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Primary Mortgage market
local lenders who supply funds to borrowers as an investment
What are the requirements for lenders in to invest in the primary mortgage market?
- -require residential mortgage loan originators to be enrolled in the National Mortgage Licensing System and Registry (NMLS) and be licensed by the state through the NMLS.
- -real estate agents who accept a fee for taking an application or offering to negotiate term of a residential mortgage loan, must be licensed under SAFE.
- -exemptions are government employee relations and family relation transactions.
What is SAFE?
Secure and Fair Enforcement Mortgage Licensing Act.
What are the 7 main types of primary mortgage markets?
- -Savings Association (S&L)
- -Commercial Banks
- -Savings Banks
- -Insurance Companies
- -Mortgage Banking Companies
- -Mortgage Brokers
- -Credit Unions
What type of primary mortgage market specializes in long-term residential loans, main source of investment is real estate assets, most flexible on lending procedures and main function is to promote thrift and home ownership?
- -Savings Associations aka S&Ls
- **All savings associations must be chartered either by federal or state government.
- **participate in conventional, FHA and VA loans.
Commercial banks also participate in conventional, FHA and VA loans. And also must be charted by the state or federal government.
This type of primary mortgage market operates like a savings association, but prefer lower-risk loans such as FHA or VA loans. What is it called?
This type of primary mortgage market gains large sums of money from the premiums paid by their policyholders. Much of this money is used to invest in real estate loans that finance commercial and industrial properties. They also invest in residential loans by purchasing large blocks of government-backed loans from Fannie Mae and Freddie Mac and other.
This primary mortgage market uses money borrowed from other institutions and/or funds of their own to make real estate loans. They than sell the loans to investors, but retain the servicing, usually charging 0.25%.
Mortgage Banking Companies
Mortgage brokers are not lenders but operate as a primary mortgage market. What do they do?
- -act as intermediaries to bring borrowers and lenders together; locate potential borrowers, process preliminary loan applications, and submit the applications to lenders for final approval.
- -do not service loans once they are made
- -can also be real estate brokers; full disclosure must be made to all parties to the transaction.
Credit unions are a primary mortgage market but difficult to get loans in.
Residential lenders are required to use the ____________________ Application for all loans.
Uniform Residential Loan Application
What is the difference between prequalified and preapproved?
- -prequalified is when the lender takes the applicants info and calculates the max amount for a loan (online calculators)
- -preapproved is when the lender takes the applicants info and checks it, to find the max amount for a loan.
Before approving a loan, the lender must qualify what three things?
the buyer, the title, and the property
What are the five factors that account for the majority of a FICO credit score?
- -the borrower's payment history
- -amounts owed
- -length of credit history
- -types of credit used
- -number of new credit applications or queries
What is the range on FICO score?
What is the minimum score FHA requires?
Fannie Mae and Freddie Mac look for at least 620, and usually charge a higher interest rate for scores under 660.
Before applying for a mortgage loan, borrowers should check the accuracy of their credit score.
If an applicant is rejected for a loan based on credit score or approved for a loan with a higher rate, a lender must provide the consumer with the credit score, explain the factors that adversely affected the score, and indicate the range of possible scores. This is rule of what Act?
What is a computerized loan origination (CLO) system?
- -electronic network for handling loan applications through remote computer terminals linked to several lenders' computers.
- -a real estate broker/agent can call up a menu of mortgage lenders, interest rates, and loan terms, then help a buyer select a lender and apply for a loan right from the brokerage office.
In order for a real estate broker/agent to assist in the CLO application and in answering on-screen questions, negotiates or discuss rates or terms, they must be licensed as a residential mortgage loan originator, a ________ requirement.
Automated underwriting is the process of electronically evaluating a loan application and subsequently providing a recommendation for or against a loan approval. It is the primary method of ___________.
Real estate agents should advise borrowers not to take on additional debt between the time of loan application and the date of closing.
true; could result in resubmit of new loan and takes up time
Online mortgage lenders are putting even more loan choices into buyers' hands. Because buyers may research lenders' websites, it benefits a license to stay informed about what?
the latest internet resources
What are the four main types of payment plans?
- -fully amortized payment
- -Flexible payment
- -interest-only payment
- -partially amortized (balloon) payment
How is a fully amortized loan paid off?
- -aka direct reduction loan
- -mortgagor pays a constant amount monthly; most of beginning payments are interest and end is mostly principal; interest declines, principal amount increases; until paid off.
Most mortgage and deed of trust loans are what type of payment plans?
fully amortized loans
If a borrower wants to pay off a fully amortized loan faster, he may...
- -pay additional amounts, higher payments
- -negotiate a biweekly payment plan
How do interest-only loans work? And what are they primary used for?
- -aka term loan
- -payments of interest, with the principal to be paid in full at the end of the loan term
- -generally used for home improvement loans, second mortgages, and investor loans.
