20: Finance Practices
Nonrecourse loan
(also called a dry mortgage), the lender generally feels confident that the property used as collateral will be adequate security for the loan. The promissory note contains an exculpatory clause that prohibits the lender from suing for a deficiency judgment in the event that a foreclosure on the property securing the loan does not produce sufficient proceeds to pay all sums due the lender. Financing is used in real estate syndications to enable the limited partners to add their proportionate share of the mortgage in their tax basis for the purpose of computing depreciation deductions or taking other losses in a real estate syndication.
The Fed uses four tools to influence and stabilize the economy:
-printing money -reserve requirements -discount rates -open market considerations
The number of discount points charged depends on two factors:
1. the difference between the interest rate and the lender's required yield and 2. how long the lender expects it will take the borrower to pay off the loan.
A veteran who meets any of the following time-in-service criteria is eligible for a VA loan:
90 days of active service for veterans of World War II, the Korean War, the Vietnam conflict and the Persian Gulf War A minimum of 181 days of active service during interconflict periods between July 26, 1947 and September 6, 1980 Two full years of service during any peacetime period after September 7, 1980 Six or more years of continuous duty as a reservist in the Army, Navy, Air Force, Marine Corps or Coast Guard or as a member of the Army or Air National Guard.
Truth-in-Lending Act
A body of federal law passed in 1968 as part of the Consumer Credit Protection Act, and implemented by the Federal Reserve Board's Regulation Z. The main purpose of this law is to ensure that borrowers and customers in need of consumer credit are given meaningful information with respect to the cost of credit. The law does not apply to loans for business purposes. It requires disclosure of the cost of credit in the form of an annual percentage rate (APR), among other things. It also prohibits advertising credit using specific terms without also including additional required disclosures.
FHA Prepayment Privileges
A borrower may prepay an FHA-insured loan on a one-to four-family residence without penalty. For loans made before August 2, 1985, the borrower must give the lender written notice of intention to exercise the prepayment privilege at least 30 days before prepayment. If the borrower fails to provide the required notice, the lender has the option of charging up to 30 days' interest. For loans initiated after August 2, 1985, no written notice of prepayment is required.
Adjustable-Rate Mortgage ("ARM")
A broad term for a loan with rates and terms that can change. The ARM has become commonplace with "caps" on interest rate fluctuations, both annually and for the life of the loan. The ARM contains an escalation clause which allows the interest rate to go up or down.
Certificate of Eligibility
A certificate issued by a Veterans Administration regional office to veterans who qualify for a VA loan.
Certificate of Reasonable Value (CRV)
A certificate issued by the VA setting forth a property's current market value estimate, based on a VA-approved appraisal.
Exculpatory Clause
A clause sometimes inserted in a mortgage not in which the lender waives the right to a deficiency judgment.
Escalator Clause
A contract provision permitting an adjustment of certain payments either up or down to cover certain contingencies. Adjustable rate mortgages and index leases contain escalator clauses.
Credit Union
A cooperative nonprofit organization in which members (labor unions, clubs, churches, Realtors) place money in savings accounts, usually at higher interest rates than other savings institutions.
Bond
A debt instrument; an obligation to pay; which may or may not be secured by a mortgage or deed of trust.
What protects a lender if he does not want a loan to be assumed by another party?
A due-on-sale clause.
Government National Mortgage Association (GNMA) ("Ginnie Mae")
A federal agency created in 1968 as a secondary mortgage market participant when FNMA was partitioned into two separate corporations. "Ginnie Mae," as it is popularly called, is a corporation without capital stock and is a division of HUD. GNMA buys only pools of FHA and VA loans and obtains funds for buying the pools by selling mortgage-backed securities on the stock market.
Home Mortgage Disclosure Act
A federal law that requires lenders with federally related loans to disclose the number of loan applications and loans made in different parts of their service areas; designed to eliminate the discriminatory practice of redlining.
Negative Amortization
A financing arrangement in which the monthly payments are less than the true amortized amounts and the loan balance increases over the term of the loan rather than decreases; an interest shortage that is added to unpaid principal.
Reverse Annuity Mortgage (RAM)
A form of mortgage that enables elderly homeowners to borrow against the equity in their homes so they can receive monthly payments needed to help meet living costs.
Shared Appreciation
A form of participation mortgage in which the lender charges a reduced interest rate in consideration of the mortgagor agreeing to share with the lender the profits generated from the mortgaged property when it is sold.
Growing Equity Mortgage (GEM)
A full-term mortgage with an initial payment and interest rate generally equal to the prevailing conventional market rate. The GEM has provisions for gradually increasing payments (from 2.5% to 7.5% per year) based on either predetermined increases or increases tied to an index. The increases in payments are applied directly to principal and substantially reduce both the term of the loan and the total amount of interest paid.
Veterans Administration (VA) Loan
A government-sponsored mortgage assistance program in which the VA guaranties the lender will not lose any of its loan investment should the borrower default. The main purpose of the VA loan is to assist veterans in financing the purchase of reasonably priced homes with little or no down payment, relatively easy qualification criteria and comparatively low interest rates.
The type of loan that might be used to finance the purchase of a first-time home for a young attorney would be which of the following?
A graduated payment mortgage.
A couple obtained a second mortgage loan on their home to add a new bedroom and bathroom to accommodate a growing family. The type of loan they obtained is called:
A home equity loan is used to borrow against the equity in the home for a number of reasons. The loan is typically a second mortgage loan.
