4REF/REIT/BOND/Mutual saving/ primary secondary market/ CMOS/ REMIC/ CMO/GSE/QM/FANNIE MAE/ FREDDIE MAC/ GINNIE MAE/ FHLB/

So it's possible that a married couple could receive up to __________ ($15,000 per child per parent) to secure a real estate transaction.

$120,000

OTHER BONDS

--General obligation

Corporate Bonds

--Secured --Coupon --Debenture --Registered

Municipal Bonds

--Zero coupon --Industrial development --Revenue

CMO and Market Conditions Before the Tumble

-Home prices were rising. Loan originators used loose qualifying standards. Private companies issued more and more CMOs.

QM Facts

1.Qualified mortgages are safer for consumers. 2.Qualified mortgages can't have risky or confusing features, or any surprises for consumers. 3.Consumers should be able to repay a qualified mortgage. 4.Consumers have more communication from lenders when they fall behind on their payments. 5.Loan term of 30 years or fewer 6.Points and fees equal to or less than 3% of the loan amount 7. cannot be Negative amortization loan

Real Estate Mortgage Investment Conduit (REMIC)

A REMIC is a collateralized mortgage obligation (CMO) disguised as an entity or company. Some REMICs were created as a result of the Tax Reform Act of 1986. Given certain requirements are met, an election can be made with the IRS to create a REMIC. Most CMOs are REMICs because of the tax benefits a REMIC offers, mainly avoiding double taxation of income. As a result, from a federal income tax perspective, the REMIC is treated as a partnership. Income received by the REMIC is not taxed at the company level. Instead, after the income is passed through to investors, it becomes taxable. Here's the difference in taxation between a REMIC and CMO: remic --Income passes through REMIC to investors --Income taxed at investor level cmo --Income is received by the CMO, taxed, then passed to investors --Income is received by the CMO, taxed, then passed to investors

false

A REMIC is treated as a corporation for federal income tax purposes.

What is a collateralized mortgage obligation?

A debt security holder

What is a government-sponsored enterprise?

A private company the U.S. Congress created to make certain borrowing easier and cheaper

Tranches

A slice of a CMO that has specific rules for distributing income received from the collateral

Why Sell to Fannie Mae?

Access to additional mortgage credit For the collection fees

PRIMARY Market

Bank Investors Thrift Credit union Mortgage co.

Fannie Mae

Buys conventional loans, mainly from large commercial banks

Freddie Mac

Buys conventional loans, mainly from small banks or thrifts

COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs)

CMO issuer purchases MBSs and/or individual mortgages to use as collateral Issuer organizes this collateral into different security classes or tranches贷款 that make up the CMO. Each tranche has specific rules for distributing income received from the collateral, and has differing balances, maturities, and risks. Investors buy into specific tranches of the CMO. Interest payments from the underlying collateral are paid to each tranche. Principal payments from the underlying collateral are paid to the first tranche only, until it retires (usually two to three years). After the first tranche retires, principal payments are paid to the second tranche until it retires (usually five to seven years). After the second tranche retires, principal payments are paid to the third tranche until it retires (usually 10-12 years).

TRUE

Corporate bonds are credit instruments used to raise funds.

Equity REIT

Equity REITs invest in real estate. Equity REITs get their income from property when it is sold or rented.

Advances funds to member banks

Federal Home Loan Bank

Federal Home Loan Bank (FHLB) and the Secondary Market

Federal Home Loan Bank (FHLB) is cooperative banking system and a government-sponsored enterprise regulated by the Federal Housing Finance Agency (FHFA). It was created by the Federal Home Loan Bank Act of 1932 for the purpose of increasing the amount of funds available for lending institutions who provide mortgages to individuals. Its current mission focuses on increasing loanable funds for affordable housing and community development projects. FHLB lends money (called advances) to its member banks in exchange for collateral (usually mortgages), providing funds for those banks to make more loans in their communities. Advances from the FHLB are usually made at rates that are lower than competitive commercial loans.

Fannie Mae considers total debt-to-income as well as the housing debt-to-income ratios for borrowers.

