14 Hour Mortgage Broker 2006

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FloridaMortgageBrokering/LendingContinuingEducationOnline or Correspondence

Course Includes • LatestupdatestoFloridalawsandrulesforthemortgagebrokering/lendingindustry

• ModulesincludeFNMA,fairhousing,andrealestatefinanceandmortgages

• Optionalend-of-modulereviewquestionsprovidedtoensureyour

comprehensionofthematerial.No final exam required.

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2 0 0 6 E D I T I o N

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Study on your schedule, at your pace.

CorrespondenceThis book contains the 4-hour mandatory law and rule update plus additional modules on real estate fi nance and mortgages, FNMA, and fair housing. Mail or fax your Registration Form/Affi davit to us and receive your offi cial Certifi cate of Completion.

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Florida statutes and Department rules require all loan originators, principal representatives, associates, and mortgage brokers to complete 14 hours of continuing education every two years. The next deadline is August 31, 2006.

Busy professionals can study on their

schedule, at home or work. There is no need to travel and attend class or seminars.

This book contains the 14-hour course you need to complete your education, including the 4-hour law and rule update. Optional end-of-module review questions provided to ensure your comprehension of the course material. No final exam required.

Take full advantage of the benefits of

distance learning! Bert Rodgers Schools offers the identical course online and by correspondence. At only $39.95 for 14 hours—online or correspondence—it is a true value.

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licensed professionals since 1958, Bert Rodgers Schools is accredited by the Florida Department of Financial Services (Permit #MBS 2006-43).

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Continuing Education Course2006 Edition

P.O. Box 4708, Sarasota, Florida 34230-4708

14hour_MortBroker.indb 1 5/5/05 5:02:26 PM

Mortgage Brokering/Lending 14-HourFlorida

Bert Rodgers Schools of Real Estate, Inc.© 2005

All rights reserved, including the right to reproduce this manual or any portion of this manual in any form, or to use it for teaching purposes without the express written consent of the copy-right holder.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

Bert Rodgers Schools of Real Estate, Inc. shall not be liable in any way for failure to receive and/or process your Registration Form/Affidavit within any specific time period. It is your responsibility to ensure that you have complied with your license renewal requirements in a timely manner.

Bert Rodgers Schools of Real Estate, Inc. recognizes and respects its students’ privacy. Course records are confidential, and the School does not sell or rent students’ names or other infor-mation to any company or organization.

Cover design and photographs: Digital Ink Design Group

ISBN: 1-891753-32-2

Printed in the United States of America


Second Printing

Bert Rodgers Schools of Real Estate, Inc. iii

14-HourBrokering/Lending

Continuing Education

Course

Bert Rodgers Schoolsof Real Estate, Inc.

FounderBert Rodgers

PresidentLori J. Rodgers

Administrative Vice PresidentWilliam E. Giffard

ExecutiveAdministrative Assistant

Kelli Finnigan

Website CoordinatorAlison Harner

Production CoordinatorLisa Lacey

Production SupportLaraine Jansen

InstructorJanine Spiegelman

AccountantAaron Pulone

TypesettingWild Dezign

PrintingAction Printing

Cover DesignDigital Ink Design Group

Table of Contents

Module One Florida Mortgage Brokerage and Lending

Act Rules and Regulations 1 Recent Changes in Florida Statutes Regulating

Mortgage Brokerage and Mortgage Lending 2 Mortgage Brokerage License Law 3 Part I: General Provisions 4 Part II and III: Mortgage Brokers and

Mortgage Lenders 6 Part IV: Florida Fair Lending Act 6 Review Questions 11

Module Two Real Estate Finance and Mortgages 13

Review Questions

30

Module Three

The Federal National Mortgage Association

(Fannie Mae)

33

Review Questions

46Module Four

Fair Housing

49

Review Questions

57Registration Form/Affidavit 59


Florida Mortgage

17: t 23Part II Real Estate

Part I: Real Estate Finance Mor gages

iv Bert Rodgers Schools of Real Estate, Inc.

P.O. Box 4708, Sarasota, Florida 34230-4708

Tel. (941) 378-2900Toll Free (800) 432-0320

Fax (941) 378-3883

Email: [email protected]

Website: www.bertrodgers.com

200 East Gaines StreetTallahassee, Florida 32399-0372

Tel. (850) 410-9805(Initial license or license renewal questions)

Telephone Hours: 8:00 a.m. - 5:00 p.m. Monday through Friday

Fax (850) 410-9748

For additional information, visit the Department website:

D I R E C T O R Y


Florida Office of Financial Regulation Division of Securities and Finance

www.flofr.com/licensing/MBlist.htm

Bert Rodgers Schools of Real Estate, Inc. v

Welcome to Bert Rodgers Schools! Online or Inside this Book …

Everything You Need to Complete Your Continuing Education Requirement.

CONTINUING EDUCATION

originators, and

associates are required to complete

fourteen (14) hours of continuing education every two years. Four hours of the total 14 must cover the laws in Chapter 494, F.S., and the rules in Chapter 69V-40, F.A.C. Module 1 of the Bert Rodgers Schools course meets this requirement.

IT’S EASY TO MEET YOUR REQUIREMENT WITH BERT RODGERS SCHOOLS!

Study the course in this book, sent at no obligation, or study online. No test is required! Complete the optional review questions to measure your compre-hension of the course material.

Correspondence. Simply complete the Registration Form/Affidavit and submit it with your payment by mail, or fax.

Online. Register and pay by credit card at www.bertrodgers.com. Then complete and submit the online Affidavit and print your official Certificate of Completion.

NEED HELP?

Call our toll-free number and talk to a real person! We will answer your administrative, technical, and instructional questions quickly and professionally. If you prefer, email us 24/7.

Administrative Support: Weekdays 8:30-5:15 Technical Support: Weekdays 7-9, Weekends 9-5 Toll Free: (800) 432-0320 Local: (941) 378-2900 Fax: (941) 378-3883Website: www.bertrodgers.comEmail administrative inquiries: [email protected] instructor inquiries: [email protected]

HOW DO I RECEIVE MY CERTIFICATE OF COMPLETION?

Mail: Use the enclosed envelope and send your Registration Form/Affadavit and payment to us. We will mail your certificate of completion the following business day.

Fax: For even faster results, choose one of our con-venient FaxBack Services and receive your certificate same-day or next-day.

Online: For immediate results, submit your payment and affidavit online, and print your official certificate! Important Note: Do not send your certificate of comple-tion or any other type of notice to the Department unless otherwise requested. Retain your certificate of completion for at least 4 years following the end of the renewal period.

SUMMARY

Keep this book as a valuable reference! You may study the 14-hour course with the book or online. You can


Principal representatives, loan mortgage brokers

always rely on Bert Rodgers Schools for quality, convenience, and value in continuing education.

The deadline is August 31, 2006.

vi Bert Rodgers Schools of Real Estate, Inc.


Bert Rodgers Schools of Real Estate, Inc. vii

How to Complete YourContinuing Education Requirement

Online at www.bertrodgers.com

Step 1: Study the 14-hour course in this book or online.

Step 2: Register and Pay for the course affidavit. Click on Register For Courses. Choose a username and password and submit your credit card payment securely.

Step 3: Enter your username and password and choose 14-Hour Course Including Affidavit. Finish the course by submitting your name, date and the time in hours to complete the course.

Step 4: Upon successful completion of your course affidavit, print your official certificate of completion.

Correspondence Step 1: Study the 14-hour course in this book.

Step 2: Complete the Registration Form/Affidavit including the Course Completion Affidavit, Student Information, and Payment Method sections. If you choose an optional FaxBack Service, complete this section too.

Step 3: Mail or fax the Registration Form/Affidavit to us and we mail your certificate the next business day. To receive a copy of your certificate sooner, choose one of our Priority FaxBack Services.

Standard TuitionYour Registration Form/Affidavit is processed the same business day it is received, and your certificate of completion is sent to you by first-class mail the next business day.

Priority FaxBack Services (optional) • Same-Day FaxBack ($10 service fee*, credit cards only). Fax your Registration Form/

Affidavit to us any business day by 12p.m. est. We will fax your certificate of completion to you by 4 p.m. the same day (continental United States only).

• Next-Day FaxBack ($7 service fee*, credit cards only). Fax your Registration Form/Affidavit to us any business day by 5p.m. est. We will fax your certificate of completion to you by 11 a.m. the following business day (continental United States only).

*Priority FaxBack Service is available in the continental United States for the fees listed. For fax services outside of the continental United States, we charge an additional $10.

Priority FaxBack Service Notes• To use the Priority FaxBack Service, payment must be made by credit card.• Fax your Registration Form/Affidavit to us at (941) 378-3883—be sure to provide your fax number.• Your certificate of completion will be faxed only if you pay for Priority FaxBack Service.• Priority grading includes three attempts to fax your certificate of completion.


viii Bert Rodgers Schools of Real Estate, Inc.

AcknowledgmentsBert Rodgers Schools of Real Estate, Inc. expresses our gratitude and appreciation to the authors, and others

who have contributed to this mortgage brokering/lending distance learning program and the new edition of the

Mark Mazzuki of Digital Ink Design Group for his cover design.

Lori J. Rodgersand the Bert Rodgers Staff


14-Hour Mortgage Brokering/Lending Continuing Education Course.

Bert Rodgers Schools would also like to thank Julie Wild of Wild Dezign for her typesetting expertise and

An additional thank you to our instructor Janine Spiegelman.

© 2005 Bert Rodgers Schools of Real Estate, Inc. 1

LEARNING OBJECTIVESAfter completing this module, you should be able to:

Florida Mortgage Brokerage and Act Rules and Regulations

M O D U L E 1

1. Summarize the changes in the rules regulating mortgage brokerage and mortgage lending.

2. Identify the educational requirements for licen-sure in mortgage brokerage and lending.

3. Summarize the organizational structure of the Florida Department of Financial Services, includ-ing the Financial Services Commission and the Office of Financial Regulations.

4. Explain the powers and duties of the Financial Services Commission and the Office of Financial Regulations.

5. Explain the penalties, which could be imposed for a violation of Chapter 494, F.S.

6. Identify the prohibited practices pursuant to Chapter 494.

7. Explain the purpose for the enactment of the Florida Fair Lending Act.

8. Identify the types of transactions covered by the Florida Fair Lending Act.

9. Define a “high-cost home loan”.10. Identify the acts prohibited by the Florida Fair

Lending Act.11. Identify the disclosure requirements of the

Florida Fair Lending Act.12. Explain the enforcement and penalties of any

violation of the Florida Fair Lending Act.

The Department of Financial Services regulates mortgage brokers (MB), mortgage brokerage busi-nesses (MBB), mortgage lenders (ML), and cor-respondent mortgage lenders (CL) by the use of Florida Statutes (F.S.) and the Florida Administrative Code (F.A.C.). Chapter 494, F.S., is known as the Florida Mortgage Brokerage and Lending Act Rules and Regulations. Chapter 494 originally became effective in October 1991, and several significant amendments have been made since 1991. Chapter 69V-40 of the Florida Administrative Code (formerly Chapter 3D-40 F.A.C.) is called Rules Regulating Mortgage Brokerage. Certain minor changes to Chapter 69V-40 were made effective on August 2, 2002, and a few minor amendments have been made through 2003

and 2004. The purpose of this module is to review Florida mortgage brokerage rules and regulations.

In 2002, the Florida Legislature created the Financial Services Commission (Commission), con-sisting of the Governor and the elected Cabinet. The Financial Services Commission serves as agency head for the Office of Financial Regulation (OFR or Office) and the Office of Insurance Regulation (OIR). OFR and OIR are administratively housed within the Department of Financial Services, headed by the Chief Financial Officer. The Office of Financial Regulation has offices located in Miami, Fort Lauderdale, West Palm Beach, Tampa, Orlando, Jacksonville, Pensacola and Fort Myers. The regional offices are primarily responsible for conducting examinations to ensure

INTRODUCTION

Clay Rodgers graduated from the University of Florida with a B.S. degree in Business Administration, majoring in Real Estate. He is President of Rodgers Appraisal Services, Inc., and has more than 20 years experience serving the appraisal needs of Florida’s mort-gage brokers and lenders.


Janine Spiegelman, BS, received her degree from the University of Miami . licensed Florida Mortgage Broker

State of Florida, Department of Banking and Finance (now known as The Department of Financial Services)

as

a

Financial Examiner/

Analyst

II.

A, Janine worked for the

2 Module 1

regulatory compliance by financial institutions and financial service companies.

The Office examines and regulates all state-authorized or state-chartered banks, credit unions, trust companies, and foreign banking organizations to ensure they operate in a safe and sound manner and in compliance with applicable statutes and rules. It reviews and processes new state financial institution charter or license applications as well as applications relating to existing state financial institutions.

The Office also regulates non-depository finan-cial service companies and related industries, includ-ing securities dealers and investment advisers, retail installment sales businesses, consumer finance com-panies, mortgage brokers and lenders, collection agencies and money transmitters; protects consumers from illegal financial activities; reviews all applications to conduct business as a financial service company or securities firm; reviews license applications for regu-lated individuals; and imposes licensing restrictions or denies licensure based on findings. The Office is responsible for conducting financial investigations into allegations of suspected illegal financial activities within jurisdiction of the Office.

RECENT CHANGES IN FLORIDA STATUTES REGULATING MORTGAGE BROKERAGE AND MORTGAGE LENDING

This section discusses the more significant changes in the rules regulating mortgage brokerage and mortgage lending. The most significant change is that all of Chapter 3D-40, F.A.C., Rules Regulating Mortgage Brokerage, including Chapter 3D-40.001 through 3D-40.290, have been moved to a new chap-ter entitled Chapter 69V-40, F.A.C. All references to the Department of Banking and Finance have been changed to the Financial Services Commission and the Office of Financial Regulation, depending on the specific division of responsibility between the new departments. The following are some of the impor-tant changes in these rules.

Books and Records

69V-40.170, F.A.C. was amended to substitute the Office of Financial Regulation for all references to the Department of Banking and Finance.

Application Procedure for Mortgage Broker License

69V-49.031(1), F.A.C. provides that all applications for licensure as a mortgage broker must be filed with the OFR. The new address is:

Office of Financial Regulation 200 East Gaines StreetTallahassee, Florida 32399-0375

The application form for Licensure as a Mortgage Broker has been changed to OFR-MB-101, and is available by mail from the OFR (69V-40.031(a), F.A.C.). The fee, which must accompany the appli-cant’s fingerprint card, has changed from $15.00 to $23.00 (69V-40.031(c), F.A.C.). In the remainder of this section, all references to the Department of Banking and Finance have been changed to the Office of Financial Regulation.

Application Procedure for Mortgage Brokerage Business License

All applications for licensure as a mortgage broker-age business must now be filed with the OFR. (69V-40.051, F.A.C.). The form that now must be used for this application is OFR-MB-201, and can be obtained by mail from the OFR or online. www.dbf.state.fl.us/licensing/mbbapp.pdf

69V-40.051(2), F.A.C. regarding the fingerprint cards and Biographical Summary, now provides as fol-lows:

Each ultimate equitable owner of 10% or greater interest, the chief executive offi-cer and each director of an entity applying for licensure as a mortgage brokerage busi-ness, shall submit a completed fingerprint card and Biographical Summary, Form OFR-MBB-BIO-1 (revised 10/99), to the Office of Financial Regulation along with a $23 nonrefundable processing fee. Form OFR-MBB-BIO-1 is hereby incorporated by refer-ence and available by mail from the Office of Financial Regulation, 200 East Gaines Street, Tallahassee, Florida 32399-0375.

All former references to the Department of Banking and Finance have been changed in this sec-tion to the Office of Financial Regulation.

Application Procedure for Change in Ownership or Control of Saving Clause Mortgage Lending

In 69V-40.100, F.A.C., all references to the Department of Banking and Finance have been changed to the Office of Financial Regulation. The application for Change in Ownership or Control of Saving Clause Mortgage Lending must use the new form OFR-MLST. The form must be mailed to the Office at the new address.

The same changes to the fingerprint card filing and Biographical Summary that were made to the other license application regulations, (i.e. new form OFR-ML-BIO-1 and the new fee of $23), were also made to this section.

NEW

NEW

NEW

NEW


Florida Mortgage Brokerage and Lending Act Rules and Regulations 3

Application Procedure for Mortgage Lender License

69V-40.200, F.A.C. has similarly been amended. The new application form for licensure as a mort-gage lender has changed to OFR-ML-222 and is to be mailed to the Office at the new address. Further, the surety bond must be submitted on new form OFR-ML-444, Mortgage Brokerage and Mortgage Lending Act Surety Bond. The completed fingerprint card and Biographical Summary, new form OFR-ML-BIO-1, and the new nonrefundable, pro-cessing fee of $23 must be submitted to the Office. All references to the Department of Banking and Finance have been changed to the Office of Financial Regulation.

Mortgage Lender License, Mortgage Lender License Pursuant to Saving Clause, and Branch Office License Renewal and Reactivation

69V-40.205, F.A.C. has also been amended. The new form for renewal and reactivation of a mortgage lender license is OFR-ML-R, and the new form for renewal and reactivation of a mortgage lender license pursu-ant to saving clause is OFR-ML-RS. The new form for branch office renewal is OFR-ML-RB, Mortgage Lender and Correspondent Mortgage Lender Branch Office License Renewal and Reactivation Form. All new forms must be filed with the Office.

Application Procedure for Correspondent Mortgage Lender License

69V-40.220, F.A.C. has been amended to change the applicable forms, processing fees, and new references to the Office of Financial Regulation. The new appli-cation form for licensure as a correspondent mort-gage lender is OFR-CL-333. The new surety bond form is OFR-ML-444. The new fingerprint card and Biographical Summary form is OFR-CL-BIO-1, and the processing fee is now $23. All forms must be filed with the Office.

Correspondent Mortgage Lender License and Branch Office License Renewal and Reactivation

69V-40.225, F.A.C. has been amended to change the applicable forms and new references to the Office of Financial Regulation. The new renewal and reac-tivation form for correspondent mortgage lender license is form OFR-CL-R. The new surety bond form is OFR-ML-444. The new Mortgage Lender and Correspondent Mortgage Lender Branch Office License Renewal and Reactivation form is OFR-ML-RB. All forms must be filed with the Office.

Application Procedure for Mortgage Lender or Correspondent Mortgage Lender Branch Office License

69V-40.240, F.A.C. has been amended to change the application form and new references to the Office of Financial Regulation. The new application form for mortgage lender branch office or correspondent mortgage lender branch office license is OFR-ML-222B. All forms must be filed with the Office.

Principal Representative

The regulations contained in 69V-40.242, F.A.C. have also been amended to change the applicable form and new references to the Office of Financial Regulation. The new Principal Representative Designation form is now OFR-ML/CL-PR. All forms must be filed with the Office.

MORTGAGE BROKERAGE LICENSE LAW

Chapter 494, F.S., is now divided into five parts: Part I, General Provisions (494.001-494.00295); Part II, Mortgage Brokers (494.003-494.0043); Part III, Mortgage Lenders (494.006-494.0077); Part IV, Florida Fair Lending Act (494.0078-494.00797); and Part V, Loans Under the Florida Uniform Land Sales Practices Law (494.008).

NEW

NEW

NEW

NEW

NEW

NEW


4 Module 1

PART I: GENERAL PROVISIONS (494.001-494.00295)

The Financial Services Commission

The Financial Services Commission serves as agency head for the Office of Financial Regulation (OFR or Office) and the Office of Insurance Regulation (OIR). OFR and OIR are administratively housed within the Department of Financial Services, headed by the Chief Financial Officer. The Office examines and regulates all state-authorized or state-chartered banks, credit unions, trust companies, and foreign banking organizations to ensure they operate in a safe and sound manner and in compliance with applicable statutes and rules. The Office also regulates non-depository financial service companies and related industries, including securities dealers and investment advisers, retail installment sales businesses, consumer finance companies, mortgage brokers and lenders, collection agencies and money transmitters; protects consumers from illegal financial activities; reviews all applications to conduct business as a financial service company or securities firm; reviews license applica-tions for regulated individuals; and imposes licensing restrictions or denies licensure based on findings. The Office is responsible for conducting financial investi-gations into allegations of suspected illegal financial activities within its jurisdiction.

Powers and Duties of the Commission and Office

The Office of Financial Regulation is responsible for the administration and enforcement of the Florida Statutes regulating both mortgage brokers and mortgage lenders (494.003-494.0077 F.S), while the Financial Services Commission has authority to adopt rules pursuant to 120.563(1) F.S and 120.54 F.S to implement 494.001-494.0077 F.S. The Commission may adopt rules to allow electronic submission of any forms, documents, or fees required by Chapter 494. The Commission may also adopt rules to accept cer-tification of compliance with requirements of Chapter 494 in lieu of requiring submission of documents.

The Office:• has the power to issue and to serve subpoenas

and subpoenas duces tecum to compel the atten-dance of witnesses and the production of all books, accounts, records, and other documents and materials relevant to an examination or investigation.

• may conduct an investigation of any person whenever the office has reason to believe, either upon complaint or otherwise, that any violation

of 494.001-494.0077 F.S. has been committed or is about to be committed, and may, at inter-mittent periods, conduct examinations of any licensee or other person under the provisions of 494.001-494.0077 F.S.

• may bring action through its own counsel in the name and on behalf of the state against any per-son who has violated or is about to violate any provision of 494.001-494.0077 F.S. or any rule of the commission or order of the office issued under 494.001-494.0077 F.S. to enjoin the per-son from continuing in or engaging in any act in furtherance of the violation.

• has the power to issue and serve upon any per-son an order to cease and desist and to take corrective action whenever it has reason to believe the person is violating, has violated, or is about to violate any provision of 494.001-494.0077 F.S., any rule or order issued under 494.001-494.0077 F.S., or any written agree-ment between the person and the Office. All procedural matters relating to issuance and enforcement of such a cease and desist order are governed by the Administrative Procedure Act.

Note: The four provisions listed above are used for regu-lation of the Florida Fair Lending Act, under Section 494.00795, reviewed in section IV of this book.

• has the power to order the refund of any fee directly or indirectly assessed and charged on a mortgage loan transaction which is unauthor-ized or exceeds the maximum fee specifically authorized in 494.001-494.0077 F.S.

