided with a copy
of the notification form at the time of loan
application ( Appendix D, Form 6) - required for FHA insured homes built prior to 1978
VA- Guaranteed GI Loans
- Servicemen’s Readjustment Act of 1944
- Department of Veterans Affairs VA is authorized to guarantee loans to purchase or construct homes for eligible veterans.
- Financing with little to no down payment at low interest rates
- Certificate of Eligibility
- NO PREPAYMENT PENALTY
- NO maximum loan amount but VA will generally loan up to 4 times a veterans available entitlement without a down payment.
$89.912 max guarantee x 4 = 100% of loan up to $359,650
- GUARANTEES loans to purchase mobile homes
plots on which to place them. - DOES NOT lend money itself, UNLESS in
isolated rural areas.
Certificate of Eligibility : VA Loan
- does not mean that the veteran will automatically
receive a mortgage - Sets forth the max guarantee the veteran is
entitled to, which is frequently called the
entitlement or eligibility. - veterans eligible entitlement is 36K but can be increased to a max of 89,912 K allowing a 100 percent loan of up to $359,650
Assumption Rules
VA loans made prior to March 1st 1988
- remain freely assumable by veterans and non veterans
- assumption processing fee charged
- require lender approval of the buyer and an assumption agreement
Rural Economic ad Community Development Services
Agency of the Dept of Agriculture
- offers programs to help purchase or operate family farms
- provides loans for single family homes in rural areas fewer than 10,000 people.
Two Categories
1) Guaranteed Loans- made and serviced by the
agency
2) Direct Loans- from the agency
*DOES lend loans
Purchase Money Mortgage
owner financing given at the time of purchase to facilitate the sale
- instrument given by the purchaser to a seller who takes back a note and mortgage for part or all of the purchase price.
- may be 1st or 2nd deed of trust
- becomes lien on property when title passes
- If Foreclosure happens
- takes priority over judgement liens against the borrower and over mechanics liens.
- In NC seller lender not entitled to a deficiency judgement.
Package Loans
includes real estate, all fixtures and appliances
- popular for condos
- real and personal property packaged in one loan.
Blanket Mortgages
- covers more than one parcel of land
- used to finance subdivision
- include a provision called a partial release clause
Wraparound Loans
- method of re- financing real property or financing the purchase of real property when ann existing mortgage cannot be prepaid.
- finance real estate when a buyer wishes to put up a minimum of initial cash for the sale.
- Buyer takes title subject to existing mortgage.
- Original loan cannot contain a due on sale clause, nor may have an acceleration clause, or alienation clause.
Open End Mortgage Loan
- Act as a line of credit or equity line, allowing the mortgagee (lender) to make additional future advances of funds to the mortgagor (borrower)
- set up as home equity loans
Construction Loans
- Made to Finance the construction of improvements on real estate homes, apartments, office buildings,
- Lender commits the full amount of the loan but makes partial installment payments or draws as the building is being constructed
- Interim /Short term Financing
- HIgher interest rate due to risks
- inadequate releasing of mechanics liens
- delays in completion of building
- financial failure of contractor or subcontractors
- Greatest degree of risk for Lenders
Buydown Loan
- way to lower the initial interest rate on a mortgage or deed of trust loan.
- lump sum paid in cash to lender at closing to offset and reduce interest rate and monthly payments.
- reduce IR by 1-3% over the first year to third year of loan term then the rate rises.
- 3-2-1- Buydown
3-2-1 Buydown
*Interest rate is bought down by 3 percent in first year, 2 percent in second year, and 1 percent in third year.
Home Equity Loan
- Source of funds for homeowners who wish to finance the purchase of expensive items
- Consolidate existing installment loans on credit card debt
- pay for medical, educational, home improvement or other expenses
- Tax laws do not allow deductibility of interest on debts not secured by real estate.
- Fixed loan or HELOC loan
Reverse Annuity Mortgage: RAM
- regular monthly payments made to the borroweer
- based on equity the homeowner has invested in the property given as security for the loan.
- allows senior citizens to utilize the equity buildup in their homes without having to sell the property.
- borrower charged a fixed rate of interest and loan is paid back when property is sold upon death.
First Mortgage
Mortgage on land that has no prior lien on it.
*has prior claim over second mortgage
Second Mortgage
owner of land executes another loan for additional funds
- second lien subject to first lien
- greater risk to lenders
- higher interest rates
- shorter terms.
Subordination Agreement
First lender subordinates its lien to that of the second lender
*must be signed by both lenders to be valid.
Conventional Conforming Loans: measures income
*proposed monthly housing expense (PITI, Property
Taxes, Insurance, HOA dues) cannot be more than
28% of borrowers monthly gross income.
