© 2009 by South-Western, Cengage Learning SAMIRLANDER Chapter 13.

© 2009 by South-Western, Cengage Learning

SAMSAMIRLANDERIRLANDER

Chapter 13Chapter 13

Florida Real Estate:Florida Real Estate: Principles, Practices and Principles, Practices and

License LawLicense Law

Chapter 13Chapter 13

Mortgage Market OperationsMortgage Market Operations



Key TermsKey TermsClosing costs

Conforming loan

Discount points

Discount rate

Disintermediation

Entitlement

Intermediation

Loan-to-value (LTV)

Mortgage bankers

Mortgage brokers

Mortgage company

Office of Thrift Supervision

Open-market operations

Origination fee

Primary mortgage market

PMI

PPM

Reserve requirements

Secondary mortgage market


Federal Reserve SystemFederal Reserve System

12 privately owned regional Federal Reserve banks & commercial banks

Reserve requirements: Reserve requirements: amount to be held on deposit


Federal Reserve SystemFederal Reserve System

Open market operations: Open market operations: buys and sells securities

Discount rate: Discount rate: rate charged to member banks


Federal Home Loan Bank Federal Home Loan Bank SystemSystem

FHLB: governs savings associations

Provider of reserve credit

Office of Thrift Office of Thrift Supervision: Supervision: Charters member savings associations


Federal Deposit Insurance Federal Deposit Insurance CorporationCorporation

Insures individual accounts up to $100,000


Intermediation Intermediation

Intermediation: Intermediation: Banks and savings associations receive money into saving accounts

Funds are available for mortgages


Disintermediation Disintermediation

Disintermediation: Disintermediation: Money is withdrawn from banks and savings associations to achieve higher yields

Funds are scarce for mortgages


Primary and Secondary Primary and Secondary Mortgage MarketsMortgage Markets

Savings & loan associations

Commercial banks

Insurance companies

Mortgage companies

Mortgage brokers

Mutual savings banks

Municipal bonds

Credit unions

Pension, endowment, and trust funds



5 major sources

Savings & loan associations

Mortgage companies

Mortgage brokers

Commercial banks

Private lenders



Loans on residential property

Funds from depositors



Use their own funds

Sell loans to investors

Retain the servicing

Primarily government backed mortgages

Conventional loans



Bring together borrower and lender for a fee

Do not lend their own money

Do not service the loans



Lend depositor’s funds

Short-term loansHigher risk & higher rates

Have become a significant source for residential loans



Make 1st or 2nd mortgage loans

Seller financingPurchase money mortgage Purchase money mortgage (PMM)(PMM)



Invest policyholder’s premiums

Large scale projectsCommercial and industrial



Interest is tax exempt

Rates are 1% - 2% below market



Provides liquidity Provides liquidity for the primary for the primary marketmarket

FNMAFNMA

GNMAGNMA

FHLMCFHLMC



InvestorsInvestorsoror

GovernmentGovernmentoror

Other lendersOther lenders

Figure 13.2Figure 13.2



Private for profit Private for profit corporationcorporation

Sells bonds to buy Sells bonds to buy loansloans

Buys FHA, VA, and Buys FHA, VA, and conventional loansconventional loans



Federal agency in Federal agency in HUDHUD

Guarantees Guarantees payment of payment of securities sold to securities sold to the publicthe public

FHA and VA loansFHA and VA loans


The History of LoansThe History of Loans

Federal Housing Administration (FHA)

Federal National Mortgage Association (FNMA – Fannie Mae)



Private corporationPrivate corporation

Increases supply Increases supply of financing by of financing by purchasing loanspurchasing loans

Conventional Conventional loansloans

Some FHA & VASome FHA & VA



Longer term

Monthly not annual payments

Payments cover interest plus principalI nI n

t et err e s te s t

Principal

Principal



Insures loans reducing the lenders risk

FHA 203(b)

FHA 234(c)



Allowed lenders to recoup funds

Original purpose: purchase of FHA loans

Largest agency purchasing lenders loans


Loan DiscountingLoan Discounting

Selling a loan for less than face valueIncreases the yield (return on investment)

