© 2016 OnCourse Learning California Real Estate Finance Fesler & Brady 10th Edition Chapter 2 Institutional Lenders

Preview Institutional Lenders Highly regulated Loan thru financial intermediaries Not subject to usury laws Qualified to make DVA and FHA loans Secondary market available PMI requirements Lock in rates Private Lenders Free from regulations Loan their own funds Limits on rates of interest Not qualified Sell to another private lender None Varies

Objectives After completing this chapter, you should be able to: – Demonstrate how savings deposits become real estate loans. – Differentiate institutional from non-institutional lenders. – List three types of institutional lenders and briefly explain the differences between them. – Discuss several of the trends facing institutional lenders. – Decide when to use one institutional lender over another. – List five regulatory agencies that supervise the operations of institutional lenders.

Outline Savings Banks Commercial Banks Life Insurance Companies Mutual Savings Banks Depository Institutions and Monetary Control Act Pension and Retirement Funds Government Regulatory Agencies Trade Associations

Savings Banks (Slide 1 of 2) Financial intermediary – Accepts savings – Invests savings in real estate Mutual institutions – Share certificates or receipts Capital stock institutions – Shares of stock State chartered – Licensed by State of California Federal chartered – Licensed by Federal Housing Finance Board – Use “Federal” in title

Savings Banks (Slide 2 of 2) Lending characteristics – Majority of assets must be in real estate – <90% loan to value (LTV) ratio Exceptions for FHA or DVA – 30 (maybe 40 or 15) year terms – Interest rates match those of commercial banks – Single-family, owner-occupied usually – Combo loans (construction and permanent “take-out” financing) – Collateral loans (secured by other than real estate)

Commercial Banks (Slide 1 of 3) Demand Deposits (DDA) – Not available for loans Time Deposits (TDA) – Available for loans State chartered – Stock corporations – Regulated by California Department of Financial Institutions Federal chartered – Stock corporations – Licensed by the Comptroller of the Currency – Use “National” in title

Commercial Banks (Slide 2 of 3) Lending characteristics – FHA & DVA loans with more liberal loan-to-value ratios – Construction loans (24 – 60 months) – Take out agreements usually required – Property in proximity to bank – Home improvement and home equity loans – Swing loans AKA Bridge loans or Interim loans – For paying for new home before selling old home

Commercial Banks (Slide 3 of 3) Trends – Larger banks due to mergers and acquisitions Or TBTFs (Too Big To Fail) – Interstate banking – Longer maturities – Diversification Commercial paper Mortgage-backed securities Municipal revenue bonds Insurance & Securities Real Estate transactions – Electronic banking

Community Reinvestment Act All federal financial institutions report on Race Gender Income Census tract Grade institutions within the community on Knowing credit needs Informing about credit services Involving directors Participating in government- insured, guaranteed or subsidized loans Distributing credit application, approvals and rejections Offering range of mortgages

Home Mortgage Disclosure Act Borrower must report – Ethnicity – Race – Sex On loan application (1003) If not reported, lender notes the information “on the basis of visual observation or surname”

Life Insurance Companies (Slide 1 of 2) Mutual companies – Owned by insured Stock companies – Owned by stockholders Lending characteristics (broadest of institutional lenders) – State regulated – Mainly commercial properties – <80% loan-to-value ratio – 30 year term with prepayment penalty (lock-in clause) – Lower interest rates – Large loans (>$1M) – Minimal construction loans, if any, prefer take out financing – Use loan correspondents

Life Insurance Companies (Slide 2 of 2) Trends – Equity conversion positions Convert loan to ownership – Upfront equity participations Share of income produced by property – Variable and fixed annuities Provide large sums for reinvestment – Holding companies and joint ventures Allow for full gamut of interrelated lending activities

Mutual Savings Banks Mainly in northeastern U.S. None in California 50 – 90% loan-to-value

Depository Institutions and Monetary Control Act Phased out restrictions on interest rates lenders pay depositors Federal thrift institutions can invest in – Consumer loans – Commercial paper – Corporate debt securities – Junior trust deeds Federal savings institutions can make – Acquisitions, development & construction loans Removes geographical lending restrictions Removes dollar limitations on residential loans

Pension and Retirement Funds $Billions in assets Administrators have yet to tap the real estate market – PERS (Public Employees Retirement System – STRS (State Teachers Retirement System 100% financing Contributions are down payment 95% LTV IRAs – Tax deferred contributions for employees Keogh Plans – Tax deferred contribution for self-employed

Government Regulatory Agencies (Slide 1 of 2) Created by Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) – Office of Thrift Supervision Replaces Federal Home Loan Bank Board Chief regulator of all savings banks and S&Ls – Savings Association Insurance Fund (SAIF) Replaces Federal Savings and Loan Insurance Corporation (FSLIC) Managed by FDIC – Federal Deposit Insurance Corporation Insures accounts up to $250K Manages the SAIF and Bank Insurance Fund

Government Regulatory Agencies (Slide 2 of 2) – Federal Housing Finance Board Oversees lending by 12 regional Federal Home Loan Banks Provides statistical data per “Housing and Economic Recovery Act of 2008” – Federal Reserve Bank Board Oversees Federal Reserve System Regulates commercial banks – Federal Home Loan Mortgage Corporation Freddie Mac Secondary mortgage market (Chapter 7) – Office of the Comptroller of the Currency Charters and oversees national and foreign banks – California Department of Financial Institutions Under California Business, Transportation and Housing Agency headed by Financial Commissioner Supervises all state chartered banks

Trade Associations California League of Savings Institutions Mortgage Bankers Association of America American Bankers Association National Association of Independent Mortgage Bankers Institute of Life Insurance National Association of Mortgage Brokers

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