Unit 15: Real Estate Financing Practices 1 Learning Objectives - - PDF document

▶
unit 15 real estate financing practices
SMART_READER_LITE
LIVE PREVIEW

Unit 15: Real Estate Financing Practices 1 Learning Objectives - - PDF document

Oct 03, 2023 107 likes •324 views

10/25/2019 Unit 15: Real Estate Financing Practices 1 Learning Objectives Lessons learned from the housing financial crisis Purpose of the Federal Reserve Primary & secondary mortgage market FHA, VA, USDA & special

slide-1
SLIDE 1

10/25/2019 1

Unit 15: Real Estate Financing Practices

Learning Objectives

  • Lessons learned from the housing financial crisis
  • Purpose of the Federal Reserve
  • Primary & secondary mortgage market
  • FHA, VA, USDA & special purpose loans
  • Lending practices & procedures
  • Major federal finance legislation
  • Loan-to-value & qualifying ratio calculations

Introduction to the Real Estate Financing Market

Dodd-Frank Act of 2010 created the: Consumer Financial Protection Bureau

  • Federal agency with consumer

protection responsibilities

1 2 3

slide-2
SLIDE 2

10/25/2019 2

Consumer Financial Protection Bureau (CFPB) Consumer Financial Protection Bureau (CFPB)

Dodd-Frank mandated the consolidation of duplicate lender disclosures under (TILA) Truth in Lending Act

+ (RESPA) Real Estate Settlement Procedures Act =

(TRID) TILA/RESPA Integrated Disclsoure

Page 390

Federal Reserve System (The Fed)

  • Created to help maintain sound credit conditions,

help counteract inflationary and deflationary trends, and attempt to create a favorable economic climate

  • Country is divided into 12

Federal Reserve Districts

4 5 6

slide-3
SLIDE 3

10/25/2019 3

A.Open market operation B.Reserve requirements

  • C. Discount rates

Federal Reserve System (The Fed)

The Primary Mortgage Market 1.Lenders that originate mortgage loans directly to the borrower 2.Income on loan generated by (a) Finance charges at closing, such as loan

  • rigination fees and discount points

(b) Recurring income from interest payments (c) Servicing loans for other lenders

The Primary and Secondary Mortgage Market

Major Primary Market Lenders a.Savings associations (thrifts) and commercial banks b.Insurance companies

  • c. Credit unions

d.Pension funds

  • e. Endowment funds

The Primary and Secondary Mortgage Market

Page 392

7 8 9

slide-4
SLIDE 4

10/25/2019 4

Major Primary Market Lenders

  • f. Investment group financing
  • g. Mortgage banking companies
  • h. Mortgage brokers
  • i. Individual lenders

The Primary and Secondary Mortgage Market

The Secondary Mortgage Market

  • Secondary mortgage market—where mortgage loans

are bought, serviced, and frequently re-sold after they have been funded in the primary market to create cash flow

  • The originating lender may service the loan for a fee

The Primary and Secondary Mortgage Market

The Secondary Mortgage Market (Cont.)

  • 1. Fannie Mae (Federal National Mortgage Association; FNMA)
  • 2. Ginnie Mae (Government National Mortgage Association;

GNMA)

  • 3. Freddie Mac (Federal Home Loan Mortgage Corporation;

FHLMC)

The Primary and Secondary Mortgage Market

10 11 12

slide-5
SLIDE 5

10/25/2019 5

The Recent Financial Crisis

  • Cause of crisis
  • Subprime mortgage market
  • Foreclosures and bankrupt lenders

The Primary and Secondary Mortgage Market The Primary and Secondary Mortgage Market

Federal actions to stabilize and strengthen housing and lending markets

(1) FNMA and FHLMC holding about half of mortgages placed in federal conservatorship under Federal Housing Finance Agency (2) $100 billion federal bailout of lenders to ensure liquidity (3) Goal to reduce mortgage portfolios of FNMA and FHLMC by 10% annually

Conventional loans

  • 1. Not backed by a government agency in any way
  • 2. Loan-to-value ratio lowest (see Math Concepts)
  • 3. Conforming and nonconforming

loan guidelines

Types of Mortgage Loans

13 14 15

slide-6
SLIDE 6

10/25/2019 6

Private mortgage insurance (PMI)