How to flexible-payment loans work? Who benefits from these loans
-younger people and buyer in times of high interest rates; mortgagor makes lower monthly payments for the first few years (usually 5) and larger payment for the remainder of the term
How does a balloon payment work?
- -aka partially amortized loan
- -monthly payments are lower to where the loan will not be paid off at end of term, which at end of term a large sum payment is due to cover the rest of the loan.
Conventional loans can be conforming or nonconforming. What does this mean?
- -If a conventional loan is conforming, it following the guidelines of Fannie Mae and Freddie Mac, so the loan can be easily sold on the secondary market; 2013 loan limit was $417,000.
- -Nonconforming loans do not meet the guidelines and can be held in a lenders own portfolio or sold to a private mortgage packager; exceed the conforming loan limit.
What are the qualifications for most conventional loans? If a borrower does not meet the qualifications, what can be a helping hand for qualifying?
- -buyer's maximum house payment (PITI) for 25-28% of gross monthly income (housing-expense or front-end ratio).
- -Total debts cannot exceed 33-36% (total debt or back-end ratio); includes house payment, installments and resolving account payments, child support.
- -depending on the borrower's credit score, cash reserves, and residual income, higher ratios may be allowed.
What is the current maximum LTV ratio for conventional loans?
-95%, 5% down
The LTV is calculated by dividing the amount of the loan by the value of the property, which is the lesser amount of sales price or _______.
What is the current LTV ratio for a VA loan?
What is the current LTV ratio for a FHA insured loan?
96.5% (3.5% down)
Higher down payment equals ___ LTV and ___ lender risk.
If a property has a sales price of $105,000 and an appraised value of $100,000, secured by an $80,000 loan, what is the LTV?
80%; $80,000 (loan)/$100,000 (lesser of sales price or appraisal) = 80%
What is PMI?
- -Private mortgage insurance; insure a lender against borrower default and loss due to foreclosure.
- -insures usually 25-30%
What are the requirements of PMI? HINT: two requirements.
- -PMI is required on high LTV loans where the borrower invested less than 20%; LTVs over 80%; purchased when the loan is closed
- -if a loan balance is 80% or less, an annual notes is sent to the borrower to cancel the PMI.
- ****Texas law requires notification when the loan-to-current value reaches 80%.
The PMI can affect what borrower's can by because of the added charges. What can a borrower, or an agent suggest when that happens?
get the property reappraised
To continually replenish their supplies of funds, lending institutions will often sell the loans to investors instead of holding them for the full term. However, the interest rate that a lender charges for a loan might be less than the yield an investor demands. To make up the difference, the lender charges the borrower what?
-discount points; lender figures out, has rate sheet
A point is 1% of:
a. loan amount
b. purchase price
As a general rule, each point of discount raises the effective yield by 1/8 of 1%; the actual amount depends on the _____ and ____ of loan. For the borrower, one discount point equals __% of the loan amount and is charged as prepaid interest at closing.
What is a loan origination fee?
-fee for doing loan; usually 1% of loan
A house sells for $100,000, and the borrower seeks an 80% LTV loan. Each point charged on the $80,000 loan would be what? If the lender charges 3 discount points, the total discount points due to the lender at closing would be what? The lender's yield would be increased by an estimated 3/8.
- -$800 ($80,000 x 0.01)
- -$2,400 ($80,000 x 0.03)
The Federal Housing Administration (FHA) operates under the...
Department of Housing and Urban Development (HUD)
FHA loan refers to a loan that is _____ by the agency.
An FHA-approved appraiser must appraise the house and confirm that the property meets HUD's minimum property standards.
The most popular FHA program is ___________, which provides a fixed-interst rate loan for 10-40 years on one-family to four-family residences.
Title II, Section 203(b)
FHA Borrowers with a credit score of ____ or higher are eligible for the maximum FHA-insured loan amount of ___%.
The loan amount is chosen by the lessor amount, meaning which one is less: the appraised amount or the sales price.
FHA borrowers with credit scores of 579-500 are limited to ___% LTV loan amounts.
FHA borrowers with a credit score below ___ are not eligible for FHA financing.
FHA loan amounts are between $217,050 to $625,500 depending on the _____.
For homes less than one-yr old that were not built to FHA standards and do not carry a 10-yr warranty plan, the loan ratio is ___%.
If the contract purchase price exceeds the FHA loan amount, the buyer may pay the difference in cash as a part of the _______________.
For FHA insured loans, the borrower has to pay what in addition to the interest charged.
Up-front mortgage insurance (UFMIP) (one-time only) and annual mortgage insurance (a monthly mortgage insurance premium).
What is the rate of FHA UFMIP? What is the annual mortgage insurance rate? How are these insurance premiums paid?
