Unit 13 Highlights
HUD has special programs that may offer a reduced down payments on property. HUD's Good Neighbor Next Door program is intended to help revitalize certain areas by allowing law enforcement officers, firefighters, emergency medical technicians, and pre-kindergarten through grade 12 teachers to purchase eligible property in those areas at a 50% discount off the list price. The buyer must occupy the property as the buyer's sole residence for a minimum of 36 months.
*VA-guaranteed loans The US Department of Veterans Affairs (VA) is authorized to guarantee loans used to purchase or construct homes for eligible veterans and their spouses (including unremarried spouses of veterans whose deaths were service-related)
Conventional loans are viewed as the most secure loans because their loan-to-value (LTV) ratios are often lowest. The lender carefully evaluates both the property and the prospective borrower. The lender relies primarily on its appraisal of the property. No additional insurance or guarantee on the loan is necessary to protect the lender's interest.
A loan with less than a 20% down payment usually will require private mortgage insurance. Loans must meet strict criteria to be sold to Fannie Mae or Freddie Mac. The Federal Housing Finance Agency (FHFA) publishes the maximum loan limits for loans sold to Fannie Mae and Freddie Mac. Loans that exceed the stated limits are called nonconforming loans or jumbo loans and are not marketable
Package loan includes real and personal property. These kinds of loans have been very popular with developers and purchasers of unfurnished condominiums.
Blanket loan covers more than one parcel or lot. It is used by a developer to finance a subdivision, but can also be used to finance the purchase of improved properties or to consolidate multiple loans on a single property. Includes provision know as a partial release clause.
Sale-and-leaseback Not a loan, but an agreements used to finance large commercial or industrial properties. Enables a business to free money tied up in real estate to be used as working capital.
Buydown A way to temporarily (or permanently) lower the interest rate on a mortgage or deed of trust. The buyer's relatives or the sellers might want to help the buyer qualify. A lump sum is paid in cash to the lender at the closing. Typically buydown arrangements reduce the interest rate 1-2% over the first one or two years of the loan term.
A creditor may not consider age unless the applicant is too young to legally sign a contract. Age can be considered if income will drop due to retirement. Lenders are prohibited from discriminating against recipients of public assistance programs such as food stamps and rent subsidies. They may not question about a spouse, unless the spouse is also applying for credit; they may not discount a woman's income or assume she will leave the workforce to raise children. If a loan application is rejected, ECOA and the federal Fair Credit Reporting Act (FCRA) require the lender detail the reasons for the rejection in a statement that must be provided to the loan applicant within 30 days.
Community Reinvestment Act of 1977 (CRA) refers to the responsibility of financial institutions to help meet their communities' needs for low-income and moderate-income housing. Under CRA, financial institutions are expected to participate and invest in local community development and rehabilitation projects; and participate in loan programs for housing, small business, and small farms.
Open-end loan provides a security interest when a note is executed by the borrower to the lender, but also secures any future advances of funds made by the lender to the borrower. The interest rate on the initial amount borrowed is fixed, but interest on future advances may be charged at the market rate in effect at that time. Is often a less costly alternative to a home improvement loan.
Construction loan is made to finance construction of improvements on real estate. Lender commits to the full amount of the loan, but disburses the funds in payments during construction. These payments are also known as draws. Before each payment the lender inspects the work. Construction loans are generally short-term or interim financing. The borrower is expected to arrange for a permanent loan, also know as an end loan or take-out loan, which will pay off when the work is completed.
Other types of FHA-insured loans include adjustable-rate mortgages, home improvement and rehabilitation loans, and for the purchase of condos. A borrower can obtain an FHA-insured loan with a 3.5% down payment. The borrower is charged a mortgage insurance premium (MIP) for all FHA loans and is also responsible for paying an annual premium that is usually charged monthly. The real estate must be appraised by an approve FHA appraiser, and the borrower must meet standard FHA credit qualifications. If the purchase price exceeds the FHA-appraised property value, the buyer may pay the difference in cash as part of the down payment.
Discount points The lender of an FHA-insured loan may charge discount points in addition to a loan origination fee. As of Nov, 2009, if the seller pays more than 6% of the costs normally paid by the buyer, the lender will treat the payments as a reduction in sales price and recalculate the mortgage amount accordingly.
