Real Estate Finance: Chapter 2 Money and the Monetary System

Annual Percentage Rate

(APR) The effective interest rate. It's a rate that will reflect the effective rate of interest on a loan, which can then be used by the borrower as a standard to shop the market for the best rate and terms available.

The Bureau of Engraving and Printing

(BEP) Produces security documents along with billions of Federal Reserve notes for delivery to the Federal Reserve System each year. Also produces portions of U.S. passports, materials for the Department of Homeland Security, military identification cards, and the Department of Immigration and Naturalization certificates.

California Financial Agencies: California Housing Finance Agency

(CalHFA) Provides real estate loans for low-income families through approved lenders who agreed to participate in this plan. Obtains funds for the purchase of these loans by the sale of tax-free bonds.

California Financial Agencies: Department of Financial Institutions

(DFI) Oversees the secure operation of appoximately 700 state-licensed financial institutions Responsible for administering state laws regulating banks, credit unions, industrial banks, trust companies, offices of foreign banks, issuers of travelers checks, money orders, money transmitters, and premium finance companies.

California Financial Agencies: Department of Corporations

(DOC) Handles securities transactions Deals with franchising of businesses Licenses thrift and loan companies, credit unions, money order issuers, escrow companies, and broker dealer investments Conducts periodic audits of these organizations Involved in Licensing, regulating, and providing surveillance and control of companies engaged in the business of lending money and/or selling securities of commodities or advising or receiving funds from the public in fiduciary capacity. (The corporation commissioner regulates real estate syndications.)

The Federal Deposit Insurance Corporation

(FDIC) 2 Permanent members on the board of governors (The Office of the Comptroller of the Currency (OCC) and the director of the Office of Thrift Supervision) and 3 U.S. citizens appointed by the president, with the consent of the Senate, to serve for a maximum of 6 years. No more than 3 members of the board may be of the same political party. The chair and vice-chair (may not serve more than 5 years in either capcity) are designated from the three appointed members. Created by the Banking Act of 1933 to add stability to the failing U.S. bank system during the Great Depression. Primary goal was to help reinstate the public's confidence in the commercial banking system by insuring the safety of deposits. Initially, insurance covered up to $5,000 for each account, but it climbed steadily. On May 20, 2009 it increase to $250,000. On January 1, 2014 the standard insurance was returned to $100,000 per depositor for all accounts except for individuals retirement accounts (IRAs) and certain other retirement accounts, which will remain at $250,000 per depositor. FDIC insures all accounts in member despository institutions, including both banks and thrifts. If a bank or savings institution fails, the FDIC may: 1. Apprpriate funds to carry on the business of the failing institution 2. Conserve its assest and property 3. Place the insured despository institution in liquidation and preceed to dispose of its assets, having due requard for the conditions of credit in the locality 4. Organize a new federal saving association to take over such assets or liabilities 5. Merge the insured deposits of the failed institution with those of another insured depository organiation 6. If liquidated, the payment of insured deposits will be made by the FDIC as soon as possible, either by cash or by a transferred deposit into another insured depository institution.

Federal Deposit Insurance Corporation

(FDIC) Provides insurance of $250,000 per account and supervises the operations of banks that qualify for membership in the insurance program.

Federal Home Loan Bank System

(FHLB) Serves the nation's savings associations.

The Federal Home Loan Bank System

(FHLB) • Patterned After Federal Reserve -12 district banks -Loans money -Sets reserves • Provides National Market for Member Securities • Organization • Office of Thrift Supervision • Activities - Provides its members a national market for their securities -The Federal Home Loan Bank System, basically provide its member banks and national market for their securities or secondary mortgage market for their members. -its central credit clearing facility for its members and it also establishes rules and regulations for the membership. Serves the nation's savings associations. Organized in 1932 to bring stability to the nation's savings associations, the FHLB was designed to provide a central credit clearing facility for all members savings associations and to establish rules and regulations for its members.

