Chp 15 - Real Estate Financing: Practice

Front 1

what is the role of the Federal Reserve System

Back 1

-to maintain sound credit conditions
-help counteract inflationary and deflationary trends

Front 2

how many federal reserve districts are there

Back 2

12

Front 3

what are the Fed's requirements

Back 3

-each member bank keep a certain amount of assets on hand as reserve funds
-this money cannot be used for loans

Front 4

-Fed Reserve member banks are permitted to borrow money from the district reserve banks to expand their lending operations
-discount rate is the rate charged by the Fed when it lends to its member banks

Back 4

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Front 5

rate recommended by the Fed for the member banks to charge each other on short-term loans

Back 5

federal funds rate

Front 6

prime ratem the short-term interest rate cahrged to a bank's largest, most credit worthy customers, is strongly influened by the Fed's discount rate

Back 6

Fed Reserve discount rate is high, bank interest rates are high

Front 7

-made up of the lenders that originate mortgage loans
-lenders make money available directly to borrowers

Back 7

primary mortgage market

Front 8

what 2 sources does income from a loan come from

Back 8

-finances charges collected at closing, such as loan origination fees and discount points
-recurring income, that is, interest collected udring the term of the loan

Front 9

what is the primary investment objective of lenders

Back 9

to look at income generated from the fees charged in originating loans

Front 10

-once loans are made, they are sold to investors
-by selling loans to investors in the secondary mortgage market, lenders generate funds with which to originate additional loans

Back 10

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Front 11

major lenders in primary mortgage market are...

Back 11

-thrifts, savings assocations, and commercial banks (knowns as fiduciary lenders) (thrifts generic term for savings associations)
-insurance companies
-credit unions
-pension funds
-endowment funds
-investment group financing
-mortgage banking companies
-mortgage brokers

Front 12

fiduciary lenders are subject to standards and regulations established by government agencies such as,,,

Back 12

Federal Deposit Insurance Corporation (FDIC) and Office of Thrift Supervision (OTS)

Front 13

-a government agency that governs the practices of fiduciary lenders
-was created by the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

Back 13

Office of Thrift Supervisor (OTS)

Front 14

an independent federal agency that insures the deposits in commercial banks

Back 14

Federal Deposit Insurance Corporation (FDIC)

Front 15

a market for purchase and sale of existing mortgages, designed to provide greater liquidity for mortgages

Back 15

secondary mortgage market

Front 16

in the secondary mortgage market, various agencies purchase a number of mortgage loans and assemble them into packages (called Pools)

Back 16

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Front 17

-a government-sponsored enterprise
-organized as a privatly owned corporation that issues its own common stock
-provides a secondary market for mortgage loans
-deals in conventional, FHA and VA loans
-buys from a lender a block or pool of mortgages that may then be used as collateral for mortgage-backed securities (MBSs) tha are sold on the global market

Back 17

Fannie Mae

Front 18

-entirely a governmental agency
-division of the HUD
-organized as a corporation without capital stock
-administers special-assistance programs and guarantees MBSs using FHA and VA loans as collateral

Back 18

Ginnie Mae

Front 19

a security interest in a pool of mortgages that provides for a monthly pass-through of principal and interest payments directly to the certificate holder

Back 19

Ginnie Mae pass-through certificate

Front 20

-government sponsored enterprise
-provides a secondary market for mortgage loans, primarily conventional laons
-has the authority to purchase mortgages, pool them, and sell bonds in the open market with the mortgages as security
-does not guarantee payment of its mortgage

Back 20

Freddie Mac

Front 21

a loan in which only interest is paid during the term of the loan, with the entire principal amount due with the final interest payment

Back 21

straight (term) loan

Front 22

a mortgage that only requires the payment of interest for a stated period of time with the principal due at the end of the term

Back 22

interest-only mortgage

Front 23

a final payment of a mortgage lan that is considerably larger than the required periodic payments because the loan amount was not fully amortized

Back 23

balloon payment

Front 24

a loan in which the principal as well as the interest is payable in monthly or other periodic installments over the term of the loan

Back 24

amortized loan

Front 25

a loan characterized by a fluctuating interest rate, usually one tied to a bank or savings and loan association cost-of-funds index

Back 25

adjustable-rate mortgage (ARM)

Front 26

interest rate is tied to the movement of an objective economic indicateor called..

