Fl. Real Estate Unit 13

Adjustable Rate Mortgage (ARM)

A loan characterized by a fluctuating interest rate, usually one tied to a bank or savings and loan association cost-of-funds index.

Required Credit Costs Disclosures Under TILA

A major accomplishment of the TILA was to establish the requirement to disclose the annual percentage rate (APR). The APR presents the annual cost of credit expressed as a rate. TILA also required disclosure of other facts about the full cost of the credit, including the total cost of the loan, the amount financed, and the total of payments.

VA guidelines recommend a total housing expense ratio (HER) not exceeding 28%.

False The VA does not use a housing expense ratio. FHA requirements allow up to 31% for the housing expense ratio.

Kickbacks, Fee-Splitting, and Unearned Fees Real Estate Settlement Procedures Act (RESPA)

It is illegal under RESPA for anyone to pay or receive a fee, kickback, or anything of value in exchange for referring a settlement service business to a particular person or organization. For example, a mortgage lender may not pay a real estate broker a fee for referring a buyer to the lender. It is also illegal for anyone to accept a fee or part of a fee for services if that person has not actually performed settlement services for the fee. For example, a lender may not add to a third party's fee, such as an appraisal fee, and keep the difference. RESPA does not prevent title companies, mortgage loan originators, appraisers, attorneys, closing agents, and others who actually perform a service in connection with the mortgage loan or the closing from being paid for the reasonable value of their work.

Closing Disclosure

Lenders are required to provide borrowers with a written Closing Disclosure at least three business days before closing the loan. The Closing Disclosure replaced the TILA's final Truth-in-Lending Disclosure and the HUD-1 Settlement Statement.

Qualifying Ratios

Lenders qualify applicants for a mortgage loan by reviewing how much debt the applicant has in relation to how much income the applicant earns. Lenders review the applicant's total monthly expenses in relation to the applicant's monthly gross income to determine what is called qualifying ratios. Qualifying ratios are important because borrowers who have high debt compared to gross income may run into trouble paying the mortgage payments if something unexpected should occur.

Adjustment Interval

On an adjustable rate mortgage, the time between changes in the interest rate and/or monthly payment, typically one, three or five years depending on the index.

Partially Amortized Mortgage

Purpose-Specific Mortgage Products (cont.) Partially Amortized Mortgage Loan Recall that an amortized mortgage consists of a series of fixed, equal monthly payments and at the end of the loan term the loan is completely paid off. With a partially amortized mortgage (also called a balloon mortgage), the monthly payments are calculated for a 20-year or 30-year loan term; however, the payments are paid for a shorter period of time, such as five years. By amortizing the loan over 20 or 30 years, the fixed, monthly payments are smaller than if the loan were amortized over a five-year term. At the end of the stipulated period (in this example, five years), the remaining unpaid loan balance is due. A single large final payment (called a balloon payment) becomes due on the loan maturity date. In Florida, a partially amortized mortgage must be clearly identified as such on the face of the mortgage, with the amount of the final balloon payment disclosed.

Escrow for Taxes and Insurance Real Estate Settlement Procedures Act (RESPA)

RESPA limits the amount that lenders can require borrowers to place in escrow for property taxes and hazard insurance. The lender must perform an annual escrow account analysis. An excess of $50 or more must be returned to the borrower.

Teaser Rate

Sometimes a lender will offer borrowers an initial below-market interest rate called a teaser rate. The low rate is usually offered for the first year of the loan, with a sharp annual rate increase at the next rate-adjustment period to bring the loan in line with the agreed-upon index.

Affiliated Business Relationships Real Estate Settlement Procedures Act (RESPA)

Sometimes, several businesses that offer settlement (closing) services are owned or controlled by a common corporate parent. These businesses are called affiliates. When a lender, real estate broker, or other closing participant refers a borrower to an affiliate for a settlement service (for example, when a real estate broker refers a buyer to a mortgage broker affiliate), RESPA requires the referring party to give the borrower an affiliated business arrangement (AfBA) disclosure. This form explains to borrowers that they are not required, with certain exceptions, to use the affiliate and are free to shop for other providers. The AfBA must include an estimate of the affiliated business provider's charges. Except in cases where a lender refers a borrower to an attorney, credit reporting agency, or real estate appraiser to represent the lender's interest in the transaction, the referring party may not require the consumer to use the affiliated business.

VA Mortgage Loan Qualifying Ratio

To qualify loan applicants, the VA guidelines recommend a total obligations ratio (TOR) not to exceed 41% of the total monthly gross income

A conventional loan is one that is NOT insured or guaranteed by a government agency.

True. Conventional loans carry no government guarantee or government insurance for the lender if the borrower fails to repay the loan.

In times of rising interest rates, including a payment cap in an adjustable-rate mortgage reduces the amount of interest the borrower will pay over the life of the loan.

false. If interest rates rise sharply, but the payments do not because of a payment cap, the unpaid interest is added to the loan balance.

A reverse mortgage loan insured by the federal government is called a package mortgage.

false. The only reverse mortgage insured by the federal government is called a Home Equity Conversion Mortgage (HECM).

A commercial bank sold a group of 2,000 mortgages directly to Fannie Mae. This is an example of

secondary market activity.

