1. © 2009 by South-Western, Cengage Learning SAMIRLANDER Chapter 13

2. Florida Real Estate: Principles, Practices and License Law Chapter 13 Mortgage Market Operations © 2009 by South-Western, Cengage Learning

3. Key Terms Closing costs Conforming loan Discount points Discount rate Disintermediation Entitlement Intermediation Loan-to-value (LTV) Mortgage bankers Mortgage brokers Mortgage company Office of Thrift Supervision Open-market operations Origination fee Primary mortgage market PMI PPM Reserve requirements Secondary mortgage market

4. © 2009 by South-Western, Cengage Learning Federal Reserve System 12 privately owned regional Federal Reserve banks & commercial banks Reserve requirements: Reserve requirements: amount to be held on deposit

5. © 2009 by South-Western, Cengage Learning Federal Reserve System Open market operations: Open market operations: buys and sells securities Discount rate: Discount rate: rate charged to member banks

6. © 2009 by South-Western, Cengage Learning Federal Home Loan Bank System FHLB: governs savings associations Provider of reserve credit Office of Thrift Supervision: Office of Thrift Supervision: Charters member savings associations

7. © 2009 by South-Western, Cengage Learning Federal Deposit Insurance Corporation Insures individual accounts up to $100,000

8. © 2009 by South-Western, Cengage Learning Intermediation Intermediation: Intermediation: Banks and savings associations receive money into saving accounts Funds are available for mortgages

9. © 2009 by South-Western, Cengage Learning Disintermediation Disintermediation: Disintermediation: Money is withdrawn from banks and savings associations to achieve higher yields Funds are scarce for mortgages

10. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Savings & loan associations Commercial banks Insurance companies Mortgage companies Mortgage brokers Mutual savings banks Municipal bonds Credit unions Pension, endowment, and trust funds

11. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets 5 major sources Savings & loan associations Mortgage companies Mortgage brokers Commercial banks Private lenders

12. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Loans on residential property Funds from depositors

13. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Use their own funds Sell loans to investors Retain the servicing Primarily government backed mortgages Conventional loans

14. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Bring together borrower and lender for a fee Do not lend their own money Do not service the loans

15. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Lend depositor’s funds Short-term loans Higher risk & higher rates Have become a significant source for residential loans

16. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Make 1 st or 2 nd mortgage loans Seller financing Purchase money mortgage (PMM)

17. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Invest policyholder’s premiums Large scale projects Commercial and industrial

18. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Interest is tax exempt Rates are 1% - 2% below market

19. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Provides liquidity for the primary market FNMAGNMAFHLMC

20. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets InvestorsorGovernmentor Other lenders Figure 13.2

21. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Private for profit corporation Sells bonds to buy loans Buys FHA, VA, and conventional loans

22. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Federal agency in HUD Guarantees payment of securities sold to the public FHA and VA loans

23. © 2009 by South-Western, Cengage Learning The History of Loans Federal Housing Administration (FHA) Federal National Mortgage Association (FNMA – Fannie Mae)

24. © 2009 by South-Western, Cengage Learning Primary and Secondary Mortgage Markets Private corporation Increases supply of financing by purchasing loans Conventional loans Some FHA & VA

25. © 2009 by South-Western, Cengage Learning The History of Loans Longer term Monthly not annual payments Payments cover interest plus principal I n t e r e s t Principal

26. © 2009 by South-Western, Cengage Learning The History of Loans Insures loans reducing the lenders risk FHA 203(b) FHA 234(c)

27. © 2009 by South-Western, Cengage Learning The History of Loans Allowed lenders to recoup funds Original purpose: purchase of FHA loans Largest agency purchasing lenders loans

28. © 2009 by South-Western, Cengage Learning Loan Discounting Selling a loan for less than face value Increases the yield (return on investment) Prepaid interest at closing 1 discount point = 1% of the loan amount Charged based on: Other investments What secondary lender will pay for the loan

29. © 2009 by South-Western, Cengage Learning Loan Discounting Discount points are determined by supply and demand for loan funds Money supply low and demand high - points are charged Money supply high and demand is low – no or low points

30. © 2009 by South-Western, Cengage Learning Loan-T0-Value Ratio LTV sets limits on how much can be loaned Expressed as: Loan divided by sales price Loan divided by appraised value Whichever is lower

31. © 2009 by South-Western, Cengage Learning Conventional loans Not issued, insured or guaranteed by the government Costs paid by buyer or seller 80%, 90%, or 95% LTV