- -UFMIP: 1.75%
- -Annual: 1.35%; higher loans, 1.55%
- --paid at closing by borrower or someone else, but are normally added to the loan amount
FHA requires most FHA borrowers to continue paying annual premiums for the life of their mortgage loan.
Title I FHA program loans are granted for...
home improvements and repairs and for the purchase of manufactured homes.
Title II FHA program loans are granted for...
- -the construction or purchase of a home; also refinancing.-
- -Section 203(b)
- -Section 203(h); disaster program
- -Section 203(k); rehabilitation; fixer upper
- -Section 251; ARM insurance program
- -Section 255; reverse mortgage
- -Energy-Efficient Mortgage Progam (EEM)
What are the housing-expense and total-debt ratio qualifications for an FHA-insured loan?
- -buyer must have a housing-expense ratio (including PITI, MIP, and homeowners' dues) of no more than 31%
- -buyer's total debt ratio cannot exceed 43% of gross monthly income.
- -transactions where the borrower has a credit score below 620 and the debt-to-income ratio exceeds 43%, it must be manually underwritten.
FHA qualifying procedures are more lenient than those for conventional or VA loans.
The lender of an FHA-insured loan can charge discount points in addition to a ___________ fee.
loan origination fee
In a FHA-insured loan, sellers may contribute up to __% of the sales price towards closing costs, prepaid expenses, and discount points. If a sellers concessions exceed this percent, the exceeded funds are contributed to the price of the property.
VA guaranteed loans are used to purchase or construct homes; residential property must be owner-occupied.
There is no VA limit on the amount of loan a veteran can obtain; the limit is determined by the lender.
What secondary market sells most VA loans and requires at least 25% guaranty?
Lender will generally base the maximum VA loan amount on the VA's ________.
To determine the portion of a mortgage loan that the VA will guarantee, the veteran must apply for a _________________, which states the veteran's entitlement to VA loan benefits under the law, based on military service.
certificate of eligibility
A certificate of eligibility guarantees a veteran will get a loan.
false; it reflects the available entitlement, which is the maximum amount the VA will guarantee.
With a VA loan, the specific loan amount that would be guaranteed is based on what?
-the loan amount and the prior use of the entitlement for another VA loan.
If on active duty, requirements for eligibility are __ days wartime, or __ days peacetime.
Requirements for Reserves and National Guard for eligibility is...
What two methods must be employed to determine a veteran's ability to qualify for a loan?
- -debt-to-income ratio; 41%
- -residual income; the amount of monthly income remaining after all the debts; depending on area; incomes based on family size and location
For a VA loan, an appraisal is conducted by a VA-approved appraiser.
For a VA loan, after the appraisal of the property, the VA issues a Notice of Value (NOV). What is this?
-stating the current market value and placing a ceiling on the amount of a VA loan allowed for the property.
For a VA loan, If the purchase price is greater than the amount cited in the NOV, what are the options the veteran can take?
- -withdraw from the contract without penalty and have the earnest money refunded
- -or pay the difference in cash at closing.
The VA regulations limit the fees that the veteran can pay to obtain a loan. The fees are set into fees that are reasonable and customary "Itemized Fees and Charges" and then up to 1% flat charge by the lender.
- -1%; origination fee, expenses not covered in the "Itemized Fees and Charges" list; loan closing or settlement fees, document prepation fees or loan application fees
- -reasonable: recording fees, a credit report, a survey, and most appraisal fees
- **discount points are paid by the seller or buyer
VA home loan programs require that each veteran must pay a ___________ to the VA at closing. The amount of this fee depends on regular or reserve military status, amount of down payment and whether it is the first or subsequent use of VA financing.
funding fee; can be paid up front, but generally added in the loan amount.
VA-guaranteed loans can't be assumed by purchasers who do not qualify as veterans.
false; VA loans can be assumed by non-veterans
In order for a veteran to get full entitlement back with a process of assumption loans, what has to happen
- -the purchaser assuming the loan has to be military
- -veteran has to pay off the loan
What are the two programs under the US Department of Agriculture (USDA)?
- -Farm Service Agency
- -Rural Development
Farm Service Agency (FSA) offers...
- -direct (government) and guaranteed (local lenders) loans
- -purchase farmland, construct or repair buildings and other fixtures
Rural Development (RD) provides...
- -direct and guaranteed loans
- -purchase and construction of single-family homes, repair of existing homes, and the development of affordable rental housing
- -Guaranteed Rural Housing program, RD targets low-income to moderate-income applicants in rural communities with populations of 10,000 or less
- --no downpayment, no monthly mortgage insurance, and no loan limits; ratios 29%/41%
What are the two programs available through the Texas Department of Housing and Community Affairs (TDHCA)? Qualifications of each?
- 1. The Texas First-time Homebuyer Program: loans targeted towards low to moderate-come Texans who are purchasing their first home or have not purchased a home in the past three years; also offers down payment and closing cost assistance
- --To Qualify: income of no more than 115% of the area median family income or 140% of are median family income in targeted areas.
