Real Estate Finance Today, 3rd Edition

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Real Estate Finance Today, 3rd Edition

• Doris S. Barrell

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Course Objectives

• Define basics of real estate finance
• Review government Influences
• Discuss current issues in lending
• Describe conventional and government loan
  programs
• Calculate monthly mortgage payments
• Examine special financing alternatives

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Basics of Real Estate Finance

• Financing Instruments
• Primary Market
• Secondary Market

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Financing Instruments

• Note
• Mortgage
• Deed of Trust

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The Note

• Signed Legal document
• States terms and conditions for repayment of the
  loan
• Accompanied by either a mortgage or a deed of
  trust

I. O. U.
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The Mortgage

• Pledges real property as security for debt
• Creates a mortgage lien on property
• Requires judicial foreclosure in case of default

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The Deed of Trust

• Establishes real property as security for debt
• Conveys title rights to trustee
• Trustee has power of sale
• Lender named as beneficiary
• Does not required court action to foreclose

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The Transaction

• Note Mortgage
• or
• Deed of Trust

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The Primary Market

• Sources of funding
• Broker or Banker?
• Origination and Processing

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Sources of Funding

• Commercial Banks
• Savings Associations
• Credit Unions

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Commercial Banks

• Originally for short-term loans
• Active today in mortgage lending

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Savings Associations

• Originally called Savings Loan
• Historically primary source of mortgage lending
• Also referred to as thrifts

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Credit Unions

• Newcomer to mortgage financing
• Provide service to members
• Greatly expanding

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Mortgage Broker or Banker?

• Mortgage Broker
• Originates loan
• Matches borrower with investor
• Paid by finder fee
• PLUS has wide range of loan products

• Mortgage Banker
• Originates loan
• Uses own money
• Continues to service loan
• PLUS qualifying standards are set, underwriting
  flexible

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Origination Processing

• Prequalified?

• Preapproved?

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Members of the Team

• Loan Officer
• Appraiser
• Processor
• Underwriter
• Closing Department
• Settlement Attorney or Agent

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Loan Officer

• Meets with borrower
• Collects information on assets debts
• Fills out Uniform Residential Loan Application
• Determines appropriate loan product

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Appraiser

• Appraisal is ordered by the lender
• Appraisal paid for by borrower at time of
  application
• Appraisal establishes value to substantiate the
  loan

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Processor

• Receives application from loan officer,
  appraisal, and credit report
• Collects and verifies all information
• Prepares case file for submission to underwriter
• Stays in contact with borrower

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Underwriter

• Approves or denies the loan
• May set conditions

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Lender Closing Department

• Prepares financing documents
• Submits file to settlement attorney or title
  company closing agent

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Settlement (or Closing)

• Attorney or title company agent
• Prepares deed to convey title
• Prepares HUD-1 Statement
• Conducts title search
• Acquires title insurance for lender and purchaser
• Ensures all terms of contract are met

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Geographic Differences
Eastern mid-west settle with attorney or title
company agent
Western states settle in escrow
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Secondary Market

• Fannie Mae
• Freddie Mac
• Ginnie Mae

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Fannie Mae

• Originally chartered as Federal National Mortgage
  Association (FNMA)
• Created in 1938 to purchase FHA loans
• Extended to VA loans after WWII
• Totally stockholder owned since 1968
• Purchases both government and conventional loans
• Sells mortgage-backed securities

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Freddie Mac

• Originally chartered as Federal Home Loan
  Mortgage Corporation (FHLMC)
• Chartered in 1970 to purchase conventional loans
• Today purchases government and conventional loans
• Sells marketable securities
• Under general oversight by HUD

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Ginnie Mae

• Government National Mortgage Association
• Created as spin-off from Fannie Mae in 1968
• Guarantees mortgage-backed securities based on
  FHA and VA mortgage loans

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Private Investors

• Insurance Companies
• Pension Funds
• Individual Investors
• REMIC Real Estate Mortgage Investment Conduit

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Private Investors

• Life Insurance
• Pension Funds
• REMICs
• Individuals

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Government Influences

• The Federal Reserve
• Federal Home Loan Banks
• Department of the Treasury
• National Credit Union Administration
• Dept. of Housing and Urban Development

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The Federal Reserve

• Controls flow of money into the economy
• Discount Rate
• Reserves
• Open Market
• Supervises commercial banks

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Federal Home Loan Bank

• Established in 1932 to supervise savings
  associations
• 12 District banks (like the Fed)
• Federal Home Loan Bank Board abolished in 1989
• Supervision of savings associations given to OTS
• Provides reserves and secondary market for its
  members

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Department of the Treasury

Office of the Comptroller of Currency
(OCC) Office of Thrift Supervision (OTS) Federal
Deposit Insurance Corporation (FDIC)
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National Credit Union Administration (NCUA)

• Independent federal agency
• Charters and supervises federal credit unions
• Operates National Credit Union Share Insurance
  Fund (NCUSIF)
• Insures savings in all federal and many state
  chartered credit unions

