Unit 13 Flashcards
Conventional Loan
a mortgage that has no direct federal involvement
FHA/VA Loan
loans with federal involvement
RE Financing Market has 3 basic components
- government influences, primarily through FED
- primary mortgage market
- secondary mortgage market
Reserve requirements
the minimum level of funds that an institution must maintain
primary mortgage market
made up of lenders that originate mortgage loans
How is income on a loan realized
- finance charges collected at closing
2. recurring income
Major lends in primary mortgage market
- savings association and commercial banks
- insurnace companies
- credit unions
- pension funds
- endowment funds
- investment group financing
- mortgage banking companies
- mortgage brokers
Mortgage brokers
intermediaries who bring borrowers and lenders together; locate potnetial borrowers, process the loan application, submit the application to lenders for final approval; do not service loans
Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act)
requires states to license mortgage loan originators according to national standards and all state agneices to participation in teh NMLS
NMLS
sole system of licensure for mortgage companies for 57 state agencies and sole system for licensure for MLO’s for 59 state and territorial agencies
Secondary Mortgage Market
loans are bought and sold only after they have been funded (closed)
What does the secondary mortgage market help with?
raise capital to make additional mortgage loan; helps when money is in short supply
What does the secondary mortgage market help stimulate?
- housing construction market
2. mortgage market
How does the lender benefit from the secondary mortgage market?
- raising additional capital
- avoiding interest rate risks
- making a profit on the sale
Pools
a number of mortgage loans assembled into blocks
Government Sponsored Enterprises
key players in the secondary mortgage market to help increase loan opportunities for homebuyers
Government Sponsored Enterprises
- Fannie Mae
- Freddie Mac
- Ginnie Mae
How does Fannie Mae Work
buys a block or pool of mortgages that they then use as collaterial for mortgage-backed securities that are sold on the global market
What are Fannie Mae’s secondary market functions
Conventional, FHA-insured, VA Guaranteed
What are Freddie Mac’s secondary market functions
Mostly conventional loans
What are Ginnie Mae’s secondary market functions
special assistance loans
What is the most importnat feasures of GSEs
standardization loan application, credit report, appraisal and other forms that are required for loans purchased, detailed guideliens for lending process
Farmer Mac
created a secondary market for agricultural mortgage and rural utilities loans and the portinos fo agriculture and rural development loans garanteed by the USDA
How does Farmer Mac work?
guarantee payment of principal and interest on the loans it purchases and pools those loans for sale
How does Ginnie Mae differ from other secondary markets?
part of governmetn; government agency
How does Ginnie Mae work?
administer special assistance programs and guarantees investment securities issued by private offerors and backed by pools of FHA-insured and VA-guaranteed mortgage loans
pass-through certificate
a security interest in a pool of mortgages that proves for a monthly pass-through of principal and interest payments directly to the certificate holder
What’s the biggest difference with Ginnie Mae
pass-through certificates
How are mortgage loans classified
Loan-to-Value Ratio (LTV)
Loan to Value Ratio
ratio of debt to the value of the property where value is the sales price or approased value, whichever is less
If you have a low LTV radio, what happens to the down payment?
higher
what does a higher down payment mean for a lender?
a more secure loan, minizing risk
What is the real name for Ginnie Mae
Government National Mortgage Association
What is the real name for Farmer Mac
Federal Agricultural Mortgage Corporation
What is the real name for Fannie Mae
Gederal National Mortgage Association
What is the real name for Freddie Mac
Federal Home Loan Mortgage Corporation
What are the most secure loans
conventional loans
Why are conventional loans most secure
LTV ratio is lowest
How does a conventional loan vendor determine the loan amount?
appraised value
Private Mortgage Insurance
private insurance for a loan with less than 20% down payment
What does the lender carefully evalue when making a conventional loan?
