Real Estate Unit 13 Gov't Involvement in Real Estate Financing

TILA-disclosure of all loan costs

RESPA-disclosure of all costs to close

The federal Real Estate Settlement Procedures Act or RESPA, applies to any residential real estate transaction involving a new first mortgage loan.

RESPA=FIRST RESIDENTIAL MORTGAGE LOAN R=RESPA=RESIDENTIAL

Loans that exceed the limits of loans eligible to be sold to Fannie Mae and Freddie Mac are called

nonconforming loans

The basic components of the real estate financing market are

primary mortgage market, secondary mortgage market, and government influences, primarily the Federal Reserve System.

Equal Credit Opportunity Act-ECOA-purpose is to make consumer credit available with fairness and impartiality

protected categories include -race -sex -religion -national origin -MARITAL STATUS -DEPENDENCE ON PUBLIC ASSISTANCE -AGE

Farm Credit

provides loans to farmers and ranchers

On which type of loan can the borrower prepay without penalty?

-FHA loans -Loans sold to Fannie Mae and Freddie Mac -VA loans

FHA

-Operating under HUD, it protects lenders from loss from borrower's default -Offers loans with LTV up to 96.5%

Major lenders of home mortgage and commercial property loans include:

-Savings associations (also called thrifts) and commercial banks -Insurance companies -Credit unions -Pension funds -Endowment funds -Investment group financing -Mortgage banking companies -Mortgage brokers

All of the following are true for buyers using an FHA or VA loan

-The loan-to-value ratio is typically higher than those used for conventional loans -These loans do not allow prepayment penalties -These loans must have an appraisal when they are originated.

The VA assists veterans in financing the purchase of homes with little or no down payment at market interest rates. The VA issues rules and regulations that set forth the qualifications, limitations, and conditions under which a loan may be guaranteed.

-The owner must live on the property -The veteran must apply for a certificate of eligibility. This certificate sets forth the maximum guarantee to which the veteran is entitled, but the veteran must still qualify for the loan with the lender. -For individuals with full eligibility, no down payment is required for a loan up to the maximum guarantee limit.

A veteran who meets any of the following time-in-service criteria is eligible for a VA-guaranteed loan: -90 days of active service for service people currently on active duty and veterans of at least 90 days of active service during World War II, the Korean War, the Vietnam conflict, and the Gulf War (which extends to the present time) -A minimum of 181 days of active service during interconflict periods between July 26, 1947, and September 6, 1980

-Two full years of service during any peacetime period since 1980 (since 1981 for officers) or the full period (at least 181 days) for which the veteran was called or ordered to active duty -Six or more years of continuous duty as a reservist in the Army, Navy, Air Force, Marine Corps, or Coast Guard, or as a member of the Army or Air National Guard

Federal law requires that private mortgage insurance (PMI) must automatically terminate if:

-a borrower has accumulated at least 22% equity in the home and -is current on mortgage payments.

Primary mortgage sources

-banks -mortgage brokers -insurance companies

VA and FHA loans require all of the following

-borrower must occupy -purchase agreement must have escape clause -no prepayment penalty

The Fed regulates the flow of money and interest rates in the marketplace through its member banks and other depository institutions by:

-controlling the rate charged for loans it makes to them-the discount rate -controlling their reserve requirements—the minimum level of funds that an institution must maintain.

Conventional mortgages

-debt repayment is based solely on the borrower's ability to repay -loans are not insured or guaranteed -if LTV is higher than 80%, borrower must pay PMI

The role of the Federal Reserve System (the Fed), acting through its Board of Governors, is to:

-maintain sound credit conditions -help counteract inflationary and deflationary trends -create a favorable economic climate

PMI

-protects lenders from loss -borrower pays PMI when the LTV is above 80%

The provisions of the Truth in Lending Act (Regulation Z) require all of the following to be disclosed to a residential buyer

-the loan interest rate -discount points -a loan origination fee

2 types of conventional loans

-uninsured (don't need PMI because LTV is less than 80%) -insured ( by PMI because LTV is greater than 80%)

Four primary disclosures required of lenders under TILA: 1-the true cost of credit-expressed as APR. APR is also known as the effective rate 2-the total finance charges -nominal interest, origination fee, points, mortgage insurance

3-the total number and amount of payments 4-the total amount financed

The federal Fair Credit Reporting Act (FCRA) requires the lender to detail the reasons for rejection of a loan application in a statement to the applicant within

30 days.

Sale-and-leaseback arrangements, while not loans, are used to finance large commercial or industrial properties

A business owner sells real estate to an investor but remains on the property as a tenant

PMI (private mortgage insurance) is required on conventional loans with less than 20% down.

But the rules are different for FHA loans. All FHA loans require mortgage insurance premium (MIP), regardless of down payment size.

A buyer purchased a new residence from a builder for $350,000. The buyer made a down payment of $30,000 and obtained a $320,000 mortgage loan. The builder of the house paid the lender 3% of the loan balance for the first year and 2% for the second year. This represented a total savings for the buyer of $16,000. What type of mortgage arrangement is this?

Buydown

What does private mortgage insurance cover?

Protects the top 20% to 30% of the loan against borrower default

Originally the Federal National Mortgage Association, FANNIE MAE created as a government agency in 1938. It became a completely PRIVATE SHAREHOLDER OWNED CORPORATION in 1968, although it is still under congressional supervision.

Fannie Mae BUYS FROM A LENDER a block or pool of mortgages that may then be used as collateral for mortgage-backed securities that are sold on the global market.

Lenders that make conventional loans to sell in the secondary mortgage market follow the standardized forms and guidelines issued by Fannie Mae and

Freddie Mac.