Real estate licensees should recognize potential red flags, such as a sale contract that states "owner of record" in the place where the seller's name is indicated

true. Licensees should be aware of red flags that indicate possible fraudulent activity. For example, if a sale contract states "owner of record" rather than identify the seller's name, it should be a red flag to the selling real estate agent that a property flip might be occurring.

Monetary policy refers to the actions taken by the Federal Reserve to influence the availability and cost of credit.

true. Monetary policy refers to the actions undertaken by the Fed to influence the availability and cost of money and credit to promote national economic goals.

Qualifying Ratios Lenders consider two qualifying ratios when borrowers apply for a conventional mortgage.

1. The housing expense ratio (HER) is calculated by taking the borrower's expected monthly housing expenses divided by monthly gross income. Housing expenses include principal, interest, property taxes, and hazard insurance (PITI) plus the monthly private mortgage insurance premium (PMI) for mortgage loans greater than 80% LTV. Homeowners association fees, condominium fees, and flood insurance, if applicable, are also considered housing expenses (see the following formula). The recommended HER for a conventional mortgage loan is 28%. Formula: Housing Expense Ratio (HER) monthly PITI + PMI ÷ monthly gross income = HER To determine the couple's HER, determine the total monthly housing expenses: $1,420 PITI + $96 PMI = $1,516 total monthly housing expense Next, divide the total monthly housing expenses by the monthly gross income: $1,516 ÷ $6,737 monthly gross income = .2250 or 22.5% HER 2. The total obligations ratio (TOR) is a measure of a borrower's total monthly installment debt divided by monthly gross income. Monthly installment debt includes the expenses that appear on the borrower's credit report, such as credit card payments, auto payments, student loan payments, and child support payments, referred to as long-term obligations (LTO). The monthly installment debt also includes the monthly housing expense used in the HER (see the following formula). The recommended TOR for a conventional mortgage is 36%. Formula: Total Obligations Ratio (TOR) (PITI + PMI + LTO) ÷ monthly gross income = TOR To determine the couple's TOR, determine the total monthly obligations: PITI + PMI + LTO = $1,516 + $460 car + $200 loan + $150 credit = $2,326 Next, divide the total monthly obligations by the monthly gross income: $2,326 total monthly obligations ÷ $6,737 = .3452 or 34.5%

Amortized Mortgage

A loan characterized by payment of a debt by regular installment payments. consists of a series of fixed, equal monthly payments over the loan term. Typical mortgage loan terms are 15-year and 30-year terms. At the end of the loan term, the loan is completely paid off. For example, a loan with a 30-year term will be paid in full in exactly 30 years (360 monthly payments). The monthly payments are constant (same monthly payment) each month for the loan term. Fixed-rate amortized mortgages are sometimes referred to as level-payment plan mortgages because the borrower pays the same mortgage payment each month.

Level-payment Plan

A method for amortizing a mortgage whereby the borrower pays the same amount each month.

Federal Regulatory Bodies and Mortgage Fraud Using a Straw Buyer

A straw buyer is someone whose credit is used to purchase a property and secure financing but who isn't actually going to own the property. Straw buyers never intend to live on the property and only lend their credit information for a fee. At other times, the straw buyer is a victim of identity theft. The victim's credit profile is stolen and used as a straw buyer. The true buyer cannot qualify for the mortgage, so someone (a straw buyer with better credit) fraudulently applies for the mortgage. The true buyer is deceiving the lender for the purpose of getting a better loan than the buyer would be able to obtain if the loan application contained accurate financial information.

Interest Rate Caps

ARMs typically include rate caps to limit how much the interest rate may change per adjustment. Most ARMs have two types of rate caps—periodic cap and lifetime cap A periodic cap limits the amount the interest rate may increase at any one time, usually a year. For example, the interest rate may be capped to not increase more than 2% during an annual adjustment interval. ARMs typically also feature a lifetime cap that caps the total amount the interest rate may increase over the life of the loan. For example, the loan might have a lifetime cap or ceiling of 6% over the life of the loan.

Mortgage Amortization Table

An amortization table is a spreadsheet that lists each monthly payment for the entire loan term. An amortization schedule allocates each monthly payment into two components: 1. Interest paid. A portion of each monthly payment is applied to interest. Interest is the amount the lender gets paid for making the loan to the borrower. The amount of the mortgage payment allocated to interest is the largest portion of the monthly payment in the early years of the loan term. 2. Principal paid. After the interest charges are allocated, the remainder of the monthly payment is applied to paying off the loan. This portion of the monthly payment is called principal. As the loan balance is gradually paid off, the amount allocated to interest gradually decreases, and the amount allocated to principal gradually increases.

Federal Regulatory Bodies and Mortgage Fraud Red Flags

Another type of mortgage fraud involves inflating the appraised value of property for the purpose of obtaining more financing. Unscrupulous appraisers altered or fabricated information and/or used inappropriate comparable sales. Some cases of fraud involved using fake photos of the property under contract to substantiate a higher value. In other situations, real estate licensees entered inaccurate data into the MLS database. The appraiser did not verify the information (as required) through another independent source.

Right of Rescission

Consumers who are refinancing residential mortgage loans have the right of rescission, which is a cooling-off period of three business days during which they may cancel the loan without losing any money. The right of rescission applies to most consumer loans but does not apply to loans to purchase or construct a home. The three-business-day right of rescission applies to: home equity lines of credit, second mortgages, and refinance loans.

