Real Estate - Chapter 13

A loan applicant's past credit history indicates his ________ to honor dept obligations, and his income is a measure of the _______ to repay the loan.

Willingness, Ability.

The Federal National Mortgage Association (Fannie Mae) was originally created to buy _____ loans.

FHA.

Mortgage Loan Originators (MLOs)

A MLO is a licensed individual who takes residential mortgage loan applications or offers or negotiates terms of a residential mortgage loan for compensation; they do not make loans. MLOs must be licensed by the Florida Office of Financial Regulation.

The Secondary Mortgage Market

A secondary mortgage market was developed to provide a constant source of funds (liquidity) in the primary mortgage market with which to make loans. Secondary market lenders purchase mortgages that originated in the primary mortgage market as bundles or packages. The principal secondary lenders are government or quasi-governmental agencies and include: -Fannie Mae (FNMA or Federal National Mortgage Association) -Freddie Mac (FHLMC or Federal Home Loan Mortgage Corporation) -Ginnie Mae (GNMA or Government National Mortgage Association)

Interest rates for Federal Housing Administration mortgages are determined by which of the following? A. The market B. FHA C. The government D. The Congress

A.

Reverse Mortgage

Also known as a reverse equity mortgage or reverse annuity mortgage, allows an age 62 or older homeowner to receive a lump sum or monthly advance on a line of credit based on the equity in their home. The lender is repaid when the property is sold, when the owner dies, or when the owner ceases to be a permanent resident.

Purchase Money Mortgage

Also referred to as seller financing, a PMM is any mortgage loan obtained from the seller when the proceeds of the loan are used to purchase real property; typically used when the buyer cannot qualify for a mortgage through other lending channels.

Adjustable Rate Mortgage

An amortized loan where the interest rate fluctuates based on a specified index over the term of the loan (based on the one-year T-bill rate or the eleventh district cost of funds). Payment adjustments are made at set intervals. The margin is a percentage that is added to the index rate by the lender and does not change. The margin added to the note rate is the rate the borrower pays. A teaser rate is an initial rate that is lower than the fully indexed rate used to encourage borrowers to obtain an ARM. Rate adjustment dates, rate adjustment periods (or intervals), and periodic rate cap and payment caps may also apply. Payment caps may cause negative amortization.

Mortgage loan originators _____ loans and mortgage lenders _____ loans.

Arrange, Originate.

If a mortgage loan payment consists of interest only, what term refers to the final payment which includes the full amount borrowed? A. Monthly payment. B. Balloon payment. C. Amortized payment D. Term payment

B.

Prior to deregulation of the banking industry in the 1980s, which institutions were dominant in providing funds for the purchase of single-family residences? A. Commercial banks. B. Saving Associations. C. The FHA. D. Mortgage Loan Originators.

B.

The Federal National Mortgage Association was originally formed to purchase what type of loans? A. Conventional B. FHA C. VA D. Deeds of trust

B.

What will be the effect if the Federal Reserve Board decides to purchase government securities in the open market? A. The money supply will decrease and interest rates will increase. B. The money supply will increase and interest rates will decrease. C. The amount of money that member banks may use for loan purposes will be limited, thereby causing interest rates to increase. D. A tight money market will be created.

B.

When does disintermediation occur? A. When deposits exceed the demand for loans. B. When depositors withdraw their savings from depository institutions. C. When the Internal Revenue Service taxes earnings of investments. D. When the Federal Reserve Board reduces the discount rate.

B.

Which of the following statements best describes the secondary mortgage market? A. It is the market where second mortgages are sold. B. It is where loans originated in the primary market are sold. C. It is where loans made only by private parties are sold. D. It is the market where second mortgages are originated.

B.

With an adjustable rate mortgage, if a payment is not sufficient to cover the interest amount due, the unpaid interest amount may be added to the loan balance. What is the term used to describe this situation? A. Negative amortization. B. Warehousing. C. Indexing. D. Predatory lending.

B.

A Real Estate Investment Trust is formed as a(n) _____ and operates similarly to a(n) _____.

Business Trust, Mutual Fund.

How are mortgage loan originators usually compensated for their services? A. Monthly loan service fee. B. Salary C. Finder's fee or commission D. Share of the borrower's assets

C.

What is the major source of funds for large commercial real estate developments? A. Saving Associations. B. Commercial Banks. C. Life Insurance Companies. D. Mutual Saving Banks.

C.

Which of the following statements regarding types of mortgage loans is correct? A. Both the FHA and the VA make loans. B. FHA loans are guaranteed. C. The FHA insures loans. VA loans are guaranteed. D. Conventional loans are insured by the government.

