RE Section 4 Chapter 2

Reserve Account or Reserve Fund/ Escrow account

*An account used by lenders to hold money that will be used for future payment of items such as taxes, insurance, and deferred maintenance* (customer's trust fund) A borrower is frequently required to pay a lump sum amount at closing to the lender to set up the reserve account. Thereafter, the borrower will be required to pay a monthly portion of the estimated taxes and insurance. This is part of the total monthly payment to the lender and is known as PITI payment.

Discount points

1% of loan amt. Upfront payment borrow pays the lender for a smaller interest rate.

Types of Mortgage Loans

1) conventional loans 2) Govt-Insured (FHA) Loans 3)Govt. guaranteed (VA) loans 4) Farmer's Home Administration (FmHA) loans

Disintermediation

Depositors withdrawing their money from banks

The SAFE Act

Designed to enhance consumer protection and reduce fraud. establishes minimum standards for the licensing and registration of state-licensed mortgage loan

A "purchase money mortgage" involves: Select one: a. Any mortgage used to finance the purchase of a property b. A mortgage with an LTV above 80% c. Seller financing of the purchase of a property d. A mortgage loan not made by a depository institution, but rather by a private third party

c. Seller financing of the purchase of a property

The person or firm who is tasked with analyzing a mortgage loan application for purposes of approval, modification or denial is called a(n): a. Loan officer b. Loan originator c. Underwriter d. Loan servicer

c. Underwriter

What type of loan is most likely not to require any down payment? Select one: a. FHA loans b. Conventional loans c. VA loans d. Both FHA and VA loans

c. VA loans

Disclosures

cash price required down payment number, amounts, and due dates of all payments annual percentage rate total of all payments to be made over the term of the mortgage (unless the advertised credit refers to a first mortgage deed of trust to finance the acquisition of a dwelling)

Federal Reserve Board

central banking system that has 12 districts, each served by a Federal Reserve Bank. This can heavily influence interest rates. Established to help the US's economy.

Usury

charging a rate of interest in excess of that which is permitted by law. Most states have enacted some sort of ceiling on interest rates. Some are set rates while others float with an economic indicator.

Fannie Mae (FNMA)

creates liquidity for mortgages, buys conventional, FHA, and VA loans then sells them to investors through mortgage pools

The person or firm who collects the monthly payments and keeps records regarding a mortgage loan is called a(n): Select one: a. Loan officer b. Loan originator c. Underwriter d. Loan servicer

d. Loan servicer

A lender adds some additional charges to the monthly payment for the reserve or escrow account. The purpose of this charge is to: a. Increase the interest yield to the lender b. Create a buffer in case the borrower misses a payment c. Comply with the Real Estate Settlement Procedures Act d. To ensure payment of property taxes and insurance

d. To ensure payment of property taxes and insurance

The Secondary Mortgage Market

designed to provide liquidity for the funds used by these primary lenders.

VA Guaranteed Loans

does not require a down payment, for veterans, veteran needs to obtain a certificate of elligibility, an appraisal needs to be completed by a certified VA approved appraiser. The certificate of Reasonable Value is needed (CRV).

loan points

each is 1% of the loan - they are charged to the borrower at the time the loan is made. This is the loan origination fee: charged for creating the loan

The Truth in Lending Act (TILA)

ensures borrowers receive full disclosure of the costs of credit. Therefore consumers can shop around for rates Banks need to provide: amt financed finance charge APR total of all pmts over term of loan Exemptions: agricultural, business, or commercial 4+ family complex personal loans above $54K loans of less than 4 installments

Amortized Mortgage

entire loan balance is paid in a fixed series of monthly payments

Farm Service Agency

federal agency that channels credit to farms and rural areas of less than 10,000 people. The agency will either make the loan or guarantee a portion of the loan made by private lenders.