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Dept. of Housing and Urban Development (HUD)
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Congressional Acts
Fair Housing Act of 1968
Equal Credit Opportunity Act (ECOA)
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Congressional Acts

• Real Estate Settlement Procedures Act (RESPA)

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Congressional Acts

• Truth-in-Lending Act (TILA)
• Requires disclosure of all cost of credit
• Annual Percentage Rate (APR) must be shown
• Regulation Z affects advertising
• Community Reinvestment Act (CRA)
• Requires banks commitment to community

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Congressional Acts

• Taxpayer Relief Act of 1997
• Sale of personal residence

• 500,000 capital gains tax exemption for couple
  (250,000 for single)
• Must have occupied 2 out of past 5 yrs.
• Can be taken every 2 years
• No buy-up required

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Congressional Acts

• Taxpayer Relief Act of 1997
• Sale of Investment Property

• Capital Gain tax on profit reduced to 15
• Depreciation recapture at 25
• Hold for 12 months

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Current Issues in Mortgage Lending

• The Subprime Crisis
• Foreclosure Rates Increase
• Importance of Credit Score
• Required Homeowner Insurance

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The Subprime Crisis

• Extreme growth
• Declining housing market
• New affordable lending options
• Predatory Lending Concerns

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Foreclosures Increase

• Whos hurting?
• Whos to blame?
• Who can help?

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Lender Workout Options

• Foreclosure Presale
• Short Sale
• Deed in Lieu
• Reinstatement
• Forbearance
• Refinancing

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Sources of Help

• Consumer Credit Counseling Service
• Non-profit organizations
• 888-995-HOPE
• www.HOPENOW.com

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Credit Scoring

• Equifax
• Experian
• (TransUnion
• FICO

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Percentage of Contribution

• Payment history 35
• Current total debt 30
• Length of credit history 15
• Requests for new credit 10
• Types of credit in use 10

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Factors That Lower Score

• Late payments
• Too many credit cards
• Excessive potential credit
• Maxed-out cards
• Liens, judgments, foreclosure
• Multiple inquiries

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Ways to Improve Score

• Pay bills on time
• Reduce number of credit cards
• Refuse preapproved credit cards
• Refuse increased loan limits
• Correct errors on credit reports

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Required Homeowner Insurance

• Disaster impact
• Accelerating rates
• Flood Insurance

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Conventional Mortgage Loans

• Standard Conforming Loans
• Affordable Loan Products
• Non-conforming Loans
• Adjustable Rate Mortgage (ARM)
• Growing Equity Mortgage (GEM)

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Standard Conforming Loans
Guidelines established by Fannie Mae and Freddie
Mac Made homeownership possible for more people
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Original Guidelines

• Maximum loan amount set annually
• Minimum down payment 5
• Qualifying ratios 28/36
• Reserves 2 months
• Private mortgage insurance required
• Non-assumable
• No pre-payment penalty

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Private Mortgage Insurance

• Protects the lender
• Required with less than 20 down
• Payment can be made upfront, financed or paid in
  monthly increments
• Legislation mandates removal of PMI when 78 LTV
  reached
• Ways to avoid PMI

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Ways to Avoid PMI

• Lender-paid PMI
• Lender charges slightly higher rate with no PMI
  payment
• Combined lst 2nd mortgage (trust)
• 80-10-10
• 80-15-5
• 80-20

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Affordable Loan Products

• Fannie Mae Mortgage Solutions
• Biweekly Mortgage
• Expanded Approval
• Flexible 97 and Flex 100
• MyCommunity Mortgage

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Affordable Loan Products

• Freddie Mac Home Possible
• Home Possible 97 and 100
• Neighborhood Solution
• Initial Interest Fixed-rate

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Non-conforming Loans

• Loans which do not conform to Fannie Mae/Freddie
  Mac guidelines
• Guidelines set by lender
• Loans exceeding conventional limits are called
  jumbos

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Special Community Programs

• Attract essential workers into community
• Encourage low moderate income first-time
  homebuyers
• Help to move from subsidized housing
• Promote revitalization

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Adjustable Rate Mortgages

• Index
• Margin
• Note Rate
• Initial Rate
• Adjustment period
• Caps
• Assumable
• Convertable

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Example of a 1-year ARM

• Index (T-bill) 4.0
• Margin 2.5
• Note rate 6.5
• Initial rate 4.5
• Caps 2/6
• Worst-case scenario
• Yr. 1 4.5 Yr. 3 8.5
• Yr. 2 6.5 Life of loan 10.5

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Benefits Disadvantages

• Benefits
• Qualify for more loan
• Lower monthly payment
• Good for short-term planning

• Disadvantages
• Payments increase
• More interest paid
• Sharing risk with lender

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Growing Equity Mortgage

• Increasing payments to principal
• Decrease term of loan
• Save in interest paid
• Bi-monthly mortgage
• Pay one-half payment every 2 weeks
• Creates one extra months payment

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Formulas Using Rate Factor

• Formula One
• Determine principal and interest payment
• Multiply loan amount by rate factor
• 200,000 x 6.65
• 1330.00