C.

The Federal Reserve System's least effective tool to affect the money supply is the ability to change the _____.

Discount Rate

Conventional Loans

Conventional loans are not insured or guaranteed by the federal government and are usually more difficult for a borrower to obtain than an FHA or VA loan. Conventional loans traditionally require a higher down payment and carry a higher interest rate than FHA or VA loans. Since they are not insured or guaranteed, they also carry a higher risk of foreclosure. - Qualifying ratios: Typical income ratios for conventional loans are 28% for monthly housing expense and 36% for total obligations ratio. - Interest rate limits: F.S. 687 limits the interest rate that may be charged. Rates in excess of those established by statute is unlawful and is referred to as usury.

A blanket mortgage that allows for the release of a single parcel upon payment of a specified sum contains which clause? A. Defeasance B. Acceleration C. Satisfaction D. Release

D.

Gerri has a 15-year loan with monthly payments that remain the same amount for the entire loan period. Which type of mortgage repayment plan does Gerri have? A. Adjustable rate B. Indexed C. Partially amortized D. Level payment

D.

Lenders who make conventional loans where the buyer puts down less than a 20% down payment will normally require that the borrower pay which of the following? A. Up-Front Mortgage Insurance Premium (UFMIP) payments B. Uninsured Primary Mortgagor Insurance (UPMI) C. Mortgage Insurance Premium (MIP) payments D. Private Mortgage Insurance (PMI)

D.

Which group of financial institutions traditionally preferred to make short-term loans for construction? A. Mutual Saving Banks. B. Savings Associations. C. Life insurance companies using a mortgage broker. D. Commercial Banks.

D.

Other FHA Loan Programs

FHA Section 203(k) Rehabilitation Mortgage Insurance - enables home buyers to finance both the purchase or refinance of a one- to four-family dwelling and the cost of its rehabilitation through a single, long-term, fixed or adjustable rate mortgage. FHA Section 234(c) Condominiums - insures a loan for 30 years specifically for the purchase of a single-unit condominium. FHA Section 251 Adjustable Rate Mortgages - provides insurance on adjustable interest rate financing that is based on FHA/HUD approved market indexes.

Types of Mortgage Fraud

Foreclosure rescue schemes - fraudster approaches homeowner in the beginning stages of foreclosure and offers to work as an intermediary to eliminate the debt and save the house for a fee, but disappears without providing any real assistance. Borrower identity theft - fraudster unlawfully uses someone else's personal information to obtain a mortgage. Reverse mortgage scams - fraudsters take advantage of elderly homeowners with regard to the reverse mortgage process, charging fees or insisting on additional (unnecessary) requirements. Straw borrowers - an individual who is paid to allow someone else to use his or her credit profile to obtain a mortgage; the actual buyer, who would otherwise be unable to secure a loan, is kept secret. House flipping - based on appraisal fraud. No document ("no doc") loans - a loan in which the borrower provides very little information to qualify; the loan is often based only on past credit history or credit scores.

The government owned organizations operating in the secondary mortgage market to make low yield, high risk, loans marketable is the _____ nicknamed _____.

Government National Mortgage Association, Ginnie Mae.

A(n) _____ is a loan secured by the equity in a home and generally must be repaid over a fixed loan period. A(n) _____ is a revolving line of credit obtained against the equity of a home, in which the borrower can draw funds as needed.

Home Equity Loan, HELOC.

Package Mortgage

Includes both real and personal property as security for a loan. A chattel mortgage uses only personal property as security for the loan.

The Federal Reserve should decide to buy government securities, the money supply would _____ and interest rates would _____.

Increase, Decrease.

The flow of funds into deposits held by primary lenders, increasing the mortgage money supply is called _____.

Intermediation.

Mortgage Lenders

Life insurance companies (LICs) - the largest source of funds for financing apartments and commercial projects; regulated by the states in which they operate. Real estate investment trusts (REITs) - formed by private investment groups to purchase real estate for investment and to make short-term construction loans and long-term mortgage loans. A REIT is a business trust where investors make investments in the trust, thereby creating a pool of money that can be used to purchase, construct, or fund its real estate ventures; used primarily for apartment complexes and commercial properties. Commercial banks - stockholder owned companies that make short-term loans to assist commerce. Deposits are insured for up to $250,000 by the Bank Insurance Fund (BIF), a division of the FDIC. Mortgage bankers - make and sell loans; a large source of residential loans.

The secondary mortgage market provides _____ to the primary mortgage market.

Liquidity.

