Real Estate chapter 4: Unit 4 Financing

Parties that commonly commit mortgage fraud

Mortgage loan originators Colluding appraisers Accountants Attorneys Real Estate agents Buyers Government workers Title and escrow companies

subordination agreement

An agreement that changes the order of priority of the liens between two creditors. Creditors, in essence, agree to swap positions for receiving compensation when a property is foreclosed on.

Government Programs: The Federal Housing Administration

agency and was operated under the direction of the Department of Housing Development (HUD). The FHA was designed to pull the United States economy out of the Great Depression in the 1930's by encouraging home ownership among the country's working middle class. The FHA program offered a very low down payment for the borrower compared to typical mortgages and included mortgage insurance coverage for private lenders. This mortgage insurance coverage protects the lender against a loss brought on by a borrower's default on a loan. In the event of a borrower's default, the lender forecloses as with any other loan. After the recovery through foreclosure sale, if the lender suffers a loss, the FHA will make-up the loss to the lender. Under the guidelines set forth by FHA, the borrower is not permitted to borrow any portion of his down payment. The rationale behind this is that if a borrower has none of his own money invested in the property, it would be more tempting for him to simply walk away from the loan and leave the FHA to pay the mortgage insurance claim upon default. An amendment was later added allowing the prospective mortgagor to accumulate the down payment with a gift. These gift funds must be verified and must come from a relative. The down-payment required on an FHA loan is typically manageable by more potential borrowers, such as the current 3.5% as opposed to 10% or more on other products. However, since the FHA requires this minimum FINANCING 91 investment by the borrower the buyer would have to put more down if his investment falls below 3.5% in the event the seller pays for some of the closing costs. HUD allows a portion or all of a FHA insured loan to be prepaid at any time. By law, there is no pre-payment penalty attached to it. Also, HUD must first approve a lender who originates FHA insured loans. FHA has strict qualifying guidelines that a lender must follow in order to continue to be HUD approved. FHA requires that the subject property be appraised before it will commit to insure any loan. The appraisal must be requested by an approved lending institution, and may not be ordered by the buyer or seller directly. FHA's loan insurance amounts are based on a percentage of the appraised value of the property or sale price, whichever is lower. FHA will accept appraisals made by the Veteran Administration. The FHA originally required a 20 % down payment which resulted in an 80% loan to value ratio. By 1982, the down payment requirement was significantly reduced to reflect a net down payment of less than 5% of the lower of the sales price or appraised value. FHA loans that were originated prior to December 1, 1986, were simple assumptions. This means that those properties financed with an FHA loan may be taken over by a new purchaser with no qualifying, no credit check and no appraisal of the property. During the mid-1980's, unscrupulous investors would buy some of these properties form financially troubled sellers. By assuming these FHA loans with little or no cash out of pocket, these equity jumpers would purchase many such properties by simple assumption, rent them out, collect the rents and never pay a note due on the properties. Since so many properties were going into default for various reasons during that time, HUD became backlogged with foreclosures, which took well over a year to reach a foreclosure sale. Meanwhile, the equity jumpers were capitalizing on the situation until they were eventually apprehended and penalized. In time, this problem was rectified when HUD dictated important changes concerning FHA loans. First, FHA loans that originated after December 1989 are no longer simple assumptions. If a potential buyer wants to purchase a property by way of assuming a loan under new FHA guidelines, the new buyer must qualify for the loan and be approved by a lender. Second, no investor may assume one of these post-1989 loans. In other words, the new purchaser must be an owner-occupant. FHA has no requirement that the property sell at or below the appraised value. The sale price can be any price agreed upon by the buyer and seller. However, maximum insurable loan amounts are computed on the FHA appraised value of the property or sale price, whichever is the lesser, and the difference between actual sale price and maximum loan amount must be paid in cash by the borrower as a down payment. No junior financing of any kind is permitted on any FHA insured loan. The difference between the sale price and maximum loan must be paid in cash at the time of closing, and the buyer must demonstrate that he has the necessary cash available before FHA will commit to insure the loan. Other features of FHA loans include: Most of the closing costs may legally be added into the loan There is a Mortgage Insurance Premium (MIP) that is an annual charge but is usually paid monthly, and usually for the life of the loan An additional MIP premium may be charged to be paid at the time of closing 92 FINANCING The maximum allowable loan varies by geographic region When used to finance new construction, FHA loans require special inspections unlessthe borrowerismakingaminimumdownpaymentoftenpercentofthe sale price Manufactured homes may be financed using FHA-insured loans if the borrower owns the property on which the manufactured unit is located and also on lots in approved manufactured home developments Discount points may be charged

Periodic payments on a____________do not fully amortize loans by the final payment. A balloon payment will be larger than the scheduled payments. An example would be a second mortgage with monthly payments at $500 for three years and eleven months and then one final payment of $145,000. This is very common in commercial financing.

balloon payment

A wraparound loan

is a loan that "wraps" the second mortgage around the first. It enables a borrower with an existing mortgage to obtain additional financing through a second lender (institutional or private) without paying off the first loan. The second lender gives the borrower a new, increased loan at a higher interest rate and assumes payment of the existing loan. The borrower pays the new lender and the new lender makes payments on the original loan. This loan can be used to refinance real property or finance the purchase of real property when an existing mortgage cannot be paid off.