- 2. The Texas "Bootstrap" Loan Program: makes loan amounts up to $45,000 to low-income families for construction.
- --To Qualify: borrower must provide at least 65% of the labor.
The Texas Veterans Land Board (VLB), administers three programs to assist Texas veterans in purchasing a principal residence and/or land and in financing home improvements. A veteran may participate in all the loan programs or just one or two at a time. What are these programs and what are the qualifications?
- Qualifications of these assistance programs are at least one of these:
- -have served at least 90 days of active duty
- -have completed active duty training in the National Guard or Reserve
- -not have been dishonorably discharged
- -live in Texas with the intent to remain in Texas
- -have repaid a previous VLB loan in the specific loan program for which the veteran is applying for
- -be the unmarried surviving spouse of a Texas veteran; veteran's home of record must have been Texas at the time of entry into the military, or the veteran must have been legal resident of Texas at the time of death.
- 1. Veterans Housing Assistance Program (VHAP): provides funds to purchase a primary residence in Texas:
- --Requirements: must occupy property within 60 days of closing and live in the home at a principal residence for at least 3 years; all new construction homes must be Energy-Star certified; VLB loan max is $325,000, rest out of pocket; may be downpayment; a rate discount is available for veterans with a 30% or more service connected disability; no discount points allowed; lenders can charge reasonable and customary fees (1% origination fee, appraisal, title insurance, credit report, and other costs); 1% participation fee may be charged (cannot be financed); seller may pay all or part of fees
- ***The base rate and discounts change weekly and are published each Friday after 5:00pm on the VLB website.
- 2. Veterans Land Program: opportunity to buy at least one acre of land and finance the purchase up to $80,000 over a 30-yr term with minimum of 5% down: pay the difference out of pocket.
- --Requirements: land must meet specific VLB criteria (located in Texas and having access to a public road); vet does not have to live on land.
- ***VLB originates land loans; application onlinve
- 3. Veterans Home Improvement Program (VHIP); lend up to $25,000 up to 20 yrs to make improvements to existing primary residence
- --Requirements: vet must get a minimum of two quotes on improvements to be made and a general contractor must complete all work; must be a first or second lien; vet must occupy the home as primary residence for at least 3 yrs from the date of completion of the home improvements.
The Texas VLB waives the interest on VHAP loans for Texas reservists and national guard troops called to active duty; the monthly payments includes ________ and _______ funds only.
principal and escrow
Licensed real estate agents who have completed VLB training may be listed in the Broker Registry and may link the VLB website to their own.
true: www.glo.texas.gov/vlb for more info
Adjustable-Rate Mortgages (ARMs) has changing interest rates, which will change the amount of a mortgage payment. Details on how, when, and how much the interest rate will change are included in the note: What is an adjustment period? What is the interest rate based off of? What is a periodic cap? What is an aggregated rate cap? What is a convertible feature? What is a margin?
-Adjustment period: states how often a lender can adjust the rate; ex, can adjust no more than one time a yr.
-Interest rate is based off of the index; an economic national number, based on market growth.
-Periodic cap: the highest percent that the interest rate can increase during the adjustment period; ex, periodic cap of 2% in an adjustment period of one yr.
-aggregated rate cap: provides a max percent that the interest rate can climb through the entire loan; ex, not can climb no more than an extra 6% with in the 30 yr loan.
-Convertible feature: on must ARMs, which allows borrowers to convert to a fixed-rate loan during specific periods of time.
-margin: amount beyond the minimum; profit
EX: For ARMs with initial period of five years or less, Fannie Mae requires a borrower to qualify at the greater of the note rate plus 2% or the fully indexed rate--11%.
Lenders favor loans that are fixed.
What is a buydown mortgage?
- -the lender charges a buydown fee: pays a portion of the mortgage loan interest in advance; like a loan discount fee, increases the lender's yield; reduces interest rate over the first one to two years of the loan term
- -mainly used for when a lender wants to offer a lower than market rate or when a first-time homebuyer may have difficulty qualifying for a loan at the prevailing rates, and seller or family member buys down the interest.
What is a purchase money mortgage or purchase money deed of trust?
-a note and deed of trust created at the time of the purchase; buyer assumes original loan, and gives the seller a note or cash over the assumed amount for seller profit.
Equity Loans is where the lender agrees to make a loan based on the amount of equity in a borrower's home. Texas has some restrictions on equity loans, what are they?
- -max LTV ratio is 80%; less if any existing liens on the property; closing costs cannot exceed 3%; no negative amortization
- -lowered market value cannot trigger loan acceleration, and prepayment penalties are prohibited.
- -on default; lender must pursue a judicial foreclosure; no personal liability beyond the homestead property.