Freddie Mac focuses on total debt-to-income.+ Purpose of loan

qualified mortgge

General Qualified Mortgage = Loan that meets all the requirements set and has a debt-to-income ratio of 43% or less. Small Creditor Qualified Mortgage = Loan that meets all the requirements and is originated by a lender that makes 500 or fewer mortgages annually and has $2 billion or less in assets. GSE-eligible Qualified Mortgage = Loan that meets all the requirements and can be purchased, insured, or guaranteed by a GSE, FHA, VA, or USDA.

Ginnie Mae

Guarantees MBSs that contain loans issued or guaranteed by a U.S. Government agency

What activity does Ginnie Mae perform?

Guarantees MBSs with the full faith and credit of the U.S.

Hybrid REIT

Hybrid REITs combine equity and mortgage REITs. Hybrid REITs get their income from property sales, rent, and interest earned from mortgages and mortgage- backed securities.

Fourth

Investors purchase shares of the MBS

first

Loans are issued on the primary market, then sold on the secondary market. The institution that purchases the loan combines it with other loans into an MBS that it sells to investors.

Third

Loans are packaged into a mortgage-backed security

CONFORMING LOANS

Meet all qualifying guidelines set by Fannie Mae and Freddie Mac, which include: • Loan amount • Down payment requirements • Loan-to-Value (LTVR) ratio • Housing-debt-to-income and/or total debt-to-income ratios

Fifth

Money received from investors is used to purchase additional loans

Mortgage REIT

Mortgage REITs lend money for mortgages. They also invest in mortgages, as well as mortgagebacked securities. Mortgage REITs get their income from interest earned from investments.

A qualified mortgage is ______.

One that meets certain lending standards

What term does Freddie Mac use to describe its MBS product?

Participation certificate (PC)

Private lenders

Private lenders include large national companies, regional providers, local offices, and individual entrepreneurs. Private lenders issue junior financing most of the time, which is a smaller loan amount, due in a shorter amount of time, with collateral as backing. Private loan companies take a risk by covering riskier loans that commercial banks won't touch. To compensate for that risk, private loan companies charge higher fees and interest to the borrower. Despite the higher cost to the borrower, private loan companies play an important part of the mortgage lending process, since they help those who need just a little extra funding to meet their goal of property ownership

Who does Farmer Mac serve directly?

Rural lenders

More than 70% of the assets of mutual savings banks are derived from ______.

Savings accounts

Second

Secondary mortgage market institution purchases the loan

true

Sellers have the option to go to a bank and get a loan for a buyer, or to provide a loan to them directly.

What is the most common structure for a CMO?

Sequential pay

______ sets conforming loan limits for mortgages.

The Federal Home Financing Agency

What role did CMOs play in the financial crisis of 2007?

They increased market speculation. CMOs were an investment vehicle that at that time was highly speculative, given the number of subprime mortgages involved.

How Do Private Loan Companies Protect Themselves?

They may charge up to the maximum allowable interest for the loan. They may put a lien on the property for which the loan is being taken. They may require collateral to secure the loan. They may charge higher loan fees.

Limitations are set by the bank's charter.

They prefer to keep their business nearby, so they can monitor loans more efficiently.

issue loans for U.S. real estate purchases,

U.K, Canada, and China, Mexico.

Mortgage revenue bonds

are a variety of industrial development bond. After bonds are sold, their value goes up and down with the market. Municipal bonds are used to pay for community improvements. Bonds issued against a company's general assets are called ventures.

Foreign buyers did purchase a significant amount of property

but it was just 4% of the total home sales in 2017.

FHFA took over management and power from the boards.

false: The Fannie Mae and Freddie Mac boards of directors continued to manage the institutions

Ginnie Mae is government agency

not gses

How does Farmer Mac meet its goal of making credit available in rural communities?

purchasing loans issued by agricultural and rural lenders

PERCENTAGE https://www.fanniemae.com/content/eligibility_information/eligibility-matrix.pdf

single unit principal residence using a fixed-rate mortgage. His loan may be eligible for Fannie Mae purchase if the LTV ratio is no greater than 97%. fixed-rate mortgage, but to purchase a second home that she'll use for weekend and vacation getaways. This loan may be eligible for purchase if the LTV is lower than 90%. adjustable rate mortgage to purchase a duplex that will be used as an investment property. The LTV for this loan must be no more than 75% for it to remain eligible for Fannie Mae purchase.

