Real Estate Finance Unit 5

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Conventional loan

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Is any loan without government insurance or guarantees. The main sources are commercial banks, thrifts, and mortgage companies

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Underwriting

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Is the practice of analyzing the degree of risk involved in a real estate loan

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Fixed-rate, Adjustable-rate, or Graduated payments

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Types of Amortization

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Borrower Qualifications

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Each conventional lender determines the criteria it uses to qualify borrowers for loans. Some have flexible guidelines and others are very strict. Many conventional lenders use the Fannie Mae/Freddie Mac guidelines discussed later in the unit. Loans that are underwritten using the Fannie Mae/Freddie Mac guidelines may be sold in the secondary mortgage market in the future

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Risk-based pricing

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Is a process that lenders use to determine home loan rates and terms. Since each lender measures risk differently, interest rates vary from lender to lender

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Loan-to-value ratio (LTV)

Example: The lender has an 80% LTV ratio for its conventional loan. The property is appraised at $200,000. Therefore, the maximum loan amount is $160,000. ($200,000 x .80). The borrower will need a 20% down payment of $40,000 to qualify for this loan. This LTV is written 80/20.
A common LTV ratio is 80%, but lenders often originate loans with LTVs of 90% or higher.

Example: If someone is buying a $300,000 home and has $30,000 as a down payment, the buyer will borrow $270,000 (90% of the appraised value). This is referred to as a 90% LTV loan and is written 90/10.

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Is the ratio of the loan amount to the property’s appraised value or selling price, whichever is less

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Down payment

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Is the portion of the purchase price that is not financed

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Mortgage insurance

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Insurance that provides coverage for the upper part of a residential loan in the event of default. The lender is insured against losses that result when a borrower defaults on a loan and the loan must be foreclosed by the lender. Is used for loans with LTV ratios that are higher than 80%

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Private mortgage insurance (PMI)

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Extra insurance that lenders require from most homebuyers who obtain conventional loans that are more than 80% of their new home’s value. In other words, buyers with less than a 20% down payment are normally required to buy PMI

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Automatic Termination

Lenders or servicers must automatically cancel PMI coverage on most loans once a borrower pays down the mortgage to 78% of the value, providing payments are current.

Borrower Cancellation

By sending a written request, the borrower may ask for cancellation of PMI when the mortgage balance reaches 80% of the original value of the property. However, the borrower must have a good payment history and the value of the home must not have declined. The lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage.

When the policy is cancelled, the borrower is entitled to a refund of the unearned portion of the mortgage insurance premium paid. The refund must be transferred to the borrower by the lender within 45 days of cancellation

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Effective July 29, 1999, the federal Homeowner’s Protection Act (HPA) allows the cancellation of private mortgage insurance under certain circumstances

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Conforming loans
(Therefore, conventional loans that are kept by lenders are called non-conforming loans or portfolio loans)

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Any conventional loans sold in the secondary mortgage market must conform to the Fannie Mae/Freddie Mac underwriting guidelines and are called

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Portfolio loan

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A loan retained by the lender. Since these loans do not conform to Fannie Mae/Freddie Mac credit standards, they cannot be sold into the secondary market. They are either retained in the lender’s portfolio or privately securitized for sale on Wall Street

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Conforming loans

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Have terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These loans are called “A” paper loans, but are also known as prime loans or full documentation loans, for which the lender requires 2 years of tax returns, verification of income, deposits, employment, a high credit score, and a clean credit history. “A” paper loans can be made to purchase or refinance homes. Fannie Mae and Freddie Mac guidelines establish the maximum loan amount, borrower credit, income requirements, down payment, and property requirements

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Underwriting guidelines

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Principles lenders use to evaluate the risk of making real estate loans

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Second loan

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Loan secured by either a mortgage or deed of trust and has a lien position that is subordinate to the first mortgage or deed of trust

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Debt-to-income ratio (DTI)

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To determine a consumer’s maximum loan amount, lenders use a guideline called a _________. It is the percentage of a consumer’s monthly gross income that goes toward paying debts. Lenders use two calculations—a front ratio and a back ratio

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Front Ratio
The front ratio used in conforming loans is 28%

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The percentage of a borrower’s monthly gross income that is used to pay the monthly housing expense. To calculate this percentage, divide the housing expense by the borrower’s gross monthly income. The monthly housing expense for renters is the monthly rent payment. For homeowners, it is the amount of principal, interest, taxes, and insurance (PITI)

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Back Ratio

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The percentage of income needed to pay for all recurring debt. To calculate this percentage, divide the housing expense and consumer debt by the borrower’s gross monthly income

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Consumer debt

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Can be car payments, credit card debt, judgments, personal loans, child support, alimony, and similar expenses. Car or life insurance, utility bills, and cell phone bills are not used to calculate the ratio. The back ratio for conforming loans is 36%