32. © 2009 by South-Western, Cengage Learning Conventional loans Private mortgage insurance PMI: PMI: protects the lender against loss Loans greater than 80% LTV Insurance premium 1% or less at origination Less than 1% annually

33. © 2009 by South-Western, Cengage Learning Conventional loans LTV of 80% or less = 80% Loan LTV greater than 80% up to and including 90% = 90% Loan LTV greater than 90% up to and including 95% = 95% Loan

34. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Step 2 $82,000 Sales price - 6,000 Down payment $76,000 Loan amount $82,000 Sales price = 92.7% 95% LTV

35. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Step 2 $70,000 Sales price - 16,000 Down payment $54,000 Loan amount $70,000 Sales price = 77.1% 80% LTV

36. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Step 2 $120,000 Sales price - 17,000 Down payment $103,000 Loan amount $120,000 Sales price = 85.8% 90% LTV

37. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Calculate the loan amount Round down to the nearest 100 Step 2 Subtract the loan amount from the sales price

38. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Step 2 Subtract the loan amount form the sales price $110,500 Sales price X 90% LTV $ 99,450 Round down to the nearest 100 $99,400 Loan amount

39. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Step 2 $87,500 Sales price X 95% LTV $ 83,125 Round down to the nearest 100 $83,100 Loan amount $87,500 Sales price - 83,100 Loan amount $ 4,400 Down payment

40. © 2009 by South-Western, Cengage Learning Conventional loans 90%, 95%, and some 80% LTV Protects the lender against loss Premiums are a % of the loan

41. © 2009 by South-Western, Cengage Learning Conventional loans Paid by either buyer or seller Seller In cash at closing Buyer In cash at closing Financed Paid part in cash and part financed

42. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Step 2 Round down to the next lowest 100 Step 3 $88,500 Sales price X 90% LTV $79,650 $79,600 $79,600 Loan amount X 2% (for 90% LTV) $1,592 PMI premium

43. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Step 2 $60,000 Sales price X 95% LTV $57,000 $57,000 Loan amount X 2.5 % (for 95% LTV) $1425 PMI premium

44. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Step 2 Step 3 $80,000 Sales price X 90% LTV $72,000 Loan amount X.0025 factor $ 180 Annu al PMI 12 = $15 Monthly PMI PMI

45. © 2009 by South-Western, Cengage Learning Conventional loans Step 1 Step 2 round down to $63,500 Step 3 Step 4 $66,900 Sales price X 95% LTV $63,555 Loan amount $63,500 Loan amount X.0025 Factor $ 158.75 Annu al PMI $158.75 Annual 12 = $13.23 Mon. PMI PMI

46. © 2009 by South-Western, Cengage Learning FHA Loans (Nonconventional) Federal Housing Administration Improve housing standards Stabilize the mortgage market Provide mortgage insurance FHA does not make loans

47. © 2009 by South-Western, Cengage Learning FHA Loans (Nonconventional) FHA insures loans Mortgage Insurance Premiums (MIP) Loan programs: Section 203(b) - Standard Veterans Section 245 - Graduated payment loan

48. © 2009 by South-Western, Cengage Learning FHA Loans (Nonconventional) 1- 4 Family residential Owner occupied properties

49. © 2009 by South-Western, Cengage Learning FHA Loans (Nonconventional) Low down payment 0% on the first $25,000 5% between $25,000 - $125,000 10% over $125,000

50. © 2009 by South-Western, Cengage Learning FHA Loans (Nonconventional) Initial payments are low and increase over a period of years Single family owner occupied 30 year maximum term Maximum loan amount

51. © 2009 by South-Western, Cengage Learning FHA Loans (Nonconventional) % Yearly Increase Year to Reach Maximum Payment Plan I 2.5%5 Plan II 5%5 Plan III 7.5%5 Plan IV 2%10 Plan V 3%10

52. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program Borrower defaults Lender forecloses Property is sold FHA pays the difference between proceeds and loan balance

53. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program LTV 30-Year Loans 15-Year Loans Below 90% 1.50% up front plus 0.5% monthly 1.5% up front No monthly premium 90% - 95% 1.50 up front plus 0.5% monthly 1.50% up front plus 0.25% monthly Over 95% 1.5% up front plus 0.5% monthly 1.5% up front plus 0.25% monthly

54. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program Includes the down payment Less than conventional loans 3% of sales price or appraised value Whichever is lower

55. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program Maximum amount depends on location Sales price or appraised value plus % of closing costs LTV typically greater than 95%

56. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program Rates set by lender and borrower Market conditions Paid by buyer or seller Historically lower rates

57. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program 30 Years Same items as conventional loans Paid by buyer or seller Required monthly payments for taxes and insurance

58. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program Time varies Usually longer than conventional Minimum property requirements (MPR’s) FHA-approved independent appraisers

59. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program 2 Purposes: Established value Conditional commitment Conditional Commitment FHA will insure loan if borrower qualifies

60. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program Ordered by the lender Paid in cash Sets maximum amount of loan Identifies needed repairs

61. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program Good for specified period: Existing properties: 6 months Proposed construction: 12 months

62. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program Contract contingent upon appraisal If sales price is less than appraised value Void contract & return earnest money Pay the difference in cash Renegotiate price Reconsideration of appraisal

63. © 2009 by South-Western, Cengage Learning 203 (B) Standard Loan Program Cash down payment No prepayment penalty No due on sale clause Loans are assumable Originated after Dec. 15, 1989 requires qualification

64. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) GI Bill to provide assistance for returning WWII veterans VA guarantees loans Veteran defaults Lender forecloses Property is sold VA pays the difference between proceeds and loan balance up to a certain limit

65. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) Limits of VA guarantee: Up to $45,000 - 50% of loan amount $45,000 - $144,000 40% of loan amount OR $36,000 (whichever is less) $22,500 Greater than $144,000 – 25% of the loan amount Maximum of $104,250

66. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) Entitlement: Entitlement: amount of guarantee to an eligible veteran Maximum amount: $104,250 May use all or part

67. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) None Lenders typically lend 4X the guarantee with no down payment 4X the guarantee = $417,000 Sales price in excess of $417,000 Requires 25% down payment

68. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) None required 100% LTV Historically lower rates Paid by buyer or seller Same items as conventional loans Paid by buyer or seller

69. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) Down Payment No down payment 5% down payment 10% down payment Funding Fee 2.00% of loan amount 1.50% of loan amount 1.25% of loan amount Offsets claims under the guarantee program

70. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) Fee will increases With subsequent use Military reserves Paid by buyer or seller Can be included in loan Waived for service related disability

71. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) Required monthly payments for taxes and insurance

72. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) Liable for default Remains liable upon assumption by a non- veteran Liability and entitlement may be transferred to another veteran No prepayment penalty No alienation clause May 1, 1988

73. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) VA standards VA- approved appraiser Certificate of reasonable value (CRV)

74. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) Purpose: Determines acceptability Establishes value Identifies repairs Loan cannot be greater than appraised value

75. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) Fee paid in cash and in advance Good for specified periods Existing properties: 6 months Proposed construction: 12 months

76. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) Contract contingent upon appraisal If sales price is less than appraised value Void contact & return earnest money Pay the difference in cash Renegotiate price Reconsideration of appraisal

77. © 2009 by South-Western, Cengage Learning VA Loans (Nonconventional) 1 – 4 family owner occupied properties No Investors 100% LTV Loans cannot exceed appraised value No maximum loan amount Loans 4X entitlement

78. © 2009 by South-Western, Cengage Learning Assumption Methods Down payment equal to Seller’s equity Buyer takes over seller’s loan Two Methods Assume and agree to pay Subject to the existing loan

79. © 2009 by South-Western, Cengage Learning Assumption Methods Most common Buyer becomes liable for loan Seller may obtain a judgment for any deficiency

80. © 2009 by South-Western, Cengage Learning Assumption Methods Buyer does not become liable for the loan Inform Seller: Buyer is not liable Seek legal advise

81. © 2009 by South-Western, Cengage Learning Assumption Methods Alienation Clause may: Require loan be paid in full upon transfer Allow rate increase Require qualification of buyer

82. © 2009 by South-Western, Cengage Learning Assumption Methods Buyer’s cash to close at contract Buyer’s cash to close at closing $100,000 Sales price - $80,000 Loan balance $ 20,000 Cash required $100,000 Sales Price $79,000 Loan balance $21,000 Cash required

83. © 2009 by South-Western, Cengage Learning Assumption Methods Price to control: the selling price is set and will control the cash to be paid by buyer Cash to control: a fixed amount to be paid by the buyer. Sales price is not set until closing Second Mortgage: seller financing

84. © 2009 by South-Western, Cengage Learning Assumption Methods Is loan assumable? LTV? More likely assumption conditions: Seller will finance Mortgage money unavailable Buyer cannot get a new loan Property's value has decreased Difference in interest rate

