Real Estate - Financing

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Primary Mortgage Markets

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This is where lenders originate loans y lending funds directly to borrowers. May be provided by institutional or non-insitutional lenders.

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Institutional Lenders

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these are lenders that are regulated financial institutions that accumulate the savings of many individuals and use this money to make loans at rates exceeding the rates paid to their depositors. (savings banks, commercial banks, credit unions, and life insurance companies)

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Non-institutional Lenders

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Lenders that include real estate investment trusts, pension and trust funds, private lenders, finance companies, mortgage bankers, and sellers of property. Most of these need not guarantee a return to depositors or investors and are therefore able to loan money on more speculative ventures than are institutional lenders.

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Mortgage Broker

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brings borrowers and lenders together for a real estate loan. His function is to take and process loan applications and arrange for lenders to make the loans. As a result, his transactions involve money form others, and not his own. he receives a commission paid by the borrower.

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Mortgage Banker (mortgage lender or mortgage company)

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a person who originates, finances, and closes mortgage loan transactions, and then sells the mortgages to large investors in the secondary market. Differs from a mortgage broker in that he will use his own money to make loans and does not need consent of anyone else in making the loan. Active in government insured and government garaunteed loans. usually only loans if he has a buyer for the loan (like a commitment to buy form a savings bank, bank, insurance company, Fannie Mae, Freddie Mac, or other investor. . . . . perform two functions. One, they will make loans, with their own money, sell them at a discount to investors in the secondary mortgage market, and service them for the investor. Two, they will act as loan correspondents and represent investors and process loans for the investors, and then service the loans for the investor. Loans they will make with their funds include construction loans, FHA and VA loans, and conventional loans.

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Warehousing (as it pertains to loans)

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used by a mortgage banker in need of funds temporarily, between the time it makes the loans and the time it sells them. Involves assembling loans and pledging them with a commercial bank to serve as security for a line of credit. . . . a lender, usually a mortgage banker, assembles a number of loans into a portfolio and offers the package as security for a short- term loan or line of credit from another lender, such as a commercial bank. This gives the primary lender funds with which to operate until the loans can be sold.

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Commercial Banks

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These lenders have the greatest amount of assets available of any lenders, but prefer short-term commercial and consumer loans to long-term mortgage loans.

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Savings Banks

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these Lenders are most involve with the financing of residential property, as well as shopping centers, office buildings, and commercial structures. May be federally chartered or state charter.

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Life Insurance Companies

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these lenders are actively engaged in financing real estate but generally not directly with the borrower. Invest major portions of assets in long term real estate loans (normally for commercial or industrial projects). Residential loans are through FHA and VA mortgages in the secondary market. They are usually represented by mortgage bankers (who originate and service the loans) All of them are state chartered rather than federally chartered.

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Pension Funds

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Invest most heavily in government and corporate securities.

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Credit Unions

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specialize in short term consumer loans but may also provide funds for long term financing of real estate, equity loans, and home improvement loans to their members.

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Finance Companies

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Specialize in consumer loans, but may also make real estate loans, usually second mortgage loans for residential property.

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Real Estate Investment Trusts (REITs)

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these invest in construction and land development loans for multi-family or commercial properties.

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Discount Points

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This is to assist a buyer in qualifying for a loan at an interest rate he could afford. They are prepaid interest charges, or interest rate equalization factors, used to increase the yield to the lender. Paid by anyone willing to help out borrower including borrower or seller. One point is equal to 1% of loan amount.

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Secondary Mortgage Market

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the market in which existing loans are bought, sold, or borrowed, against. . . . when existing loans are sold or used as collateral for other loans or securities. While the primary market originates loans, in the ______ _______, lenders and investors will warehouse loans, sell them, or buy and hold them.

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Three types of transactions in Secondary Mortgage Market

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1) Mortgage Warehousing, 2) Buying and selling individual mortgage loans, 3) Forming a group or pool of mortgage loans and issuing securities backed by the pool. Purchasers of the securities receive an interest in the pool of loans and are repaid their investments as well as interest on their investment for the mortgage payments received by the lender (or investor) holding the loans.

