Lesson 3: Finance Continued Flashcards

1
Q

What is a primary market?

A

The primary market, sometimes called the primary mortgage market is where lenders provide money to borrowers.
Some examples are mortgage companies and commercial banks.

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2
Q

What is a secondary market?

A

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.

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3
Q

What are bond markets?

A

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.

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4
Q

What are two types of bonds?

A

Secured

Unsecured

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5
Q

What are secured bonds?

A

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.

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6
Q

What are unsecured bonds?

A

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.

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7
Q

Federal Reserve System (FED) and real estate?

A

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.

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8
Q

What is a commercial paper?

A

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.

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9
Q

What is a discount window?

A

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.

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10
Q

What is a discount rate?

A

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.

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11
Q

What is a prime rate and how it relates to a discount rate?

A

The Fed’s discount rate is used to set the prime rate or the rate banks charge their prime or best customers.

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12
Q

Truth-In-Lending or…

A

…Regulation Z

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13
Q

The Federal Home Loan Bank System (FHLB)

A

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.

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14
Q

Housing and Urban Development (HUD)

A

Their job is to administer and expand housing programs.

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15
Q

Veterans Administration (VA)

A

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.

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16
Q

What is today’s monetary system based on?

A

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.

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17
Q

Discounts Points

A

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.

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18
Q

What’s the value of a point and who pays them?

A

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) .

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19
Q

Loan origination fee

A

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.

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20
Q

Loan-to-Value ratio

A

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.

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21
Q

Equity

A

Equity is the difference between the value of a property and the amount owed on it.

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22
Q

What kind of real estate loans do commercial banks make?

A

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.

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23
Q

Industrial banks

A

Industrial banks bridge the gap between commercial banks and small loan companies.

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24
Q

Life insurance companies

A

Life insurance companies have for many years actively invested in real estate as owners, developers, and long-term lenders.

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25
Q

Credit Unions

A

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.

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26
Q

Mortgage companies

A

Mortgage companies make mortgage loans to individual home buyers (primary market) then sell them to long-term investors in the secondary money market.
Having made and sold the loan, the mortgage company usually continues to service it.

27
Q

Mortgage brokers

A

Mortgage brokers differ from mortgage bankers in that they specialize in bringing borrowers and lenders together rather than in lending money.

28
Q

Pension funds

A

Pension funds contribute to real estate financing in a large way.

29
Q

Farmer’s Home Administration (FmHA)

A

The program provided credit for both the purchase, improvement, and operating of farms and ranches. FmHA is now guaranteeing loans, similar to VA, and appears to be phasing out its lending.

30
Q

Federal Land Bank (FLB)

A

The Federal Land Bank is a privately owned cooperative that provides loans to farmers and ranchers for agricultural operations. Since it is a cooperative, those who borrow from the bank become owners of the bank.

31
Q

Real estate investment trusts (REITs)

A

Investment trusts provide investment opportunities to small investors.
Real estate investment trusts (REITs) pool the money of many investors to purchase real property, similar to what mutual funds do with stocks and bonds.

32
Q

The Federal National Mortgage Association

A

(FNMA) or Fannie Mae
They purchase FHA, VA and conventional mortgage loans. The purchase of these loans enabled lenders to obtain the money to make more loans.
Money to buy loans, then, comes from the sale of FNMA stock and FNMA bonds and notes. FNMA pays its note and bond holders from its mortgagors’ payments on loans.

33
Q

The Government National Mortgage Association

A

GNMA or Ginnie Mae
is a federal agency within the Department of HUD.
Ginnie Mae operates through a mortgage-backed security program designed to attract sources of credit for government loans.
GNMA guarantees repayment of privately issued securities backed by pools of FHA, VA, and FmHA mortgages. Ginnie Mae, then, buys only government loans.

34
Q

The Federal Home Loan Mortgage Corporation

A

FHLMC or Freddie Mac
It’s job is to increase the availability of residential mortgages. Unlike FNMA and GNMA, however, Freddie Mac concerns itself with conventional mortgages.
Freddie Mac issues securities backed by its own mortgage pools, unlike Ginnie Mae, which guaranties securities issued by others.

35
Q

Term Loan or a strait loan

A

A term loan requires only interest payments for a specific period of time, after which the entire principal balance is due. Interest payments are usually required periodically, such as monthly, quarterly, semi-annually, etc.

36
Q

Maturity date

A

The date of the end of the life of a loan

37
Q

Amortized loan

A

An amortized loan is one that is repaid in a specified period of time with fixed payments in an amount sufficient to pay the interest due and to reduce the principal to zero by the loan’s maturity date.

38
Q

Budget loan

A

The budget loan is an amortized loan in which the lender in addition to collecting for the principal and interest (P and I) also collects for the property taxes and hazard insurance on the mortgaged property. Thus the loan payment contains the payment of principal, interest, taxes, and insurance (PITI) and is often called a PITI loan.
The money paid for taxes and insurance is placed by the lender in an pound account or escrow account, and when they are due the lender pays them.

39
Q

Package loan

A

A package loan is one that finances both the real property and personal property that is essential to being able to live in the property, such as stoves, refrigerators, etc.
The mortgage or trust deed names the articles and defines them as fixtures.

40
Q

Purchase money loan

A

A purchase money loan is to purchase real property that serves as collateral for the loan. That is, the loan to buy the property is secured by a mortgage on the property. A purchase money loan may be a first or a junior lien.