Mortgage loans can be grouped into two general categories

Conventional loans carry no government guarantee or government insurance for the lender if the borrower fails to repay the loan. The lender assumes the full risk of default in a conventional loan. To offset the lender's risk, borrowers are sometimes required to purchase insurance to protect the lender against the borrower's default. Qualifying for a conventional loan is generally more difficult than qualifying for a loan that is guaranteed or insured by a government agency. Nonconventional loans are backed by the federal government. Nonconventional loans include FHA-insured and VA-guaranteed loans. Nonconventional loans offer more flexible options for borrowers.

Qualifying for a Conventional Mortgage Loan

Conventional loans have more stringent qualifying requirements compared with nonconventional loans. To qualify for a conventional loan, the borrower must have a good to excellent credit score and meet certain income requirements, work history, down payment, and qualifying ratios. These qualifying requirements are established by Fannie Mae and Freddie Mac guidelines

Home Equity Loan

Credit line offered by mortgage lenders that allows a homeowner to borrow money against the equity in their home.

Which individual must be state licensed as a mortgage loan originator?

Employee who works as a loan originator for a mortgage brokerage company that is not federally regulated

FHA and VA Comparison

FHA Loan Role of government Fully government insured; does not originate loans VA Loan Partial government guarantee; can make direct loans if needed FHA Loan Down payment 3.5% minimum investment VA Loan 0% Fees FHA Loan UFMIP and MIP VA Loan Funding fee Loan limit FHA Loan Set by market area VA Loan No established loan limit FHA Loan AssumableYes VA Loan Yes FHA Loan Due-on-sale clauseNo VA Loan No

Which set of qualifying ratios applies to FHA mortgage loans?

FHA lenders require a housing expense ratio (HER) of no more than 31% and a total obligations ratio (TOR) of no more than 43%.

Ginnie Mae purchases existing conventional mortgage loans.

False. Ginnie exists to solely guarantee the security of federally insured loans and federally guaranteed loans. Ginnie, unlike Fannie and Freddie, does not purchase mortgage loans from lenders.

Private mortgage insurance is required for conventional mortgages with a loan-to-value ratio (LTV) greater than 20%.

False. Private mortgage insurance (PMI) is required for conventional loans that have anLTV ratio greater than 80% (the down payment is less than 20%).

When applying for a conventional mortgage loan, the appraiser determines whether the structure meets certain required minimum standards.

False. The lender orders a property appraisal of the property that will be pledged as collateral for the loan. The appraiser estimates the property's value. In the case of FHA and VA, the appraiser also determines if the overall condition of the structure meets the required minimum FHA and VA standards.

The monthly payment shown on an amortization table consists of principal, interest, taxes, and insurance (PITI).

False. There are two components of the monthly mortgage payment: principal and interest, referred to as PI. Because property taxes and hazard insurance are not part of the loan repayment, they are not included in the amortization table.

Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac are not government agencies. They are known as government sponsored enterprises (GSEs). GSEs are publicly traded corporations that are sponsored by the U.S. government. Fannie Mae and Freddie Mac are regulated under the conservatorship authority of the Federal Finance Housing Agency. Fannie Mae and Freddie Mac operate in the secondary mortgage market. They purchase about two-thirds of all U.S. mortgages. Fannie and Freddie set guidelines for the types of loans they will purchase. Mortgages that meet Fannie and Freddie guidelines are called conforming loans. Loans sold to Fannie and Freddie must be written on uniform forms approved by Fannie and Freddie, including loan applications, appraisals, and mortgage instruments, in addition to meeting specific qualifying guidelines. Fannie and Freddie buy consumer mortgages from local lenders and package them into mortgage-backed securities (MBS). MBSs are created by bundling thousands of mortgage loans together. The MBSs are sold worldwide to investors, providing funds to the financial institutions to make new consumer loans. Fannie Mae (sometimes referred to as the Federal National Mortgage Association and FNMA) was created by Congress in 1938. It created the secondary market as a way to stimulate the housing market after the Great Depression. Freddie Mac (sometimes referred to as the Federal Home Loan Mortgage Corporation and FHLMC) was created by Congress in 1970. Freddie Mac was originally created to provide competition to Fannie Mae. The goal was to reduce borrower's financing costs by providing more competition and liquidity. Freddie Mac provides a secondary market for conforming conventional mortgage loans purchased from smaller banks, credit unions, and savings associations (formerly called savings and loans). The loans are then pooled together and sold to investors as MBSs. Like Fannie, Freddie Mac purchases mortgages that meet their underwriting and product standards, package the mortgage loans into securities, and sell the securities to investors on Wall Street.

Ginnie Mae

Ginnie Mae (also referred to as Government National Mortgage Association and GNMA) provides a secondary market exclusively for government-insured and government-guaranteed loans, including FHA, VA, Rural Development, and American Native Indian Housing loans. Ginnie Mae, unlike Fannie and Freddie, is a government corporation housed within the Department of Housing and Urban Development (HUD). Ginnie's purpose is to provide liquidity for low- to moderate-income homebuyers. Ginnie is the only secondary participant backed by the full faith and credit guarantee of the federal government. Ginnie, unlike Fannie and Freddie, does not purchase mortgage loans from lenders. Once a lender makes a government-insured or government-guaranteed loan commitment to buyers, the lender obtains a guarantee from Ginnie. The lender pools similar mortgages together and delivers the pool of loans to a securities dealer. Securities dealers sell the Ginnie Mae guaranteed MBSs to investors. The securities dealers advise Ginnie Mae of the sales. The lender that originated the loans continues to service the loans and forwards the payments to Ginnie Mae. Ginnie disburses payments to investors. Ginnie's guarantee means that it makes the disbursements even if the payments have not been received from the borrower.