Estoppel
A legal doctrine by which a person is prevented from asserting rights or facts that are inconsistent with a previous position or representation made by act, conduct or silence. For example, a mortgagor who certifies that he or she has no defense against the mortgagee would be estopped to later assert any defenses against a person who purchased the mortgage in reliance on the mortgagor's certificate of no defense.
Estoppel Certificate
A legal instrument executed by a mortgagor setting forth the exact unpaid balance of a mortgage, the current rate of interest and the date to which interest has been paid. It further states that the mortgagor has no defenses or offsets against the mortgagee at the time of the execution of the certificate. Once the mortgagor has executed a certificate of no defense, the mortgagor cannot thereafter claim that he or she did not owe the amount indicated in the certificate. Also called a certificate of no defense.
Open-End Mortgage
A loan in which the borrower is given a limit up to which he or she may borrow, with each incremental advance to be secured by the same mortgage. The advances may be in amounts up to but not exceeding the original borrowing limit. Lines of credit, credit cards and construction loans are types of open-end loans.
Nonrecourse Loan
A loan in which the borrower is not held personally liable on the note. The lender of a nonrecourse loan generally feels confident that the property used as collateral will be adequate security for the loan. Also called a dry mortgage.
Secondary Mortgage Market
A market for the purchase and sale of existing mortgages, designed to provide greater liquidity for selling mortgages; also called the secondary money market, not to be confused with secondary financing. The primary participants in the secondary mortgage market are FNMA, GNMA and FHLMC (Fannie Mae, Ginnie Mae and Freddie Mac). The largest participant is FNMA.
Package Mortgage
A method of financing in which the loan is secured by both real and personal property of the borrower.
Wraparound Mortgage
A method of financing in which the new mortgage is placed in a secondary or subordinate position; the new mortgage includes both the unpaid principal balance of the first mortgage and whatever additional sums are advanced by the lender. Sometimes called an all-inclusive loan.
Purchase-Money Mortgage (PMM)
A mortgage given as part of the buyer's consideration for the purchase of real property and delivered at the same time that the real property is transferred as a simultaneous part of the transaction. It is commonly a mortgage taken back by the seller in lieu of purchase money.
Participation Mortgage
A mortgage in which the lender participates in the income from the mortgaged property beyond a certain fixed return, in consideration of a reduction in the interest rate on the loan.
Graduated Payment Mortgage (GPM)
A mortgage in which the monthly payment for principal and interest graduates by a certain percentage each year for a specific number of years and then levels off for the remaining term of the mortgage.
First Mortgage
A mortgage or deed of trust on property that is superior in right to any other mortgage. It is not enough that a mortgage is the first to be executed or that the parties call it a first mortgage; absent subordination, it must be recorded first.
Blanket Mortgage
A mortgage secured by several properties or a number of lots, often used to secure construction financing for proposed subdivisions or condominium developments.
Direct Reduction Mortgage
A mortgage that requires payment of a fixed amount of principal each period, plus accrued interest.
Financing Statement (form UCC-1)
A new brief document (required under the Uniform Commercial Code) filed with the Secretary of State to "perfect" or establish a creditor's security interest in personal property which is not "titled," such as farm equipment, office machines, cattle, etc.
Which of the following is most likely to contain an exculpatory clause?
A nonrecourse loan is one in which the lender waives the right to a deficiency judgment if the property has to be sold through foreclosure. The clause used to waive this right is called an "exculpatory" clause.
Mortgage Broker
A person or firm that acts as an intermediary between borrower and lender; one who for compensation or gain, negotiates, sells or arranges loans and sometimes continues to service the loans; also called a loan broker.
Mortgage Banker
A person, corporation or firm not otherwise in banking and finance that normally provides its own funds for mortgage financing as opposed to savings and loan associations or commercial banks that use other people's money to originate mortgage loans.
Good-Faith Estimate
A preliminary account of expected closing costs, which RESPA requires lenders to give to borrowers within 3 business days from receipt of a loan application when a federally related mortgage loan is involved.
Section 203(b)
A program of home mortgage insurance offered by the Federal Housing Administration.
Release Clause
A provision found in many blanket mortgages enabling the mortgagor to obtain partial releases of specific parcels from the mortgage upon a payment larger than the pro rata portion of the loan.
A mortgage loan made by the sellers to enable the buyers to complete the purchase of a property is called:
A purchase money mortgage is any loan made to finance the purchase of a property, but the term is commonly used to describe seller financing.
Gloria Stones is qualified to obtain an FHA loan for the purchase of a new home. From which of the following may she obtain this loan?
A qualified Federal Housing Administration lender. The FHA doesn't make loans, it insures them. In order for a lender to offer FHA financing, the lender must be approved by the FHA.
Sale-Leaseback
A real estate financing technique whereby a property owner sells the property to an investor or lender and, at the same time, leases it back.
Conventional Loan
A real estate loan that is not supported by any government guaranty or insurance.
A buyer purchased a home in a new subdivision. When the transaction closed, only a portion of the existing mortgage was paid, yet the buyer's new mortgage was now a first mortgage. In order for the seller's mortgage to have been partially satisfied, the mortgage must have included which of the following?
A release clause
A buyer purchased a home in a new subdivision. When the transaction closed, only a portion of the existing mortgage was paid, yet the buyer's new mortgage was now a first mortgage. In order for the seller's mortgage to have been partially satisfied, the mortgage must have included which of the following?