Another form of a security instrument for the lender is the deed of trust, sometimes referred to as a trust deed. The deed of trust is used in a ___________ which transfers title from ________ (borrower) to a ________ (third party) as security for a note to a ________ (lender). When the note is paid, the trustee conveys title to the trustor with an instrument known as a ________.

three-party transaction,the trustor,trustee,beneficiary, deed of reconveyance

A very important point to remember on a purchase money loan is that title does________ to the buyer and the seller holds a lien position on the property. This is different from a Bond or Deed in which the title does not transfer to the buyer until the loan is paid off.

transfer

Promissory Note is

1. Evidence of the Debt 2. Includes promise to repay—must be in writing in most states 3. Negotiable instrument—can be sold to another lender without borrower's permission 4. If note is secured, there is also a mortgage 5. Acceleration Clause - allows lender to call entire note upon default 6. Prepayment Clause - allows borrower to repay loan before due

estoppel certificate

A document from the lender stating the current balance, interest rate, monthly payments, etc. is called the

Mortgage

A mortgage is separate agreement from a promissory note. Whereas, the promissory note is evidence of the borrower's debt, the mortgage is security for the debt. A borrower is called the mortgagor and the lender is called the mortgagee. The mortgage basically establishes the mortgagee's right in the property if the mortgagor defaults. By means of a mortgage, the borrower pledges the real property as collateral for the debt, while retaining possession of the property for his/her use during the term of the indebtedness.

statutory right of redemption.

A second right available to borrowers in many states. This option gives the borrower the right to redeem the property after the foreclosure has been completed. The time period for redemption depends on the state statutes and usually for a 1-24 month period following the sale. Again, depending on the state laws, the new purchaser may not gain possession until the statutory period expires. Unfortunately, the property usually sits vacant during this time period, causing it to deteriorate and lose value. This generally works to the disadvantages of both the mortgagor and the mortgagee since bidders typically offer less than maximum value due to the greater risk involved.

usury

A violation by lending institutions that occurs when rates of interest are charged in excess of the maximum rate allowed by state law is known as usury.

When the buyer acquires property with an outstanding deed of trust or mortgage, he or she can either assume the debt payment or purchase the real estate subject to the mortgage. The ____________ the mortgage occurs when both the buyer and the seller may be responsible for any deficiency if the buyer defaults. In this instance, the purchaser assumes the seller's debt, and the buyer is now personally obliged to pay the debt. On the other hand, the buyer is not personally obliged to pay the seller's outstanding debts on the real estate if the buyer is held________ the mortgage. If the property is foreclosed and is sold in a court sale, the buyer is only financially liable if he agreed to assume the mortgage.

"assumption of", "subject to"

Protecting Your Clients

As a real estate agent, you are typically in a fiduciary role within the transaction and your purpose is to protect the best interest of your client within a transaction. To that end, while you are typically not a mortgage finance expert it is prudent to be aware of trends and best practices within the mortgage finance industry so that you can provide the appropriate cautions to your clients and customers who seek financing.

Fraud and Lending Practice

As seen in other sections of this manual, there are many laws and statutes which protect consumers in a credit transaction and prohibit certain misconduct or discrimination by a creditor. However, sometimes these crimes can be somewhat more difficult to detect or violate other laws and rules that are not specifically spelled out in the classic sense of the law.

Mortgage fraud examples

Inflated appraisals Stolen identities Straw buyers Falsifying loan applications Fraudulent documents supporting a loan application Kickbacks

arbitrage

Making money made on the "spread" in interest rates is called

Secondary Mortgage Market:Ginnie Mae

The second major result of FNMA's reorganization of 1968 was the creation of the Government National Mortgage Association (GNMA). Generally referred to as "Ginnie Mae," this governmental agency was established to deal with subsidized mortgage notes for low and moderate-income homebuyers under special government loan programs. As a subsidiary of HUD, GNMA buys these subsidized mortgages at below market interest rates in order to stimulate housing production in areas with special housing needs. These mortgages are then resold at current market prices at a loss to HUD. The government, through GNMA, absorbs the losses on these transactions.

Redemption

There are certain rights that the borrower may exercise depending on the state laws, before or after the foreclosure sales.

A term loan or a straight loan

a loan made for a specified period of time and requires only interest payments until the end of the time period with no repayment of principal during the life of the loan. The entire principal balance is repaid in a lump sum at the end of the loan. During the life of the loan, the borrower will usually be required to pay interest at fixed periods, usually annually, but sometimes semi-annually or quarterly. This type of loan is also referred to as a standing mortgage (since the entire principal stands until maturity).

The clause of a mortgage or deed of trust that permits the lender to "call in" the entire debt upon a default of payments of the borrower is the

acceleration clause. Most often, non-payment triggers the use of this clause.

The __________requires the lender to give the mortgagor a release or satisfaction of mortgage when the debt has been paid in full and the promissory note is cancelled. This is a basic clause designed to protect the borrower's interest once the loan obligation has been satisfied. The actual document must be recorded in the courthouse records in the county/parish where the property is located to remove the lien from the title records.

defeasance clause

If, at the foreclosure sale, the property sells for more than the total amount of claims owed on it, including all mortgages, penalties, court costs and sheriff's fees, the borrower would receive any surplus funds. If, however, the sale of the property does not satisfy all claims, the lender may seek a __________ against the borrower, which would allow the lender to proceed against the borrower's other unsecured assets.

deficiency judgment

Pension Funds

derive money from pension plans of employees or union members. At this point in time, pension funds invest their capital by financing large commercial projects that have predictable revenue streams of long-term tenant leases. They also participate in residential lending by purchasing packages of loans in the secondary mortgage market. Some pension funds allow their own members to secure home mortgage from the fund at very reasonable rates.

An unsecured note

has no collateral pledged toward the loan and is validated only by the signature of the borrower. This is often referred to as a signature loan. Therefore, the note will state if it is to be secured by a mortgage or trust deed in favor of the lender or if it is to be an unsecured loan. In either event, provision is made for the signature of the borrower (obligor) who is required to sign the note by state law to prove that he/she owes the money. The lender (oblige) is not required to sign the note.

Life insurance Companies

have long been active in the real estate marketplace as developers, owners and long-term lenders. Their primary sources of income are premiums paid by policyholders as well as interest earnings from long-term investments. Insurance companies focus on long-term lending for commercial projects such as shopping centers, office buildings and large apartment complexes.