Home Equity Conversion Mortgage (HECM) or Reverse Mortgage Loan

Homeowners age 62 and older who have paid off their mortgage or have only a small mortgage balance remaining are eligible to participate in HUD's reverse mortgage program. The only reverse mortgage insured by the federal government is called a Home Equity Conversion Mortgage (HECM) and is only available through an FHA-approved lender. The program allows homeowners to borrow against the equity in their homes. Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. The size of reverse mortgage loans is determined by the borrower's age, the interest rate, and the home's value. Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Lenders recover the principal and interest when the home is sold. The remaining value of the home goes to the homeowner or to the homeowner's heirs. If the sale proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration (FHA), which is part of HUD, collects an insurance premium from the borrower to provide this coverage

Conventional Mortgage Loan Features

Interest Rate Private lenders make conventional mortgage loans. Interest rates for conventional mortgages reflect market conditions and are negotiated between the lender and the borrower. Assumption Fixed-rate conventional loans include a due-on-sale clause that requires the loan balance to be paid in full when the property is sold, thereby preventing another person from assuming the mortgage loan . Adjustable-rate conventional loans are assumable (see Adjustable-Rate Mortgage later in this unit.) Prepayment Fixed-rate conventional mortgage loans contain a prepayment clause that allows borrowers to prepay the mortgage principal Down Payment and Private Mortgage Insurance Conventional loans typically require the borrower to make a larger down payment (equity) as compared with nonconventional loans. However, borrowers can make down payments as small as 3%. Private mortgage insurance (PMI) is required for conventional loans that finance more than 80% of the purchase price. In other words, if the borrower makes a down payment of less than 20% of the purchase price, PMI is required. Private mortgage insurance protects lenders in case the borrower defaults. Loan-to-Value Ratio Recall that the loan-to-value (LTV) ratio is a financial term used by lenders to describe the ratio between the mortgage loan amount and the property's value. To calculate LTV, divide the loan amount by the property's purchase price (or the appraised value if it is less than the purchase price). As part of the lender's underwriting process, it will require that the borrower comply with a particular LTV. The LTV ratio is also used to determine whether the borrower will have to purchase PMI. PMI is required if the LTV ratio is greater than 80%. The portion of the loan that exceeds 80% of the property's sale price (or appraised value) is insured with PMI. If the borrower defaults and the proceeds from the foreclosure sale are not sufficient to cover the amount that is due the lender, the mortgage insurance covers the difference. The borrower can request the PMI coverage to be cancelled once the outstanding balance of the mortgage drops to 80% of the original value of the home (.80 or 80% LTV).

FHA Mortgage Loan Features

Interest Rate The interest rate on FHA mortgages is not set by the FHA or HUD. The interest rate is allowed to fluctuate with the market and is negotiable between the lender and the borrower. Discount Points FHA-approved lenders may charge discount points on FHA-insured mortgage loans. Discount points may be paid by either the seller or the buyer (see also Discount Points in Unit 12). Assumption FHA mortgage loans do not have a due-on-sale clause in the mortgage. The FHA requires complete qualification of the buyer assuming the loan. All assumed loans (and new FHA loans) are for owner-occupied use only (no investor loans). The lender must release the original mortgagor from liability if the assuming mortgagor is found creditworthy and executes an agreement to assume and pay the mortgage debt. By law, FHA loans cannot charge prepayment penalties; the loan may be paid off early without penalty . Down Payment A major benefit of FHA-insured loans is that the down payment is much smaller than the amount required for most conventional mortgage loans. A borrower can obtain an FHA-insured loan with a down payment as low as 3.5% of the purchase price or the appraised value, whichever is less. FHA refers to the required down payment as the minimum cash investment. Closing costs may not be used to meet the minimum 3.5% down payment requirement. Borrowers must have a good credit history to qualify for maximum financing. Loan Limit Recall that FHA loans are a type of nonconventional loan because they are insured by the FHA. FHA sets limits on the amount that can be borrowed. The limits vary significantly, depending on the average cost of housing in different regions of the country. For example, the maximum FHA loan for a one-unit residence is greater in Fort Lauderdale and Miami than in Gainesville or Tallahassee because the average cost of housing is greater in the Fort Lauderdale and Miami markets. Lenders make FHA-insured loans in even $50 increments. Loan Insurance Premium FHA loans require two types of mortgage insurance. Borrowers are charged a one-time mortgage insurance fee at closing. This fee is called the up-front mortgage insurance premium (UFMIP). The percentage of the UFMIP is based on the type (new or refinance) and term (15 year or 30 year) of the mortgage. The UFMIP is paid at closing and can be financed into the mortgage amount. In addition to the UFMIP, the borrower is also charged an annual mortgage insurance premium (MIP). The annual MIP is paid monthly (annual premium divided by 12) as part of the monthly mortgage payment. The MIP must be included in the proposed monthly expenses when calculating the buyer's qualifying ratios. The monthly MIP is paid for the life of the FHA loan when the borrower receives maximum financing. UFMIP and MIP go into an FHA fund for repaying lenders if borrowers default. Qualifying Ratios FHA lenders use two qualifying ratios for loan applicants. FHA requirements currently allow up to 31% for the housing expense ratio (HER) and up to 43% for the total obligations ratio (TOR). Appraisal The home must be appraised by an FHA-approved appraiser. HUD requires the appraiser to confirm that the property meets HUD's minimum property standards. However, the FHA does not warrant the condition of the property. The FHA encourages buyers to have a home inspection conducted. Insured Commitment A developer will sometimes seek an FHA commitment to insure the mortgages on a planned project. The FHA gives a conditional commitment to insure the mortgage loans on the individual homes in the planned project that is dependent on the structures being completed according to verified FHA standards.