• may prohibit the association by a mortgage broker business, or the employment by a mort-gage lender or correspondent mortgage lender, of any person who has engaged in a pattern of misconduct while an associate of a mortgage brokerage business or an employee of a mort-gage lender or correspondent mortgage lender.

• or its duly authorized representative, has the power to administer oaths and affirmations to any person.

PenaltiesWhoever knowingly violates any provision of 494.0041(2)(e), (f), or (g); 494.0072 (2)(e), (f), or (g); or 494.0025 (1), (2), (3), (4), or (5), is guilty of a felony of the third degree, except that any person convicted of a violation of any provision of 494.001-494.0077 F.S., in which violation the total value of money and



property unlawfully obtained exceeded $50,000 and there were five or more victims, is guilty of a felony of the first degree. Each such violation constitutes a separate offense. In addition, if a mortgage transac-tion is made in violation of any provision of 494.001-494.0077 F.S., the person making the transaction and every licensee, director, or officer who participated in making the transaction are jointly and severally liable to every party to the transaction in an action for dam-ages incurred by the party or parties. However, a per-son is not liable under this section upon a showing that such person’s licensees, officers, and directors who participated in making the transaction, if any, acted in good faith and without knowledge and, with the exer-cise of due diligence, could not have known of the act committed in violation of 494.001-494.0077 F.S.

Prohibited PracticesSection 494.0025 F.S. provides that it is unlawful for any person:

To act as a mortgage lender in this state without a cur-rent, active license issued by the office pursuant to 494.001-494.0077, F.S.

To act as a correspondent mortgage lender in this state without a current, active license issued by the office pursuant to 494.006-494.0077, F.S.

To act as a mortgage broker in this state without a current, active license issued by the office pursu-ant to 494.003-494.0043, F.S.

In any practice or transaction or course of business relating to the sale, purchase, negotiation, pro-motion, advertisement, or hypothecation of mort-gage transactions, directly or indirectly:

• To knowingly or willingly employ any device, scheme, or artifice to defraud;

• To engage in any transaction, practice, or course of business which operates as a fraud upon any person in connection with the purchase or sale of any mortgage loan; or

• To obtain property by fraud, willful misrepre-sentation of a future act, or false promise.

In any matter within the jurisdiction of the office, to knowingly and willfully falsify, conceal, or cover up by a trick, scheme, or device a material fact, make any false or fraudulent statement or rep-resentation, or make or use any false writing or document, knowing the same to contain any false or fraudulent statement or entry.

To violate 655.922(2) F.S., subject to 494.001-494.0077 F.S.

Who is required to be licensed under 494.006 F.S.-494.0077 F.S., to fail to report to the office the failure to meet the net worth requirements of 494.0061 F.S., 494.0062 F.S., or 494.0065 F.S. within 48 hours after the person’s knowledge of such failure or within 48 hours after the person should have known of such failure.

To pay a fee or commission in any mortgage loan transaction to any person or entity other than a mortgage brokerage business, mortgage lender, or correspondent mortgage lender, operating under an active license, or a person exempt from licensure under this chapter.

To record a mortgage brokerage agreement or any other document, not rendered by a court of com-petent jurisdiction, which purports to enforce the terms of the mortgage brokerage agreement.

To use the name or logo of a financial institution, as defined in 655.005(1), F.S., or its affiliates or sub-sidiaries when marketing or soliciting existing or prospective customers if such marketing materials are used without the written consent of the finan-cial institution and in a manner that would lead a reasonable person to believe that the material or solicitation originated from, was endorsed by, or is related to or the responsibility of the financial institution or its affiliates or subsidiaries.


6 Module 1

PART II AND III: MORTGAGE BROKERS AND MORTGAGE LENDERS

The only relevant changes made to 494.003-494.797, F.S. were the substitution of the Financial Services Commission or the Office of Financial Regulation in place of the Department of Banking and Finance.

PART IV: FLORIDA FAIR LENDING ACT ABUSIVE MORTGAGE LENDING

In 494.0078, F.S. the Florida Legislature found that:

“abusive mortgage lending has become a problem in this state even though most high-cost home loans do not involve abusive mortgage practices. One of the most com-mon forms of abusive lending is the making of loans that are equity-based rather than income-based. The financing of points and fees in these loans provides immediate income to the originator and encourages creditors to repeatedly refinance home loans. As long as there is sufficient equity in the home, an abu-sive creditor benefits even if the borrower is unable to make the payments and is forced to refinance. The financing of high points and fees causes the loss of equity in each refinanc-ing and often leads to foreclosure.

Abusive lending has threatened the viabil-ity of many communities and caused decreases in home ownership. While the marketplace appears to operate effectively for conven-tional mortgages, too many homeowners find themselves victims of overreaching creditors who provide loans with unnecessarily high costs and terms that are unnecessary to secure repayment of the loan. The Legislature finds that as competition and self-regulation have not eliminated the abusive terms from home-secured loans, the consumer protection pro-visions of this act are necessary to encourage fair lending.”

DEFINITIONS

Section 494.0079, F.S. sets forth the following defini-tions.

Affliate: Any company that controls, is controlled by, or is in common control with another company, as set forth in 12 U.S.C. 1841 et seq. and the regulations adopted thereunder.

Annual percentage rate: The annual percentage rate for the loan calculated according to the provi-sions of 15 U.S.C. 1606 and the regulations adopted thereunder by the Federal Reserve Board.

Borrower: Any natural person obligated to repay a loan, including, but not limited to, a coborrower, cosignor, or guarantor.

Bridge loan: A loan with a maturity of less than 18 months that only requires the payment of interest until such time as the entire unpaid balance is due and payable.

Commission: The Financial Services Commission.

Office: The Office of Financial Regulation of the commission.

Lender: Any person who makes a high-cost home loan or acts as a mortgage broker or lender, finance company, or retail installment seller with respect to a high-cost home loan, but shall not include any entity chartered by the United States Congress when engag-ing in secondary market mortgage transactions as an assignee or otherwise.

Residential mortgage transaction: A transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the consumer’s dwelling to finance the acquisition or initial construction of such dwelling. 15 U.S.C. 1602(w)

HIGH-COST HOME LOANS

Definition

The provisions of the Florida Fair Lending Act deal primarily with high-cost home loans. High-cost home loans are defined by 15 U.S.C. 1602(aa), which pro-vides in pertinent part as follows:

(1) A mortgage referred to in this subsection



means a consumer credit transaction that is secured by the consumer’s principal dwelling, other than a residential mortgage transaction, a reverse mortgage transaction, or a transac-tion under an open end credit plan, if:

(A) the annual percentage rate at consum-mation of the transaction will exceed by more than 10 percentage points the yield on Treasury securities having comparable periods of maturity on the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the cred-itor; or

(B) the total points and fees payable by the consumer at or before closing will exceed the greater of:

(i) 8 percent of the total loan amount; or (2) (A) After the 2-year period beginning on the

effective date of the regulations promul-gated under section 155 of the Riegle Community Development and Regulatory Improvement Act of 1994, and no more frequently than biennially after the first increase or decrease under this sub-paragraph, the Board may by regulation increase or decrease the number of per-centage points specified in paragraph (1)(A), if the Board determines that the increase or decrease is:

(i) consistent with the consumer protec-tions against abusive lending provided by the amendments made by subtitle B of title I of the Riegle Community Development and Regulatory Improvement Act of 1994; and

(ii) warranted by the need for credit. (B) An increase or decrease under subpara-

graph (A) may not result in the number of percent-

age points referred to in subparagraph (A) being:

(i) less that 8 percentage points; or (ii) greater than 12 percentage points. (C) In determining whether to increase or

decrease the number of percentage points referred to in subparagraph (A), the Board shall consult with representatives of con-sumers, including low-income consumers, and lenders.

(3) The amount specified in paragraph (1)(B)(ii) shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index, as reported on June 1 of the year preceding such adjustment.

(4) For purposes of paragraph (1)(B), points and

fees shall include: (A) all items included in the finance charge,

except interest or the time-price differen-tial;

(B) all compensation paid to mortgage bro-kers;

(C) each of the charges listed in section1605(e) of this title (except an escrow for future payment of taxes), unless:

(i) the charge is reasonable; (ii) the creditor receives no direct or indi-

rect compensation; and (iii) the charge is paid to a third party

unaffiliated with the creditor; and (D) such other charges as the Board deter-

mines to be appropriate.

PROHIBITED ACTS

Section 494.00791,F.S. provides for prohibited acts involving high-cost loans.

Prepayment Penalties

A high-cost home loan may not contain terms that require a borrower to pay a prepayment penalty for paying all or part of the loan principal before the date on which the payment is due.

Notwithstanding paragraph (a), a lender making a high-cost home loan may include in the loan con-tract a prepayment fee or penalty, for up to the first 36 months after the date of consummation of the loan, if:

• The borrower has also been offered a choice of another product without a prepayment penalty.

• The borrower has been given, at least 3 business days prior to the loan consummation, a written disclosure of the terms of the prepayment fee or penalty by the lender, including the benefit the borrower will receive for accepting the prepay-ment fee or penalty through either a reduced interest rate on the loan or reduced points or fees.

Default Interest Rate

A high-cost home loan may not provide for a higher interest rate after default on the loan. However, this prohibition does not apply to interest rate changes in a variable rate loan otherwise consistent with the pro-visions of the loan documents, provided the change in interest rate is not triggered by a default or the accel-eration of the interest rate.

Balloon Payments

A high-cost home loan having a term of less than 10 years may not contain terms under which the aggre-


(ii) $5 . 28

8 Module 1

gate amount of the regular periodic payments would not fully amortize the outstanding principal balance. However, this prohibition does not apply when the payment schedule is adjusted to account for the sea-sonal or irregular income of the borrower or if the loan is a bridge loan.

Negative Amortization

A high-cost home loan may not contain terms under which the outstanding principal balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of the interest due.

Prepaid Payments

A high-cost home loan may not include terms under which more than two periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower.

Extending Credit Without Regard to the Payment Ability of the Borrower

A lender making a high-cost home loan shall not engage in any pattern or practice of extending high-cost home loans to borrowers based upon the bor-rowers’ collateral without regard to the borrowers’ ability to repay the loan, including the borrowers’ current and expected income, current obligations, and employment.

Payments to a Home Contractor

A lender shall not make any payments to a contractor under a home improvement contract from amounts of a high-cost home loan other than:

• in the form of an instrument that is payable to the borrower or jointly to the borrower and the contractor; or

• at the election of the borrower by a third-party escrow agent in accordance with terms estab-lished in a written agreement signed by the bor-rower, the lender, and the contractor prior to the date of payment.

Due-On-Demand Clause

A high-cost home loan may not contain a provision that permits the lender, in its sole discretion, to call or accelerate the indebtedness. This provision does not prohibit acceleration of the loan due to the borrower’s failure to abide by the terms of the loan, or due to fraud or material misrepresentation by the consumer in connection with the loan.

Refinancing Within an 18-Month Period A lender, its affiliate, or an assignee shall not refinance any high-cost home loan to the same borrower within the first 18 months of the loan when the refinancing does not have a reasonable benefit to the borrower considering all of the circumstances, including, but not limited to, the terms of both the new and refi-nanced loans, the cost of the new loan, and the bor-rower’s circumstances.

A lender or assignee shall not engage in acts or practices to evade this requirement, including a pat-tern or practice of arranging for the refinancing of the lender’s or assignee’s own loans by affiliated or unaffil-iated lenders or modifying a loan agreement, whether or not the existing loan is satisfied and replaced by the new loan, and charging a fee.

Open-Ended LoansA lender shall not make any loan as an open-ended loan in order to evade the provisions of this act unless such open-ended loans meet the definition in 12 C.F.R. s. 226.2(a)(20).

Recommendation of DefaultA lender shall not recommend or encourage default on an existing loan or other debt prior to and in con-nection with the closing or planned closing of a high-cost home loan that refinances all or any portion of such existing loan or debt.

Prohibited Door-To-Door LoansA high-cost home loan may not be made as a direct result of a potential or future lender or its representa-tive offering or selling a high-cost home loan at the residence of a potential borrower without a prear-ranged appointment with the potential borrower or the expressed invitation of the potential borrower. This subsection does not apply to mail solicitations that may be received by the potential borrower.

Late Payment FeesA lender may not charge a late payment fee for a high-cost home loan except as provided in 494.0079 (13)(a)(b)(c), F.S.:

A late payment fee:

• may not be in excess of 5 percent of the amount of the payment past due.

• may only be assessed for a payment past due for 15 days or more.

• may not be charged more than once with respect to a single late payment. If a late payment fee is deducted from a payment made on the loan and such deduction causes a subsequent default



on a subsequent payment, no late payment fee may be imposed for such default. If a late pay-ment fee has been imposed once with respect to a particular late payment, no such fee shall be imposed with respect to any future payment which would have been timely and sufficient, but for the previous default.

Modification or Deferral FeesA lender may not charge a borrower any fees or other charges to modify, renew, extend, or amend a high-cost home loan or to defer any payment due under the terms of a high-cost home loan on a minimum of one modification, renewal, extension, or deferral per each 12 months of the length of the loan.

HIGH-COST LOAN DISCLOSURESSection 494.00792, F.S. provides for required disclo-sures for high-cost home loans.

A lender making a high-cost home loan shall pro-vide a notice to a borrower. (The required notice is found in Figure 1.1.)

Annual Percentage RateA lender making a high-cost home loan shall disclose:

• In the case of a fixed mortgage, the annual percentage rate and the amount of the regular monthly payment.

• In the case of any other credit transaction, the annual percentage rate, the amount of the reg-ular monthly payment and the amount of any

balloon payment permitted under this section, a statement that the interest rate and monthly payment may increase, and the amount of the maximum monthly payment based upon the maximum interest rate allowed pursuant to law.

Notice to Purchasers and AssigneesAll high-cost home loans shall contain the following notice:

Notice: This is a mortgage subject to the provisions of the Florida Fair Lending Act. Purchasers and assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage which the borrower could assert against the creditor.

Timing of DisclosureThe disclosure required by this subsection shall be given not less than 3 business days prior to the con-summation of the high-cost home loan.

New disclosures are required when, after disclo-sure is made, the lender making the high-cost home loan changes the terms of the extension of credit, including if such changes make the original disclo-sures inaccurate, unless new disclosures are provided that meet the requirements of this section.

A lender may provide new disclosures pursuant to paragraph (b) by telephone, if:

1. The change is initiated by the borrower.

2. At the consummation of the high-cost home loan:

Figure 1.1: Required Disclosure for High-Cost Home LoansIn addition to other disclosures required by law, the following notice in conspicuous type, must be given to the borrower.Notice to borrower.If you obtain this high-cost home loan, the lender will have a mortgage on your home. You could lose your home and any money you have put into it if you do not meet your obligations under the loan. Mortgage loan rates and closing costs and fees vary based on many factors, including your particular credit and financial circumstances, your employment history, the loan-to-value requested, and the type of property that will secure your loan. The loan rate and fees could also vary based upon which lender or broker you select. As a borrower, you should shop around and compare loan rates and fees. You should also consider consulting a qualified independent credit counselor or other experienced financial adviser regarding the rates, fees, and provisions of this mortgage loan before you proceed. You should contact the United States Department of Housing and Urban Development for a list of credit counselors available in your area. You are not required to complete this agreement merely because you have received these disclosures or have signed a loan appli-cation. Borrowing for the purpose of debt consolidation can be an appropriate financial management tool. However, if you continue to incur significant new credit card charges or other debts after this high-cost home loan is closed and then experience financial difficulties, you could lose your home and any equity you have in it if you do not meet your mortgage loan obligations. Remember that property taxes and hom-eowners’ insurance are your responsibility. Not all lenders provide escrow services for these payments. You should ask your lender about these services. Also, your payments on existing debts contribute to your credit rating. You should not accept any advice to ignore your regular payments to your existing creditors. (Chapter 494.00792 F.S.)


10 Module 1

• The lender provides the disclosures in writ-ing to the borrower.

• The lender and the borrower certify in writ-ing that the new disclosures were provided by telephone no later than 3 days prior to the consummation of the high-cost home loan.

A creditor must disclose to any high-cost home loan borrower the rights of the borrower to rescind the high-cost home loan within 3 business days pursu-ant to 15 U.S.C. s. 1635(a) and shall provide appro-priate forms for the borrower to exercise his or her right to rescission. The notice, forms, and provisions thereof must be in accordance with the requirements of 15 U.S.C. s. 1635(a).

REGULATION OF THE FLORIDA FAIR LENDING ACT

The Office of Financial Regulation and the Financial Services Commission is responsible for the adminis-tration and enforcement of The Florida Fair Lending Act. Duties include investigations, examinations, injunctions, and orders.

Powers and Duties of the Commission and Office

In addition to the provisions listed within the Powers and Duties of The Commission and Office in Part I of this module, section 494.00795, F.S. provides:

• Any person having reason to believe that a pro-vision of this act has been violated may file a written complaint with the office setting forth the details of the alleged violation.

• The office may conduct examinations of any person to determine compliance with this act.

• Whenever the office finds a person in violation of this act, it may enter an order imposing a fine in an amount not exceeding $5,000 for each count or separate offense, provided that the aggregate fine for all violations of this act that could have been asserted at the time of the order imposing the fine shall not exceed $500,000.

• Any violation of this act shall also be deemed to be a violation of chapter 494, chapter 516, chapter 520, chapter 655, chapter 657, chapter 658, chapter 660, chapter 663, chapter 665, or chapter 667. The commission may adopt rules to enforce this subsection.

Enforcement of the Florida Fair Lending Act

Section 494.00796 F.S. provides:

• Any person or the agent, officer, or other rep-resentative of any person committing a mate-rial violation of the provisions of this act shall forfeit the entire interest charged in the high-cost home loan or contracted to be charged or received, and only the principal sum of such high-cost home loan can be enforced in any court in this state, either at law or in equity.

• A creditor in a home loan who, when acting in good faith, fails to comply with the provisions of this act shall not be deemed to have violated this act if the creditor establishes that within 60 days after receiving any notice from the borrower of the compliance failure, which compliance failure was not intentional and resulted from a bona fide error notwithstanding the mainte-nance of procedures reasonably adapted to avoid such errors, the borrower has been notified of the compliance failure, appropriate restitution has been made to the borrower, and appropri-ate adjustments are made to the loan. Bona fide errors shall include, but not be limited to, cleri-cal, calculation, computer malfunction and pro-gramming, and printing errors. An error of legal judgment with respect to a person’s obligations under this section is not a bona fide error.

• The remedies provided in this section are cumu-lative.

CONCLUSION

In conclusion, it is important to be aware of current rules and regulations governing the mortgage lend-ing business and the extent to which they affect daily practice. These rules and regulations apply to a wide range of topics, including licensure requirements, continuing education requirements, and penalties for violations of the rules. The Department of Financial Services is responsible for regulating the activities of mortgage brokers, mortgage brokerage businesses, mortgage lenders, and correspondent mortgage lend-ers by the use of Florida Statutes and the Florida Administrative Code and, when necessary, for impos-ing penalties on licensees found to be in violation.



R E V I E W Q U E S T I O N S — M O D U L E O N E

Following are review questions. While you are not required to answer these questions to complete the 14-hour course, they are intended to help you evaluate your comprehension of the material. Choose the best response to each review question. The answers to the review questions are found at the end of each section.

Transfer your answers to the space provided on the Answer Sheet.

1. The Financial Services Commission serves as agency head for which of the following?

a. Office of Financial Regulation (OFR or Office)b. Office of Insurance Regulation (OIR)c. both the Office of Financial Regulation and the Office of Insurance Regulationd. neither the Office of Financial Regulation and the Office of Insurance Regulation

2. Which of the following is now responsible for the administration and enforcement of the Florida Statutes regulating both mortgage brokers and mortgage lenders?

a. Department of Banking and Financeb. Office of Financial Regulationc. Financial Services Commissiond. Division of Securities and Finance

3. Which of the following has the authority to adopt rules to implement the provisions of Chapter 494 F.S.?


4. Which of the following has the authority to conduct investigations of any person who has allegedly violated the provisions of Chapter 494 F.S.?


5. A violation of any provision of 494.001-494.0077 in which violation the total value of money and property unlawfully obtained exceeded $50,000 and there were five or more victims, is guilty of a:

a. misdemeanor of the second degree.b. misdemeanor of the first degree.c. felony of the second degree.d. felony of the first degree.

6. Pursuant to the Florida Fair Lending Act, one of the most common forms of abusive lending is the making of loans that are:

a. equity-based rather than income-based.b. income-based rather than equity-based.c. value-based rather than equity-based.d. value-based rather than income-based.

7. The Florida Fair Lending Act deals primarily with what type of loans?

a. no-cost home loansb. high-cost loansc. high-cost home loansd. any loan in which discount points are charged to the borrower


8. A mortgage referred to in the Florida Fair Lending Act means a consumer credit transaction that is secured by:

a. the consumer’s principal dwelling, other than a residential mortgage transaction.b. any real property owned by the consumer.c. any property owned by the consumer, other than the consumer’s principal dwelling.d. the consumer’s principal dwelling, including a residential mortgage transaction.

9. For purposes of the Florida Fair Lending Act, a “residential mortgage transaction” means any transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the consumer’s dwelling to finance:

a. the construction of additions to the dwelling.b. any improvements made to the dwelling.c. an equity line-of-credit loan.d. the acquisition or initial construction of the dwelling.

10. The Florida Fair Lending Act prohibits all of the following acts except:

a. a home loan in which a higher rate of interest is charged after default on the loan.b. a home loan in which the outstanding principal balance will increase at any time over the course of the loan

because the regular periodic payments do not cover the full amount of the interest due.c. a home loan which contains a prepayment clause allowing the borrower to prepay the outstanding principal

balance before maturity, without a penalty.d. a home loan which was based upon the borrower’s collateral without regard to the borrower’s current and

expected income, current obligations, and employment.

11. The special disclosures required by the Florida Fair Lending Act must be provided to the borrower:

a. not less than 3 days prior to the consummation of the high-cost home loan.b. not less than 5 days prior to the consummation of the high-cost home loan.c. not less than 3 business days prior to the consummation of the high-cost home loan.d. not less than 5 business days prior to the consummation of the high-cost home loan.

