Source of Funds

Question 1

What is the major difference between an institutional lender and a non-institutional lender?

Answer 1

Institutional lenders are highly regulated by state and federal agencies, while non-institutional lenders have few, if any, regulations.

Question 2

Who licenses commercial banks?

Answer 2

The Texas Department of Banking licenses state-chartered banks, while the Comptroller of the Currency gives licenses to nationally-chartered banks.

Question 3

Historically what has been true of interest rates on loans from savings and loan associations?

Answer 3

The interest rates for loans from savings associations have historically been higher than what banks have charged, due to the higher demand for loans from the savings institutions. However, more recently that has changed, and the rates charged by both savings associations and banks are usually about the same.

Question 4

What kinds of projects are typical for life insurance company investments?

Answer 4

Life insurance companies are a major source of credit for shopping centers, office buildings, hotels and motels, industrial buildings and large apartment complexes.

Question 5

What is usury law?

Answer 5

Usury laws regulate the maximum amount of interest an entity can charge on various loans.

Question 6

How many types of Real Estate Investment Trusts are there and what are they?

Answer 6

There are three types of real estate investment trusts: equity trusts, mortgage trusts and hybrid (or combined) trusts.

Question 7

What are the two types of municipal bonds and how are they used?

Answer 7

General obligation (GO) bonds are typically used to fund projects that will benefit the entire community, like sewers, road paving and parks.   
Revenue bonds are used to fund projects that will benefit specific populations, who provide the revenue to repay the debt through user fees and user taxes, such as toll charges for a bond-financed toll bridge construction project.

Question 8

What kinds of loans do private loan companies usually deal in and why?

Answer 8

Private loan companies have been particularly active in the junior loan market. The Tax Reform Act of 1986 abolished deductions for any interest paid on consumer finance, but maintained the deductions for any interest paid on home loans. This action served to make investment in junior loans more widespread.

Question 9

Who typically would use the services of a mortgage broker?

Answer 9

A mortgage broker is usually retained by a borrower to help obtain financing for a specific commercial property.

Question 10

What is a mortgage correspondent and what does it do?

Answer 10

A mortgage correspondent is a mortgage banking company that represents an institutional lender. The correspondent receives a fee for originating, processing and closing a loan. In some cases the correspondent may also collect payments, periodically inspect the property and supervise a foreclosure.

Question 11

Under what circumstances would a real estate licensee need a mortgage loan originator’s license?

Answer 11

If a licensee does any of the following:

Contacts a delinquent seller’s existing lender to work out a loan modification to avoid a foreclosure

Takes mortgage loan application information from a prospective buyer

Attempts to negotiate a residential loan on a client’s behalf

Negotiates for a seller who is offering seller financing on the sale of an investment property when the buyer intends to use the property as a residence

Question 12

List three disclosure forms that mortgage loan originators must use. (See screen 27-28 for other correct answers.)

Answer 12

Required Disclosure Form
Conditional Qualification Letter (Form A)
Conditional Approval Letter (Form B)

Question 13

An institutional lender is

Answer 13

any financial institution whose loans and lending practices are regulated by law. These institutions pool the funds of their depositors and invest the funds in real estate loans, making them financial intermediaries

Question 14

In Texas, institutional lenders include:

Answer 14

Commercial banks
Savings and loan associations
Life insurance companies

Question 15

A commercial bank is designed to

Answer 15

act as a depository for funds and as a lender for commercial activities – usually short-term loans. Commercial banks are very active in the home equity loan market.

Question 16

A savings and loan association’s primary function is

Answer 16

to promote thrift and home ownership. These institutions often offer their depositors a higher rate of interest on their deposits than commercial banks offer.

Question 17

Life insurance companies are a major source of

Answer 17

credit for shopping centers, office buildings, hotels and motels, industrial buildings and large apartment complexes. These companies typically invest up to a third of their assets in real estate loans.

Question 18

Non-institutional lenders are those entities who

Answer 18

make real estate loans but who are not so strictly regulated by state or federal government agencies.

Question 19

Non-institutional lenders include

Answer 19

private parties (individuals), mortgage brokers, mortgage bankers, real estate trusts, syndications, real estate bonds, endowment funds, private loan companies, pension and endowment funds and credit unions.

Question 20

Private party lenders

Answer 20

have no formal structure. They have very few laws or regulations to deal with in regard to their lending practices. However, private party lenders are not exempt from usury laws.

Question 21

Mortgage Brokers

Answer 21

help borrowers obtain property financing. Finding a suitable lender and arranging the loan entitles the broker to a commission or fee, which is paid by the borrower.

Question 22

Mortgage Bankers

Answer 22

are managers of real estate loans. They can receive a fee for originating, processing and closing the loan. In some cases they may also collect payments, periodically inspect the property and supervise a foreclosure, if that becomes necessary.

Question 23

Real Estate Investment Trusts (REITs)

Answer 23

allow small investors to combine their resources with others to raise venture capital for real estate transactions. REITs are exempt from corporate tax if they invest at least 75 percent of their assets in real estate and distribute 95 percent or more of their annual real estate income to their investors.

Question 24

Syndicates

Answer 24

are groups of two or more people who unite their resources for the purpose of making and operating an investment. They can use the pooled capital to finance a real estate transaction or to purchase a piece of property.

Question 25

Real Estate Bonds

Answer 25

are popular financing instruments, which can be in the form of either corporation bonds or municipal bonds. General obligation (GO) bonds, a common form of the municipal bond, are used to raise capital for community development projects, such as parks and schools.

Question 26

Private Loan Companies

Answer 26

deal mostly in junior financing – second deeds of trust that allow borrowers to pull out some of the equity in their property to use for other purchases

Question 27

Some of these private loan companies deal with financing for

Answer 27

consumer goods other than real estate, but there are others who deal exclusively in real estate financing. They can make loans from their own or borrowed funds, they can act as brokers between borrowers and lenders, and they can buy and sell junior financing instruments.

Question 28

Since mortgage-backed securities have become available

Answer 28

pension funds have begun to play a role in the real estate market by purchasing existing real estate loans in the secondary market.

Question 29

Since endowment funds are permanent, they offer

Answer 29

a good source of mortgage financing for commercial and industrial properties. Many commercial banks and mortgage companies handle investments for endowment funds.

Question 30

Credit unions are nonprofit financial institutions

Answer 30

They pay no income tax, so they can pay higher interest rates on deposits than other savings institutions. They also offer a wide variety of loans at far lower interest rates than their competitors. This makes credit union membership very attractive.