Back 26

index

Front 27

-the interest rate is the inde rate plus a premium, called the..
-it represents the lender's cost of doing business

Back 27

margin

Front 28

-rate caps limit the amount the interest rate may change on an ARM

Back 28

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Front 29

what are the 2 types of rate caps of ARMS

Back 29

-periodic
-life-of-the-loan (or aggregate)

Front 30

-periodic rate cap limits the amount the rate may increase at any one time
-aggregate rate cap limits the amount the rate may increase over the entire life of the loan

Back 30

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Front 31

-mortgagor is protected from unaffordable individual payments by the payment cap
-payment cap sets a maximum amount for payments
-with a payment cap, a rate increase could result in negative amortization, that is, an increase in the loan balance

Back 31

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Front 32

-adjustment period establishes how often an ARM rate may be changed

Back 32

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Front 33

-uses a fixed interest rate, but payments of principal are increased according to an index or a schedule
-total payment increases, and the loan is paid off more quickly

Back 33

growing-equity mortgage (GEM)
also known as rapid-payoff mortgage

Front 34

-a loan in which payments are made by the lender to the borrower
-the payments, which may be made by regular monthly payments, in one lump sum, or as a line of credit to be drawn against, are based on the equity the homeowner has invested in the property given as security for the loan

Back 34

reverse-annuity mortgage (RAM)

Front 35

-ratio of debt to value of the property
-value is the sale price or appraisal value, whichever is less
-the lower the ratio of debt to value, the higher the down payment by the borrower

Back 35

loan-to-value ratio

Front 36

-loan that is viewed as the most secure loan because the loan-to-value ratios is foten the lowest
-security of the loan solely by the mortgage
-not government-insured or guaranteed

Back 36

conventional loan

Front 37

what is needed to qualify for conventional loan under Fannie Mae guidelines

Back 37

-borrower's monthly housing expenses, including PITI, must not exceed 28% total monthly gross income
-borrower's total monthly obligations, including housing costs plus other regular monthly payments, must not exceed 36% of his/her total monthly gross income (33% in case of 95% LTV laons

Front 38

conventional loans that meet criteria to be eligible to be sold in the secondary market

Back 38

conforming loans

Front 39

-insurance provided by private carrier that protects a lender against a loss in the event of a foreclosure and deficiency
-protects the top portion of a lon, usually 25% to 30%, against borrower default
-premium may be financed

Back 39

private mortgage insurance (PMI)

Front 40

what can a borrower do once he/she has built up equity equal to 22% of the purchase price

Back 40

-borrower with a good payment history may request that PMI be canceled
-lenders are required by law t oinform borrowers of their right to cancel PMI

Front 41

-loan insured by the Federal Housing Administration
-made by FHA-approved lending institutions
-provides security to the lender in addition to the real estate

Back 41

FHA loan

Front 42

most popular FHA program is...

Back 42

Title II, SEction 203(b), fixed-interest rate loans for 10 years to 30 years on 1-family to 4-family residences

Front 43

the technical requirements that must be met before FHA will insure loans

Back 43

-borrower is charged a percentage of the loan as a premium for the FHA insurance
-FHA regulations set standards for type and construction of buildings, quality of neighborhood, and credit requirements for borrowers
-the mortgaged real estate must be appraised by an approved FHA appraiser

Front 44

to qualify for FHA loan, the amount cannot exceed either of the following....

Back 44

-98.75% for loans over $50,000 with 1.25% down (for loans less than $50,000, the buyer must contribute 3% of the sales price to the down payment and closing costs
-97.75% of the sales price or appraised value for loans over $50,000 with 2.25% down

Front 45

if purchase price exceed the FHA-appraised value, what can the buyer do?

