Real Estate Principles and Practices Chapter 10 Lending Institutions and Loans © 2014 OnCourse Learning

Real EstateReal Estate Principles and Practices Principles and Practices

Chapter 10Chapter 10

Lending Institutions and LoansLending Institutions and Loans

© 2014 OnCourse Learning


Key TermsKey Terms

APR

Automated underwriting

Disintermediation

ECOA

FHLMC

FHA

FNMA

FED

FHA loan

GNMA

Land contract

MBS

Mortgage banker

Mortgage broker

MIP

Novation


Key TermsKey Terms

Primary mortgage market

PMI

RESPA

Regulation Z

RTC

SAIF

Secondary mortgage market

Truth-in-lending law

Underwriter

UFMIP

VA loans


OverviewOverview

Money marketMoney market: business of making money available for financing

Financial fiduciaries: Financial fiduciaries: safeguard depositors funds

Disintermediation: Disintermediation: deposits removed from S&Ls for higher paying investments

Secondary mortgage market:Secondary mortgage market: purchases loans at a discount


OverviewOverview

Mortgage bankers: Mortgage bankers: originate loans and package them in pools

Mortgage-backed securities (MBSMortgage-backed securities (MBS):): pools of loans sold to investors


The Federal Reserve (FED)The Federal Reserve (FED)

Federal Reserve: Federal Reserve: manages the money supply

Discount rate

Reserve requirements

Open Market Operations

Comprised of:12 districts

5 presidents

7 governors


The Federal Reserve (FED)The Federal Reserve (FED)

Regulates flow of money and sets monetary policy

Primary mortgage market: Primary mortgage market: where the borrow obtains financing


Sources of FinanceSources of Finance

Oxford Providence Building Association

Great Depression caused collapse of S&Ls Federal Home Loan Act of 1932

Homeowners Act of 1933 Federal Housing Administration (FHA)Federal Housing Administration (FHA)

Federal insurance for home mortgages



End of WWII - early 1970’s: “the best of times”

No longer the primary source of home financing

Early 1980’s - short term adjustable rate mortgages

Failure of S&Ls

Resolution Trust CorporationResolution Trust Corporation (RTC)(RTC)

Liquidated insolvent thrifts



Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

Savings Association Insurance Fund (SAIF)Savings Association Insurance Fund (SAIF)

District banks separated from the role of regulator

New regulations limit risk

S&Ls now operate like commercial banks



Invest insurance premiums

Favor commercial loans greater than $1 million

Participation financingParticipation financing



Federally or state chartered

15- & 30-year fixed-rate loans and balloon loans

Short term construction and home improvement loans

Bridge loans

FHA & VA



Trust dept. manage and supervise real estate holdings

Benefits a 3rd party

Safeguards entrusted property



Located in NE

State chartered

Favor long-term investments

Earnings returned to depositors

FDIC



Founded by firms as savings programs for employees

Usually pay a higher rate of interest

Offer lower interest rates to employees

Some are providing long-term, fixed-rate loans for their members



Forced saving for contributors

Funds are invested

Dividends passed to subscribers



Tax exemptions for qualifying REITs

Minimum of 90% of profit distributed to investors

Two typesEquity REIT

Mortgage REIT

Real Estate Investment Conduit



Bonds are sold to investors to provide funds for housing

Qualifications for financing:Principal residence

No home for past 3 years

Price limit

Restriction on income

May not refinance



Interest is tax exempt

Constituted authority created under state statue

“Yield” determined by issue price and term

Recapture tax


Mortgage CorrespondentsMortgage Correspondents

Bring lenders and borrowers together

Do not lend their own money or service loans

Finder’s fee: % of the loan amount

Usually specialize in commercial loans



Originate and sell loans to investors

Sell to secondary mortgage market or private investors

Buy back the loan if is doesn't meet standards of:

FNMAFNMA FHLMCFHLMC GNMAGNMA



Earn income form origination and servicing fees

Loans made in primary mortgage markets

Bundled and sold on the secondary market


Government Regulations on Government Regulations on LoansLoans

The Consumer Protection Finance Bureau (CFPB)