Money to issue more loans helps keep:

• Credit flowing • Cost of borrowing DOWN • Ease of borrowing UP

How Bonds Work

two primary bond types are municipal and corporate. Investors may use bonds in real estate financing: --As collateral for a loan --By issuing bonds, through an investment company, in order to gain cash for an investment Investors may also choose to invest in a bond that's used to finance a real estate development project. Municipal Bonds --Municipal bonds are bonds issued by a city, county, or state to fund government projects, such as road improvements, school renovations, and other infrastructure projects. Municipal bonds are considered a debt instrument, because when an investor purchases a bond, it's essentially a loan to the authority that issued the bond, for which the authority promises to pay interest. This interest is called the "coupon rate" because, back in the day, an actual coupon was attached to the bond certificate. Investors used the coupon when they wanted to collect the interest. Interest paid out is almost always exempt from taxes at the local, state, and federal level. At the bond's maturity, the face value of the bond is then repaid to the investor. Because the bonds are low risk (being backed by the municipality that issued them), they generally pay a correspondingly low interest rate. Some municipal bonds are "callable," meaning the issuing authority may pay them off early. When this happens, it reduces the amount of interest rate the investor will earn. Corporate Bonds --Corporate bonds, which may be either secured or unsecured, are typically issued when a business needs ready cash for capital improvements, development, or expansion. Similar to municipal bonds, the bonds are issued at face value and earn interest over the holding period, after which the investor receives the face value of the bond. "Coupon rate" is also the term for interest in corporate bonds. Secured Corporate Bonds Secured bonds are backed by a corporate asset, which provides collateral that the bond purchasers can make a claim against in the event of a default. Mortgage bonds are secured by a lien on the property owned by the issuing corporation. Collateral trust bonds are secured by the corporation's investments in other entities, i.e., stocks and bonds in other companies. Because secured corporate bonds aren't backed by a governmental entity, they usually pay a higher yield than municipal bonds do. Also, corporate bonds don't offer the same tax advantages as municipal bonds, so the interest paid is taxable. Unsecured Corporate Bonds --Unsecured corporate bonds, also called debentures, aren't backed by specific collateral, but by the credit of the issuer. With their higher risk, investors usually realize a higher yield than with secured corporate bonds. And Coupon Bonds --Coupon bonds, aka bearer bonds, aren't as popular as they once were, and you'll soon see why. They're so named because "coupon" originally referred to an actual physical coupon that was detachable from the bond certificate itself. Since these types of bonds aren't registered, ownership was proven by possession of the bond certificate and coupon. As stated above, when the bond holder wanted to collect the interest payment, the coupon was removed and presented to the bond issuer. Although some bearer bonds are still around, they've been phased out for two reasons. The first reason is obvious: If the bond certificate is lost, it's impossible to recoup one's investment. The second reason is because they're not registered, bearer bonds were a great place for the notorious and nefarious to launder their funds.

types that may be eligible for purchase by Fannie Mae.

Adjustable-rate mortgages Fixed-rate mortgages Renovation loans Refinancing loans

MORTGAGE-BACKED SECURITIES (MBSs)

Banks sell issued mortgages on the secondary market Secondary market institution groups these mortgages into a mortgage-backed security and sells shares of this security to investors Money received from investors is used by secondary market institutions to purchase additional loans Principal and interest payments 2 filter through from borrower to bank to MBS to investors (minus fees along the way

After Home Prices Fell

CMOs were no longer receiving payments from the underlying mortgages because many borrowers were in foreclosure.

According to the National Association of REALTORS®, the majority of foreign investors in U.S. real estate are ______.

Chinese

NON-CONFORMING LOANS

Don't meet all qualifying guidelines set by Fannie Mae and Freddie Mac. Frequently are "jumbo loans," above the loan limit for government-backed loans.

true

Each tranche has specific rules for distributing income received from the collateral, and has differing balances, maturities, and risks.