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Automated underwriting (AU)

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A technology-based tool that combines historical loan performance, statistical models, and mortgage lending factors to determine whether a loan can be sold into the secondary market

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Automated underwriting system (AUS)

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Can evaluate a loan application and deliver a credit risk assessment to the lender in a matter of minutes. It reduces costs and makes lending decisions more accurate and consistent

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Desktop Underwriter® (DU)

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the automated underwriting system that Fannie Mae has developed to assist lenders in making informed credit decisions on conventional, conforming, and FHA/VA loans. Contrary to popular belief, DU does not approve loans. DU provides underwriting recommendations and underwriting reports to the lender, who uses these recommendations to approve or disapprove loans. DU supports most of the Fannie Mae loan products discussed here

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Loan Prospector® (LP)

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A risk assessment tool that gives lenders access to Freddie Mac’s credit and pricing terms. Uses statistical models based on traditional underwriting factors such as a person’s capacity to repay a loan, a person’s credit experience, the value of the property being financed, and the type of loan product. In accordance with federal fair housing laws, LP never uses factors such as a borrower’s race, ethnicity, age, or any other factor prohibited by the nation’s fair housing laws.

Loan Prospector® does not approve loans. It provides quick feedback as to the eligibility of the borrower and property for a particular Freddie Mac loan. The lender uses that information as a tool to approve the loan or fine-tune the application to meet Freddie Mac guidelines. LP supports most of the following Freddie Mac loan programs

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Fixed-rate

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_______ loans lock in an interest rate and a stable, predictable monthly payment. They continue to be the mortgage of choice for the majority of borrowers. Fannie Mae’s short-term fixed-rate loans allow the borrowers to build equity faster and carry a lower interest rate

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MyCommunityMortgage® (MCM)

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Loan is a conventional, community lending mortgage that offers underwriting flexibilities to qualified borrowers who meet specific income criteria or properties that meet geographic location eligibility criteria under FannieNeighbors®.
MCM product offers prospective borrowers the ability to qualify with higher loan-to-value ratios and allows for nontraditional credit sources such as timely payment of rent and utilities

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Community Solutions™ and Community HomeChoice™

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MCM also permits additional eligibility-based options:

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Community Solutions

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Loans are available for full-time employees of public or private schools (kindergarten through college), law enforcement agencies, and fire departments, certified, accredited, or licensed health care workers such as nurses, medical residents, pharmacists, therapists, technicians, and technologists

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Community HomeChoice™

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Loans are designed to meet the needs of low- to moderate-income people who have disabilities or family members with disabilities living with them

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FannieNeighbors®

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A nationwide, neighborhood-based mortgage option designed to increase homeownership and revitalization in census tracts designated as underserved by the U.S. Department of Housing and Urban Development (HUD). Adds underwriting flexibility to Fannie Mae's MyCommunityMortgage® product by removing the income limit if a property is located in one of these areas.

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Community Seconds® loan program

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A borrower can obtain a secured second loan that typically is funded by a federal, state, or local government agency, an employer, or a nonprofit organization. To qualify for this loan, borrowers must earn no more than 100% of the median income for their Metropolitan Statistical Area (MSA) or county and attend a homebuyer education session

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Metropolitan Statistical Area (MSA)

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An urban area that has at least one city with a population of 50,000 or more and has adjacent communities that share similar economic and social characteristics

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Energy improvement feature (EI feature)

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Can provide sustainable funding for improvements to lower homeowner costs through energy efficiency

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Affordable Merit Rate® Mortgage

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Offers borrowers who are credit challenged an initial interest rate that is closer to conventional rates. The program gives borrowers the opportunity to reduce their interest rate at no cost. If the borrowers make 24 consecutive on-time payments in a 4-year period, they qualify for an automatic one-time, 1% interest rate reduction. If a loan payment is made late in the first 24 months, borrowers are re-evaluated for an interest rate reduction on the 36-month or 48-month anniversary of the payment due date

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Home Possible® Mortgage

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Targets first-time homebuyers, move-up borrowers, retirees, families in underserved areas, new immigrants, and very low and low-to-moderate-income borrowers. This product features higher loan-to-value ratios, higher debt-payment-to-income ratios, and flexible credit terms to help borrowers qualify. For borrowers without a readily verifiable credit history, noncredit payment references, such as a documented savings history of at least 12 months, may be included if the history shows periodic deposits (at least quarterly) resulting in a growing balance over the year. Temporary buy-downs offer the borrower an option to prepay interest up front and lower the overall interest rate

