Chapter 13
The Federal Reserve Board of Governors has the following three tools at its disposal to assist in the regulation of the money supply or to influence interest rates:
*Reserve requirement- most abrupt.- *Discount rate-least effective Open Market operations.
The Federal Reserve System has five parts:
*The Board of Governors *12 Federal Reserve Banks and their branches *The Federal Open Market Committee *The Federal Advisory Council *Members Banks- includes federally regulated commercial banks and state chartered banks that have voluntarily joined the system.
There are many types of mortgage lenders"
*savings associations *commercial banks *credit unions *life insurance companies *real estate investment trust (REIT) *mortgage brokers
Borrowers are allowed a recission period -days to back out- which is ____ days, on the refinance home Equity loan of a principal residence.
3,. this does not apply to new loans for financing a purchase o loans to build a home.
Mortgage revenue bonds helps low and middle income first time homebuyers by offering long-term mortgages at below market rates.
A state can issue mortgage revenue bonds-a form of tax-free municipal bond- to investors, then use the capital proceeds to invest in the state's MRB loan program.
Reverse mortgage scams-
Elderly homeowners can be taken advantage of due to the complexity of the reverse mortgage process.
The federal national mortgage association was originally formed to purchase what type of loans?
FHA
Discount rate-
Federal Reserve member banks can borrow money from one of the 12 federal reserve district banks.
Government National Mortgage Association (GNMA)
Ginnie Mae was created in 1968 as a government owned corporations that operates within HUD.
The purchase of a home often includes personal property such as a refrigerator., range, dishwasher, and so on.
If these items are a part of the security offered in the mortgage, it creates a package mortgage.
Ginnie Mae assists in the financing of urban renewal and housing projects by offering below market interest rates to low-income families.
It also provides a secondary market for VA and FHA loans and guarantees payment of securities backed by residential mortgages.
REIT- is not a secondary market lender
Its investments and loans are primarily in apartment complexes and commercial properties. If qualified, a REIT receives special tax treatment under federal income tax laws.
What is the major source of funds for large commercial real estate developments?
Life insurance companies
The Board of Governors are consists of seven members who are appointed by the President and confirmed by Congress.
Members are appointed to terms of 14 years.
*VA guaranteed loans Veterans Affairs
No limits, no down payments.
Foreclosure Rescue Scheme
Offers to help a homeowner in financial difficulty refinance their loan or obtain a mortgage modification to avoid foreclosures but doesn't deliver in the end, leaving the homeowner in even worse financial shape than before
FHA Section 251 Adjustable Rate Mortgages
One, three and five year adjustable rate mortgage 1% per year after the fixed rate period, with a maximum rate increased over the life of the loan of no more than 5%.
Equal Credit Opportunity Act-
Prohibits creditors from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, because an applicant receives income from a public assistance program, or because an applicant has exercised in good faith any right under the Consumer Credit Protection Act.
Real Estate Settlement Procedures Act- RESPA
Prohibits kickbacks and rebates on certain loan transactions.
Dodd Frank Act-
Prohibits mortgage loan originators from steering consumers toward a mortgage where the consumer lacks a reasonably ability to repay.
A blanket mortgage typically contains a-
Release Clause thereby allowing the borrower to pay a specified amount to release a single lot from the blanket so it can be sold to a buyer upon completion of construction.
Home Mortgage Disclosure Act
Requires lenders to report loans made to ensue that borrowers reflect the actual makeup of the community.
RESPA standardize real estate closings by:
Requiring lenders to provide a loan estimate of settlement costs no later than 3 business days following the date of mortgage loan application.
Prior to deregulation of the banking industry in the 1980's, which institution were dominant in providing funds for the purchase of single family residences?
Savings association
conventional mortgage loans typically require a higher down payment than those required by FHA or VA, and traditionally carry a higher interest rate.
Since these loans are neither insured nor guaranteed, they carry higher risk in the foreclosure than the FHA and VA loans.