SECONDARY MORTGAGE MARKET

Fannie Mae Freddie Mac Ginnie Mae Farmer Mac Fed Home Loan Bank Investment banks REMICs Loans are packaged into Mortgage-Backed Securities (MBSs) to sell to investment banks and Real Estate Mortgage Investment Conduits (REMICs).

Fannie Mae

Established as the Federal National Mortgage Association (FNMA) in 1938, Fannie Mae is a GSE regulated by the FHFA. Fannie Mae's goal is to help expand consumer access to mortgage credit, and the way it meets that goal has evolved over time. 1938: Began by purchasing FHA-insured loans. 1944: Began purchasing VA-guaranteed loans as well. 1970: Emergency Home Finance Act expanded Fannie Mae's buying options to include conventional loans. By purchasing loans (primarily from commercial banks), Fannie Mae provides lenders with additional capital to continue making loans. It also pays a collection fee to these lenders when the loan is purchased. These fees, as well as loan origination fees collected when issuing the loans, provide lenders with income. The more loans a lender originates and sells to Fannie Mae, the more income the lender can generate. So, what does Fannie Mae do after purchasing the loans? It packages them into mortgage-backed securities, which are then sold on the open market.

true

A REMIC is treated as a partnership for federal income tax purposes.

Who's Investing?

Chinese investors were the largest investors in U.S. real estate in 2017. Fifty percent of foreign real estate sales in 2017 were in just five states.

When Fannie Mae purchases the loan, what will Synergy National Bank receive in return?

Collection fee

Qualified mortgage requirements are set by the ______.

Consumer Financial Protection Bureau

FALSE

Corporate bonds are credit instruments used to secure commitments for future investment.

Fannie Mae packages the loans they purchase into mortgage-backed securities.

Fannie Mae also purchases conventional loans.FHA-insured and VA-guaranteed loans.

When establishing guidelines for conforming loans, Fannie Mae and Freddie Mac use loan limits set by which entity?

Federal Home Financing Agency

Government-Sponsored Enterprises (GSEs)

GSEs are private companies such as Fannie Mae, Freddie Mac, and the Federal Home Loan Bank, created by the U.S. Congress to make borrowing easier and more cost effective. Commonly, GSEs serve homeowners, farmers, and students. GSEs are not government entities, but are backed by the U.S. government. How would you like to be a GSE? Just look at the perks GSEs receive: They have a line of credit with the U.S. Treasury. They don't have to register their securities with the Securities and Exchange Commission (as MBS issuers do). They're not required to pay local or state corporate income taxes (as other private corporations do). GSEs are regulated by the Federal Housing Finance Agency (FHFA) and play an integral role in providing capital to lenders in the housing market by making borrowing easier and more cost effective.

individual Financiers

Many times, a buyer is unable to secure enough financing to close on the purchase of a home. In these cases, individual financiers may help. Sellers Sometimes the seller will provide financing for a portion of the purchase price. The seller may use junior loans, contract-for-deed, and other creative financing methods to cover a portion of the purchase price and help the buyer complete the transaction. It's crucial that the buyer disclose to the lender the source of any financing beyond the actual mortgage loan. Buyers Some buyers get help from family members to purchase real estate. Under 2018 tax laws, individuals may give up to $15,000 tax-free to any individual annually. If all four parents of a couple contribute the maximum to each borrower (in this case, the couple), that's $120,000 in private financing assistance ($15,000 from each of four parents to both borrowers). Remember, this can't be a loan (because then it must be calculated in the debt-to-income ratio). It must be given and treated as a gift.

Which of these might you find in a CMO?

Mortgages Mortgage-backed securities

Identify whether these items are criteria Fannie Mae uses in their underwriting process.