Amortization tables can be easily created from programmed software. There are three figures that must be inserted into the formula to create an amortization table:

Loan amount Interest rate Loan term

monetary policy

Monetary policy refers to the actions undertaken by the Fed to influence the availability and cost of money and credit to promote national economic goals.

Nondepository Primary Lenders

Mortgage lenders are full-service mortgage companies that process, close, and sell the loans they originate. Mortgage lenders fund the loans they originate with either their own funds or borrowed capital. Mortgage lenders are non-depository primary lenders because they do not accept savings deposits and demand deposits. Mortgage lenders package loans they originate and sell them to institutional investors and to secondary-market participants. The principal activity of mortgage lenders is to originate and service loans for residential and income properties. They primarily make VA and FHA loans. A mortgage broker license is required for an entity conducting loan originator activities through one or more licensed loan originators employed by the mortgage broker or as independent contractors to the mortgage broker. Mortgage brokers do not make loans. Instead, mortgage brokers arrange loans for prospective borrowers with various mortgage lenders. Mortgage brokers do not service loans. A mortgage loan originator (MLO) is a person who holds a state MLO license for the purpose of soliciting mortgage loans, accepting mortgage loan applications, and negotiating the terms or conditions of new or existing mortgage loans on behalf of a borrower or a lender. MLOs process mortgage loan applications and negotiate the sale of existing mortgage loans to noninstitutional investors for compensation

Federal Regulatory Bodies and Mortgage Fraud No Documentation Loans

No documentation loans were very popular before the mortgage crisis. Unlike the stated income/stated asset loan application process, this type of loan program allowed a borrower with a certain minimum credit score to qualify for a mortgage without disclosing employment information, income, and assets. The lender approved the loan application without verifying the borrower's financial information. It was convenient for borrowers who qualified for the loans they applied for; however, other borrowers lied about their income and assets to qualify for mortgage loans that they would not otherwise be able to obtain. As a result, many homeowners found themselves with mortgages they could not repay.

Preapproval and Prequalification

Prequalifying is less formal. The lender asks the borrower questions concerning income and debt; however, a credit report is not pulled. Preapproval, however, is more detailed. The lender runs a credit report and verifies income and assets. The application is submitted for preliminary underwriting, and the prospective borrower is provided with a preapproval letter that defines the loan amount the buyer is approved to receive. Approval letters are usually valid for 120 days.

Depository Lenders

Primary Mortgage Market Depository Lenders The primary mortgage market consists of lenders that originate new mortgage loans for borrowers. These lenders make money available directly to borrowers. Three major depository lenders originate mortgages 1. Savings associations (SAs) invest the bulk of assets in residential mortgages and home equity loans. 2. Commercial banks (CBs) specialize in construction loans for residential and commercial projects. 3. Credit unions (CUs) are nonprofit organizations that provide services to their members, providing financing for residential loans and home improvement loans. SAs, CBs, and CUs are depository lenders, meaning that they accept savings deposits and demand deposits (checking accounts). These depository lenders are also called portfolio lenders because they can hold mortgage loans permanently in their portfolios. The demand deposits and savings deposit accounts provide depository lenders with a relatively stable funding source. The flow of funds into deposits held by primary lenders, increasing the mortgage money supply, is called intermediation.

Purchase of Title Insurance Real Estate Settlement Procedures Act (RESPA)

RESPA prohibits a seller from requiring the homebuyer to use a particular title insurance company as a condition of sale. Generally, the lender will require title insurance. The borrower can shop for and choose a company. However, if the seller is paying for the owner's title insurance policy, the law does not prohibit the seller from choosing the title company.

Triggering Terms

TILA is also concerned that consumers may be misled by being given truthful but inadequate information in advertising. While it does not require creditors to advertise credit terms, it does provide that if they advertise certain credit terms, called triggering terms, they must include additional disclosures. Trigger terms include the: amount or percentage of any down payment, number of payments, period (term) of repayment, amount of any payment, and amount of any finance charge. Advertisements containing any of the triggering terms must also disclose the following: Amount or percentage of down payment Terms of repayment Annual percentage rate, using that term, and if the rate may be increased in the future, that fact must also be disclosed TILA allows general phrases such as "owner will finance" and "favorable financing terms available." Such expressions are too general to trigger additional disclosure requirements.