Loan servicing

firm that collects monthly payments- usually the lender that originally accepted the loan

Straight Mortgage

interest only loan paid until the maturity date, then the full loan amount is due

Mortgage Guaranty Insurance Corporation (MGIC)

largest private mortgage insurance company, insures the top 10 to 30% of the principal on loans made to qualified buyers.

Equity loans

line of credit- second mortgage. Ex: Parents borrow money against their house to put kids through school

Conventional Loans

loans which do not have any government insurance or guarantee therefore they represent a higher risk to the lender.

Two types of mortgage companies

mortgage bankers and mortgage brokers

Life Insurance Companies

mostly deal with large multi family complexes/shopping centers/etc. Commercial loans

Negative Amortization

occurs when the loan payments are not sufficient to repay the interest. The loan balance therefore increases over the life of the loan rather than decreases.

underwriter

one who evaluates the extent of risk assumed in connection with a loan. includes such things as determining the borrower's ability to repay, verifying the value of the property, and reviewing the title search.

loan originator

one who handles the origination of a loan, from processing the application to disbursing the funds. Employee of a bank or mortgage company

Savings and Loan Associations

originally created to make mortgage loans and for many years that is the only type of loan they made. Still mostly sell mortgage loans.

buydown

prepaying interest charges so the buyer's monthly payments can be lowered during the initial years of the loan.

Regulation Z Advertising

provides for strict regulation of real estate advertisements that include mortgage financing terms. Again, the reason for this is to give consumers the information they need so that they can compare the true cost of obtaining credit from various lenders and shop wisely. Terms like "easy financing" are okay.

mortgage bankers

raise money in capital markets and make mortgage loans

Partially Amortized Mortgage

requires buyer to make regular payments smaller than what is required to completely pay off the loan. On the loan's maturity date, a balloon payment is due either through refinancing or paying it all off

Freddie Mac (FHLMC)

same as FNMA

Open-End Mortgage

similar to an open line of credit. You borrow the money when needed and pay it back when you can.

Hypothecation

the borrower retains the right to possess and use the property while the property serves as security for a loan. To use something as collateral

Liquidity

the ease with which an asset can be converted into cash

Shared Appreciation Mortgage (SAM)

the lender loans money at below the current market interest rate in return for a share of the profit when the property is sold.

Intermediation

the process by which individuals place their money with financial institutions in savings accounts and time accounts. The financial institutions, acting as financial intermediaries, take the deposited funds of savers and invest them in money markets, mortgages, government securities, etc. (banks are intermediate)

Commercial Banks

these did not make residential mortgage loans but now are major mortgage lenders

Leverage

use of borrowed funds to pay for property.

finance charge

A fee for borrowing money, added to a monthly credit card bill. This includes such items as the interest amount, origination fee, loan servicing, loan-finder's fee, and discount points.

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. Has rate caps that determine the max amount of increase on an interest rate in an adjustment period. May have initial, periodic, lifetime, and payment caps.

Graduated Payment Mortgage (GPM)

A mortgage in which the early payments are lower and then gradually increase over the life of the loan until it eventually levels off at a fixed rate. When someone's financial status might not be great now but there is reason to believe it will greatly increase over the next few years.

Package Mortgage

A mortgage that is secure by personal as well as real property.

Blanket Mortgage

A mortgage which covers more than one piece of real estate. Often used by a developer in the financing of undeveloped lots. Contains a partial release clause.

Interim Mortgage

A short term mortgage loan which is usually an interest-only loan

Bridge Loan

A short-term loan sometimes used by home-buyers to "bridge the gap" between selling their existing home and buying a new home. used frequently by developers

Mortgage Guaranty Insurance Corporation (MGIC)

An independent corporation that insures (guarantees) the top 12 to 30% of the principal on loans made by approved lenders to qualified borrowers.

secondary mortgage

Any junior mortgage or deed of trust (any mortgage other than the first mortgage or deed of trust).

Wraparound Mortgage

Combines 1st and 2nd mortgage on one new loan. wrapping second mortgage around the 1st mortgage (seller). buyer pays seller, seller pays loan.

annual percentage rate (APR)

Cost of borrowing money on an annual basis; takes into account the interest rate and other related fees on a loan. It is the relationship of the total finance charge to the total amount to be financed.