- property
2. prospective borrower
What is the maximum loan limit for a single-family home
$679,650
Nonconforming Loans/Jumbo Loans
loans that exceed the stated limits; not marketable; held in lender’s investment portfolio
Homeowner’s Protection Act of 1998
requires that the lender automatically terminate the PMI payment if the borrower has accrued at least 22% equity in the home and is current on mortgage payments
Federal Housing Administration (FHA) Loan
refers to a loan that is insured by the agency
Other types of FHA loans
adjustable rate mortgages, home improvement and rehabilitation loans, loans for the purchase of condominiums
Prepayment privilages for FHA loan
the borrower under a VA-guaranteed loan can prepay the debt at any time without penalty
Assumption rules for VA Loans
VA-guaranteed loans made on or after March 1, 1988 are no longer assumable without prior consent from the lender
Farm Service Agency (FSA)
federal agency of teh department of agriculture that offers programs to help families purchase or operate family farms and has taken over function of the former Farmers Home Administration (FmHA)
Rural Housing and Community Development Services (RHCDS)
FSA provides loans to help familities purchase or improve single-family homes in rural areas
2 categories of FSA loan programs
- guaranteed loans that are made and serviced by private lenders and guarateed for a specific percentages by the FSA
- Loans made directly by the FSA
Farm Credit System (Farm Credit)
provides loans to farmers, ranchers, rural homeowners, argicultural cooperatives, rural utility systems, and agribusinesses
Do Farm Credit loans take deposits?
no
How are loanable funds raised for Farm Credit loans?
through bonds and notes
Package Loan
includes real and personal property; popular for condos; usually include furniture, drapes, kitchen range, microwave oven, refrigerator, dishwasher, washer, dryer, and other applicances as part of the sales price
Blanket Loan
covers more than one parcel or lot
What are blanket loans used for?
by developers to finance subdivisions, finance purchase of improved properties, consolidate multiple loans on a single property
What do blanket loans usually include?
partial release clause
Partial release clause
permits the borrower to obtain the release of any one lot or parcel from the blanket lien by repaying a certain amount of the loan
Open-end loan
provides a security interest when a note is execuited by the borrower to the lender, but also secures any future advances of funds made by the elnder to the borrower
What is the interest rate on the intial amount borrowed in an open ended loan?
fixed, but future advances may be charged at market rate
Why would someone prefer an open-ended loan?
less costly alterative; allows borrower to icnrease the debt to its original amount or the maximum amoutn stated in teh note after the debt has been reduced by payments over a period of time
Construction loan
made to finance the construction of improvements on real estate such as homes, apartments and office buildings
Sale adn leaseback arrangements
used to fiannce large commercial or industrial properties; not loans
Buydown
a way to temporariliy (or permanently) lower the interest rate on a mortgage or deed of trust loan
Home equity loan
a source of funds that takes advantage of the equity built up in a home
draws
disburse of funds in payments by the lender during construction
What does the lender do before releasing a draw?
inspects the work
End loan/take-out loan
permanent loan that will pay off the construction financing lender when the work is completed by paying the principal owed on the construction loan
What does the borrower pay interest on for construction loans?
money that has actually been disbursed
What type of financing are construction loans typically?
short-term or interim financing
How are draws made?
made to the general contractor or the owenr for the part of the construction work that has been completed since the previous payment
What must the general contractor provide for construction loans?
must provide the lender adquate waivers that release all mechanics’ lien rights for the work covered by the payment
How do sale-and-leaseback loans work?
land and building are sold to an investor who then leases it back to the seller who can do business as a tenant
What can a home equity loan be used for?
- finance a purchase of an expensive item
- consolidate existing intallment loans or credit card debt
- pay medical, education, home improvement, or other expenses
How can a home equity loan be taken out?
- fixed loan
2. line of credit
Home Equity Line of Credit (HELOC)
lender extends a line of credit that the borrower can use at will
What is a downside to HELOC?
the full amoutn of the line of credit will appear on the borrower’s credit report, even though it isn’t being used
What is the upside to HELOC?
could eventually lead to a new first mortgage loan
What are the benefits to a home equity loan?
