MY UNIT 3: REAL ESTATE FINANCING PRINCIPLES

Mortgagor

A borrower who conveys his or her property as security for a loan

Mortgage

A lender in a mortgage loan transaction

Package Loan

A loan that includes both real and personal property

Promissory Note

Agreement to repay a debt in definite installments with interest

Usury

Charging interest at a rate higher than the maximum rate established by state law

T/F: The Down Payment Assistance Program is administered by the Texas Veterans Land Board

FALSE

T/F: Through the Texas First-Time Homebuyer Program, the Department of Housing and Community Affairs lends below-market interest rate mortgage money directly to very-low- to moderate income families

FALSE

T/F: Under the Home Improvement Loan Program, a Texas veteran is permitted to borrow up to $10,000 for a home improvement loan.

FALSE

T/F: Under the Veterans Land Program, the minimum size of an eligible tract of land is five acres.

FALSE

Secondary Mortgage Market

Investors who buy and sell loans after funding

CASE STUDY

John and Joanne Iuro listed their home, which they purchased together shortly after they got married, at 3040 North Racine Avenue, Lot 15 Block 7, in the Cedar Oaks Addition in Dallas, Texas 75340 with the Open Door Real Estate Company. The listing price was $218,500 and possession could be given within four weeks after all parties had signed the contract. The Iuros owe $220,000 under the terms of their loan. Under the terms of the listing agreement, the sellers agreed to pay the broker a commission of 5½% of the sales price. The Iuros have received a notice of appraised value for the property with estimated taxes of $4,383.55. The Iuros want to sell the home as quickly as possible because John recently lost his job and they cannot keep up with the house payments. The Redemanns want the home because the mortgage payments will be less than the home they currently own, which is already worth less than what they owe on it. On May 16, the Open Door Real Estate Company, under an intermediary agreement, submitted a contract offer to the Iuros from Blake and Connie Redemann, husband and wife. The Redemanns offered $215,000 and agreed to obtain a new mortgage loan. After receiving a copy of the Sellers Disclosure Notice, they agree to purchase the property as is and to pay the sellers $100 for the option to terminate the contract within 10 days from the effective date of the contract. The Iuros signed the contract on May 18. Closing was set for June 15 at the office of ABC Title Company. The title company holds earnest money in the amount of $15,000. (Use a 360-day year for prorations.) The buyers will be applying for a 15-year conventional loan from Thrift Federal Savings in the amount of $165,000 at 3% interest. They will be signing a deed of trust to secure the loan. They agree to obtain credit approval within 15 days of signing the contract. Buyers will pay for a new survey. Using these facts, answer the following questions.

Hypothecation

Pledge of specific real or personal property as security without surrendering possession of it

Defeasance Clause

Provision in mortgages that cancels a specified right on the occurrence of a certain condition

Fannie Mae

Quasi-government agency that buys pools of mortgages from lenders in exchange for mortgage backed securities

T/F: A veteran's Housing Assistance Program loan may be coupled with a new conventional, FHA, or VA loan

TRUE

Buydown

Temporarily lowers the initial interest rate through the payment of a lump sum of cash to the lender

Assuming that the interest rate factor is 6.90582, what is the approximate monthly P&I mortgage amount for the loan for which the Redemanns will be applying?

The answer is $1,139.46. The factor for a 3% interest rate is 6.90582 per $100,000. Multiplying the factor by 165 ($165,000 loan), the answer is $1,139.46.

How much will the Redemanns have to make per month to afford the payments in question 3 if Thrift Lending is using a 28% housing-expense ratio?

The answer is $4,069.50. If the mortgage is $1,139.46 and 28% of their income can be used toward their housing expense, $1,139.46 ÷ 0.28 = $4,069.46. Thus the Redemanns have to bring in at least $4,069.50 per month to afford the loan.

Assuming that the appraised value of the house is $205,000, what is the LTV?

The answer is 80%. $165,000 ÷ $205,000 (lesser of sales price or appraisal) = 80%.

The true yearly rate of interest describes

The answer is APR. The Truth in Lending Act, Regulation Z, states that the true rate of interest, adjusting the nominal rate by adding the loan costs, is the APR. The APR must include the costs that are incurred in a transaction solely because there is a loan involved, such as the nominal interest rate, loan origination fees, finders' fees, service charges, loan insurance or guaranty fees, and points. In the case of a mortgage loan made to finance a dwelling, the lender must disclose the APR but does not have to disclose the total interest payable during the term of the loan.

Which secondary market entity primarily provides a secondary market for conventional loans?

The answer is Freddie Mac. Freddie Mac is a private corporation that primarily provides a secondary market for conventional loans. It has the authority to purchase mortgages, pool them, and sell bonds in the open market with the mortgages as security. Fannie Mae is a privately owned corporation that issues its own common stock and provides a secondary market for conventional, FHA, and VA loans. It buys individual loans or pools of mortgages from a lender in exchange for mortgage-backed securities, which the lender may keep or sell. Ginnie Mae, is a wholly owned corporation within the Department of Housing and Urban Development (HUD). It guarantees investment securities issued by private institutions (such as banks and mortgage companies) and backed by pools of FHA, VA, and FSA mortgage loans. Farmer Mac is a stockholder-owned corporation within the Farm Credit System. It is the secondary market for first-mortgage agricultural real estate loans.

