Section 5: Sources of Funds

Based on current laws, a certain amount of money can be gifted tax-free every year from one individual to another. So it's possible that a married couple could receive up to __________ ($15,000 per child per parent) to secure a real estate transaction.

$120,000 Current law states an individual can gift up to $15,000 annually to another individual. So a married couple could receive up to $120,000 from their combined parents.

Corporate bonds

-Coupon -Registered -Debenture

Equity REIT

-Deals in real estate sales only -Provides income from rent or sale of property

Which of the following are potential private loan resources that may be willing to finance a home?

Individual entrepreneurs

An industrial development bond is a variety of _____ bond.

Municipal

Which type of bond is used to pay for community improvements?

Municipal bonds

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

Savings accounts

After bonds are ______, their value goes up and down with the market.

Sold

Mutual savings banks were created to serve ______ during the mid-19th century.

Workers

The two primary bond types are municipal and corporate. Investors may use bonds in real estate financing:

-As collateral for a loan -By issuing bonds, through an investment company, in order to gain cash for an investment

Mortgage Banker

-Can have varying interest rates -Stay involved with the loan for its entire lifecycle -Most are private enterprises -Paid through fees from origination and servicing loans -Originate their loans -Loan offerings limited to those offered in-house

Municipal Bonds

-Revenue -Zero coupon -Industrial development

Who or what entity directs the activities of credit unions?

A board of directors

There are three types of international buyers: those who have work visas and are looking for a home to purchase while they're in the U.S., those who are looking for a second home in the U.S., and those who are looking for ______.

A home to purchase as an investment

Kaycie is a new employee at a mutual savings bank. During orientation, she learned that mutual savings banks have limitations that are set by their ______.

Charter

Some countries have banks that issue loans for U.S. real estate purchases. Besides Mexico, what are those countries?

China, the U.K., and Canada

A new apartment building is going up downtown. The owner secured interim financing for the job. Which of these loan types is interim financing?

Construction loan

How much of a mutual savings bank's assets come from savings accounts?

More than 70%

Life insurance companies sometimes like to insure their investment in commercial projects by insisting on an equity position. This is known as ______ financing.

Participation

What does REIT stand for?

Real Estate Investment Trust

Foreign lenders may be U.S. banks with international offices, or foreign banks with U.S. offices. The NAR found that the number of international banks that lend money to foreigners in the U.S. is small. Which three of these countries were mentioned in the 2016 report that's in your resources?

-China -The UK -Canada

Other Bonds

-Secured -Coupon -Registered -General obligation

Private Lender

-The seller -A family member

Investing in an REIT

An equity REIT invests in real estate and earns profits from rent or sale of the property. A mortgage REIT makes mortgage loans and invests in mortgage-backed securities. It gets paid through fees and dividends. Then there's the hybrid REIT option, which is a combination of the activities of the other two types.

Which of the following represents a potential concern when borrowing funds from a pension or retirement plan?

Borrowing without consulting a financial expert can result in unintended consequences, such as income tax liability and loss of retirement income.

Purpose of the Credit Union Membership Access Act

In 1998 Pres. Bill Clinton enacted the Credit Union Membership Access Act. This opened the door for credit unions to recruit new members from a much wider criteria than they had before, making credit unions much more competitive with commercial banks.

Joe decided to borrow funds from his retirement account to fund the down payment on his new house. It's now two years later and he lost his job. What is true about his pension plan?

The loan must be repaid immediately.

Who should sellers consult before agreeing to carry part of a loan for a buyer?

Their financial advisor

Why are life insurance companies less concerned with liquidity than long term security of an investment?

They prefer financing larger projects, which inherently have a more long-term security.

Which of the following statements is true about where mutual savings banks conduct business?

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

Mutual savings banks prefer to keep their lending activities in their immediate geographic area. Why?

They prefer to personally monitor the loans they issue.

Which of these statements are correct about credit unions in regard to real estate loans?