A release clause. The clause in a blanket mortgage that requires the mortgagee to release part of the real estate from the mortgage or deed of trust upon receipt of payment of a portion of the property that was sold is called a release clause. The clause specifies how much principal must be paid for the release of each lot after the property is divided.
Bridge Loan
A residential financing arrangement in which the buyer of a new home borrows money and gives a second mortgage on the buyer's unsold home to fund the acquisition of a new home. Also called a swing loan.
Interim Financing
A short-term loan usually made during the construction phase of a building project; often referred to as a construction loan. Proceeds from the interim loan are disbursed in increments as the construction progresses. Long-term or permanent financing is usually arranged in advance to take out the interim loan.
Construction Loan
A short-term or interim loan to cover the cost of construction of a building or development project, with loan proceeds advanced periodically in the form of installment payments as the work progresses. Upon completion of the project, the construction loan is paid off from a long-term, take-out loan, such as a new FHA, VA or conventional loan.
Which mortgage clause allows a lender to regain his investment if a borrower stops making payments?
Acceration
The type of mortgage that usually contains rate caps is:
Adjustable Rate Mortgage. A cap on the interest rate on an adjustable rate mortgage prevents the borrower from experiencing radical fluctuations in the interest rate on the loan that could cause the monthly payments to increase to a point at which the borrower could no longer afford them.
An escalation clause is usually found in which of the following types of mortgages?
An ARM.
Discount Points
An added loan fee charged by a lender to make the yield on a lower-than-market-interest FHA, VA or conventional loan competitive with higher-interest loans. One discount point is equal to 1% of the loan amount. Each discount point represents an approximate equivalent change in the interest rate of 1/8%.
Annual Percentage Rate (APR)
An expression of the relationship of the total finance charge to the total amount to be financed as required under the federal Truth-in-Lending Act.
The type of loan that allows the borrower to withdraw and repay up to a certain amount over and over again without having to record a new mortgage or sign a new note is referred to as:
An open-ended loan
Federally Related Transactions
Any sale transaction that ultimately involves a federal agency in either the primary or secondary mortgage market.
A person in a hurry to purchase a piece of real estate could use which of the following without paying a loan origination fee?
Assume the existing loan. When a person assumes the existing loan, no new loan is being originated, so there is no loan origination fee. There will most likely be an assumption fee charged by the lender. However, assumption fees are nowhere near as expensive as loan origination fees. Also, a person assuming an existing loan avoids other fees such as the appraisal fee, title insurance premium, processing fee, underwriting fee and other fees
Discount Rates
Banks that are members of the Federal Reserve System may go directly to the Federal Reserve Bank in their district and borrow money from the Federal Reserve at this. The Fed will lend money to members only on an emergency basis—that is, when members have a need for cash. The money cannot be used for working capital, so a change in this serves more as a signal to the banking community than as a indicator of cost of funds. This rate is the basis on which the banks determine the percentage rate of interest they will charge their loan customers. The prime rate (the short-term interest rate charged to the big, money-center banks' largest, most creditworthy customers) is strongly influenced by the Fed's rate. In turn, the prime rate is often the basis for determining a bank's interest rate on other loans, including mortgages. In theory, when the Federal Reserve discount rate is high, bank interest rates are high. When bank interest rates are high, fewer loans are made and less money circulates in the marketplace. On the other hand, a lower discount rate results in lower interest rates, more bank loans and more money in circulation.
In a sale-leaseback arrangement, the:
Buyer is the lessor. Since the buyer is leasing the property back to the seller, the buyer is the lessor and the seller is the lessee.
A creditor
Defined under the law as anyone who extends more than 25 non-real estate secured consumer loans of $25,000 or less in a given year. The term also applies to anyone who makes more than 5 consumer loans in a given year, which are secured by a 1-4 unit residence. The regulation does not apply to business, commercial or agricultural loans or to unsecured personal loans of more than $25,000. (So if an investor purchased a residential property for commercial purposes, Regulation Z would not apply.) The loan must be subject to a finance charge and payable in 4 or more installments.
wraparound mortgage (or all-inclusive deed of tru
Enables a borrower with an existing mortgage or deed of trust loan to obtain additional financing from a second lender without paying off the first loan. The second lender gives the borrower a new, increased loan at a high interest rate and assumes payment of the existing loan. The total amount of the new loan includes the existing loan as well as the additional funds needed by the borrower. The borrower makes payments to the new lender on the larger loan. The new lender makes payments on the original loan out of the borrower's payments. Can be used to refinance real property or to finance the purchase of real property when an existing mortgage cannot be prepaid due to a prepayment penalty.
Fannie Mae
Federal National Mortgage Association or FNMA
The largest participant in the secondary mortgage market is:
Federal National Mortgage Association. The Federal National Mortgage Association ("FNMA" or "Fannie Mae") was originally created by the federal government to purchase FHA loans, giving an incentive to the lenders to make loans with a 30-year term because they had a place to sell them. Fannie Mae was sold to the private sector before the creation of the Government National Mortgage Association ("FNMA" OR "Ginnie Mae"). When Fannie Mae was sold to the private sector, it was free to purchase not only government insured or guaranteed loans, but conventional loans as well. It rapidly became the largest participant in the secondary mortgage market. Since Fannie Mae and Freddie Mac were taken over by the federal government in 2008, much has changed. Until the dust settles, and the full impact of the real estate market crash of recent years is felt, we really can't predict the future of the big three participants in the secondary market.