Penalties Alternatively, a successful class action alleging that a creditor understated the APR and/or finance charge could make the creditor liable for punitive damages of the lesser of $500,00 or 1% of the creditor's net worth. A willful violation is a misdemeanor punishable by a fine of up to $5,000, one year's imprisonment, or both.
Equal Credit Opportunity Act A federal Equal Credit Opportunity Act (ECOA) prohibits discrimination in the lending processes based on the applicant's race, color, religion, national origin, sex, marital status, age, or receipt of public assistance. The ECOA requires that credit applications be considered only on the basis of income, the stability of the source of that income, net worth and credit rating.
Private mortgage insurance (PMI) One way a borrower can obtain a conventional loan with less than a 20% down payment is by obtaining a PMI. The borrower purchases an insurance policy that provides the lender with funds in the event of borrower defaulting on the loan. PMI protects the top portion of a loan. The borrower pays a monthly premium or fee while PMI is in force. The Homeowner's Protection Act of 1998 (HPA) requires the lender automatically terminate the PMI payment if the borrower has accrued at least 22% equity in the home and is current on mortgage payments.
FHA-insured loans *The Federal Housing Administration (FHA), which operates under HUD, neither builds homes nor lends money. An FHA-insured loan must be made by an FHA-approve lending institution. As with PMI, the FHA insures lenders against loss from borrower default. The most popular FHA covers fixed-rate loans for 10-30 years. It does not set interest rates, but does limit lender fees and specifies how closing costs and down payment may be paid and by whom. FHA loans cannot charge prepayment penalties.
Government-Sponsored Enterprises (GSEs) Fannie Mae - Conventional, FHA-Insured, VA-guaranteed loans. Freddie Mac - Mostly conventional loans Ginnie Mae - Special assistance loans
Fannie Mae Originally the Federal National Mortgage Association, Fannie Mae was created as a government agency in 1938. 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. In Sept 2008, Fannie Mae was placed into a conservatorship of the Federal Housing Finance Agency (FHFA). One of the most important features of the GSEs has been their development of standardized loan application, credit report, appraisal and detailed guidelines for the lending process.
Automated underwriting and scoring automated underwriting procedures can shorten loan approvals from weeks to minutes. They also tend to lower the cost of loan application and approval. When used in automated underwriting systems, the application of credit scores has become somewhat controversial. In the absence of human discretion, it could be more difficult for low-income and minority borrowers to obtain mortgages.
Freddie Mac states about automated underwriting: Underwriters must consider all three areas of underwriting--collateral, credit reputation, and capacity
*Assumption rules A qualified buyer may assume an existing FHA-insured loan. The assumption rules for FHA-insured loans vary, depending on the date the loan was originated. *As of December 15, 1989*, an assumption is not permitted without complete buyer qualification.
HUD home sales HUD accepts bids on foreclosed properties only from real estate professionals who are registered with HUD. Properties are sold in "as-is" condition, which means that HUD will not make repairs prior to the sale. HUD allows an early bidding period for those who intend to be owner-occupants; properties are made available to investors only after the period has elapsed.
Government Involvement in Real Estate In this unit, we will consider the overall financial marketplace, and refer to any loan secured by either a mortgage or a deed of trust as a mortgage loan *A mortgage that has no direct federal involvement (even though it may be made by a federally chartered lender) is called a conventional loan. Loans that have direct federal involvement include those insured by a Federal Housing Administration (FHA) or guaranteed by the US Department of Veterans Affairs (VA)
Introduction to the real estate financing market The real estate financing market has three basic components: -Government influences -Primary mortgage market -Secondary mortgage market Under the umbrella of the monetary policy set by the Federal Reserve System, lenders that are part of the primary mortgage market originate loans that are bought, sold, and traded in the secondary mortgage market.
Ginnie Mae The Government National Mortgage Association, Ginnie Mae, was created in 1968 and has always been a governmental agency. Ginnie Mae is a division of the Department of Housing and Urban Development (HUD), organized as a corporation without capital stock. Ginnie Mae administers special-assistance programs and guarantees investment securities issued by private offerors and backed by pools of FHA-insured and VA-guaranteed mortgage loans. *The Ginnie Mae pass-through certificate is a security interest in a pool of mortgages that provides for a monthly pass-through of principal and interest payments directly to the certificate holder.