12. What portion of the interest charged in a high-cost home loan must be forfeited by the person or the agent, officer, or other representative of any person committing a material violation of the provisions of the Florida Fair Lending Act?

a. 25%b. 75%c. 100%d. none

ANSWERS: 1) c. 2) b. 3) c. 4) b. 5) d. 6) a. 7) c. 8) a. 9) d. 10) c. 11) c. 12) c.

12 Module 1




LEARNING OBJECTIVES

After completing this module, you should be able to:

Real Estate Finance and Mortgages

M O D U L E 2

1. Identify the mortgage programs available to the real estate industry.

2. Know how the Federal Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), and the Equal Credit Opportunity Act (ECOA) apply to real estate and mortgage trans-actions.

3. Know the basic concepts of the mortgage amorti-zation process.

4. Be familiar with basic guidelines for qualifying for a real estate mortgage, the mortgage applica-tion process, and the tax benefits of home own-ership.

GLOSSARY AND ACRONYMS

Many names used in real estate finance are referenced by acronyms. Also many financial terms often require more precise definitions than are normally used in everyday conversation. These acronyms and terms are defined at the beginning of this module to assist in fully understanding the material presented. This list is not all-inclusive, but does cover material used in this module. Prior to studying the course material, it is suggested that the reader review the glossary.

Americans With Disabilities Act (ADA): The act to eliminate discrimination against individuals with disabilities and allow them to enter the economic and social mainstream of society. Effective 1/26/1992

Annual Percentage Rate (APR): The yearly interest rate that reflects the actual cost of the mortgage. It includes points and other costs paid by the borrower, almost always higher than the rate advertised, and must be disclosed to the borrower. The APR allows a borrower to make a direct comparison of different mortgages.

Appraisal: This is an estimate of value of the property in question. It is made by a professional appraiser, and is usually the amount the lender will use to determine a mortgage amount.

Closing costs: All the charges associated with plac-ing a mortgage. They can include origination fees, discount points, appraisal fee, title search and insur-ance, survey, recording fees, cost of credit reports, search fees and special delivery costs. Closing, or settlement costs, may add 3% to 6% to the mort-gage amount.

Community Home Buyers Program (CHBP): A program designed to give credit worthy buyers the opportunity to purchase a home if they earn up to 115% of an area’s median income. Generally more flexible than other mortgages and requires a down payment as low as 5% of the mortgage.

Community Reinvestment Act (CRA): Directs lenders to work with community groups and local government officials to identify the credit needs of the community. A CRA sign is required in the lobby of the lender.

Robert K. Strickland CCIM, GRI is a Certified Commercial Investment Member (CCIM) recognized as a professional in commercial real estate brokerage, valuation, and investment analysis. He is a state-licensed real estate instructor. A graduate of the U.S. Military Academy at West Point, Bob is a retired USAF Colonel serving on 160 combat missions in jet fighters in SEA.


14 Module 2

Consumer Credit Protection Act (TILA): A lender must disclose finance costs to the borrower with a Truth-In-Lending disclosure within three business days of the loan application. The TILA is to ensure the meaningful disclosure of credit and terms to poten-tial borrowers. It lists the APR, the finance charge, and any other costs of making the loan. Regulation Z enforces TILA through regulation of advertising credit availability by the advertiser and the creditor. For closed-end consumer credit advertisements, the entire opportunity must be described; the sales price, the amount or percentage of down payment, terms of repayment, APR, and any other facts that will affect the borrower’s loan if any of the specifics are given. For example, if the APR is stated “8.75% APR”, the remaining terms must be stated. However, if only general terms like “no down payment”, are used, it is not necessary to disclose any other terms of the credit offering.

Conventional mortgages: Mortgages not insured or guaranteed by FHA or the VA.

Credit score: A numerical measurement based on an analysis of the borrower’s credit report that reflects the management of credit by the borrower. For infor-mation used by the three major credit bureaus, con-tact them at:

Equifax, 800-525-6285 www.equifax.com; Experian, 888-397-3742 www.experian.com; TransUnion, 800-680-7289 www.transunion.com.

Debt ratio: This is a term used by Lenders to com-pare the total monthly income to the total monthly obligations of a borrower. Debts included are monthly housing expenses, all monthly installment debts with more than 10 months to run, child support or alimony, all revolving credit, and any negative cash flows from investment properties. For conventional mortgages, this ratio is calculated by dividing the total monthly obligations by the stable gross monthly income. It should not exceed 36%, but FHA allows up to 41%.

Department of Housing and Urban Development (HUD): A Federal Agency that provides a number of guidelines and safeguards in the housing market for lenders, buyers, sellers, and tenants. HUD is involved

lenders should be aware of the latest changes to HUD- enforced programs, particularly in the area of Civil

can provide a wealth of useful information on

various HUD programs.

Department of Veterans Affairs (VA): Guarantees real estate loans to qualified veterans, who may finance up to 100% of the purchase price of a home. Lenders in the private sector provide the funds and must qual-

ify to participate in the VA programs. More infor-mation on VA mortgages and homes available in the program may be found at www.vahomes.org/sp/.

Down Payment Assistance Programs (DAPs).:Programs designed to contribute funds necessary to close the purchase of a home. These programs come in many shapes and sizes, and may include outright grants to certain low-income buyers.

Energy Efficient Mortgage (EEM): Energy mort-gages offer special financing for homes that are desig-nated energy efficient or can be made energy efficient. An official home energy rating or Home Energy Rating System (HERS) report is required to secure an EEM.

Equity: The value of the home minus all mortgages.

Escrow: Usually a third party (such as a title com-pany or an attorney) account designated to hold funds deposited as “good faith money” during the sale nego-tiations. Escrow can also be defined as the funds col-lected by lenders in addition to mortgage payments, to pay taxes and insurance with low loan to value ratio mortgages (below 80/20 LTV).

Equal Credit Opportunity Act (ECOA): Prohibits discrimination and promotes the availability of credit to all credit worthy applicants regardless of race, color, religion, national origin, sex, marital status, age, receipt of public funds assistance, or good faith exer-cise of any rights under the Consumer Credit Protection Act.

Each borrower must be evaluated under the same underwriting standards, and must be notified in writ-ing within 30 days of the loan decision. Verbal denials are prohibited.

Fair Housing Act: Prohibits lenders from discrimi-nation based on a borrower’s race, national origin, color, religion, sex, handicap, or familial status. Note that individuals infected with AIDS, or are HIV positive must receive the same protection as other protected groups. All applicants must be reviewed on the same underwriting standards, and all proper-ties must be appraised so that the age or location of the property does not discriminate in the estimate of

reviewed periodically to insure compliance. Although

Public are Federal Laws and guidelines, each State has parallel laws and guidelines that will apply in the mortgage marketplace as well. Check www.fairhous-

Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac): A secondary mortgage market entity that purchases conventional mortgages from the primary lenders.


HUD and homes and communities involved with the

Rights. The web site at www.hud.gov/homes/index.

in a number of programs affecting real estate, and

cfm

value. Lending practices of all lending institutions are

this act and many others affecting lenders and the

ing.com and HUD Resources for more information.

Real Estate Finance and Mortgages 15

Federal Housing Administration (FHA): A fed-eral agency that helps people become homeowners by providing special insurance, lower down payments and more flexible qualifying standards for mortgages granted by qualified lenders. There are numerous programs available from the FHA. A recent and very beneficial addition to the paperwork required is the FHA Home Inspection Notice Form, which puts the Buyer on notice that a home inspection, while not required, is a very prudent step prior to purchase.

Federal National Mortgage Association (FNMA Fannie Mae): A secondary market entity that pur-chases conventional mortgages from primary lenders.

Fixed rate mortgage: A mortgage that has an inter-est rate that does not change (fixed) for the life of the mortgage. Also monthly payments generally do not change.

Government National Mortgage Association (GNMA, Ginnie Mae): A secondary mortgage mar-ket entity that purchases FHA and VA mortgages from primary lenders.

Home Mortgage Disclosure Act (HMDA): Lenders must maintain records by census tract of borrowers to whom they are making loans in their community. An HMDA notice must be posted in the lender’s lobby advising the public of the availability of these records.

Home Energy Rating System (HERS): An evalua-tion to determine the costs of energy improvements as compared to the energy savings.

Housing payment: P & I, insurance, taxes and if applicable, PMI, homeowners association dues, and other secondary mortgage payments.

Housing ratio: A measure of the percentage of the borrower’s stable monthly gross income which is used to pay PITI, other mortgage insurance, homeowner’s dues, and any secondary financing as compared to the gross income: housing payment divided by stable gross monthly income should not exceed 28% for conven-

Interest: The cost of borrowed money, paid to the lender.

Lead-based paint disclosure rule: The lead-based paint disclosure for all homes built prior to 1978 became mandatory is 1996. It is designed to protect children from lead poisoning and must be given to all buyers or tenants prior to any offer to sell or lease. In addition to providing the pamphlet, “Protect Your Family from Lead in Your Home”, the disclosure explains the lead-base paint hazard and provides a record of lead-based paint on the property if available, offers an inspection opportunity and puts a notice in any contract for sale or lease of a qualifying property.

Loan to Value Ratio (LTV): The ratio of borrowed money to the value of the property. For example, if the purchase price is $100,000 and the loan is $80,000, the LTV is 80/20 or 80% of the purchase price is financed.

Loan discount points (points): Points represent additional fees paid to the lender to add additional profit to the mortgage, or to lower a long-term inter-est rate based on the market. (More points paid up front give the lender an incentive to provide a lower a long term rate.) Each point represents 1% of the loan amount. Two points on a $100,000 loan is $2000, but each point paid changes the loan percentage amount by 1/8%. An 8% mortgage with one point would actually be 8.125 % over the life of the loan.

Mortgage Insurance Premium (MIP): This refers to the mortgage insurance premium charged by FHA Lenders as part of the up front costs of a mortgage and the monthly MIP charged as part of the PITI. On an FHA loan, the MIP is always higher than a con-ventional mortgage, as FHA charges 1.5% of the pur-chase price up front and a renewal premium of .5% annually. Conventional lenders can be as low as .5% up front, and .3% annually.

Nehemiah Program: The largest down payment assistance program in the US. The down payment provided is usually 1% to 6% of the loan amount.

Negative amortization: A repayment of the loan that does not cover the full amount of the interest owed, which results in an increasing principal amount dur-ing the life of the loan.

Non-recourse loan: A loan that does not require a personal guarantee from the borrower.

Origination fee: The fee charged by the lender for services performed in processing the initial applica-tion for the loan.

Portfolio loan: In order to maintain liquidity, most lenders sell most of the loans they make to buyers, (FNMA, GNMA, or FHLMC), in the secondary market. At times however, a lender may choose to make a loan, then retain it in its own portfolio. When a lender retains a loan, it is described as a portfolio loan. Reasons vary from property type to terms and conditions of the mortgage.

Prepaids: Any funds paid prior to closing that reduce the amount required at closing, such as appraisal fees, attorney fees, insurance, or interest.

Prepaid interest: Interim interest paid at closing that accrues on the mortgage between the closing date and the payment date of the first mortgage payment.

Prepayment penalties: Lenders sometimes place mortgages with attractive benefits that may change


tional loans. FHA may allow up to 31%.

16 Module 2

depending on the financial climate. To continue to receive these benefits, a lender may put in a prepay-ment penalty to offset the loss of these benefits if the borrower pays the mortgage off before the due date. For example if a lender sets a rate near the top of the market, then the market falls significantly, it would be to the borrowers advantage to refinance, but the lender would lose the better rate. To recover the lost interest, the lender might require a cash payment in addition to the payoff amount.

Principal: The actual amount of the mortgage or the amount remaining after payment begins- the face amount of the loan.

PITI (principal, interest, taxes and insurance): Acronym for the individual parts of a typical monthly mortgage payment where taxes and insurance are escrowed.

Private Mortgage Insurance (PMI): A mortgage insurance policy required by the lender that covers the top end of the mortgage, i.e. the loan amount over 80% of the purchase price. It is generally required on all mortgages that have an LTV of less than 80/20. The policy insures the lender against losses where the borrower has less than 20% equity. If a borrower is required to have PMI at the beginning of a mortgage, it can generally be dropped at the request of the bor-rower once the equity reaches 20%. When the equity reaches 22%, the lender must remove the PMI.

Real Estate Settlement Procedures Act (RESPA): Under RESPA, lenders must make full disclosure of the estimated closing costs associated with the loan the borrower is applying for within three business days of the application. The lender must also provide the HUD booklet, “Settlement Costs and You”, and a Uniform Settlement Statement must be prepared at closing listing all the costs associated with the loan.

Reverse mortgages: This is a special type of mort-gage that allows senior citizens to use the equity in their home as a source of income. Rather than mak-ing monthly payments, a lender will make monthly

payments to the owners and increase the mortgage amount. Fannie Mae has a similar program for home purchases called the “Home Keeper”. The buyers must have a substantial cash down payment but will have no monthly payments. A typical scenario for this type of mortgage would look like this: Purchase price $158,000, down payment – $64,000. The lender will hold the $94,000 balance as a first mortgage and require no monthly payment. A danger is that the homeowner will run out of equity. In both cases the lender owns the home less any equity remaining when the final settlement is made.

Self-employed borrowers. If a borrower has 25% or more ownership in a business and is not otherwise employed, he will be required to provide a 2-year self employment record to insure he has a stable employ-ment record before a lender will consider his mort-gage application.

Stable monthly income: This is the verified gross monthly income from all primary sources of employ-ment. Part time employment, commissions, bonuses, and overtime will not be considered if appropriate verification cannot be provided to show they will con-tinue.

Title insurance: An insurance policy purchased from a Title Company that insures against errors in title search, and essentially guarantees that the title on the property insured has no outstanding recorded claims against it. Certain unrecorded claims may be covered.

Variable Rate Mortgage (VRM) - Adjustable Rate Mortgage (ARM): The rate on a VRM/ARM is adjusted periodically to reflect the current market. The rate goes up or down as the market rates change. There is a relatively new program called a two-step mortgage that allows the borrower to take advantage of lower initial rates of an ARM, and then adjust to a fixed rate in the fifth or seventh year of the mortgage. There are also a wide variety of other ARM’s available in the market



In the early years of this country, home buying was a very simple process. A person saved his money and at some point he accumulated enough cash to buy a home. This process, while simple for the frugal saver, did not offer enough opportunity for the average person. Circumstances varied with every family and demand increased to the point where conventional lenders (banks, then S & L’s) began to offer interest only loans so that a borrower paid only the interest monthly or annually until the balance or “the bal-loon” came due. Unfortunately many families could not control their income to the point where they were able to accumulate the cash to pay the principal outstanding when the note came due. This was par-ticularly true in the Depression era, 1929-1934, when literally thousands lost their homes and farms. When President Franklin D. Roosevelt came into office in 1932, he realized that home ownership was a key fac-tor in creating a strong national economy, as well as helping people recover their personal wealth and their self-esteem.

In 1934 President Roosevelt created the Federal Housing Administration (FHA) to help provide adequate home financing and to encourage new construction of housing. It was not a true financing program, but an insurance program to indemnify conventional lenders against losses and share some of the risk in the event of default by the buyer. It was also the first time that lenders began to offer amortiz-ing loans. Since that time mortgage lending has gone through an incredibly evolutionary process, generated not only by economic conditions, but also by the on-going process of government involvement to protect the borrower population. It has also become very obvious that licensees need to be very knowledgeable of the mortgage process, particularly since the major-ity of the home buying population today still requires a mortgage to own a home.

Before discussing the types of mortgages avail-able, you should remember that all mortgages have two main documents, the actual mortgage and the note. The mortgage pledges the property as collateral for the debt, and the note is a promise to repay from the borrower. Depending on the ownership entity, the note may be signed by only one party or by all par-ties who are bound in the purchase. A non-recourse note indicates that the party signing will not be held personally liable for repayment. In most residen-tial purchases, the note will be a recourse loan, i.e., the borrower will be held personally responsible for repayment. Today there are two types of mortgages available for most residential purchases — conven-tional and Government insured/guaranteed.

CONVENTIONAL MORTGAGES

Conventional mortgages are available from creditors who regularly extend consumer credit that is subject to a finance charge, or payable by written agreement in more than four installments. Banks, savings and loan institutions, mortgage companies, and individu-als make up this category of lenders and the loans may be insured or uninsured depending on the down payment, financial strength of the borrowers, and the quality and location of the property. If a down payment is less than 20% of the purchase price, the lender will generally require private mortgage insur-ance (PMI) to cover his risk above 80% of the value

limit on single family loans if they are to be sold to Freddie Mac or Fannie Mae. There are as many loan programs as lenders in this segment of the market, but the basic categories are: fixed rate loans with terms up to 30 years, many varieties of ARMs, and interest only loans with balloon payments. Traditionally, conven-tional mortgages required a fairly stringent qualify-ing standard, 20% down payment and were amortized over thirty years. New products in the market greatly expand the types of loans now offered from conven-tional lenders.

Since it is almost impossible for a lender to hold every mortgage it makes in its own portfolio, the Government found it necessary to establish a sec-ondary market to buy the loans from these primary lenders to keep a ready supply of cash in market. To implement a viable secondary marketplace, the Federal Government created FNMA, or Fannie Mae, and FHLMC, or Freddie Mac, to buy these loans and keep the primary lenders solvent. Further, to insure quality and a standardized product, it was necessary to create a wide variety of rules and regulations govern-ing initial qualifications for borrowers, loan approval and processing procedures, and minimum property standards. Other guidelines to match these mortgages to other laws governing banking standards, civil rights laws and environmental regulations were required as well.

FHA MORTGAGESFHA mortgages are mortgages granted by FHA qualified lenders (HUD approved). The loans are insured by the FHA, which removes much of the risk of default from the primary lender. Since 1934, FHA has been supplying Americans of modest means with an opportunity for home ownership, either as a new purchase or to refinance an existing mortgage. These

PART I: REAL ESTATE FINANCE


home, in an unlimited amount, there is a $ , 0 4 0017of the home. While a lender may match a loan to the

18 Module 2

loans generally offer lower down payments and easier buyer qualifying standards, but the home as well as the buyer must qualify. There are a number of spe-cific requirements for FHA properties that will be investigated by the Lender to make sure the home qualifies under FHA standards. A typical example is the requirement for the roof to have a certain amount of economic life remaining. Make sure the applicant understands that these requirements are for his pro-tection, but may complicate a purchase if the home does not initially qualify for the FHA loan. Eligible properties include one to four unit houses and condo-miniums. Under the single-family construction pro-gram, FHA assists builders in obtaining construction financing by allowing buyers to be approved prior to the start of construction.

In the past few years conventional lenders have modified their loans to resemble FHA loans, but there are still some major differences. For first time home-buyers, the minimum FHA cash down payment is 3% of the value of the home, but part of this can be used for closing costs. Conventional lenders also offer a 3% down payment loan, but it must be used for the purchase price only. Qualifying standards are more

reduced waiting times after a bankruptcy or foreclo-sure. FHA loans include higher payment to income ratio. Conventional lenders require a range of 25%-

is also higher with FHA loans. Total debt payment including debts with more than 10 months remain-

tional lenders use 36% as a limit. Single family loan

Some geographic areas may be higher as some coun-ties in Florida and for example, Alaska, Guam and

tend to be similar, but a recent analysis of national

are about .2 percentage points higher than conventional rates. FHA does insure ARM’s under several of its programs (Sections 203b, 234c, and 203k).

Probably the biggest difference is in the payment of the mortgage insurance premium (MIP). FHA requires an up-front payment of 1.5% of the purchase price, but it can be added to the loan. If the mortgage

collect the premium monthly. GNMA buys FHA insured loans in the secondary market to keep the pri-mary lenders solvent. Generally, FHA mortgages can be reassigned to qualified borrowers, but conventional

The FHA market tends to be most active in areas of lower priced homes. Many lenders specialize in this market and because of the many and changing rules for FHA loans, it is necessary to keep good lines of communication open with loan officers who specialize in FHA mortgages, including property qualifications. Down payment assistance programs (DAPS) are loan programs designed to assist first time homebuyers. Nehemiah, Hart, Neighborhood Gold, CHDAP, and CHAFA are examples of programs for down payment assistance.

As part of the FHA package, HUD now offers homeowners age 62 and older a Reverse Mortgage Program. If the homeowner has paid off his home mortgage or has only a small balance remaining, he may borrow against the equity in his home. He can receive the payments as a lump sum, monthly, or as a line of credit. Unlike ordinary home equity loans, a HUD reverse mortgage does not have to be repaid as long as the borrower lives in the home. The loan is recovered at sale of the home. The home’s value, age of the borrower and the interest rate determine the amount of the loan. The older the borrower is, the greater the LTV. There are no income or asset limi-tations on a reverse mortgage, but the total amount is generally capped by the FHA maximum mortgage limit for the area. Even with FHA MIP, the HUD reverse mortgage program is generally less expensive than a loan from a conventional lender.

FHA has an energy efficient mortgage program that allows borrowers to be eligible for up to 97% financing including closing costs for including energy efficient components in the improvements to an exist-ing home or in new construction. The improvements must be cost effective in that the cost is less than the total present value of the energy saved over the useful life of the energy improvement. The cost as compared to the savings is determined by a home energy rating system (HERS).

A final point — if you are dealing with a buyer who has paid off an FHA mortgage in the past, he may have money owed to him. About 100,000 FHA borrowers, or 1 in 10, left money in their escrow accounts when they paid off the loan. The average amount was $700 so it would be worthwhile to have the buyer check the status of any previous FHA loans. Call 800-697-6967, or write: HUD, PO Box 23669, Washington, DC, 20026-3699.

VA MORTGAGES

The Veterans Administration was an outgrowth of World War II, when hundreds of veterans were return-ing to civilian life after service during the war. Most came back with few marketable skills and even less money, but they were ready to get on with their lives and looked to the Federal Government for help. Thus


as well. Conventional lenders that require insurance,

loans are rarely assumable. Go to the FHA Connect- n at www.hud.gov/offices/hsg/connect.cfm

ion.at www.hud.gov/offices/hsg/connect.cfm

credit checks and

28%. FHA allows as much as 31%. The debt burden

amounts are greatly reduced in the FHA programs.