41
Q

Hard money loan

A

Unlike a purchase money loan, a hard money loan is given to finance something other than the property that is mortgaged.
For instance, if a loan is taken out and secured by a home already owned by the borrower, home “A”, in order to purchase another home, home “B”, the loan is a hard money loan.

42
Q

Demand loan

A

A demand loan may be called due at any time by the lender. This type of loan is almost never used any more.

43
Q

Open ended mortgage

A

The borrower can borrow additional funds, up to the original loan amount, using the mortgage or trust deed already in place as security. Home equity loans are often of this type.

44
Q

Construction loan

A

The construction loan, also called interim financing, is an open- ended mortgage loan, usually for a short term, to finance the construction of a building.
The construction loan is unique because the building pledged as part of the security for the loan is not in existence when the mortgage is created. Only the land can be used as collateral.
Money is advanced in installments as construction progresses.

45
Q

Take out loan

A

The take out loan is a permanent mortgage obtained at the same time as, or before the construction loan, to repay the interim mortgage at the completion of construction.

46
Q

Blanket mortgage

A

A blanket mortgage is one secured by more than one property.
This kind of mortgage is used by developers who obtain a parcel of land, build a house on each lot, and sell the lots to individual buyers. As a lot is sold, a partial release clause releases the lot, freed from the lien.

47
Q

Adjustable rate mortgage (ARM)

A

With an adjustable rate mortqaqe (ARM), also referred to as a variable rate mortqaqe, the interest rate can shift up or down at certain intervals over the life of the mortgage.
Interest shifts are tied to the fluctuation of an indicator outside of the lender’s control, such as the prime rate offered by banks, the consumer price index, or treasury bills.

48
Q

Index rate

A

ARMs are tied to an index rate, preventing the lender form arbitrarily or excessively increasing the interest rate of the loan.
The index must be a rate that accurately reflects current market conditions.
The most popular index is the interest rate on one-year U.S. Treasury Bills.

49
Q

Margin

A
A margin (the cost of doing business, the payment for taking the risk of loss, and profit) is added to the index rate. 
The margin today is typically 2% to 3%. The margin usually remains constant during the life of the loan.
50
Q

Adjustment period

A

The time between adjustments is the adjustment period. The most common adjustment period is one year; less common adjustment ! periods are six month, three year, and five year periods.

51
Q

Interest caps

A

Most variable rate loans contain ceilings or interest caps, defining how much the interest rate can increase over a given period of time.
The loan could not vary, up or down, more than one percent per year, nor more than five percent from the original note rate.

52
Q

Payment caps

A

ARM loans include payment caps which limit the dollar amount a monthly payment can increase in an adjustment period. A popular figure is 7.5 percent per year.
That is to say that no matter how high an index adjusts a monthly payment, the increase in that payment may not exceed 7.5 percent.

53
Q

Negative amortization

A

When instead of decreasing, the loan balance increases in such a fashion, it is called negative amortization.

54
Q

Graduated payment mortgage (GPM)

A

The graduated payment mortgage (GPM) loan is a fixed-rate loan with monthly principal and interest payments starting below what is required to amortize the loan and increasing by a certain amount for a scheduled number of years to a point where they are sufficient to fully amortize the loan and where they remain for the rest of the life of the loan.

55
Q

Wraparound mortgage

A

A wraparound mortgage, also called an all-inclusive mortgage, an all-inclusive deed of trust and a blended mortgage is a mortgage loan that encompasses or wraps around an existing mortgage loan and is subordinate or junior to it.
The existing mortgage remains in place and the new mortgage is combined with it, or is said to wrap around it.
The buyer makes one payment to the person doing the wrap and the person doing the wrap pays the first mortgage.

56
Q

Shared appreciation mortgage (SAM)

A

The borrower gives a portion of the property’s appreciation to the lender in return for a lower interest rate. The lender’s portion of the appreciation is paid when the house is sold or refinanced.

57
Q

Reverse annuity mortgage

A

The reverse annuity mortgage (RAM) enables a borrower to capitalize on the equity in the home. A lender pays the retired person a fixed monthly annuity until a certain balance is reached, at which time the borrower would start repayment.

58
Q

Pledged account mortgage (PAM)

A

The pledged account mortgage (PAM) is a fully amortized, graduated payment mortgage in which a portion of the down payment is placed into a pledged savings account, with some being taken out each month to subsidize the payment.

59
Q

Carryback financing

A

Carryback financing is done when a seller accepts a part of the property’s purchase price on a promissory note from the purchaser.
If buyer does not have enough money to close, the seller can carryback the difference and allow buyer to pay him in installments with interest.

60
Q

Balloon loan

A

A balloon loan is one with a final payment larger than any previous payment. The final payment is the balloon payment.

61
Q

Partially amortized loan

A

A partially amortized loan is one that calls for amortized payments for a certain time period, after which a balloon payment is required.

62
Q

Bridge loan

A

A bridge loan is a short-term loan made when the closing of the sale on a first property is dependent on the sale of a second property, and the closing of the sale of the second property is delayed.

63
Q

Buydowns

A

Buydown programs enable loans to be made at below market interest rates by paying front-end (up-front) discount money. Buydowns are often made by builders.
The builder can pay the lender an up-front sum of money called discount points to reduce the interest rates to buyers of their homes.