- -one equity loan in a year
- -equity loan cannot be closed sooner than 12 days after loan application; owner has a 3 day right of rescission after the credit has been extended.
- -if lender goes against any rules they give up money
- -if terms where negotiated in Spanish, a summary has to be provided in Spanish
- -home equity loan may not be secured by homestead property that is designed for agricultural use as of the date of closing.
Equity loans are popular as a source of funds for home improvement, college expense, new business start-ups, and additional real estate investment.
What are the two most popular home equity loans?
- -Home equity line of credit loan (HELOC): line of credit that a borrower can request
- --Stripulations: advances up to 50% of the fair market value of the home are permitted, but the full amount borrowed cannot exceed 80% of the fair market value; each advance must by at least $4,000; lender may charge a fee for the line of credit loan only at the time the loan is initially established--not with additional advances or payments; closing costs cannot exceed 3% of the loan amount.
- -Reverse Mortgage: enables homeowners who are 62 or older to borrower against equity in their homes; loan amount depends on age, current interest rates, and value of home; does not have to be free and clear; loan proceeds can be used for any purpose and can be taken out in a lump sum, payments or line of credit; loan balance increases as borrower takes out an advance; --no repayment will be due on the funds advance until: the property is sold; the borrowers moved from the home for longer than 12 months without prior approval from the lender; all borrowers have died; or the borrower defaults on any of the terms.
- **Most popular: FHA Home Equity Conversion Mortgage (HECM)
In order to get a reverse mortgage, the home must be owned free and clear to qualify.
false; does not have to be free and clear
Reverse mortgage proceeds can be used for any purpose and can be taken out in one lump sum, payments or a line of credit.
Homeowners with reverse mortgages must continue to pay homeowners insurance premiums, real estate property taxes, homeowners' association dues, and maintenance expenses.
Lenders cannot require repayment from any asset other than the home on a reverse mortgage.
One of the most popular reverse mortgages is the FHA Home Equity Conversion Mortgage (HECM), which holds two traditional loan options, what are they?
1. HECM Standard
2. HECM for Purchase: a buyer can purchase a home and obtain a reverse mortgage at the same time.
**Under the new HUD rules for FHA HECM loans, borrowers are restricted on the amounts accessible to them at closing and during the first year after closing.
**Several lenders have made other HECM loan options available
The average life of a FHA HECM loan is under 8 yrs.
A home equity loan may be used as a tool to enable a homebuyer to close on a new home before a previous home has sold and closed--as long as the buyer...
can qualify for the payments on all loans advanced against both properties.
Married couples interested in taking out a reverse mortgage loan should make sure that both names are on the loan.
true; or they risk having to repay or refinance the loan if the signing spouse passes away or is unable to remain in the home
What is a shared-appreciation mortgage (SAM)?
- -lender makes a loan with interest a lower than current market rate in return for a shared gain when the property is sold.
- **primarily made to developers of large real estate projects or writedown of loan principal when a property is refinanced.
What is a package mortgage?
-includes not only the real estate but also all personal property and appliances installed on the premises.
What is a Blanket Mortgage?
- -pledges more than one parcel or lot; primary to finance a subdivision or purchase of improved properties or consolidate loans
- -includes a partial release clause that permits the borrower to obtain the release of any one lot or parcel from the lien by paying a specified amount of the loan.
What is a Wraparound Loan?
-A method of refinancing 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.
**A due-on-sale clause (alienation clause) in the original deed of trust generally prevents a sale with a wraparound loan; therefore it is not used often.
What is an Open-End Mortgage?
- -A mortgage loan that is expandable by increments up to a maximum dollar amount, the full loan being secured by the same original mortgage.
- -interest rate on initial amount borrowed is fixed, but any advances may take market rate in effect
- -open to increase debt of loan
A construction loan is made to finance the construction of improvements on real estate. Under this type of loan, the lender commits to the full amount, but disburse the funds (draws), throughout the construction period. Before each payment, the lender inspects the work. This type of loan bears a higher than market interest rate, why?
-Risks: inadequate release of mechanics' liens, possible delays in construction, or the financial failure of the contractor.
**loans are usually short term
What is a Sale-and-leaseback?
- A transaction in which an owner sells improved property and as part of the same transaction, signs a long-term lease to remain in possession of the premises.
- -Used to finance large commerical or industrial properties.
- -investor buys property from seller, then leases the property out to the seller
What is a Contract for Deed (Installment Contract)?
A contract for the sale of the property, to where the buyer retains possession of the property while making periodic installments to cover downpayment and other closing costs, meanwhile the seller holds title until these costs are paid in full.
In addition to the FHA-insured and VA-guaranteed loan programs and the USDA agricultural loan programs, the federal government plays a major role in mortgage lending through the _________________, as well as its ________________activities.
Federal Reserve System and the Secondary Market.
What does the Federal Reserve System (Fed), the nation's central bank, do?