Hawaii. Interest rates rates indicated FHA rates

is longer than 15 years, an annual premium is required

lenient as well, with alternative

ing can be as much as 43% of income while conven-


the VA, now the Department of Veterans Affairs, was formed to assist in a number of ways from education to mortgages. A VA loan is a real estate loan guaran-teed by the Department of Veterans Affairs. Funds for these loans are provided by private sector VA qualified primary Lenders. They are available only to qualified veterans and can be up to 100% of the purchase price of the home. The VA is very strict in determining who is qualified for a VA loan, and these qualifications change as national events change military manpower requirements. The current service dates for eligible veterans with at least 90 days service:

• WW II – 9/16/1940 to 7/25/1947• Korea – 6/27/1950 to 1/31/1955• Vietnam – 8/5/1964 to 5/7/1975• Persian Gulf – after 7/2/1990• Gulf War – 8/2/1990 to Undetermined

and officer service after 10/16/1981.

Members of Selected Reserves and National Guard are eligible after six years of service regardless of status-active or discharged.

Based on current overseas assignments, there will be a number of new military personnel eligible. Go to www.homeloans.va.gov/elig2.htm for the latest information.

VA financing covers houses, town houses or con-dominiums in a VA approved project, new construc-tion, home improvement and energy improvement loans, refinancing of existing home loans and pur-chase of a manufactured home and/or lot. A certificate of eligibility is required as first step toward getting a VA loan. At that time the service record of the apply-ing veteran will be evaluated to determine eligibility.

Another point that could further assist veterans in using VA loans is the loan entitlement amount. A VA loan is a guaranteed loan, thus the VA simply provides an entitlement amount, which is in effect a down pay-ment amount from the veteran. Since the early years of VA loans this entitlement amount has increased, or in many cases, the loan associated with the entitle-ment has been paid off the current maximum guar-anteed loan is $60,000 but for loans in excess of $144,000, the limit is 25% of the FHMLC conform-

limit on the size of a VA guaranteed loan, provided the Veteran is qualified for the loan from a credit and income standpoint. Lenders, however, will usually limit the maximum amount to 4 times the amount of the Veteran’s available entitlement plus any downpay-

are now available under the VA.

Should a Veteran have a bankruptcy, the VA credit standards follow these guidelines:

a. less than 3 years – loan not available unless sig-nificant credit re-established.

b. 3 to 5 years – some consideration, but accept-able if reasonable credit re-established.

c. Over 5 years – may be disregarded.

Any VA loan can be prepaid without penalty.To check on the status of any current entitlement

or restoration of entitlement, a veteran can contact the nearest VA office and complete Form 26-1880. One unique feature of a VA loan is the requirement for the veteran to pay a “funding fee”. The purpose of the funding fee is to help the government offset the cost of any foreclosure. To encourage a larger down payment, the funding fee is calculated as a percentage

Disabled

veterans do not pay funding fees. Speciality Adapted Housing grants up to $50,000 are available

to veterans with service connected disabilities who have lost the use of both arms.

Regulations and documentation for a VA loan application can be voluminous; therefore the licensee would be well served to maintain close contact with a loan officer from a VA qualified lender who spe-cializes in VA mortgages. GNMA buys these loans in the secondary market to keep the primary lenders solvent.

COMPARISON OF THE THREE LOAN PROGRAMSAs a quick comparison of the three types of loan programs, Ginnie Mae allows you to pre-pare a chart. (www.ginniemae.gov/ypth/index.asp?Section=YPTH) While there are a wide vari-ety of loan products available in the market place, this table compares only the basic loan for each program. For example, the house under consideration meets the criteria for each program and is offered for sale at $175,000. Mortgage available is a 30 year term, fixed rate at 6.5%. Monthly housing costs less mortgage payment are set at $386. Cash required at closing was estimated up front with the program calculating any overages.

As you can see in Table 2.1 (page 20), there is a vast difference in cash required. The conventional mortgage has a lower monthly payment, but the down payment will require a lot more cash. Also note that the VA purchase ends up with a larger mortgage than the cost of the house. This will have a definite impact when the time comes to sell. Also timing may be a fac-tor, as the VA and FHA loans may take longer to close because of the additional paperwork. For a rent versus buy comparison, go to http://www.ginniemae.gov/


• 181 days continuous active duty for peacetime service• 2 years service for enlisted service after 9/7/1980

ing loan limit of $417,000, or $104,250. There is no

ment.

Adjustable rate and hybrid ARMs

of the purchase price up to a maximum of 3.3% of the loan amount, www.warm -7.ht m l. s.vba.va.go v/pa m26

20 Module 2

rent_vs_buy/rent_vs_buy_calc.asp?.

FEDERAL TRUTH IN LENDING ACT (TILA)

(15 U.S.C. 1601 et seq.)

The purpose of the TILA is to assure that consum-ers are fully informed of the terms and cost of credit in typical consumer credit transactions which include home mortgages, home equity loans and home improvement loans as well as other types of credit such as credit cards, auto purchases, store credit and install-ment loans. The Board of Governors of the Federal Reserve System is authorized to administer and imple-ment TILA rules and regulations regarding consumer credit. Regulation Z, published by the Board, requires a very specific explanation and description of the cost of credit both in dollars and percentage rates. It also includes some very specific requirements when adver-tising credit for the above listed loans.

TERMS

Before a consumer or homebuyer enters into an installment credit contract, the consumer must be given the following information in a format that is easy to understand.

Total sale price: This number must include the offered price, down payment, or trade-in, and any interest or other charges.

Amount financed: The borrowed amount plus the cost of any extended warranties.

Finance charges: A dollar amount of the cost of credit such as interest, credit life insurance, loan origination fees, discount, etc. It does not include credit applica-tion fee, title work, cost of credit report, application fees, attorney’s fees, or escrow payments.

Annual percentage rate (APR): The APR is the cost of credit as expressed as an annual percentage rate. It is calculated by including all the costs of the loan into a new annual rate. It is almost always higher than the initial quoted, or base rate and represents a uniform true cost of credit which can then be compared to other purchase options, so the consumer can shop for the best credit terms.

Total amount of payments: This figure is a total amount that will be paid over the life of the loan. It is the total of the interest and the principal and is calcu-lated by multiplying the monthly P & I by the num-ber of payments.

Payment schedule: A statement which sets forth the monthly payment amount and the payment due date.

In addition to the above information, lenders are required to disclose late payment penalties and when they apply, any prepayment penalties, variable interest rates, and if the lender is being given a security inter-est in the property or merchandise being financed. There is a three-day “cooling off” period for refinanc-ing principal residences.

REGULATION Z

Under Regulation Z, advertisers and lenders must also clearly state the exact terms of any credit being offered in order for the consumer to be able to make direct comparisons of various credit opportunities. While consumer credit is divided into open-end and closed end categories, real estate lending is consid-ered closed-end, and is credit extended for personal, family or household purposes, but does not include business and agricultural loan or loans over $25,000 that are not secured by real property. It is tradition-ally extended by a creditor that regularly extends con-

Table 2.1: Comparison of FHA, VA and Conventional Loans

LOAN A FHA

LOAN B VA

LOAN C CONV

Sale Price $175,000 $175,000 $175,000Loan Amount $148,750Monthly Mtge. PaymentMonthly Expense $ 386 $ 386 $ 386Total Monthly CostDownpayment $ 0 $ 26,250Closing Costs $ 6,112Total Cash $ 32,362

Source: http://www.ginniemae.gov/2_prequal/le_intro_quesitons.asp


$173,569$ 1,365

$ 1,752$ 5,250$ 1,736$ 6,986

$178,588$ 1,326

$ 1,712

$ 6,723$

$ 1,242

$ 1,629

0


sumer credit subject to a finance charge and meets other conditions usually associated with real estate lending or general consumer credit. If an advertise-ment promotes closed-end credit through a creditor, both the advertiser and the creditor must comply with the requirements of Regulation Z. Seller financing usually does not meet the definition of a creditor, and does not have to comply with Regulation Z.

There are some other advertising rules that apply under the Federal guidelines that must be considered when advertising properties that fall under HUD guidelines. Under Part 109 of the Federal Fair Housing Act, HUD publishes an outline of phrases, symbols, words, and visual aids that may convey discrimina-tory preferences or limitations. For example, words that imply blindness, deafness, mental illness, physical handicap, etc. or, words like “restricted”, “exclusive”, “private”, “integrated” and similar terms that indi-cate one race, a language other than English or other national origin indicators should be avoided. Even advertising property as ‘distressed, needs repairs, etc.” may be discriminatory under some conditions. To get a current list of words and phrases that are considered discriminatory, go to www.fairhousing.com/

There are some very specific financial disclosures that are required under Regulation Z if certain finan-cial terms are used in an ad. Similarly, other terms do not trigger the full disclosure requirement under the Regulation. For example if the terms “No down payment, easy monthly payments, no closing costs, or financing available” or similar non-specific words are used, there are no further disclosures required. If, however, specific terms such as “ 10% down, 95% financing, or low 7.5% mortgage, etc.” are used, the remaining details of the financing opportunity must be disclosed – “sales price $125,000, monthly payment $578 P & I, APR-8.5%, mortgage amortized over 30 years” etc. In summary, all details of the offered financing must be disclosed – monthly payment in either PI, PIT or PITI, down payment in percent if price is given or amount, APR, and term of the loan in order for the consumer to compare credit offerings and make knowledgeable decisions.

The variety of loan products in the market today including ARM/VRMs, buydowns, and other special features of mortgages make it imperative that credi-tors and advertisers fully understand the requirements for advertising financial opportunities in Regulation Z and how they apply to the product offered, and then comply accordingly. There are significant penalties for violation of these rules, both civil and criminal.

REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA)

12 U.S.C. 2601

RESPA is one of a number of federal consumer pro-tection statutes that are designed to make consumers more knowledgeable about real estate transactions, and to reduce the cost of real estate settlement ser-vices. RESPA was first passed in 1974 and its primary purposes were to help consumers become better shop-pers for settlement services and to eliminate kickbacks and referral fees that increased the costs of real estate settlement services. HUD is responsible for enforcing RESPA, and it covers several types of loans on one to four family residential properties. Specifically, home purchase loans, mortgage assumptions, refinancing, property improvement, and equity lines of credit fall under RESPA.

At the time of application or within three days, lenders and mortgage brokers must provide potential borrowers the following information:

• The Special Information Booklet, “Settlement Costs and You”, which provides the borrower with consumer information on real estate ser-vices to be provided in the purchase transac-tions only.

• A good faith estimate (GFE) of the settlement (or closing) costs for the transaction. Actual charges may differ.

• A Mortgage Servicing Disclosure Statement as to the lender’s intent to sell or hold the mort-gage.

• Information on how to submit a complaint and complaint resolution.

If the lender intends to refer the potential bor-rower to another service provider, the borrower must be given an Affiliated Business Arrangement (AfBA) disclosure that describes the business arrangement with the original lender and the fees to be charged.

As the transaction proceeds toward closing, the

a HUD-1 Settlement Statement. This is a standard-ized form that clearly shows all charges imposed on the borrower and the seller in connection with the settlement. One day prior to closing the lender or closing agent must provide the borrower a copy of the completed HUD-1 closing statement, using infor-mation available at that time. At the time of closing, the lender also provides the borrower with an Initial Escrow Statement showing the escrow payment and the amount to be deposited at closing for the escrow account. After closing the lender must provide an escrow statement annually and the borrower must be notified (by a Servicing Transfer Statement) if the lender sells or assigns the servicing and/or the mort-gage to another party.

There are several other sections of the RESPA that licensees need to understand:

Section 6. Borrowers who have problems with


closing agent prepares a settlement statement described as

22 Module 2

their account or the escrow should contact their loan server in writing. The server must acknowl-edge the complaint within 20 days, and resolve it within 60 days.

Section 8. Kickbacks, fee splitting and referral fees for referrals of settlement services for fed-erally related mortgage loans are not allowed. Penalties include civil and criminal violations.

Section 9. A seller cannot force a buyer to use a specific title company as a condition of sale. Buyers have the right to sue a seller who violates this provision for up to three times the settlement charges for title insurance.

Section 10. Monthly escrow accounts payments are limited to one-twelfth the annual sum required to service all escrow disbursements, however the lender can collect a cushion amount not to exceed one sixth of the annual disbursement. RESPA does not require escrow accounts, but the lenders may.

HUD, the State Attorney General or the State Insurance Commissioner can bring court actions to enforce the above sections. Complaints should be filed with:

Director, Interstate Land Sales/RESPA DivisionOffice of Consumer and Regulatory AffairsUS Dept. of Housing and Urban DevelopmentRoom 9146451 7th Street, SWWashington, DC 20410

EQUAL CREDIT OPPORTUNITY ACT (ECOA)

12 CFR 202.2The ECOA has been in existence since 1972, and was written to make certain discriminatory practices by creditors unlawful. Under ECOA and Regulation Z, creditors are prohibited from denying credit, either through mortgages or credit transactions, to any-one based on religion, race, national origin, gender, marital status, or source of income. It is designed to prevent discrimination in granting credit by requiring banks and other creditors to extend credit equally to all credit worthy applicants with fairness and impar-tially. If an applicant has demonstrated an ability and willingness to repay borrowed money, he is considered creditworthy. A creditor is given 30 days to determine if the applicant meets the creditworthy standard. At that time the creditor must make a commitment deci-sion, and if credit is denied must state in writing the reason.

To start the process for acquiring a loan, a lender can request the applicant provide the following infor-mation:

• A list of current credit accounts to include names and address of contact person.

• Names previously used by the applicant to secure credit.

• The source of any income to be used to deter-mine the applicant’s creditworthiness.

The evaluation of the application can use the fol-lowing information as long as it is not used in a dis-criminatory manner.

• Age (Elderly applicants must not be discrimi-nated against.)

• Existing utility service• Income sources from the credit application and

the probable longevity of these sources.• Credit history.• Any other information that would indicate cred-

itworthiness.

In the process of evaluating the potential cred-itworthiness of an applicant, the creditor may not refuse credit based on sex, marital status, physical or mental disability or any other classification protected from discrimination. Lenders may not inquire about birth control practices or future plans for children. Further a creditor cannot require the signature of a spouse or other guarantor if the applicant qualifies under the creditor’s standards for the amount and term of the loan. Property owned jointly and used as collateral will require the signature of all joint own-ers, however. Finally, lenders must notify an applicant that they have a right to receive a copy of the appraisal on a qualified property. Fair housing violations are enforced by HUD, and must be filed within one year with HUD and within two years in state and federal courts. Any violations should be reported to:

U.S. Department of Housing and Urban Development451 Seventh St., SWWashington, DC 20024



PART II: REAL ESTATE MORTGAGES

An average person in this country might buy three or four homes in a lifetime. As a result, the mortgage application process is almost always a new experi-ence. Because lenders are getting more demanding in their evaluation of potential borrowers, it is impera-tive to be prepared to provide thorough guidance to the borrower. When the decision is made to purchase real estate, a potential borrower may pre-qualify for a mortgage, or may wait until they find a suitable prop-erty. In any case, the first stop is a lender or mortgage company that will provide a checklist of information needed to complete the application and the actual application.

MORTGAGE APPLICATIONS

The decision to enter the real estate market is not made lightly by most people. In most cases, emotion provides the incentive, and the financial consider-ations are not clearly understood early in the process. Usually a buyer’s first exposure to a mortgage appli-cation is a bit overwhelming; thus an experienced mortgage broker or loan officer can be a calming influence to get the buyer started in the right direc-tion. The list below is typical, but because lenders have varying requirements, it may not be complete for all mortgages.

Items that may be required to complete an appli-cation:

• A check to cover the appraisal report and the credit report. These are prepaid costs, and gen-erally not refundable.

• For borrower, and co-borrower if applicable, a two year employment history with names and addresses of employers.

• Residence addresses from last two years and landlord’s name and address if applicable.

• A list of all bank, S&L and credit union accounts with numbers, balances, and addresses, etc.

• A list of all contractual debts to include credit cards, auto loans, personal loans and other monthly obligations.

• Information on mortgages now or previously owned in last two years.

• Complete information on any owned real estate to include mortgage information, market value, rental information and location.

• List of assets such as stocks, bonds, CD’s, etc.• List of autos owned if free and clear and less

than three years old.

• Copy of divorce papers if paying or receiving alimony or child support.

• If there is income in addition to a salary, bring proof to document source and frequency.

• If self employed or on commission, bring last two years of federal tax returns and W-2s, 1099s or other documentation, plus corporate returns and P & L for past two years. Also bring updated personal financial statement.

• If salaried or on an hourly wage, bring past two years W-2s, and one month’s pay receipts.

• Bring the last two month’s bank statements.

If the borrower is refinancing a mortgage there are several additional items required:

• copy of current title policy• warranty deed• copy of survey• copy of current insurance policy• any other information that would enhance the

value of the property such as signed leases, ter-mite inspections, new roof contract, etc.

all the items above even though some may not be required for all applications. The mortgage applica-

time for the potential borrower to assemble the information, and in some cases it may not be read-ily available because of lost or damaged records, lack of understanding of exactly what is needed, or other reasons. A knowledgeable lender can be a great help in getting the application fully completed. Filling in the appropriate blanks of the application is really only the first step in getting the loan, however. At this point the application is submitted to a lender who must review and evaluate the data to make sure the borrower has the ability to repay the potential loan.

BORROWERS PRE-QUALIFICATION GUIDELINES

The most important factor in a credit approval is determining the borrower’s willingness to repay the loan. The lender uses an evaluation tool called a credit score. In use for more than 30 years, the credit score is a numerical measurement developed from the credit report, which allows the lender to rank the bor-rower’s management of credit against a standard used by that particular lender. Some lenders use different


The five-page standard form (Fannie Mae Form

mortgage application is lengthy, because it covers

tion process is neither simple nor quick. It will take

1003/Rev. 7/05 or Freddie Mac Form 65/Rev. 7/05)

24 Module 2

standards for different type loans. Also, some lenders create scores in-house directly from the credit appli-cation while others use scores generated by one of the major bureaus. There is no good or bad score, as the risk evaluation indicated by the score may preclude certain types of loans, but allow a lender to offer a dif-ferent product. Table 2.2 describes a typical credit scoring process based on the five main types of credit information.

Obviously payment history closely followed by outstanding debt information are the main concerns. Note also that wages earned are not a factor in devel-oping a credit score. Further, a credit score may not include information concerning the borrowers race, religion, gender, marital status, personal description, address or birthplace.

As mentioned, many lenders use different scores in their underwriting process, but since FHLMC, in the secondary market, buys most of the mortgages created by the primary lenders, Freddie Mac recom-mends the use of FICO scores as developed by Fair

Isaac & Co. According to Chris Larsen, Chairman of online lender E-Loan, “the FICO score is the No.1 piece of data to determine how much you will pay on a loan and whether you’ll get credit.” Table 2.3 shows how these scores are established based on property type and level of underwriting. If FICO scoring is used, Freddie Mac requires the primary lender to fol-low one of the review (or underwriting) levels shown below. Note that the risk of default goes up as the scores go down.

A concern for lenders when using credit scores is that the scores discriminate against minorities. If application guidelines are strictly followed, and the financial information used to create the scores comes from credit repository reports, the process actually promotes fair lending and non-discriminatory prac-tices. The three different credit bureaus that compile these reports are Equifax, TransUnion and Experian. Using only these credit reports, minority and non-minority applicants will most likely receive the same score. Low scores, however, do not necessarily prevent

Table 2.2: Credit - Scoring ProcessCredit Information Factors WeightPayment History Late payments,

Judgments,Bankruptcy Collection action

35%

Outstanding debt Number of open balances,Average open balance,Open balance as compared to limits

30%

Credit history Age of the open accounts 15%Number of inquiries To open new credit or new accounts and time since

last inquiry10%

Type of credit Finance company vs. revolving 10%

Source: Compiled by author

Table 2.3: FICO Scores Based on Level of Underwriting and Property TypeLevel of Underwriting

Recommended Approach toReviewing Credit

Property Type

FICOScore

Basic Review to confirm willingness to repay 1-unit2-units3-4 units

over 660over 680over 700

Comprehensive Review all aspects of credit historyTo establish willingness to repay

1-unit2-units3-4 units

620-660640-680660-700

Cautious Perform a detailed review of total credit history to clearly define willingness to repay. Without compen-sating circumstances, willingness to repay is in ques-tion, and risk is high for a default.

1-unit2-units3-4 units

less than 620less than 640less than 660




the borrower from getting a loan. There are numer-ous Down Payment Assistance Programs (DAPS) that assist the low- to moderate-income and first time homebuyer in acquiring a mortgage. Anyone can get this information from loan offices or directly from a number of local sources. To check your own credit score as compiled by Equifax, go to www.myfico.com. If you have a problem with the score, request reports from the other two agencies to compare the data. According to a recent article in U.S News and World Report (June 17, 2002), there is another reason to keep close track of your credit score. “The prop-erty insurance industry is using this score as an indi-cator of risk, and subsequently bases their premiums on this tool. In fact, industry representatives acknowl-edge that some insurers use credit scores as the sole underwriting criteria, ignoring other indicators such as prior claims and auto accident records.” As a mort-gage professional, you have an obligation to the public to make sure they understand the role a credit score can play in a real estate transaction. Additional infor-mation on credit scores and availability of free credit

BASIC AMORTIZATION AND MORTGAGE COMPARISON

Lenders offer loan packages that represent the most profitable transaction for the lender, but they often have enough flexibility to make modest changes to a loan offering that will add significant benefit for the borrower if someone is knowledgeable enough to ask. Unfortunately many borrowers do not fully under-stand the mortgage application process or the basic loan amortization and will not ask questions for fear of exposing their lack of understanding. The lender should understand this reluctance and be ready to assist in comparing the various lenders’ products, even if the questions are very basic.

Mortgage AmortizationModern investment and financial theory rests firmly on the concept of compound interest and the pro-cess of discounting. Amortization and amortization schedules are part of this financial theory. The fixed payment for an amortized mortgage consists of a principal repayment and interest charge. At the begin-ning of the payment schedule, the interest charged makes up the majority of the payment, but as the loan matures, the principal gets larger as the interest por-tion gets smaller. Over the life of a loan, whether to maturity or some interim stop, the amount of interest paid is significant in the early years when there is a large balance remaining on the loan. The borrowing public often does not understand the process, or the real costs they pay for borrowing money. In the sec-

tion on Buying and Selling Mortgages, the amorti-zation process will be discussed in detail. One of the tools a lender should master is a financial calculator. With a financial calculator it is extremely easy to do a very complete analysis of nearly any mortgage. On a financial calculator, there are five keys – present value or loan amount (PV), number of payments (N), annual interest rate (I/YR), payment amount (PMT), and future value (FV) – that are used to calculate all the parts of an amortizing loan. There are many new calculators on the market that are easy to master and inexpensive. It is particularly important to get a calcu-lator that allows the above data to be entered in any order and that will calculate any of the entries if three or four are entered. Many REALTOR® Associations offer regular training programs for financial calcula-tors. A typical full featured and widely available model is the HP-10B II from Hewlett Packard, which sells for under $35 and takes about two hours to learn to operate.