Equal Credit Opportunity Act
Federal legislation passed in 1974 to ensure that the various financial institutions and other creditors exercise their responsibility to make credit available with fairness and impartiality and without discrimination on the basis of race, color, religion, national origin, sex, marital status, age or receipt of income from public assistance programs.
Seller Financing
Financing provided by the owner/seller of real estate, who takes back a secured note. Also called a purchase money mortgage.
Discount points for borrowers
For the borrowers, one discount point equals 1 percent of the loan and is charged as prepaid interest at the closing. For instance, three discount points charged on a $100,000 loan would be $3,000 ($100,000 x 3% or .03). If a house sells for $100,000 and the borrower is obtaining an 80% loan, each point would be $800.
Ginnie Mae
Government National Mortgage Association or GNMA
Buyers purchased a home using a 20% down payment and financed the balance of the purchase price. The lender required them to pay 2 points which was equal to $1,000. What was the cost of the house?
If the buyers are making a 20% down payment, the loan amount is equal to 80% of the purchase price. Each discount point is equal to 1% of the loan amount. So, $1,000 ÷ .02 (or 2%) = $50,000 loan amount. $50,000 ÷ .8 (or 80%) = $62,500.
Servicing loans
In addition to the income directly related to loan origination, some lenders derive income from this for other mortgage lenders or investors who have purchased the loans. Servicing involves such activities as: collecting payments (including insurance and taxes), accounting, bookkeeping, preparing insurance and tax records, processing payments of taxes and insurance and following up on loan payment and delinquency.
Flood Insurance
Insurance offered by private companies and subsidized by the federal government, designed to provide coverage for damage from floods or tidal waves. Lending institutions regulated by the federal government require flood insurance on any financed property located within certain flood-prone areas as identified by the Federal Emergency Management Agency, in accordance with the National Flood Act of 1968.
The Federal Home Loan Mortgage Corporation (FHLMC) (NYSE: FRE), known as Freddie Mac
Is a government sponsored enterprise (GSE) of the United States federal government. Has its headquarters in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia.[1][2] Was created in 1970 to expand the secondary market for mortgages in the US. Buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market.
Regulation Z requires lenders to make certain disclosures regarding the true cost of credit for which of the following loans?
Lenders must disclose the amount financed, the total finance charge, the total of payments and the annual percentage rate before the buyer becomes obligated on the loan, if the lender makes more than 5 real estate loans in a year, secured by the borrowers 1-4 unit principal residence.
Rate caps
Limit the amount the interest rate may change. Most ARMs have two types—periodic and aggregate.
Fannie Mae and Freddie Mac under the conservatorship of the in 2008
On September 7, 2008, Federal Housing Finance Agency (FHFA) director James B. Lockhart III announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA (see Federal takeover of Fannie Mae and Freddie Mac). The action has been described as "one of the most sweeping government interventions in private financial markets in decades." Moody's gave Freddie Mac's preferred stock an investment grade rating of A1 until August 22, 2008 when Warren Buffett said publicly that both Freddie Mac and Fannie Mae had tried to attract him and others. Moody's changed the credit rating on that day to Baa3, the lowest investment grade credit rating. Freddie's senior debt credit rating remains Aaa/AAA from each of the major ratings agencies Moody's, S&P, and Fitch. As of the start of the conservatorship, the United States Department of the Treasury had contracted to acquire US $1 billion in Freddie Mac senior preferred stock, paying at a rate of 10 percent a year, and the total investment may subsequently rise to as much as US $100 billion. Because Fannie Mae and Freddie Mac's involvement in the secondary mortgage market is so pervasive, the underwriting guidelines of many primary market lenders are written to comply with their regulations. Bank statements, tax returns, verifications of employment and child support—most of the paperwork a potential borrower must deal with—may be tied to Fannie Mae and Freddie Mac requirements.
Regulation Z and advertising
Provides strict regulation of real estate advertisements (in all media, including newspapers, fliers, signs, billboards, web sites, radio or television ads and direct mailings) that refer to mortgage financing terms. General phrases like "liberal terms available" may be used, but if details are given, they must comply with the act. The annual percentage rate (APR)-which is calculated based on all charges rather than the loan interest rate-must be stated. Advertisements for buydowns or reduced-interest rate mortgages must show both the limited term to which the interest rate applies and the annual percentage rate. If a variable-rate mortgage is advertised, the advertisement must include: the number and timing of payments, the amount of the largest and smallest payments and a statement of the fact that the actual payments will vary between these two extremes.
The RESPA Uniform Settlement Statement form must be used to illustrate all settlement charges for:
RESPA applies to transactions in which a federally related mortgage loan is used to finance the purchase of a 1-4 unit residence.
A savings and loan association sold 100 notes to the Federal National Mortgage Association. What type of activity is this?
Secondary market. The secondary market (or secondary mortgage market) is where loans are bought and sold. They are originated in the primary market.
The VA also issues a Certificate of Reasonable Value (CRV) for the property being purchased.
States the property's current market value based on a VA-approved appraisal. Places a ceiling on the amount of a VA loan allowed for the property. If the purchase price is greater than the amount cited, the veteran may pay the difference in cash.
A senior lienholder may become a junior lienholder by recording which agreement?
Subordination A subordination agreement is one in which the holder of an existing mortgage loan agrees that the mortgage or trust deed is subordinate or junior to the lien of a mortgage or deed of trust that is recorded concurrently with the subordination agreement.