Credit Unions

have traditionally specialized in consumer loans, but recently many have branched-out into real estate loans. The majority of their activities involve second mortgages and home improvement loans. Credit unions derive their funds from member depositors who must be members of the credit union in order to borrow or deposit funds.

Mortage: The process of pledging something as security without giving up possession is called...

hypothecation

The pledging of property as security for the loan without losing possession of it is______________. Unless there is a debt to secure, a deed of trust or mortgage cannot be legally effective.

hypothecation

An __________ is a trust account used by a lender to require the borrower to set aside money monthly for taxes and insurance until the deal is completed or terminated.

impound (escrow) account

equity of redemption

in which a mortgagor can retain title at any time prior to the foreclosure auction by paying the balance owed plus interest due and any other fees due, including the sheriff's fee.

A package loan includes

real and personal property in the same loan. The borrower is able to finance items such as appliances or other equipment installed in the home at the same rate of interest as the principal loan. Thus, a package loan includes both movable and immovable property as security. This type of loan is not used much in residential single family property except for mobile homes and some condominium projects. Lenders generally do not want to grant a 30-year mortgage on a refrigerator, washer, dryer, or any other appliance with a shorter life span than the 30-year amortization period.

predatory lending

which involves loans which take advantage of poorly informed borrowers in order to earn a lender a high profit by charging unusually high fees and/or stripping a property of its equity. As the name suggests, the concept is to prey on certain borrowers who may be underserved or poorly informed to therefore issue expensive loans or burdensome debt obligations in order to turn a large profit.

Amortization

which literally means "paying back", is the system for most home loans whereby an equal payment is made each month. Some of each payment is applied to the principal and part to the interest so that the entire loan is paid after the last payment. Most deed of trust and mortgage loans are amortized in which regular payments on a mortgage are made usually in a 15 or 30 year time frame.

Discounting

which literally means "up front", in lending means paying interest "up front" such as paying by discount points.

A reverse annuity mortgage

with monthly payments. A reverse annuity mortgage is opposite. The lender makes monthly payments to the borrower up to a pre-determined maximum amount. Interest is charged only on the balance received by the mortgagor. The loan is repaid upon the sale of the property or the death of the owners. This type of loan is particularly valuable for couples who do not want to sell their home, but whose retirement income is not quite enough to make ends meet. The loan is usually financed through an insurance company.

Truth in Lending Act (TILA)

was originally enacted on May 29, 1968 as part of the Consumer Credit Protection Act and is implemented by Regulation Z. The TILA is intended to ensure that credit terms are disclosed in a meaningful way so consumers can compare credit terms more readily and knowledgeably. Before its enactment, consumers were faced with a bewildering array of credit terms and rates. It was difficult to compare loans because they were seldom presented in the same format. Now, all creditors must use the same credit terminology and expressions of rates. In addition to providing a uniform system for disclosures, the act: • Protects consumers against inaccurate and unfair credit billing and credit card practices; • Provides consumers with rescission rights; • Provides for rate caps on certain dwelling-secured loans; • Imposes limitations on home equity lines of credit and certain closed-end home mortgages; • Delineates and prohibits unfair or deceptive mortgage lending practices. The TILA and Regulation Z do not, however, tell financial institutions how much interest they may charge or whether they must grant a consumer a loan. By definition within Regulation Z, the creditor is someone that extends the consumer credit more than 25 times a year or more than 5 times a year if the transaction involves a residence as security. Under Regulation Z, the borrower has three days in which he can rescind the contract simply by informing the lender. This is called the three-day right of rescission and applies specifically to refinancing a home mortgage or to a home equity loan. Under special circumstances, the right to rescind can be waived. Regulation Z also provides for strict legislation in all forms of media advertising and promotion, including advertising on the internet. General terms such as "liberal terms available" could be permitted, but only if certain trigger terms are avoided. Some trigger terms such as down payment, term of the loan, number of payments, amount of payments, period of payments, or finance charges cannot be advertised unless the advertisement includes the cash price, the required down payment, details of all payments, the APR and the total number of payments to be made over the term of the mortgage. To better enforce the regulations, Regulation Z allows for penalties, usually financial but can include up to one-year imprisonment for willful violation. TILA is also administered by the CFPB.

adjustable rate mortgage (ARM)

. The interest rate is keyed to certain economic indexes, such as the Prime Rate or Treasury Bills, and allows the lender to vary the interest rate as conditions change through the years. The benefit to the borrower is that he/she can qualify for a loan at a much lower income level. This is because the initial interest rate usually starts 2-4 percent lower than the fixed rate mortgage. At pre-determined intervals, usually annually, the interest rate may be adjusted upward or downward depending on economic conditions. To protect the borrower from skyrocketing monthly payments, interest rate caps are generally built into the mortgage agreement that would limit the rate increase each year and over the life of the loan. For instance, a person may want to borrow $100,000 to purchase a home. However, based upon his/her current income and a market interest rate of 9%, he/she does not qualify for the loan. With an ARM, his/her first year interest rate could be as low as 6%. With this "adjusted" rate, he/she now qualifies. If he/she has yearly "caps" of 1% and a "life of the loan cap" of 5%, after the first year, his new adjusted interest rate could go no higher than 7%. Over the life of the loan, the rate would never exceed 11%. The adjustable rate mortgage is also commonly used by persons who plan to live in or otherwise use a piece of property for no more than 3-5 years. During that time period they take advantage of the low rates in the initial years of the mortgage.