Bait and Switch Advertising

TILA makes bait-and-switch advertising a federal offense. For example, if a subdivision developer advertises homes for sale with a down payment of $1,000, the seller must accept $1,000 as the complete down payment or be in violation of the law.

Purpose of FHA

The Federal Housing Administration (FHA) was created in 1934. The FHA is a government agency within the Department of Housing and Urban Development (HUD). Its mission is to stimulate homeownership. FHA loans are fully insured by the government to help increase the availability of affordable housing in the United States. FHA loans are made by FHA-approved lenders. Lenders must meet certain criteria for their loans to be FHA-approved, after which the FHA insures the loans the lender issues against losses in the event that borrowers default on the loans. FHA loans protect lenders from financial risk. The cost of the mortgage insurance is paid by the borrower. The FHA does not make loans to borrowers, process loans, or build housing. FHA loans are a good option for first-time homebuyers or for buyers who have challenges dealing with the more stringent requirements of conventional financing because they require a 3.5% down payment and have less stringent credit score requirements and other qualifying criteria compared with conventional loans. There are many types of FHA loan programs; however, the most popular loan program is a Section 203(b) loan, which is a fixed-rate mortgage loan for the purchase or construction of one- to four-family residential property. FHA-insured mortgage loans require that the borrower will use the home as a primary residence for at least the first year of ownership.

Federal Regulatory Bodies and Mortgage Fraud Federal Reserve System

The Federal Reserve System, also known as the Federal Reserve or just the Fed, is the central bank of the United States. It was established by Congress in 1913 to provide the nation with a safer and more stable monetary system. The Fed consists of a seven-member Board of Governors and 12 Reserve Banks located in major cities across the nation. The members of the Board of Governors are appointed by the president and confirmed by the U.S. Senate. Today, the Fed's duties include (1) conducting the nation's monetary policy, (2) supervising and regulating banking institutions and protecting the credit rights of consumers, and (3) maintaining the stability of the financial system. Monetary policy refers to the actions undertaken by the Fed to influence the availability and cost of money and credit to promote national economic goals. The Fed is charged with the responsibility for setting monetary policy. The Fed also has regulatory and supervisory responsibilities over banks that are members of the Fed. Additionally, the Board is responsible for the development and administration of regulations that implement major federal laws governing consumer credit, such as the Truth in Lending Act and the Equal Credit Opportunity Act.

Loan Estimate

The Loan Estimate clearly presents the information considered most important to consumers: the interest rate, monthly payment, total closing costs, and cash required to close. There is no obligation to work with a lender just because the prospective borrower submits a mortgage loan application. Under the TRID rule, the lender is prohibited from charging the borrower any fees until the borrower has received the Loan Estimate and indicated a desire to proceed with the loan. This prohibition includes fees for application, appraisal, and underwriting. The only fee that a lender may charge before issuing the Loan Estimate is a fee to obtain the borrower's credit report. TRID replaced HUD's Special Information Booklet required under RESPA with a smaller consumer-friendly booklet, Your Home Loan Toolkit (Toolkit). The Toolkit helps borrowers determine how much house they can afford, suggests questions to ask the lender, and features worksheets and checklists to fill out during the loan process. The booklet also describes the Loan Estimate and Closing Disclosure forms. Lenders are required to give borrowers the Toolkit within three business days of loan application.

Real Estate Settlement Procedures Act (RESPA)

The Real Estate Settlement Procedures Act (RESPA) is a federal law administered by the Consumer Financial Protection Bureau (CFPB) and implemented by Regulation X. The law is designed to ensure that borrowers are informed regarding the amount and type of charges they will pay at closing.

Truth in Lending Act

The Truth in Lending Act (TILA) is a federal law designed to promote the informed use of consumer credit. The TILA regulates what information lenders must make known to consumers about their products and services. It requires disclosures about its terms and costs and standardized the manner in which costs associated with borrowing are calculated and disclosed.

A prospective borrower has a projected PITI of $1,000, an MIP of $260, a monthly car payment of $290, and a student loan payment of $175 per month. The borrower's gross monthly income is $4,200. What is the borrower's HER?

The answer is 30%. $1,000 PITI + $260 MIP = $1,260 monthly housing expense ÷ $4,200 gross monthly income = .30 or 30% HER

Which qualifying ratio applies to conventional mortgage loans?

The answer is 36% TOR. To qualify for a conventional mortgage, the borrower's TOR must not exceed 36%.

he law requiring lenders to furnish borrowers with the APR disclosure is the

The answer is Truth in Lending Act. The Consumer Credit Protection Act (Truth in Lending Act) requires lenders to provide borrowers with the APR disclosure.

A partially amortized mortgage has a final payment required to completely pay off the loan called

The answer is a balloon payment. With a partially amortized mortgage, the buyer makes regular payments smaller than what is required to completely pay off the loan by the date of termination. A single large final payment, called a balloon payment is made at loan maturity.

When investors bypass thrift institutions for direct investment elsewhere, the process is called

The answer is disintermediation. This process is called disintermediation.

Equal Credit Opportunity Act (ECOA)

The federal law that prohibits discrimination in the extension of credit because of race, color, religion, national origin, sex, age, or marital status.