Open Market Operations
The Fed may enter into open market operations. This strategy encompasses the movement of cash into or out of commercial ba nks through the buying or selling of government bonds. When the Fed buys bonds, the banks receive an influx of cash that can be used to make more loans and thus stimulate the economy.
Reserve Requirements
The Fed regulates reserve requirements for all depository institutions offering transaction (checking) accounts. Depository institutions must keep a specified percentage (usually 10% to 25%) of their deposits in a noninterest-bearing reserve held by the Fed. This reserve is a cushion and can be used by the Fed for short-term loans to its members.
The type of mortgage in which all payment increases are applied to a reduction of the principal balance is called:
The GEM (growing equity mortgage) has payments that increase as the equity increases. The payment increases are all applied to a reduction in the principal balance.
Purchase-money mortgage example
The White's are purchasing a home from Mr. and Mrs. Black for $160,000. The current market rate of interest is 8.5% per annum. When they bought the home three years ago Mr. and Mrs. Black obtained a first mortgage loan in the amount of $140,000 with interest at the rate of 5.875%. The loan is assumable and non-escalating, provided the buyer's qualify. The White's have agreed to assume the balance of the existing loan and make a down payment of $15,000 if the seller's are willing to take back a second mortgage loan for the difference between the purchase price minus the down payment and the principal balance of the existing loan. The second in favor of the seller's is a "purchase money mortgage."
escalation or escalator clause
The clause in the promissory note that allows for periodic adjustments in the interest rate
Balloon Payment
The final payment that is due at the maturity of a note or obligation, when that final payment is substantially larger than the previous installment payments and repays the debt in full.
Origination Fee
The finance fee charged by a lender for making a mortgage loan. An origination fee covers initial costs such as preparation of documents and credit, inspection, loan processing, etc. The origination fee is generally computed as a percentage of the face amount of the loan.
Discount Rate
The interest rate at which the Federal Reserve loans money to its member banks.
FHA Discount Points
The lender of an FHA-insured loan may charge discount points in addition to a loan origination fee. Who pays the points is a matter of negotiation between the seller and the buyer. However, if the seller pays more than 6 percent of the costs normally paid by the buyer (such as discount points, the loan origination fee, the mortgage insurance premium, buydown fees, prepaid items and impound or escrow amounts), the lender will treat the payments as a reduction in sales price and recalculate the mortgage amount accordingly.
Primary Mortgage Market
The market in which lenders originate loans and make funds available directly to borrowers, bear the risk of long-term financing and usually service the loan until the debt is paid off—in contrast with the secondary mortgage market into which the primary market lenders sell their loans.
Prime Rate
The minimum interest rate charged by a commercial bank on short-term loans to its largest and strongest clients (those with the highest credit standings). Prime rate is often used as a base rate for other business and personal loans.
The Federal Home Loan Mortgage Corporation (FHLMC)
The name, "Freddie Mac", was a creative acronym of the company's full name that had been adopted officially for ease of identification.
Federal Reserve System
The nation's central bank created by the Federal Reserve Act of 1913, the purpose of which is to help stabilize the economy through the judicious handling of the money supply and credit available in this country.
Disintermediation
The process of individuals investing their funds directly instead of placing their savings with banks, savings and loan associations and similar institutions for investment by such institutions, thus causing a shortage of mortgage money.
An FHA 203(b) loan would most likely be used in which of the following cases?
The purchase of an existing, owner-occupied 1-4 unit family residence. Section 203(b) of the FHA underwriting guidelines sets forth the details and requirements for an FHA insured loan that is made to finance the purchase or refinance of a 1-4 unit residence.
Federal Reserve System (the "Fed")
The purpose is to help stabilize the economy through the judicious handling of the money supply and credit available in this country. The system is overseen by a seven-member Board of Governors (appointed by the President under the advice and consent of the Senate). The country is divided into 12 Federal Reserve Districts, each of which has a Federal Reserve Bank. Each district bank has its own president. All nationally chartered banks must join the Fed and purchase stock in its district reserve banks. State chartered banks are not required to join the Fed, but may, if they so choose.
The type of loan that is used to provide extra income for senior citizens is which of the following?
The reverse annuity mortgage (RAM) is designed to provide income for senior citizens.
Regulation Z provides a right of rescission:
The right for the borrower to cancel the loan lasts until midnight of the third business day after consummation of the transaction or the lender makes the material disclosures, whichever is later. The right does not apply to loans made to finance the purchase or construction of a home.
The type of loan in which the lender is entitled to a percentage of the increase in value to the property after five years is which of the following?
The shared appreciation mortgage (SAM) is one in which the lender participates in the increase in value of the property when the loan is five years old and 40% of the increase in value is added to the principal balance.
Refinance
To obtain a new loan to pay off an existing loan; to pay off one loan with the proceeds from another. Properties are frequently refinanced when interest rates drop and/or the property has appreciated in value. Most lenders will not allow the borrower to receive any additional cash out of the new loan, but will allow them to borrow extra to pay off other debts not previously secured by a mortgage.
Pools
Warehousing agencies purchase a number of mortgage loans and assemble them into packages
Discount Points
When loans are sold to investors on the secondary mortgage market, the investors demand a particular yield (true rate of return) on their investments. When the actual interest rate charged for the loans is less than the yield demanded by investors, the lender must sell the loans at a discount—that is, the amount received from the sale of the loan will be less than the actual principal balance of the loan plus accrued interest. Depending on the interest rate and loan term, it takes between six and ten discount points to change the interest rate 1 percent on a 30-year loan. For example, eight points will change a 25-year 9 percent loan to 8 percent.