85. © 2009 by South-Western, Cengage Learning Assumption Methods Faster and less expensive Lender requirements: Loan transfer fee Warranty deed Insurance Escrow account

86. © 2009 by South-Western, Cengage Learning Assumption Methods Seller advantages: Lower closing costs Possible release of liability VA Loan: possible transfer of eligibility

87. © 2009 by South-Western, Cengage Learning Assumption Methods Buyer advantages Possible lower interest rate Lower closing costs Less time to close Less liability possible

88. © 2009 by South-Western, Cengage Learning Assumption Methods Buyer disadvantages: Larger down payment Inability to offer future assumption due to increased equity Seller disadvantages Unless released, remains liable Default may result in lawsuit New loan application

89. © 2009 by South-Western, Cengage Learning Qualifying the buyer Evaluates: Property value Buyer’s ability to make: Down payment Repay loan Guidelines: Freddie Mac FHA VA

90. © 2009 by South-Western, Cengage Learning Qualifying the buyer Conforming loan: Conforming loan: approved under FNMA/FHLMC guidelines Four factors: Income Net worth and assets Credit history Documentation

91. © 2009 by South-Western, Cengage Learning Qualifying the buyer Borrower's income Determines ability to pay Income: base monthly plus other sources Employment record

92. © 2009 by South-Western, Cengage Learning Qualifying the buyer Borrower's income Ratios: Mortgage payment to monthly income (28%) $560 mortgage pymt. $2,000 monthly income = 28%

93. © 2009 by South-Western, Cengage Learning Qualifying the buyer Borrower's income Ratios: Mortgage payment to total installment debt (36%) $720 total debt $2,000 monthly income = 36%

94. © 2009 by South-Western, Cengage Learning Qualifying the buyer Net Worth and Assets Down payment and reserves Net worth: difference between assists and liabilities Liquid assets equal to 2 months of mortgage payments

95. © 2009 by South-Western, Cengage Learning Qualifying the buyer Income ratios Increased form 29/31 to 31/43 31% - new housing expense to monthly income 43% - total monthly debt to monthly income

96. © 2009 by South-Western, Cengage Learning Qualifying the buyer Down Payment Sales price minus loan amount Minimum cash investment of 3%

97. © 2009 by South-Western, Cengage Learning Qualifying the buyer Underwriting Different guidelines Eligibility War time: 90 days active duty Peacetime: 181 days prior to 9/8/1980 2 years after 9/7/1980

98. © 2009 by South-Western, Cengage Learning Qualifying the buyer Must list all debt on application Credit report

99. © 2009 by South-Western, Cengage Learning Qualifying the buyer Regular: VOE: employment verification VOD: verification of deposits Credit report

100. © 2009 by South-Western, Cengage Learning Qualifying the buyer Alternative: 2 pay stubs and W-2 tax form 3 bank statements Credit report.

101. © 2009 by South-Western, Cengage Learning Qualifying the buyer Establish value Sales price or appraised value whichever is less

102. © 2009 by South-Western, Cengage Learning Qualifying the buyer Determined by: Available cash Monthly payment

103. © 2009 by South-Western, Cengage Learning Qualifying the buyer Maximum conventional loan with $10,000 down payment 95% LTV - $190,000 loan 90% LTV - $90,000 loan 80% LTV - $40,000

104. © 2009 by South-Western, Cengage Learning Loan Charges Closing costs Closing costs: loan charges Variable costs Lender’s title insurance Origination fees

105. © 2009 by South-Western, Cengage Learning Loan Charges Fixed costs Appraisal Attorney fees Credit report Survey Recording fees Pictures Amortization schedule

106. © 2009 by South-Western, Cengage Learning Loan Charges Title Insurance Protects against loss Required by lender not by law Buyer’s title Fees Origination fee Fees for processing the loan % of loan amount

107. © 2009 by South-Western, Cengage Learning Loan Charges Appraisal fee Determines property value for lender Attorney fees Legal services Credit report fee Evaluates credit risk

108. © 2009 by South-Western, Cengage Learning Loan Charges Survey Required by some lenders Recording fee Charged by county Pictures Required by some lenders Amortization schedule Payment schedule

109. © 2009 by South-Western, Cengage Learning Loan Charges FHA & VA Paid by buyer or seller VA funding fee

110. © 2009 by South-Western, Cengage Learning Loan Charges Loan application Loan analysis ApprovalandprocessingClosingServicing FIGURE 13.4