Where a financial calculator can also be a real help is working with buyers who come into the market with a set budget, and little knowledge of what that budget can buy. A quick calculation on a financial calculator can determine a market price range, and can also help in determining what kind of mortgage would better serve the borrower.

For example, the buyers say they have $25,000 for a down payment, and they can pay no more than $1500 per month for housing expenses. The ini-tial assumption would be to determine a mortgage amount based on an 80/20 loan amortized over 30 years. Assuming the pre-paids will not exceed $1000, that leaves a down payment of $24,000, a potential mortgage of $96,000, and an estimated purchase price of $120,000.

$25,000 - 1,000 = $24,000 down payment available$24,000 = 20% of the purchase price as a down pay-ment$24000 / .2= $120,000 purchase price

$96,000 first mortgage.30 year amortization at 7.25% annually

Using a financial calculator:PV = 96000N = 360 (30 yrs equals 360 payments.)Quoted InterestRate (I/YR) = 7.25%Payment (PMT) = $654.89 per monthMonthly budget = $1500 - $654.89 = $845.11 for

other expenses.

The question then becomes “Is this a realistic sit-uation, or will I have to modify the mortgage to meet the financial needs of the buyer?” The best part of


reports is available on line at www.annualcreditreport ..com/cra/index.jsp

26 Module 2

this scenario is that it can be done before starting the mortgage qualification process, and will really focus the buyer on a property and a mortgage he can actu-ally afford. If the initial circumstances do not fit, it is very easy to recalculate using different LTV ratios, interest rates and even adjustable rate mortgage calcu-lations to find the right mortgage opportunity.

Another feature of a financial calculator is the ability to determine loan payoff amounts by using the “FV” or future value key. This feature will be very useful when considering buying or selling a mortgage, and again, is a very easy process. After the mortgage information has been entered in the calculator, enter the length of time the mortgage has been held and press the “FV” key. The remaining balance will be calculated and displayed.

An important additional service a lender should be able to perform is to help a potential borrower evaluate a variety of mortgage opportunities, using both a financial calculator and TILA/Regulation Z. As you recall, under RESPA a lender is required to provide the borrower a clear description of the cost of credit in both dollar and percentage amounts within three days after the application is submitted. The APR is calculated based on the finance charge added to the loan and paid in installments over the life of the loan. (Remember, when you pay points on a loan, each point is equivalent to 1% of the loan amount, and it changes the lender’s yield by one eighth percent annually.) Since the APR is routinely higher than the quoted rate, the lender can provide guidance on what is included and what the total numbers really mean to a borrower in terms of costs he will have to pay for the credit. Also by comparing APRs, it is possible to make a direct comparison of a variety of loan products.

OTHER MORTGAGE OPPORTUNITIES

Taxes and Homeownership

The Taxpayer Relief Act of 1997. Home owner-ship has always provided some significant tax ben-efits, both from a capital gains point of view and in IRS tax exemptions. The Act provides even more benefits, particularly concerning the principal residence of the homeowner. The definition of a principal residence is the homeowner’s primary dwelling. It can be an owner occupied house, con-dominium, boat, mobile home or even a recreation vehicle, as long as it has a kitchen, bath and sleeping facilities. On the other hand, the homeowner can have only one principal residence and to be eligible for the tax benefits, the owner must have occupied it at least two out of the last five years. There can be excep-tions such as job transfers, or “unforeseen circum-stances”, that could allow prorated benefits, but for an accurate application of these rules a tax specialist should be consulted. One part of the tax rules that did

not change regards any loss in the sale of a principal residence. Such a loss is not tax deductible, but if the taxpayer itemizes his tax return, all home mortgage interest and real estate taxes are deductible.

Tax treatment of gain from the sale of a principal residence. Single sellers may receive up to $250,000 of capital gain from the sale or exchange of a princi-pal residence tax-free and for joint filers the tax-free amount is $500,000. The old rules regarding “over 55 years of age”, and “once in a lifetime exemption”, or “reinvest the proceeds” no longer apply. Sellers may claim this exemption no more than once every two years as a general rule, but the “unforeseen circum-stances rule” may apply. Also any improvements and alterations should be added to the cost of the property to adjust the basis and lower the gain realized. Selling costs are deductible from the sale price to reduce the amount realized but routine maintenance costs are not deductible. Because of the increased limits for the exemption, it is no longer necessary for title compa-nies or brokers to file IRS Form 1099S information return for principal residence transactions with a sell-ing price of over $500,000, or $250,000 for a single seller. (See Example on page 27.)

Capital gain rules – New rates. In the event a sale of a principal residence generates capital gain in excess of the exclusion amount, the Taxpayer Relief Act of 1997 changed the capital gains tax rate from 28% to 20% for those tax payers in the brackets above 15% and 10% for those in the 15% bracket. All assets must be held for more than 12 months to be eligible for these rates, otherwise the standard tax rate applies. Current rates are 15% and 5% if a five-year holding period is met. Fifteen percent property must be acquired after December 31, 2000 to be eligible. Five percent prop-erty simply needs to be held for five years regardless of acquisition date. The capital gain tax rates apply to other types of real estate as well, but the exclusion applies only to primary residences.

Office in the home. If any portion of the home is used for business purposes, and depreciated on an annual basis, that portion of the gain is taxed at 25%. The homeowner still has the $250,000 or $500,000 exemption, but the accumulated depreciation for the office portion is fully taxable at the 25% rate. Because IRS rules change frequently and “office in the home” rules change as well, it is advised that a professional tax expert be contacted for the latest information on this subject.

Other comments on taxes. Under the old law, the rates ranged from 15% to 39.6%, but by 2006 the rates will range from 10 % to 35%. FICA taxes will not be affected. The estate tax is repealed, but it will not be effective until 2010. In the meantime, the max-imum current rate of 55% for estates over $3 million



will fall to 45% and the exempt amount will increase to $3.5 million. In 2010 there will be no inheritance taxes, but in 2011, the $675,000 exempt amount will be reinstated. Remember, these rates are for income levels, not capital gains, which will remain as described above. An interesting point here is that the whole tax cut bill will be repealed January 1, 2011. The reason has to do with Senate budget preparation and some obscure, tangled rules that must be followed. Tax pol-icy has always been a political football and the next few years will see a very lively game, particularly if world events continue to be unsettled, and the politi-cal arena remains in turmoil.

Special rules for reporting cash payments over $10,000. If a real estate broker receives more than $10,000 in cash in a single transaction, the details of this deposit must be reported to the IRS on Form 8300. For purposes of this report, cash is considered any currency of the United States or another coun-try, cashier’s checks, bank drafts, traveler’s checks and money orders. Personal checks are not included in this definition, nor are single instruments issued by banks, S & L’s, etc. since the issuing entity will meet the reporting requirement. If several items above are presented with individual values of less than $10,000 but collectively greater than $10,000, the transac-tion must be reported as well. Penalties for failure to report these transactions are both civil and criminal and can be severe. Brokers must carefully comply with these rules as drug smugglers and dealers may use these transactions to launder money.

Refinancing

When interest rates go down, it is often to the advan-tage of the homeowner to refinance an existing higher rate mortgage. There are several factors at work here in making the personal as well as the financial deci-sion. First, is there a need for additional cash for home improvement or other major expenses? Second, is there a lower rate and/or lower cost mortgage avail-able that would reduce your monthly payments sig-nificantly? Third, are you prepared to go through the mortgage application process? And finally, what are your intentions as to how long you will keep your home?

If you need additional cash, you might consider a home equity loan, as lenders will often be reluctant to let you take cash out of the mortgage if the ratios are close to the limits. Home equity loans are par-ticularly attractive if you have a large equity in your home, and you plan to upgrade or expand your home. Generally, a home equity loan will be less expensive and somewhat easier to get than going through the full refinancing process. Using a home equity loan for non-capital expenses, however, is generally not a good idea, unless you have a clear plan to repay the loan.

Years ago, there was a rule of thumb in the market that said if you have a “2-2-2” advantage you should refinance. The thinking was that if the rate was 2% below your current mortgage rate, you would have to pay two points or less for a new mortgage, and you planned to stay in the house two or more years, you should refinance. Today, that rule has been overtaken

Example: Tax Treatment of Gain from the Sale of Principal Residence

A married couple purchased a home in 1992 for $210,000. In 1994, they added a pool and second story for $75,000. They sold the home in April 2000 for $525,000. Cost of sale was $40,000.

Net Sales price $525,000 - $40,000 = $485,000

Adjusted (cost) basis $210,000 + $75,000 = $285,000

Taxable Capital Gain Net Sales Price $485,000 Less Adjusted Basis $285,000 Gain on Sale $200,000 Exclusion $500,000 Tax Due $0 Note: If the full amount of the exclusion is not used it cannot be carried forward. A point of caution here—when you calculate your gain under the new rules, you have to include the gains you rolled over into your current house. Say you have owned three houses in the past 15 years and each one appreciated $100,000 during the time you owned it. Since you probably rolled each profit into the next house, you will have a gain of $300,000. For singles, that is a taxable amount of $50,000, but for joint filers you are still under the limit. Your gain must include all the profit you have made on any houses you have owned. See IRS Pub. 523 for the appropriate worksheets. You will need Form 2119 from previous tax filings.


28 Module 2

by the times, because it is very easy to use a financial calculator to determine the financial advantage if you want to evaluate any refinancing opportunities. For example, if your current mortgage payment is based on a 30-year loan at 7.75%, and the original amount was $150,000, your P & I is $1,075 monthly. If a new rate of 6.25% is available, the savings would be approximately $151 per month. If it required one and one half points or $2,025 as a cost of the new mortgage (One point is one percent of the mortgage amount. One and one half points equals $2,250.) It would take 15 months (2250 / 151 = 15 payments) to break even, and then, from that point you would be ahead $151 every month. Make sure you do not exceed the 80/20 LTV, as any down payment less than 20% of the pur-chase price will generally trigger private mortgage insurance that will add to your costs unnecessarily. Another caution; if you itemize your deductions on your tax return, you will reduce your mortgage inter-est deductions and cut your savings based on your tax bracket. For example if you are in the 28% bracket, the $151 savings in interest will be reduced by $43 in tax deductions, so the benefit, if you itemize, will be cut to $151 – $43 = $108, still a reasonable savings monthly. Any proceeds of the refinancing that come to the owner are not taxable at this time.

The final solution to the refinancing puzzle really comes down to financial as well as personal issues. It is important to save money, but it takes a lot of time and effort to complete the mortgage application, plus your personal circumstances may be such that staying in the home long enough to recoup the costs is not guaranteed. If the overall benefits of refinancing don’t offset the actual dollar amount gained, do not do it.

One last comment on refinancing and home equity loans. Remember that many times a home may have an existing second mortgage already in place. If a home is refinanced, that mortgage must be retired. If the second mortgage is a home equity loan, it may have a prepayment penalty attached, or the first lender may not allow any kind of a second mortgage without its approval.

Buying And Selling Mortgages

Mortgage professionals may buy and sell mortgages as part of their personal investment portfolio. When mortgages are bought and sold in this manner, they are not sold at face value, i.e., the full amount of the remaining balance is the sales price of the mortgage. Usually the buyer buys the mortgage at a discount, or for less than the full amount of the mortgage remain-ing. The discount is determined based on the return the buyer wants to receive on his money, and what the seller will accept. Any seasoned income stream, such as a lease, can be purchased in the same way, but in this discussion only mortgages will be covered. To

better understand the process, consider the following example.

You are considering the purchase of a seasoned mortgage that is five years old, and was originally cre-ated under the following terms and conditions.

Original loan amount (PV) $60,000Interest rate (I/YR) 8 %Term (N) 20 yearsMonthly Payment (PMT) $501.86Remaining balance after 5 years (FV) $52,515.35

Table 2.4 (on page 29) is a graph of the mortgage payoff. The solid top line represents the total mort-gage payment. The next line represents the interest payments and next line is the mortgage balance. The area below the interest line represents the total inter-est paid and the area above that line represents the principal paid.

By picking a point on the time line, it is easy to see how a discount is represented by the change in slope of the line as the principal of each payment increases and the interest is reduced.

To calculate the exact amount, follow the instruc-tions below:

You desire to get a 10% return on the money you invest. If you buy the mortgage with no discount it would cost $52,515.35, which is the present value after 60 payments have been made, but you would get only the 8% or face value rate of return. You want to get a higher rate to increase your return as well offset any additional risk. In order to determine what you should pay for the remaining balance of the 8% mortgage, use a financial calculator. Enter the data for the origi-nal mortgage, then calculate the remaining balance (FV) after five years -5 yellow key, N, then press FV. (FV = $52,515.35). This is what the remaining unpaid balance of the 8% mortgage is after 60 payments. Now simply change the sign and make $52,515.35 the current value (PV), change the interest rate to the desired yield (I/YR = 10%), press FV for the future value. The calculator will show $47,541.09, which is the amount you should pay for the mortgage to get a 10% return on your invested amount. The discount is $52,515.35 – $47,541.09 = $4,974.26. It is important to remember at this point, that you have not created a new mortgage with a 10% rate. The original 8% mortgage is still in place, but the amount required to pay it off has been reduced thus increasing the yield. (The payments will continue until the $52,515.35 is paid, but your investment was only $47,541.09!) Will the seller sell at this number? The answer is, try it and see! Seller motivations span a wide gamut, and the old saying, “Nothing ventured-nothing gained” applies. If the seller counters with a different sale price you can enter this in the calculator as a new PV and ask the calculator to determine the rate of return this price will produce. The rate might still be acceptable for



your investment portfolio.From the above discussion, it is obvious that a

financial calculator is a vital tool. Not only does it provide timely financial information to you personally, but also its very presence indicates to clients and cus-tomers alike that you have the professional financial skills to help them solve their mortgage problems.

Mortgage brokerage and real estate brokerage go hand in hand in the real world, but the actual busi-nesses must be separate. Mortgage brokers must have a valid State mortgage broker license to receive com-pensation for placing a mortgage, just as they need a State real estate license to broker real estate for a fee. No license is required to buy and sell mortgages for

CONCLUSIONLending practices and mortgages make the real estate industry work. It is imperative that each practitioner have a thorough knowledge of the current mortgage market and what the requirements are to successfully place a mortgage on a piece of real property. Further, a full understanding of discriminatory practices in advertising, and mortgage qualification is impera-tive to comply with many of the Federal and State statutes.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Remaining Bal. Interest Annual Payment

Table 2.4: Mortgage Payoff



your own account. However if you advertise to find these mortgages that triggers licensure [Rule 69V-40.290(2)(e)(f)]

30 Module 2

1. The Federal Housing Administration function is:

a. to provide adequate home financing for all buyers.b. a mortgage insurance program. c. not available for qualified buyers. d. for “interest only” mortgages.

2. FNMA and FHLMC:

a. loan money to individual buyers.b. require PMI on every mortgage.c. are the main buyers of mortgages in the secondary market. d. are government owned corporations.

3. A reverse mortgage:

a. allows a homeowner to borrow against the equity in their home. b. does not have to be repaid as long as the borrower lives in the home. c. has no income or asset limitations. d. all of the above.

4. When advertising properties that fall under HUD guidelines, advertisers should avoid which of the follow-ing words?

a. restricted b. exclusive c. cozy d. both a. and b.

5. What is the purpose of RESPA?

a. to increase paperwork for lenders b. to reduce the cost of real estate settlement services c. to make consumers more knowledgeable about real estate transactions d. both b. and c.

6. Which of the following is designed to prevent discrimination in granting credit by requiring banks and other creditors to extend credit equally to all creditworthy applicants with fairness and impartiality?

a. Equal Credit Opportunity Act (ECOA) b. Federal Housing Administration (FHA) c. Federal National Mortgage Association (FNMA) d. Department of Housing and Urban Development (HUD)

7. Which of the following does not factor into developing a credit score?

a. payment history b. number of open balances c. wages earned d. type of credit

R E V I E W Q U E S T I O N S – M O D U L E T W O

Following are review questions. While you are not required to answer these questions to complete the 14-hour course, they are intended to help you evaluate your comprehension of the material. Choose the best response to each review question. The answers to the review questions are found at the bottom of the next page.


8. If any portion of a home is used for business purposes and depreciated on an annual basis, that portion of the gain from the sale of the home is taxed at what rate?

a. 15% b. 20% c. 25% d. 30%

9. Single taxpayers filing an individual tax return may receive up to what amount of capital gain from the sale or exchange of their principal residence?

a. $50,000 b. $75,000 c. $100,000 d. $250,000

10. If a homeowner is considering refinancing his or her mortgage, what factors should he or she consider?

a. how long he or she plans to continue owning the home b. whether there is a need for additional cash for home improvement or other major expense c. whether monthly payments would be significantly reduced d. all of the above

Real Estate Finance and Mortgages 31ANSWERS: 1) b. 2) c. 3) d. 4) d. 5.d. 6) a. 7) c. 8) c. 9) d. 10) d.



32 Module 2



LEARNING OBJECTIVESAfter completing this module, you should be able to:

The Federal National Mortgage Association (Fannie Mae)

M O D U L E 3

1. Describe the origins of Fannie Mae.2. Explain the two primary lines of business that

Fannie Mae is involved in to generate revenues.3. Explain how the federal government regulates

Fannie Mae.4. Describe the process by which Fannie Mae

provides a constant source of mortgage funds to lenders but does not lend money directly to homebuyers.

5. Explain the differences between the primary and secondary mortgage markets.

6. Explain how Fannie Mae has taken steps to eliminate predatory lending practices, including a description of steering, excessive fees, prepay-ment penalties, and full-file credit reporting.

7. Summarize Fannie Mae mortgage loan limits for each type of housing in 2005.

8. Explain the origins and importance of private mortgage insurance (PMI).

9. Explain Fannie Mae property appraisal guide-lines, including appraiser qualifications, appraisal documentation, the appraisal review process, and the approaches to value.

10. Summarize mortgage eligibility requirements for conventional loans.

11. Describe the process for calculating a bor-rower’s earnings on Form 1005, Verification of Employment.

12. Summarize acceptable sources of income in the application process.

13. Summarize acceptable and unacceptable sources of funding in the application process.

14. Describe the monthly housing-expense-to income ratio.

INTRODUCTION

The Federal National Mortgage Association, which is commonly known as Fannie Mae, is the oldest and largest secondary market investor in the nation. Fannie Mae also is the largest single source of mort-gage credit to minority and low- and moderate- income families in the United States. The primary mission of Fannie Mae is to make home ownership available to a broad cross section of the population.

Fannie Mae relies on mortgage professionals to make loan-underwriting decisions that result in invest-ment-quality loans. Such loans require a high level of underwriting to ensure that the borrower is able and willing to repay the mortgage debt and that the prop-erty provides sufficient security for the mortgage. The purpose of this module is to provide a review of the historical background and mission of Fannie Mae and of the underwriting guidelines that it imposes.

Clay Rodgers graduated from the University of Florida with a B.S. degree in Business Administration, majoring in Real Estate. He is President of Rodgers Appraisal Services, Inc., and has more than 20 years expe-rience serving the appraisal needs of Florida’s mortgage brokers and lenders.

Janine Spiegelman, BS, received her degree from the University of Miami in 1986. She has been a licensed Florida Mortgage Broker since 1987. Janine worked for the State of Florida, Department of Banking and Finance (now known as The Department of Financial Services) from 1994 to 1996 as a Financial Examiner/Analyst II. She has her own real estate bro-kerage company and enjoys work-ing with first time homebuyers.


34 Module 3

HISTORICAL PERSPECTIVE

Fannie Mae was originally established by an act of Congress in 1938 and was a part of the Federal Housing Administration (FHA). Because of the Great Depression, the national economy was in a state of disarray at that time. Fannie Mae was specifically cre-ated to bring stability back to the housing industry and was authorized to buy only FHA-insured loans to replenish lenders’ supply of capital. In 1944, the role of Fannie Mae was expanded to allow the purchasing of loans insured by the Department of Veterans Affairs (VA). Then, in 1968, Congress rechartered Fannie Mae as a private company. The privatization process was completed in 1970, and FNMA started purchas-ing conventional mortgages. In 1976 FNMA pur-chased more conventional mortgages than FHA and VA mortgages for the first time. Congress mandated that Fannie Mae operate with private capital on a self- sustaining basis to enhance the flow of funds through the secondary market to American homebuyers.

Since 1968, Fannie Mae has provided more than 63 million families with mortgage financing. Fannie Mae receives no subsidy or appropriation from the federal government, and it does not insure loans. Therefore, Fannie Mae securities are not backed by the full faith and credit of the U. S. Government. Fannie Mae operates exclusively in the secondary mortgage market providing support to mortgage lending institutions in the primary market.

OPERATIONAL STRUCTURE AND OBJECTIVESFannie Mae operates under a federal charter, which is called the Federal National Mortgage Association Charter Act. This act confers certain rights and responsibilities on the company. Specifically, the charter requires that Fannie Mae increase liquidity in the residential mort-gage finance market and promote access to mortgage credit throughout the country. Fannie Mae’s business is focused on those mortgages with an original prin-cipal balance that is less than or equal to mandated annual loan limits. The company also has a special responsibility to facilitate low- and moderate-income families and housing in underserved areas.

Special benefits afforded Fannie Mae to assist it in fulfilling its missions include:

• exclusion from the Security and Exchange Commission’s registration requirements;

• exemption from state and local income taxes;• the availability of debt as collateral for public

deposits;• the eligibility of securities for Federal Reserve

open market purchases; and• the ability of the Treasury Department to pur-

chase up to $2.25 billion in Fannie Mae debt.