Typical Covenants or promises made by the mortgagor to the mortgagee:

1. Covenant to pay taxes: With this covenant, the mortgagor promises to pay all taxes when due. 2. Covenant to provide insurance: The mortgagor promises to keep the property insured, at least in the amount of the mortgage. 3. Covenant against removal: The mortgagor promises not to remove or demolish any improvements to the property during the life of the mortgage. To do so would diminish the value of the property as security for the note. 4. Covenant of good repair: The mortgagor promises to keep the property in good repair during the life of the mortgage, in order to preserve the value of the property as security for the note. 5. Covenant of reentry: This covenant gives the mortgagee the right to enter the premises during the life of the note, to determine if the other covenants are being upheld. 6. Covenant of recordation: Requires that the mortgage be delivered by the mortgagor to the mortgagee who is responsible for recording it with the appropriate officer of the court. The mortgage, like the promissory note, has several important clauses, most of which are designed to protect the interests of the lender. They define the ongoing duties of the mortgagor and the mortgagee and also spell out certain terms and conditions. In addition to the prepayment clause and acceleration clause found in the promissory note, the mortgage may also contain several other clauses.

Since the mortgage defines a specific asset pledged as collateral for a loan, it must contain basic provisions designed to protect the interest of both parties. Included among these provisions are:

1. Names of the mortgagor and mortgagee 2. Legal description of the property 3. Words of conveyance which clearly indicate whether the mortgagor is transferring to the mortgagee a security interest (lien theory) or legal title (title theory) 4. Signature of the mortgagor 5. Covenants or promises made by the mortgagor to the mortgagee

Financing/Credit Laws:Foreclosure Laws

Anytime the borrower or trustee breaches any part of the mortgage contract, he is in default on the loan, and the lender may utilize the acceleration clause and call the entire balance immediately due. In most cases, foreclosure is a result of the mortgagor falling behind or becoming delinquent on his payments. Contrary to popular opinion, lenders are not anxious to foreclose on delinquent mortgages and often elect to forebear such action since the process is time consuming, expensive and unprofitable. Lenders would prefer to arrange an alternate method to solve the problem such as a restructured, stretched-out payment schedule. Because of the major inconveniences involved with the process, current lenders consider foreclosure to be the last resort.

One-stop shopping for consumers of real estate services has become popular. A real estate firm, mortgage broker, home inspector or title insurance company may agree to offer a package of services to consumers. As long as consumers are clearly informed of the relationship among the service providers and that other providers are available these controlled business arrangements (CBA) are permitted by RESPA. Affiliated companies may not exchange fees simply for referring business to one another. Licensees who offer computerized loan origination (CLO) services to their clients and customers should also be aware of this important issue. A borrower's ability to comparison shop for a loan may be enhanced by a CLO system, but his or her range of choices must not be limited. Consumers must be informed of the availability of other lenders.

Controlled Business Arrangements

loans that are not government insured or guaranteed but are controlled by the market place. These loans are often perceived as the most secure loans due to their low loan-to-value ratio (discussed later in this chapter). The lender must carefully check the appraisal of the property and the credit and ability of the borrower to pay back the loan. Conventional loans that meet Fannie Mae or Freddie Mac are called conforming loans, which are able to be sold in a secondary market, unlike nonconforming loans.

Conventional loans

Secondary Mortgage Market: Freddie Mac

In 1970, the United States government established the Federal Home Loan Mortgage Corporation (FHLMC). Established as a private, for profit company, the agency became known as "Freddie Mac." Its purpose was very similar to that of FNMA. Freddie Mac differs from Fannie Mae in that its participating lenders are essentially federally chartered savings and loan associations. FHLMC primarily deals with privately insured, highly leveraged (90%, 95%) loans, and FHLMC buys primarily conventional loans. Another common term for both Fannie and Freddie is a GSE, or Government Sponsored Enterprise.

judicial foreclosure

In a lien-theory state, when a mortgagor goes into default, the mortgagee must file a foreclosure action in court, asking the court to allow the sale of the property at auction and to apply the proceeds to the debt. This method, allows the sheriff to carry out the sale after proper advertisement.

deed in lieu of foreclosure

In order to avoid the difficulties and expense of foreclosure proceedings, a borrower may voluntarily convey title to the mortgaged property back to the lender. In return, the lender agrees to cancel all remaining debts owed to that lender. This is known as a deed in lieu of foreclosure, or as a friendly foreclosure. This process is completely voluntary by both the mortgagor and the mortgagee. If either party feels his/her interests may be better served in a foreclosure, he/she may negate the agreement. A will not terminate the right of any junior lien holders. It becomes the responsibility of the acquiring lender to make those payments or risk foreclosure by the junior mortgagees. It should also be noted that when a lender grants a deed in lieu of foreclosure to a debtor, the lender negates his right to seek a deficiency judgment against that debtor.

The percentage relationship between the loan granted by the lender and the value of the property is known as the ___________ The value of the property is determined by the lesser of the sales price or appraised value. To determine the LTV divide the loan by the sale price (appraised price). For example, Sam is purchasing a home for $100,000. He borrows $80,000 from the bank. Sam has an 80% LTV or an 80% loan.

Loan to Value Ratio (LTV).

as opposed to mortgage bankers and other lenders, neither take in deposits nor borrow money to lend. They specialize in bringing together borrowers and lenders, not unlike the way real estate brokers bring together buyers and sellers. The mortgage broker does not make any money servicing the loan, but instead receives a fee for his service, usually expressed as a percentage of the loan amount.

Mortgage Brokers

Mortgage Fraud

Mortgage fraud is generally defined as some sort of scheme which involves a misstatement, misrepresentation, or omission of important information relative to a mortgage loan usually resulting in profit or property for the perpetrator.