Which of the following statement regarding types of mortgages loans is correct?
The FHA insures loans. VA loans are guaranteed.
FHA Insured Mortgage loans- low income- limited on loan-
The Federal Housing Administration was created in 1934 to provide sound lending practices, promote home ownership, and upgrade housing standards.
Appraisal is required to make sure that the property meets certain safety,security and soundness standards.
The appraisal must be performed by a FHA approved appraiser and is reported per the HUD handbook,. The buyer typically pays for the appraisal.
All borrowers qualified by the lender are eligible to apply.
The cost of the rehabilitation must be at least $5000, but the total value of the property must still fall within the FHA maximum loan amount for the geographical area.
The increase in the discount rate causes a banks cost of doing business to increase.
The increased cost will be passed to the borrowers in the form of higher interest rates.
The primary mortgage market is where loans are originated.
The market consists of individuals and businesses that want or need to borrow money and the various sources for the loans.
FHA provides a variety of loan programs for the purchase of manufactured homes, single family homes, and multifamily properties.
The purpose of the insurance is to protect the lender from loss in the event of foreclosure.
Mortgage Loan Originator- MLO
They arrange loans by taking mortgage applications and searching for lenders who offer the lowest interest rates and easiest borrower qualification.
If the ARM payment does not change on the same date as the interest rate, negative amortization occur.
This is due to the fact that the monthly payment may be lower than the payment required for principal plus the amount of interest due.
*VA guaranteed loans Veterans Affairs
VA entitlement can be used over and over again if a prior loan guaranteed by the VA is repaid, or another qualified veteran, who is willing to apply his or her entitlement to the loan balance, assumes the existing loan.
Down- payment-
VA loans do not normally required a down payment. A VA loan amount is 100% of the purchase price if the purchase price does not exceed the maximum loan amount.
When does disintermediation occur?
When depositors withdraw their savings from depository institutions
FHA Section 203 k rehabilitation mortgage insurance
a portion of the loan proceeds is used to pay the seller, or if a refinance to a payoff the existing mortgage and the remaining funds are placed in an escrow account and released as rehabilitation is completed.
Straw Borrowers-
a straw borrower is either an individual whose identity is concealed knowingly or unknowingly identity theft.
*VA guaranteed loans Veterans Affairs
a veteran must serve a specified minimum amount of time to be eligible and honorably discharge.
Reverse Mortgage also called reverse equity mortgage or reverse annuity mortgage
allows a homeowner to receive a lump sum or a monthly advance on a line of credit based on the equity in their home. The lender is repaid when the property is sold, when the owner dies, or when the owner ceases to be a permanent resident.
Triggering terms
amount of down payment-express as a % or $ amount. amount of any payment-express as a % or as a $ amount. number of payments. period of payments. amount of any finance charge.
The disclosures are:
amount or percentage of down payment terms of repayment annual percentage rate.
savings association=
are charted either by the federal government or by the states in which they operate.
REIT -Real Estate Investment Trust-
are formed by private investment groups to purchase real estate for investments, and to make short-term construction loans and lone term mortgage loans.
Life insurance companies-
are organized either as stock companies owned by stockholders who pay premiums.
Commerical banks-
are stock companies that are owned by their stockholders and are chartered either by the state or by the federal government.
Life insurance companies-
are the largest source of funds for financing both apartment projects and commercial properties.
A REIT is a
business trust that operates similarly to a mutual stock fund in that individual investors make investments in the trust, thereby creating a pool of money that can be used to purchase, construct or fund its real estate ventures.
Mortgage Loan Originator- MLO
charge borrowers an application fee and often earn a finder's fee or commission for arranging loans.
Which group of financial institutions traditionally preferred to make short term loans for construction?
commercial banks
Real Estate Settlement Procedures Act -RESPA
covers most residential mortgage loans used to finance the purchase of one to four family properties. Federally regulated.
