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Residential Mortgage Lending: Principles and Practices, 6e

Residential Mortgage Lending: Principles and Practices, 6e. Chapter 8 Government Lending. Objectives. After completing this chapter, you should be able to: State the major functions of Federal Government mortgage insurance and guarantee programs.

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Residential Mortgage Lending: Principles and Practices, 6e

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  1. Residential Mortgage Lending:Principles and Practices, 6e Chapter 8 Government Lending

  2. Objectives • After completing this chapter, you should be able to: • State the major functions of Federal Government mortgage insurance and guarantee programs. • Explain how the FHA mortgage insurance program stimulated lending activity among life insurance and mortgage companies. • List three reasons why use of FHA insurance declined in the 1970s. • Understand the basic guidelines of FHA and VA loans. • Compare and contrast the basic provisions of FHA insurance, VA guarantee, and USDA guarantee programs. • Explain how FHA, VA, and RHS programs have changed in the last ten years and why.

  3. The Practice of Government Lending – Who is the Lender?

  4. Government Programs • Federal Housing Authority (FHA) • VA-Guaranteed Loans • Rural Housing Services (RHS)

  5. FHA Insurance • The FHA insurance premium is comprised of two components: • an upfront premium paid at closing • and an annual premium.

  6. FHA Today ● Section 203(b) Insured Mortgage ● Section 203(k) Rehabilitation Mortgage ● Title I Home Improvements ● Energy Efficient Mortgage ● Section 255 Home Equity Conversion ● Section 248 Indian Reservations and Other Lands ● Section 203(h) Insured Mortgage for Disaster Victims

  7. FHA Loan Limits •  Mortgage maximums single family $271,050

  8. Qualifying Ratios • FHA’s ratios of 31% for housing debt/income • and 43%for total debt/income

  9. VA Guarantee • The VA guarantee authorizes the Veteran’s Administration to reimburse the lender for a percentage of its loss after foreclosure on a VA loan. Without it, lenders would be prohibited by their regulators from providing credit under such favorable terms to the borrower. • Regular refinance transactions are limited to an entitlement of $36,000, or $144,000 loan amount.

  10. Eligibility ● Current or former armed service personnel ● Active duty personnel ● National Guard reservists ● Unremarried surviving spouses of veterans whose deaths were caused by a service-related injury or ailment ● Spouses of members of the armed services who have either been missing in action or prisoner of war for more than 90 days

  11. VA Down Payment • The program was designed to allow veterans to buy homes with no money down.

  12. What Do You Think? • Discuss the positive and negative ways in which government-sponsored mortgage programs impact housing. • How is mortgage insurance (FHA or PMI) different from a mortgage guarantee (VA or USDA)? • Why has FHA mortgage lending increased so dramatically in recent years? • Explain how FHA mortgage programs differ from conventional mortgage programs.

  13. What Do You Think? • How do VA guarantee programs work? • What program eligibility issues and restrictions does the VA impose? • What eligibility issues and restrictions do USDA RHS programs have?

  14. Check Your Understanding • Mortgage insurance reduces risk and increases the liquidity of a mortgage investment. • Mortgage insurance encourages lenders to make more loans with low down payments. • Mortgage guaranty companies were heavily regulated in the1920s and 30s. • Most mortgage guaranty companies had adequate reserves to withstand the Depression years. • Careless underwriting and appraisal procedures contributed to the failure of mortgage guaranty companies in the 1920s.

  15. Check Your Understanding • FHA-insured mortgages reduced risk to investors by establishing standards for the borrower and the property. • Mortgage companies make FHA-insured loans in areas with capital shortages and sell the loans in capital surplus areas. • FHA-insured loans offer an attractive yield to investors because of to the dramatically higher interest rates. • The ceilings set for the maximum FHA-insured loan amount often fall behind the cost of real estate. • The length of time required to obtain a commitment from FHA contributed to the decline in the program’s usage in the 70s.

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