- only amount borrowed will be subject to higher rate
2. interest paid on a home equity loan of up to $100k is tax deductible
Negative to home equity loan?
carries higher interest rate than a purchase loan
How does a buydown work?
a lump sum is paid in cash to the lender at the closing with the payment offsetting and reducing the interest rate and monthly payments during the mortgage’s first few years; after first 2 years, the rate rises
How does the federal government regulate lending practices?
- Truth of Lending Act (TILA)
- Equal Credit Opportunity Act (ECOA)
- Community Reinvestment Act of 1977 (CRA)
- Real Estate Settlement Procedures Act (RESPA)
When does Regulation Z generally apply?
when a credit transaction is secured by a residence
Creditor (Regulation Z)
any person who extends consumer credit more than 25 times each year or more than 5 times each year if the transactions invovle dwellings as security
3 day right of recission
the borrower has 3 business day in which to rescind thetransaction by notifying the lender; for most consumer credit transactions covered by Regulation Z
What does the 3 day right of recission apply to?
refinancing a home mortgage or taking out a home equity loan
What does the 3 day right of recission not apply to?
owner-occupied residential purchse-money or first mortgage or deed of trust loans
All media includes
newspapers, flyers, signs, billboars, websites, radio, TV ads, direct mailings
Triggering Terms
specific credit terms (down payment, monthly payment, dollar amount of the finance charge, term of loan)
What must be included in advertisements with triggering terms to comply with regulation Z?
- cash price
- Required Down Payment
- Number, amounts and due days of all payments
- APR
- Total of all payments to be made over the term of the mortgage
Equal Credit Opportunity Act (ECOA)
prohibits discrimination in the lending process based on the credit applicant’s race, color, religion, national origin, sex, maritual status, age, or receipt of public assistance
Equal Credit Opportunity Act (ECOA)
prohibits discrimination in the lending process based on the credit applicant’s race, color, religion, national origin, sex, maritual status, age, or receipt of public assistance
What does ECOA require?
credit application be considered only on the basis of income, the stability of the source of that income, net work, and credit rating
If a loan application is rejected, what does ECOA and FCRA require of lendors?
the lendor details the reason for rejection in a statement that must be provided to the loan application within 30 days; loan applicant has right ot get a free copy of the report
Agency that enforces ECOA
- Federal Trade Commission
2. Department of Justice
Community reinvestment
refers to the responsibility of financial institutuion to help meet their communities’ needs for low-income and moderate-income housing
Community Reinvestment Act of 1977 (CRA)
financial institutions are expected to meet the deposit and credit needs of their communities; participate and invest in local community development and rehabilitation projects; and participate in loan programs for housing, small businesses, and small farms
What does the law require CRA statements contain
- definition of the geographic boundaries of its community
- identify the types of community reinvestment credits offered
- comments from public about institution’s performance in meeting the community’s needs
Real Estate Settlement Procedures Act (RESPA)
applies to any residential real estate transaction involving a new first mortgage loan; designed to ensure that the buyer and seller are boht fully informed of all costs related to closing the transaction
Automated underwriting
can shorten loan approvals from weeks to minutes; tends to lower cost of loan application and approval
Freddie Mac automated underwriting system?
Loan Prospector
Fannie Mae automated underwriting system?
Desktop Underwriter
What is the problem with using automated underwriting systems?
application of credit scores may not be accurate or fair, which could result in making it more difficult for low-income and minority borrowers to obtain mortgages
What do underwriters need to consider?
- collateral
- credit reputation
- capacity
What do underwriters look at for collateral
house value, down payment, property type
What to underwriters look at for capacity?
income, debt, cash reserves, product type
What do underwriters look at for credit reputation?
credit scores, human judgement
Federal Reserve System’s role
to maintain sound credit conditions, help counteract inflationary and deflationary trends, and create a favorable economic climate
How many federal reserve districts are there?
