© 2013 All rights reserved. Chapter 3 Real Estate Finance II1 New York Real Estate for Brokers, 5th e By Marcia Darvin Spada Cengage Learning

© 2013 All rights reserved. Chapter 3 Real Estate Finance II2 Chapter 3 Real Estate Finance II

© 2013 All rights reserved. Chapter 3 Real Estate Finance II3 Chapter 3 Key Terms  Adjustable rate mortgage (ARM)  Amortized mortgage  Bridge loan  Buydown  Construction loan  Conventional loans  Convertible mortgage  Department of Veteran Affairs (VA)  Depression  Disintermediation  Federal Housing Administration (FHA)  Gap financing  Ground lease  Home equity loan  Inflation

© 2013 All rights reserved. Chapter 3 Real Estate Finance II4 Chapter 3 Key Terms (continued)  Installment land contract (contract for deed)  Mortgagee/mortgagor  Primary mortgage market  Recession  Redlining  Release clause  Sale leaseback  Secondary mortgage market  Stagflation  State of New York Mortgage Agency (SONYMA)  Subordinate lease  Underwriting  Usury

© 2013 All rights reserved. Chapter 3 Real Estate Finance II5 Mortgagor and Mortgagee The borrower gives a mortgage to the lender Mortgagor The lender receives a mortgage from the borrower Mortgagee

© 2013 All rights reserved. Chapter 3 Real Estate Finance II6 Mortgage Clauses Mortgage Note or Bond Alienation Clause Acceleration Clause Prepayment Penalty clause Defeasance Clause

© 2013 All rights reserved. Chapter 3 Real Estate Finance II7 Monthly Mortgage Payment P = Principal I = Interest T = Taxes I = Insurance

© 2013 All rights reserved. Chapter 3 Real Estate Finance II8 Lender’s Criteria for Granting a Loan $ Investment quality of the property $ Loan-to-value ratio $ Borrower’s ability to repay loan

© 2013 All rights reserved. Chapter 3 Real Estate Finance II9 Loan-to-Value Ratio Ratio of loan amount to property value Loan ÷value = ratio  Example: Loan = $144,000 Value = $160, ,000 = 90% 160,000

© 2013 All rights reserved. Chapter 3 Real Estate Finance II10 Qualifying Ratios Monthly Housing Expense Total Obligations Fixed rate conventional loan 28%36% Adjustable rate Conventional loan 28 %36% FHA loans 31%41% VA loansNone 41%

© 2013 All rights reserved. Chapter 3 Real Estate Finance II11 Mortgage Loan Origination Loan Approval Underwriting- Documentation review Loan processing- Application review Uniform Residential Loan Application Form

© 2013 All rights reserved. Chapter 3 Real Estate Finance II12 Conventional and Government Loans Conventional loan No participation by a government agency Government loan Guaranteed, insured or funded by a government agency

© 2013 All rights reserved. Chapter 3 Real Estate Finance II13 Types of Mortgages  FHA-insured loans  VA Guaranteed loans  Rural Housing Service  State of New York Mortgage Association (SONYMA)

© 2013 All rights reserved. Chapter 3 Real Estate Finance II14 Mortgages Mortgage AmortizedBalloonBlanket Adjust- able rate Straight- term

© 2013 All rights reserved. Chapter 3 Real Estate Finance II15 Other Mortgages Special Mortgages Graduated payment Pledged account Reverse annuity Package Shared appreciation

© 2013 All rights reserved. Chapter 3 Real Estate Finance II16 Special Types of Mortgages Home equity loan Gap financing Wraparound Subordinate or Junior Mortgages Purchase Money Mortgage Convertible Mortgage

© 2013 All rights reserved. Chapter 3 Real Estate Finance II17 Construction Mortgage  Short term loan  Disbursed in stages  Interest not charged until the money has been disbursed  When project is complete, converted to permanent long- term loan called take-out or end loan

© 2013 All rights reserved. Sale Leaseback Chapter 3 Real Estate Finance II18

© 2013 All rights reserved. How to Secure FHA Financing  FHA does not make mortgage loans  FHA-insured loans protects lenders against financial loss  Buyer pays for this insurance protection by paying an upfront mortgage insurance premium  FHA does not set maximum sales price, only a maximum loan amount  FHA insured mortgages require mortgage insurance Chapter 3 Real Estate Finance II19

© 2013 All rights reserved. FHA Mortgage Advantages Credit criteria for a borrower are not as strict Borrower’s allowable costs can be partially wrapped into loan 100% of down payment and closing costs can be gifted Loans are assumable Disadvantages With a 30-year FHA loan, and a down payment of more than 5% of the loan amount, the upfront mortgage insurance premium (MIP) is 2.25 percent of the loan amount in addition to the 1.10 percent annual renewal premium that a borrower pays for the life of the loan FHA limits the amount that can be borrowed Chapter 3 Real Estate Finance II20

© 2013 All rights reserved. Chapter 3 Real Estate Finance II21 The Primary and Secondary Mortgage Market Sold to secondary mortgage market Primary lender Mortgage Assignable (conforming Loans)

© 2013 All rights reserved. Chapter 3 Real Estate Finance II22 Secondary Mortgage Market Organizations NameOwnershipPurchases Fannie Mae (FNMA) Privately owned FHA, VA, RHS, conventional Ginnie Mae (GNMA) HUDVA, FHA, RHS Freddie Mac (FHLMC) Savings. savings and loan banks Members of Fed. Home Loan Bank, other banks

© 2013 All rights reserved. Chapter 3 Real Estate Finance II23 Truth-in-Lending Act oDoDisclosure oCoCooling off period oAoAdvertising (Regulation Z) oPoPenalties

© 2013 All rights reserved. Lending Discrimination LawsACTS Truth in Lending ActCommunityReinvestmentAct Real Estate Settlement & Procedures Act Home Mortgage Disclosure Act Chapter 3 Real Estate Finance II24

© 2013 All rights reserved. The Economy and How it Affects the Real Estate Market Chapter 3 Real Estate Finance II25 Affordability of property for buyers Valuation of Seller’s property Stock Market Interest rates/indices The Economy Employment

© 2013 All rights reserved. Predatory Lending Practices- What is it?  High-cost (subprime loans) include conventional first mortgages that have an interest rate of more than 8 percent and junior mortgages that have an interest rate of more than 9 percent  High-cost loans also include conventional loans for more than $50,000 when the points and fees exceed 5 percent of the loan Chapter 3 Real Estate Finance II26

© 2013 All rights reserved. Predatory Lending  Lender may target certain ethnic group  Takes advantage of consumer  Lender makes unaffordable loans based on assets of borrower, not ability to repay  Induces refinancing  (flipping)  Fraud regarding true nature of loan obligation Chapter 3 Real Estate Finance II27

© 2013 All rights reserved. Flipping  Real estate investors or speculators believe that they can turn quick profits by buying the property at a certain price and then immediately selling the property at a higher price  Flipping may be a problem because it can drive up prices  The investor attempts to buy low and sell high Chapter 3 Real Estate Finance II28

© 2013 All rights reserved. Subprime Loans  Borrowers considered subprime if they have a less-than-perfect credit report  Subprime lenders  Companies that provide loans to home- buyers who do not have good credit histories or who are risky candidates for loans because of their incomes Chapter 3 Real Estate Finance II29

© 2013 All rights reserved. New York Anti-Predatory Lending Law Places many restrictions on high-cost (subprime) loans that are first or junior (second) mortgages Loans covered under New York Law Maximum indebtedness of $300,000 For family or personal reasons Applies to one- to four-unit property that is the borrower’s personal residence Chapter 3 Real Estate Finance II30