Mortgage Fraud

Mortgage fraud occurs when a consumer or mortgage industry professional intentionally provides incorrect information to a lender to cause them to apply for, fund, purchase, or insure a mortgage loan which otherwise would not have been approved.

Blanket Mortgage

Mortgage given by a borrower (commonly a builder or developer) that pledges two or more parcels as security for a loan. A release clause allows the borrower to pay a specified amount to release a single lot from the blanket so it can be sold to a buyer.

Life insurance companies are the largest source of funds for _____ loans.

Non-Residential

Biweekly Mortgage

One half of the mortgage payment is made every two weeks instead of one payment per month. This is the same as making 13 monthly payments each year and reduces the time necessary to amortize the loan.

The Federal Reserve System's most effective tool to affect the money supply is referred to as _____.

Open Market Operations

The primary mortgage market is where loans are _____.

Originated.

A lender that prefers to keep a loan rather than sell it in the secondary market is called a(n) _____ lender.

Portfolio.

Real Estate Settlement Procedures Act

Real Estate Settlement Procedures Act (RESPA) - regulates closing procedures for one- to four-family residential loans made by federally regulated lenders. RESPA requirements include: - Lenders must provide a loan estimate of settlement costs no later than three business days following the date of mortgage loan application. - Applicant must be provided with a specific information booklet which explain the various closing charges. - A closing disclosure must be completed and provided to the borrower no later than three business days prior to closing. - Kickbacks and rebates are prohibited on any transaction regulated under the provisions of RESPA when a service has not been provided; Florida law allows kickbacks and rebates if a service was provided, all parties are informed, and the recipient of the fee has the appropriate license. - A mortgage servicing disclosure is required

Federal Reserve Board (Tools)

Reserve requirement - a percentage of the money on deposit in a bank that cannot be used for lending and must be transferred to a district Federal Reserve Bank. By increasing or decreasing the reserve requirements, the Federal Reserve can increase or decrease the amount of money a bank has available to lend. If the amount of money available for lending is decreased, the interest rate charged by the bank goes up. If the amount of money available increases, the interest rate charged by the bank goes down. Discount rate - the rate of interest charged by the Federal Reserve to a member bank on funds loaned. An increase in the discount rate causes the bank's cost of doing business to increase, which will be passed on to borrowers in the form of higher interest rates. A decrease in the discount rates lowers the bank's costs, which would result in lower interest rates for borrowers. This is the least effective of the three tools. Open market operation - considered to be the most effective tool available to the Federal Reserve for controlling the money supply. When the FOMC wants to stimulate the economy, they purchase government securities on the open market which puts more money into the economy (intermediation), providing more money for loans and decreasing interest rates. To slow down the economy, the FOMC sells government securities with interest rates higher than banks pay on savings accounts, removing money from the economy (disintermediation), making less money available for loans (making money tighter) and causing the economy to slow down.

Amortized Loan

Scheduled level payments that typically include an interest portion and a principal portion that are fully amortizing, which means the payment is sufficient to repay the interest owed and the loan amount over the life of the loan (typically 15 or 30 years). Early in the loan period, the interest part of the payment is highest and the principal part is lowest. As the payments are made, the interest part decreases and the amount applied to the principal increases. Partially amortized loans are not sufficient to pay the interest and loan in full, so they include a balloon payment at the end. Negative amortization occurs when loan payments fail to cover the interest due, causing the remaining amount of interest to be added to the loan balance, increasing the amount owed.

Home Equity Loan

Secured by the equity in the home; commonly used by homeowners to finance major expenses such as remodeling. Interest paid may be tax deductible.

Term Mortgage

Term (or straight term) mortgage - payments are interest only for the term of the loan. The principal amount borrowed is repaid in a lump sum payment called a balloon payment at the end of the term.