Equal Credit Opportunity Act (ECOA)

The Equal Credit Opportunity Act is a federal law in the United States which prohibits creditors from discrimination against any applicant with respect to any aspect of a credit transaction. Prohibitions are based on a creditor discriminating based on race, color, religion, national origin, sex, marital status, age, dependence on public assistance, or that an applicant has exercised any right under the Consumer Credit Protection Act. In other words, creditors should not make decisions on the extension of credit or the terms of credit offered based on a discriminatory preference or reason. Organizations which are subject to the provisions of ECOA would include those who regularly extend credit such as banks, mortgage companies, credit card companies, and credit unions among others. ECOA does not prohibit the company asking some questions or including demographic information on a mortgage application, for instance, but this information alone should not guide the creditor's decisions. Violations of the provisions under ECOA could result in penalties for the creditor, with some being quite severe depending on the facts of the case. Liability for punitive damages could be as much as $10,000 per individual and the lesser of either $500,000 or 1% of the creditor's net worth in class actions. Furthermore, with the addition of the CFPB to the regulatory landscape more distinct powers of disciplinary action and monetary fines can be imposed to creditors in order to dissuade further misconduct and to assist victims in being made whole again.

Government Programs:The VA home financing guarantee prog

The VA home financing guarantee program was established as a result of the Serviceman Readjustment Act of 1944. The program originally intended as a means of financial assistance to returning veterans of World War II. Through congressional legislation, the program has been extended several times since and is likely to remain in existence for an indefinite period. Loans guaranteed under this program are sometimes called "GI" loans. The concept of the VA program is to guarantee a portion of the loan against loss due to defaults by the borrower. After the loan has been foreclosed and the property sold at auction, in the event of a lender loss the Veteran's Administration will make up a portion of the loss suffered by the lender up to a certain amount. Although VA guarantees the lender against loss, the maximum amount of the guarantee fluctuates to keep up with the increasing value of homes and usually conforms with the limits imposed under the FHA program. The VA considers the loan guarantee an "entitlement" to the qualified Veteran, and the amount is tied to the conforming loan limits of Fannie Mae. Lenders will typically loan up to 4 times a Veteran's available entitlement without a requirement for a down payment. For more information on the exact VA loan guarantee limits in a particular market, you may visit http://www.benefits.va.gov Remember, VA does not insure the loans as does FHA and there is no MIP charged to the veteran for a VA loan. The VA entitlement program is an outright government guarantee for those who qualify. Any veteran who served for a period of at least ninety days in the Armed Forces of the United States or of an ally, between September 16, 1940 and July 25, 1947, were initially eligible. Of course, the program has been extended to cover veterans and active duty members of the armed forced after those initial dates. The eligibility for a VA loan now extends to persons who have served 90 consecutive days during wartime, 181 days during peacetime, more than 6 years of service in the National Guard or Reserves, or the spouse of a service member who died in the line of duty or as a result of service-related disability. The eligibility is good until used, and may be reinstated if the original loan for which it was used is paid off. To establish eligibility, the veteran must secure a Certificate of Eligibility (COE) form from a VA regional office. In addition to the above eligibility requirements, the property itself also must meet certain VA loan guidelines. While single-family homes were long the standard for VA loan approval, it is also possible to qualify for a VA loan for condominiums, townhomes, modular homes, and even new construction. VA loans for those who qualify can also be used to make home improvements, make energy efficiency improvements to a home, or even buy a manufactured home and/or lot. The property itself must meet certain dwelling and safety requirements determined by the VA, and if it is a condominium the complex must be a VA approved condominium complex. The Veterans Administration requires that a VA approved appraiser appraise the property and that the appraiser uses the Certificate of Reasonable Value (CRV).The CRV is ordered usually through an approved lending source, in a manner similar to that used in ordering FHA appraisal. In addition, the VA approved appraiser will assess the property and determine that it meets the Minimum Property Requirements (MPR) of the VA. If any updates or improvements are needed, the appraiser will assess the property and point out these MPR needs. The VA will permit the veteran purchaser to pay more than the appraised value of the property, however, he/she must sign a Certificate of Awareness to show that he/she has been made aware of the actual appraisal and is paying more than this amount of his/her own free will. In the event the purchaser does pay more than the appraised value, the maximum loan amount would be the appraised value, and all above this amount would have to be paid in cash at closing by the purchaser as a down payment. Junior financing is allowed, but is not often utilized, primarily because regulations permit the first mortgage loan may be up to 100% of the appraised value. A few advantages of a VA Loan: No down payment as long as sales price does not exceed appraised value No private mortgage insurance (PMI) VA rules limit the amount charged in closing costs Closing cost can be paid by the seller VA loans do not have pre-payment penalties The recipient does not have to be a first-time homebuyer The VA benefit can be used more than once VA loans are assumable by those who qualify

Secondary Mortgage Market:Fannie Mae

The most widely known secondary market player is the Federal National Mortgage Association (FNMA). Also referred to as "Fannie Mae," this clearinghouse of mortgages was first established in 1938 as a subsidiary of the FHA. Originally, FNMA was designed as a government agency designed to facilitate the purchase and subsequent resale of mortgages originated by conventional lenders, under the FHA mortgage insurance program and VA guarantee programs. Eventually, FNMA became active in the purchase and sale of subsidized loans, a function for which it was not intended. In 1968, FNMA was reorganized, which resulted in two major changes in the secondary market plan. First, FNMA was removed from the organizational structure of HUD and became a private corporation whose stocks, bonds and security notes are traded on the New York Stock Exchange. Although technically FNMA is no longer a government agency, as a funding corporation it is still backed by the full faith and credit of the United States government. Fannie Mae is best described as a GSE, or a government sponsored enterprise. The FNMA currently buys FHA, VA and conventional loan packages and sells "seasoned loans" to investors.

Why do people commit Moratge fraud?

