Real Estate Principles and Practices Chapter 10 Lending Institutions and Loans © 2010 by South-Western, Cengage Learning

Key Terms APR Automated underwriting Conventional loan Disintermediation ECOA FHLMC FHA FNMA FED FHA loan GNMA Land contract MBS Mortgage banker Mortgage broker MIP Novation

© 2010 by South-Western, Cengage Learning Key Terms Primary mortgage market PMI RESPA Regulation Z RTC SAIF Secondary mortgage market Truth-in-lending law Underwriter UFMIP VA loans

© 2010 by South-Western, Cengage Learning Overview Money market Money 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: purchases loans at a discount

© 2010 by South-Western, Cengage Learning Overview Mortgage bankers: Mortgage bankers: originate loans and package them in pools Mortgage-backed securities (MBS): Mortgage-backed securities (MBS): pools of loans sold to investors

© 2010 by South-Western, Cengage Learning 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

© 2010 by South-Western, Cengage Learning The Federal Reserve (FED) Regulates flow of money and sets monetary policy Primary mortgage market: Primary mortgage market: where the borrow obtains financing

© 2010 by South-Western, Cengage Learning Sources 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

© 2010 by South-Western, Cengage Learning Sources of Finance 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 Corporation Resolution Trust Corporation (RTC) (RTC) Liquidated insolvent thrifts

© 2010 by South-Western, Cengage Learning Sources of Finance Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) Savings Association Insurance Fund (SAIF) District banks separated from the role of regulator New regulations limit risk S&L’s now operate like commercial banks

© 2010 by South-Western, Cengage Learning Sources of Finance Invest insurance premiums Favor commercial loans greater than $1 million Participation financing

© 2010 by South-Western, Cengage Learning Sources of Finance Federally or state chartered 15 & 30 year fixed rate loans and balloon loans Short term construction and home improvement loans Bridge loans FHA & VA

© 2010 by South-Western, Cengage Learning Sources of Finance Trust dept. manage and supervise real estate holdings Benefits a 3 rd party Safeguards entrusted property

© 2010 by South-Western, Cengage Learning Sources of Finance Located in NE State chartered Favor long term investments Earnings returned to depositors FDIC

© 2010 by South-Western, Cengage Learning Sources of Finance Forced saving for contributors Funds are invested Dividends passed to subscribers

© 2010 by South-Western, Cengage Learning Sources of Finance Tax exemptions for qualifying REIT’s Minimum of 90% of profit distributed to investors Two types Equity REIT Mortgage REIT Real Estate Investment Conduit

© 2010 by South-Western, Cengage Learning Sources of Finance 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

© 2010 by South-Western, Cengage Learning Sources of Finance Interest is tax exempt Constituted authority created under state statue “Yield” determined by issue price and term Recapture tax

© 2010 by South-Western, Cengage Learning Mortgage 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

© 2010 by South-Western, Cengage Learning Mortgage Correspondents 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: FNMA FHLMC FHLMC GNMA GNMA

© 2010 by South-Western, Cengage Learning Mortgage Correspondents Earn income form origination and servicing fees Loans made in primary mortgage markets Bundled and sold on the secondary market

© 2010 by South-Western, Cengage Learning Government Regulations on Loans Enforced and administered by Federal Reserve Regulation Z: Regulation Z: implements Part of the Consumer Protection Act

© 2010 by South-Western, Cengage Learning Government Regulations on Loans Annual Percentage Rate (APR): Annual Percentage Rate (APR): net loan proceeds Within 3 days Disclosure statement Hidden finance charges Allows borrower to compare

© 2010 by South-Western, Cengage Learning Government Regulations on Loans 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

© 2010 by South-Western, Cengage Learning Government Regulations on Loans 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

© 2010 by South-Western, Cengage Learning Government Regulations on Loans 3 day “cooling off” period Advertising of credit terms must include Price Down payment Amount of mortgage Due date Number of payments APR

© 2010 by South-Western, Cengage Learning Government Regulations on Loans Advertising penalties Fine up to $4,000 &1 year in jail or both Civil liability to the mortgagor Mortgagee liability Not to exceed $1,000 + costs

© 2010 by South-Western, Cengage Learning Government Regulations on Loans Standardizes closing procedures Applies to 1 st mortgages S & L’s insured by FDIC Banks FHA VA HUD Loans sold to Fannie Mae, Ginnie Mae, or Freddie Mac Real Estate Settlement Procedures Act

© 2010 by South-Western, Cengage Learning Government Regulations on Loans Broker may collect fair fee for services CLO Disclosure of affiliated businesses Prevents kickbacks 2009 Good Faith Estimate & Hud-1 Limits escrow funds

© 2010 by South-Western, Cengage Learning Government Regulations on Loans 1. Information booklet 2. Uniform Settlement Statement 3. Good Faith Estimate 4. Uniform Settlement Statement 24 hours prior to closing At Loan Application

© 2010 by South-Western, Cengage Learning Government Regulations on Loans 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

© 2010 by South-Western, Cengage Learning Government Regulations on Loans Prohibits discrimination in lending Borrower’s income sources: Public assistance programs Alimony Separate maintenance Child support Exception Non-citizens

© 2010 by South-Western, Cengage Learning Government Regulations on Loans Prohibits discrimination in lending Woman: Child-bearing age Part-time employment Young adults & singles Senior citizens

© 2010 by South-Western, Cengage Learning Government Regulations on Loans Allows consumers to examine their credit report Restricts access

© 2010 by South-Western, Cengage Learning Government Regulations on Loans Title I: Employment Title II: Public Service Title III: Public Accommodations Title IV: Public Communication

© 2010 by South-Western, Cengage Learning Secondary 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

© 2010 by South-Western, Cengage Learning Secondary Mortgage Market Federal National Mortgage Association Created to purchase FHA loans Owned by stockholders Quasi-government enterprise: BOD must get government approval Buys, sells, & services loans

© 2010 by South-Western, Cengage Learning Secondary Mortgage Market Defines standards in underwriting loans and appraisals 1999 expanded risk profile “Sub-prime” loans Federal Government placed Fannie Mae and Freddie Mac in conservatorship

© 2010 by South-Western, Cengage Learning Secondary Mortgage Market Government National Mortgage Association Operated by HUD Provides reduced interest rates to lower income home purchasers

© 2010 by South-Western, Cengage Learning Secondary Mortgage Market Federal Home Loan Mortgage Corporation Created to buy conventional loans Pools and sells loans in the marketplace

© 2010 by South-Western, Cengage Learning Secondary Mortgage Market 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

© 2010 by South-Western, Cengage Learning Secondary Mortgage Market 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