-Credit unions do a lot of business making personal property loans. -Credit unions lend money for traditional mortgages.

According to the NAR, which of the following statements are true regarding foreign investments in U.S. real estate?

-Foreign buyers purchased $153 billion in property in the U.S. between April 2016 and March 2017. -Chinese investors were the largest investors in U.S. real estate in 2017. -Fifty percent of foreign real estate sales in 2017 were in just five states. -Nearly 4% of all home sales in the U.S. in 2017 were to foreign buyers

Other Revenue

-IRA -Trust account -Bond

Borrowing against retirement funds, whether pensions or other retirement accounts, has both benefits and drawbacks. Kathy plans to borrow against her retirement fund to buy a house. Which of the these statements are true?

-Kathy's lender probably won't count this loan in the debt-to-income ratio. -If Kathy doesn't pay the loan back, it'll probably be classified as an early distribution of retirement funds, resulting in a very sad Kathy when her income taxes are due. -Kathy must repay the loan within 5 years. -Kathy should keep in mind that until the borrowed money is repaid, the potential growth of her retirement account will be reduced.

Which of the statements are true about the role life insurance companies play in real estate financing?

-Life insurance companies prefer to finance much larger projects, such as shopping malls. -Life insurance companies are solid, because they generate billions annually. -Life insurance companies prefer to finance large commercial projects such as shopping malls. -Participation financing is a way for life insurance companies to have partial ownership in large projects. -Life insurance companies often purchase blocks of single-family mortgages from the secondary market.

Mutual Savings Banks Limitations

-Limitations are set by the bank's charter. -Limitations vary from state to state.

Pensions and trusts have been investing in mortgage-backed securities for several years, but they're making a move toward more activity on the primary mortgage market, too. The mortgage or hybrid real estate investment trust (REIT) is an increasingly popular option. Which of the following statements describes the hybrid REIT?

-Mortgage REITs earn income in part from the interest earned on mortgage loans made. -A mortgage REIT is similar to a mutual fund, but it invests in properties instead of stocks and bonds.

Which of the following are requirements in order for a trust to qualify as an REIT?

-Owned by at least 100 people -During the last half of any year, no more than 50% of shares owned by five or fewer people -Minimum 90% of taxable income distributed to shareholders annually

Demand Deposit

-Savings account -Checking account

Which of the statements are true about the seller as the lender?

-Sellers who agree to carry part of a loan for a buyer should understand the risks involved. -Sellers have the option to go to a bank and get a loan for a buyer, or to provide a loan to them directly. -One option for seller financing is a contract-for-deed.

Which four of these are areas in which life insurance companies would likely participate in real estate funding?

-Shopping centers -High-rise buildings -Apartment complexes -Hospitals

What percentage of home buyers in the U.S. are international buyers?

10%

Secured corporate bonds use ________ as collateral.

Corporate assets

Mark and Nancy purchased a municipal bond to help with the funding of a new school gymnasium. In exchange for their investment, what will they receive?

Interest

Who originates their own loans?

Mortgage bankers

The Secure and Fair Enforcement Mortgage Licensing Act

An important piece of legislation pertaining to mortgage bankers and mortgage brokers was signed into law in 2008 as part of the Housing and Economic Recovery Act. The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) created a national registry for all mortgage loan originators, who were required to register by July 29, 2011. Only mortgage bankers and brokers who originate loans are required to register. The SAFE Act provides consumer protection and reduces the potential for fraud.

What does NCUA stand for?

National Credit Union Administration

Anna is selling her home and met a nice young couple she really wanted to sell to, but they couldn't get financing. If Anna agrees to carry part of the loan for the buyers, what does she need to understand?

The risks involved

Which of the following statements are true about commercial banks as a source of mortgage funds?