  • 1. Loan-to-value ratio higher than certain

percentage (usually 80%)

  • 2. Borrower pays insurance premium to

the lender to insure the top 20- to 30%

  • f the loan
  • 3. Homeowners Protection Act allows

termination of PMI with good payment history by borrower

Types of Mortgage Loans

FHA-Insured Loans

The Federal Housing Administration was created under the National Housing Act of 1934 to: (1) Encourage improvement in housing standards and conditions (2) Provide an adequate home financing system through insurance (3) Exert a stabilizing influence on the mortgage market

Types of Mortgage Loans

  • Now part of the Department of Housing and Urban

Development (HUD)

  • FHA insures real estate loans made by approved

private lending institutions that set the interest rates

Types of Mortgage Loans

16 17 18

slide-7
SLIDE 7

10/25/2019 7

Fixed-interest rate for 10-30 yrs on 1-4 residence

  • 1. Borrower pays a one-time mortgage insurance

premium (1.5–3%) at closing (MIP)

  • 2. Must be appraised by FHA-approved appraiser and

generally requires 3% down payment

  • 3. FHA has set standards for construction, quality of

neighborhoods and credit requirements

Types of Mortgage Loans

FHA Programs Under Title II

Prepayment privileges—no penalty to prepay as long as the lender receives minimum 30 days of advance notice. Assumption rules—depends on when loan was originated Other FHA loan programs

  • a. Home improvement loans
  • b. Condominium loans
  • c. Graduated payment mortgage loans
  • d. Adjustable rate mortgage loans

Types of Mortgage Loans

Points—who pays them and in what amount is negotiable between the parties Interest rates—not fixed by FHA and can fluctuate with the market Lead paint notification—HUD requires a lead paint notification on homes prior to 1978

Types of Mortgage Loans

19 20 21

slide-8
SLIDE 8

10/25/2019 8

VA-Guaranteed (GI) Loans

  • a. The Veterans Administration was created under the

Servicemen's Readjustment Act of 1944

  • b. Eligibility status varies
  • c. Usually guarantees real estate loans

(see Figure 15.1)

Types of Mortgage Loans

Financing Provisions

  • 1. Generally, no down payment is required
  • 2. There is no limit on the amount of the loan (usually up

to 4X)

  • 3. Certificate of eligibility indicates maximum guarantee

Types of Mortgage Loans

Financing provisions

(4) The VA will issue a certificate of reasonable value (the VA-approved appraisal) (5) If property does not appraise, veteran can cancel the contract or make a down payment to make up the difference between the appraisal and sale price

Types of Mortgage Loans

22 23 24

slide-9
SLIDE 9

10/25/2019 9

Assumption rules

  • 1. Lender approval of the buyer
  • 2. Original borrower remains liable
  • 3. Non-veterans may assume the loan

Types of Mortgage Loans

Restoration of entitlement—can only have one property with VA loan at a time Prepayment—can prepay without any penalty Points—can be paid by anyone, but cannot be financed

Types of Mortgage Loans

The Rural Economic and Community Development Services (USDA)

  • 1. Division of the Department of Agriculture
  • 2. Has guaranteed loan programs as well as a

direct loan program

  • 3. Eligibility restricted to low-income residents
  • f rural areas or very small towns

Types of Mortgage Loans

25 26 27

slide-10
SLIDE 10

10/25/2019 10

  • 1. Purchase-money mortgages
  • 2. Package loans
  • 3. Bridge loans
  • 4. Blanket mortgages
  • 5. Open-end mortgages

Other Types of Loans Types of Mortgage Loans

Other Types of Loans

  • 6. Construction loans
  • 7. Buydowns
  • 8. Home equity loans (HELOCs)
  • 9. Reverse mortgages