Property type Type of dwelling

Checklist for REIT

Structured as a trust, association, or corporation Taxable as a corporation Owned by at least 100 people Not an insurance company Not a financial institution No more than 20% invested in taxable REIT subsidiaries Managed by a board of directors At least 95% of income is from property income or interest dividends Issues transferable certificates of interest or shares During the last half of any year, no more than 50% of shares owned by five or fewer people (known as the 5/50 rule) Minimum 90% of taxable income distributed to shareholders annually (dividends) Minimum 75% of total assets invested in real estate Minimum 75% of income from real estate investments

Farmer Mac

The Federal Agricultural Mortgage Company (FAMC) was created in the late 1980s and is familiarly called Farmer Mac. Through community lenders, Farmer Mac makes long-term credit available to homeowners and businesses in agricultural and rural communities, including farmers and ranchers. Farmer Mac acts as a secondary market player by buying qualified agricultural loans from lenders. This provides funds for agricultural and rural lenders to keep making loans in their rural communities.

Federal Housing Finance Agency

The Federal Housing Finance Agency (FHFA) was created in 2008 in response to the 2007 financial crisis. Its creation was the result of a statutory merger of the Federal Housing Finance Board (FHFB), the Office of Federal Housing Enterprise Oversight, and the government-sponsored enterprise mission team from the U.S. Department of Housing and Urban Development. It established conservatorship over Fannie Mae and Freddie Mac, taking over both management and power from their boards of directors, and also regulates the 12 Federal Home Loan Banks. To keep them afloat after their severe losses from MSBs and other debt obligation instruments, the U.S. Treasury bought stock in both Fannie Mae and Freddie Mac. Next, the FHFA sued other financial institutions to recover some of those losses, claiming that the institutions had improperly represented the quality of the MSBs sold. In addition to its oversight and cleanup responsibilities, FHFA sets: Limits for conforming loans Percentage targets for loans made to low- and moderate-income borrowers

​CONFORMING LOAN LIMITS

The national conforming loan limit for mortgages that finance single-family one-unit properties increased from $33,000 in the early 1970s to $417,000 for 2006-2008, with limits 50 percent higher for four statutorily-designated high cost areas: Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Since 2008, various legislative acts increased the loan limits in certain high-cost areas in the United States. While some of the legislative initiatives established temporary limits for loans originated in select time periods, a permanent formula was established under the Housing and Economic Recovery Act of 2008 (HERA). The 2018 loan limits have been set under the HERA formula.

Area of Focus

Fannie Mae: Can purchase any type of loan, but primarily deals with conventional loans from commercial banks Freddie Mac: Can purchase any type of loan, but primarily deals with conventional loans from thrifts Ginnie Mae: Guarantees MBSs that contain loans insured or guaranteed by a U.S. government agency Farmer Mac: Purchases agricultural loans and loans from rural lenders Federal Home Loan Bank (FHLB): Advances (or loans) its member banks money in exchange for collateral (usually mortgages)

FHFA Regulation

Federal Home Loan Bank Freddie Mac Fannie Mae

Ginnie Mae only guarantees MBSs that hold certain types of loans.

Federal Housing Agency (FHA)-insured loans HUD's Office of Public and Indian Housing issued loans Loans originated by the Department of Agriculture's Rural Housing Service (RHS) Loans guaranteed by the Department of Veterans Affairs (VA)

Freddie Mac

Freddie Mac was created as the Federal Home Loan Mortgage Corporation (FHLMC) in 1970 with a stated mission to "provide liquidity, stability and affordability to the U.S. housing market." regulated by the Federal Housing Finance Agency, does not issue loans. Freddie Mac purchases conventional mortgages from thrifts and mortgage-related securities, and then packages these into mortgage backed-securities they call participation certificates (PCs). PCs are sold to investors. The money received from investors provides capital for Freddie Mac to purchase additional loans from originators. Originators receive money from Freddie Mac and can continue to make loans in their communities. Freddie Mac purchases loans that conform to its underwriting standards, which largely mirror Fannie Mae guidelines. These include items such as: Property type: Primary residence that is a single family home, condo, or manufactured home, or residential properties with up to four units, a single-unit second home, or residential investment properties Loan-to-value ratio (LTVR): Varies depending on product Amortization type: Fixed or adjustable rate Purpose of loan: Purchase or refinance Loan term: 15, 20, 30, or 40 years Down payment: Varies depending on product Borrower credit score Lenders can enter information about the loan, property, and borrower on Freddie Mac's automated underwriting system, Loan Prospector®. A primary difference between the underwriting guidelines used by Freddie Mac and Fannie Mae relates to debt to income ratios. Fannie Mae considers total debt-to-income as well as the housing debt-to-income ratios for borrowers. Freddie Mac focuses on total debt-to-income.