Prepaid interest at closing

1 discount point = 1% of the loan amount

Charged based on:Other investments

What secondary lender will

pay for the loan


Loan DiscountingLoan Discounting

Discount points are determined by supply and demand for loan funds

Money supply low and demand high - points are charged

Money supply high and demand is low – no or low points


Loan-T0-Value RatioLoan-T0-Value Ratio

LTV sets limits on how much can be loaned

Expressed as:Loan divided by sales price

Loan divided by appraised value

Whichever is lower


Conventional loansConventional loans

Not issued, insured or guaranteed by the government

Costs paid by buyer or seller

80%, 90%, or 95% LTV



Private mortgage insurancePrivate mortgage insurance

PMI: PMI: protects the lender against loss

Loans greater than 80% LTV

Insurance premium1% or less at origination

Less than 1% annually



LTV of 80% or less = 80% Loan

LTV greater than 80% up to and including 90% = 90% Loan

LTV greater than 90% up to and including 95% = 95% Loan



Step 1Step 1

Step 2Step 2

$82,000 Sales price- 6,000 Down payment

$76,000 Loan amount

$76,000 Loan amount$82,000 Sales price

= 92.7%

95% LTV95% LTV



Step 1Step 1

Step 2Step 2


$54,000 Loan amount


= 77.1%

80% LTV80% LTV



Step 1Step 1

Step 2Step 2


$103,000 Loan amount


= 85.8%

90% LTV90% LTV



Step 1Step 1Calculate the loan amount

Round down to the nearest 100

Step 2Step 2Subtract the loan amount from the sales price



Step 1Step 1

Step 2Step 2Subtract the loan amount form the sales price $110,500 Sales price

X 90% LTV$ 99,450

Round down to the nearest 100 Round down to the nearest 100

$99,400 Loan amount



Step 1Step 1

Step 2Step 2 $87,500 Sales priceX 95% LTV

$ 83,125Round down to the nearest 100 Round down to the nearest 100

$83,100 Loan amount

$87,500 Sales price- 83,100 Loan amount $ 4,400 Down payment$ 4,400 Down payment



90%, 95%, and some 80% LTV

Protects the lender against loss

Premiums are a % of the loan



Paid by either buyer or seller

Seller

In cash at closing

Buyer

In cash at closing

Financed

Paid part in cash and part financed



Step 1Step 1

Step 2Step 2

Round down to the next lowest 100Round down to the next lowest 100

Step 3Step 3

$88,500 Sales priceX 90% LTV

$79,650

$79,600

$79,600 Loan amountX 2% (for 90% LTV)

$1,592 PMI premium$1,592 PMI premium



Step 1Step 1

Step 2Step 2


$57,000

$57,000 Loan amountX 2.5 % (for 95% LTV)

$1425 PMI premium$1425 PMI premium



Step 1Step 1

Step 2Step 2

Step 3Step 3


$72,000 Loan amount

$72,000 Loan amountX .0025 factor $ 180 Annual PMI

$180 Annual PMI

12= $15 Monthly= $15 Monthly PMIPMI



Step 1Step 1

Step 2 round down to $63,500Step 2 round down to $63,500

Step 3Step 3

Step 4Step 4


$63,555 Loan amount

$63,500 Loan amountX .0025 Factor

$ 158.75 Annual PMI

$158.75 Annual 12

= $13.23 Mon.= $13.23 Mon. PMIPMI


FHA Loans (Nonconventional)FHA Loans (Nonconventional)

Federal Housing Administration

Improve housing standards

Stabilize the mortgage market

Provide mortgage insurance

FHA does not make loansFHA does not make loans



FHA insures loans

Mortgage Insurance Premiums (MIP)