Disintermediaton occurs when-
depositors bypass traditional depository institutions and withdraw from accounts with low fixed interest rates, transferring those funds to alternative investments with higher interest rates (yields) such as the stock market, mutual funds, artwork and so on.
The rate of interest that is charged that the federal reserve to a member bank on funds loaned is called the
discount rate because the interest o the loan is deducted from the loan proceeds when the loan is originated, with the bank receiving the net difference.
*VA guaranteed loans Veterans Affairs- Eligibility-
eligibility for the mortgage loan program is shown on a certificate of eligibility that is obtained from the VA. This certificated indicates the amount of guarantee for which the veteran is eligible.
How are mortgage loan originators usually compensated for their services?
finders fee or commission
Package Mortgage -
includes both real and personal property as a security for a loan.
Mortgage Fraud
includes situations in which homebuyers and or lenders falsify information to obtain a home loan.
Home equity loans are commonly used by homeowners to finance major expenses,such as home remodeling.
interest on a home equity loan may be tax deductible.
Mortgage bankers-
is a company, individual, or institution that originates loans and earns fees associated with the origination.
Nonconforming loans-
is a loan offered to borrowers who do not qualify for conforming loans. The loan typically have higher interest rates, and may carry additional upfront fees and insurance requirements.
Home Equity Loan-
is a loan secured by the equity in the home.
Credit Unions-
is a nonprofit, cooperative financial institution owned and run by its members.
Reserve requirement-
is a percentage of the money on deposit in a bank that cannot be used for lending purposes and must be transferred to a district Federal Reserve Bank
Blanket Mortgage
is a single mortgage given to a borrower that pledges two or more parcels as security for a loan.
Mortgage Loan Originator- MLO
is an individual , who takes residential mortgage loan applications or offer or negotiates terms of a residential mortgage loan for compensation
Mortgage Broker-
is an individual who conducts loan originator activities through one or more licensed MLO's.
A purchase money mortgage -PMM-
is any mortgage loan obtained from the seller when the proceeds of the loan are used to purchase real property. Also referred to as seller financing.
Interest rate-
is determined by negotiation between the lender and the borrower.
The Federal Reserve system is a central bank established by Congress in 1913 to give the country an elastic currency, provide s system for discounting commercial paper and to improve the supervision of the banking industry.
it is made up of 12 regional banks that are managed by a board of governors.
Mortgage Loan Originator- MLO
license must be obtain from the Florida Office of Financial Regulation to engage in this business in this state.
Which of the following statements best describes the secondary mortgage market?
loans originated in the primary market are sold.
Federal Fair Housing Act-
makes discrimination in housing illegal
Interest rates for federal housing administration mortgages are determined by which of the following?
market
Mortgage Loan Originator- MLO
may negotiate the terms or conditions of a new or existing mortgage on behalf of a borrower or lender.
Trust that engage in both lending and ownership activities are called-
mixed trusts.
The action of the Boards of Governors called-
monetary policy, regulates the cost and availability of credit in the United States.
Money market-
money is bought and sold in the marketplace line any other commodity. the interest paid on borrowed money is the price of money and can be thought of as rend paid for its use.
In a process referred to as warehousing or warehousing lending-
mortgage lenders may borrow money as a line of credit from a commercial bank. These borrowed funds are used to fund additional mortgage loans that borrowers initially use to buy property.
House flipping-
most fraudulent flipping is based on appraisal fraud.
savings association=
primarily used for residential loans. Organized to assist members with the financing of residential property.
RESPA standardize real estate closings by:
prohibiting kickbacks and rebates on any transaction regulated under the provisions of RESPA. Kickbacks and rebates are allowed if a service has been provided, the recipient of the fee has any appropriate license.and all parties to the transaction have been advised of the payment.
savings association=
provide both savings accounts that are called time deposits, and negotiable order of withdraw NOW accounts that are referred to as demand accounts which are equivalent of a checking account.
