Lesson 3: Finance Continued Flashcards
What is a primary market?
The primary market, sometimes called the primary mortgage market is where lenders provide money to borrowers.
Some examples are mortgage companies and commercial banks.
What is a secondary market?
Primary lenders sell their loans in the secondary market as a way to obtain money to make loans.
These loans are bought in the secondary market by insurance companies, pension funds, primary lenders with excess funds, and individual investors.
What are bond markets?
Bonds are commonly used to raise funds for financing real estate projects. Bonds are interest-bearing certificates in which the issuers commits to pay the holder some sum of money on a specific date.
What are two types of bonds?
Secured
Unsecured
What are secured bonds?
When corporate bonds, credit instruments used to raise long-term funds, are backed by a mortgage on a specifically described piece of real property, they are secured bonds.
What are unsecured bonds?
When a corporation issues bonds backed by the general credit of the corporation, rather than by a specific lien on particular assets, they are unsecured bonds or debentures.
Federal Reserve System (FED) and real estate?
Its primary influences upon the real estate industry is its control of the supply and cost of money and credit (interest rates).
The Fed controls the amount of money in circulation through Federal Reserve Banks, which create and destroy money.
What is a commercial paper?
Loans issued by commercial banks are called commercial paper. The Fed buys this paper from its member banks at a discounted rate, providing those banks with additional funds for more lending.
What is a discount window?
The selling of such commercial paper is done at the discount window , which is either opened or closed to control the money supply.
When the window is open and paper is sold to the Fed, money is added to the economy; when the window is closed, the opposite is true.
What is a discount rate?
The Fed then charges commercial banks interest that is termed the discount rate. This rate is obviously the cost of borrowing the money.
By changing the discount rate, the Fed controls the amount of money and credit within the system.
What is a prime rate and how it relates to a discount rate?
The Fed’s discount rate is used to set the prime rate or the rate banks charge their prime or best customers.
Truth-In-Lending or…
…Regulation Z
The Federal Home Loan Bank System (FHLB)
The FHLB does for S&L (savings and loans) essentially the same thing as the Federal Reserve System does for commercial banks. The FHLB, however, does not print money.
Housing and Urban Development (HUD)
Their job is to administer and expand housing programs.
Veterans Administration (VA)
VA guarantees lenders making loans to eligible veterans to purchase real property that these loans will be paid in the event of default by the veteran. Note that VA guarantees loans, it generally does not make loans.
What is today’s monetary system based on?
Today’s monetary system, then, is based on confidence. As long as people can exchange money for items of like value, there is no problem with such a system. When confidence declines, though, this kind of system can run into trouble.
Discounts Points
Discount points, or simply points, are a one-time fee paid up front, that is at the time of loan origination, in return for the lender giving the borrower an interest rate lower than the market rate.
What’s the value of a point and who pays them?
Points may be paid by the borrower, the seller, or someone else. One discount point equals one percent of the loan amount (including private mortgage insurance) .
Loan origination fee
Lender’s also charge from one to three percent of the loan amount for loan origination fees in addition to discount points. These charges cover the costs of loan processing.
Loan-to-Value ratio
The loan-to-value ratio is the relationship between the loan amount and the market value of the property. It is the loan amount divided by the market value or the L/V ratio.
LVR is the percentage of money that will be lend relative to the value of the property.
Eventually, LVR determines the downpayment too.
Equity
Equity is the difference between the value of a property and the amount owed on it.
What kind of real estate loans do commercial banks make?
The real estate loans made by commercial banks tend to be short-term loans, such as construction loans for from six months to two to three years.
Industrial banks
Industrial banks bridge the gap between commercial banks and small loan companies.
Life insurance companies
Life insurance companies have for many years actively invested in real estate as owners, developers, and long-term lenders.
Credit Unions
Credit unions have invested in financing personal property. Recently, however, they have expanded their investments to short-term home improvement loans, home equity loans (second mortgage loans), and even to first mortgage loans.