Ginnie Mae

Ginnie Mae was created as the Government National Mortgage Corporation in 1968 under the Department of Housing and Urban Development (HUD). Ginnie Mae's stated mission is to "help make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets." Specifically, the Ginnie Mae guaranty allows mortgage lenders to obtain a better price for their mortgage loans in the secondary mortgage market. The lenders can then use the proceeds to make new mortgage loans available. Ginnie Mae functions a bit differently in the secondary market than Fannie Mae and Freddie Mac. For instance, it doesn't buy loans or issue mortgage-backed securities. Instead, Ginnie Mae explicitly guarantees certain MBSs with the "full faith and credit of the United States." This guarantee makes these MBSs a very safe investment, and assures investors that they'll receive timely principal and interest payments from the MBS. Ginnie Mae doesn't guarantee all MBS products, however. It only guarantees MBSs that contain loans insured or guaranteed by a U.S. government agency, including the Federal Housing Agency (FHA), Department of Veterans Affairs (VA), Department of Agriculture's Rural Housing Service, and HUD's Office of Public and Indian Housing. Securities guaranteed by Ginnie Mae include: -Single class securities, which are MBSs called Ginnie Mae I and Ginnie Mae II. Investors in these products receive principal and interest payments pro rata (based on how many shares of the MBS they own). -Multiple class securities, such as: Platinum, which combines Ginnie Mae I and Ginnie Mae II, allowing investors who own shares of both to receive a single payment -Real Estate Mortgage Investment Conduits, which pay investors according to the class or tranche they're invested in, rather than pro rata.

Who Sees the Money?

Loan servicer MBS issuer MBS investor

Mutual Savings Banks: Quick Facts

Mutual savings banks are primarily concentrated along the East Coast and were created to serve workers during the industrial expansion of the mid-19th century. With an organization similar to credit unions, depositors in mutual savings banks are owners, and the boards of directors are made up of local business people. Mutual savings banks have individual charters that vary from state to state and set limitations on lending activities, such as property types and the percentage of funds that may be used. Investments made by mutual savings banks are on the conservative side. Funds from those investments help finance long-term real estate loans backed by mortgages. More than 70% of the assets of a mutual savings bank come from savings accounts. These banks prefer to keep mortgage lending local so they can closely monitor the loans. When a mutual savings bank invests outside of its geographic area, it's by necessity, and mostly occurs when working with mortgage bankers. In spite of the limits imposed by geography and custom (mostly residential deals), mutual savings banks provide important funding for real estate loans in their local markets.

CMOs and the 2007 Financial Crisis

Prior to the 2007 subprime mortgage crisis, housing prices were rising rapidly and investors couldn't lose. Rampant speculation swept the market. However, not everyone wanted to manage rentals or other investment properties. Where there's a market, a service or product will arise to meet it. Soon, private companies began offering CMOs. Many CMOs included adjustable-rate mortgages, subprime loans, and other high-risk loans, however in the "can't lose" environment that was the early 2000s, investors were more interested in potential returns than in the quality or health of the underlying mortgages. Many investors flocked to CMOs issued by private companies who had less stringent underwriting standards than those required by Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac saw their market share declining so they also started purchasing these CMOs (which included subprime loans). All of this would have been fine if housing prices could've continued their upward trajectory. But that didn't happen. Home prices began to fall. Borrowers couldn't refinance because their loan balances now exceeded the value of the collateral—their homes. Borrowers began missing mortgage payments and foreclosure rates increased. CMOs weren't collecting the expected principal and interest payments due to the increase in foreclosures for their underlying collateral. Subprime lenders started going out of business, and even Fannie Mae and Freddie Mac suffered and were eventually placed under the conservatorship of the Federal Housing Finance Agency, which focused on stabilizing operations and preventing more foreclosures.