Fannie Mae is limited by its charter to the resi-dential mortgage market. For this reason Fannie Mae purchases mortgage loans from primary lenders such as mortgage companies, savings institutions, and commercial banks. The major sources of income for Fannie Mae come from two lines of business; mort-gage portfolio investments and guaranty fees on its mortgage-backed securities (MBS). Mortgage port-folio investments consist of mortgages purchased throughout the United States from approved mort-gage lenders. Income is derived from the difference, or spread, between the yield on the mortgage loans and the borrowing costs to fund the investments. For MBS, Fannie Mae reviews the quality of a large pool of mortgage loans and then issues securities backed by these loans. The corporation provides a guaranty of timely payment of interest and principal to the pur-chaser of the MBS in return for a guaranty fee.

SECTION REVIEW

Primary mission of Fannie Mae: The primary mis-sion of Fannie Mae is to make home ownership available to a broad cross section of the United States population. Fannie Mae is the largest sin-gle source of mortgage credit to minority and low- and moderate-income families. Fannie Mae is also the oldest and largest secondary market investor in the nation.

Fannie Mae established by Congress in 1938:

• Originally part of the Federal Housing Administration (FHA); specifically created to bring stability back to the housing indus-try and authorized to buy only FHA-insured loans.

• Fannie Mae’s role expanded in 1944 to allow purchasing of loans insured by the Department of Veterans Affairs (VA).

• Rechartered as a private company by Congress in 1968, with privatization process complete in 1970. Congress mandated that Fannie Mae operate with private capital on a self-sustaining basis Fannie Mae started pur-chasing conventional mortgages in 1970 and by 1976 was purchasing more conventional mortgages than FHA and VA.

Federal National Mortgage Association Charter Act: • Requires Fannie Mae increase liquidity in

the residential mortgage finance market and promote access to mortgage credit through-out the nation.


The Federal National Mortgage Association (Fannie Mae) 35

• Special responsibility to facilitate low- and

moderate-income families and housing in underserved areas.

• Charter limits Fannie Mae to the residential mortgage market

Two lines of business:

• Mortgage portfolio investments consist of mortgages purchased throughout the United States from approved mortgage lenders. Income derived by the spread between the yield on the mortgage loans and the borrow-ing costs to fund the investments.

• Mortgage-backed securities (MBS) are securi-ties issued backed by a large pool of mort-gage loans. Fannie Mae provides a guaranty of timely payment of interest and principal to the purchaser in return for a guaranty fee.

Regulation of Fannie Mae

Fannie Mae is regulated by two principal federal agencies. The Department of Housing and Urban Development (HUD) is the mission regulator for the corporation. HUD is responsible for ensuring that the corporation fulfills its mission to increase liquidity in the residential mortgage finance market, sets afford-

able housing goals, monitors the fulfillment of those goals, and approves new loan programs. The Office of Federal Housing Enterprise Oversight (OFHEO) is an independent agency within HUD that is respon-sible for the financial safety and soundness of Fannie Mae. In accordance with legislation enacted in 1992, OFHEO develops regulations to implement risk-based capital standards.

In 2003 Fannie Mae stated their total business volume grew by 68% and their total book of busi-ness grew by over 20%. However, on December 22, 2004 Fannie Mae announced that its previously issued financial statements should not be relied upon in light of the SEC’s determination that the financial state-ments were prepared applying accounting practices that did not comply with generally accepted account-ing principles, or GAAP.

In 2004 the OFHEO classified Fannie Mae as sig-nificantly undercapitalized. The OFHEO directed Fannie Mae to submit a capital restoration plan that would provide for compliance with its minimum capital requirement, as well as a 30% capital sur-plus. Fannie Mae formally began its capital restora-tion program December 2004 by issuing $5 billion in preferred stock. In addition, the company reduced its first quarter 2005 common stock dividend by 50% to accelerate capital restoration.

Fannie Mae worked with OFHEO to develop and

Table 3.1 FNMA Fortune 500 Ranking

FORTUNE 500 DATA

$ MILLIONS

% CHANGE FROM 2003

RANK

PREVIOUS RANK

Revenues 53,766.9 1.6 20 16

Profits 7,904.9 71.1 11 15

Assets 1,009,568.5 — 2 2

Stockholders’ Equity 22,373.3 — 33 44

Market Value 75,061.3 — 30 —

Employees 5,032 — 460 —

Profits as % of

%

Rank

Previous Rank

Revenues 14.7 56 99

Assets 0.8 392 —

Stockholders’ Equity 35.3 32 —

Earnings Per Share

2003 ($) 7.91

2002 ($) 4.53

% change 74.6

10-year growth rate (%) 16.6

Total Return to Investors % Rank

2003 19.6 325

10-year annual rate 16.5 102

Source: www.Fortune.com


36 Module 3

submit a proposed capital restoration plan, and hav-ing obtained the agency’s approval, the company will work closely and cooperatively with OFHEO to carry out the requirements of the plan.

Fannie Mae is a private, shareholder-owned com-pany that endeavors to provide mortgage money for people in all communities throughout the United States. Rather than lending money directly to home-buyers, Fannie Mae cooperates with lenders to make sure that they have a constant source of mortgage funds. In addition to providing mortgage credit to homebuyers in all areas of the country under all eco-nomic conditions, Fannie Mae also demonstrably lowers mortgage interest rates. The corporation has approximately 5,100 full- and part-time employees combined, and the company stock is actively traded on the New York Stock Exchange under the stock symbol FNM. The company stock is also a part of the Standard & Poor’s 500 Composite Stock Price Index. In 2004, Fannie Mae was ranked 20th by the Fortune 500. See Table 3.1.

FNMA’s Primary Lines of Business

Fannie Mae has three principal lines of business: single-family business, multifamily business, and housing and community development.

Single-family business. Fannie Mae buys single- family home loans from mortgage bankers, sav-ings and loan associations, commercial banks, credit unions, state and local housing finance agencies (HFA’s), and other financial institutions. This provides these institutions with a steady stream of funds avail-able for lending, so that even more loans can be made to potential homebuyers.

Multifamily business. Fannie Mae also pro-vides financing for the multifamily housing market throughout the United States. Multifamily housing is defined as being rental housing consisting of five or more dwelling units. Through a network of approved lenders, the corporation provides financing options on rental housing. This results in an enhanced level of flexibility and liquidity within the rental housing market overall.

Housing and community development. On a larger scale, Fannie Mae operates as a catalyst for community development by expanding the opportunities for home ownership throughout the nation. A recent example of this capability is the company’s $2 trillion American Dream Commitment, which is a ten-year plan to increase the nation’s home ownership rate to unprec-edented levels. The plan was unveiled in March 2000 and specifically targets 18 million American families.

The lenders that do business with Fannie Mae are a part of the primary mortgage market. The primary market is where mortgages are originated and funds

are loaned to borrowers. Lenders within the primary market include mortgage companies, savings and loan associations, commercial banks, credit unions, and local housing finance agencies. These lenders sell mortgages in the secondary mortgage market. This is where mortgages are bought and sold by a variety of investors, including Fannie Mae, insurance com-panies, pension funds, securities dealers, mortgage investment trusts, and other financial entities and institutions.

After a mortgage has been originated, the lender has two choices. Either the mortgage can be held in the lender’s own portfolio, or it can be sold to second-ary market investors, including Fannie Mae. When lenders sell a mortgage, they are able to replenish their funds so that they can lend more money to more homebuyers. However, loans that are sold to Fannie Mae must be in full compliance with the company’s guidelines and loan limits. Its underwriting guidelines are very thorough, and loan limits are adjusted each year in response to changes in housing affordability. Fannie Mae operates exclusively within the secondary mortgage market to ensure the availability of mort-gage funds in two ways. First, the company pays cash for mortgages that are purchased from lenders and then held in the company portfolio. Second, Fannie Mae issues MBS in exchange for pools of mortgages from lenders. These securities provide lenders with a more liquid asset to either hold or sell.

SECTION REVIEW

Department of Housing and Urban Development (HUD): Mission regulator for Fannie Mae. Responsible for ensuring that Fannie Mae fulfills its mission to increase liquidity in the residen-tial mortgage finance market, sets affordable housing goals, monitors the fulfillment of those goals, and approves new loan programs.

Office of Federal Housing Enterprise Oversight (OFHEO): Independent agency within HUD responsible for the financial safety and sound-ness of Fannie Mae. Develops regulations to implement risk-based capital standards.

Single-family business: Single-family home loans are purchased from mortgage bankers, sav-ings and loan associations, commercial banks, credit unions, state and local housing finance agencies, and other financial institutions. Provides these institutions with a steady stream of funds available for lending.

Multifamily business: Multifamily housing is defined as rental housing consisting of five or more dwelling units. Fannie Mae provides several financing options for rental housing through a network of approved lenders.



Housing and community development: Fannie Mae operates as a catalyst for community development by expanding opportunities for home ownership. Example is American Dream Commitment.

Primary market: Market in which mortgages are originated and funds are loaned to borrowers.

Secondary market: Market in which mortgages are bought and sold by a variety of investors. Fannie Mae operates exclusively in the second-ary market.

Unacceptable Lending Practices

As part of the $2 trillion American Dream Commitment, Fannie Mae has made a conscious effort to eliminate predatory lending practices through their mortgage consumer rights agenda. Lending practices that are considered predatory and are not acceptableto Fannie Mae include the following:

Steering. Lenders are required to offer mortgage applicants a full range of products for which they qual-ify and should specifically avoid the steering of bor-rowers to high-cost products that are designed for less creditworthy borrowers if the applicants can qualify for lower-cost products. In addition, consumers who seek financing through a lender’s higher-priced subprime lending channel should be offered or directed toward the lender’s standard mortgage product line if they are able to qualify for one of the standard products.

Excessive fees. For loans delivered to Fannie Mae, points and fees charged to a borrower should not exceed 5% of the loan amount, except where this would result in an unprofitable origination, such as with a very small loan size. In addition, Fannie Mae will not purchase a mortgage if it is subject to the requirements of the Home Ownership and Equity Protection Act of 1994 (HOEPA) that apply to highcost mortgages.

Prepaid single-premium credit life insurance policies. Fannie Mae will not purchase or securitize any mortgage for which a prepaid single-premium credit life insurance policy was sold to the borrower in connection with the origination of the mortgage loan, regardless of whether the premium is financed as a part of the mortgage amount or paid from the borrower’s funds.

Prepayment penalties. Fannie Mae will only con-sider prepayment penalties under the terms of a nego-tiated contract, or where the lender adheres to the following criteria:

• A mortgage with a prepayment penalty should provide some benefit to the borrower, such as

an interest rate or fee reduction.• The borrower should be offered the choice of

another mortgage product that does not require payment of such a premium.

• The terms of the mortgage provision that requires a prepayment penalty should be ade-quately disclosed to the borrower.

• The prepayment penalty should not be charged when the mortgage debt is accelerated as the result of the borrower’s default in making the mortgage payments.

Additional Requirements Fannie Mae requires that lenders who are servic-ing any Fannie Mae loan must report on a monthly basis to the credit repositories the status of each loan. Fannie Mae believes that it is important for a bor-rower’s entire payment history be reported, since that gives a borrower with a good payment history more opportunities to obtain new financing.

Fannie Mae requires loan servicers to maintain escrow deposit accounts for the monthly deposit of funds to pay taxes, ground rents, and mortgage insur-ance premiums.

Fannie Mae loan limits are linked to the Federal Housing Finance Board’s (FHFB) October single-family price survey. Loan limits are adjusted each year in accordance with the results of this housing survey.

are as summarized within Table 3.2.

Loan Type Loan Limit

One-Family Loans

Two-Family Loans

Three-Family Loans

Four-Family LoansSource: Compiled by author.

Loan limits for one-to-four-family first mort-gages in Alaska, Guam, Hawaii, and the U.S. Virgin Islands are 50% higher than the limits for the remain-der of the country. The maximum allowable original

sum of the original loan amounts for the first and sec-

Guam, Hawaii, and the U.S. Virgin Islands.

With regard to mortgage delinquency, Fannie Mae takes every possible step to avoid foreclo-sure proceedings. It is recognized that when there is a problem with a loan, foreclosure is the least


Effective January 1, 2006 first mortgage loan limits

Table 3.2: 2006 First Mortgage Loan Limits

$417,000

$533,850

$645,300

$801,950

loan amount for a second mortgage is $208,500. This

Hawaii, and the U.S. Virgin Islands. In addition, the second mortgage limit is $312,750 in Alaska, Guam,

ond mortgages cannot exceed $417,000 within the continental United States, and $625,500 in Alaska,

(www.fanniemae.com)

38 Module 3

desirable solution for all parties. In addition to being an unpleasant experience for the borrower, it is also the most costly solution for Fannie Mae and for the loan servicer. Fannie Mae has instructed its lenders and servicers to avoid foreclosure whenever possible by offering borrowers a variety of alternatives. These alternatives may include temporary forbearance, loan modifications, and preforeclosure sales. Fannie Mae policies regarding private mortgage insurance (PMI) are consistent with the PMI cancellation legislation that was passed by Congress in 1998. This law applies to all mortgages originated after July 29, 1999, and requires lenders to disclose to borrowers their rights to termination of mortgage insurance. Fannie Mae requires automatic cancellation of a borrower’s PMI on all single-family residences that are the borrower’ principal residence when the outstanding loan balance reaches 78% of the original property value, provided that loan payments are current at that time.

Fannie Mae policies also extend beyond the requirements of the law. For existing mortgages that have reached their half-life, which would be the 15th year of a 30-year mortgage for example, PMI is auto-matically terminated.

In 1994, Fannie Mae initiated a new program called the Partnership Office Initiative. Through a series of Partnership Offices around the country, the corporation is able to create long-term relation-ships with lenders, local governments, public officials, housing organizations, community nonprofit groups, builders, and developers. As of August 2003, Fannie Mae had opened 54 Partnership Offices, representing more than $320 billion in investment plans to help more than 3.5 million families obtain affordable hous-ing in these locations.

In January 2000, Fannie Mae announced the cre-ation of the Mortgage Consumer Bill of Rights, which is intended to help promote consumer protection for homebuyers. According to this document, consumers have the following rights:

• the right to have access to mortgage credit;• the right to the lowest-cost mortgage credit for

which the consumer can qualify;• the right to know the true cost of a mortgage;• the right to be free of regulatory burden; and• the right to know what a lender’s mortgage deci-

sion is based upon.

The Mortgage Consumer Bill of Rights is intended to be the cornerstone of Fannie Mae’s American Dream Commitment, which was dis-cussed earlier in this module. Also introduced with the Mortgage Consumer Bill of Rights was Fannie Mae’s open-book approach to automated underwrit-ing. This includes disclosure of all loan fees used by

the Desktop Underwriter (DU) system. Fannie Mae also introduced the True Cost Calculator, which is an Internet-based tool that can be used by consumers to shop for the best mortgage terms in their area.

SECTION REVIEW

Unacceptable lending practices:• steering;• excessive fees;• prepaid single-premium credit life insurance

policies; and• prepayment penalties.

First mortgage loan limits: From for one-family loans to $ 91, 0 for four-family loans. Loan limits are 50% higher in Alaska, Guam, Hawaii, and the U.S. Virgin Islands.

Private mortgage insurance: Fannie Mae requires automatic PMI cancellation when the outstand-ing loan balance reaches 78% of original prop-erty value, or when existing mortgages have reached their half-life.

UNDERWRITING GUIDELINES

Fannie Mae has very specific underwriting guidelines that must be adhered to at all times. A review of all Fannie Mae guidelines would extend well beyond the scope of this module, since they are very extensive. For the purposes of this module, we will reviewthe more pertinent Fannie Mae guidelines relating to appraisals, mortgage eligibility for conventional mort-gages, and underwriting for principal residences.

Property and Appraisal GuidelinesObtaining an accurate and reliable appraisal of the real estate serving as security for the loan is a cru-cial component of the loan underwriting process. For this reason, Fannie Mae has very detailed guide-lines regarding every aspect of the appraisal process. This includes how to select a reputable appraiser, what the responsibilities of the appraiser are, what information is required for an appraisal, and how to review an appraisal report. A good understanding of these appraisal guidelines serves to facilitate both the appraisal process and the underwriting process.

Appraiser qualifications. The first step in the process is to ensure that a well-qualified appraiser is chosen to estimate the market value of the property. Unlike the FHA, Fannie Mae does not approve individual appraisers. It is the responsibility of the lender to obtain an independent, disinterested examination and


www.fanniemae.com

$417,00080 5


valuation of the property that secures the mortgage that is intended to be sold to Fannie Mae. Therefore, the lender is responsible for selecting the appraiser and ordering the appraisal for each mortgage transac-tion.

The appraiser must not be selected by any other party who has an interest in the transaction such as the property seller or the real estate broker. In addi-tion, the lender must not attempt to influence the appraiser in any way. The appraiser must be allowed to estimate the market value of the subject property based upon market data available for analysis as of the date of valuation. Since lenders are solely accountable for the performance of the appraiser selected for each transaction, the lender must take appropriate steps to ensure that the appraiser selected is qualified to per-form appraisals for the particular types of property and the property locations being considered.

Lenders typically will consider the appraiser’s edu-cation and experience levels, as well as reviewing sam-ple work products and taking into consideration any professional references and professional affiliations the appraiser may have. Professional appraisal designations can be helpful in analyzing an appraiser’s qualifications, but federal law prohibits a lender from selecting an appraiser based solely on the appraiser’s membership in any particular appraisal organization. The appraiser must be experienced in appraising the types of prop-erties for which the lender intends to use his or her services. A lender must not assume that an appraiser is adequately qualified based only on his or her member-ship in a particular organization or on the fact that the appraiser is state-licensed or state-certified.

Fannie Mae also requires that lenders use apprais-ers who are state-licensed or state-certified in accor-dance with Title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). Lenders must ensure that any appraisers they retain are appropriately licensed. Proof of licen-sure must be documented by the lender by retaining in its office files a copy of the license of each appraiser used. The appraiser is also required to note his or her license or certification number on each individual appraisal report prepared.

Lenders must ensure that appraisers describe the subject property and the neighborhood in factual, unbiased, and specific terms. Fannie Mae assumes that professional appraisers understand that discrimi-natory valuation and appraisal reporting practices are illegal and unethical. Appraisers must not use subjec-tive terms in their reports, such as pride of ownership, poor neighborhood, or crime-ridden area. In addi-tion, since Fannie Mae holds lenders responsible for the quality of the appraisals it uses, the lender must ensure that the appraiser does not engage in any unac-ceptable appraisal practices.

A partial list of unacceptable appraisal practices includes the following:

• development of and/or reporting an opinion of value that is not supportable by market data or that is misleading;

• inclusion of inaccurate factual data about the subject neighborhood, site, improvements, or comparable sales;

• failure to comment on negative factors with respect to the subject neighborhood, subject property, or proximity of the subject property to adverse influences; and

• creation of comparable sales by combining vacant land sales with the contract purchase price of a home that has been built or will be built on the land.

Appraisal documentation. The lender is required to make the appraiser aware of any and all information concerning the subject property that it is aware of, if the information could affect either the marketability of the property or the appraiser’s opinion of value. This information is usually conveyed by providing the appraiser with a copy of the sales contract involving the property. In order for the appraisal to be valid, it must have been prepared no more than 12 months prior to the date of the note and mortgage.

If an appraisal report is more than four months old, the appraiser is required to inspect the exterior of the property and review current market data to deter-mine whether the value of the property has declined since the date of the original appraisal. If the appraiser believes that the value of the property has declined, a new appraisal is required. If the appraiser believes that the value of the property has not declined, the lender is required to request an update of the appraisal based upon an exterior inspection of the improvements. Appraisal reports must be prepared in conformance with the Uniform Standards of Professional Appraisal Practice (USPAP). Fannie Mae also has certain report-ing requirements that extend beyond USPAP require-

that can be used to manually

designed for one-family properties in planned unit

forms can be


ments. Fannie Mae has five different appraisal forms

the Uniform Residential Appraisal Report, which is

developments. A list of commonly used Fannie Mae

underwrite mortgages, depending upon the property type.

The

most

commonly used form is Form 1004,

found in Table 3.4. Forms may be viewed at www.efanniemae.com/sf/forms/index.jsp

40 Module 3

Reviewing the appraisal report. The subject prop-erty data section of an appraisal report is designed to allow for a very specific identification of the sub-ject property. Appraisers are required to describe the location of the property and to provide information concerning property taxes, the occupancy status of the property, the property rights being appraised, the current property owner, and the client. The subject property should be identified by its complete legal description and property address. Identification via the use of a post office box number is not accept-able. Appraisers must also identify the property rights being conveyed, such as fee simple interest or leased fee interest. Appraisers must disclose if the subject property is located within a planned unit development (PUD) and whether the appraisal is being used for a refinance transaction.

Appraisers are responsible for adequately researching market data from all reasonably available and appropriate sources of information. These sources include public records, proprietary data sources, mul-tiple listing services, and interviews with active mar-ket participants in the area such as real estate brokers. Failure to consider all relevant market data can result in an appraisal that is of poor quality and potentially misleading.

Appraisers are also required to understand and relate to the reader the fundamental characteristics of the neighborhood in which the subject property is located. Neighborhood information of particular interest includes neighborhood boundaries, which can be natural or man-made, neighborhood character-istics, and neighborhood factors that can impact the marketability of the subject property. These charac-teristics can include the proximity of the property to employment centers and amenities, employment sta-bility in the area, and market appeal.

The location of the property being appraised must be identified as urban, suburban, or rural. An urban location means that the property is located within a city, while a suburban location means that the prop-erty is located adjacent to a city. A property that is

located in the country or anywhere beyond the subur-ban area is considered to be rural. All properties must be accessible by roads that meet local standards.

Related to property location are the degree of development and the growth rate for the area. The degree of development of an area may indicate whether the property being appraised is residential in nature. This is an important consideration, since Fannie Mae does not purchase or securitize mortgages secured by agricultural properties. The lender must carefully review the appraisal report for properties that have sites larger than those typical for residential properties in the area. Particular attention should be paid to the description of the subject neighborhood, zoning, and the highest and best use conclusion for the property.

Appraisers are required to report the predomi-nant type of occupancy in the area of the property, including owner or tenant, as well as the percent-age of occupancy in the area. This information can be used to determine the appropriateness of location adjustments made within the valuation section of the report.

Appraisers are required to report the price range and predominant price of properties within the sub-ject neighborhood. This information can be used to determine whether the subject property represents an overimprovement in the area, which relates to the principle of conformity.