Balloon payment
When the periodic payments are not enough to fully amortize the loan by the time the final payment is due, the final payment is larger than the others. It is a partially amortized loan because principal is still owed at the end of the term. It is frequently assumed that if payments are made promptly, the lender will extend this for another limited term. The lender, however, is not legally obligated to grant this extension and can require payment in full when the note matures.
A lender's conditional approval is:
a loan commitment.
money market
a place in which real estate loans are originated, sold and purchased. Is what determines the types of loans that the lenders will offer to borrowers. It also determines the interest rates charged on the various types of loans.
Shared-appreciation mortgage (SAM)
also called a participation mortgage is one in which the lender offers a below-market interest rate in return for a percentage in the appreciation of the property. Typically, the home is appraised in five years, with the lender being entitled to 40% of the increase in value (which is added to the mortgage balance). A type of this more commonly used for large commercial or multi-family properties and is typically made by life insurance companies. The lender agrees to a rate of interest that is below the current market rate in exchange for participation in the profits generated from the property.
Land Contract
also known as a contract for deed or an installment contract. the buyer (called the vendee) agrees to make a down payment and a monthly loan payment that includes interest and principal. The payment also may include real estate tax and insurance reserves. The seller (called the vendor) retains legal title to the property during the contract term, and the buyer is granted equitable title and possession. At the end of the loan term, the seller delivers clear title. The contract usually permits the seller to evict the buyer in the event of default. In that case, the seller may keep any money the buyer has already paid, which is construed as rent. Many states now offer some legal protection to a defaulting buyer under a land contract.
A non-recourse provision in a mortgage is known as:
an exculpatory clause.
Regulation Z
applies when credit is extended to individuals for personal, family or household uses.
Mortgage-backed securities (MBS)
are pools of mortgages used as collateral for the issuance of securities in the secondary market. Are commonly referred to as "pass-through" certificates because the principal and interest of the underlying loans is "passed through" to investors. The interest rate of the security is lower than the interest rate of the underlying loan to allow for payment of servicing and guaranty fees. Ginnie Mae's of these are fully modified pass-through securities guaranteed by the full faith and credit of the United States government. Regardless of whether the mortgage payment is made, investors in Ginnie Mae's of these will receive full and timely payment of principal as well as interest.
Sale-and-leaseback arrangements
are used to finance large commercial or industrial properties. The land and building, usually used by the seller for business purposes, are sold to an investor. The real estate then is leased back by the investor to the seller, who continues to conduct business on the property as a tenant. The buyer becomes the lessor, and the original owner becomes the lessee. This enables a business to free money tied up in real estate to be used as working capital. Involve complicated legal procedures, and their success is usually related to the effects the transaction has on the firm's tax situation. Legal and tax experts should be involved in this type of transaction.
A blanket loan
covers more than one parcel or lot. It is usually used to finance subdivision developments. However, it can finance the purchase of improved properties or consolidate loans as well. Usually includes a provision known as a partial release clause. This clause permits the borrower to obtain the release of any one lot or parcel from the blanket lien by repaying a certain amount of the loan. The lender issues a partial release for each parcel released from the mortgage lien. The release form includes a provision that the lien will continue to cover all other unreleased lots.
Adjustment period
establishes how often the rate may be changed. For instances, it may be monthly, quarterly or annually.
FSA loan programs fall into two categories:
guaranteed loans, made and serviced by private lenders and guaranteed for a specific percentage by the FSA, and loans made directly by the FSA.
Ginnie Mae (Government National Mortgage Association or GNMA)
helps make affordable housing a reality for millions of low- and moderate-income households across America by channeling global capital into the nation's housing markets. Allows mortgage lenders to obtain a better price for their mortgage loans in the secondary market. The lenders can then use the proceeds to make new mortgage loans available. Unlike Fannie Mae, Does not buy or sell loans or issue mortgage-backed securities (MBS). Therefore, there balance sheet doesn't use derivatives to hedge or carry long term debt. guarantee investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans — mainly loans insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Other guarantors or issuers of loans eligible as collateral for Ginnie Mae MBS include the Department of Agriculture's Rural Housing Service (RHS) and the Department of Housing and Urban Development's Office of Public and Indian Housing (PIH). There securities are the only MBS to carry the full faith and credit guaranty of the United States government, which means that even in difficult times an investment in There MBS is one of the safest an investor can make.
package loan
includes not only the real estate, but also all personal property and appliances installed on the premises. In recent years, this kind of loan has been used extensively to finance furnished condominium units. Usually include furniture, drapes, carpets and the kitchen range, refrigerator, dishwasher, garbage disposal, washer, dryer, food freezer and other appliances as part of the sale price of the home.
Margin
interest rate is the index rate plus a percentage. Represents the lenders cost of doing business. For example, the loan rate may be 2 percent over the ten-year U. S. Treasury bill rate.
The Farm Service Agency (FSA), formerly the Farmers Home Administration
is a federal agency of the Department of Agriculture. The FSA offers programs to help families purchase or operate family farms. Through the Rural Housing and Community Development Service, it also provides loans to help families purchase or improve single-family homes in rural areas (generally areas with populations of fewer than 10,000). Loans are made to low- and moderate-income families, and the interest rate charged can be as low as 1 percent, depending on the borrower's income. The FSA provides assistance to rural and agricultural businesses and industry through the Rural Business and Cooperative Development Service.
