CH 16 Residential and Commercial Property Financing

2 Outline I. The Mortgage Concept II. The US Housing Finance System III. Residential Mortgage Underwriting V.Commercial Mortgage Underwriting

3 I. The Mortgage Concept  Definitions: - secured vs. unsecured debt - hypothecation - The loan on a house has 2 parts: mortgagepromissory note - mortgagor- prepayment clause vs.- acceleration clause - mortgagee- due-on-sale clause

4 Foreclosures  Foreclosure is the process of seizing and using the proceeds from its sale to satisfy the defaulted debt.  Title vs. lien theory: In title theory states, the lender receives the in the case of default. In lien theory states (such as FL), the lender has a in the case of default and has to go through a court ordered process to foreclose on the property.

5 Foreclosures  Alternative to foreclosure: Def: ”The sale of a property by a financially distressed borrower for less than the outstanding mortgage balance due, where the proceeds from the sale will be used to repay the lender.”

6 Alternative Ways to Buy Real Estate  Trust Deeds: Title to a property is held by a.  Land Contracts: The real estate transaction is financed by the.

7 II. The U.S. Housing Finance System  Definition: all the arrangements and institutions that have the purpose of.  The process of creating a new loan agreement between a borrower and lender is known as, which occurs in the mortgage market.  The secondary mortgage market consists of transactions involving existing loans being sold from to or from to.

8 Federal Housing Administration (FHA)  Created in 1934 to help restore.  The FHA established 3 things: FHA loans have maximum loan amount restrictions and up-front and annual premiums.

9 Private Mortgage Insurance (PMI)  Borrowers pay a premium to purchase an insurance policy that limits the risk faced by the lender in the event of default by the borrower. PMI is required when the down payment is.  PMI loans are available for loan amounts than FHA insurance.

10 VA-guaranteed Loans  The Department of Veterans Affairs guarantees these loans made to veterans with down payment and interest rates.  VA and FHA loans are called:

11 Federal National Mortgage Association  Fannie Mae was created as a government agency in Its purpose was to: 1) 2)  Converted to a private company in  In 1970, started trading under the symbol “FNM” on the NYSE.  In 2008 the US government placed FNM into “conservatorship”.  In 2010, started trading OTC under the symbol “FNMA”.  Fannie Mae buys all types of loans and repackages them into.

12 Government National Mortgage Association  Created in 1968 as a government agency. GNMA’s purpose was to  In 1970, GNMA introduced a program that guarantees on FHA and VA mortgages.

13 Federal Home Loan Mortgage Corporation  Freddie Mac was created in 1970 to create and operate.  In 1989, Freddie Mac started trading under the symbol “FRE” on the NYSE.  In 2008, the US government placed FRE into “conservatorship”.  In 2010, started trading OTC under the symbol “FMCC”.  Freddie Mac competes with in the market for all types of mortgages and mortgage backed securities.

14 III. Residential Mortgage Underwriting  Mortgage debt outstanding in the U.S.: 2010: $14.10 trillion 2008: $14.72 trillion 2003: $9.40 trillion 2000: $6.78 trillion Source: The Federal Reserve Board

15 Residential Mortgage Market Participants  Loans are originated by: - mortgage bankers - mortgage lenders (- correspondent lenders) - mortgage brokers, now: mortgage originators - commercial banks - savings institutions - credit unions

16 Source: The Federal Reserve Board

17 Source: The Federal Reserve Board

18 Residential Loan Applications  Uniform Residential Loan Application: A standardized loan application form that complies with the requirements imposed on lenders by and.  The application collects information about the borrower’s income, other debts, other assets, employment history, etc.

19 Federal Legislation Related to Residential Loan Applications  Equal Credit Opportunity Act  Consumer Credit Protection Act  Real Estate Settlement Procedures Act (RESPA) 1. HUD booklet 2. good faith estimate of settlement costs 3. no kickbacks/referral fees 4. copy of appraisal report 5. HUD-1 settlement statement 6. Loan sold in secondary market? 7. Limit on escrow funds  Flood Disaster Protection Act  Fair Credit Reporting Act ww.transunion.com, ww.transunion.comwww.equifax.com

20 Def. of Residential Mortgage Underwriting  The process of evaluating the of an applicant and the property being pledged as collateral and deciding whether or not to.

21 Residential Mortgage Underwriting Cont’d  Properties are evaluated by obtaining an independent of the market value of the property.  Applicants are evaluated based on:

22 Residential Mortgage Underwriting Cont’d Two Debt Ratios: Mortgage Debt Ratio (MDR) = PITI / GMI max: % for a conventional mortgage % for a FHA-insured mortgage. Total Debt Ratio (TDR) = PITI and other monthly debt obligations/GMI max: % for a conventional mortgage or % for a FHA-insured mortgage.

23 Residential Mortgage Underwriting Example  What is the LTV ratio of a property that was purchased for $140,000 if the bank will provide a $115,000 loan?

24 Residential Mortgage Underwriting Example  Assume a borrower has gross annual income of $108,000 and is applying for a mortgage that will require monthly payments of $2,250. Taxes and insurance on the property will total $2,400 per year. The borrower has to pay monthly child support of $500 and make $450 of monthly car payments. What is the MDR and the TDR? Would the borrower qualify for the loan?

25 V. Commercial Underwriting  Commercial loan underwriters are more concerned with the to repay the debt than they are concerned with the borrower’s income.  Debt coverage ratio = NOI/debt service payments minimum requirement: maximum loan-to-value ratio for commercial loans: typically %.

26 Commercial Underwriting Example  Assume a commercial property has gross rental income of $10,000 per month and monthly operating expenses of $6,500. If the debt service payment is $2,500 per month, would the property’s income qualify for a commercial loan?