Qualifying the property

The lender orders a property appraisal of the property that will be pledged as collateral for the loan. The appraiser estimates the property's value and, in the case of FHA and VA, determines if the overall condition of the structure meets the required minimum standards

Intermediation

The process whereby financial middlemen consolidate many small savings accounts belonging to individual depositors and invest those funds in large, diversified projects

Fannie Mae purchases primarily conventional conforming loans from large commercial banks

True. Fannie Mae purchases primarily conforming conventional mortgages from large commercial banks. It also purchases some FHA loans and VA-guaranteed loans.

The Uniform Residential Loan Application is used to qualify loan applicants applying for a loan to finance a single-family residential property.

True. Lenders use the Uniform Residential Loan Application (URLA) form to qualify applicants (borrowers) applying for a one-to-four-family residential property.

The TRID rule prohibits lenders from charging loan applicants an application fee before receiving the Loan Estimate and indicating a desire to proceed with the loan.

True. The only fee that a lender may charge a loan applicant before issuing the Loan Estimate is a fee to obtain the borrower's credit report.

A VA loan is a mortgage loan program established by the

U.S. Department of Veterans Affairs (VA). VA loans assist service members, veterans, and eligible surviving spouses to become homeowners. The VA issues rules and regulations that set the qualifications and conditions for VA loans. The VA guarantees a portion of the loan referred to as a partial guarantee. The partial guarantee covers the top portion of the loan. VA home loans are provided by private lenders, such as banks and mortgage companies. The applicant must plan to use the home as a primary residence. A major benefit of a VA purchase loan is that the VA does not require a down payment. However, a lender may require a down payment if the appraised value of the home is less than the sale price. Nearly 90% of all VA-guaranteed home loans are made with no down payment. The VA loan guarantee differs from the FHA program that insures loans; VA home loans do not charge a mortgage insurance premium.

Which type of loan has NO established loan limit?

Which type of loan has NO established loan limit?

The Equal Credit Opportunity Act applies to residential borrowers only.

false. The Equal Credit Opportunity Act applies to all consumer and commercial credit, without regard to the nature or type of the credit or the creditor.

An FHA borrower has monthly PITI of $2,276 MIP of $160, a car payment of $479, a revolving credit card minimum monthly payment of $165 per month, and a student loan of $200 per month. The borrower's gross monthly income is $8,000. The borrower's housing expense ratio (HER) is 32%.

false. The borrower's housing expense ratio is 30%. $2,276 + $160 = $2,436 monthly housing expense ÷ $8,000 gross monthly income = .3045 or 30% HER

The one-time mortgage insurance fee charged on FHA mortgage loans that is paid at closing is called the mortgage insurance premium (MIP).

false. The one-time mortgage insurance fee paid at closing is called the up-front mortgage insurance premium (UFMIP).

The two most common types of conventional mortgage loans are

fixed-rate amortized mortgage loans and adjustable-rate mortgage loans. The interest rate of a fixed-rate conventional mortgage loan is determined at the time that the loan is originated and does not change over the entire loan period, referred to as the loan term. With an adjustable-rate mortgage, the interest rate may go up or down during the loan term.

TILA-RESPA Integrated Disclosure Rule (TRID)

in 2015, Congress directed the Consumer Financial Protection Bureau (CFPB) to publish an integrated disclosure for mortgage transactions, called the TILA-RESPA Integrated Disclosure rule (TRID). Under the new TRID rule, the mortgage disclosure requirements under the Truth in Lending Act and RESPA were condensed into two disclosure forms. The borrower receives a loan estimate disclosure form shortly after applying for a loan, and a closing disclosure is received shortly before closing Disclosure Documents Timing Loan Estimate Delivered or placed in the mail no later than the third business day after receiving the borrower's loan application. Closing Disclosure Provided to the borrower at least three business days before the loan closing. TRID Transactions and Exemptions features a list of the types of loans for which TRID rules apply and a list of TRID Exemptions. TRID Applies Consumer loans secured by real property Mortgage loans Refinance loans Construction loans Vacant land loans Loans secured by 25 or more acres TRID Exemptions Commercial loans for building more than four units Reverse mortgages Home equity lines of credit (HELOCs) Mobile home loans Loans for dwellings not attached to real property Loans for agricultural purposes

Package Mortgage

includes both real and personal property as security for the debt. A buyer uses a package mortgage, for example, when purchasing a restaurant complete with cooking equipment and other personal property that serve as a part of the collateral for the debt

In an adjustable-rate mortgage, the calculated interest rate is the

index + margin. The calculated interest rate is arrived at by adding the index to the lender's margin.

Purchase Money Mortgage (PMM)

is a mortgage in which payments are made to the seller (seller financing) rather than to a lending institution. It is typically used in lieu of a portion of a buyer's down payment when the buyer assumes an existing mortgage. The seller conveys legal title to the buyer at closing, and the seller retains a vendor's lien right as security for the debt. EXAMPLE: The purchase price of a home is $200,000. The buyer is assuming the seller's FHA mortgage loan with an unpaid balance of $120,000. $200,000 purchase price - $120,000 = $80,000 cash due at closing The buyer asks the seller to accept $30,000 cash at closing and the remaining amount due to be paid to the seller over five years. The buyer is asking the seller to take back a purchase money mortgage at a specified interest rate and loan term in lieu of $50,000 cash at closing. This may be a good arrangement for both the buyer who does not have sufficient savings available for the entire amount of cash due at closing and the seller who can receive an income stream over time at a favorable interest rate. The buyer will sign a note and a mortgage with the seller. The assumed FHA mortgage was recorded as a first mortgage, so the PMM will be recorded as a second mortgage.

