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Real Estate > Government Financing Regulations > Flashcards

Government Financing Regulations Flashcards

1
Q

Monetary policy

A

Management of the money supply.

-Impacts the pricing & the availability of credit (loans).

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2
Q

How does monetary policy impact the real estate market?

A

“How can banks give loans?”

Affects how much money there is for people to borrow.

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3
Q

The Federal Reserve

A

“The Fed”

  • Central banking system of the US.
  • The “Bank’s bank”.
  • Sets US monetary policy.
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4
Q

What are the two ways banks meet reserve requirements?

A
  1. Keep deposits.

2. Borrow (either from other banks or from the federal government).

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5
Q

How many regional Federal Reserve banks are there?

A

12 regional banks.

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6
Q

Why was the Federal Reserve created?

A

Created in 1913 in response to the Panic of 1907.

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7
Q

How is the Federal Reserve run?

A

Privately, but w/ congressional oversight and character.

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8
Q

What are the two goals of the Federal Reserve?

A
  1. To keep the unemployment rate reasonable low at 5%.

2. To keep inflation down at 2%.

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9
Q

In what ways does the Federal Reserves achieve their goals?

A
  1. Dictate interest rates.
  2. Reserve requirements.
  3. FOMC (federal open market committee operations): buys/sells government securities, bonds, bills, etc.
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10
Q

What is a reserve requirement?

A

How much banks must maintain on hand as “cash” as a percentage of their deposits & liabilities.

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11
Q

What happens when reserves are high?

A

Low availability of credit (loans).

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12
Q

FOMC open market operations

A
  • 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.
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13
Q

The Discounted Rate

A
  • Rate at which banks may borrow directly from “the Fed”.

- Set by “The Fed”.

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14
Q

The Fed Funds Rate

A
  • 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 $”.
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15
Q

The Prime Rate

A
  • 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.
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16
Q

The US Dept. of Treasury

A

-Manages gov. revenue

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17
Q

What 3 ways does the Dept. of Treasury pay for the cost of running the gov?

A
  1. Raising Revenue:
    - Make people & businesses pay taxes/increase taxes.
    - Drawback: Less disposable income, less consumer spending.
  2. Borrowing Money:
    - Issuing gov. securities such as bills, bonds.
    - Drawback: It’s a liability because they ultimately have to pay it back.
  3. Printing money:
    - Printing money to pay for debts.
    - Drawback: Inflation.
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18
Q

RESPA

A

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.
19
Q

ABAs

A

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).
20
Q

What was common practice prior to 2015?

A

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).

21
Q

What happened in October of 2015?

A

Dodd Frank Act & Consumer Financial Protection Bureau changed some RESPA requirements & processes.

22
Q

TILA RESPA Integrated Disclosure forms

A
  • Creates the “TRID disclosure” form.
  • -Details closing costs.
  • Must be given no later than 3 day after loan application.
23
Q

Closing Disclosure

A

Must be given at least 3 days before closing.

24
Q

TILA

A

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.
25
Q

What does APR include?

A

Interest rate rate, points, loan fees, disclosure of penalties, etc.

26
Q

What does APR not include?

A

Municipal taxes, attorney fees, credit reports, etc.

27
Q

Regulation Z

A
  • Know before you borrow.

- Lenders have to tell you terms of credit before you borrow.

28
Q

What triggers Regulation Z?

A

Any time there are specific loan terms advertised.

29
Q

Do real estate agents fall under TILA-RESPA?

A

It depends; only when they advertise loan arrangements for a referral fee.

30
Q

Proration

A
  • 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.
31
Q

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?

A 
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
32
Q

ECOA

A

Equal Credit Opportunity Act.

-Prohibits discrimination in lending (redlining).

33
Q

Predatory Lending

A
  • Any unfair, deceptive or abusive lending.

- Examples: unfairly high interest rates, loan slipping, not disclosing all terms of loan, etc.

34
Q

Usury

A
  • Charging an illegally high rate of interest (so high that borrower couldn’t be able to pay it back).
  • Determined state by state.
35
Q

Real estate sales must be reported to who?

A
  • Must be reported to the IRS by the lender.

- Includes sales price, names of parties, tax ID#, & SSN.

36
Q

Foreign Investment in Real Estate Property Tax of 1980

A
  • 10% of proceeds from the sale of property by non citizens must be withheld.
  • Buyer must forward $ to the IRS.
37
Q

Income properties typically generate what?

A
  • Income, and they are subject to income tax.

- To reduce tax liability, owners may write off depreciation (known as book recovery or cost recovery).

38
Q

Depreciation (in terms of investment taxes)

A
  • 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.
39
Q

What happens when a property is sold in terms of investment taxes?

A

Capital gains tax rate (15%)

Depreciation recapture tax rate (25%)

40
Q

Straight line depreciation

A

Each year, property depreciates the same amount based on its value and economic life.

41
Q

1031 “like kind” exchanges

A
  • 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.
42
Q

Residential Taxes

A
  • 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).
43
Q

Who can take advantage of residential tax deductions?

A

The primary homeowner.

44
Q

Tax Payer Relief Act of 1997

A
  • 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.

Real Estate (19 decks)

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