Appraisers are also required to report the age range and predominant age of properties in the neigh-borhood, present land uses, changes in land use, and competitive properties in the area. Analysis of the sub-ject site is also important. It should include a discus-sion of the property size, configuration, topography, availability of utilities, street improvements, and other amenities. These property characteristics can enhance or diminish the marketability of the subject property and should be examined in appropriate detail.

Appraisers are responsible for reporting the cur-rent zoning of the subject property as of the date of valuation. It is also necessary to determine whether

Table 3.4: Commonly Used Fannie Mae Forms

1025 (3/05) Small Residential Income Property Appraisal Report

1073 (3/05) Individual Condominium Unit Appraisal Report

1075 (3/05) Exterior-Only Inspection Individual Condominium Unit Appraisal Report

2055 (3/05) Exterior-Only Inspection Residential Appraisal Report

2075 Desktop Underwriter Property Inspection Report

2090 (3/05) Individual Cooperative Interest Appraisal Report

2095 (3/05) Exterior-Only Inspection Individual Cooperative Interest Appraisal Report




the subject property’s improvements represent a legal nonconforming use. Zoning regulations determine the legally permissible use of the property, which leads to the highest and best use conclusion for the property. Highest and best use is considered to be the reason-able and probable use that supports the highest pres-ent value on the effective date of the appraisal. For improvements to represent the highest and best use, they must be legally permissible, financially feasible, physically possible, and must provide more profit (return) than any other use of the site would generate.

Other site-related information pertinent to the appraisal include the availability of utilities, the exis-tence of off-site improvements such as sidewalks and street lights, the particular characteristics of the lot itself, and flood hazard information. The subject property’s improvements must also be inspected and analyzed closely so that a detailed description can be included within the report. This description should include a general overall description as well as specific descriptions of the exterior, foundation, basement, insulation, interior surfaces, heating and cooling sys-tems, kitchen equipment, attic, amenities such as a swimming pool, and car storage (garage or carport). The appraiser should determine whether the improve-ments are in conformance with the neighborhood in terms of age, design, and construction materials.

For example, a single-family residence that is 30 years old will not be in conformance with the neigh-borhood if the predominant property age in the area is 10 years. The appraiser should report both the actual age and the effective age of the improvements. When properly maintained, improvements can have an effective age that is considerably less than their actual age. This is an important consideration, since Fannie Mae does not place a restriction on the actual age of dwellings.

The gross living area and the gross building area of the subject property’s improvements must be reported within the appraisal report. Gross living area relates to above-grade heated and cooled living space, while gross building area relates to the total finished area of the improvements, including common areas, stairways, and hallways, based upon exterior build-ing measurements. It is important for the appraiser to use consistent techniques when comparing the build-ing area of comparable sale properties to the subject property. Inconsistent measurement or comparison techniques can result in misleading appraisal results.

Approaches to Value

The three approaches to value include the sales comparison approach, the cost approach, and the income approach.

Sales comparison approach. The sales comparison approach is the most straightforward and most easily

understood of the three typical approaches to value. The sales comparison approach is relied upon most heavily in the appraisal of single-family residences, and is based upon the principle of substitution, which states that a knowledgeable purchaser will not pay more for a property than the price he or she would pay for a similar property of equal desirability and utility if purchased without undue delay. The sales comparison approach involves the analysis of recent sales of properties considered similar to the subject property, with adjustments made to the sales account-ing for characteristic differences such as location, size, and condition.

The foundation of the sales comparison approach is high-quality market data. Therefore, it is imperative that appraisers exercise due diligence while research-ing and verifying appropriate market data.

Fannie Mae requires appraisers to use a minimum of three comparable sales as part of the sales compari-son approach; however additional sales may be sub-mitted if the appraiser considers them to be pertinent to the analysis. Appraisers are encouraged to use sales that have occurred within the preceding 12 months, but older sales can be used if their use is justified and explained within the appraisal report. The appraiser is required to comment on the use of any sale that is older than six months. Sales that have occurred within the subdivision in which the subject property is located are usually the best indicators of value and should be used if at all possible. If the appraiser uses sales out-side the subdivision, an explanation is required.

In the sales comparison approach, adjustments are made to the comparable sale properties in comparison to the subject property. Adjustments are made for dif-ferences relating to sales and financing concessions, location, terms and conditions of sale, date of sale, and the physical characteristics of the property such as size and condition. Adjustments for the passage of time, commonly referred to as time adjustments, are intended to reflect changes in market conditions over time, if any. These adjustments should be supported by market evidence whenever possible. The subject property is the standard against which the comparable sales are compared. Therefore, a comparable sale with an inferior property characteristic requires a positive adjustment in comparison with the subject property. Conversely, a comparable sale with a superior prop-erty characteristic requires a negative adjustment in comparison with the subject property. Fannie Mae has established guidelines for the net and gross per-centage adjustments that underwriters may rely on as general indicators of whether a property should be used as a comparable sale in an appraisal.

Generally, the dollar amount of the net adjust-ments for each comparable sale should not exceed 15% of the sales price for the comparable sale. If the adjustments exceed 15%, the appraiser is required


42 Module 3

to offer an explanation for the severity of the adjust-ments that have been made. In addition, the dollar amount of the gross adjustments for each comparable sale should not exceed 25% of the sales price of the comparable sale. The gross adjustment is measured without regard for positive or negative adjustments.

Cost approach. The cost approach, which is also based upon the principle of substitution, assumes that a potential purchaser will consider building a substi-tute residence that has the same utility as the property that is being appraised. The cost approach measures the cost of production, and its reliability is a function of well-supported replacement cost estimates, depre-ciation estimates, and an estimate of market value for the underlying land. Fannie Mae will not accept appraisals that are based solely upon the cost approach. In addition, the cost approach is not required in the appraisal of a unit in a condominium or cooperative project because of its inherent impracticality.

The cost approach is best suited for the appraisal of newer properties that do not suffer from high lev-els of accrued depreciation. As the effective age of the subject property increases, the reliability of the cost approach as an indicator of value decreases. This is due primarily to the subjectivity associated with the estimation of accrued depreciation suffered by the improvements. Accrued depreciation consists of physical deterioration, functional obsolescence, and external obsolescence. Physical deterioration and functional obsolescence are caused by characteristics of the subject property itself. External obsolescence, which is also commonly referred to as economic obso-lescence, is caused by factors outside the subject prop-erty, which might include, for example, an economic downturn or proximity to negative influences such as a prison facility or landfill.

Income approach. The income approach is used only for income-producing investment properties. It is not applicable in the appraisal of owner-occupied single-family residences. The income approach is based upon the principle of anticipation, which states that the market value of a property is related to the rent or income that the property is capable of gener-ating. A market rental rate is estimated for the subject property based upon an analysis of comparable rental properties in the area. The market value of the prop-erty can then be estimated by using one of a variety of comparison techniques, including gross rent multipli-ers, net income multipliers, or direct capitalization of the net operating income into a market value estimate for the property.

The final step in the appraisal process is the rec-onciliation and final value estimate. In this section of the report, the appraiser must reconcile the reason-ableness and reliability of each applicable approach to value, as well as the reasonableness and validity of the

indicated value estimates. Each approach to value will have certain strengths and weaknesses. The appraiser must weigh these factors to arrive at a final estimate of market value for the subject property as of the date of valuation. The reconciliation process is never an aver-aging technique.

SECTION REVIEW

Property and appraisal guidelines:

• Fannie Mae does not approve individual appraisers; lenders have the responsibility of selecting the appraiser and ordering the appraisal.

• Federal law prohibits a lender from selecting an appraiser based solely on the appraiser’s membership in any particular appraisal orga-nization.

• Lenders are required to select state-licensed or state-certified appraisers.

• Appraisals must be prepared no more than 12 months prior to the date of the note and the mortgage.

• Property location is described as urban, sub-urban, or rural. Fannie Mae does not pur-chase or securitize mortgages secured by agricultural properties.

• Approaches to value include sales compari-son, cost, and income approaches. For most residential properties, the sales comparison approach is the most useful approach to value.

Mortgage Eligibility for Conventional Loans

Fannie Mae purchases and securitizes conventional first and second mortgages that meet the qual-ity standards private institutional investors apply to mortgages of similar lien types. Unless specified to the contrary, these eligibility requirements apply to both types of mortgages. Fannie Mae purchases and securitizes conventional first mortgages that provide for either a fixed interest rate or an adjustable inter-est rate. As for conventional second mortgages, only fixed-rate mortgages are considered by the corpora-tion. Purchase money transactions are those in which the proceeds are used to finance the purchase of real property. A refinance transaction is not a purchase money transaction. A refinance transaction involves the repayment of an existing debt from the proceeds of a new mortgage that has the same borrower and the same property as security for the mortgage.



Only mortgages that have been made to natural persons will be considered by Fannie Mae for purchase or securitization. The borrower cannot be a legal entity such as a corporation or general partnership.

In addition, the borrower must have reached the age at which the mortgage note can be legally enforced in the jurisdiction in which the property is located. Mortgages cannot be made to minors; how-ever there is no maximum age limit for borrowers.

Fannie Mae will accept mortgages that have a co-borrower, and that individual is not required to take title to the property. However, income from the co-borrower will not be accepted for qualifying purposes unless he or she also signs the mortgage note.

Three occupancy status definitions are used to determine the eligibility of a conventional mort-gage. A principal residence is defined as a one-to-four-family property that is the borrower’s primary residence. At least one of the borrowers must occupy and take title to the property and execute the note and mortgage. A second home is defined as a single- family property that the borrower occupies in addition to his or her principal residence. When the property is classified as a second home, rental income may not be used for loan qualification purposes. An investment property is defined as a one-to-four-family property that the borrower does not occupy. This definition is used whether or not the property is income pro-ducing. Mortgage terms for one- to-four-family first mortgages may not extend more than 30 years beyond the date of the first monthly payment. Fannie Mae generally requires a minimum down payment of 5% of the purchase price for the property. The down pay-ment must consist of the borrower’s savings or other liquid assets. Donated funds are not acceptable for this purpose. Loan-to-value ratios for most first mortgages are determined by dividing the mortgage balance at the time the mortgage is submitted for purchase or securitization by the property value. Property value is considered to be the lower of the sales price or the appraised value. Fannie Mae requires mortgage insur-ance for first mortgages that have loan-to-value ratios greater than 80%. Generally, the borrower pays for the mortgage insurance coverage.

Fannie Mae will purchase or securitize first mortgages secured by manufactured housing units as long as they are legally classified as real property. This requires that the unit be permanently affixed to a foundation, and it must assume all the characteris-tics of site-built housing. All wheels, axles, and trailer hitches must be removed when the unit is placed on its permanent site. Single-width manufactured housing units must be located within a Fannie Mae-approved project. A multi-width unit may be located on an individual lot or in any project. In most cases, project approval for multi-width units located on individual lots in subdivisions is not required.

Underwriting Guidelines for Principal Residences and Second Homes

Underwriters will consider all aspects of a borrower’s credit before approving or declining a mortgage appli-cation. To determine whether a particular borrower is eligible for Fannie Mae financing, lenders analyze the borrower’s ability and willingness repay the mort-gage debt. Analyzing the ability to repay the debt is a fairly straightforward procedure, but analyzing the borrower’s willingness to repay the debt is much more difficult to evaluate.

A borrower’s income potential consists of many factors including occupation, employment tenure, opportunities for future advancement, educational background, and occupational training. Lenders typi-cally use Form 1005, Verification of Employment, to determine the adequacy and continuation of the applicant’s income. If earnings shown on Form 1005 are not shown as a gross monthly income, the lender must translate the information into a usable format. This can be accomplished by one of the following techniques:

• dividing annual income by 12; • multiplying weekly income by 52, and then

dividing by 12; or • multiplying hourly income by the number of

hours worked per week, then multiplying this result by 52, and then dividing by 12.

The lender is required to verify the borrower’s employment for the full two years that precede the mortgage application. The borrower is required to explain gaps in employment that extend beyond one month during this two-year period. When a borrower is employed by a relative or family-owned business, the lender will require the borrower to submit signed federal income tax returns for the past two years. Underwriters must determine the probable stability and continuance of employment. A borrower who changes jobs frequently to advance within the same profession and has a successful track record should receive favorable consideration. However, frequent job changes without advancement may be an indica-tion of unstable income.

Sources of income that can be considered in the application process include:

• military income;• commission income;• overtime and bonus income;• part-time or second job income;• retirement income;• social security income;• alimony or child support;• notes receivable;


44 Module 3

• interest and dividends;• mortgage differential payments;• trust income;• VA benefits;• unemployment and welfare income;• rental income;• automobile allowances; and• foster-care income.

Commission income, overtime and bonus income, and Commission income, overtime and bonus income, and part-time, second job income can fluctuate from one year to the next. For this reason, lenders scruti-nize these sources of income carefully. Retirement income and social security income are more easily verified. Income from alimony or child support must be expected to continue for at least the next three years in order to be considered. Rental income from boarders (tenants) in a single-family residence cannot be considered as acceptable income. However, rental income received from other properties is acceptable, even if the borrower occupies one of the units in a multiple-unit property. A borrower is considered to be self-employed if he or she has a 25% or greater ownership interest in a business. Self-employed bor-rowers will be required to submit additional docu-mentation as a part of the loan application process, including signed income tax returns for the past two years, signed copies of business income tax returns for the last two years, an individual credit report, a year-to-date profit and loss statement, and a balance sheet for the past two years. Income from self-employment is considered stable if the borrower has been self-employed for at least two years.

Verification of funds is accomplished by the use of Form 1006, Verification of Deposit. The lender determines the amount of money required to close a mortgage transaction by adding the cash down pay-ment, borrower closing costs, and borrower loan fees.

Typical sources of funding include:

• deposit according to the sales contract;• checking and savings accounts;• gifts from relatives;• grants;• sales proceeds or anticipated sales proceeds;• bridge loans;• retirement accounts;• government bonds, stocks, or trust accounts;• borrowed funds against collateral.

Checking and savings account balances must be verified by the underwriter, and gifts from relatives must be accompanied by a gift letter stating that no

repayment is expected. Sale proceeds from the sale of currently owned property is a common source of funds, as are a variety of investments including retire-ment accounts, bonds, stocks, and trust accounts.

Cash on hand is not considered an acceptable source of funds since it has no paper trail attached. In addition, sweat equity is not considered an acceptable source of funds.

Credit report. One of the most important compo-nents of credit analysis is the credit report.

Lenders will closely review the following compo-nents of the credit report:

• payment history on the previous mortgage;• undisclosed debt;• revolving accounts;• judgments, garnishments, or liens;• bankruptcy; and• previous mortgage foreclosure.

The payment history on the previous mortgage is a good indicator of the borrowers willingness and ability to repay the debt. If the credit report reveals debts that were not initially disclosed by the bor-rower, the underwriter will require a complete writ-ten explanation of the discrepancy. Bankruptcy must have been discharged fully and the borrower must have re-established good credit. Fannie Mae consid-ers an elapsed time of four years between discharge of the bankruptcy and the mortgage application to be a sufficient period of time to re-establish credit. The monthly housing expense-to-income ratio is the ratio between a borrower’s total monthly expenses and total monthly income. The benchmark monthly housing expense-to-income ratio for conventional mortgages is 28%. Since this ratio is intended to serve as a guideline, lenders may use a higher ratio for any given conventional mortgage if this is justified by fully documented compensating factors. The total obliga-tions-to-income ratio is the ratio between a borrow-er’s debts and income sources. The benchmark total obligations-to-income ratio is 36% of the borrower’s stable income for conventional mortgages.

SECTION REVIEW

Principal residence: A one-to-four-family property that is the owner’s primary residence. At least one of the borrower’s must occupy and take title to the property and execute the note and mortgage.

Second home: A single-family residence occupied by the borrower in addition to the principal residence. Not an investment property.



Investment property: A one-to-four-family property

that the borrower does not occupy. This defi-nition applies whether the property is income producing or not.

CONCLUSION

Fannie Mae plays a vital role in making funds available to homebuyers throughout the United States because of its involvement in the secondary mortgage market. Fannie Mae is the nation’s largest investor in home mortgages today and currently owns or holds in trustone out of every five mortgages in the United States. Because of its significant influence within the mort-gage lending business, it is important to be familiar with the mission, operational structure, and under-writing requirements of Fannie Mae.


is which of the following?

d. $413,100

2. If an appraisal report is more than four months old and the appraiser determines that the value of the property has declined since the date of the original appraisal, what action is required by Fannie Mae?

a. No action is required, because appraisals are valid for 12 months.b. The lender is required to request an update of the original appraisal based upon an exterior inspection of the

subject property’s improvements.c. A new appraisal of the property is required.d. The lender is required to request an update of the original appraisal based upon an interior and exterior

inspection of the subject property’s improvements.

3. A borrower reports a gross weekly income of $1,250. Convert this to a monthly gross income figure as required on Form 1005, Verification of Employment.

a. $5,000b. $5,416.67c. $6,000d. $6,586.67

4. A borrower has several sources of income. Which of the following income sources cannot be considered in the application process?

a. commission incomeb. social security incomec. rental income from a four-unit residential property when one of the residential units is occupied by the bor-

rower d. rental income from tenants in a single-family residence

5. Fannie Mae considers the benchmark monthly housing-expense-to income ratio to be which of the following?

a. 28%b. 30%c. 36%d. no housing-expense-to income ratio benchmark for lenders established by Fannie Mae

6. Which of the following statements regarding the operational structure of Fannie Mae is correct?

a. Fannie Mae stock is not permitted to be traded openly on the New York Stock Exchange.b. Fannie Mae is not regulated by the federal government in any way.c. Fannie Mae is a private, shareholder-owned company that cooperates with lenders to ensure the constant

availability of funds.d. Fannie Mae lends money directly to individual home buyers.

46 Module 3

Following are Review questions. While you are not required to answer these questions to complete the 14-hour course, they are intended to help you evaluate your comprehension of the material. Choose the best response to each review question. The answers to the review questions are found at the end of each section.


REVIEW Q U E S T I O N S — M O D U L E T H R E E

1. For 2006, the Fannie Mae mortgage loan limit for one-family loans within the continental United States

c. b. $322,700a. $300,700

$417,000


7. Fannie Mae was established by an act of Congress in 1938 and was rechartered as a private company in what year?

a. never rechartered as a private companyb. 1968c. 1952d. 1942

8. For application purposes, a borrower is considered to be self-employed if:

a. he or she has a 50% or greater ownership interest in a business and employs fewer than five other people.b. he or she works a second job for more than 20 hours per week.c. he or she has a 25% or greater ownership interest in a business.d. he or she has a 20% or less ownership interest in a business, regardless of the number of people employed by

that business.

9. Which of the following sources of funds cannot be considered in the application process?

a. retirement accountsb. grantsc. gifts from relativesd. cash on hand

10. Fannie Mae purchases and securitizes which of the following types of loans?

a. fixed-interest-rate conventional mortgages only

with fixed interest ratesc. conventional first and second mortgages with fixed interest rates onlyd. conventional first mortgages with either fixed or adjustable interest rates and conventional second mortgages

with adjustable interest rates

ANSWERS: 1) . 2) c. 3) b. 4) d. 5) a. 6) c. 7) b. 8) c. 9) d. 10) b.


b. conventional first mortgages with either fixed or adjustable interest rates and conventional second mortgages

d

48 Module 3



LEARNING OBJECTIVES

After completing this module, you should be able to:

Fair Housing

M O D U L E 4

1. Explain the impact on real estate practices of the Civil Rights Act of 1866, the Fair Housing Act of 1968, the Equal Credit Opportunity Act, and the Americans with Disabilities Act.

2. List groups protected under and exemptions to the Fair Housing Act;

3. Cite the significant aspects of the Florida Fair Housing Act and identify groups protected under this statute.

4. Define terms such as steering, redlining, block-busting, familial status, and discriminatory advertising.

5. Cite government enforcement policies and procedures.

6. Provide examples of specific acts of discrimina-tion.

INTRODUCTIONMany property owners, mortgage lending profession-als and real estate licensees lack a clear understand-ing of civil rights legislation or his or her role in the implementation of fair housing laws. To make mat-ters more complex, federal, state, and local discrimi-nation laws differ. Misinformation and confusion, as well as intentional discrimination, all create problems for minorities and the disabled seeking to purchase or rent homes.

CHRONOLOGY OF ANTIDISCRIMINATION LEGISLATION REGARDING PROPERTYThis section outlines the chronology of anti-discrim-ination legislation.

Civil Rights Act of 1866The history of fair housing properly begins with the Civil Rights Act of 1866, the first significant statute to deal with equal housing opportunity. It states that “all citizens have the same right in every State and

Territory, as is enjoyed by the white citizens thereof, to inherit, buy, sell, or lease all real and personal property” (42 U.S.C. 1981).

In a landmark 1968 case, Jones v. Mayer, the Supreme Court applied the Civil Rights Act of 1866 to affirm the prohibition of all racial discrimination, private as well as public, in the sale of real property. This ruling covers all real estate and does not limit itself to dwellings.

Fair Housing ActThe second major federal law to prohibit discrimina-tion is the Fair Housing Act, officially known as Title VIII of the Civil Rights Act of 1968 (42 U.S.C. 3601). This legislation prohibits discrimination in housing on the basis of race, color, religion, or national ori-gin. A 1974 amendment added a prohibition of dis-crimination on the basis of sex (or gender). The Fair Housing Amendments Act of 1988 added provisions to prevent discrimination based on mental or physical handicap or familial status.

Deborah H. Long, DREI, Ed. D. has been a real estate educator for over 25 years and completed her doctorate in Educational Leadership in 1994. She is a licensed real estate instructor in more than 10 states. Dr. Long is the award-winning author of 16 books. She holds a Doctorate degree in Educational Leadership from Florida Atlantic University as well as a Master’s degree in English Education from the University of Illinois.


50 Module 4

DEFINITION OF TERMS

This section summarizes the definitions of terms used in the Fair Housing Amendments Act.

Handicap DefinedThe amendment defines handicap as any physical, emotional, or mental impairment that substantially limits one or more life functions. Handicap also refers to a record of having had such an impairment.

Landlords must allow disabled tenants to make reasonable modifications to their apartments to accommodate their special needs. Tenants pay for the modifications and for returning the premises to their original condition. As of 1988, new multifamily con-struction must provide certain accommodations for people with disabilities, for example, switches and thermostats at wheelchair level.