Federal Open-Market Committee

(FOMC) Federal Open Market Committee; directs and regulates the Federal Reserve System's open-market operations. They meet once a month to decide on current policies. Its composed of 12 members. All 7 members of the Federal Reserve's board of governors serve the FOMC, giving them the majority. The president of the Federal Reserve Bank of New York and four other district reserve bank presidents are elected to serve one-year terms on a rotating basis. When the FOMC sells securities, the economy slows as money available for credit is withdrawn from the market. When the FOMC buys securities, it's pumping money into the economic system, thereby encouraging growth and expansion. The impact of these procedures on the availability of money for real estate is obvious and is quite similar to the impact caused by raising or lowering the discount.

Federal Reserve System

(Fed) The United States Federal Reserve System -Central banking system that provides a rising standard of living through controlled growth of money and credit. • 12 District Banks • All nationally chartered commercial banks • State-chartered banks may join -Lender of last resort, -This Federal reserve system is our central bank and basically a regulator monetary policy. -It regulates the pulse of the economy and has the power to influence it by putting money into the economy and taking out to resuscitate our economy. -It can be termed as a lender of last resort and basically the fed will lend money to its member banks The nation's "monetary manager", the Fed regulates its member banks. Its charged with the maintenance of sound credit conditions to help counteract both inflationary and deflationary movements and with a role in creating conditions favorable to high employment, stable values, internal growth of the nation, and rising levels of consumption. It keeps the public informed of its activities through its web site. Established in 1913 when President Woodrow Wilson signed the Federal Reserve Act. Orignal purpose was to establish facilities for selling or discounting commercial paper and to improve the supervision of banking activities, its full impact on our monetary system has broadened over time to influence the availability and cost of money and credit (interest rates). The nation's central bank. The Federal Reserve attempts to ensure that money and credit growth over the long-run is sufficient to provide a rising standard of living for all. In the short-run , the Federal Reserve seeks to adapt its policies in an effort to combat deflationay or inflationary pressures as they arise. As a lender of LAST RESORT, it is responsible for utilizing available policy instruments in an attempt to forestall national liquidity crises and financial panics.

The Office of the Comptroller of the Currency

(OCC) Federal agency that regulates national banks. Established in 1863 to develope a national currency, the OCC charters, regulates, and supervises all U.S. banks. Funded from assessments on the national banks and income from its investments in U.S. Treasury securities.

California Financial Agencies: Office of Real Estate Appraisers

(OREA) Created to implement the requirements of FIRREA (The Financial Institutions Reform, Recovery and Enforcement Act of 1989) regarding appraisals of real property. Anyone other than a state-licensed or certified appraiser is prohibited by FIERRA (The Financial Institutions Reform, Recovery and Enforcement Act of 1989) from conducting an appraisal for federally related real estate transactions.

Office of Thrift Supervision

(OTS) Similar to the way the OCC charters, regulates, and supervises the national banks, the OTS charters and regulates the nation's thrift associations. Funded by assessments and fees charged to the thrifts it regulates. 1996 Congress gave thrifts increased flexibility in offering consumer loans and many of the new charters approved by the OTS were issued to nonbanks, such as insurance companies and other large financial entities. Federal charter from OTS preempts state laws and allows the chartered entity to operate in all 50 states without needing to be licensed in each state. 2011 OTS merged with the Office of the Comptroller of the Currency (OCC).

Federal Reserve System: Functions: Truth in Lending Act (Regulation Z)

(TILA) Truth-in-lending provision that requires lenders to reveal the actual costs of borrowing. The Federal Reserve is responsible for supervising TILA, Title I of the Consumer Protection Act of 1968. The Fed's board of governors formulates and issues a regulation called Regulation Z to carry out the purpose of this act. With many agencies involved, the Fed retains supervision over these agencies as part of its primary role as regulator of the U.S. national credit level. Real estate loans, Loans for personal family, or household purposes, and Consumer loans for $250,000 or less are covered by the act if the loan is to be repaid in more than four installments or if a finance charge is made. Requires that lenders inform their borrowers in writing of all the costs involved in securing a loan. Lenders must reveal the loan's actual Annual Percentage Rate (APR).