Types of Mortgage Loans

28 29 30

slide-11
SLIDE 11

10/25/2019 11

Mortgage Priorities

  • Normally have priority in the order in which they have

been recorded

  • First or senior mortgage—a mortgage on real estate that

has no prior mortgage lien on it

Types of Mortgage Loans

Mortgage Priorities

  • Second or junior mortgage—when the owner of a property

executes another loan for additional funds

  • Subordination agreement—the first lender subordinates his
  • r her lien to that of the second lender, changing the

priority of the mortgage liens

Types of Mortgage Loans

31 32 33

slide-12
SLIDE 12

10/25/2019 12

Application for credit

Requested information (1) Employment, income, assets and debt

  • bligations

(2) Information about collateral property (legal description, taxes, title…)

Residential Lending Practices and Procedures

Application for credit

Requested information (3) For commercial or investment property loans, financial or operating statements, leases, and balance sheets (4) Lender approval is usually a written loan commitment letter

Residential Lending Practices and Procedures

Importance of credit scores

  • 1. Credit scores range from

300 to 850

  • 2. Interest rates are based on

credit score

  • 3. FHA-insured loans are the

best for borrowers with low credit scores

Residential Lending Practices and Procedures

Good Credit Bad Credit

34 35 36

slide-13
SLIDE 13

10/25/2019 13

Importance of Credit History

  • a. Lender considers last 2 years in detail and up to 7 years of

repayment history

  • b. Late payments, foreclosures, bankruptcies, and judgments

can seriously damage the odds of loan approval

  • c. Lenders will generally look to see if good credit patterns

have been reestablished after a financial crisis

Residential Lending Practices and Procedures

Rate Lock – guarantee from mortgage lenders that they will give applicants a certain interest rate for a specific time period at a certain price.

Residential Lending Practices and Procedures

Prequalifying Buyers

  • 1. Underwriting guidelines or qualifying

standards—broker should have basic understanding of lenders’ standard in

  • rder to prequalify buyers
  • 2. Lender is measuring the borrowers’ adequacy of

income

Residential Lending Practices and Procedures

37 38 39

slide-14
SLIDE 14

10/25/2019 14

Computerized Loan Origination and Automated Underwriting

  • Electronic network for handling loan applications
  • Lowers cost and time of applications

Residential Lending Practices and Procedures

  • 1. Scoring and automated underwriting—utilizes credit scores
  • 2. Conventional conforming loans—apply two ratios to the

buyer's gross monthly income to measure adequacy

  • a. Proposed monthly housing expense can be no more

than 28% of the borrower's monthly income

  • b. Proposed monthly housing expense plus the buyer's
  • ther long-term recurring monthly debts can be no

more than 36% of the buyer's monthly income

Residential Lending Practices and Procedures

  • 3. FHA loans—uses same two ratios to qualify borrowers;

however, the maximum proposed housing expense to income ratio is 31% and the maximum proposed total monthly expense to income ratio is 43%

  • 4. VA loans—uses the total monthly expense to income

ratio, which the VA has set at 43% of the borrower's monthly income and also uses the residual income method based on a chart

Residential Lending Practices and Procedures

40 41 42

slide-15
SLIDE 15

10/25/2019 15

Financing Legislation

Truth in Lending Act and Regulation Z

  • 1. Requires lenders to disclose the true cost of
  • btaining credit
  • 2. Always applies to residential mortgages
  • 3. Applies to personal loans of

$25,000 or less

  • 4. Does not apply to agricultural loans,

business, or commercial loans

  • The consumer must be fully informed of all

financing charges, including loan origination fees, finders' fees, service charges, discount points, and interest charges

  • The mortgage lender must compute and disclose

the annual percentage rate (APR); the relationship

  • f all finance charges to loan amount; will always

be higher than the interest rate

Financing Legislation

  • 5. Chief disclosures required in Federal Box in closing

papers

  • a. APR of loan
  • b. All finance charges associated with the loan
  • c. Total number and amount of all payments
  • d. Total amount financed

Financing Legislation

43 44 45

slide-16
SLIDE 16

10/25/2019 16

Advertising

  • 1. Strict regulation of real estate advertisements that include

mortgage financing terms

  • 2. Advertising of any trigger terms require disclosure of all

loan terms such as the cash price, required down payment, number of payments, amounts, and due dates of all payments, and the annual percentage rate