Those who commit mortgage fraud encompass a wide variety of persons, including those individuals who simply lie on their loan applications to receive a loan illegally. Unfortunately, the detailed truth is that most mortgage fraud involves one or more industry professionals. For a complicated and expensive mortgage fraud scheme to work, a person will generally need an industry insider to get the job done. Therefore common parties to mortgage fraud include:

Financing/Credit Law: Mortgage Foreclosure, strict foreclosure

Under the original concepts of mortgages, when a mortgagor defaulted on the note or mortgage terms, the mortgagee simply took title and possession of the property, and the mortgagor's rights were immediately terminated or foreclosed after appropriate notice to the delinquent borrower. This system is known as ___________ and is increasingly uncommon. Today, in the United States, only three states follow this procedure, and even in these states the law has usually been modified to give the mortgagor some rights even after default.

Some good practices or cautions for a real estate agent for their client seeking financing could include:

Watching for warning signs or other evidence of fraud or predatory lending Understanding the basic disclosures and impacts for your client so that you may help them to understand the transaction Keeping several industry contacts at your disposal so that you can refer your client or ask relevant questions in your client's best interest Helping your client understand the relationship between the financing terms in their purchase agreement and what may be required of them Helping your client understand financing alternatives and assisting them in shopping for a loan which meets their needs

Mortgages/Deeds of Trust:Title Theory vs. Lien Theory

When classifying a state as title theory or lien theory, one is examining who holds the title to property and what measures the lender must take to regain title in case of default. In title theory states, the lender holds the title until the loan is repaid. The lender must give legal notice, but does not have to go to court to get the title in case of default. Lien theory states, on the other hand, give the title to the buyer. The lender is given a mortgage that establishes a lien on the property. In cases of default, the lender must go to court to get the title.

A promissory note is an

agreement between the obligor (borrower) and the obligee (lender) and is used as written evidence of the borrower's indebtedness (personal promise to repay) to the lender. It acknowledges the indebtedness, and sets forth the terms of repayment. The following is a brief description of the elements of a typical promissory note. The promissory note, commonly referred to as a note, begins with an acknowledgement of the borrower's indebtedness to the lender and his promise to repay the indebtedness, either to the lender named in the note or to anyone the lender directs payment to. Thus, the note is a negotiable instrument which can be sold to another investor if the lender desires. It specifies the amount of the indebtedness, therate of interest, and date on which interest charges are to begin, and the amount and terms of repayment.

A sale and leaseback is an

agreement is used to finance large industrial or commercial properties. An owner sells the property, usually land and building, to an investor. The investor then leases the property back to the seller who will continue to conduct business. The buyer becomes the lessor and the seller becomes the lessee.

There may be an ________ stating that if title to the property is transferred, the entire balance is immediately due and payable at the option of the mortgagee. This makes it possible for a lender to eliminate a loan with a low interest rate, should the property be sold during a period when interest rates are higher than the rate called for on the note covered by the subject mortgage. This clause also allows the lender to focus on the credit worthiness of the new borrower who will have primary responsibility for loan re-payment. It is also referred to as the due-on-sale clause.

alienation clause

Prepayment Clause

allows borrower to repay loan before due

Acceleration Clause

allows lender to call entire note upon default

Fully Amortized Loans

also known as direct reduction loans, require payment of equal installments made consistently over the life of the loan. In the initial period of the loan, a portion of each payment is used to pay interest due on the loan. In the initial period of the loan, a portion of each payment is used to pay interest due on the loan while a smaller portion of each payment is used to gradually reduce the principal owed. After approximately 75% of the payments have been made, the ratio of interest due and principal credited in each payment is about equal. With each succeeding payment, more of the payment becomes credited towards the principal. By the end of the amortization period, the outstanding loan balance will have been reduced to zero.

Primary Market LendersCommercial Banks and Savings Associations,

also known as thrifts, have historically been the nation's largest source of money for residential real estate financing. One of their primary functions is to take in money in the form of deposits from local customers and then lend this money to individuals or families for home purchases. The initial avenues of deregulation of the lending industry began in the late 1970's and continued into the 1980's. In 1981, the U.S. Congress enacted the Depository Institutions Deregulation and Monetary Control act that eliminated interest rate ceilings on deposits and dropped geographical lending barriers. Commercial banks and savings associations are fiduciary lenders; therefore, both are regulated and have standards established by the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS). Commercial banks' and savings associations' deposits are insured to a maximum of $250,000 as of the printing of this book.

a promissory note may be used as evidence of

any debt, and may be secured by either a mortgage or trust deed. In some states, a bond is used instead of a note. The effect of the bond is the same as that of a note.

Mortgage Bankers

are non-depository lenders who originate loans, usually from borrowed funds, then sell these loans on the secondary mortgage market in order to generate capital for making more loans. Their income is derived from loan origination fees, loan servicing fees, and profit from the sale of loans to the secondary market. Loan servicing fees generally include setting up the loan, accounting, handling of escrowed funds such as tax and insurance deposits, acting as trustee under trust deeds, and any other services necessary to maintain the loan. For this service, they receive a small percentage, usually one-fourth to one-half of one percent of the annual outstanding balance.

Effective as part of Dodd-Frank Wall Street Reform there is a specific provision known as the Mortgage Reform and Anti-Predatory Lending Act which prohibits

certain predatory lending practices in the mortgage finance industry. Examples of predatory practices prohibited within the act would be extending credit to an applicant with little to no income, packing a loan with insurance and other fees, or refinancing one high-cost loan for another high-cost loan within a short time-frame.