12
What does the Fed regulate?
the flow of money and interest rates in teh marketplace through its member banks by controlling the rate charged for loans it makes to them as well as their reserve requirements
discount rate
rate charged for loans
Prime rate
base rate
What happens when discount rates rise
interest rates on all sorts of loan rise, making funding harder to obtain
How does the Fed stimulate the economy?
by increasing the amount of money in circulation by buying Treasury securities
How does the Fed control inflation?
by decreasing the amount of money in circulation by selling Treasury securities
What is a loan to a borrower?
means of financing an expenditure
What is a loan to a lender?
an investment
What does serving a loan involve
- collecting payments
- accounting
- bookkeeping
- preparing insurance and tax records
- processing payments of taxes and insurance
- following up on loan payment and delinquency
What type of lenders are savings associations and commerical banks?
fiduciary lenders
Insurance companies
accumulate large sums of money from premiums paid by their policyholders
Credit unions
cooperative organizations whose members place money in savings accounts
Pension funds
have large amounts of money availbale for investment
Who handles real estate activity for pension funds?
mortgage bankers and mortgage brokers
What are endowment funds used for mostly?
low-risk commerical and industrial properties
Who uses investment group financing?
large real estate projects (highrise apartment buildings, office complexes, shopping centers)
How do mortgage banking companies originate loans?
with money belonging to insurance companies, pension funds, and individuals, as well as funds of their own
Private mortgage Insurance (PMI)
an insurance policy that provides the lender with funds in the event of borrower default on the loan
How can a borrower obtain a conventional mortgage loan with a down payment of less than 20%
Private Mortgage Insurance
What does an FHA-insured loan provide?
extra security to the lender
What do FHA-insured loans protect against?
loss from borrower default
How are FHA loans competitive?
an FHA loan can be made even when the borrower makes a relatively low down payment, resulting in a high LTV
What is the most popular FHA loan
covers fixed-rate loans for 10-30 years on 1-4 family residences
What is the lowest down payment for an FHA loan?
3.5%
Can an FHA loan charge discount points?
yes
FHA loan assumption rules
a qualified buyer can assume an existing FHA-insured loan
Who can bid on HUD foreclosed homes?
real estate professionals who are registered with HUD and do not deal with the general public directly
HUD’s good Neighbor Next Door program
intended to help revitalize certain areas by allowing law enforcement officers, firefighters, EMTs, and Pre-K-12 treachers to purchase eligible property in those areas at a 50% discount off list price; must live in property for at least 36 months
What are VA loans for?
for the purchase or construction of homes for eligible veterans and their spouses; purchase manufactured homes and the lots on which to place them
Criteria for VA Loans
- 90 days of active service for service people currently on active duty
- 90 days of active service for veterans of WW2, Korean War, Vietnam, Gulf War
- 181 days active service during interconflict periods between July 26, 1947 - September 6, 1980
- 2 years of service during any peactime period since 1980 or full period for which the veteran was called or ordered to active duty
- 6+ years of continuous duty as reservist
Rules and regulations for VA loans
- owner must live on property
- must apply for certificate of eligibility
- Max guarantee a veteran is entitled
Limit on VA loans
no dollar limit; determiend by lender a qualifications of buyer
Certificate of Reasonable Value (CRV)
states the property’s current market value based on a VA-approved appraisal; places limit on loan
VA funding fee
% of loan amount
In which cases are there no VA funding fees
- veteran receiving VA compensation for service-connected disability
- ceteren entitled to receive compensation for service-connected disabliity if the veteran did not receive retirement or active duty pay
- surviving spouse of a veteran who died in service or from a service-connected disability
What cannot be charged to a veteran buyer?
commission, brokerage fees, buyer broker fees
Regulation Z
requires that credit institutuions inform borrowers of the true cost of obtaining credit
Who does Regulation Z not apply to?
business or commerical loans or teh agrucultural loans of any amount
What do finance charge disclosures need to contain?
any loan fees, finder’s fees, service charges, points, interest
Hepling Families Save Their Home Act
Under TILA, requires that consumers be notified of the sale or transfer of their mortgage loans
Within what time frame must a mortgage purchaser provide disclosures?
30 days
Regulation Z requirements for buydowns or reduced-rate mortgages
must include both the term to which the interest rate applies and the APR
Regulation Z requirements for variable-rate mortgages
number and timing of payments, amount of the largest and smallest payments, statement of fact that the actual payments will vary between these two extremes