- -operates to maintain sound credit conditions
- -help counteract inflationary and deflationary trends
- -create a favorable economic climate
- -***Regulates the flow of money and interest rates in the marketplace indirectly by controlling reserve requirements and discount rates for member banks and by its open market operation.
The Federal Reserve System is divided into __ federal reserve districts, each served by a federal reserve bank.
The Federal Reserve requires each member bank to keep a certain amount of its assets on hand as reserve funds, which are unavailable for loans or any other use. Why does the Fed require this of its member banks?
- -protects customer deposits and provides a means of manipulating the flow of cash in the money market.
- -establishes the amount of money that member banks can use to make loans: when the reserve requirement increases the amount of money available for lending decreases and interest rates rise; this in return causes the economy to slow down, limiting the number of loans; opposite is also true.
In setting its reserve requirements, the Fed, can what?
-control the money flow, which has an effect on the economy as a whole to slow or speed up.
If the Fed increases the requirement amount for member banks to have in reserve, what happens? What happens if the required amount decreases?
- -increase of reserves, decreases the amount of money available for lending, which increases interest rates and overall slows the economy due to less loans given.
- -decrease in reserves, has the opposite effect: more lending, decrease in interest rates, speeds up the economy.
Since October 2008, the Fed has had the authority to pay banks interest on their reserves in excess of the required amount. By raising or lowering those interest rates, the Fed can control the release of money from banks to businesses to consumers. If the Fed offers a higher interest rate what happens?
-banks will retain their excess reserve and earn the higher interest rates offered by the Fed, Businesses are not willing to pay the higher interest rates which in return limits the amount of money going into the marketplace and slows economy.
Federal Reserve member banks are permitted to borrow money from the district reserve bank to maintain their liquidity but not to expand their lending operations. The interest rate charged by the district banks for the use of this money is called what?
-discount rate; based on which banks determine the percentage rate of interest they will charge their loan customers.
What is the open market operations of the Fed?
-meetings of 7 government appointed Feds people, plus the 12 fed district bank managers, who meet about 8 times a year to discuse the buying and selling of government bonds (invisible money) to be released into the district banks to increase amount of money for loans.
The _______ mortgage market is where loans are originated, and the _______ mortgage market is where the loans are sold to.
Loans are bought and sold by the secondary mortgage market, after they have been closed and funded by the primary mortgage market. Primary mortgage lenders sell their loans why?
- -to avoid interest rate risks and realize profit on the sales
- -enables lenders to recoup their capital to continue making mortgage loans
When a loan is sold, the original lender may retain the servicing or the servicing may be sold too. What is loan servicing?
-collecting payments from the borrower and passes the payments along to the investor.
Loans are eligible for sale to the secondary market only if what three main things meet certain requirements?
-if the collateral, borrower, and the documentation meet certain requirements to provide a degree of safety for the investors.
Warehousing agencies purchase a number of mortgage loans and assemble them into packages called what?
What are the two main government-sponsored enterprises (GSE)?
- -Fannie Mae and Freddie Mac
- -Farmer Mac is another one
What is the purpose of Fannie Mae and Freddie Mac?
- -banks give loans, banks sell loans to these GSEs (as long as the loan meets the guidelines), investors buy these loans, which in return allows the banks lend more money.
- -Fannie Mae and Freddie Mac were created in order to increase the amount and ease of low-to middle class mortgages. More relaxed guidelines.
How do primary market mortgages make money if they sell the loans?
-fees from making the loan, also interest from holding onto the loan before selling it.
Fannie Mae mainly deals with what kind of mortgage loans? What does Freddie Mac deal with?
- -Fannie Mae: conventional, FHA, and VA mortgage loans.
- -Freddie Mac: conventional
Chartered as the Government National Mortgage Association (GNMA), Ginnie Mae is wholly owned corporation within the Department of Housing and Urban Development (HUD). What is Ginnie Mae's main goal?
- -to help make affordable housing a reality for low- to middle income households.
- -sells mortgage-backed securities that are backed by pools of FHA and VA loans.
private corporations created to reduce the cost of borrowing.
Farmer Mac is another GSE chartered by Congress as a private corporation, what does it provide?
-provides a secondary market for first-mortgage agricultural real estate loans by purchasing USDA guaranteed loans from agricultural mortgage lenders, pooling those loans and issuing mortgage-backed securities, increasing the availability of credit for farmers, ranchers, and rural homeowners.
Private Mortgage Packagers also purchase and pool mortgages from loan originators selling to the secondary market. Some specialize in areas not serviced by Fannie Mae, Freddie Mac, or Ginnie Mae, such as...
-jumbo loans with balances that exceed limits set by the other secondary markets.
The federal government regulates the lending practices of mortgage lending through several Acts. What are the five main Acts?