  • 3. Annual percentage rate (APR) reflects all charges and can

stand alone

Financing Legislation

Penalties

  • 1. Liability to the consumer for twice

the amount of the finance charge with a $100 minimum and a $1,000 maximum plus court costs, attorneys' fees, and any actual damages

Financing Legislation

  • 2. Fines of up to $10,000 for each day a violation continues

after an administrative order enforcing Regulation Z is given or for engaging in unfair or deceptive trade practices

  • 3. For willful violations, up to a $5,000 fine or one year in

prison or both

Financing Legislation Penalties, contd

46 47 48

slide-17
SLIDE 17

10/25/2019 17

Federal Equal Credit Opportunity Act (ECOA) aka Regulation V

  • 1. Prohibits lenders and those who grant or arrange credit to

consumers from discriminating on the basis of named protected classes

Financing Legislation

  • a. Race
  • b. Color
  • c. Religion
  • d. National origin
  • e. Sex
  • f. Marital status
  • g. Age
  • h. Dependence on

public assistance

  • 2. Lenders and creditors must inform rejected credit

applicants, in writing within 30 days, why credit was denied or terminated

  • 3. Require lenders to treat income of both spouses on an

equal basis

Financing Legislation

Fair Credit Reporting Act aka Regulation B

  • 1. Gives consumers the right to check their own credit

reports and demand that mistakes be corrected

  • 2. Credit bureaus must limit credit information to 7 years,

except for bankruptcies that can stay for 10 years

  • 3. Fair and Accurate Credit Transaction Act (FACT Act)

authorizes one free credit report a year from each of the three national credit bureaus

Financing Legislation

49 50 51

slide-18
SLIDE 18

10/25/2019 18

Loan Fraud Legislation

  • a. Making any false representations to a lender in order to

borrow more money that one is entitled to under the lender’s guidelines

  • b. Applies to all residential and commercial real estate

transactions

  • c. Federal felony punishable by fines up to $1,000,000

and/or imprisonment up to 30 years

Financing Legislation

Residential Mortgage Fraud Act

  • 1. North Carolina-specific act that makes one violation a

felony

  • 2. Penalties include incarceration, forfeiture of the property,
  • r restitution

Financing Legislation

North Carolina Predatory Lending Act

  • 1. Permissible fees lenders may charge in connection

with home loans secured by first liens

  • 2. Main provisions:
  • a. To impose restrictions and limitations on high-

cost loans

Financing Legislation

52 53 54

slide-19
SLIDE 19

10/25/2019 19

North Carolina Predatory Lending Act

  • b. To revise the permissible fees and charges on

certain loans

  • c. To prohibit unfair and deceptive trade practices

by mortgage lenders and brokers

  • d. To provide public education and counseling about

predatory lenders

Financing Legislation

Real Estate Settlement Procedures Act (RESPA)

Created to provide the parties with disclosure of all settlement charges in a residential real estate transaction involving new financing

Financing Legislation Math Concepts

Determining Loan to Value Ratio (LTV)

A property is appraised at $100,000 and is secured by a $90,000 loan. What is the LTV? $90,000 (Loan) ÷ $100,000 (Value) = 0.90 or 90% (LTV)

Page 411

55 56 57

slide-20
SLIDE 20

10/25/2019 20

Mortgage Factors (A.K.A. Loan Constants)

Buyers borrow $350,000 at 4.5% for 30 years. What is their maximum principal & interest payment?

  • Ref. Figure 15.2

$350,000 ÷ 1,000 = $350 (Thousands borrowed) $350 X 5.07 (Mortgage Factor) = $1,774.50 (PI)

Page 412

Math Concepts PRINCIPLE AND INTEREST (DEBT SERVICE)

Total Interest over Life of Loan – Simple Interest PI remains the same on a fixed-rate mortgage Interest = Principal (P) x Rate (R) x Time (T) $180,000 loan (P) at 5% (R) for 15 years (T) 180,000 x 5% x 15 = 135,000

58 59 60

slide-21
SLIDE 21

10/25/2019 21

Don’t stop! You’re so Close! 61