Back 45

buyer may pay the difference in case as part of the down payment

Front 46

prepayment privileges?

Back 46

borrower may repay an FHA-insured laon ona 1-family to 4-family residence without penalty

Front 47

what are the assumption rules for FHA-insured loans

Back 47

they vary, depending on the dates the loans were originated
-FHA loans originating before Dec 1986 generaly have no restrictions on their assumptions
-FHA loan originating between December 1, 1986, and December 15, 1989, a creditworthiness review of the prospective assumer is required
-FHA loans originating on December 15, 1989, and later, no assuptions are permitted without complete buyer qualification

Front 48

authorized to guarantee loans to purchase or construct homes for eligible veterans and their spouses (including unremarried spouses of veterans whose deaths were service-related

Back 48

Department of Veterans Affairs (VA)

Front 49

what time-in-service criteria does a veteran meet to be eligible for a VA loan

Back 49

-90 days of active service for veterans of WW II, Korean War, the Vietname conflict, and the Persian Gulf War
-a minimum of 181 days of active service during interconflict periods between July 26, 1947, and September 6, 1980
-2 full years of service during any peacetime period since 1980 for enlisted, and since 1981 for officers
-six or more years of continous duty as a reservist in the Army, Navy, Air Force, Marine Corps, Coast Guard, or as a member of the Army or Air National Guard

Front 50

a mortgage loan on approved property made to a qualified veteran by an authorized lender and guaranteed by the Department of Veterans Affairs in order to limit the lender's possible loss

Back 50

VA loan

Front 51

what is the limit of the amount of the loan will VA guarantee

Back 51

-VA loan guarantee is tied to the current conforming loan limit for FAnnie Mae and Freddie Mac
-typically lenders will loan 4 times the guarantee (for example, a conforming loan of $417,000 / 4 + $104,250 VA guarantee

Front 52

-to determine what portion of a mortgage loan the VA will guarantee, what must the veteran apply for

Back 52

certificate of eligibility

(individuals with full eligibility, no down payment is required for a loan up to the maximum guarantee limit)

Front 53

a form indicating the appriased value of a property being financed with a VA loan

Back 53

certificate of reasonable value

Front 54

-only one active VA loan at a time
-veteran may own only 2 properties acquired using VA loan benefits
-a veteran may use his/her VA benefits as many times as he/she chooses, as long as the previous benefit use has been paid

Back 54

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Front 55

prepayment privileges???`

Back 55

veteran can prepay the debt any time without penalty

Front 56

assumption rules

Back 56

-VA loans made before March 1, 1998, are freely assumable
-assumption processing fee is usually $500
-for loans made on or after March 1, 1988, the VA must approve the buyer and assumption agreement
-original veteran borrower remains personally liable for the repayment of the loan unless the VA approves a release of liability

Front 57

release of liability issued by VA only is....

Back 57

-the buyer assumes all of the veteran's liabilities on the loan, and
-the VA or lender approves both the buyer and the assumption agreement

Front 58

-a release of liability issued by the VA does not release the veteran's liability to the lender
-this must be obtained separately from the lender

Back 58

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Front 59

an agency of the federal government (Dept of Agriculture) that provides credit assistance to farmers and other individiauls who live in rural areas

Back 59

Farm Service Agency (FSA)

Front 60

-FSA loans are made to low-income and moderate-income families
-the interest rate charged can be as low as 1%, depending on the borrower's income

Back 60

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Front 61

FSA loan programs fall into 2 categories...

