Government Financing Regulations Flashcards
Monetary policy
Management of the money supply.
-Impacts the pricing & the availability of credit (loans).
How does monetary policy impact the real estate market?
“How can banks give loans?”
Affects how much money there is for people to borrow.
The Federal Reserve
“The Fed”
- Central banking system of the US.
- The “Bank’s bank”.
- Sets US monetary policy.
What are the two ways banks meet reserve requirements?
- Keep deposits.
2. Borrow (either from other banks or from the federal government).
How many regional Federal Reserve banks are there?
12 regional banks.
Why was the Federal Reserve created?
Created in 1913 in response to the Panic of 1907.
How is the Federal Reserve run?
Privately, but w/ congressional oversight and character.
What are the two goals of the Federal Reserve?
- To keep the unemployment rate reasonable low at 5%.
2. To keep inflation down at 2%.
In what ways does the Federal Reserves achieve their goals?
- Dictate interest rates.
- Reserve requirements.
- FOMC (federal open market committee operations): buys/sells government securities, bonds, bills, etc.
What is a reserve requirement?
How much banks must maintain on hand as “cash” as a percentage of their deposits & liabilities.
What happens when reserves are high?
Low availability of credit (loans).
FOMC open market operations
- The Federal open market committee.
- Buying & selling of US debt to & from member banks of the Fed.
- Stabilizes the cost of borrowing for the US gov.
- The more the Fed buys, the more $ that is available for banks to lend out & vise versa.
- T-bills, notes, & bonds.
- Sells gov debt=takes $ out of the market; less liquidity.
- Buys gov debt=puts $ back in the market; more liquidity.
The Discounted Rate
- Rate at which banks may borrow directly from “the Fed”.
- Set by “The Fed”.
The Fed Funds Rate
- The rate at which banks loan to each other (Short term interbank lending).
- Set by “The Fed”.
- “Preferred/most common option for banks so increase their $”.
The Prime Rate
- Theoretically best interest rate available from a bank.
- Typically not possible to borrow at the prime rate unless you’re a large corporation (used as a benchmark, pay a premium for).
- Set by the market, floats above the Fed Funds Rate.
The US Dept. of Treasury
-Manages gov. revenue
What 3 ways does the Dept. of Treasury pay for the cost of running the gov?
- Raising Revenue:
- Make people & businesses pay taxes/increase taxes.
- Drawback: Less disposable income, less consumer spending. - Borrowing Money:
- Issuing gov. securities such as bills, bonds.
- Drawback: It’s a liability because they ultimately have to pay it back. - Printing money:
- Printing money to pay for debts.
- Drawback: Inflation.
RESPA
The Real Estate Settlement Procedures Act.
- Requires lenders to provide borrowers w/ info. about closing costs for financing 1-4 family homes.
- Only earned kickbacks that are disclosed are permitted.
- Lender must report transactions to the IRS.
ABAs
Affiliated Business Arrangements.
- Permitted=any real estate service providers who package services together (think Toll Brothers).
- All firms must share at least 1%common ownership.
- Consumer must be fully informed.
- Consumer must be given other options if desired.
- ABA providers can be paid for their services & receive a return on their 1%+investment, but nothing more (no additional fees).
What was common practice prior to 2015?
Banks needed to provide a bona fide (good faith) estimate for the charges of real estate closing.
-Used the uniform Settlement Statement (HUD-1 form).
What happened in October of 2015?
Dodd Frank Act & Consumer Financial Protection Bureau changed some RESPA requirements & processes.
TILA RESPA Integrated Disclosure forms
- Creates the “TRID disclosure” form.
- -Details closing costs.
- Must be given no later than 3 day after loan application.
Closing Disclosure
Must be given at least 3 days before closing.
TILA
Truth In Lending Act
- Enforced by Consumer Financial Protection Bureau.
- Provides consumers w/ full disclosure of the costs of credit.
- Advertising of specific loan terms requires lenders to calculate their costs of credit.
- Must express APR.
What does APR include?
Interest rate rate, points, loan fees, disclosure of penalties, etc.
What does APR not include?
Municipal taxes, attorney fees, credit reports, etc.
Regulation Z
- Know before you borrow.
- Lenders have to tell you terms of credit before you borrow.
What triggers Regulation Z?
Any time there are specific loan terms advertised.
Do real estate agents fall under TILA-RESPA?
It depends; only when they advertise loan arrangements for a referral fee.
Proration
- An expense that is prepaid or unpaid at closing will be prorated.
- Reflected on closing disclosure.
- Need to know who the closing day belongs to (if it doesn’t indicate who owns that day, assume it’s the sellers).
- 360 days in a year, unless otherwise stated (for exam purposes).
- Remember: Taxes run on a fiscal year July 1st-June 30th.
Proration math:
A landlord is selling their property on June 20th, their tenant paid rent of $3K on the first of the month. How much give the buyer?
June has 30 days in the month. Seller owns June 1-20; buyers owns June 21-30. $3000/30days=$100 per day. Seller keeps 20 days x $100= $2000 Buyer gets 10 days x $100=$1000
ECOA
Equal Credit Opportunity Act.
-Prohibits discrimination in lending (redlining).
Predatory Lending
- Any unfair, deceptive or abusive lending.
- Examples: unfairly high interest rates, loan slipping, not disclosing all terms of loan, etc.
Usury
- Charging an illegally high rate of interest (so high that borrower couldn’t be able to pay it back).
- Determined state by state.
Real estate sales must be reported to who?
- Must be reported to the IRS by the lender.
- Includes sales price, names of parties, tax ID#, & SSN.
Foreign Investment in Real Estate Property Tax of 1980
- 10% of proceeds from the sale of property by non citizens must be withheld.
- Buyer must forward $ to the IRS.
Income properties typically generate what?
- Income, and they are subject to income tax.
- To reduce tax liability, owners may write off depreciation (known as book recovery or cost recovery).
Depreciation (in terms of investment taxes)
- Loss given to you by the IRS.
- Calculated on the economic life of a property (27.5 yrs. for residential; 39 yrs. for commercial).
- Can only be deducted from rental income or passive income.
- Only those who qualify as real estate professionals may deduct from active income.
- Only improvements can be depreciated.
What happens when a property is sold in terms of investment taxes?
Capital gains tax rate (15%)
Depreciation recapture tax rate (25%)
Straight line depreciation
Each year, property depreciates the same amount based on its value and economic life.
1031 “like kind” exchanges
- A way for an investment property owner to defer (transfer for a later date, not eliminate) capital gains tax.
- Must reinvest the proceeds from the sale into another piece of real estate.
- Must happen within 6 months of sale.
- Unreplaced property value or reduced mortgage debt (“boot”) is taxable.
Residential Taxes
- Residential homeowners may write off mortgage interest & property taxes.
- Up to &750K mortgage debt.
- Up to $10K in property taxes, including any state tax write offs (salt limit: state and local taxes).
Who can take advantage of residential tax deductions?
The primary homeowner.
Tax Payer Relief Act of 1997
- Portion of profit on primary residence sheltered from capital gains tax.
- If you are single, you are exempt from capital gains tax on the first $250K from the sale of your home.
- If a married couple sells their home, they are exempt from capital gains tax on the first $500K from the sale of their home.
