Chapter 2 - Finance - Real Estate

quantitative easing (QE)

A monetary policy whereby the U.S. Central Bank of the United States directly influences the economy by increasing the amount of cash in circulation in order to stimulate the economy. This is done by purchasing securities and lowering interest rates significantly where traditional methods employed by the Fed are ineffective.

Treasury Notes

Department of the Treasury intermediate-term securities that run two to 10 years.

Treasury Bonds

Department of the Treasury long-term securities that run more than 10 years.

Troubled Asset Relief Program (TARP)

Establishes and manages a Treasury fund in an attempt to curb the ongoing financial crisis of 2007. Under 2008's Troubled Asset Relief Program (TARP), the Treasury was authorized to spend $700 billion to purchase assets and equity from financial institutions in trouble with a cost to the taxpayers of as much as $300 billion. That amount was reduced to $475 billion under the Dodd-Frank Act. In March 2011, the Congressional Budget Office stated that the actual expenditure would be $432 billion at a cost of $19 billion to taxpayers. The authority to make new financial commitments under TARP ended on October 3, 2010. As of October 31, 2016, cumulative collections under TARP, together with the Treasury's additional proceeds from the sale of non-TARP shares of AIG, exceed total disbursements by nearly $8 billion. The Treasury is now winding down its remaining TARP investments and is also continuing to implement TARP initiatives to help struggling homeowners avoid foreclosure.

Regulation Z

Implements the Truth in Lending Act, requiring credit institutions to inform borrowers of the true cost of obtaining credit.

Treasury Bills

Instruments for short-term borrowing by the government.

commercial paper

Mortgage loans establishing commercial property as collateral. Commercial banks operate primarily to finance personal property purchases and short-term business needs. The loans they issue are called commercial paper. The Fed operates a market for selling this paper at a discount, providing member banks with additional funds for continued lending activity. This is done at the "discount window," which is either open or closed to control the money supply. When the window is open, money is added to the system, and vice versa.

reserve requirements

Percentage of deposits the Federal Reserve requires member banks to set aside as a safety measure.

Securities

Something given, deposited, or pledged to make secure the fulfillment of an obligation, usually the repayment of a debt. Generically, mortgages, trust deeds, and other financing instruments backed by collateral pledges are termed securities for investment purposes.

open-market operations

The Fed's activities in buying and selling securities to control the money supply.

FDIC (Federal Deposit Insurance Corporation)

The Federal Deposit Insurance Corporation (FDIC) was created as an independent agency in 1933 in response to the thousands of bank failures that occurred during the Great Depression. Initially, bank deposits were insured up to $5,000 for each account. This coverage climbed steadily over the years to its present level of $250,000 per title per account. The FDIC insures all accounts in member depository institutions, both banks and savings associations (thrifts). Since the beginning of the FDIC program, no depositor has lost any money because of a bank failure.

Truth in Lending Act (TILA)

The Federal Reserve is responsible for supervising the Truth in Lending Act (TILA), Title I of the Consumer Protection Act of 1968. The Fed's board of governors was given the responsibility at that time to formulate and issue a regulation, called Regulation Z, to carry out the purposes of this act. Rulemaking authority for TILA regulations was transferred to the Consumer Financial Protection Bureau (CFPB) on July 21, 2011, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The exemption threshold was raised from $25,000 to $50,000 and is to be adjusted annually based on the percentage increase in the Consumer Price Index. The threshold, as of January 1, 2015, is $54,600 and will remain there until December 31, 2017. Each of the following three loan types is covered by the act if the loan is to be repaid in more than four installments or if a finance charge is made: Real estate loans Loans for personal, family, or household purposes Consumer loans for $50,000 or less

discount rate

The interest rate set by the Federal Reserve that member banks are charged when they borrow money through the Fed. Although discounting commercial paper may appear to have little significance for real estate finance, the process enables members to expand their lending activities. The banks actually borrow funds from their district federal reserve bank and pledge their commercial paper as collateral. In effect, the Fed charges the borrowing bank interest on its loan, interest that is considered to be the discount rate, which can also be interpreted as the cost of borrowed funds to the borrower bank. Thus, the individual bank has a basic or primary interest rate against which it can measure the interest it must charge its borrowers.

prime rate

The rate of interest charged by commercial banks to first-class-risk corporate borrowers for short-term loans. The prime rate is the basis of the whole structure of commercial interest in the United States.

Federal Funds Rate (FFR)

The rate recommended by the Federal Reserve for the member banks to charge each other on short-term loans. These rates form the basis on which the banks determine the percentage rate of interest they will charge their loan customers.

annual percentage rate (APR)

The relationship of the total finance charges associated with a loan. This must be disclosed to borrowers by lenders under the Truth in Lending Act. In the final analysis, however, Regulation Z is nothing more than a law requiring that lenders reveal total loan costs through the use of a standard measurement of interest rates, called an annual percentage rate (APR). This is not an interest rate per se, but simply a rate that will reflect the effective rate of interest on a loan. EXAMPLE - Assume a borrower needs $1,000 for one year at 8% interest. If, at the end of the year, the borrower repays the $1,000 plus the $80 interest, the annual percentage rate (APR) and the interest rate will be the same ($80 ÷ $1,000 = 8%). However, if the lender collected a $25 service charge in advance, the borrower would receive $975 instead of $1,000 and pay $105 instead of $80. The APR would be calculated as follows: $105 ÷ $975 = 10.77%.

MI, M2, M3

The three measures of the total money supply are known as the monetary aggregates of M1, M2, and M3. The M stands for money, and the numbers represent increasing levels of liquidity. M1 - The Federal Reserve's basic measure of the nation's money supply. (is money easily obtainable: cash in public hands, private checking accounts at commercial banks, credit union share accounts, and demand deposits at thrift institutions. (Sometimes a category of M0 is used to represent material currency [cash and coins]). M2 is assets that are less liquid: all of M1 plus money market funds (except those in IRAs or Keogh accounts), retirement accounts, and deposits of less than $100,000. M3 is assets that are even less liquid: all of M2 plus deposits over $100,000, money held in banks abroad, institutional money market funds (including pension fund deposits), and deposits with nonbank institutions. (The Federal Reserve no longer makes data on M3 available to the public.)