© 2011 Cengage Learning created by Dr. Richard S. Savich. California Real Estate Finance Bond, McKenzie, Fesler & Boone Ninth Edition Chapter 3 NonInstitutional Lenders and The California Real Property Loan Law

© 2011 Cengage Learning created by Dr. Richard S. Savich. Objectives After completing this chapter, you should be able to: List five major non-institutional lenders. Describe major provisions of the California Real Property Loan Law. Discuss the role that mortgage correspondents, mortgage bankers, mortgage companies, and mortgage brokers play in real estate finance. Discuss why pensions, trust funds, and credit unions are increasing in importance in the financing process. Describe how and why the role of the real estate broker as financial advisor is becoming increasingly challenging.

© 2011 Cengage Learning created by Dr. Richard S. Savich. Outline Private Party Lenders Usury Law Mortgage Companies Real Property Loan Law Syndications Real Estate Investment Trusts and Endowment Funds Credit Unions and Finance Companies Financial Advisory Role of the Real Estate Broker

© 2011 Cengage Learning created by Dr. Richard S. Savich. Private Party Lenders (Slide 1 of 2) Direct Indirect Use mortgage brokers Sellers as Private Lenders Carry back loans (exempt from usury)

© 2011 Cengage Learning created by Dr. Richard S. Savich. Private Party Lenders (Slide 2 of 2) Characteristics Less formal, highly subjective decisions High interest rates Second trust deeds primarily Rarely in prime or construction loans Single family dwellings Within geographic area Balloon payments Collections through mortgage company Seller carrybacks

© 2011 Cengage Learning created by Dr. Richard S. Savich. Usury Law Greater of 10% or 5% above Federal Reserve Bank discount rate Exemptions Banks Loan Correspondents Thrift institutions Life insurance companies Mortgage companies Industrial loan companies Credit unions Personal property brokers Owners who carry back Any transaction using a real estate broker Not exempt Direct private lenders

© 2011 Cengage Learning created by Dr. Richard S. Savich. Mortgage Companies (Slide 1 of 2) Mortgage Bankers Make loans with own funds Originates Finances Closes Sells to institutional investors Could be a correspondent for others Might service loan Mortgage Loan Brokers Locate borrowers and lenders Arrange loans between them Do not service loans

© 2011 Cengage Learning created by Dr. Richard S. Savich. Mortgage Companies (Slide 2 of 2) Characteristics Must follow correspondent rules Licensed by Department of Corporations or Department of Real Estate Affected by Recovery Act of 2008 (Chapter 5) Also do Brokerage Development Construction Property management

© 2011 Cengage Learning created by Dr. Richard S. Savich. Real Property Mortgage Loan Law Enacted to protect the borrower Buyer must get Mortgage Loan Disclosure Statement Exemptions Regulated institutional lenders Purchase money transactions (carrybacks) Loans secured by first trust deeds of >$30K Loans secured by junior trust deeds of >$20K Maximum commissions Maximum charges Balloon payments (more than twice smallest installment) prohibited Term of loan < six years Loan secured by dwelling place of borrower Insurance Not required to purchase credit life or disability Lender can ask for fire and hazard Mortgage brokers are prohibited from charging loan servicing fees to be paid by borrower

© 2011 Cengage Learning created by Dr. Richard S. Savich. Maximum Commissions Percentage Commission Type of Loan< 2 years> 2 < 3 years> 3 years Exempt transactions First trust deeds5% 10%Loans >$30,000 Junior trust deeds 5%10%15%Loans >$20,000

© 2011 Cengage Learning created by Dr. Richard S. Savich. Maximum charges Loan amount <$7,801$7,801 - $13,999 $14,000 - $29,999 First loans >$30,000 Junior Loans >$20,000 Maximum charges $3905% of loan $700No legal limitations But not to exceed actual costs and expenses

© 2011 Cengage Learning created by Dr. Richard S. Savich. Syndications Two or more people who combine financial resources Organized as Usually limited partnerships But could be General partnership Corporation Real Estate Investment Trust Joint venture Improved purchasing power Better bargaining power Diversification Professional management and administration Types Equity Debt Hybrid

© 2011 Cengage Learning created by Dr. Richard S. Savich. Real Estate Investment Trusts REITs Equity Income property Mortgage Interest returns Hybrid Combo of above >100 shareholders 95% of taxable income be distributed to avoid double taxation Other favorable income tax incentives Used for Land development Take out loans for large projects

© 2011 Cengage Learning created by Dr. Richard S. Savich. Pension Funds & Endowment Funds Pension funds California State Teachers Retirement Fund United Auto Workers Helping members to buy houses in high priced areas PERS & STRS took big hits in 2008 Endowment funds Colleges & universities Hospitals Cemeteries Charitable foundations

© 2011 Cengage Learning created by Dr. Richard S. Savich. Credit Unions and Finance Companies Credit Unions Usually short term loans Finance Companies High risk loans High rate loans Short duration (<7 years) Junior trust deeds

© 2011 Cengage Learning created by Dr. Richard S. Savich. Financial Advisory Role of the Broker Computerized loan origination Details from many different lenders Use of Internet Only worked for “A” borrowers

© 2011 Cengage Learning created by Dr. Richard S. Savich. Questions and Comments?