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Fannie Mae and Freddie Mac Ginnie Mae

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agencies created by Congress to promote the secondary mortgage market for residential mortgages. These agencies have no direct contact with the public but instead buy and sell loans and offer their securities through mortgage brokers, commercial banks, savings banks, and others. When money is tight, they purchase mortgages from lending institutions, when mortgage funds are plentiful, they sell loans to others.

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Conforming loans

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Loans that meet Fannie Mae and Freddie Mac standards.

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Jumbo Loans

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Loans that exceed the amount that Fannie Mae and Freddie Mac offer.

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Discounting

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Selling loans for less than the balance (at a discount)

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Fannie Mae (FNMA)

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Largest investor in the secondary market. Quasi-public. Formerly Federal National Mortgage Association. Buys mortgages originated at other lending institutions.

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Freddie Mac

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Formerly Federal Home Loan Mortgage Associaion. Has to do with Federal Home loan bank system. Primary responsibility is to maintain an active secondary market

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Gennie Mae

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Buys mortgages originated by other lending institutions. Special Finance programs (Urban Renewal and Elderly) . Formerly Govt. National Mortgage Association. Does not deal with financing for new subdivisions

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Conventional Loans

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Loans made by private parties and nongovernment lending institutions without any govt. insurance or govt. guarantee agains loss for lender.

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Loan-to-value Ratio

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The amount of a loan expressed as a percentage of the value of the real estate offered as security . . . value of the mortgage loan principal divided by the appraised value or the sales price of the property, whichever is lower. Conventional loans will generally offer the borrower lower loan-to-value ratios, resulting in higher down payments.

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FHA Loan

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a loan in which the lender is insured by the Federal Housing Administration against loss in the event of foreclosure. It does not serve as a lender and is not the mortgagee,

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V A Loan

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a loan in which the lender is guaranteed against loss by the Federal Department of Veteran Affairs in the even of foreclosure. To obtain this loan, a veteran must have a Certificate of Eligibility from the VA, apply to a lender for the loan, pay for a VA appraisal (called a "Certificate of Reasonable Value" or "CRV") made by an appraiser approved by the VA and sign a statement declaring that he intends to occupy the property as his residence.

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Certificate of Reasonable Value (CRV)

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this is essentially a VA appraisal made by an appraiser approved by the VA. To obtain a VA loan, must have it.

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Federal Housing Administration (FHA)

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This insures loans. It has more liberal criteria for a loan qualification than what is used of conventional loans, making it easier to qualify for a loan. Created in 1934 with the goal of stimulating jobs in the construction industry. Through its programs, FHA has encouraged homeownership by making financing of housing affordable to many and increased the quality of housing by requiring improvements to meet minimum housing standards. Insures loans as authorized by Title I and Title II of the National Housing Act.

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Title I loans

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loans that finance repairs, improvements, or alterations of existing residences.

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Title II loans

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Loans used to buy or build housing, including single family, condominiums, cooperative and multifamily housing.

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203b Program

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the most popular FHA loan. This program helps finance the purchase of a one to four family home that the borrower will occupy as his residence.

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Blind Assumption

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If a loan originated after december 15, 1989, an FHA loan can be assumed by anyone, whether or not they live in the residence, based on this.

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The Borrower

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The _______ generally pays the appraisal, pays an interest rate negotiated with the lender, pays a loan origination fee as an initial service charge.

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Certificate of Reasonable Value

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This establishes the maximum loan loan the lender may make.

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Rural Housing Service

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Formerly known as the Farmers Home Administration, this was established primarily to make and insure loans to farmers and ranchers unable to secure credit from other sources.

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Subprime Loans

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These are loans made to people who may have difficulty maintaining repayment schedule. The loans typically have higher interest rates and less favorable terms in order to make up for the higher credit risk.

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Office of Federal Housing Enterprise Oversight

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sets the criteria on what constitutes a conforming loan limit that Fannie Mae and Freddie Mac can buy. In general, anyloan that does not meet guidelines is a non-conforming loan.

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Predatory Lending

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the extension of credit to borrowers who cannot afford the credit on the terms being offered, with features designed to “strip away” or reduce the borrowers equity in the collateral and increase the likelihood of foreclosure.

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Credit Scores

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scores closer to 800 indicate excellent credit. Scores closer to 600 or below, indicate poor credit.

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Qualifying Ratios

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these are debt to income ratios. One of these is the front end ratio, and it relates to total housing cost to the borrowers gross income. The ratio should not exceed 28%.