Loan programs:Section 203(b) - Standard

Veterans

Section 245 - Graduated payment loan



1- 4 Family residential

Owner occupied properties



Low down payment

0% on the first $25,000

5% between $25,000 - $125,000

10% over $125,000



Initial payments are low and increase over a period of years

Single family owner occupied

30 year maximum term

Maximum loan amount



% Yearly % Yearly IncreaseIncrease

Year to Reach Year to Reach Maximum PaymentMaximum Payment

Plan IPlan I 2.5%2.5% 55

Plan IIPlan II 5%5% 55

Plan IIIPlan III 7.5%7.5% 55

Plan IVPlan IV 2%2% 1010

Plan VPlan V 3%3% 1010


203 (B) 203 (B) Standard Loan ProgramStandard Loan Program

Borrower defaults

Lender forecloses

Property is sold

FHA pays the difference between proceeds and loan balance



LTVLTV 30-Year Loans30-Year Loans 15-Year Loans15-Year Loans

Below 90%Below 90% 1.50% up front plus1.50% up front plus

0.5% monthly0.5% monthly

1.5% up front

No monthly premium

90% - 95%90% - 95% 1.50 up front plus1.50 up front plus


1.50% up front plus1.50% up front plus


Over 95%Over 95% 1.5% up front plus1.5% up front plus


1.5% up front plus1.5% up front plus




Includes the down payment

Less than conventional loans

3% of sales price or appraised value

Whichever is lower



Maximum amount depends on location

Sales price or appraised value plus % of closing costs

LTV typically greater than 95%



Rates set by lender and borrower

Market conditions

Paid by buyer or seller

Historically lower rates



30 Years

Same items as conventional loans


Required monthly payments for taxes and insurance



Time varies

Usually longer than conventional

Minimum property requirements (MPR’s)

FHA-approved independent appraisers



2 Purposes:Established value

Conditional commitment

Conditional CommitmentFHA will insure loan if borrower qualifies



Ordered by the lender

Paid in cash

Sets maximum amount of loan

Identifies needed repairs



Good for specified period:

Existing properties: 6 months

Proposed construction: 12 months



Contract contingent upon appraisal

If sales price is less than appraised value

Void contract & return earnest money

Pay the difference in cash

Renegotiate price

Reconsideration of appraisal



Cash down payment

No prepayment penalty

No due on sale clauseLoans are assumable

Originated after Dec. 15, 1989 requires qualification


VA Loans (Nonconventional)VA Loans (Nonconventional)

GI Bill to provide assistance for returning WWII veterans

VA guarantees loansVeteran defaults

Lender forecloses

Property is sold

VA pays the difference between proceeds and loan balance up to a certain limit



Limits of VA guarantee:Up to $45,000 - 50% of loan amount

$45,000 - $144,00040% of loan amount OR

$36,000 (whichever is less)

$22,500

Greater than $144,000 – 25% of the loan amount

Maximum of $104,250



Entitlement: Entitlement: amount of guarantee to an eligible veteran

Maximum amount: $104,250

May use all or part



None

Lenders typically lend 4X the guarantee with no down payment

4X the guarantee = $417,000

Sales price in excess of $417,000

Requires 25% down payment



None required

100% LTV

Historically lower rates


Same items as conventional loans




Down PaymentDown Payment

No down payment

5% down payment

10% down payment

Funding FeeFunding Fee

2.00% of loan amount



Offsets claims under the guarantee program



Fee will increases With subsequent use

Military reserves


Can be included in loan

Waived for service related disability



Required monthly payments for taxes and insurance



Liable for default

Remains liable upon assumption by a non-veteran

Liability and entitlement may be transferred to another veteran

No prepayment penalty

No alienation clauseMay 1, 1988



VA standards

VA- approved appraiser

Certificate of reasonable value (CRV)



Purpose:Determines acceptability

Establishes value

Identifies repairs

Loan cannot be greater than appraised value



Fee paid in cash and in advance

Good for specified periods

Existing properties: 6 months

Proposed construction: 12 months



Contract contingent upon appraisal

If sales price is less than appraised value

Void contact & return earnest money

Pay the difference in cash

Renegotiate price

Reconsideration of appraisal



1 – 4 family owner occupied properties

No Investors

100% LTV

Loans cannot exceed appraised value

No maximum loan amount

Loans 4X entitlement


Assumption MethodsAssumption Methods

Down payment equal to Seller’s equity

Buyer takes over seller’s loan

Two MethodsAssume and agree to pay

Subject to the existing loan



Most common

Buyer becomes liable for loan

Seller may obtain a judgment for any deficiency



Buyer does not become liable for the loan

Inform Seller:

Buyer is not liable

Seek legal advise



Alienation Clause may:

Require loan be paid in full upon transfer

Allow rate increase

Require qualification of buyer



$100,000 Sales price

- $80,000 Loan balance

$ 20,000 Cash required

$100,000 Sales Price

$79,000 Loan balance

$21,000 Cash required



Price to control: the selling price is set and will control the cash to be paid by buyer

Cash to control: a fixed amount to be paid by the buyer. Sales price is not set until closing

Second Mortgage: seller financing



Is loan assumable?

LTV?

More likely assumption conditions:Seller will finance

Mortgage money unavailable

Buyer cannot get a new loan

Property's value has decreased

Difference in interest rate



Faster and less expensive

Lender requirements: Loan transfer fee

Warranty deed

Insurance

Escrow account



Seller advantages:Lower closing costs

Possible release of liability

VA Loan: possible transfer of eligibility



Buyer advantagesPossible lower interest rate

Lower closing costs

Less time to close

Less liability possible



Buyer disadvantages:Larger down payment

Inability to offer future assumption due to increased equity

Seller disadvantagesUnless released, remains liable

Default may result in lawsuit

New loan application


Qualifying the buyerQualifying the buyer

Evaluates:Property value

Buyer’s ability to make:Down payment

Repay loan

Guidelines:Freddie Mac

FHA

VA



Conforming loan: Conforming loan: approved under FNMA/FHLMC guidelines

Four factors:Income

Net worth and assets

Credit history

Documentation



Borrower's incomeBorrower's incomeDetermines ability to pay

Income: base monthly plus other sources

Employment record



Borrower's incomeBorrower's income

Ratios:Mortgage payment to monthly income (28%)

$560 mortgage pymt.

$2,000 monthly income= 28%



Borrower's incomeBorrower's income

Ratios:Mortgage payment to total installment debt (36%)

$720 total debt

$2,000 monthly income= 36%



Net Worth and AssetsNet Worth and AssetsDown payment and reserves

Net worth: difference between assists and liabilities

Liquid assets equal to 2 months of mortgage payments



Income ratiosIncome ratiosIncreased form 29/31 to 31/43

31% - new housing expense to monthly income

43% - total monthly debt to monthly income



Down Payment Down Payment

Sales price minus loan amount

Minimum cash investment of 3%



Underwriting Underwriting Different guidelines

EligibilityWar time: 90 days active duty

Peacetime:

181 days prior to 9/8/1980

2 years after 9/7/1980



Must list all debt on application

Credit report



Regular:Regular:

VOE: employment verification

VOD: verification of deposits

Credit report



Alternative:Alternative:

2 pay stubs and W-2 tax form

3 bank statements

Credit report

.



Establish value

Sales price or appraised value whichever is less



Determined by:

Available cash

Monthly payment



Maximum conventional loan with $10,000 down payment

95% LTV - $190,000 loan

90% LTV - $90,000 loan

80% LTV - $40,000


Loan ChargesLoan Charges

Closing costsClosing costs: loan chargesVariable costs

Lender’s title insurance

Origination fees



Fixed costsAppraisal

Attorney fees

Credit report

Survey

Recording fees

Pictures

Amortization schedule



Title InsuranceProtects against loss

Required by lender not by law

Buyer’s title

Fees

Origination feeOrigination feeFees for processing the loan

% of loan amount



Appraisal feeDetermines property value for lender

Attorney feesLegal services

Credit report feeEvaluates credit risk



SurveyRequired by some lenders

Recording feeCharged by county

PicturesRequired by some lenders

Amortization schedulePayment schedule



FHA & VAPaid by buyer or seller

VA funding fee



FIGURE 13.4FIGURE 13.4

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© 2009 by South-Western, Cengage Learning SAMIRLANDER Chapter 13.

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