FSA(Farm Service Agency)

Helps borrowers purchase homes in rural areas

In the case of most consumer credit transactions covered by Regulation Z, the borrower has three business days in which to rescind or cancel the transaction by notifying the lender. This right of rescission does not apply to owner-occupied residential purchase-money or first mortgage or deed of trust loans. REG Z=3 DAYS FOR BORROW TO CANCEL

It does, however, apply to refinancing a home mortgage or taking out a home equity loan. REG Z=HOME REFINANCE OR HOME EQUITY LOAN

VA loan

No down payment required with no maximum loan amount restriction

Fannie Mae was placed under the conservatorship of the federal government in

September 2008.

Regulation Z provides strict rules for real estate advertisements-in all media, including newspapers, flyers, signs, billboards, websites, radio or television ads, and direct mailings- that refer to mortgage financing terms

Specific credit terms, such as down payment, monthly payment, dollar amount of the finance charge, or term of the loan, are called triggering terms

The VA also issues a certificate of reasonable value (CRV) for the property being purchased.

The CRV states the property's current market value based on a VA-approved appraisal.

Currently, a borrower can obtain an FHA-insured loan with a down payment as low as 3.5% of the purchase price on a one- to four-unit structure, and certain closing costs can be included in the loan amount.

The borrower is charged a mortgage insurance premium (MIP) for all FHA loans.

In the secondary market, a number of mortgage loans are assembled into blocks called pools.

The key players in the secondary mortgage market were created by the federal government in the decades following the Great Depression and World war II to help increase loan opportunities for homebuyers. They are referred to collectively as government-sponsored enterprises or GSE's

Mortgage loans can be classified based on their loan-to-value ratio (LTV). ***The LTV is the ratio of debt to the value of the property, where the value is: * the sales price or appraised value,*** whichever is less.

The lower the ratio of debt to value, the higher the down payment by the borrower. For the lender, the higher down payment means a more secure loan, which minimizes the lender's risk.

Regulation Z, enacted by the Federal Reserve Board to enforce the Truth in Lending Act (TILA), requires that credit institutions inform borrowers of the true cost of obtaining credit. Regardless of the amount, Regulation Z generally applies when a credit transaction is SECURED BY A RESIDENCE. REG Z=SECURED BY A RESIDENCE

The regulation does not apply to business or commercial loans or to agricultural loans of any amount.

The buyers purchased a residence for $395,000, making a down payment of $79,000 and obtaining a loan for the balance. The loan is a purchase money mortgage

The term purchase money mortgage can mean either owner financing or any mortgage used as acquisition debt in the purchase of a property

The Government National Mortgage Association, GINNIE MAE, was created in 1968 and has always been a GOVERNMENTAL AGENCY. Ginnie Mae does not buy or sell loans or issue mortgage-backed securities. Instead, Ginnie Mae ADMINISTERS SPECIAL ASSISTANCE PROGRAMS AND GUARANTEES investment securities issued by private offerors

They just administer help

A blanket loan covers more than one parcel or lot. It is usually used by a developer to finance a subdivision, but it can also be used to finance the purchase of improved properties or to consolidate multiple loans on a single property. A blanket loan usually includes a provision known as a partial release clause.

This clause permits the borrower to obtain the release of any one lot or parcel from the blanket lien by repaying a certain amount of the loan

The lowest down payment requirements typically are those of

VA.

When the discount rate rises, interest rates on all sorts of loans will rise, making funding harder to obtain.

When the discount rate is lowered, interest rates will go down, making borrowed funds easier to obtain, an incentive to businesses as well as homebuyers.

The buyers purchased a residence for $395,000, making a down payment of $79,000 and obtaining a loan for the balance. The loan is

a purchase money mortgage.

When it insures a home loan, FHA tries to minimize its risk by requiring

an appraisal of the real estate by an FHA-approved appraiser.

A loan that secures any future advances of funds made by the lender to the borrower is

an open-end loan

Fannie Mae

buys FHA-insured loans.

A buydown is a way to temporarily, or permanently, lower the interest rate on a mortgage or deed of trust loan

by buying points

TILA or Truth In Lending Act=Reg Z

covers all loans-promote the informed use of consumer credit (not just residential loans). by disclosure of loan terms and costs

TILA advertising requirements: -asking price and APR are the only finance terms allowed in an ad without full disclosure

mention of down payment, interest rate, monthly payment or number of payments triggers full disclosure

TILA requires a 3 day right of recission

does not apply to home purchase and construction loans

The Office of the Comptroller of the Currency (OCC) establishes regulations and standards for

fiduciary lenders.

LTV ratio

loan amount/property value

a mortgage that has no direct federal involvement is called a conventional loan

loans that have direct federal involvement include: -loans insured by the FHA, Federal Housing Authority -guaranteed by the VA, the U.S. Dept. of Veteran Affairs

The Homeowner's Protection Act of 1998 (HPA) requires that the lender automatically

terminate the private mortgage insurance payment if the borrower has accrued at least 22% equity in the home.

The document that sets forth the maximum loan guarantee to which a veteran is entitled is

the certificate of eligibility.

The lower the ratio of debt to value,

the higher the down payment made by the borrower.

The primary mortgage market is made up of

the lenders that originate mortgage loans.

The Truth in Lending Act (TILA) provides penalties for noncompliance. A successful class action alleging that a creditor understated the APR and/or finance charge of the involved loans could make the creditor liable for punitive damages of

the lesser of $500,000 or 1% of the creditor's net worth, plus attorney's fees and court costs.

The type of real estate loan that allows the lender to increase the outstanding balance of a loan up to the original sum in the note while advancing additional funds is

the open-end mortgage.

Loan approval by Fannie Mae, taking into account the borrower's credit report, a paycheck stub, and a drive-by appraisal of the property, can be accomplished

within minutes.