Index

is an economic indicator that is used to adjust the interest rate in the loan. Lenders legally are allowed to link the interest rate of an ARM with any recognized index. Many indexes are tied to U.S. Treasury securities. The index moves up and down with fluctuations in the nation's economy. The index must not be controlled by the lender, and it must be verifiable by the borrower.

The Consumer Credit Protection Act (CCPA)

is an encompassing law that contains several acts with more precise scopes. Among the specific federal laws under the CCPA are the Equal Credit Opportunity Act and the Truth in Lending Act.

Secondary Mortgage Market

is an investor market that buys and sells existing mortgages. The existence of a secondary mortgage market allows lenders to have stable cash flow so that they can originate more new loans. The borrower will continue to make monthly payments to the lender that originated the loan if the lender continues to service the loan. The secondary mortgage market accomplishes two important objectives: Circulates the mortgage money supply. The secondary mortgage market helps lenders raise capital to make additional mortgage loans. Prior to the existence of the secondary market, portfolio lenders had to rely on deposits flowing into their financial institutions. However, when depositors chose instead to invest their savings in other types of investments, such as the stock and bond markets, disintermediation led to a shortage of mortgage funds. With a secondary mortgage market, in times of disintermediation, lenders can sell more of their loans and use the cash to originate new mortgage loans. Standardized loan requirements. The key to an efficient secondary market was the creation of standardized loan instruments. Standardized mortgage loan documents, appraisal forms, closing disclosures, and promissory notes make it possible for secondary market participants to better evaluate the mortgage loan packages being sold.

Margin

is the percentage added to the index. The margin represents the lender's cost of doing business plus profit. The margin percentage remains constant over the life of the loan. Formula: Calculated Interest Rate index + margin = calculated interest rate Example: Assume the borrower has an ARM tied to the one-year T-bill rate with a margin of 2.25. If the T-bill rate is 4%, the calculated interest rate is: 4% index + 2.25% margin = 6.25% calculated interest rate

Payment Cap

limits the amount the monthly payments can increase during any adjustment. The purpose of a payment cap is to protect the mortgagor from unaffordable high monthly payments. If interest rates rise sharply but the payments do not because of a payment cap, the unpaid interest is added to the loan balance. Negative amortization occurs when the mortgage payments are not large enough to cover the interest expense. The result is the mortgage loan balance increases (instead of decreasing). Negative amortization can result in a mortgagor owing the mortgagee more than the house is worth.

Biweekly Mortgage

loan is amortized the same way as fully amortized mortgage loans, except the borrower makes a payment every two weeks. The amount paid is equal to one-half the normal monthly payment. Because there are 52 weeks in the year, the borrower makes 26 biweekly payments. Therefore, the borrower makes the equivalent of an extra month's payment each year (26 half-size payments equal 13 full-month payments instead of 12). This saves the borrower considerable interest, and the loan is paid off sooner

A straw buyer is someone who applies for a residential mortgage but who doesn't intend to actually own the property.

true. A straw buyer is someone whose credit is used to purchase a property and secure financing but who isn't actually going to own the property.

An amortized mortgage is characterized by a constant (level) monthly payment.

true. An amortized mortgage calls for regular, equal payments. The amount of the payment that applies to interest gradually decreases, and the amount assigned to principal gradually increases.

Negative amortization results from a mortgage payment that does NOT pay all of the interest due for the period.

true. If the monthly payment on the ARM is smaller than what is required to pay the interest for the period, it will result in negative amortization.

Under a purchase money mortgage (PMM), legal title passes to the buyer and the seller retains a vendor's lien right as security for the debt.

true. Legal title conveys to the buyer, and the seller retains a vendor's lien right as security for the debt.

Borrowers must receive the Closing Disclosure at least three business days before the loan closing.

true. The TILA-RESPA Disclosure Rule requires the lender to provide the borrower with a written Closing Disclosure at least three business days before closing the loan.

The VA borrower's total obligations ratio cannot exceed 41%.

true. The VA borrower's total obligations ratio cannot exceed 41%.

An FHA borrower has the following monthly expenses: PITI of $1,225, MIP of $175, car payment of $400, homeowners association fee of $60, college loan of $350, and a revolving credit card of $125. This borrower's total monthly housing expense for calculating the borrower's housing expense ratio is $1,460

true. The housing expense ratio is $1,225 PITI + $175 MIP + $60 homeowners association fee = $1,460.

The calculated interest rate is the lender's margin added to the index.

true. The margin is the percentage added to the index to determine the calculated interest rate.

The VA charges a funding fee for VA mortgage loans.

true. The veteran borrower pays a funding fee to the VA.

The total obligations ratio (TOR) may not exceed 36% for conventional mortgage loans.

true. To qualify for a conventional mortgage, the borrower's TOR must not exceed 36%.

In a partially amortized mortgage, the payments do NOT fully amortize the loan.

true. With a partially amortized mortgage, the buyer makes regular payments smaller than what is required to completely pay off the loan by its date of termination. In other words, the payments do not fully amortize the loan.