Loan Programs The loan-to-value (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. (loan/value=LTV)
Major lenders of home mortgage and commercial property loans include: -Insurance companies. They collect large sums of money from the premiums paid by their policyholders. Part of the money is held in reserve to satisfy claims and cover operating expenses, much of it is free to be invested in profit-earning enterprises, such as large commercial real estate loans. -Credit unions. Are cooperative organizations whose members place money in savings accounts and are regulated by the National Credit Union Association (NCUA). -Pension Funds -Endowment funds -Investment group financing
Major lenders of home mortgage and commercial property loans include: -Mortgage banking companies make real estate loans with the intention of selling them to investors and receiving a fee for servicing the loans. -Mortgage brokers locate potential borrowers, process preliminary loan applications, and submit the applications to lenders for final approval. They do not service loans once they are made.
The primary mortgage market is made up of the lenders that originate mortgage loans. From a borrower's point of view, the loan is a means of financing an expenditure; from a lender's point, a loan is an investment. Income on a loan and is realized from two sources: 1. Finance charges collected at closing 2. Recurring income, the interest collected Lenders can sell mortgage loans, which produce income to make more loans.
Major lenders of home mortgage and commercial property loans include: -Savings associations (thrifts) and commercial banks. Fiduciary lenders are subject to the standards and regulations established by the Office of the Comptroller of the Currency (OCC). Deposits in insured institutions are covered up to the specified limit, currently $250,000 per depositor, per account, by the Federal Deposit Insurance Corporation (FDIC)
Agricultural loan program The Farm Service Agency (FSA) is a federal agency of the Department of Agriculture. Through the Rural Housing and Community Development Service (RHCDS), FSA also provides loans to help families purchase or improve single-family home in rural areas (generally areas with populations of fewer than 10,000 people). The Farm Credit System (Farm Credit) provides loans to farmers.
Other Financing Techniques -Package Loan -Blanket loan -Open-end loan -Construction loan -Sale-and-leaseback -Buydown -Home Equity loan
Advertising Regulation Z provides strict rules for real estate advertisements. Specific credit terms, such as down payment, monthly payment, dollar amount of the finance charge, or term of the loan, are called triggering terms.
Penalties A creditor who fails to comply with any requirements of TILA, may be held liable to the consumer for actual damages and the cost of any legal action together with reasonable attorney's fees. A creditor may be liable to a consumer for twice the amount of the finance charge, at a min of $400 and max $4,000, plus court costs, attorney's fees, and any actual damages.
Other loan costs The lender sets the loan interest rate, discount points, and closing costs. Closing costs may be paid by the veteran purchaser. seller or shared by both. No commissions, brokerage fees, or buyer broker fees may be charged to the veteran buyer. The seller is allowed to pay for some closing costs, up to 4% of the loan amount, including prepaid closing costs.
Prepayment privileges As with an FHA-insured loan, the borrower under a VA-guaranteed loan can prepay the debt at any time without penalty Assumption tules Va-guaranteed loans made on for after March 1, 1988 are no longer assumable without prior consent from the lender.
The law requires any federally regulated financial institution to prepare a statement containing -A definition of the geographic boundaries of a community -An identification of the types of community reinvestment credit offered -Comments from the public about the institution's performance The institutions must post a public notice that their community reinvestment activities are subject to federal review.
Real Estate Settlement Procedures Act RESPA is designed to ensure the buyer and seller are both fully informed of all costs related to closing the transaction. *Under the TILA-RESPA Integrated Disclosure rule (TRID), the disclosures required by TILA and RESPA have been combined into two new disclosure forms created by the Consumer Financial Protection Bureau.
The secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) requires states to license mortgage loan originators according to national standards and also requires all state agencies to participate in the Nationwide Mortgage Licensing System and Registry (NMLS) *All mortgage loan originators (MLOs) must register annually and meet other requirements.
Secondary mortgage market Secondary mortgage markets in which loans are bought and sold only after they have been funded (closed) help lenders raise capital and make additional mortgage loans. Stimulates both the housing construction market and the mortgage market. 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 are referred to collectively as government-sponsored enterprises (GSEs).
Feddie Mac Originally called the Federal Home Loan Mortgage Corporation, Freddie Mac was created in 1970 as a privately owned corporation but is also now under government conservatorship. Freddie Mac continues to provide a secondary market for mortgage loans, primarily conventional loans. Many lenders use the standardized forms and follow the guidelines issued by Fannie Mae and Freddie Mac.