- -Dodd-Frank Act,
- -the Truth in Lending Act (TILA)(TIL),
- -the Equal Credit Opportunity Act (ECOA),
- -the Community Reinvestment Act
- -the Real Estate Settlement Procedures Act (RESPA)
The Dodd-Frank Act is a very large and multifaceted law created in part to address problems that caused the financial crisis in 2008. For highlights of this legislation that are relevant to the real estate industry, the Dodd-Frank Act created what agency to hold authority over other financial consumer protection laws and to protect consumers from deceptive practices and hidden fees of financial products?
- -Consumer Financial Protection Bureau (CFPB); protect consumers from hidden fees and deceptive practices related to obtaining mortgages, credit cards, and other financial products.
- -over sees: RESPA, TILA, and HOEPA
- -establishes strict stands so financial entities don't get to big; educate them on failure solutions
- -emergency risks of financial system solutions
- -requires lender to have qualifications for borrowers
- -mortgage disclosures, fees, penalites, etc.
The Consumer Financial Protection Bureau (CFPB) has the authority to over see operations of RESPA, TILA, and HOEPA.
Regulation Z of the Truth in Lending Act, administered by the new Consumer Financial Protection Bureau (CFPB), requires that credit institutions inform borrowers of the cost of obtaining credit. How does this act promote that?
- -promotes borrowers to compare the costs of various lenders and avoid the uninformed use of credit.
- -mandates that the customer be fully informed of all finance charges and true annual interst rates (APR), nominal interest rate (interest rate before finance charges are added), other fees.
- -the borrower has three days in which to cancel the transaction by notifying the lender.
- -Advertising: regulates real estate advertising that includes mortgage financing terms.
- **does not apply to business, commercial, or agricultural loans
The Regulation Z of the Truth in Lending Act, provides strict regulations of real estate advertisements that include mortgage financing terms. If specific trigger terms, such as downpayment, number of payments, monthly payment, or dollar amount of the finance charge, are used, what info must be included as well?
- -amount or percentage of down payment
- -terms of repayment, reflecting repayment obligations over the full term of the loan, including any balloon payment, and
- -annual percentage rate and any increase in the rate after loan closing
Under the Truth in Lending Act, The Mortgage Disclosure Improvement Act (MDIA) requires what to be addressed to borrowers? What are the requirements of MDIA set by TIL?
- -the timing of disclosures to borrowers on any dwelling and the collection of fees by the lender.
- --lenders must provide good-faith estimates of mortgage loan costs within 3 days after receiving application from buyer: early disclosure
- --Lenders must wait seven days after providing early disclosures before closing a loan
- --Lenders cannot collect fees for appraisals or other expenses until early disclosures are issued
- --A homebuyer must get a copy of the appraisal at least 3 days prior to closing
- --A lender must reissue a TIL disclosure and wait an additional 3 days to close a loan if the APR increases beyond a specified percentage from the initial TIL disclosure.
- --Risky loan features must be disclosed for adjustable rate mortgages, balloon payments, negative amortizations, and similar arrangements.
Under the Truth in Lending Act, the Home Ownership and Equity Protection Act (HOEPA) addresses what? What is exempt from this act? What are the requirements for the high-cost mortgage loans?
- -addresses misleading or deceptive mortgage lending practices related to refinancing, home equity mortgage, purchase money mortgage loans, and home equity lines of credit (HELOCs).
- -exempt are: reverse mortgages, construction loans, loans financed by a Housing Finance Authority, and loans originated under the Rural Development Loan Program are exempt from HOEPA coverage.
- --Lenders must assess the borrower's ability to repay the loan
- --Lenders must provide certain disclosures to borrowers at least three business days before loan closing or account opening
- --Lenders may not charge prepayment penalties, or finance points and fees.
- --Lenders must disclose the right of rescission when the new balance on a loan modification exceeds the original balance
- --Balloon payments are generally banned except under certain circumstances
- -Late fees may not be more than 4% of the past due payment
- --Lenders may not advise borrowers to default on a debt so it can be refinanced by a high-cost mortgage
- --Lenders must ensure that the borrower has gone through homeownership counseling prior to making a high-cost mortgage loan.
Penalties under the Regulation Z can be fined up to $10,000, even daily until penalty is taken care of.
Under the Ability-to-Repay rules in Regulation Z, there are 8 factors a lender must consider in assessing the financial status of the borrower. What are they?
- -Income or assets
- -Current employment status
- -Monthly payments for the mortgage using the highest interest rate that a borrower would have to pay
- -Monthly payments for other simultanous loans secured by the property
- -Mortgage-related obligations such as property taxes, insurance, and HOA fees
- -Debt obligations, including alimony and child support
- -monthly debt-to-income ratio
- -credit history
Home equity lines of credit, time-share plans, reverse mortgages, and temporary loans are not subject to the Ability-to-Repay rule.
The Ability-to-Repay rule presumes a lender has met the ability-to-repay requirements if the loan is considered a qualified mortgage (QM). What defines a qualified mortgage?