The TILA-RESPA Integrated Disclosure Rule (TRID)

concerning disclosures during the mortgage application process. In an effort to more effectively distribute and also police the provisions of both RESPA and TILA, new disclosure forms and transactional requirements were implemented. As you can see from the name, "integrated disclosures" means there is one set of disclosure documents issued to the consumer which includes the mandatory requirements of both federal laws (TILA and RESPA). The disclosure requirements begin when a consumer makes a mortgage loan application to a lender. Typically, this is the point in a credit application process where important information has been provided to a creditor in order for a file to be opened and a decision made on whether to approve or deny the loan. Once this information has been submitted for approval to the creditor or, a Loan Estimate Form must be provided to the consumer within 3 business days of the application. The Loan Estimate is a disclosure which will state important information to the consumer about the loan for which they have been approved, and will allow the consumer the appropriate time to both consider the loan terms but also to shop the potential loan for a better product in the marketplace. If the consumer has been denied an extension of credit, the creditor must submit the reason for denial and other information to the consumer within 3 business days on how they may obtain a free copy of their credit report. In addition to the three days after application, the Loan Estimate must also be distributed to the consumer 7 business days before settlement. This ensures to the consumer that there are no major changes to the loan, and gives appropriate time for the consumer to review the loan information prior to settling the transaction. The other disclosure requirement under TRID is that of the Closing Disclosure. For many financed transactions, this disclosure form will replace the previous Hud-1 Settlement Form as the primary disclosure and settlement form. The details on the Closing Disclosure and how it is used can be found in Chapter 8 of this manual on the transfer of title.

A note may contain a___________ that sets forth the borrower's rights and obligations as to repayment.

prepayment clause

Promissory notes can be categorized as

either secured or unsecured

The granting clause

either transfers title to the property to a mortgagee (title theory) or creates a lien on the property (lien theory). In addition, a description of the property is included, often followed by a warranty of title.

Under the title theory system, the borrower holds what is known as _________which allows him/her the right to occupy, use and sell the property that is being used as collateral. The naked title being held in escrow allows the trustee only the title to the property but does retain the right to request the trustee to act on the terms agreed upon in the trust deed. These terms convey, along with the title, a_______ If the borrower does not pay his debt, the trustee (escrow agent) may sell the property and turn the proceeds of the sale over to the lender without having a judicial procedure.

equitable title, power of sale.

Two types of Redemptions

equity of redemption and statutory right of redemption

The __________allows the lender to adjust the interest rate on the loan as was agreed upon at the origination of the loan. This clause is a necessary element for adjustable rate mortgages (ARM's) or variable rate mortgages (VRM's) in which interest rates and payments change periodically to reflect market conditions.

escalator clause

When a lender sells a mortgage note to another investor, the purchaser of the note, or the assignee, will require verification of the outstanding loan balance. To provide this verification, the borrower may be asked to sign an ___________, or certificate of no defense, a statement by which the borrower verifies the loan balance as of a certain date. When a borrower sells his/her property to someone who is going to assume his/her loan, the purchaser will require assurance of the outstanding balance. The lender provides a ___________ for this purpose. Many mortgages state that either of these certificates will be furnished upon request.

estoppel certificate, certificate of reduction

An __________ is used to release the borrower from any personal liability on the loan. The lender further agrees to accept only the mortgaged property as collateral for the loan. The benefit to the borrower is that in the event of foreclosure and subsequent sale of the property, the lender agrees not to pursue a deficiency judgment against the borrower. Exculpatory clauses are more often found in commercial lending practices and are rarely included in the typical home loan.

exculpatory clause

constant payment mortgage

followed throughout the life of the loan will completely amortize or pay off the loan in 30 years in 360 payments. This loan is also referred to as a constant payment mortgage, since the monthly payment remains constant throughout the term of the loan.

growing equity mortgage(GEM)

has a fixed interest rate, but is arranged to have the principal payment increase according to an index or schedule. With the increase in payment amounts, the loan is paid off more quickly. This type of mortgage is used when a borrower's income is expected to parallel the increases in payment.

A secured note

has a mortgage attached to it that pledges property as security for the debt.

The prepayment clause will state that either the note may be prepaid without a charge or that there will be a _______for paying the note off early. Without a prepayment clause the borrower cannot repay a loan early at any time including the act of sale.

prepayment penalty

A blanket mortgage and example

is a loan that is secured by two or more properties as collateral. The mortgage usually includes a release clause that permits one or more of the properties to be released from the obligations of the mortgage once a certain amount has been repaid. security for a loan for the purchase. As he completes and sells each home, he is allowed to repay $10,000 per lot and have the sold lot released form the mortgage. Lenders use construction loans, also known as interim financing, to extend credit for the specific purpose of new construction or for renovating existing improvements. A construction loan is usually short term (six months to two years) in nature, with the funds advanced in states as construction occurs. Prepayment is made from the permanent (long-term) mortgage loan placed on the property when construction is completed. Commercial banks generally make this loan with usually a higher interest rate than the permanent financing.

Financing/Credit Laws: The power of sale

is a process that allows the lender, and typically the trustee, to sell the mortgaged property upon default by the borrower. The sale itself is held at public auction after a 90-120 day waiting period, and the property is free of junior liens and the foreclosing mortgage. The trustee given a trustee's deed that conveys all title holds the purchaser at the auction, or foreclosure sale. The power of sale clause in a contract greatly simplifies and speeds up the settlement process and is also less costly than a mortgage lien foreclosure.

A graduated payment mortgage

is a type of amortized loan that shares the same underlying motivation of the ARM, which is to reduce monthly payments in the initial years of the loan, thereby making it possible to qualify for the loan with less income. Unlike the ARM, whose interest rate and mortgage payment adjusts annually to some unpredictable economic index, the graduated payment loan steps-up the monthly payments at a pre-determined rate until after an agreed upon time period. The loan is then amortized at fixed, level payments. The main pitfall of the GPM is negative amortization. This is a situation whereby the lower monthly payments at the beginning of the loan period are insufficient to pay the interest due. The monthly shortfall between what should be charged as a monthly note and what is actually charged is added to the principal. Therefore, rather than reducing principal with every payment, the principal balance increases every month for the first several years. This type of loan assumes gradual increases in household income and the property values will rise. It is particularly beneficial to young people whose income and financial position are expected to improve as they grow older.