Charged with protecting the consumer when financing a home

Enforcement of truth-in-lending and RESPA are now under CFPB

Fair Housing will remain under HUD



Enforced and administered by Federal Reserve

Regulation Z: Regulation Z: implements

Part of the Consumer Protection Act



Annual Percentage Rate Annual Percentage Rate (APR): (APR): net loan proceeds

Within 3 days

Disclosure statementHidden finance charges

Allows borrower to compare



Disclosure must include:Date finance charge begins

APR

Number of payments

Date payments are due

Pay-off penalties

Late fees

Property description

Total finance charges



Applies to all extenders of regular credit

Exemptions:Business loans

Commercial loans

Loans to corporations / partnerships

Loan with no finance charges

Assumptions by new borrower



3 day “cooling off” period

Advertising of credit terms must include

Price

Down payment

Amount of mortgage

Due date

Number of payments

APR



Advertising penaltiesFine up to $4,000 & 1 year in jail or both

Civil liability to the mortgagor

Mortgagee liabilityNot to exceed $1,000 + costs



Standardizes closing proceduresApplies to 1st mortgages

S & Ls insured by FDIC

Banks

FHA

VA

HUD

Loans sold to Fannie Mae, Ginnie Mae, or Freddie Mac

Real Estate Settlement Procedures ActReal Estate Settlement Procedures Act



Broker may collect fair fee for services

CLO

Disclosure of affiliated businesses

Prevents kickbacks

2009 Good Faith Estimate & HUD-1

Limits escrow funds



1. Information booklet

2. Uniform Settlement

Statement

3. Good Faith Estimate

4. Uniform Settlement

Statement 24 hours prior to

closing

At Loan ApplicationAt Loan Application



Good Faith Estimate

3 days from loan application

“Settlement Cost and You”

Settlement Statement provided except when:

1. HUD exempts requirement

2. Borrow waives requirement



Prohibits discrimination in lending

Borrower’s income sources:Public assistance programs

Alimony

Separate maintenance

Child support

ExceptionNon-citizens



Prohibits discrimination in lending

Woman:Child-bearing age

Part-time employment

Young adults & singles

Senior citizens



Allows consumers to examine their credit report

Restricts access



Requires flood insurance

On all government-insured mortgages

Administered by HUD



To prevent lenders from refusing to make loans in neighborhoods that may be higher economic risk areas

Prohibits redlining



Title I: EmploymentTitle I: Employment

Title II: Public ServiceTitle II: Public Service

Title III: Public AccommodationsTitle III: Public Accommodations

Title IV: Public CommunicationTitle IV: Public Communication



Requires lenders to supply information and disclosures

Requires lenders to disclose the race, sex, and income data on all mortgage applications

In an effort to police lenders for compliance



Imposes limitations and additional disclosures on certain types of home mortgage loans with rates or fees above a certain percentage or amount



Created to:create construction jobs,

stimulate the housing industry

help Americans obtain good quality, affordable housing

FHA insures loans



Established standards for construction and appraisal

Standards for qualifying buyers

Initiated the long-term amortized mortgage loan

Made it possible to sell mortgages to the secondary market



No downpayment – 100% financing

VA guarantees loans

Vet needs entitlement

Vet needs certificate of eligibility

VA charges a funding fee

Property must appraise for sales price



A federal lender with the USDA

Makes loans for home purchases or construction

In rural areas and small communities outside metropolitan areas



5% to 15% downpayment

Insurance offsets risk of lower downpayment

Similar to FHA’s government insurance

Used on Conventional loans



Application

Appraisal

Qualify the buyer

Underwriting

Credit scoring


Secondary Mortgage MarketSecondary Mortgage Market

Mortgages are sold by primary lenders to investors

Lenders acquire new funds

Original lender services the loan for a fee

SRP: Service Release Premium



Federal National Mortgage Association

Created to purchase FHA loans

Owned by stockholdersQuasi-government enterprise: BOD must get government approval

Buys, sells, & services loans



Defines standards in underwriting loans and appraisals

1999 expanded risk profile“Sub-prime” loans

Federal Government placed Fannie Mae and Freddie Mac in conservatorship



Government National Mortgage Association

Operated by HUD

Provides reduced interest rates to lower income home purchasers



Federal Home Loan Mortgage Corporation

Created to buy conventional loans

Pools and sells loans in the marketplace



Loan originator: Loan originator: takes loan app., gets approval, and closes loan

Loans are pooled with aggregate amt. of $1 Million or more

Pools are reviewed for compliance



Mortgage-backed security Mortgage-backed security is auctioned to investors

12 year average life

The lower the rate of MBS, the higher the discount rate

Documents

Real Estate Principles and Practices Chapter 10 Lending Institutions and Loans © 2014 OnCourse Learning