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Mortgage Credit Certificate

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Entitles qualified homebuyers to reduce the amount of their federal income tax liability by an amount equal to a portion of the interest paid during the year on a home mortgage. A MCC worksheet is used to apply the tax benefit of the interest the borrower will pay on the loan, which results in a reduction of the calculated debt-payment-to-income ratio and monthly housing expense-to-income ratio. This allows buyers to qualify more easily for a loan by increasing their effective income

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Adjustable-rate mortgages (ARMs)

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Help borrowers maximize their home buying power with lower interest rates. ARMs offer flexibility for borrowers who relocate frequently or expect their income to increase within the next couple of years. Borrowers using ARMs must understand that their payments can go up or down during the term of the loan

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London Interbank Offered Rate (LIBOR)-Indexed ARMs

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Offer borrowers aggressive initial rates (lower than many other ARMs) and have proved to be competitive with other popular ARM indices

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Non-conforming loan

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A loan that does not meet the Fannie Mae or Freddie Mac lending guidelines. This can be due to the type of property being financed or because the borrower’s income is difficult to verify. Loans that exceed the maximum loan amount are called jumbo loans. Sometimes, subprime loans are an option for borrowers whose creditworthiness does not meet the guidelines

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Jumbo loan

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Exceeds the maximum conforming loan limit set by Fannie Mae and Freddie Mac. Because these loans are bought and sold on a much smaller scale, these loans usually carry a higher interest rate and have additional underwriting requirements

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Subprime loans or “B” paper and “C” paper loans

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Loans that do not meet the borrower credit requirements of Fannie Mae and Freddie Mac are called __________. The purpose of these loans is to offer financing to applicants who do not currently qualify for conforming “A” paper financing. Include those who have low credit scores or no credit score, income that is difficult or impossible to verify, an excessively high debt-to-income ratio, or a combination of these factors

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Junk fee

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A questionable fee charged in closing costs that may not bear any significant relationship to the actual loan transaction

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Yield-spread premiums

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Points paid by lenders to mortgage brokers for delivering high interest rate loans

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Processing fee

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The lender charges this fee for processing the loan. It is commonly charged in prime loans but may be excessive in subprime financing

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Loan origination fee

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The origination fee is the basic charge for executing the loan and, for a prime loan, is generally equal to 1% of the loan amount. The origination fee is typically higher for a subprime loan

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Credit report fee

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These should be the same with prime and subprime loans and the borrower should receive a copy of the credit report

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Warehouse fee

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A warehouse fee is a type of fee that mortgage brokers charge when they fund loans out of their own resources. The fee represents the cost the lender incurs to hold the loan until it is sold on the secondary market. The lender, not the borrower, should absorb this fee

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Consulting fee

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This is a junk fee. The lender should provide consulting services at no charge to the borrower

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Endorsement fee

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This fee relates to endorsements in title insurance policies that some lenders charge. Others include the fee in the cost of the lender’s title insurance policy. This is a junk fee that lenders may inflate

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Document preparation fee

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This fee typically covers the cost to prepare the note and security instrument. Lenders can arbitrarily inflate this fee

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Underwriting fee

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The amount of this fee varies from lender to lender and loan to loan and represents the lender’s expense for analyzing the borrower’s ability to qualify for the loan

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Packing

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The practice of adding credit insurance or other extras to increase the lender’s profit on a loan. Lenders can require the purchase of credit insurance with a loan as long as they include the price of the premium in the finance charge and annual percentage rate

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Exploding ARM

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A notorious home loan product offered in the subprime industry. This adjustable-rate mortgage loan product features a low introductory teaser rate for which the borrower qualifies even with high debt-to-income ratios. When these rates adjust, typically in as little as 2 years, the new fully-indexed rate on this subprime home loan can increase debt-to-income ratios 20% or more. This dramatic rate increase causes the payments to jump to a level that is unmanageable for the majority of homeowners

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Predatory lending

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The abusive practice of extending credit with the intent to deceive and take advantage of the borrower

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Title X and Title XIV

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The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has two titles that deal with predatory lending practices--Title X and Title XIV. Title X established the Consumer Financial Protection Bureau (CFPB) and authorized it to enforce laws that prohibit unfair, deceptive, or abusive acts and practices in connection with consumer financial products and services. Title XIV, the Mortgage Reform and Anti-Predatory Lending Act, regulates residential mortgage lending activities in a manner that is designed to remedy many of the abuses in the subprime mortgage lending market that helped cause the financial crisis of 2007

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Equity stripping

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A predatory scheme in which unscrupulous investors take advantage of homeowners who are in financial trouble. Occurs when these investors prey on people who are often uninformed and in need of help. In this scheme, the homeowner is promised an opportunity to buy back his or her home at some future time if the owner simply reconveys ownership of the property to the investor. In exchange, the investor promises the homeowner the right to continue to live in the home as a tenant. The agreement is often constructed in such a way that the individual is actually forfeiting all rights to the property along with any equity the property has accumulated over time