-Commercial banks provide many real estate-related loans. -Commercial banks rely mostly on demand deposits for their supply of funds. -Some commercial banks provide loans for manufactured homes. The loan term often depends on how permanently the manufactured home is attached to the property. -Construction loans are a type of interim financing provided by commercial banks. -Commercial banks provide home equity loans.

The nature of bonds

-Corporate bonds are credit instruments used to raise funds. -Municipal bonds are used to pay for community improvements -Bonds issued against a company's general assets are called debentures. -After bonds are sold, their value goes up and down with the market. -Mortgage revenue bonds are a variety of industrial development bond.

Mortgage REIT

-Earns income from interest dividends -Lends money for mortgages and invests in mortgage-backed securities

Hybrid REIT

-Earns income from rent or sale of property and interest dividends -Invests in both real estate and mortgage-backed securities

Which banking-related entity shares similarities with the purpose and function of the NCUA?

FDIC

Which of the following REITs focuses on lending money for mortgages and investing in mortgage-backed securities?

Mortgage REIT

Which type of real estate investment trust derives a portion of its income from interest dividends?

Mortgage REIT

Introducing Real Estate Investment Trusts (REIT)

The Real Estate Investment Trust Act of 1960 gave us REITs, which were designed to give investors opportunities to invest in real estate while maintaining some of the benefits of other investments, such as mutual funds. One of the major advantages of REITs is the single tax, imposed at the beneficiary level. REITs are sold just like stock on the open market. Let's take a look now at the two primary types of REITs: equity and mortgage REITs, and their kissing cousin, the hybrid REIT.

Which type of real estate investment trust derives its income from the rent or sale of property and interest dividends?

Hybrid REIT

Which type of real estate investment trust involves both residential and commercial properties?

Mortgage REIT

What impact did the authorization of the Credit Union Membership Access Act have on credit unions?

Removed membership restriction of union worker requirement.

Mike has had some financial problems and is considering borrowing from his retirement plan. Which of the following is a true statement?

He should consult with a financial expert before doing so.

What About Credit Unions?

-Federal credit unions are supervised and chartered by the National Credit Union Administration (NCUA). -Credit unions are directed by a board of directors, who are elected from the credit union membership.

Which of the following statements are true regarding the SAFE Act?

-The SAFE Act was signed into law in 2008. -The SAFE Act does not requires all mortgage bankers and brokers to have a certified safe on site. -Only those who originate loans are required to register. -The SAFE Act provides more consumer protection.

Mortgage Broker

-Work with many lenders -Many potential interest rates -Don't service the loan beyond placement -Get paid a placement fee for matching borrower with a lender -Seldom invest in a loan

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

Chinese

Georgette and Elise are buying a home together, and have taken out a loan with a private loan company. They'll pay a bit more interest, and larger fees, but they feel it's worth it to have the home they've always dreamed of. What else might the private loan company require?

Collateral

The Activities of Commercial Banks

Commercial banks are part of a classification of lenders known as institutional lenders. The primary source of funds for commercial banks is demand deposits, or checking accounts. Commercial banks offer real estate-related loans for several different purposes. Construction loans are a type of interim financing. Home improvement loans must be specifically for additions or improvements, but home equity loans may be used for almost any purpose. Some commercial banks offer mobile home loans, and most offer traditional mortgage loans.

Memoryjet, Inc has developed a new technology for high-volume jump drives. In order to manufacture their new devices they will need to gear up a new production line, which will cost about $85 million. What kind of bond instrument could they use to help secure the funds they need for their new line?

Corporate bond

Which of the following describes mutual savings bank loans?

Focus lending offerings on local businesses and residents.

Checklist for REIT

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

Where Do You Find a Private Loan Company?

-There are nationwide private loan companies. -There are nationwide, regional, and local loan companies. -Some loan companies are individual entrepreneurs. -There are individual entrepreneurs, but also loan companies that are incorporated.

Private loan companies take on substantial risk when they issue a loan to a borrower who's unable to secure financing elsewhere. Which are ways they insulate themselves from that risk?

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