Federal Reserve System (2)

- Issues currency - Monetary policy • Reserve requirements - A 20% reserve requirement means that $200 in reserves is needed for every $1,000 of deposits - The higher the requirement, the lower the lending • Open-Market operations - Fed buys and sells government securities - The more government securities sold, the lower the lending • Discount rates - Rate the Fed charges banks - The higher the rate, the lower the lending • Federal funds rate - Bank to bank borrowing rate - The higher the rate, the lower the lending • Prime rate - Rate banks charge preferred customers

Federal Reserve System: Organization of the Fed

-12 Federal Reserve districts -Each district includes Federal Reserve Bank -Directed by board of governors -Membership - Follows Federal Reserve's, Reserve Requirement - Borrow at the Discount Rate -The fed is made up of 12 Federal reserve districts each district includes. -The fed reserve banks it has directed board of governors and membership for banks across United States Government-Induced Supply Changes • The Board of Governors of the Federal Reserve System ("the Fed") exercises substantial discretionary control over the money supply - Purchase and/or sale of government bonds via its open market operations - Changing the percentages of certain types of deposits banks must keep on hand (reserve requirements) - Varying the discount rate (the interest rate the Fed changes banks for short-term loans) • Impact of government-induced money supply changes falls almost entirely on loanable funds • Influence of the U.S. bond market on the Fed's monetary policy decisions has become increasingly significant It's a central banking system composed of 12 federal reserve districts, each served by a district Federal Reserve bank. Each is coordinated and dircted by the 7-member board of governors in Washington DC, who are APPOINTED BY THE PRESIDENT with the consent of the SENATE. The Federal Reserve banks are NOT under the control of any government agency, but each bank is responsible to a board of 9-directors representing their Federal Reserve district. ALL nationally chartered commericial banks must join the Federal Reserve System. Some state-chartered banks are also members. Each member bank is required to purchase capital stock in its district Federal Reserve bank in an amount of up to 6% of its paid-in capital and surplus. Most members hold only about 3% of this required stock, but the Fed can call for the additional purchases whenever necessary. Members banks are required to maintain sufficient monetary reserves to meet the Fed's requirements and to clear checks through the system. Member and nonmembers banks must comply with various rules and regulations imposed by the Fed for governing loans and maintaining the stability of our monetary system. Member banks my borrow money from their Federal Reserve bank when in need of funds, share in the informational system available, and engage in all banking activities under the protective umbrella of the Federal Reserve System.

M2

-Adds money market mutual funds and savings and time deposits of less than $100,000 -Something that's in a bank for a longer period of time. All of M1 plus money market mutal fund shares as well as savings deposits and time deposits of less that $100,000 at all depository institutions

The Use of Paper Money

-As long as the public can exchange symbolic paper money for commodities of like value, the system works. -This is a good definition for economic system as long as the public and exchange symbolic paper money for commodities In the past goldsmiths issued receipts for deposits of gold and other valuables in their safes. The goldsmiths receipts were trusted value for the return of the amount on the receipt. 1 dollar note equals 23.22 grams of pure gold. Jewelers, dentists, and artisans used the goldsmiths process using paper money and coins along with written checks to substitute the value of their gold because it was convenient without restriction.

M1

-Cash and checking accounts. -M1 is basically a liquid money things that can grow at the grants fast and easy is called M1 and that includes cash and checking accounts Cash in public hands, private checking accounts at commercial banks, credit union share accounts, and demand deposit at thrift institutions