GEM
is a full-term mortgage with an initial payment and interest rate generally equal to the prevailing conventional market rate. Has provisions for gradually increasing payments (from 2.5% to 7.5% per year) based on either predetermined increases or increases tied to an index. The increases in payments are applied directly to principal and substantially reduce both the term of the loan and the total amount of interest paid.
A purchase-money mortgage
is a note or mortgage created at the time of purchase. Its purpose is to make the sale possible. The term is used in two ways. First, it may refer to any security instrument that originates at the time of sale. More often, it refers to the instrument given by the purchaser to a seller who takes back a note for part or all of the purchase price. The mortgage may be a first or a junior lien, depending on whether prior mortgage liens exist.
A lock-in clause
is a provision in the contract between the buyer and seller covering the right of the buyer and seller to notify the buyer's new lender to fix the amount of points as of the date of the notice. During a time of rising interest rates, and when the seller has agreed in the contract to pay some or all of the points on the buyer's loan, the buyer and seller may wish to do this with the points when they are at a low in order to avoid the risk of paying more points should an increase occur prior to closing due to an impending rise in the market rate of interest.
Adjustable-rate mortgage(ARM)
is a result of a time of rapidly rising interest rates and the concerns of lenders that long-term, low fixed interest rate loans would cause serious losses. Commercial banks had long been protecting themselves against inflation by making commercial loans with interest rates tied to the Prime Rate, so that the interest rates on the loans would rise and fall with that economic index. The interest rate is tied to the movement of an objective economic indicator called an index such as a Treasury Bill index or Cost of Funds index.
Buydown
is a way to temporarily (or permanently) lower the interest rate on a mortgage or deed of trust loan. Typically reduce the interest rate by 1 to 2 percent over the first one to two years of the loan term. After that, the rate rises. The assumption is that the borrower's income will also increase and that the borrower will be more able to absorb the increased monthly payments. In a permanent one, a larger upfront payment reduces the effective interest rate for the life of the loan.
Farmer Mac (formerly the Federal Agricultural Mortgage Corporation, or FAMC)
is an agency that operates similarly to Fannie Mae and Freddie Mac in a context of agricultural loans. Purchases agricultural loans from the original lenders and issues guaranteed mortgage-backed securities based on its own loan pools.
Construction loan
is made to finance the construction of improvements on real estate such as homes, apartments and office buildings. The lender commits to the full amount of the loan, but disburses the funds in payments during construction. These payments are also knows asdraws. Draws are made to the general contractor, the owner, subcontractors and/or suppliers for that part of the construction work that has been completed since the previous draw. Before each payment, the lender inspects the work. The general contractor must provide the lender with adequate waivers that release all mechanic's lien rights for the work covered by the payment. generally short-term or interim financing. High risk for lenders lenders typically require that there must be no work started prior to the recording of the construction mortgage or deed of trust. The borrower pays interest only on the monies that have actually been disbursed by the lender. The borrower is expected to arrange for a permanent loan, also known as an end loan or take-out loan, that will repay or "take out" the construction financing lender when the work is completed. Some lenders now offer construction-to-permanent loans that become fixed mortgages upon completion. Participation financing is when a lender demands an equity position in the project as a requirement for the loan.
A reverse-annuity mortgage (RAM)
is one in which payments are made by the lender to the borrower. The payments, which may be made as regular monthly payments, in one lump sum or as a line of credit to be drawn against, are based on the equity the homeowner has invested in the property given as security for the loan. This loan allows senior citizens on fixed incomes to realize the equity they have built up in their homes without having to sell. The borrower is charged a fixed rate of interest, and the loan is eventually repaid from the sale of the property or from the borrower's estate on his or her death.
Primary mortgage market
is the place where loans are made and is made up of banks, savings and loan associations, credit unions, mortgage bankers, mortgage brokers, thrift institutions, life insurance companies and even private investors.
The federal Equal Credit Opportunity Act (ECOA) prohibits
lenders and others who grant or arrange credit to consumers from discriminating against credit applicants on the basis of: Race Color Religion National origin Sex Marital status Age (provided the borrower is of legal age) Dependence on public assistance. In addition, lenders and other creditors must inform all rejected credit applicants of the principal reasons for the denial or termination of credit. The notice must be provided in writing, in the form specified under the act, within 30 days from the date the loan application was received. If the reason for the denial was information obtained from a credit reporting agency, the creditor is required to provide the loan applicant with the name, address and telephone number of the credit reporting agency and of his or her right to obtain, free of charge, a copy of the credit report. The federal Equal Credit Opportunity Act also provides that a borrower is entitled to a copy of the appraisal report if the borrower paid for the appraisal.
A periodic rate cap
limits the amount the rate may increase at any one time (such as annually).
An aggregate rate cap
limits the amount the rate may increase over the entire life of the loan. For example, a typical ARM note might state that the interest rate may not increase more than 2 percent per annum nor more than 5 percent over the life of the loan.
VA loan
refers to a loan that is not made by the agency but is guaranteed by it. The borrower pays a loan origination fee to the lender, as well as a funding fee (2 to 3 percent, depending on the down payment amount) to the Department of Veterans Affairs. Reasonable discount points may be charged on a VA-guaranteed loan, and either the veteran or the seller may pay them. As with an FHA loan, the borrower can prepay the debt at any time without penalty.