Ginnie Mae (GNMA)

Government National Mortgage Association (GNMA) guarantees principal and interest pmts on loans in mortgage pools

FHA Loans

It insures the lender through a mortgage insurance plan. Requires up front mortgage payment UFMIP and MIP mortgage insurance premiums

Regulation Z Exemptions

Loans for dwellings of more than four-family units; Construction loans to a builder; Business or commercial loans; Agricultural loans of more than $25,000; Personal loans of more than $25,000; and Loans of fewer than four installments.

Pre-approval and pre-qualification

Pre-qualitifaction: does not involve a credit report or verification of borrower's income Pre-approval: involves employment verification, credit report, income verification (more official however not a guarantee the granting of a loan, relies on appraisal of the property)

Equal Credit Opportunity Act (ECOA)

Prohibits discrimination in lending. Credit providers may not discriminate based on: race, color, religion, national origin, sex, marital status, age (provided applicant is of legal age), or dependence on public assistance. Must disclose reason for denial within 30 days

Real Estate Settlement Procedures Act (RESPA)

The primary purpose is to ensure that buyer and seller are fully informed as to all settlement costs, and to standardize real estate settlement practices.

loan-to-value ratio (LTV)

The relationship between the amount borrowed and the appraised value of the property. (whichever is lower). You buy a house for $100K, pay $75K down and $25K mortgage, the LTV is 75%.

FHLMC (Freddie Mac) requires lenders to use standardized forms. The purpose of such standardization is: Select one: a. To allow loans to be warehoused. b. So that loans may be easily sold in the secondary market. c. To establish uniform interest rates. d. So that consumers are well informed.

b. So that loans may be easily sold in the secondary market. The standardization of forms used by lender and settlement agents makes it much easier to review each loan which will be sold in the secondary mortgage market.

Under the Equal Credit Opportunity Act, which of the following statements is FALSE? Select one: a. Persons relying on public assistance cannot be discriminated against in lending b. The ECOA prohibits discrimination in lending and in housing c. A lender who denies credit to an individual must disclose the reason for the denial within 30 days d. None of these statements is false

b. The ECOA prohibits discrimination in lending and in housing The ECOA prohibits discrimination in lending, but not in housing. The Fair Housing Act prohibits discrimination in housing.

Larissa purchased a home for $200,000 and took out a mortgage loan with a 90% loan to value ratio. If she was charged 2 loan points when the loan was originated, how much money did she pay in points? a. $2,800 b. $3,200 c. $3,600 d. $4,000

c. $3,600 $200,000 x .90 = $180,000. $180,000 x .02 = $3,600.

As a general rule, VA loans are fixed rate, fixed term loans. What would cause the monthly payment of a VA loan to increase? Select one: a. If there was an increase in the Consumer Price Index. b. An increase in the interest rates allowed for VA loans. c. An increase in the assessed value of the property. d. None of the above, the payment cannot change

c. An increase in the assessed value of the property.

Usury laws, established by each state, provide for the protection of: Select one: a. Sellers. b. Lenders. c. Borrowers. d. Licensed real estate brokers and salespersons.

c. Borrowers. Usury laws establish the maximum amount of interest that may be charged, not just in real estate but in any type of credit extension, such as credit cards, auto financing etc. The purpose of usury laws are to protect the borrower.

