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 purpose loans • Lending practices & procedures • Major federal finance legislation • Loan-to-value & qualifying ratio calculations 2 Introduction to the Real Estate Financing Market Dodd-Frank Act of 2010 created the: Consumer Financial Protection Bureau Federal agency with consumer • protection responsibilities 3 1
10/25/2019 Consumer Financial Protection Bureau (CFPB) 4 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 5 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 6 2
10/25/2019 Federal Reserve System (The Fed) A.Open market operation B.Reserve requirements C. Discount rates 7 The Primary and Secondary Mortgage Market 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 origination fees and discount points (b) Recurring income from interest payments (c) Servicing loans for other lenders 8 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 Page 392 9 3
10/25/2019 The Primary and Secondary Mortgage Market Major Primary Market Lenders f. Investment group financing g. Mortgage banking companies h. Mortgage brokers i. Individual lenders 10 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 11 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) 12 4
10/25/2019 The Primary and Secondary Mortgage Market The Recent Financial Crisis Cause of crisis • Subprime mortgage market • Foreclosures and bankrupt lenders • 13 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 14 Types of Mortgage Loans 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 15 5
10/25/2019 Types of Mortgage Loans 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% of the loan 3. Homeowners Protection Act allows termination of PMI with good payment history by borrower 16 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 17 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 18 6
10/25/2019 Types of Mortgage Loans FHA Programs Under Title II 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 19 Types of Mortgage Loans 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 20 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 21 7
10/25/2019 Types of Mortgage Loans 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 ) 22 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 23 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 24 8
10/25/2019 Types of Mortgage Loans Assumption rules 1. Lender approval of the buyer 2. Original borrower remains liable 3. Non-veterans may assume the loan 25 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 26 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 of rural areas or very small towns 27 9
10/25/2019 Types of Mortgage Loans Other Types of Loans 1. Purchase-money mortgages 2. Package loans 3. Bridge loans 4. Blanket mortgages 5. Open-end mortgages 28 Types of Mortgage Loans Other Types of Loans 6. Construction loans 7. Buydowns 8. Home equity loans (HELOCs) 9. Reverse mortgages 29 30 10
10/25/2019 31 Types of Mortgage Loans 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 32 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 or her lien to that of the second lender, changing the priority of the mortgage liens 33 11
10/25/2019 Residential Lending Practices and Procedures Application for credit Requested information (1) Employment, income, assets and debt obligations (2) Information about collateral property (legal description, taxes, title…) 34 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 35 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 Good Bad low credit scores Credit Credit 36 12
10/25/2019 Residential Lending Practices and Procedures 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 37 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. 38 Residential Lending Practices and Procedures Prequalifying Buyers 1. Underwriting guidelines or qualifying standards—broker should have basic understanding of lenders’ standard in order to prequalify buyers 2. Lender is measuring the borrowers’ adequacy of income 39 13
Recommend
More recommend