- proposed monthly housing expense plus buyers
other monthly debts cannot be more than 36% of
buyers monthly gross income. - dependent on loans LTV ratio and down payment
- borrower MUST qualify on both ratios or they do
NOT qualify for the loan. (larger down payment =
easier to qualify)
FHA Loan: measuring buyers income
housing expense to income 29%
monthly debt to income ratio is 41%
*ratios are NOT dependent on loans LTV ratio is in
conventional loans
*ratios remain constant regardless of down payment
*FHA standards are easier to meet than
conventional standards
VA Loans: measuring buyers income
uses ONLY the total monthly debt to income ratio: and set at 41%
*residual income method also used : buyers must have cash left over after monthly expenses.
- must quality by both debt to income ratio and residual income methods.
- available to only veterans and certain unremarried widows and widowers
- limited to owner occupied residential (1family -4family) dwellings. Must sign occupancy certificate on two separate occasions.
- normally doesn’t require down payment
- Certificate of reasonable value CRV issued.
- No prepayment penalty
- buyer may pay discount points but CANNOT
finance them in the VA loan. - CANNOT be assumed by non veteran without VA
approval for loans made prior to 3/1/88. Otherwise
approval is required.- even with VA loan is assumed the original
veteran borrower remains personally liable for
the repayment of the loan unless the lender
approves the release of liability.
- even with VA loan is assumed the original
Residual Income Method : VA Loan
buyers must have a certain amount of cash left over after paying their monthly housing expenses and other recurring debts.
Regulation Z : Truth in Lending Act
requires that credit institutions inform borrowers of the true cost of finance charges and true annual interest rate before a transaction is consummated.
- applies when credit is extended to individuals for personal, family, or household uses
- applies when amount of credit is $25,000 or less
- applies when credit transaction is secured by residence.
- Lender must tell Four Chief Disclosures
1) APR
2) mloan fees- finders fees
- service charges
- points
- interest
3) total number and amount of all payments
4) total amount financed
Federal Box: Four Disclosures
1) Loans APR
2) all finance charges
3) total amount and number of payments
4) total amount financed
Advertising: Truth in Lending
- “Liberal terms available” allowed
- Trigger Terms that state numbers = total financing
term disclosure is mandatory.
-under regulation Z - APR which includes all all
charges must be stated.
Penalties: Regulation Z
- $10,000 for each day of non compliance
- creditor may be liable to a consumer for
2 x amount of finance charge (min of $100 and
max of $1000, plus court costs, legal fees, and
actual damages) - violation is misdemeanor punishable by a fine of
up to $5000 or one years imprisonment or both.
Equal Credit Opportunity Act (ECOA)
prohibits lenders and others who grant or arrange credit to consumers from discriminating against credit applicants on the basis of
- race
- color
- reigion - national origin
- sex
- marital status,
- age
- dependance of public assistance
- lenders must inform all rejected credit applicants in writing within 30 days
Federal Fair Credit Reporting Act 1970
gives the right to check their own credit reports and demand that mistakes be corrected.
Fair and Accurate Credit Transaction Act
those that have not been denied credit can still get one free credit report per year from each of the national credit bureaus.
NC Predator Lending Act 1999
- impose restrictions and limitations on high cost loans
- revise the permissible fees and charges on certain loans
- prohibit unfair or deceptive practices by mortgage brokers and lenders
- provide for public education and counseling about predatory lenders.
Loan Fraud Legislation
Any false statement to a lender is a federal felony crime punishable by fines up to $1,000,000 and or imprisonment up to 30 years.
NC Residential Mortgage Fraud Act 2007
made violation on one mortgage loan a felony.
Real Estate Settlement Procedures Act ( RESPA)
ensures that the buyer and seller in a residential real estate transaction involving a new first mortgage loan have knowledge of all settlement costs
*requires that all transaction charges to the parties be clearly itemized on the HUD-1 closing statement that makes loan fraud harder to conceal.
Value
sales price or the appraised value whichever is less
LTV Loan to Value Ratio
classifies mortgage loans.
Lower the ratio of debt to value, the higher the down payment means a more secure loan which minimizes the lenders ricks
Partial Release Clause of Blanket Mortgage
borrower may obtain the release of any one lot or parcel from the lien by repaying a definite amount of the loan at closing without triggering due on sale clause for the rest of the financed property
Computerized Loan Origination : CLO
electronic network for handling loan applications through remote computer terminals linked to several lenders computers.
LENDERS
- shortens loan approvals from weeks to minutes.
- complex mortgages can be processed in less
than 72 hours.
- reduces the cost of loan approval and
application
BUYERS
- strength for negotiating