Familial Status DefinedFamilial status can refer to families in which one or more children under 18 live with a parent, legal guardian, or someone given written permission by the parent or guardian. Inclusion of familial status in the act also makes it illegal to discriminate against a preg-nant woman or a person who has or is in the process of securing legal custody of a child.

In Florida, this amendment has had a significant impact upon homeowner associations, apartment complexes, and condominiums. These property own-ers must have facilities adapted for children and can-not discriminate against anyone on the basis of familial status when leasing, selling, or renting property.

“Adults Only” DefinedIn most circumstances, property owners and landlords are prohibited from advertising “Adults Only.” How-ever, a building or development can qualify for an exemption if (1) the building owner(s) provides hous-ing under a state or federal program that the secretary of HUD determines is specifically designed and oper-ated to assist elderly persons; (2) all units are occupied by individuals age 62 or older; or (3) at least 80% of the units are occupied by persons age 55 or older. If the building or development meets any one or more of these conditions, the units can be advertised as “Adults Only.”

HUD AND ENFORCEMENTThe Fair Housing Amendments Act of 1988 addressed the enforcement issue missing from the original Fair Housing Act of 1968. Previously, HUD had to rely solely on persuasion, but now HUD can file formal charges and refer complaints to an administrative law judge (ALJ). The ALJ who hears complaints regarding fair-housing violations can impose fines of $10,000 to $50,000 for subsequent offenses. The U.S. Attorney General now has an expanded role in initiating action in the public interest and can seek fines as high as $50,000 for the first offense in a pattern of discrimi-nation. Visit HUD’s website at <www.hud.gov>.

Exemptions to Fair Housing Laws

The Fair Housing Act exempts property owners in some limited situations:

MATCHING EXERCISE

Following is a matching exercise. While you are not required to do this exercise to complete the 14-hour course, it is intended to help verify your comprehension of the material. Fill in the letter of the correct defini-tion in Column II that matches the word(s) in Column I. The answers to the matching exercise are found on Page 56.

COLUMN I

____ 1. Handicap

____ 2. Familial status

____ 3. Adults only

____ 4. 1866

____ 5. 1968

____ 6. 1988

COLUMN IIa. can refer to an adult with children under 18, a pregnant person, or a

person who has or is in the process of obtaining legal custody of a child b. year of first significant statute to deal with equal housing opportunityc. provisions added to prevent discrimination based on mental or physical

handicap or familial statusd. meets one or more of these criteria: (1) specifically designed and oper-

ated to assist elderly persons, (2) all units occupied by individuals age 62 or older, or (3) at least 80% of the units are occupied by persons age 55 or older.

e. any physical or mental impairment that substantially limits one or more life functions

f. legislation enacted to prohibit discrimination in housing on the basis of race, color, religion, or national origin


Fair Housing 51

1. The sale or rental of single-family homes when occupied and sold by the owner without the use of a broker or public advertising, the rental of rooms or units in an owner-occupied dwell-ing of four or fewer units, the sale or rental of single-family homes owned by a private per-son who owns no more than three single-fam-ily dwellings at any one time (except that only one exemption can be taken in any 24-month period and no more than one house in which the owner was not the most recent resident can be sold using an exemption during any 24-month period).

2. Properties owned and operated by religious organizations for the benefit of their mem-bers only, provided that the religion does not restrict its membership on the basis of race or national origin.

3. Properties owned by a private club as lodging for the benefit of the membership and not for commercial purposes.

Even individuals or organizations eligible for an exemption, cannot use public advertising or the ser-vices of a broker to rent or sell the property if they want to be discriminatory. These limitations make it very difficult to market a property for rent or for sale and to discriminate, because property owners then have to rely on word-of-mouth referrals. Furthermore, those property owners who wish to claim an exemp-tion and discriminate against minorities may not do so on the basis of race; the 1866 Civil Rights Act still prohibits discrimination based on race and contains no exemptions for individuals or organizations.

HUD officials advise real estate practitioners to act as though there are no exemptions, inasmuch as the exemptions are largely illusory. The landlord or seller loses the exemption as soon as he or she engages brokerage services.

PROHIBITED DISCRIMINATORY ACTS DEFINED BY THE FAIR HOUSING ACT

The Fair Housing Act specifically prohibits the follow-ing:

1. Refusal to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, national origin, sex, dis-ability, or familial status;

2. Discrimination against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision or services of facilities in connection therewith, because of

race, color, religion, national origin, sex, dis-ability, or familial status;

3. Making, printing, or publishing, or causing to be made, printed, or published, any notice, statement, or advertisement with respect to the sale or rental of a dwelling that indicates any preference, limitation, or discrimination, or an intention to make any such preference, limitation, or discrimination, based on race, color, religion, national origin, sex, disability, or familial status;

4. Representing to any person because of race, color, religion, national origin, sex, disability, or familial status that any dwelling is not avail-able for inspection, sale, or rental when the dwelling is in fact available (steering);

5. Inducing or attempting to induce, for profit, any person to sell or rent any dwelling by rep-resentation regarding the entry or prospec-

TRUE OR FALSE?

Following are True or False questions. While you are not required to answer these ques-tions to complete the 14-hour course, they are intended to help verify your comprehension of the material. Circle (T)rue or (F)alse for each question below. The answers to the True or False questions are found on Page 56.1. HUD enforces the federal Fair Housing Act.

T F2. Property owners can use public advertising

when they claim an exemption to the federal Fair Housing Act. T F

3. Property owners cannot use the services of a broker to rent or sell the property when they claim an exemption to the federal Fair Housing Act. T F

4. In some limited situations, property owners may be able to discriminate against mem-bers of a group otherwise protected by fair housing laws. T F

5. Property owners entitled to claim an exemp-tion to the federal Fair Housing Act still may not discriminate on the basis of race. T F

6. Properties owned and operated by religious organizations for the benefit of their mem-bers only have an exemption under the fed-eral Fair Housing Act. T F

7. Private clubs that own commercial lodging may discriminate against protected classes.

T F


52 Module 4

tive entry into the neighborhood of a person or persons of a particular race, color, religion, national origin, sex, disability, or familial status (blockbusting);

6. Denying or making different terms or condi-tions as a commercial lender for home loans (redlining); and

7. Denying anyone the use of or participation in any real estate services, such as broker orga-nizations, multiple listing services, and other resources related to the selling or renting of housing.

An Atlanta real estate broker achieved notori-ety by creating the first civil rights case in the nation taken before an administrative law judge as authorized by the Fair Housing Amendments Act of 1988.

BlockbustingBlockbusting is the illegal practice of inducing own-ers to list property for sale or rent at distressed prices by telling them that persons of a particular race, color, national origin, sex, religion, disability, or familial sta-tus are moving into the area. Sometimes the licensee, who stands to gain financially, claims that an impend-ing change in the demographic composition of the neighborhood will cause property values to fall and crime to increase.

SteeringSteering is the practice of directing prospects to or away from a particular neighborhood based on their race, color, religion, sex, national origin, disabil-ity, or familial status. Directing prospective minor-ity purchasers to currently integrated areas to avoid integration of nonintegrated areas or showing white prospects properties only in areas populated by whites are two examples. Sometimes real estate practitioners steer with casual comments: “You don’t want to live in this neighborhood. You’d be the first. You’d be more comfortable in the first neighborhood I showed you.” The following are additional examples of steering:

• showing African-American prospects properties only in integrated areas;

• placing tenants with disabilities in a separate building;

• having one swimming pool for adults only;• assigning African-American sales associates to

offices in integrated neighborhoods and white salespeople to offices in nonintegrated areas; and

• advising purchasers to check out the neighbor-hood for themselves by parking outside the school building at dismissal time to see the mix of students.

Duties of a Buyer-Broker and Steering

While licensees have a duty to obey their clients, when a client asks a practitioner to disobey the law, those requests must be ignored. A 1996 letter written by Assistant Secretary of HUD Elizabeth Julian ini-tially gave licensees some latitude in showing buyers/clients property based on the ethnic or racial compo-sition of a neighborhood, but that letter was retracted. Real estate professionals should be careful to offer a full range of properties that meet the price and size criteria set by buyers and should not use any other criteria for selecting property to show.

Discriminatory Advertising

According to the Fair Housing Act, it is discrimina-tory to make, print, or publish for the sale or rental of a dwelling any notice that indicates any preference, limitation, or discrimination based on race, color, reli-gion, national origin, sex, disability, or familial status. Examples of violations include an advertisement for condo units or rental apartments with pictures that show owners or tenants of only one race, an apart-ment advertisement that states “adults only” (unless the community meets federal guidelines), and an ad stating that the owner prefers male college students as tenants. Terms such as mother-in-law suite and bach-elor pad may be considered discriminatory, however phrases such as great view, jogging trails, family room, or walk-in closet are not.

An amendment to the Fair Housing Act of 1968 requires that real estate brokers prominently display the fair housing poster. Failure to do so could sug-gest lack of intent to comply with the federal law (24 C.F.R.110.10). Brokers should also use the fair hous-ing logo on large ads and on their websites.

Redlining

Discrimination in lending is also a violation of the fed-eral Fair Housing Act. The courts have defined redlin-ing as the practice by lending institutions of cutting funds to an area because of the integrated makeup of the community. The term originated in the prac-tice by lenders of drawing red lines on maps to show which areas would not be financed.

The Equal Credit Opportunity Act (ECOA) of 1977 also prohibits discrimination by banks and other lending institutions against applicants for credit on grounds of race, religion, national origin, age, sex, or receipt of income from a public assistance program (15 U.S.C. 1691). Lending institutions cannot require any of the following from a borrower:

• information about a spouse or former spouse;

• information about the applicant’s marital status;

• information about the source of an applicant’s


Fair Housing 53

income (unless they first disclose that informa-tion regarding alimony, child support, or sepa-rate maintenance is to be furnished only at the option of the applicant); or

• information about an applicant’s birth control practices.

The ECOA does not prevent a creditor from asking any pertinent information necessary to evalu-ate the creditworthiness of applicants, such as credit history, quantity and quality of income, and amounts of debt. However, all applicants must be evaluated on the same basic information. Under the ECOA, lend-ers must give precise reasons for the denial of credit, such as inability to verify applicant’s credit references, temporary or irregular employment, or insufficient income.

Failure to comply with the ECOA subjects a lending institution to civil liability for damages up to $10,000 in individual actions and the lesser of $500,000 or 1% of the lender’s net worth in class actions.

STATE FAIR HOUSING ACTS

States have the authority to pass their own civil rights acts. State laws may protect the same groups from dis-crimination as do the federal laws, or they may pro-tect other groups as well, such as those classified by marital status. If a state law is substantially the same as federal law, complaints based on the federal law must be referred to the state enforcement agency. State laws cannot add any exemptions to those permitted under the federal law, but they may be more restrictive and provide for no exemptions.

Florida’s Fair Housing Act

The objective of Florida’s Fair Housing Act (760.20-760.37, F.S.) is to provide for fair housing throughout the state by prohibiting discrimination on the basis of race, color, national origin, sex, disability, or religion in the sale or rental of housing. The Florida Commis-sion on Human Relations administers the State’s Fair Housing Act, which can be enforced by the Division of Administrative Hearings or through civil lawsuits brought by private individuals. Violators may be liable to the plaintiff for actual damages, punitive damages of not more than $1,000, court costs, and attorney fees. The State may also require guilty parties to take affirmative action, such as community service, adver-tisements concerning fair housing, or sponsorship of a seminar on fair housing. Licensees who violate Florida’s Fair Housing Act are subject to a $10,000 fine for the first offense per violation; a second offense within five years could bring a $25,000 fine.

Counties and municipalities throughout Florida have their own fair housing ordinances. For example,

the Palm Beach County Fair Housing Ordinance pro-hibits discrimination based on age and marital status. Broward County prohibits discrimination on account of sexual orientation.

ENFORCEMENTThere are three types of evidence in fair housing liti-gation: testing (also called auditing or checking), testi-mony by other sales associates and brokers about the defendant’s past acts of discrimination, and the defen-dant’s statistical record of business.

Testing is a process for monitoring compli-ance. In one example of a test, a white couple acts as prospects to purchase a three-bedroom home in the $100,00 to $110,000 range. The real estate practitio-ner takes the couple to Rolling Hills subdivision. The white couple says that they will think about the prop-erties they were shown in that area. The next week,

WHICH OF THE FOLLOWING IS UNLAWFUL?

Following are Yes or No questions. While you are not required to answer these questions to complete the 14-hour course, they are intended to help verify your comprehension of the mate-rial. Circle (Y)es or (N)o for each question below. The answers to the Yes or No questions are found on Page 56. 1. Advertising “Perfect for Hispanic couple”

Y N

2. Choosing neighborhoods for buyers based on their financial needs Y N

3. Consistently advertising model homes with pictures of Asians only Y N

4. Asking female loan applicants their marital status Y N

5. Advertising “big walk-in closets” Y N

6. Advertising “perfect for biking, jogging professional person” Y N

7. Responding to a buyer/client’s request to see property near a bus stop Y N

8. Responding to a buyer/client’s request to see only integrated neighborhoods Y N

9. Sending a marketing piece to potential listing clients letting them know that the neighborhood is in transition Y N

10. Placing all families in the back of the apart-ment complex (property managers) Y N

11. Advertising “large family room” Y N


54 Module 4

the real estate practitioner shows properties in Jackson Heights – but not in Rolling Hills – to an Hispanic couple who are also looking for a home with the same amenities in the same price range.

The practitioner violated fair housing laws by treating the second couple differently from the first couple for no apparent reason other than race. The testers will be witnesses to the discrimination. Civil rights groups perform testing of real estate licensees as part of a federally funded program organized by HUD and the National Association of REALTORS® (NAR).

The courts can use the testimony of sales associates and brokers who have worked with or for a licensee accused of discrimination. However, given the com-petitive nature of the real estate business, this type of testimony can be biased and is seldom used unless there is corroboration.

The courts can also review the statistical record of business, or the total record of listings and sales, by the accused licensee to see if a pattern of discrimina-tion is indicated. Again, this type of evidence must be corroborated.

To file a complaint, individuals may call HUD toll free at (800) 669-9777, or they may use the online complaint form at <www.hud.gov/complaints/housediscrim.cfm>.

AMERICANS WITH DISABILITIES ACT

On January 26, 1992, the Americans with Disabilities Act (ADA) became effective (42 U.S.C. 12101). The purpose of the ADA is to eliminate discrimination against individuals with disabilities and allow them to enter the economic and social mainstream of society. Disabilities are defined as physical or mental impair-ments that substantially limit one or more of the major life activities of a person. While the ADA applies to individuals with obvious disabilities such as blindness or a physical handicap, it also applies to those whose disabilities are less evident, including those who test positive for AIDS or who suffer from dyslexia, epi-lepsy, alcoholism, or other such disabilities. By one estimate, the ADA covers over 900 disabilities.

The ADA states that individuals with disabilities cannot be denied access to public transportation, any commercial facility, or public accommodations. This has particular significance to owners and operators of public accommodations and commercial facilities, regardless of the facility’s size or number of employ-ees. The ADA also applies to all local and state gov-ernment facilities.

Effective in 1993, all public accommodations and commercial facilities are to be designed and con-structed, or altered, to meet the accessibility stan-dards of the new law, if readily achievable (easily accomplished and carried out without much difficulty or expense). Existing public facilities had to remove structural, architectural, and communication barriers if removal was readily achievable. Examples of reason-able accommodations are lowering a shelf to enable a disabled individual to reach it, rearranging furniture

TRUE OR FALSE?

Following are True or False questions. While you are not required to answer these questions to com-plete the 14-hour course, they are intended to help verify your comprehension of the material. Circle (T)rue or (F)alse for each question below. The answers to the True or False questions are found on Page 56.

1. State laws may delete protected classes, such as race. T F

2. Florida prohibits discrimination on the basis of race, color, national origin, sex, disability, or religion in the sale or rental of housing. T F

3. The Florida Commission on Human Relations administers the State’s Fair Housing Act. T F

4. If a state law is substantially the same as federal law, complaints based on the federal law must be referred to the state enforcement agency. T F

5. Counties and municipalities throughout Florida have their own fair housing ordinances. T F

TRUE OR FALSE?

Following are True or False questions. While you are not required to answer these questions to com-plete the 14-hour course, they are intended to help verify your comprehension of the material. Circle (T)rue or (F)alse for each question below. The answers to the True or False questions are found on Page 56.

1. If testing is used as evidence in fair housing litigation, it must be corroborated. T F

2. The courts cannot use the testimony of sales associatess and brokers who have worked with or for a licensee accused of discrimination. T F

3. The court can review the total record of listings and sales by a licensee to see if a pattern of discrimination is indicated. T F


Fair Housing 55

and display units to widen access aisles, placing stick-on Braille symbols next to elevator call buttons, and lowering water fountains to wheelchair height.

The ADA is enforced by the U.S. Attorney General, who can seek injunctions against a business, fines of up to $50,000 for the first offense, and fines of $100,000 each for subsequent offenses.

Portions of the ADA were incorporated in Chapter 553 of the Florida Statutes, the Florida Americans with Disabilities Accessibility Implementation Act. This statute, which covers all new single-family houses, duplexes, triplexes, condominiums, and townhouses, requires that at least one bathroom is accessible by the disabled. Furthermore, barriers at common or emer-gency entrances and exits of business establishments and commercial buildings must be removed. Visit the ADA website at <www.usdoj.gov/crt/ada/adahom1.htm>.

A FINAL NOTE

The purpose of fair housing legislation is to assist qualified prospects by providing them the opportunity to purchase a home regardless of their race, religion, color, sex, national origin, disability, or familial status. Real estate professionals should use nothing but eco-nomic factors to determine a prospect’s eligibility to live in the neighborhood of his or her choice. It is the legal and ethical responsibility of all mortgage lend-ing and real estate practitioners to be advocates of fair housing and to give everyone an equal opportunity to enjoy the American dream of home ownership.

SUGGESTED READING AND RESOURCES

The ADA Answer Book: Answers to the 146 Most Critical Questions About the Americans with Disabilities Act, Title III / edited by Lawrence G. Perry ... [et al.]. Washington, D.C.: BOMA International, 1992.

Americans with Disabilities Act of 1990. U.S. Code. Vol. 42, secs. 12101–213 (1990). <www.usdoj.gov/crt/ada/adahom1.htm>.

Williams, Martha R., and Marcia L. Russell. ADA Hand-book: Employment and Construction Issues Affecting Your Business. Chicago: Real Estate Education Company, 1991.

Berger, Warren. “The ADA in Practice.” Real Estate Today, September 1993, 22–25.To complain of discrimination, call HUD toll free

at (800) 669-9777. (For the hearing-impaired, (800) 543-8294.) To complain about discrimination regard-ing the ADA, call the Public Access Section, U.S. Department of Justice, at (202) 514-0301. The HUD website is located at <www.hud.gov>.

For reference regarding ADA and compliance issues, go to <www.buildersreferences.com> and <www.boma.org>.

TRUE OR FALSE?

Following are True or False questions. While you are not required to answer these questions to complete the 14-hour course, they are intended to help verify your comprehension of the material. Circle (T)rue or (F)alse for each question below. The answers to the True or False questions are found on Page 56.

1. The ADA is a federal law. T F

2. The purpose of the ADA is to create jobs for individuals with disabilities. T F

3. Disabilities are defined by the ADA as physical or mental impairments that substantially limit one or more of the major life activities of a person. T F

4. People who test positive for AIDS are not cov-ered by the ADA. T F

5. The ADA deals primarily with private residential housing. T F

6. The ADA deals with access to public transporta-tion, any commercial facility, or public accom-modations. T F

7. The ADA applies to all local and state govern-ment facilities. T F

8. A Florida statute requires that all new single-family houses, duplexes, triplexes, condo-miniums, and townhouses have at least one bathroom that is accessible by the disabled. T F


56 Module 4

Module Answer Keys

MATCHING EXERCISE, p. 501. e.2. a.3. d.4. b.5. f.6. c.

TRUE OR FALSE, p. 511. T2. F3. T4. T5. T6. T7. F

YES OR NO, p. 531. Y2. N3. Y4. Y5. N6. Y7. N8. Y9. Y10. Y11. N

TRUE OR FALSE, p. 541. F2. T3. T4. T5. T

TRUE OR FALSE, p. 541. F2. F3. T

TRUE OR FALSE, p. 55 1. T2. F3. T4. F5. F6. T7. T8. T


Fair Housing 57

Following are Review questions. While you are not required to answer these questions to complete the 14-hour course, they are intended to help you evaluate your comprehension of the material. Choose the best response to each review question. The answers to the review questions are found at the end of each section.

1. The process that occurs when real estate sales associates induce owners to list property for sale or rent by telling them that persons of a particular race, color, national origin, sex, religion, disability, or familial status are moving into the area is termed:

a. redlining.b. steering.c. blockbusting. d. blackballing.

2. Each of the following is a criteria for allowing adults-only advertising except:

a. the building owner(s) provides housing under a state or federal program that the secretary of HUD dete mines is specifically designed and operated to assist elderly persons.

b. all units are occupied by individuals age 62 or older.c. at least 80% of the units are occupied by persons age 55 or older.d. 80% of the units are occupied by disabled individuals.

3. The Equal Credit Opportunity Act prohibits lenders from requiring information about:

a. a borrower’s spouse or former spouse.b. the applicant’s marital status.c. an applicant’s birth control practices.d. any of the above.

4. Which of the following may have an exemption from the federal Fair Housing Act?

a. property owners working with a broker to sell their propertyb. religious organizations with property for lease for the benefit of their members only c. private clubs with for-profit property for leased. property owners who have four or more dwellings available for rent

5. The Americans with Disabilities Act (ADA) mainly deals with:

a. economic subsidies for the disabled.b. blind and deaf individuals.c. residential housing.d. places of public accommodation and commercial facilities.

ANSWERS: 1) c. 2) d. 3) . 4) . 5) .


Q U E S T I O N S — M O D U L E F O U RREVIEWdd b

58 Module 4


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1 4 - H O U R M O RT G A G E B R O K E R I N G / L E N D I N G C E C O U R S E2 0 0 6 E D I T I O N

Florida Mortgage Brokering/LendingContinuing Education Online or Correspondence

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