Federal Reserve System: Functions of the Fed

-Reserve requirements to protect depositors -Discount rates to regulate the cost of funds -Federal Funds Rate at which the Fed lends money to member -Open market operations -Truth-in-Lending Act (Regulations Z) -Disclosures -Kick-backs for referrals illegal -These are the basic functions of the Fed: One is to regulate the reserve requirement, meaning how much cash and member bank has to hold on there in a bank account before they can start lending out some of those funds and it also regulates the discount rate and the discount rate is not the prime rate the discount. -The Discount Rate is the interest rate of the lends to member banks overnight -The Prime Rate is the interest rate that a bank will give to want it to its best customers this is not the discount rate discount rate is different than the prime rate. -The fed also has a Federal funds rate to which it lends to member banks,it also has open market operations with they will buy or sell securities. If they want to pull money out of the economy or to pump money into the economy -If they want to sell securities and a good interest rate they'll pull money out of the economy thus slowing down the heated up economy or dampening down inflation -the Fed also regulates truth in lending actions, which regulates lenders banks and mortgage companies and it covers disclosures that borrowers have to receive prior to entering into a home loan and also regulates kickbacks for referrals. -Those kickbacks are illegal in any circumstance for some is referring a settlement service. Like a mortgage company. A mortgage company could not go over to real estate agents and say "hey if you would give me your next deal I'll give you half a point on the deal. It's strictly illegal that a Federal offense can happen The Fed functions in: -issuing currency in the form of Federal Reserve notes -supervising and regulating member banks -clearing and collecting their checks -administering selective credit controls over other segments of the economy -acting as the government's fiscal agent (in holding the U.S. Treasury's principal checking accounts) -assisting in the collection and distribution of income taxes For real estate financing the Fed: -regulates the amount of its member bank reserves -determines the discount rates -establishes the federal funds rates -open-market operations -supervises the Truth in Lending Act (Regulation Z)

Discount Rate

-The Discount Rate is the interest rate banks lends to member banks. The rate that the Fed charges its members for funds borrowed on collateralized loans. The Fed charges the borrowing bank interest on its loan, interest that is considered to be the discount rate, which can also be interpreted as the cost of borrowed funds to the borrower bank.

Prime Interest Rate

-The Prime Rate is the interest rate that a bank will give to its best customers. This is not the discount rate discount rate is different than the prime rate. **Interest rate charged by fiduciary institutions to their AAA-rated borrowers. The individual bank has a basic or prime interest rate against which is can measure the interest it must charge its borrowers. A borrower of funds from a bank dealing with the Fed will be reauired to pay a higher rate of interest than the bank is paying for its funds. Higher the Fed's discount rate charged to the bank, the higher the rate of interest charged by the bank to the real estate borrower.

M3

All of M2 plus large time deposits at all depository institutions

California Financial Agencies

California has a number of Federal agencies regulating mortgage and lending activities. • Department of Savings and Loans • California Housing Finance Agency (CHFA) • Department of Banking • Department of Insurance • Department of Corporations (DOC) • Department of Real Estate (DRE) • Office of Real Estate Appraiser (OREA) One of them is Department of Savings and loans, which regulates of course saving and loan institutions. -Also there's a California finance agency are CalHFA, they will provide funds for low to moderate income people for the purchase of homes, home loans lot of times in the form of second trust deeds to help them qualify. -the Department of Financial Institutions oversees state license financial institutions, -of course the Department of Insurance regulates insurance carriers, -the Department of Corporations regulates securities transactions and corporations and also Licenses Thrift and Loan companies -And the Office of Real Estate regulates licensees and real estate industry and some lenders under the department of real estate -and or EA is the Office of Real Estate Appraisers and they regulate the appraisers

Gold Reserve Act of 1934

Changed the standards of the monetary system. Caused a severe worldwide depression and an international competitive devaluation of existing currencies. Gold standards were replaced by the gold exchange standard (still used today). 13.71 grams of pure gold = sufficient to back each dollar note. Exchange of gold for coins or paper was eliminated. Government ruled that only licensed dealers could purchase gold from the U.S. Treasury. All circulated gold were requested to be returned. In 1934, paper, silver coins, and banks notes were declared legal means for paying all public and private debts. Money can't be redeemed for gold after 1934. Federal repositories held sufficient quantities to back each dollar in circulation up to the 13.71 grams. When countries are suffering from economic or political turmoil the value of money to command commodities diminishes.

Nation's Fiscal Manager

Collects funds for government operating expenses from federal income tax payment, Social Security receipts, and other sources. The receipts are held on deposit in Federal Reserve, domestc and foreign banks. Employers regularly send their pay-roll deductions for income tax and Social Security withholding tax to the nearest federal bank.