• Formula Two
• Determine loan amount
• Divide PI dollars by rate factor
• 1330 divide by 6.65 200,000

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Calculating Monthly Payment

• Principal and Interest
• (loan amount times rate factor)
• Taxes and insurance
• estimate 2 of sales price, divide by 12
• Private Mortgage Insurance
• (average .8 x loan amount divide by 12)
• Condominium or Homeowner Fees

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Case Study 1 The Browns

• Annual income (30,000 25,000)
• Debts (300)
• Savings (5,000 plus 5,000 gift)
• Interest rate - 7.5, 30 yr loan
• Qualifying ratios 28/36

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Case Study 2 - Greenberg

• Income - 36,000
• Debts - 335
• Savings - 3,000
• 7 interest, 30 yr.
• 33/38 ratios

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Case Study 3 - Gonzalezs

• Income - 70,000
• Debts - 500
• Savings - 15,000
• 8, 30 yr loan
• 33/38 ratios
• 8, 15 yr loan

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Government Insured or Guaranteed Loans

• Federal Housing Administration (FHA)
• Dept. of Veterans Affairs (VA)
• State or Local Programs

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FHA Loan Guidelines
Maximum loan amount varies by area Minimum
down payment 1.25 for sales price 50,000
or less 2.25 for over 50 K Qualifying
ratios31/43 Seller contribution up to 6 of
sales price Mortgage Insurance Premium 1.50
upfront and .5 annual, charged monthly Assumable
with purchaser qualifying
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Mortgage Insurance Premiums for FHA Loan (MIP)

• Upfront MIP
• 1.50 of loan amount amortized over life of loan
• Not charged on condos

• Annual MIP
• .5 of loan amount divided by 12 per month
• All FHA loans

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Compensating Factors

• Low long-term debts
• Large down payment
• Minimal credit use
• Excellent job history
• History of making equal or greater payments than
  new PITI
• Additional potential income

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Special FHA Programs

• FHA/VA 203(h) disaster relief
• FHA/ARM 251 (1/5 caps)
• Officer, Teacher Next Door
• Housing Choice Voucher (formerly Section 8)

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FHA 203(k) Rehab Loan
Finance both purchase and rehab costs 97 LTV of
projected value Paid in draws Minimum 5,000 in
rehab cost Owner-occupant only
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Calculate FHA monthly payment

• Principal Interest
• Loan amount x rate factor
• Taxes Insurance
• Estimate 2 of sales price divided by 12
• Mortgage Insurance
• Upfront 1.50 of loan amount financed
• Annual .5 of loan amount divided by 12
• Condo or Homeowner fee

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VA Loans

• Certificate of Eligibility
• 90 days in wartime
• 180 days service before l980
• 2 yrs. Service since 1980
• 6 yrs for reservists National Guard
• Entitlement set by VA
• 25 of current Fannie/Freddie loan limit
• Top 25 of loan guaranteed
• Bank lends 5 times entitlement

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VA loan Guidelines

• Maximum loan amount 4 times VA entitlement
• Minimum down payment 0
• Qualifying ratio just 41
• Funding fee similar to PMI or MIP
• Seller contribution unlimited
• Assumable with buyer qualification
• Certificate of Reasonable Value appraisal

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VA Funding Fee
First Use Subsequent 0-5 down 2.15 3.30 5-10
down 1.50 1.50 10 down 1.25 1.25 RESERVI
STS/NATIONAL GUARD 0-5 down 2.40 3.30 5-10
down 1.75 1.75 10 down 1.50 1.50
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Case Study 1 - Browns

• Sales price 142,000
• Mortgage 137,740
• Calculate payment for FHA loan
• FHA or MyCommunity Mortgage?

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Case Study 2 - Wong

• Income 40,000
• Debt 725
• Current rent 850
• Compensating factors?

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Case Study 3 - Martinez

• Income 28,000
• Debt 80
• Savings 2000
• VA eligible?

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Special Financing Alternatives

• Seller Financing
• Low/Doc or No/Doc Loans
• Loans for Self-employed
• Alternative Sources of Cash
• Reverse Annuity Mortgage

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Seller Financing

• First or Second Mortgage (Trust)
• Lease-Purchase Option

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Lease-Purchase Option

• Non-refundable deposit
• Sales price established
• Accelerated rent with credit back
• Liability for repairs
• Delayed settlement
• Financing arranged 60 days prior to settlement

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Loans for Self-Employed

• The Problem!
• Solutions
• Low/doc loan
• Tax returns
• Profit Loss
• Balance sheet

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Alternate Sources of Cash

• Gift
• CD, Stocks, Bonds
• IRA
• 401(k)

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Reverse Annuity Mortgage

• Payments to owner based on equity in home
• Benefit to elderly needing cash
• Lump sum
• Payments
• Line of Credit

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Available RAM Programs

• Private lender
• FHA Home Equity Conversion Mortgage (HECM)
• Fannie Mae HomeKeeper