RE Financing: Practice

1. Chapter 15 D. Zaharopoulos RE Financing: Practice

2. Federal Reserve System • Country divided into 12 districts • Board of directors nominated by President, confirmed by Congress • Current chair is Ben Bernanke • Board sets nation’s monetary policy • Regulates the flow of money & interest rates

3. Financing Terms • Discount rate: rate charged to member banks when borrowing from the Fed • Margin: the bank’s mark-up • Index: the way a lender determines cost of capital.

4. Interest Rates • Statutory (legal) • Usury – no Usury in AZ, so there is no limit (max) on what interest rate to charge • The legal rate of interest in AZ is 10% simple interest, if none is stated

5. Primary Mortgage Market Lenders who supply funds to borrowers (“Paper” is created) How they make their money: • Loan origination fees, discount points • Recurring income-interest AND • By selling “paper” to secondary markets

6. Primary Markets • Thrifts, savings, banks • Insurance companies • Credit unions • Pension funds • Endowment funds • Investment group financing • Mortgage banking co’s • Mortgage brokers

7. Secondary Mortgage Market Where loans are bought & sold after they have been funded • FNMA (Fannie Mae) • GNMA (Ginnie Mae) • FHLMC (Freddie Mac) • FAMC (Farmer Mac)

8. FNMA • Quasi-governmental agency/private-owned stock • Deals in all real estate loans –FHA, VA, conventional • Buys a block of mortgages from a lender in exchange for mortgage-backed securities

9. GNMA • A division of HUD • Sells mortgage-backed securities with a guaranteed rate of return • Only deals with government programs • Administers “special assistance” programs

10. Freddie Mac • Private • Purchases conventional loans only • Does not guarantee any payments

11. Conforming Loans Definition:Loans that comply with the standardized forms and underwriting guidelines published by Fannie Mae & Freddie Mac. Reason:Easier to sell in the secondary market.

12. Financing Techniques • Straight, or Term loans; interest-only loans • Amortized loans • ARMS • GEM-rapid payoff loan • RAM-reverse-annuity mtg-“cash poor-house rich seniors” • Balloon payment loans

13. Loan to Value Ratio LTV ratio based on the sales price or appraisal, whichever is lower. PMI-private mortgage insurance • LTV ratio is higher than other loans • Can be removed by 80% LTV ratio

14. Conventional Loans • Not government-backed • Greater risk; higher interest rates • LTV ratios important; at least 20% downpayment considered “non-risk” • Loans are typically not assumable • Typically 28% / 36%

15. FHA-insured loans • Federal housing administration- a department of HUD • Don’t need to be a US citizen • The Lender (not property) is insured against loss • Max loan amount varies by county based on median sales price • Some assumable before 1989 3 types of FHA loans • Title I- home improvement loan (2nd or 3rd loan) • Title II-home purchasing program (std 30 yr fixed) • Title III-FNMA

16. FHA continued • For 1-4 family owner-occupied residences • No prepayment penalty • Must be appraised by FHA appraiser & issued Certificate of conditional commitment (valid 6 mo’s for existing house, 12 months for blueprints on new)

17. FHA continued 3 C’s for buyer qualifications: • Cash= 3.5 % (can be gifted, but not borrowed)* • Credit = front end 29%, back 41% * (31% / 43%) • Collateral = property Seller can pay closing costs up to 6% of Sales Price *updated July 2008, however ratios may vary

18. VA Loans • Veterans serving 2 years after 9-7-80 • Can purchase homes with no downpayment • Guarantees up to $104,250 for lender (updated 2008)

19. VA-guaranteed loans • 1-4 family residential, owner-occupied • Can be used numerous times • 0% down • Qualifying ratios: no front end, back 41% • No limit on loan amount, however max guarantee amount is $104,250 & most lenders will loan up to 4 times this amount ($417,000)

20. VA Loans VA issues certificate of eligibility Good for 6 mo’s existing house, 12 mo’s blueprints Funding fees paid to VA = 2% In addition to discount points or orig. fees (orig. fee cannot exceed 1% of loan amount) Seller does pay costs, too, so seller can say “no VA loans”

21. VA Loans • Loan is assumable; non-veterans can assume • Basically, no novation; the veteran always remains responsible for the loan, unless release from liability by both VA & Lender.

22. Other Financing Techniques • Purchase-money mortgages Seller carries some of the financing • Package Loans A furnished condo or new home sales that include financing for appliances, etc. • Blanket Loans Covering many parcels or plots Financing subdivision developments; partial release clause to release one by one from lien

23. Other Financing Techniques • Wrap-around loans Gives borrower new increase loan at higher interest rate; new lender assumes responsibility of existing loan • Open-end Loans Can be expanded incrementally up to a specified amount • Construction Loans Periodic payments called “draws” at predetermined progress points • Sale & Leasebacks Seller sells property & leases it back

24. Truth in Lending & Regulation Z Requires lenders to disclose to borrowers the true cost of obtaining credit • Enforced by the FTC • For residential 1-4 family units • Cannot give partial terms w/out disclosing all • 3-day right of rescission applies to most Reg Z transactions (not on new loans for purchase, but only on 1st or 2nd refinances)

25. ECOA Equal Credit Opportunity Act • Prohibits lenders from discrimination • Race, color, religion, national origin, sex, marital status, age, or dependence on public assistance* *note: this list will vary when we study Fair Housing

26. RESPA Real Estate Settlement Procedures Act Enforcement agency is HUD Provide borrowers within 72 hours of loan application with: • HUD Booklet (Settlement Costs & You”) • Good faith estimate