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Usury Laws

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these are state laws that specify the maximum rate of interest that may be charged for various types of loans in the state.

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Inflation

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occurs when there is more money to spend on a limited number of available items. As demand for these items pushes their price up, the result is a decrease in the purchasing power of the dollar.

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Deflation

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the purchasing power of the dollar is increased because there are more goods in relation to the money available for buying them .

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Fiscal Policy and Monetary Policy

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2 Government policies at work to control inflation

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Fiscal Policy

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is action by congress that work to control inflation by increasing or decreasing income taxes. To slow the economy and halt inflation, congress can increase income tax rates, limiting the amount people can spend or save. To stimulate the economy, the govt. can lower taxes to give people more money to spend, save, or invest.

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Monetary Policy

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This policy regulates the supply and flow of money and credit available in order to promote economic growth with stability. _________ policy is controlled by the Federal Reserve System.

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Federal Reserve System (FED)

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monitors economic and financial conditions, such as volume of bank deposits and withdrawals, the cost of money and credit, unemployment levels, inflation rates and world economic conditions, and applies various controls or pressures to influence supply of money and credit available in the economy. Uses 3 basic tools 1) reserve Requirements, 2) Discount Rates, 3) Open Market Operations . . . controls inflation by controlling the supply of money in circulation in this country. It does this in a number of ways. One is "open market operations." This involves buying and selling government bonds. To decrease the supply of money in banks it will sell bonds, taking money out of the buyers' bank accounts. To increase the money supply to relieve a tight money market, it will buy bonds. Another method of control is to change member bank "reserve requirements." Banks must keep a certain percentage of their assets in reserve (unavailable for loans). By increasing the reserve requirement less money can be loaned out. By decreasing the requirement more money can be loaned. A third control method is to change the "discount rate." This is the interest rate charged to banks who wish to borrow from the Federal Reserve. An increase in the discount rate would cause the banks to increase their rate to borrowers, causing demand for loans to decrease. This would reduce the supply of money. Other methods of control include regulations for credit to purchasers of securities and persuasion (threats of more severe measures).

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Reserve Requirements

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the FED establishes these requirements for all member banks. Member banks must set aside and keep a certain percentage of their assets as reserves. When the fed increases these, banks have less money to lend, interest rates rise and borrowing and spending slow down.

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Discount Rate

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The interest rate the bank pays the Fed for the funds that it loans. It may decrease the rate to encourage bank borrowing or increase the rate when it wants to discourage bank borrowing and decrease the supply f funds banks have available to lend.

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Open Market Operations

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This refers to the purchase and sale of US Treasury Securities, such as treasury bill notes. This is the most flexible and frequently used tool of the Fed for expanding or slowing the economy. The Fed, through the Federal Reserve Bank of New York, trades securities almost daily in order to influence the availability and cost of money and credit. To limit expansion of the economy and put the brakes on inflation, the Fed might: Sell Government securities, raise reserve requirements, raise the discount rate.

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Simple Interest

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Interest paid only on the principal owed. Most real estate loans are charged through this

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Compound Interest

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Interest paid on accrued (unpaid) interest as well as on the principal owed.

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Nominal Interest Rate

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this is the rate of interest stated in the loan documents

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Effective Interest Rate

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this is the rate the borrower is actually paying; it is commonly called the annual percentage rate (APR)

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Fixed Rate

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This is a rate that will remain the same for the term of the loan, regardless of future changes in the money supply, rate of inflation, or anything else.

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Variable Interest Rate (adjustable rate mortgages (ARMs)

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The interest rate in these loans may be adjusted at period intervals during the term of the loan, based on a predetermined formula tied to an index. They have a cap on the interest rate allowed.

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Margin

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The amount a lender adds to a selected index rate to cover its costs, risk and profit.

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Mortgager

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Another name for the borrower. The fee for the appraisal of property in an FHA loan is paid by this person.

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Prime Rates

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These are rates established by the indivdual bank and not the government . . They are the rates charged to the best customers.

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Prepayment

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paying off a loan quickly. Neither FHA nor federal VA allow the lender to charge a prepayment penalty.

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Origination Fee

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The loan fee that is paid by the borrower in an FHA loan to cover the cost of processing the loan.