Real Estate Finance - Chapter 2 Flashcards
An account used by lenders to hold money that will be used for future payments of items (taxes, insurance, deferred maintenance), and borrower is frequently required to pay lump sum amount @ closing to setup account
Reserve Account/Fund
A market for the purchase and sale of already existing mortgages and make their money from fees
“Resale marketplace” for existing loans. It is a market of packaged home loans that are resold as securities to investors. Major players are Fannie Mae and Freddie Mac.
Secondary Mortgage Market
Ability to sell an asset and convert into cash
Liquidity
Process by which individuals place their $ with financial institution rather than savings or time account. Bank acts as middle man and lends money to others
Intermediation
Occurs when private individuals decide to invest their own $ rather than deposit in banks
Disintermediation
Central banking system, established to help manage economy. This regulates banks reserve requirements, determines discount rates and interest rates, decisions of where to buy and sell govt securities and supervise federal truth in lending and equal credit opportunity laws
Federal Reserve Board (F.E.D)
Cost of borrowing money and charges % for use of money
Interest
How is the rate of interest determined?
Money market- borrowers should shop around
Charging a rate of interest in excess of that permitted by law
Usury
Where borrowers and mortgage originators come together to negotiate terms and effectuate mortgage transaction. Mortgage brokers, mortgage bankers, credit unions and banks
Primary Mortgage Market
What are the 2 types of mortgage companies?
- Mortgage Bankers
2. Mortgage Brokers
Raise money in capital markets and make mortgage loans. Frequently borrow funds from commercial sources, lend the money, then package up the mortgages and sell at a discount to large investors on secondary mortgage market
Mortgage Bankers
A person who works with lenders and buyers/borrowers to facilitate the loan process. Not a lender, and does not disclose their name
Mortgage Broker
Large sums of money to invest and more concerned about financial soundness of a project and its long term stability than about funds liquidity. Most of the activity are in large real estate projects, community projects, multi use office and apartment complexes
Life Insurance Companies
Designed to provide liquidity for the funds used by primary lenders. Examples includes Fannie Mae (FNMA), Ginnie Mae (GNMA) and Freddie Mac (FMLMC)
Secondary Mortgage Market
Federally chartered corporation, which creates a secondary market for existing mortgages. Does not loan money directly, but rather buys FHA and conventional loans
Fannie Mae
Federal National Mortgage Association
Fannie Mae
Government National Mortgage Association (GNMA)
Ginnie Mae
A federally owned agency, and division of HUD, that operates special assistance aspects of federally aided housing programs and participates in the secondary market through its mortgage-backed securities pools
Ginnie Mae
Federal Home Loan Mortgage corporation (FHLMA)
Freddie Mac
Federal agency that operates under the supervision of the Federal Housing Finance Agency organized to borrow money from pension funds and trust funds, purchase mortgages, pool them together and sell bonds on open market as security
Freddie Mac
Independent corporation that insures top 12-30% of the principal on loans made by approved lenders to qualified borrowers
Mortgage Guaranty Insurance Corporation (MGIC)
In attempt to minimize risk, lenders to this to borrowers by determining their ability to repay debt and may determine the collateral (value of property).
- Examine income
- Credit
- Collateral
Qualify
The interest or cash value remaining after all debts have been deducted, usually considered to be the monetary interest the owner retains over and above mortgage indebtness
Equity
The use of borrowed funds to purchase property or maximize returns
Leverage
True or False: People may also borrow funds against their equity to one asset in order to purchase another asset
True
Ratio between the mortgage loan amount and the sales price of the property (or appraised value, whichever is lower)
Loan amount /Property Value
Loan to value ratio
A fee to lender which is 1% of loan amount
Loan Point
Also 1% of loan amount, but are charged in return for a somewhat lower interest rate.
More discount points = lower rate of loan
Discount Points
A payment made, often by the seller, to help the buyer qualify for the loan. Used in times of high interest rates
Buydown
Document that sets forth status of a loan, states the amount still to be paid, interest rate of loan, and date of maturity
Reduction Certificate
Typically a second mortgage on a home that is set up as a line of credit, Home Equity Line of Credit (HELOC), and is an open end mortgage and used to finance repairs/improvements on a home
Equity Loans
PITI
Principal, Interest, Taxes and Insurance
A loan involves supplying the lender with documentation of your income, plus all current debt obligations and will come up with debt and loan ratio based on documents. Credit report and income verification
Pre Approval and Pre Qualification
One who evalutes the extent of risk assumed in connection with a loan; determines ability to repay, verifying value of property, and reviewing title search
Underwriter
One who handles the origination of loan, from processing application to distributing funds
Loan Originator
Generally covers everything after disbursing funds until paid off; collects payment and keeps records
Loan Servicing
What are the 4 types of mortgage loans?
- Conventional
- FHA Insured Loans
- VA Guaranteed
- Farmers Home Administration
A loan that does not have any government insurance or guarentee, and represents higher risk to lender
Conventional Loans
What can a conventional loan use/include to reduce risk?