partially amortized loan

is also referred to as a renegotiable rate mortgage (RRM). It is characterized by periodic monthly payments amortized over a 20, 25, or 30 year period. After a specified time period, usually 5 to 10 years, the balance becomes due and payable. This is known as balloon payment. Realize that a balloon loan is any loan that has one or more payments that are larger than the regular payments; this larger payment is usually the final payment. A partially amortized loan is just one example of a balloon loan. A feature of the partially amortized or renegotiable rate loan is that before the balloon payment becomes due, the borrower usually has the option to either pay out the balloon or renegotiate the interest rate, keeping the loan in place. This type of loan combines the features of an amortized loan and a term loan. The promissory note calls for the entire balance to be due and payable at the end of the 5th year. The principal balance at that time would be $95,880. Thus, the borrower would make 59 payments of $804.62 and one final payment of $95,880 + $804.62 or 96,684.62.

open-end loan

is sometimes referred to as a mortgage for future advances and it operates similar to a credit card. The borrower obtains a line of credit based upon a percentage of the value of the collateral used as security. He may then obtain money advances (known as draws) during the term of the loan, until the limit has been reached. Interest is paid on the outstanding balance only and all or part of the loan can be paid off at any time.

Financing

is the industry of providing the capital that most real estate transactions require in order to take place. Since many homebuyers and those seeking to buy real estate do not have the cash to satisfy the entire sales price, there is a huge industry built around lending money to these consumers to allow their real estate dreams to come true. For many of your clients this is the largest financial transaction in their life, and therefore expert advice is usually needed and appreciated. Real estate professionals should understand this important industry and the terminology and players involved in order to better serve their clients.

Disintermediation

is the process by which investors place funds directly rather than in financial institutions for investment. This reduces the availability of mortgage money.

Equity

is what the property is worth minus what is owed on the property.

purchase money mortgage

is where the seller agrees to accept a part of the purchase price in the form of a promissory note secured by a mortgage on the property. In effect, the seller lends the purchaser a part of the purchase price. This may be a first mortgage or it may be second or lower in privilege priority.

Controlled Business Arrangements: Kickbacks

kickbacks or unearned fees. In order to prevent illicit arrangements or unnecessarily raising costs on consumers, kickbacks are prohibited between settlement service providers such as a mortgage lender and a title company. RESPA also prohibits referral fees when no services are actually rendered. The payment or receipt of a fee, kickback or anything of value for referrals includes activities such as appraisals, attorney services, credit reports, mortgage loans, surveys, title insurance and title searches. Therefore, real estate agents should exercise caution and not participate in any illegal kickback schemes with service providers which could put both parties - and their professional licenses - in jeopardy.

Usury laws

laws generally establish the maximum rate of interest or profit on a loan transaction, and therefore impose severe penalties on lenders who violate the usury laws relevant to a particular transaction. While there are certain federal laws which may govern the practice of usury, typically the majority of usury laws are held at the state level. Therefore, creditors are typically bound by the specific usury laws located within the state in which they intend to do business. Check the state portion of your course for more information on your local state usury laws.

The title theory states that the borrower grants to the trustee a limited form of title often referred as

naked title.

Discount points

occur when the yield, or the rate of return, the investor stipulates is more than the interest rate the lender is charging. The time length of the payment of the loan and the difference between the current interest rate and the yield both work to determine the discount points. Each point is equal to one percent of the loan amount, and each point paid increases the yield to the lender by 1/8th percent. Discount points are considered pre- paid interest and are deductible by the borrower on income tax. With FHA or VA loans, the seller and the buyer can negotiate over the payment of points.

Seller Financing

occurs when the seller of the real estate provides financing for the sale by taking back a secured note in the form of a purchase-money mortgage, land contract or deed of trust.

The __________ allows a lender to voluntarily take a lower priority position than he/she would otherwise be entitled to by virtue of his/her recording date. In other words, the holder of a first mortgage can volunteer to become a second mortgagee and allow the second mortgage to move into the first position. This practice does not occur that often but is sometimes done by landowners to encourage developers to buy their land.

subordination clause

Sources: Real estate financing can best be categorized into two areas: __________, which makes loans to consumers, and ____________, which provides funds for lenders.

the primary market, the secondary market

Financing Legislation:RESPA, the federal Real Estate Settlement Procedures Act

was enacted for the purpose of protecting consumers from abusive lending practices. This act also aids consumers during the mortgage loan settlement process. Consumers are provided with important, accurate, and timely information concerning the actual costs of settling or closing a transaction. Kickbacks and other referral fees that unnecessarily inflate the costs of settlements are also eliminated. Excessive escrow account deposits by lenders are also prohibited by RESPA. Application of RESPA is necessary when a purchase is financed by a federally related mortgage loan. Loans made by banks, savings and loan associations or other lenders, whose deposits are insured by federal agencies, are classified as federally related loans. Loans insured by the FHA or guaranteed by the VA; administered by HUD; or intended to be sold by lenders to Fannie Mae, Ginnie Mae or Freddie Mac also fall under RESPA. RESPA is enforced by the Consumer Financial Protection Bureau (CFPB). RESPA applies to first-lien residential mortgage loans made to finance the purchases of one- family to four-family homes, cooperatives, and condominiums, for either investment or occupancy. Second or subordinate liens for home equity loans are also governed by RESPA. Transactions financed by a purchase-money mortgage taken back by the seller, installment contracts (contract for deed), and a buyer's assumption of the seller's existing loan are not covered by RESPA. If the terms of the assumed loan are modified, or if the lender charges more than $50 for the assumption, the transaction is subject to RESPA regulations. RESPA's requirements are aimed primarily at lenders. Some provisions of the act affect real estate brokers and agents as well. Real estate licensees fall under RESPA when they refer buyers to particular lenders, title companies, attorneys, or other providers of settlement services. Licensees who offer computerized loan origination (CLO) services are also subject to regulation. It is important to remember that buyers have the right to select their own providers of settlement services.