Fraud for profit involves which illegal action?

The answer is a lender's obtaining a loan on fictitious properties. Fraud for profit involves illegal actions perpetrated by industry insiders. It may include equity skimming, property flipping, obtaining loans on fictitious properties, mortgage-related identity theft, and intentionally or knowingly making a materially false or misleading written statement in an appraisal of real property. Fraud for profit industry insiders are real estate agents, loan associates, appraisers, escrow officers, attorneys, straw buyers, and many others. Fraud for housing involves illegal actions perpetrated solely by the borrower—giving false information about incomes, expenses, or cash available for down payments in order to get a loan. Predatory lending practices on the part of lenders take advantage of people with lower incomes, senior citizens, and credit-challenged borrowers. For example, lenders charging high interest rates to borrowers based on their race or national origin is a predatory lending practice.

Which BEST defines the secondary mortgage market?

The answer is a market where loans are bought and sold after they have been originated. Loans are bought and sold in the secondary market after they have been closed and funded by a primary mortgage market lender. Lenders routinely sell loans to avoid interest-rate risks and to realize profits on the sales. Selling the loans they have originated enables lenders to recoup their capital to continue making mortgage loans. Loans are eligible for sale to the secondary market only when the collateral, borrower, and documentation meet specified requirements.

Which is qualified through the loan application, the credit evaluation, and two qualifying ratios (the housing-expense ratio and the total-debt ratio)?

The answer is buyer. The property is qualified by doing an appraisal and applying the loan-to-value (LTV) ratio. The title is qualified by doing a title search.

One of the duties of the mortgagor in a deed-of-trust mortgage document is the mortgagor's promise to maintain an adequate amount of which of the following on the property?

The answer is insurance. The borrower also promises to pay the debt in accordance with the terms of the note, to pay all real estate taxes, to maintain the premises in good repair at all times, and not to introduce hazardous materials to the property.

Are Fannie Mae, Freddie Mac, and Ginnie Mae the only entities that make real estate loans available for purchase on the secondary market?

The answer is no, private mortgage packagers exist outside the GSEs. Private packagers wrap jumbo loans (which exceed GSE loan limits) into financial securities that can be sold to investors.

Which of the following statements BEST characterizes a reason for the Iuros and the Redemanns to use the Short Sale Addendum?

The answer is the Iuros are unable to keep up the payments. There are several conditions that may apply to a short sale. The sellers may be "underwater," such that they owe more on a loan than the property's value; the seller may be near default on the mortgage; the seller is unable to keep up the payments; or the seller cannot pay the difference between what is owed and what the house can be sold for.

Who is the grantor under the deed of trust?

The answer is the Redemanns. Under the deed of trust, the borrowers are considered the grantors. The Redemanns are the borrowers and grantors while the lender, Thrift Federal Savings, is the beneficiary. A deed of trust conditionally conveys the real estate as security for the loan to the trustee, a neutral third party. The trustee acquires a mortgage lien on the property and the title to the property stays in trust with the trustee until the loan is paid off.

What are the main reasons for refinancing a mortgage?

The answer is to take advantage of lower interest rates or change from an adjustable-rate to a fixed-rate loan. Borrowers who have missed payments may have difficulty refinancing.

How long does a lender have to file for a deficiency judgment?

The answer is two years after the sale of the property. The employment of the borrower is irrelevant to the collection of the loss, which more typically is recouped from mortgage insurers.

To obtain a mortgage in Texas, what is the minimum number of documents that must be signed?

The answer is two. There are only two parts to mortgage—the debt and the security of the debt—which are the promissory note and the deed of trust.

A seller has an assumable $80,000 loan and is selling a property for $125,000. If the seller makes a $125,000 loan to the purchaser but continues making the payments on the original loan himself, what type of loan did the seller make to the purchaser?

The answer is wraparound loan. A wraparound loan is a junior loan that is larger than the existing first loan. In a wraparound loan, the new lender (or the seller, if owner financed) makes the payments on the original loan, as well as providing additional funds to the borrower. The borrowers make one payment to the new lender. However, the buyers should require a protective clause in the loan documents granting them the right to make payments directly to the original lender in the event of a potential default on the original loan by the second lender. A due-on-sale clause (alienation clause) in the original deed of trust may prevent a sale with a wraparound loan.

Are there consumer advantages to a fixed-rate mortgage?

The answer is yes, because consumers know exactly how much they are going to pay through the duration of the loan and can budget accordingly. Fixed rates do not, however, guarantee future value of a property.

Purchase-Money Mortgage

The buyer gives the seller a note and mortgage

Ginnie Mae

Wholly owned corporation with HUD that administers special assistance programs