No document loans-
refers to a loan in which the borrower provides very little information. No income, assests or employment information.
Which clause in a blanket mortgage allows for the release of a single parcel upon payment of a specified sum?
release clause
Truth in lending act-
requires lenders to clealy disclose the cost of a residential loan to the borrower.
*VA guaranteed loans Veterans Affairs
requires little to no down payment, and provides veterans with relatively easy qualification requirements and comparatively low rates of interest.
Biweekly mortgage-
requires that one half of the mortgage payment be paid every two weeks instead of one payment per month.
RESPA standardize real estate closings by:
requiring a mortgage servicing disclosure statement that discloses to the borrower the lender intends to service the loan or transfer it to another lender.
RESPA standardize real estate closings by:
requiring each loan applicant to be provided with the information booklet titled your home loan.
FHA Section 203 (b)-
review page 233
Intermediation is the
term used to describe the flow of deposits into lending institutions, thereby creating a mortgage money supply.
Open-Market Operations (OMOs)
the federal open market committee meets regularly throughout the year to review the state of the economy.
What will be the effect if the federal reserve board decides to purchase government securities in the open market?
the money supply will increase and interest rates will decrease
Most amortized loans are fully amortizing, which means-
the payment is sufficient to repay the interest owed and the loan amount in full over the life of the loan. Loan terms are typically 15 to 30 years .
Federal Home loan mortgage corporations or freddie mac-
the purpose was to purchase conventional loans that were originated by savings and loan associations.
savings association=
today a savings association can be organized either as a stock organization owned by stock holders or as a mutual association owned by depositors.
Federal National Mortgage Association FNMA or Fannie Mae
was originally created in 1938 as a government owned corporation for the purpose of purchasing FHA loan.
Appraisal-
must be performed by a VA approved appraiser and is required to make sure that the property meets the VA's minimum property requirements and to establish the property's value. The appraisal cost may be paid by the buyer, seller or shared.
An Arm with a rate adjustment period every 12 months is called-
one year ARM.
Term Mortgage-also called a straight-term mortgage-
provides for payments of interest only during the term of the mortgage. The principal amount borrowed is repaid in a lump sum payment called a balloon payment at the end of the term.
The date when interest rates can change in a an ARM is called the-
rate adjustment date.
The amount of time between rate adjustments dates is called the-
rate adjustment period or interval
The federal Homeowners Protection Act of 1998 -HPA-
requires automatic cancellation of PMI by the lender when the LTV ration is 78% or less of the property's original value.
There are only 3 types of mortgages?
*FHA *VA *Conventional
FHA Section 203 k rehabilitation mortgage insurance- types of eligible improvements includes;
*structual alterations and reconstrctions *modernization and improvement to the homes function *elimination of health and safety hazards *changes that improve appearance and elimation obsolescence *reconditioning or replacing plumbing; installing a well and or a septic system.
*VA guaranteed loans Veterans Affairs
A veteran surviving spouse may be eligible if the veteran was killed in action or died due to service related injuries. The spouse may also be eligible if a veteran a listed as missing in action or as a prisoner or war.
The VA maximum guarantee amount is $113,275, which is 25% of the maximum loan amount of %453,100.
Actual guarantee amounts vary as they are contingent on position and tenure of service.
Lender fees-points
As with other types of loans, points are added loan fees that are paid to the lender for a VA loan. Points raise the effective rate of the interest paid by the borrower over the life of a loan. Each point equal to 1% of the loan amount and may be paid by either buyer or seller as specified in the contract.
FHA Section 203 b-
Borrowers who have a credit score between 500-579 are required to provide a 10% down payment. Borrowers who FICO score below 500 are not eligible to FHA insured financing.
F.S. 687 limits the interest rate that may be charged for a loan. Lenders may not charge an interest rate more than 18% on loan amounts up to $500,000 or an interest rate more than 25% on loan amounts above $500,000.