FHA Section 203(b) Mortgage Insurance Program

The 203(b) program provides basic mortgage insurance for the purchase or refinance of owner-occupied one- to four-family properties, with the following terms and requirements: - Maximum loan amount - varies by geographic location (lower vs. higher cost counties); - Down payment requirements - at least 3.5% of the lesser of the purchase price or appraised value; can be from the borrower's own funds and/or a non-repayable gift (documented with gift letter). - Loan-to-Value (LTV) ratio - maximum 96.5% Qualifying loan ratios - borrower must not exceed a housing expense ratio of 31% and a total obligations ratio of 43% - Maximum loan amount - the lesser of the purchase price or appraised value multiplied by the LTV ratio; FHA loans are underwritten in $50 increments, so the calculation should be rounded down to the next lower increment. - Mortgage insurance premiums (MIPs) - MIP is required for all FHA insured mortgage loans, regardless of the down payment. An up-front MIP (UFMIP) paid at closing is a specified percentage of the original loan amount. An annual MIP (AMIP) that is a percentage of the outstanding loan balance (divided into 12 monthly payment) is required for the life of the loan and cannot be cancelled. - Default by the borrower - FHA insures the lender 100%. In the event of default the lender is reimbursed for losses including foreclosure costs. - Interest rate - rates are determined by negotiation between the lender and the borrower. - Lender fees (points) - points for loan fees may be added; the maximum loan origination fee is 1% - Prepayment - loans may be prepaid without penalty Loan terms - loans are fixed rate with a maximum term of 30 years. - Assumption - loans may be assumed (subject to rate change) if the borrower assuming the loan is qualified by the lender. - Appraisal - must be appraised by a FHA-approved appraiser; typically paid for by the buyer.

FHA Insured Mortgage Loans

The FHA insures loans; it does not make loans. The purpose of the insurance is to protect the lender from loss in the event of foreclosure. This encourages lenders to make loans to otherwise creditworthy borrowers and projects that might not be able to meet conventional underwriting requirements.

Federal Reserve System

The Federal Reserve System is a central bank established by Congress that is made up of 12 regional banks managed by a Board of Governors. It operates independently of the government taking actions, called monetary policy, to regulate the cost and availability of credit in the U.S, controlling the supply of money in the market.

Truth In Lending Act

The TILA was enacted to assure that consumers receive meaningful information concerning the true cost of credit. Enforced by the FTC and implemented under Regulation Z, it requires that residential borrowers be clearly shown the annual percentage rate (APR) which includes interest, credit life insurance, discount, and loan origination fees. Borrowers are allowed a rescission period of 3 days on the refinance of the principal residence. Triggering Terms: Under TILA, if an advertisement contains any one of the specified terms, then that ad must also include three prescribed disclosures. The following terms trigger the disclosures: amount of down payment (% or $), amount of payment (% or $), number of payments, period of repayment, or amount of any finance charge. The disclosures are: amount of percentage of down payment, terms of repayment, and annual percentage rate.

VA Guaranteed Loans

The VA mortgage loan program guarantees permanent, long-term mortgage loans that are originated by VA approved lenders. The program was created to assist qualified veterans with financing the purchase of reasonably priced homes by requiring little or no down payment, comparatively low interest rates, and relatively easy qualification requirements. If mortgage money is not available, the VA can loan money directly to a veteran. The following loan terms and requirements apply: - Funding fee - may be required; similar to a conventional loan loan origination fee. - Eligibility - a veteran's eligibility and amount of guarantee is shown on a certificate of eligibility obtained by the VA. The eligible veteran must have served a minimum amount of time and be honorably discharged. A surviving spouse may also be eligible. - Entitlement - amount changes periodically; can be reused if a prior VA guaranteed loan was repaid. - Down payment - not normally required. - Qualifying ratios - borrower must not exceed a total obligations ratio of 41%; the VA does not use a monthly housing ratio. - Interest rate - determined by negotiation between the lender and the borrower. - Lender fees (points) - may be added by the lender. - Appraisal - must be performed by a VA approved appraiser. - Maximum loan amount - no maximum loan amount, however, the loan may not exceed the lesser of the sales price or appraised value of the property. Prepayment - may be prepaid without penalty. Default by the borrower - Unlike FHA loans, VA loans are not insured. If default occurs and a loss results from foreclosure, the borrower is responsible for the loss.

Mortgage Fraud Red Flags

The following activities are considered "red flags" as possible signs of mortgage fraud that warrant further investigation: - Unsolicited offers from individuals claiming to be mortgage representatives. - Upfront fees for services. - Requests to make mortgage payments directly to a foreclosure service company. - Requests for a quitclaim deed to transfer the interest in the property. - Names have been added or deleted from the sales contract. - Requests to sign incomplete loan documents. - Inflated appraisals. - Inflated contract prices.

The Primary Mortgage Market

The primary market is where loans are originated. The sources may be individuals, institutional lenders, and other organizations formed to loan money as agents or middlemen for insurance companies or pension funds.

Private Mortgage Insurance (PMI)

To offset the risk, the borrower may be required to pay PMI. Federal lending regulators usually require PMI when the loan amount exceeds 80% of the value of the property. The PMI will be automatically canceled when the LTV is 78% or less of the property's original value. The borrower may request cancellation of PMI when the LTV reaches 80% and has the right to accelerate the payments to bring the LTV down.

The process of qualifying a borrower and a property in connection with the loan application is known as mortgage _____.

Underwriting