Back 61

-guaranteed loans, made and serviced by private lenders and guaranteed for a specific percentage by the FSA, and
-loans made directly by the FSA

Front 62

a federal agency of the Department of Agriculture that offers programs to help families purchase or operate family farms

Back 62

Farm Credit System (Farm Credit)

Front 63

-Farm Credit System banks and associations do not take deposits
-loanable funds are raised through the system-wide sale of of bonds and notes in the nation's capital markets

Back 63

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Front 64

government-=sponsored enterprise that operates similiarly to Fannie Mae and Freddie Mac but in a context of agricultural loans

Back 64

Farmer Mac

Front 65

-a note and mortgage that is created at the time of purchase
-purpose is to make the sale possible and is used in 2 ways
1. it may refer to any security instrument that originates at the time of sale
2. it refers to the instrument given by the purchaser to a seller who takes back a note for part or all of the purchase price

Back 65

purchase-money mortgage (PMM)

Front 66

-a loan that includes the real property and personal property and appliances installed on the premises
-used to finance furnished condominimum units

Back 66

package loan

Front 67

-a loan that covers more than one parcel or lot
-usually used to finance subdivision developments
-includes a provision known as a partial release clause

Back 67

blanket loan

Front 68

-clause in a blanket loan that permits the borrower to obtain the release of any one lot or parcel from the blanket lien by repaying a certain amount of the loan
-lender issues a partial release for each parcel released from the mortgasge lien
-release form includes a provision that the lien will continue to cover all other unreleased lots

Back 68

partial release clause

Front 69

-a loan that enables a borrower with an existing mortgage or deed of trust loan to obtain additional financing from 2nd lender without paying off the 1st loan
-2nd lender gives borrower a new, increased loan at a higher interest rate and assumes payment of the existing loan
-total amountof new loan includes the existing loan as well as the additional funds needed by the borrower
-borrower makes payments to the new lender on the larger loan
-new lender makes payments on the original loan out of the borrower's payments

Back 69

wraparound loan

Front 70

-a loan that secures a note executed by the borrower to the lender
-also secures any future advances of funds made by the lender to the borrower

Back 70

open-end loan

Front 71

-a loan made to finance the construction of improvements on real estate such as homes, apartments, and office buildings
-lender commits to the full amount of the loan but disburses the funds in payments during construction (known as draws)

Back 71

construction loan (interim financing)

Front 72

-a transaction in which an owner sells his/her improved property and, as part of the same transaction, signs a long-term lease to remain in possession of the premises (buyer becomes the lessor, original owner becomes the lessee)
-used to finance large commercial or industrial properties

Back 72

sale-and-leaseback

Front 73

-a loan under which a property owner uses his/her residence as collateral and can then draw funds up to a prearranged amount against the property
-can be taken out as a fixed loan amount or as an equity line of credit

Back 73

home equity loan (sometimes called a line of credit)

Front 74

implements the Truth-in-Lending Act requiring credit institutions to inform borrowers of the trust cost of obtaining credit

Back 74

Regulation Z

Front 75

-Federal government regulates the lending practices of mortgage lenders through this act
-a consumer must be fully informed of all finance charges and the true interest rate before a transaction is complete4d
-finance charge disclosure must include any loan fees, finder's fees, service charges and points, as well as interest
-lender must compute and disclose the annual percentage rate (APR)

Back 75

Truth-in-Lending Act

Front 76

for purposes of Regulation Z, any person who extends consumer credit more than 25 times each year or more than 5 times each year if the transactions involve dwellings as security

Back 76

creditor

Front 77

Act that prohibits lenders and others who grant or arrange credit to consumers from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age (provided applicant is of legal age), or dependence on public assistance

Back 77

Equal Credit Opportunity Act (ECOA)

Front 78

Act where financial institutions are expected to meet the deposit and credit needs of their communities; particpate and invest in local community development and rehabilitation projects; and participate in loan programs for housing, small businesses, and small farms

Back 78

Community Reinvestment Act of 1977 (CRA)

Front 79

-act that applies to any residential real estate transaction involing a new first mortgage loan
-designed to ensure that buyer and seller are both fully informed of all settlement costs

Back 79

Real Estate Settlement Procedures Act (RESPA)

Front 80

an electronic network for handling loan applications through remote computer terminals linked to several lenders' computers

Back 80

computerized loan origination (CLO) system