Private Mortgage Insurance
This allows the lender to loan more than the standard 80% loan to value ratio, and is charged with a premium that is due at closing. And reduced when Loan to Value ratio is above 80%
Private Mortgage Insurance
Authorized to guarantee loans for the purchase, construction, or refinance of personal residences for eligiable veterans. Guarantees up to 25% of loan amount for qualified vets and often doesnt require a down payment
VA Guaranteed Loan
What is issued to a veteran by the VA that states maximum guarentee to which veteran is entitled, does not guarantee will quality but merely states entitlement elegibility
Certificate of Elegibility
This states the market value of subject property based on VA approved appraisal. Also serves maximum loan amount, meaning if the purchase price is at least equal to this, no down payment is required
Certificate of Reasonable Value (CRV)
True or False: VA loan is only once in a lifetime; even if loan is paid, they are not able to apply for another
False
Federal agency under US Department of Agriculture that channels credit to farms and rural areas of less than 10,000 people. Agency will either make the loan or guarantee a portion made by private lenders
Farm Agency Service (FSA)
Short term loans sometimes used by home buyers to “bridge the gap” between selling existing home and buying a new home
Bridge Loan
Loan in which there are no principal payments made. The entire principal amt of loan is paid off at maturity/end. The interest is paid off either at the end or during note’s term
“Interest only loan” or “Term Loan”
Straight Mortgage
A systematic method of repaying a loan by making regular, equal payments (monthly) so that loan itself, and all interest on the loan is reduced to zero by loans maturity date. Interest and principal change monthly, but payment stays the same
Amortized Mortgage
Payment of a financial obligation in installments
Amortization
Mortgage that calls for a series of amortized payments followed by balloon payments at maturity
Partially Amortized
Occurs when the loan payments are not sufficient to repay interest, and loan balance therefore increases over the life of the loan rather than decreases
Negative Amoritization
Mortgage in which final payment is larger than any previous payment, and “balloons” on last payment. Fixed rate interest
Balloon Payment
A loan that allows a change in rates annually, up or down according to index. Interest charged to the borrower will be this index rate plus a “margain” (spread), and varies from one loan to another
Adjustable Rate Mortgage ARM
True or False: If a borrower takes advantage of payment caps on an Adjustable Rate Mortgage, negative amoritization will likely result
True
Loan that covers more than one parcel of RE. Usually contains a parcel release clause that allows for the release of a parcel once certain amounts of loan repaid. Commonly used by builders and developers.
Blanket Mortgage
Early payments are lower and gradually increase over life of the loan. EX: income is not high yet but will be, med school student
Graduated Payment Mortgage (GPM)
Short term loan, usually interest only. Are used to finance the construction of improvements and typically due and payable upon completion at which time a “take out” loan is used for permanent financing
Interim Mortgage
Maximum amount that can be borrowed is established but borrower does not borrow all at one time, and only pays interest on actual amount borrowed “Line of Credit” “Expandable Increments”
Open End Mortgage
A method of financing in which the purchase of the land also finances the purchase of certain personal property items. Helps for people having difficulty qualifying for loans
Ex: home loan includes washer/dryer as collateral or package
Package Mortgage
Similar to an Adjustable Rate Mortgage except this loan adjusts every 3-5 years instead of 6 mon to a year. This typically has limits on the max change in the interest rate of 0.5% per year of adjustment
Renegotiable Rate Mortgage
This loan allows elderly homeowners to receive monthly payments from lender to help living costs, and do so by borrowing on the equity built on their home. Minimum age of 62. Loan comes due upon occurrence such as sale or death of owner
Reverse Annuity Mortgage (RAM)
Lender loans money at below the current interest rate in return for a share of profit when property sold. Agrees to receive less now in exchange for a guarantee to share in future appreciation
Shared Appreciation Mortgage (SAM)
Any mortgage or deed of trust that is subordinate in lien property, and usually carry higher interest rates since entail greater risk
Junior Mortgage
A new mortgage that includes the new balance borrowed and the balance owed on an already existing mortgage. The older mortgage is not paid off but rather wraps around older one. New mortgage is junior to older one
Wrap Around Mortgage
When a seller accepts part or all of purchase price in form of promissory note from buyer, along with mortgage or deed of trust. This is seller financing and used when loans are hard to get.
Purchase Money Mortgage (PMM)
This is designed to enhance consumer protection and reduces fraud in mortgage industry. Establishes minimum standards for the licensing and registration of state licensed mortgage loan originators
The SAFE Act
This is designed to protect borrowers by requiring that lenders explain full credit terms of the borrowers (loan amount, APR, finance charges, payment schedule, and total paid over lifetime of loan). Allows consumers to compare terms wisely
Truth in Lending Law (T.I.L.A)
What is a regulation of the Federal Reserve Board applies to all loans secured by an owner occupied residence, except seller financed loans (PMMS)
Regulation Z
This is responsible for enforcing TILA with non-depository lenders, while consumer financial protection bureau enforces it with depository lenders
Federal Trader Commission FTC
Total of all costs the borrower must pay for obtaining credit (interest amounts, origination fee, loan servicing, loan finders fee, and discount points
Finance Charge
This is complied by folding all of the finance charges into interest rate. Its the relationship of the total charge to the total amount to be financed.
Annual Percentage Rate APR
What are the trigger terms for Regulation Z advertising?
- Amount or % of down payment
- Amt of any installment/non payment
- # of payments
- Period of payments
- Finance charge
- Interest rate only if APR also given
- Use of terms assume or assumable if any specific loan detail is also mentioned
This prohibits lenders and others who grant or arrange for credit to consumers from discriminating against credit applications on the basis of race, color, religion, sex, marital status, age and dependence on public assistance. Must disclose reasons for denial of credit or term of credit in writing within 30 days of application
Equal Credit Opportunity Act ECOA
