Real Estate Principles and Practices Chapter 10 Lending Institutions and Loans © 2014 OnCourse Learning

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

© 2014 OnCourse Learning Key Terms Primary mortgage market PMI RESPA Regulation Z RTC SAIF Secondary mortgage market Truth-in-lending law Underwriter UFMIP VA loans

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse Learning The Federal Reserve (FED) Regulates flow of money and sets monetary policy Primary mortgage market: Primary mortgage market: where the borrow obtains financing

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse 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&Ls now operate like commercial banks

© 2014 OnCourse Learning Sources of Finance Invest insurance premiums Favor commercial loans greater than $1 million Participation financing

© 2014 OnCourse 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

© 2014 OnCourse Learning Sources of Finance Trust dept. manage and supervise real estate holdings Benefits a 3 rd party Safeguards entrusted property

© 2014 OnCourse Learning Sources of Finance Located in NE State chartered Favor long-term investments Earnings returned to depositors FDIC

© 2014 OnCourse Learning Sources of Finance Founded by firms as savings programs for employees Usually pay a higher rate of interest Offer lower interest rates to employees Some are providing long-term, fixed-rate loans for their members

© 2014 OnCourse Learning Sources of Finance Forced saving for contributors Funds are invested Dividends passed to subscribers

© 2014 OnCourse Learning Sources of Finance Tax exemptions for qualifying REITs Minimum of 90% of profit distributed to investors Two types Equity REIT Mortgage REIT Real Estate Investment Conduit

© 2014 OnCourse 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

© 2014 OnCourse Learning Sources of Finance Interest is tax exempt Constituted authority created under state statue “Yield” determined by issue price and term Recapture tax

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse Learning Mortgage Correspondents Earn income form origination and servicing fees Loans made in primary mortgage markets Bundled and sold on the secondary market

© 2014 OnCourse Learning Government Regulations on Loans The Consumer Protection Finance Bureau (CFPB) Charged with protecting the consumer when financing a home Enforcement of truth-in-lending and RESPA are now under CFPB Fair Housing will remain under HUD

© 2014 OnCourse Learning Government Regulations on Loans Enforced and administered by Federal Reserve Regulation Z: Regulation Z: implements Part of the Consumer Protection Act

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse Learning Government Regulations on Loans Standardizes closing procedures Applies to 1 st mortgages S & Ls insured by FDIC Banks FHA VA HUD Loans sold to Fannie Mae, Ginnie Mae, or Freddie Mac Real Estate Settlement Procedures Act

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse Learning Government Regulations on Loans Prohibits discrimination in lending Borrower’s income sources: Public assistance programs Alimony Separate maintenance Child support Exception Non-citizens

© 2014 OnCourse Learning Government Regulations on Loans Prohibits discrimination in lending Woman: Child-bearing age Part-time employment Young adults & singles Senior citizens

© 2014 OnCourse Learning Government Regulations on Loans Allows consumers to examine their credit report Restricts access

© 2014 OnCourse Learning Government Regulations on Loans Requires flood insurance On all government-insured mortgages Administered by HUD

© 2014 OnCourse Learning Government Regulations on Loans To prevent lenders from refusing to make loans in neighborhoods that may be higher economic risk areas Prohibits redlining

© 2014 OnCourse Learning Government Regulations on Loans Title I: Employment Title II: Public Service Title III: Public Accommodations Title IV: Public Communication

© 2014 OnCourse Learning Government Regulations on Loans Requires lenders to supply information and disclosures Requires lenders to disclose the race, sex, and income data on all mortgage applications In an effort to police lenders for compliance

© 2014 OnCourse Learning Government Regulations on Loans Imposes limitations and additional disclosures on certain types of home mortgage loans with rates or fees above a certain percentage or amount

© 2014 OnCourse Learning Government Regulations on Loans Created to: create construction jobs, stimulate the housing industry help Americans obtain good quality, affordable housing FHA insures loans

© 2014 OnCourse Learning Government Regulations on Loans Established standards for construction and appraisal Standards for qualifying buyers Initiated the long-term amortized mortgage loan Made it possible to sell mortgages to the secondary market

© 2014 OnCourse Learning Government Regulations on Loans No downpayment – 100% financing VA guarantees loans Vet needs entitlement Vet needs certificate of eligibility VA charges a funding fee Property must appraise for sales price

© 2014 OnCourse Learning Government Regulations on Loans A federal lender with the USDA Makes loans for home purchases or construction In rural areas and small communities outside metropolitan areas

© 2014 OnCourse Learning Government Regulations on Loans 5% to 15% downpayment Insurance offsets risk of lower downpayment Similar to FHA’s government insurance Used on Conventional loans

© 2014 OnCourse Learning Government Regulations on Loans Application Appraisal Qualify the buyer Underwriting Credit scoring

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse 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

© 2014 OnCourse Learning Secondary Mortgage Market Government National Mortgage Association Operated by HUD Provides reduced interest rates to lower income home purchasers

© 2014 OnCourse Learning Secondary Mortgage Market Federal Home Loan Mortgage Corporation Created to buy conventional loans Pools and sells loans in the marketplace

© 2014 OnCourse 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

© 2014 OnCourse 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