A lender has been accused of violating a state's usury laws. This accusation would necessarily involve: a. Disintermediation b. Redlining c. Charging excessive interest rates d. Any of the above

c. Charging excessive interest rates

Renegotiable Rate Mortgage (RRM)

The interest rate is adjusted after an agreed upon period following the start date, such as three or five years instead of every six months or one year. Similar to an adjustable rate mortgage. Adjustment periods are longer than adjustable rate mortgage

PITI

The payment that the borrower makes to the lender that includes the loan principal and interest, as well as the taxes and insurance that the lender pays on behalf of the property owner Principal Interest Taxes Insurance

Purchase Money Mortgage (PMM)

When a seller accepts part or all of the purchase price in the form of a promissory note from the buyer along with a mortgage or trust deed

The Primary Mortgage Market

Where loans are made. Consists of direct lenders, also known as prime lenders or originators, who make mortgage loans directly to borrowers.

reduction certificate

a document that sets forth the status of a loan. It states the loan balance, the interest rate of the loan, and the date of maturity. required when a home purchaser is going to assume a loan or take title subject to the existing loan.

Balloon Mortgage

a mortgage in which the entire remaining balance of the loan is due in one single payment

How many loan payments will a buyer have to make per month when purchasing a home using a wraparound mortgage? Select one: a. 1 b. 2 c. 3 d. 4

a. 1

Under which of the following conditions could a veteran who already has a VA loan obtain another VA loan? Select one: a. Pay off the existing loan and convey the property. b. If the property has a pending contract for sale. c. The veteran can obtain a new VA loan if the first loan is more than five years old. d. If the veteran buys a condominium to be used as rental property.

a. Pay off the existing loan and convey the property. If the veteran sells the existing home and repays the VA loan, the veteran could get a new VA loan on his or her next home.

Real estate loans would be sold by a lender in the: a. Secondary mortgage market b. Primary mortgage market c. Federal Reserve Open Market d. Fannie Mae market

a. Secondary mortgage market Loans are sold in the secondary market. While that would include selling to Fannie Mae, there are more outlets than just Fannie Mae, so choice A is the better answer.

A buyer locates a seller who will remain responsible for the existing loan. The buyer gives the seller a new increased loan at a higher interest rate. This new loan is called a: Select one: a. Wraparound mortgage. b. Blanket mortgage. c. Combination mortgage. d. Balloon mortgage.

a. Wraparound mortgage. This is a prime example of a wraparound mortgage. The new, higher mortgage wraps around the old mortgage. When the buyer pays the seller his monthly payment, the seller uses part of that payment to make the payment on the old (existing) loan.

Mortgage Brokers

act as intermediaries between and bringing together borrowers and lenders

Reverse Annuity Mortgage (RAM)

allows elderly homeowners to receive monthly payments from their lender to help meet living costs. They do so by borrowing on the equity they have built up in their homes. must be repaid upon death or sale of the property All borrowers must be at least 62 yrs old.

private mortgage insurance (PMI)

allows the lender to loan more than the standard 80% loan-to-value ratio. Pay an additional fee for mortgage insurance each month

There are four main disclosures that must be made before a contractual relationship is created between a borrower and a lender

amount to be financed finance charge annual percentage rate (APR) total of all payments to be made over the term of the mortgage

Junior Mortgage

any mortgage on a property that is subordinate to the first mortgage in priority. any mortgage or deed of trust that is subordinate in lien priority. a Second mortgage is an example of this.

Which of the following loans would be exempt from the Truth in Lending Act? Select one: a. A loan to purchase 4 residential units - one of which will be occupied by the owner b. An agricultural loan for $30,000 c. A loan with 10 installments d. A personal loan for $20,000

b. An agricultural loan for $30,000 An agricultural loan above $25,000 would be exempt from the Truth-in-Lending Act.

The three-day right of rescission mandated by Regulation Z applies to residential purchase money, first mortgage, and first deed of trust loans. Select one: a. True b. False

b. False

What are discount points? a. Adverse factors considered when qualifying an applicant for a loan b. Loan points paid in return for a lower interest rate c. The ratio between the purchase price of a home and the loan amount d. None of the above

b. Loan points paid in return for a lower interest rate

If a lending institution refuses to consider a loan on property located in a particular area because of the ethnic composition of the area, the lender is: Select one: a. In violation of Truth-in-Lending Regulations. b. Redlining. c. Violating RESPA regulations. d. Practicing good fiscal management.

b. Redlining.