- -cannot be interest-only loan, a negative amortization loan, or balloon loan, and no longer than 30yr term
- -verified income and assets
- -debt-to-income cannot exceed 43%
- -upfront points and fees cannot exceed 3% of the loan amount for loans of $100,000 or greater.
- -monthly payments must be calculated based on the highest payment that will apply in the first five years of the loan
- -full documentation of loans must be preserved by lenders for 3 yrs.
The Qualified Mortgage rule under the Ability-to-Repay, spells out the _________ standards that lenders must meet to be shielded from litigation.
The Fair and Accurate Credit Transactions Act (FACTA) deals with what?
- -identity theft; expand consumer access to credit, enhance the accuracy of consumers' finaancial info, and help fight identity theft.
- -"red flag" rule: financial institutions develop written programs to identify and detect red flays of identity theft: making sure consumers are giving accurate info.
Requesting a ____________ allows consumers to lock up their credit reports to protect their credit records from identity thieves who use stolen info to open new accounts in their victims' names.
security freeze; prevents a credit reporting agency from releasing a credit report or a credit score
Financial institutions originating mortgages need to comply with a portion of the ____________ Act that holds them responsible for identifying customer, verifying their identities, keeping records on them, and checking their names against those on a government terrorist list.
Who are the main targets for predatory lender?
- -people with lower incomes
- -senior citizens
- -credit-challenged borrowers
HUD defines predatory lending as lenders, appraisers, mortgage brokers, and home improvement contractors who...
- -knowingly lend more money than a borrower can afford to repay
- -charge high interest rates based on race or origin
- -charge fees for unnecessary or nonexistent products and services
- -pressure borrowers to accept higher-risk loans such as balloon loans, interest-only payments, and steep prepayment penalties
- -use cash-out refinance offerings
- -strip equity by convincing homeowners to refinance again and again when there is no benefit
- -use high pressure sales tactics to sell home improvements and then finance them at high interest rates.
Mortgage fraud affects lenders. What are the two types of mortgage fraud?
- -fraud for housing: fraud to acquire ownership of real estate that they would not qualify for; give false info
- -fraud for profit; illegal actions by industrial insiders/investors; loans on non-existing properties, misleading appraisal, identity theft, etc.
- **Texas law: mandates all lenders, mortgage brokers, or licensed mortgage brokers require a home loan application to sign a statement at closing that all claims to identity, employment, income, and intent to occupy the property as a residence are true and correct.
The federal Equal Credit Opportunity Act (ECOA), administered by the Consumer Financial Protection Bureau (CFPB), prohibits lenders and others who grant or arrange credit to consumers from ____________ against credit applicants. Must inform all rejected credit applicants, in writing, of the principal reasons why credit was denied or terminated.
discriminating; race, color, sex, age, etc.
The federal Real Estate Settlement Procedures Act (RESPA), administered by the CFPB, was created to ensure that the buyer and seller in a residential real estate transaction involving a new first mortgage loan have knowledge of all _____________.
The Community Reinvestment Act (CRA), administered by the CFPB, requires that lenders do what?
serve their local communities first--to meet the deposit and credit needs of their low-income moderate-income housing communities and to participate and invest in local community development projects.
The Texas Securities Act includes provisions to control and regulate the offering and sale of securities.
With a fully amortized mortgage or deed of trust loan each month the total payment is the same but the allocation to interest is different.
The D'angelos purchased a residence for $95,000. They made a down payment of $15,000 and agreed to assume the seller's existing mortgage, which had a current balance of $23,000. The D'angelos financed the remaining $57,000 of the purchase price by executing a mortgage and note to the seller. This type of loan, by which the seller becomes the mortgagee, is called a...
purchase money mortgage
When Federal Reserve Board raises its discount rate, what happens?
interest rates will rise
Discount points on a mortgage are computed as a percentage of the selling price.
false; are a percentage of the amount borrowed.
Funds for FHA-insured loans are usually provided by...
approved lending institutions.
A charge of three discount points on a $120,000 loan equals...
Under the provisions of Regulation Z (the Truth in Lending Act), the annual percentage rate (APR) of a finance charge includes all of the following components EXCEPT:
a. discount points paid by borrower
b. broker's commission
c. loan origination fee
d. nominal interest rate
A borrower obtains a $100,000 mortgage loan for 30 yrs at 7 1/2% interest. If the monthly payments of $699.21 are credited first to interest and then to principal, what will be the balance of the principal after the borrower makes the first payment?
Hellon borrowed $85,000, to be repaid in monthly installments of $509.62 at 6% annual interest. How much of her first month's payment was applied to reducing the principal amount of the loan?
If a lender agrees to make a loan based on an 80% LTV, what is the amount of the loan if the property appraises for $114,500 and the sales price is $116,900?