The Federal Agricultural Mortgage Corporation (Farmer Mac) is privately owned and publicly traded, and was established by Congress in 1988 to create a secondary market for agricultural mortgage and rural utilities loans and the portions of agricultural and rural development loans guaranteed by the US Department of Agriculture (USDA). Farmer Mac is part of the Farm Credit System and is regulated by the Farm Credit Administration.
A veteran who meets the following 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 active service during WWII, Korean War, Vietnam conflict, and Gulf war -A minimum of 181 days of active service during interconflict periods between July 26, 1947, and Sept 6, 1980 -Two full years of service during any peacetime period since 1980, or the full period (at least 181 days) where called to active duty -Six or more years of continuous duty as a reservist
The VA assists veterans in financing the purchase of homes with little or no down payment. 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. There is no VA dollar limit to the amount of the loan a veteran can obtain. The VA also issues a certificate of reasonable value (CRV) which places a ceiling on the amount of a VA-guaranteed loan allowed for the property.
Federal Reserve System 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, and create a favorable economic climate. The Fed divides the country into 12 federal reserve districts, each served by a federal reserve bank. The Fed regulates the flow of money and interest rates in the marketplace through its member banks by controlling the rate charged for loans, called the discount rate, as well their reserve requirements--the minimum level of funds that an institution must maintain.
The discount rate charged by the Fed influences the prime rate (base rate) that member institutions charge for credit cards, small business loans, and other forms of financing. When the discount rate rises, interest rates on all sorts of loans will rise. When the discount rate is lowered, interest rates will go down. The Fed acts on the open market to stimulate the economy at a time of recession by increasing the amount of money in circulation by buying Treasury securities. The Fed can also act to control inflation by decreasing the amount of money in circulation by selling Treasury securities.
Home equity loan is a source of funds that takes advantage of the equity built up in a home. The original loan remains, but the home equity loan is junior to the original lien. It will carry a higher interest rate, but is an alternative to refinancing because only the amount borrowed will be subject to the higher rate. An added benefit, the interest paid up to $100,000 is deductible from federal income tax. Can be used to: finance an expensive item, consolidate other debt, used for medical, educational, or home improvement needs.
The home equity loan can be taken out as a fixed loan amount or as a line of credit. With the home equity line of credit (HELOC), the lender extends a line of credit for the borrower to use. One downside to a HELOC is the full amount of the line of credit will appear on the borrower's credit report, even if it isn't used. The homeowner could refinance all outstanding mortgage loans at some point with a single new loan at an attractive interest rate, in which case the original loan and home equity loan would be paid off
Under TILA, a consumer must be fully informed of all finance charges and the true cost of the financing before the transaction is completed. The finance charge disclosure must include any loan fees, finder's fees, service charges, and points, as well as interest. The lender must compute and disclose the annual percentage rate (APR). In 2009, the Helping Families Save Their Homes Act amended TILA by requiring consumers be notified of the sale or transfer of their mortgage loans.
The party acquiring the loan must provide the required disclosures no later than 30 days after the date on which the loan was acquired. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) transferred most of the Federal Reserve's responsibilities for enforcing TILA in July, 2011, to the new Consumer Financial Protection Bureau (CFPB).
Creditor The creditor, for purposes of Regulation Z, is any person who extends consumer credit more than 25 times each year or more than 5 times each year if the transactions involve dwellings and security. The credit must be subject to a finance charge or payable in more than four installments by written agreement.
Three-business-day right of rescission The borrower has three business days in which to rescind (cancel) the transaction by notifying the lender. This right of rescission does not apply to owner-occupied residential purchase-money for first mortgage or deed of trust loans. It does apply to refinancing a home mortgage or taking out a home equity loan.
*Financing Legislation The federal government regulates the lending practices of mortgage lenders through the Truth in Lending Act (TILA), Equal Credit Opportunity Act (ECOA), Community Reinvestment Act of 1977 (CRA), and Real Estate Settlement Procedures Act (RESPA).
Truth in Lending Act and Regulation Z *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.* Regulation Z generally applies when a credit transaction is secured by a residence. The regulation does not apply to business or commercial loans or to agricultural loans.