Federal Reserve System: Functions: Discount Rates

Commercial banks operate primarily to finance personal property purchases and short-term business needs. The loans they issue are called commercial paper. Established in 1913, the Federal Reserve System primarily provided its member banks with facilities for selling or discounting their commercial paper The Fed operates a market for selling this paper at a discount, providing member banks with additional funds for continued lending activity. The process enables member banks to expand their lending activities. The banks actually borrow funds from their district Federal Reserve bank and pledge their commercial paper as collateral. Then the Fed charges the borrowing bank intereston its loan, Interest that is considered to be the discount rate, which can also be interpreted as the cost of borrowed funds to the borrower bank. The individual bank has a basic or prime interest rate against which is can measure the interest it must charge its borrowers. Making a borrower of funds from a bank dealing with the Fed will be required to pay a higher rate of interest than the bank is paying for its funds. Now the implications for real estate finance become clearer. The higher the Fed's discounts rate charged to the bank, the higher the rate of interest charged by the bank to the real estate borrower. These discount or prime rates establish the base interest charges for short-term mortgage loans in real estate finance.

Commercial Paper

Commercial paper represents an unsecured promissory note of a corporation. The notes are normally issued at a discount and redeemed at face value. These notes are not guaranteed by the FDIC and may be sold directly by the issuer.

The United States Mint

Created by Congress in 1792. Primary mission is to produce an adequate volume of circulatory coinage for the nation to conduct its trade and commerce. It produced 20 billion coins annually, maintained physical custody and protection of the nation's billions of dollars of gold and silver assets. It also produces commemorative coins and medals for the general public as wel as selling platinum, gold, and silver bullion coins. Locations are: 1. Denver, Colorado 2. Philadelphia, Pennsylvania 3. San Francisco, California 4. West Point, New York 5. Fort Knox, Kentucky

Federal Reserve System: Functions: Reserve Requirements

Each of the Fed's individual member banks is required to keep reserve funds equal to a specified percentage of the bank's total funds on deposit with its federal district bank. Reserve requirements are designed to protect bank depositors by guaranteeing that their funds will be available when they need them. Most important is that the banks' depositors is the Fed's ability to effectively "manage" the national money market by adjusting the amount of reserves required from time to time. By raising the reserve requirements and thereby limiting the amount of money available to the member banks for making loans, the Fed can frequently cool down a "hot" money market and slow the economic pace. By lowering the reserve requirements, the Fed can permit more money to enter a sluggish economy. Member banks can retain a larger percentage of their total assets, allowing more money to become available for loans. Managing the reserve requirements is one way the Federal Reserve System serves its purpose of balancing the national economy. Depending on the types of deposits and the location of the member banks, they have reserves varying from 3-22% of the member banks' deposits. More reserves are required from acity bank than from a country bank becuase of the increased banking activities expected from numerous urban depositors as opposed to a smaller number of rural depositors. The passage of the Deregulation Act of 1980 strengthened the Fed's control over nonmember banks geting the Fed authority to require them to meet the reserve requirements.

Personal Income

Earned from: -Wages -Salaries -Commissions -Interest -Profits from businesses or investments Then deduct for: -Taxes -Rent -Other nontax payments -Disposal personal income -Personal consumption Equals Savings.

Discretionary Income

Earned funds left over for investment after allocations for necessitites and reserves.

The Supply of Money

Economic stability is directly linked to the supply and cost of money. The larger the supply of money available, the greater the economic activity. When the economy is infused with more spendable cash, the possibility for an increase in spending activities is enhanced, complemented by concurrent demands for increased production to replenish depleted inventories. Money brings more jobs, more are employed and spending money. Supply, Demand, and Market-Clearing Interest Rates • Analysis of supply and demand for loanable funds and their role in determining market rates of interest represent a straightforward application of basic economic concepts: - Interest represents the price of borrowing or the reward for lending, and the level of interest rates (price of funds) depends on the relative positions of suppliers (lenders) and demanders (borrowers) in the marketplace Economic activities are influenced by: -the quality of available money -how quickly this "permanent" asset is circulated. Effective quantity is a function of both the measured aggregate and the velocity of its circulation. Interest rates are now being established primarily by marketplace realities rather than by governmental edicts. All depository institutions have the ability to "create" money through credit. Joining the banks and savings institutions are the: -brokerage houses -mutual fund managers -insurance companies -credit card services which now offer checking accounts or electronic fund transfers through sophisticated computer programs. These creators of money can affect the quantity of money available for mortgages.