Charging rates in excess of those established by statue is unlawful and referred to as usury.
FHA Section 203 b-
Closing costs associated with FHA insured mortgage loans may be rolled into the loan balance, as long as the loan to value maximum guidelines are still met. The loan plus closing costs must not exceed 96.5% of the home's appraised value or the selling price, which ever is less.
FHA Section 203 (k) rehabilitation mortgage insurance
Cooperative units are not eligible for this program.
*VA guaranteed loans Veterans Affairs
Discharge in less time than required due to service related disability automatically qualifies the veteran for benefits.
FHA Section 203 b-
Down payment requirements- FHA requires eligible borrowers to have a FICO credit score of at least 580 and to provide a down payment of at least 3.5% of the home's purchase price or appraised value, whichever is less.
*VA guaranteed loans Veterans Affairs
During the peacetime, the eligibility period is 181 days, and during periods of military conflict, 90 days.
*VA guaranteed loans Veterans Affairs
Entitlement is the amount available for use on a loan. Lenders will generally loan up to 4 times a veterans available entitlement without a down payment. provided the veteran is income and credit qualified and the property is appraises for asking price.
The four most popular loans programs under FHA insured are:
FHA Section 203(b) Mortgage insurance- this program provides basic mortgage insurance for the purchase or refinance of owner-occupied one to four family properties.
Mortgage loan terms-
FHA insured mortgage loans have a maximum term of 30 years. Loans are fixed- rate.
Prepayment-
FHA insured mortgage loans must provide the borrower with the right of prepayment without penalty.
Assumption-
FHA loan may be assumed subject to rate change. if the borrower who is assuming the loan is qualified by the lender. Only the lender, not FHA can released the original borrower from financial liability.
FHA Section 203 k rehabilitation mortgage insurance
HUD also requires that properties financed under this program meed certain basic energy efficiency and structural standards.
FHA insured mortgage loans insures the lender 100%.
In the event of default of the mortgage loan, the lender is reimbursed for losses including foreclosure cost by HUD/FHA
The interest rate of FHA insured mortgage loan is determined by negotiation between the lender and the borrower.
Interest rates are established by supply and demand in the marketplace.
*VA guaranteed loans Veterans Affairs
Interestingly, the eligibility period was set at 90 days during the Gulf War, but congress has not re-instated the 181 day requirement.
FHA Section 203 b-
Maximum loan amount. HUD limits the maximum FHA insured mortgage loan amounts, which vary by geographic location. Lower cost areas, such as Ocala and Okeechobee have lower maximum loan amounts than higher cost areas such as key west.
Lender fees points-as with other types of loans, points are additional loan fees paid to the lender of an FHA insured mortgage loan.
Points raise the effective rate of interest paid by the borrower over the life of the loan.
To offset the higher risk, and to allow conventional lenders to compete with FHA and VA loans, private mortgage insurance was developed.
Private mortgage insurance (PMI) was introduced by the mortgage guarantee insurance corporation - MGIC in 1957 and require this insurance when the loan amount exceeds 80% of the value of the property.
FHA Section 203 b-
The down payment can be from the borrower's own funds, from a non repayment gift, or a combination of the two. The lender is required to document any gift funds in a gift letter.
Prepayment-
There is no prepayment penalty on VA loans
Each point equals to 1% of the loan amount and may be paid by either the buyer or seller.
The maximum loan origination fee is 1%
Federal law requires the lender to lower the rate when the index goes down, increases are at the option of the lender.
The rates is sometimes expressed in basis of points with 100 basis points equal to 1% of interest.
AMIP- annual mortgage insurance premium-
The standard AMIP is .85% of the annual outstanding loan balance divided into 12 monthly payments. This must be paid for the life of the loan; it cannot be cancelled.
