quiz 5

9. What is the 5-year average for maintenance capex?

(20+100+40+50+30)/5 = 48%

Reverse mortgages are designed to

address the problem of house rich cash poor elderly that have insufficient cash flow to cover living expenses, so might be forced to sell their home. 62+

11. When the total amount owed to the bank reaches the "maximum claim amount", normally equal to the original value of the house, what can the lender do?

The FHA have to give the maximum claim amount to the lender, so ask the FHA for it as they then take over payments to borrower until they move out or die. So risk free for lender as long as backed by FHA.

7. Suppose an appraisal indicates a house is worth $200,000 and there is an outstanding first mortgage with $100,000 principal remaining. If a HELOC lender uses an 80% CLTV rule, the credit limit offered is

.8(200000) = 80% of appraisal = $160000 Then minus outstanding mortgages So $60000

Residential loans look at

1. Debt to income ratio 2. LTV 3. FICO

Under Dodd frank which prepayment penalties are banned?

1. non qualified residential mortgages 2. adjustable rate mortgages 3. mortgages with an APR 6.5 to 8.5% above to average offer for a comparable transaction

7. For a property of average risk, a 'stabilized' DSCR of _______ or higher is normally acceptable for a lender.

1.2 DSCR = NOI/total debt service. 1.2 means cash flows from the properties debt exceed debt service by 20%

Commercial loans look at

1.Debt service coverage ratio (DSCR) or debt to income rate 2. LTV

5. All else equal (FICO, LTV, DTI, etc.), why do lenders charge more for cash-out refinancing than for purchase loans or for "rate and term" refis with no change in loan amount?

As those who want cash out refinancing are likely short of money so are more risky for the lender as have a higher principle to pay off

6. For lenders, which real estate sectors generally have relatively low risk? High risk? Explain.

Cyclical demand, length of lease Apartments low risk and low interest rates as leases are relatively long term and have low cyclicality in demand Health care also low risk as long term leases and most expenses paid by tenants low cyclicality in demand. lodging high risk as people stay in them for short periods of time so high interest rates and have high cyclicality in demand.

11. Assume the proposed 5-year balloon loan interest rate is 5% and the amortization period is 25 years. What is the DSCR, and should the bank make the loan if the borrower is of typical risk?

DSCR= Debt service coverage ratio = NOI/ annual debt service Monthly PMT (25 yr, 5% from table) = 171.06= Loan/ 171.06=6000/171.06 = 35.075 Yearly PMT= 35.075 * 12 = 420.9 (annual debt service) DSCR = 427.8/ 420.9 =1.11. This is smaller than average cap of 1.2 so bank should not make them the loan. Other factors in bank not making them the commercial loan includes: LTV being above 80% at 6000/7000 = 85.7% (lower is better) as asking for 6000 to refinance 7000 appraised property. Also they don't currently pay themselves a human management fee right now which we would have to as the bank if we took over in a foreclosure.

Progress payment plan

Don't get funds from loan until certain amounts are complete of project with holdback %'s as contingencies

8. How often do HELOC interest rates typically adjust, and are they subject to caps?

Every month based on Libor or T-bills plus minimal lifetime cap.

When can borrowers refinance at a lower rate?

If market interest falls enough to cover the costs of refinancing. Or improved credit scores or income.

2. In what situations might a borrower want to pay back a mortgage in full, before the end of its term?

Improvements in financials (new job, higher wage, better FICO score) for refinancing Also maybe just have money to afford it Or selling house/moving

LTV limit per loan category (raw land, Land development, construction: Commercial multi family non-residential, 1-4 family residential)

LTV's allowed for loan Raw land 65% Land development 75% Construction 80% 1-4 fam residential 85% (i.e. 15% down) So higher LTV allowed as closer to completion

9. What is the typical HELOC minimum payment during the draw period? At the end of the HELOC draw period, what are the typical repayment terms?

Minimum is just the interest payments during draw period. Then at the end of draw period principal repayment in 5-15 years.

4. Suppose a construction loan for an office building has the maximum LTV under the regulatory guidelines. The forecasted value of the completed project is $10M. If the project is now 70% complete, how much (in total) should have been advanced to the borrower at this point, assuming 5% holdback?