California Financial Agencies: Bureau of Real Estate

Effective July 1, 2013 California Department of Real Estate comes under the California Department of Consumer Affairs and is called the Bureau of Real Estate (BRE) aka the Bureau. Enforces provisions of the real estate law to achieve maximum protection for purchasers of real property and persons dealing with real estate licenses Investigates complaints against licensees Regulates subdivisions, nonexempt franchises, and real property securities Screens and qualifies applicants for license Requires endorsements by the Bureau for mortgage loan originators Investigates nonlicensees allegedly doing business for which a real estate license is required The Real Estate commissioner DOES NOT have authority to settle or litigate commission disputes or to give legal advise.

The Cost of Money

In terms of the interest charged for borrowed funds, it would appear that the higher the cost. Changes in Demand • Demand for loans varies inversely with market interest rates. Underlying factors interact to determine the demand function: - Expected demand for the product being produced - Cost of productive elements other than capital - Changes in technology and innovation - Shifting expectations concerning the future economic and political environment The lower the borrowing activity, the slower the slower the economic activity. The reverse: The lowering of interest rates, should raise the demand for borrowed funds and produce increased economic activity. Manipulations of the supply and cost of money should result in economic balance.

Treasury Notes

Issued for from 2 - 10 years.

Treasury Bonds

Issued for from 5 - 10 years.

Treasury Bills

Issued for less than a year.

The Treasury's Role

Mixes its issues of short-term and long-term debt instruments to repay or refinance the securities periodically coming due, which keeps the government in funds. It DIRECTLY influences the money supply and INDIRECTLY affect sources of funds for real estate finance. -Issuing more securities should remove money from a "hot" economy and act to slow it down by increasing interest rates, just like the selling operations for the FOMC. -Repaying some securities issues as they become due should pump more money into a sagging economy. -Because of purely fiscal pressure, the Treasury's effort run counterproductive to the Fed's goals.

Silver

Money can't be redeemed for silver after 1960. Silver certificate notes have been replace by Federal Reserve notes.

What is Money?

Money is basically a standard value that you need to buy goods and services. -Medium of exchange or means of payment -Storehouse of purchasing power -Standard of value Money allows us to convert our physical and mental efforts into a convenient method of exchange. Viewed as: -Medium of exchange or means of payment -Storehouse of purchasing power -Standard of value Money - Coins - Paper currency - Checking accounts (demand deposits) (along with debit cards) - Negotiable orders of withdrawal (NOW accounts) - Money market accounts • Near money - Savings accounts (time deposits) - U.S. government bonds - Cash value of life insurance - Preferred and common stocks publicly traded - Money market mutual funds • Credit - Credit cards - Overdrafts - Credit reserves - Home equity lines of credit In the past, money was anything that is accepted as a means of exchange. (beads, salt, shells, etc.) Currently our monetary system is based on confidence and convenience. Paper money and coins are accepted as a means for exchanging value We save money to satisfy our needs for the basic necessities of food, clothing, and shelter. After we have the necessities we save money to satisfy our nees for security, pleasure, and/or power, depending of individual motivations.