*VA guaranteed loans Veterans Affairs-funding fees
This feed is similar to an origination fee that is charged in connection with conventional mortgage loan.
FHA Section 203 k rehabilitation mortgage insurance-
This program can be also be used by homeowners to refinance an existing one to four family dwelling along with cost of rehabilitation.
FHA Section 234c Condominiums
This program insures a loan for 30 years specifically for the purchase of a single unit condominium, and a similiar to that for single family detached homes.
FHA Section 251 Adjustable Rate Mortgages
This program provides mortgages insurance on adjustable interest rate financing that is based on FHA/HUD approved market indexes.
FHA Section 203 k rehabilitation mortgage insurance
This rehabilitation loan program protects the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequately security.
Qualifying ratios:
To qualify for a VA loan, a borrower must not exceed a total obligation ration of 41%.
Some lenders qualify for self-insurance, and in the event, do not require PMI. However, they may charge the borrower a fee for this protection.
With PMI a conventional borrower my obtain a loan up to 95% of the value of the property.
FHA Section 203 (b)-
a FHA mortgage insurance premium(MIP) is required for all FHA insured mortgage loans, regardless of the down payment.
Amortized mortgage
a loan with scheduled periodic payments where the loan payments typically include a portion that applies to the interest owed and a portion that goes toward repaying the loan, called principal.
*VA guaranteed loans Veterans Affairs
guarantees permanent long term mortgage loans than originated by VA approved lenders for owner occupied residences, including condos and mobile homes that meet VA standards.
*VA guaranteed loans Veterans Affairs
if defaults occurs and a loss results from foreclosure, the borrower is responsible for loss.
FHA Section 203 k rehabilitation mortgage insurance
insured mortgage loan program enables homebuyers to finance both the purchase of a one to four family dwelling and the cost of its rehabilitation through a single long term fixed or adjustable rate mortgage.
FHA Section 203 b-
insured mortgages loans are underwritten in $50 increments.
An Arm with a rate adjustment period every 60 months
is a five year ARM.
Margin- profit-
is a percentage that is added to the index rate by the lender to cover the lender's overhead and provide a profit on the loan. The margin does not change for the life of the loan.
Adjustable rate mortgage -ARM-
is an amortized loan in which the interest rate fluctuates over the term of the loan. Payment adjustments are made at set intervals.
Teaser rate_
is an initial interest rate that is stated in the promissory note that is lower than the fully indexed rate. A teaser rate is intended to encourage mortgage loan borrowers to obtain an ARM instead of a fix-rate loan.
Conventional Mortgage loan-
is any loan that is not insured or guaranteed by an agency of the government. conventional mortgage loans made by lending institutions and private lenders are the predominant method in which single-family residences are financed.
Index-cost of business-
is foundation rate for the loan that must be published and is beyond the control of the lender. Two index rates ofter used by lenders are the weekly average yield on U.S. Treasury Securities called the one-year T-bill rate and the 11th district cost of funds tend to be less volatile, thereby resulting in less dramatic changes in the borrower's payment.
UFMIP (up-front mortgage insurance premium)
is paid at the time of closing of the loan, although all or portion of the mortgage insurance premium may be financed. The UFMIP is 1.75% of the mortgage amount in most cases. If paid in cash at closing.
A periodic cap, or periodic rate cap,-
limits how much the rate can change at any one time.
FHA Section 203 (b)- calculating the maximum loan amount
the maximum loan amount can be determined by multiplying the lesser of the purchase price or appraised value by the maximum LTV ratio.
Standard loan to value percentage-
the standard maximum loan to value (LTV) ration for an FHA insured mortgage loan is 96.5%
An Arm with a rate adjustment period every 36 months is a-
three year ARM
The word amortize comes from latin word amorte which means-
to kill.
FHA Section 203 b- qualifying income ratios
to qualify for an FHA loan a borrower must not exceed a housing expense ration of 31% and a total obligations ration of 43%
