ESSENTIALS OF REAL ESTATE FINANCE 10th Edition Revised David Sirota Doris Barrell, Consulting Editor

Nature of Real Estate Finance Construction Influence Credit System Economy Primary & Secondary Markets

Cycles of Real Estate Finance Supply & Demand of Housing Supply & Demand of Money

Factors Affecting Cycles Housing Supply Supply of Money Business Activities

Factors Affecting Cycles Demographics Tax Rules Social Attitudes

Money and the Monetary System The Federal Reserve—the Monetary Manager of the Nation’s Economy

Money and the Monetary System The Fed’s Functions Regulates Reserves Determines Discount Rates Balances Economy Through Open-Market Operations Supervises Truth-in-Lending Act

United States Treasury The Nation’s “Fiscal Manager” Treasury Bills, Notes, and Bonds FIRREA FDIC BIFSAIF OTS

Federal Home Loan Bank System Patterned After Federal Reserve –12 District Banks –Loans Money –Sets Reserves Provides National Market for Member Securities

Primary Activities of HUD

Interstate Land Sales “Year-Round Sunshine” “Good soil for crops!” “Just sign here!”

Federal Legislation Equal Credit Opportunity Act Real Estate Settlement Procedures Act Community Reinvestment Act

Agricultural Lending Cyclical Requirements Farm Credit System USDA Rural Development

Secondary Mortgage Market Federal National Mortgage Association—“Fannie Mae” Federal Home Loan Mortgage Corporation—“Freddie Mac” Government National Mortgage Association—“Ginnie Mae”

Fannie Mae Originated as Government Agency in 1934 Reorganized as Private Corporation in 1968

Fannie Mae Purchases Loan Packages Through Administered Price System Sells Mortgage-Backed Securities

Fannie Mae Underwriting Conforming and Nonconforming Loans Desktop Underwriter ® “Jumbo Loan”

Credit Scoring “Perfect Score” Optimum ScoreHigh 700s Preferred Score680 Marginal Score620 Questionable ScoreUnder 620 “Forget It” ScoreUnder 400

Ways to Improve Score Pay Bills on Time Have Fewer Cards Do Not “Max Out” Cards Correct Errors on Credit Reports

Freddie Mac Established in 1970 to Provide Secondary Market for Savings Associations Loan Prospector ® Electronic Underwriting Sells Participation Certificates

Affordable Loan Products Fannie Mae Community Home Buyer® Fannie 97 Flex 97 Freddie Mac Affordable Gold® Alt 97

Secondary Market Participants “Ginnie Mae”—Guarantees FHA and VA Mortgage-Backed Securities “Farmer Mac”—Underwrites Farm Loans REMIC—Multiclass Securities

Financial Fiduciaries Commercial Banks Savings Associations/Thrifts Life Insurance Companies Pension Funds Credit Unions

Semi and Nonfiduciaries Mortgage Brokers and Bankers REITs and REMTs Real Estate Bonds Individuals/Sellers Private Loan Companies

Instruments of Real Estate Encumbrances and Liens –Easements –Covenants –Voluntary and Involuntary Liens –Specific and General Liens

Instruments of Real Estate Interests Secured –Note and Deed of Trust –Note and Mortgage –Mortgage –Contract for Deed –Junior Instruments

Special Provisions Late Payment Penalty Prepayment Privilege Prepayment Penalties Assumption vs. Subject to

Special Provisions (cont.) Lock-in Clause Due-on-Sale Clause Subordination Clause Release Clause Exculpatory Clause Nonrecourse Clause

Conventional Loans 30-Year Fixed Rate Adjustable-Rate Private Mortgage Insurance Buydowns

Special Conventional Programs Community Home Buyer® Affordable Gold® Zero Down Payment Automatic Rate Reduction 0%! 8% 6% 7%

More Special Programs Subprime Loan Track Record Adjusted Refinancing Electronic Loan Services

FHA-Insured Loans Special Programs: 203(b), 203(v), 251, 203(k) Underwriting Guidelines Mortgage Insurance 203(k) Candidate?

VA-Guaranteed Loans Eligibility/Entitlement Guarantee Partial Entitlement Certificate of Reasonable Value

VA-Guaranteed Loans (cont.) Income Qualifying Requirements: 41% of Gross Monthly Income Closing Costs (May Not Be Included in VA Loans) Funding Fee (May Be Paid in Cash or Included in Loan Amount)

Processing Real Estate Loans

Qualifying the Borrower Loan Application –Assets, Liabilities –Deposits, Employment Credit Report Qualifying Ratios

Qualifying the Collateral Definition of Value The Appraisal Process –Direct Sales Comparison –Cost Approach –Income Approach –Gross Rent Multiplier –Reconciliation

Qualifying the Title Abstract and Opinion Title Insurance Torrens System Title Faults Survey

Closing the Loan Costs at Settlement –Points –Escrow Account –Property Taxes, Insurance, Interest –Prorations –Fees

Interest Payments on a Loan I = PRT Term Loan Interest Only Balloon Payment Amortized Loan Equal Payments Principal and Interest Loan “Dies” at End

Adjustable-Rate Mortgage Adjustment Period Initial Rate, Qualifying Rate Index, Margin Note Rate Rate Caps, Payment Caps

Reverse Annuity Mortgage Lender Pays Borrower! –Monthly Checks –Initial Lump Sum –Line of Credit HUD-Insured RAM Fannie Mae Senior Programs

Variations in Format Open End Mortgage Construction Mortgage Blanket Mortgage Package Mortgage Mobile Home Mortgage

Tax-Free Mortgage Lending Refinance Installment Sale Option to Buy 1031 Exchange

Defaults Delinquencies –Principal and Interest, Property Taxes, Insurance Adjustments –Moratorium –Recasting Deed in Lieu

Foreclosures Judicial –Conventional, FHA-Insured, VA-Guaranteed Power-of-Sale –Deed of Trust, Mortgage Strict Foreclosure Tax Impact