Most supposed to loan = 80% (look in book) Therefore, max loan = $8M*.7= $5.6M * (1-.05)= $5.32M

1. When can a homeowner with a reverse mortgage be forced into foreclosure?

Never for as long as the person live's. House is kept in original condition and taxes and insurance are paid

5. Why are land development and construction loans typically structured as interest-only balloons, rather than fully-amortizing loans?

No incoming cash flows to repay the principal. Also meaning they have high default risk. The earlier in the land devlepment the riskier it is as furthest away from cash flows. E.g. time land purchased is very risky.

Are there Dod Frank restrictions with commercial real estate loans?

No prepayment penalties are allowed

10. Are reverse mortgages recourse or non-recourse?

Non recourse as cannot sue senior citizen for deficiency

3. What kinds of senior citizens will be attracted to a reverse mortgage with a house tenure annuity? Why does that fact create problems for the FHA?

Those expecting to live a long time (so healthy). FHA problem as interest paid to borrower ends up amounting to a higher value than the house.

HELOC (Home Equity Line of Credit)

like a credit card with house as collateral. It is a second mortgage with more flexible terms

4. A homeowner is considering refinancing a mortgage with 20 years remaining and $150,000 in principal. She does not itemize deductions. The current rate she pays is 4.5% and the new 20-year loan rate is 4%. The new loan has 0.75 discount points and a 1% origination fee. Other miscellaneous closing costs total $1200. What are total closing costs? During the first year, how much will the homeowner save in interest? From your answers to these two questions, the crude breakeven point is thus X= ____ years for refinancing to make sense. The true breakeven point is somewhat ____ than X years, after accounting for the time value of money and the paying down of principal over time.

Total closing costs = 1200+((.01)+.0075)*150000= $3825 Savings for homeowner in first year = current - old interest rate = 0.5% = .005 *150000= $750 Crude break even = closing costs/ savings per year = 3825/750 = 5.1 years True break even point?

10. Assume other expenses going forward will be the same as in 2018. With the information available, what is a reasonable estimate of NOI going forward?

Total revenues - real estate expenses= NOI 625.8-(50-20-40-48)= $467.8

8. What would actual rental income in 2018 have been if the vacancy/bad debt rate had equaled the 5-year average?

Vacancy debt = amount left in maintenance/ income net of bad debts 2018= 80/700= 11.4 2017=5.8 2016=16.79 2015= 7.7 2014= 11.3 Average= 10.6% Actual rental 2018 income = (1-0.106)* gross scheduled rental income (700)= $625.8 Therefore, gain 5.8 on actual rent income. As 620

When can qualified fixed rate mortgages not have prepayment penalties?

When penalties are in excess of: 1. 2% of the outstanding balance in the first or second year. 2. 1% of the balance during the third year 3. After the third year no penalties may be imposed

Cash-out refinancing

When the refinancing loan amount requested exceeds the original loan amount. This extra money can be used for anything

3. Five years ago, you borrowed $100,000 at 7% to buy your house. The mortgage has $665 monthly payments, and $93,900 in remaining principal. If you refinance with a new 30-year 7% mortgage, the payments will be $625, so you will save $40 per month or $480 per year on your payments. After-tax closing costs are $1500. If you expect to keep living in the house for around 5 years, then should you refinance, and why or why not?

Years to refinance wrongly = after tax closing costs/ yearly saved = 1500/480 = 3.125 years Instead do not refinance as you not actually saving money as you are paying the same rate just spread over a longer period of time. With the smaller amount left in the principle. So look for interest rate when refinancing

Can homeowners refinance 1st mortagage if they have a 2nd one?

Yes, and 2nd mortgage would have seniority in liens over refinanced loan. 2nd mortgage would normally agree if refinancing rate is lower and principle is not increased.

Can HELCO's freeze borrowing/ credit amount when they want?

Yes, they can when there is a reasonable belief that the borrower cannot meet payments or the housing price has decreased.

NOI does not include

depreciation or any income taxes paid by property owner

Cash out refinancing ... the LTV of the home as

increases the new loan has a higher principle than the old loan

HELOC rate

variable interest rate tied to LIBOR or T-bill rate