The U.S. Treasury

Nation's Fiscal Manager -the U.S. treasury balances the government's income against long and short term debt instruments has a direct effect on the monetary and credit climate of the country. • The Office of the Comptroller of the Currency (OCC) • Nation's Fiscal Manager • The Treasury's Role • The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) • The Federal Deposit Insurance Corporation (FDIC) • The Deposit Insurance Fund -it is a direct effect on the monetary and credit climb in the country -some of the agencies under the treasury are the office of Comptroller of the currency are the OCC, they regulate and supervise all U.S. Banks. -the treasury actually is the nation's fiscal manager -to roll the treasury department is to regulate money and credit and maintain economic balance -the FDIC your Federal deposit insurance corporation insures depositors up to $250,000 - the FDIC is also responsible for handling the assets of failed savings institutions in United States. -the Office of Thrift Supervision OTS supervises National Banks The U.S. Treasury is involved in maintaing the nation's economic balance. The Fed determines monetary policies, the Treasury acts as the nation's fiscal manager and is responsible for controlling the daily operations of the federal government, including the management of the enormous federal debt and the supervision of the banking system through the FDIC. How effectively the Treasury balances the government's income against it's long-term and short-term instruments has a direct effect on the monetary and credit climate of the country.

U.S. Treasury

Nation's fiscal manager.

The Federal Home Loan Bank System: Organization

Patterned after the Fed. 12 regional federal home loan district banks FHLB now regulated by the Federal Housing Finance Agency

The Federal Home Loan Bank System: Activities

Provide its members a national market for their securities. Member banks can borrow directly from their district home loan banks for up to 2 years withour collateral, the longer-term loans necessary for real estate finance ust have collateral pledged by the borrowing association. In terms of total financial assets, the FHLB ranks second in the country, behind Fannie Mae.

California Financial Agencies: Department of Savings and Loans

Regulates state saving and loan association by regular examination of the books and records of each institution. Many have converted to federally chartered savings and loan associations.

California Financial Agencies: Department of Insurance

Regulates various types of insurance companies by examining records to monitor financial stability Regulates insurance companies to judge their rating and underwriting procedures for compliance with the Open Competition Rating Law of California Issues Certificates of Authority for companies to operate in California Administers the examination for agent's licensing

Basic Money Supply

The Supply and Cost of Money • M1 includes cash and checking accounts • M2 adds savings and time deposits of less than $100,000 • M3 adds large time deposits at all depository institutions • Creating money -the supply of money can be grouped into categories -M1 -M2 -M3 Creating money through credit.

Nominal Rate

The interest rate stipulated in a contract.

Federal Reserve System: Functions: Federal Funds Rate

The rate the Fed recommends that member banks charge each other. The Fed also lends money to its member banks without requiring collateral. These loans usually usually are made for short periods of time, and the rate of interest that is charged to the borrowing banks is known as the federal funds rate. This rate is published daily in financial journals and becomes another benchmark against which the banks can base interest charges to their customers.

Federal Reserve System: Functions: Open-Market Operations

The techniques employed by the Fed in buying and selling government securities that, in tur, control the amount of money in circulation. It also includes securities issused by federally sponsored housing and farm credit agencies such as the Federal Home Loan Bank System, the Federal Housing Administration, and the Government National Mortgage Association. Dealer and their customers are linked by a national system of telephone and wire services that facilitate the transfer of tremendous qualities of securities.

Disposal Personal Income

Total income less alocations for necessities; available for personal consumption.

Regulatory Agencies

• Federal Deposit Insurance Corp- FDIC - Insures deposits for commercial and savings banks • Federal Housing Finance Board- FHFB - Oversees mortgage lending by the 121 Federal Home Loan Banks • Federal Reserve Board- FRBB - Oversees the Federal Reserve System. Regulates flow of money

Regulatory

• Federal Home Loan Mortgage Corp- FHLMC (Freddie Mac) - Go to business for buying and selling existing real estate loans-secondary mortgage market • Office of Comptroller of the Currency- OCC - Charters and oversees national banks and holding companies • Calif. Dept. of Financial Inst - Supervises all state chartered banks

Instruments of Credit Policy

• General functions of the Fed - Issue currency - Regulate member banks - Clear and collect checks - Administer credit controls - Act as government's fiscal agent, holding Treasury checking accounts and income tax returns

Government Regulatory Agencies

• Office of Thrift Supervision- OTS - Created by FIRREA - Replace Home Loan Bank Board - Regulator of all savings banks whose deposits are federally insured • Savings Assoc. Insurance Fund - Created by FIRREA to replace FSLIC - Managed by FDIC - Collects premiums on all checking and savings deposits from federally insured savings and loans