FHA loan
refers to a loan that isinsured by the agency. These loans must be made by FHA-approved lending institutions. The FHA insurance provides security to the lender in addition to the real estate. As with private mortgage insurance, the FHA insures lenders against loss from borrower default. The most popular FHA program is Title II, Section 203(b), fixed-interest rate loans for 10 to 30 years on one-to four-family residences. Rates are competitive with other types of loans, even though they are high loan-to-value loans. Certain technical requirements must be met before the FHA will insure the loans. These requirements include the following: -The borrower is charged a percentage of the loan as a premium for the FHA insurance. The up-front premium is paid at closing by the borrower or some other party. It also may be financed along with the total loan amount. A monthly premium also may be charged. Insurance premiums vary for new loans, refinancing and condominiums. -FHA regulations set standards for type and construction of buildings, quality of neighborhood and credit requirements for borrowers. -The mortgaged real estate must be appraised by an approved FHA appraiser. The loan amount generally cannot exceed either of the following: (1) 98.75 percent for loans over $50,000 (for loans less than $50,000, the buyer must contribute 3 percent of the sales price to the down payment and closing cost) or (2) 97.75 percent of the sales price or appraised value, whichever is less. If the purchase price exceeds the FHA-appraised value, the buyer may pay the difference in cash as part of the down payment. In addition, the FHA has set maximum loan amounts for various regions of the country.
Open-end loan
secures a note executed by the borrower to the lender. It 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. Is often a less costly alternative to a home improvement loan. It allows the borrower to open the mortgage or deed of trust to increase the debt to its original amount, or the amount stated in the note, after the debt has been reduced by payments over a period of time. The mortgage usually states the maximum amount that can be secured, the terms and conditions under which the loan can be opened and the provisions for repayment.
The payment cap
sets a maximum amount for payments. With this, a rate increase could result in negative amortization—that is, an increase in the loan balance.
teaser rate
that is lower than the current market rate.
The real estate financing aspect of the money market consists of three basic components:
the Federal Reserve System; the primary mortgage market and the secondary mortgage market.
Fannie Mae (the Federal National Mortgage Association or FNMA)
the largest participant in the secondary mortgage market, is a government-sponsored enterprise (GSE) chartered by Congress with a mission to provide liquidity and stability to the U.S. housing and mortgage markets. Operates in the U.S. secondary mortgage market. Rather than making home loans directly with consumers, Works with mortgage bankers, brokers, and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates. Funds mortgage investments primarily by issuing debt securities in the domestic and international capital markets. Has three businesses - Single-Family, Housing and Community Development, and Capital Markets - that work together to provide services, products, and solutions to lender partners and a broad range of housing partners. Together, these businesses contribute to the company's chartered mission objectives, helping to increase the total amount of funds available in America to make homeownership and rental housing more available and affordable.
Home equity line of credit
the lender extends a line of credit that the borrower can use whenever he or she wants. The borrower receives the money by a check sent to him or her, deposits made in a checking or savings account, or a book of drafts the borrower can use up to his or her credit limit.
When real estate is sold under a land contract, possession is usually given to the buyer and:
the seller keeps legal title until the full purchase price is paid. The buyer gets possession at closing and holds equitable title.
When real estate is sold under a land contract, possession is usually given to the buyer and:
title is held by the seller until the full purchase price is paid. Under a land contract or contract for deed, the buyer gets equitable title and possession at closing and then must make payments to the seller. When the full price plus interest have been paid, the buyer will receive legal title. The seller keeps legal title until that time.
Specific credit terms, such as down payment, monthly payment, dollar amount of the finance charge or term of the loan are referred to as this s, and may not be advertised unless the advertisement includes the cash price; required down payment; number, amounts and due dates of all payments; annual percentage rate; total of all payments to be made over the term of the mortgage (unless the advertised credit refers to a first mortgage or deed of trust to finance the acquisition of a dwelling).
trigger term
Graduated payment mortgage (GPM)
was originally created during a time when interest rates were very high. It is intended to be used for young professionals (such as doctors and attorneys) whose income is expected to increase greatly over the first few years of the loan. It has also been nicknamed the yuppie loan. The interest rate remains fixed throughout the term of the loan, but the monthly payments start out at a low level and gradually increase (for example, at 3 percent per year) until they rise above the level at which a standard fixed rate mortgage would have been written. In the initial years of the loan the payment amount is not large enough to pay the monthly interest and there is a negative amortization but, eventually, the payment will rise to an amount that will be sufficient to fully amortize the loan over its remaining term.
The federal Truth-in-Lending Act
was originally passed in 1968 to encourage consumer credit shopping by requiring creditors to disclose the true cost of consumer credit before the borrower becomes obligated on the loan. The Federal Reserve Board (FRB) was charged with enforcement of the Act and promulgated it into their rules and regulation as Regulation Z.
Secondary mortgage market
where loans are bought and sold after they have been funded. Lenders routinely sell loans to avoid interest rate risks and to realize profits on the sales. This activity provides liquidity for the primary market enabling the lenders to continue making mortgage loans. When lenders loan out all of their available funds, they must stop making loans and are disintermediated. This can seriously impair the real estate and other important markets. Stimulates both the housing construction market and the mortgage market by expanding the number and types of loans available.
Conversion option
which permits the mortgagor to covert from an adjustable-rate to a fixed-rate loan at certain intervals during the life of the mortgage. The option is subject to certain terms and conditions for the conversion.
