Transcript Real Estate Finance Today

Real Estate Finance
rd
Today, 3 Edition
Doris S. Barrell
1
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
2
Basics of Real Estate Finance
 Financing
Instruments
 Primary Market
 Secondary
Market
3
Financing Instruments
Note
Mortgage
Deed of Trust
4
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.”
5
The Mortgage
 Pledges real
property as security
for debt
 Creates a mortgage
lien on property
 Requires judicial
foreclosure in case
of default
6
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
7
The Transaction
Note + Mortgage
or

Deed of Trust
8
The Primary Market
 Sources of funding
 Broker or Banker?
 Origination and
Processing
9
Sources of Funding
Commercial
Banks
Savings
Associations
Credit Unions
10
Commercial Banks
 Originally for
short-term
loans
 Active today in
mortgage
lending
11
Savings Associations
Originally called Savings &
Loan
Historically primary source of
mortgage lending
Also referred to as “thrifts”
12
Credit Unions
 Newcomer to
mortgage
financing
 Provide service
to members
 Greatly
expanding
13
Mortgage Broker or Banker?
Mortgage Broker
Mortgage Banker
 Originates loan
 Originates loan
 Matches borrower
 Uses own money
with investor
 Paid by “finder fee”
 Continues to service
 PLUS: has wide
 PLUS: qualifying
range of loan
products
loan
standards are set,
underwriting flexible
14
Origination & Processing
Prequalified?
Preapproved?
15
Members of the Team
Loan Officer
Appraiser
Processor
Underwriter
Closing Department
Settlement Attorney or Agent
16
Loan Officer
 Meets with borrower
 Collects information
on assets & debts
 Fills out Uniform
Residential Loan
Application
 Determines
appropriate loan
product
17
Appraiser
 Appraisal is ordered
by the lender
 Appraisal paid for by
borrower at time of
application
 Appraisal establishes
value to substantiate
the loan
18
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
19
Underwriter
 Approves or denies the
loan
 May set conditions
20
Lender Closing Department
 Prepares
financing
documents
 Submits file to
settlement
attorney or title
company
closing agent
21
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
22
Geographic Differences
Western states
settle “in escrow”
Eastern & mid-west
settle with attorney or
title company agent
23
Secondary Market
Fannie Mae
Freddie Mac
Ginnie Mae
24
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
25
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
26
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
27
Private Investors
 Insurance Companies
 Pension Funds
 Individual Investors
 REMIC – Real Estate Mortgage
Investment Conduit
28
Private Investors
 Life Insurance
 Pension Funds
 REMICs
 Individuals
29
Government Influences
 The Federal Reserve
 Federal Home Loan Banks
 Department of the Treasury
 National Credit Union Administration
 Dept. of Housing and Urban Development
30
The Federal Reserve
 Controls flow of
money into the
economy



Discount Rate
Reserves
Open Market
 Supervises
commercial banks
31
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
32
Department of the Treasury
Office of the Comptroller of
Currency (OCC)
Office of Thrift Supervision (OTS)
Federal Deposit Insurance
Corporation (FDIC)
33
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
34
Dept. of Housing and Urban
Development (HUD)
HUD
FHA
Fannie M ae &
Freddie M ac
CDB G &
S ection 8
G innie M ae
Indian Housing
RE S P A &
Fair Housing
35
Congressional Acts
Fair Housing Act of 1968
Equal Credit
Opportunity Act
(ECOA)
36
Congressional Acts
Real Estate
Settlement
Procedures
Act
(RESPA)
37
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 bank’s commitment to
community
38
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
39
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
40
Current Issues in Mortgage
Lending
 The Subprime Crisis
 Foreclosure Rates Increase
 Importance of Credit Score
 Required Homeowner Insurance
41
The Subprime Crisis
 Extreme growth
 Declining housing market
 New affordable lending options
 Predatory Lending Concerns
42
Foreclosures Increase
 Who’s hurting?
 Who’s to
blame?
 Who can help?
43
Lender Workout Options
 Foreclosure Presale
 Short Sale
 Deed in Lieu
 Reinstatement
 Forbearance
 Refinancing
44
Sources of Help
 Consumer Credit Counseling Service
 Non-profit organizations
 888-995-HOPE
 www.HOPENOW.com
45
Credit Scoring
Equifax
Experian
(TransUnion
FICO
46
Percentage of Contribution
 Payment history
 Current total debt
 Length of credit history
 Requests for new credit
 Types of credit in use
35%
30%
15%
10%
10%
47
Factors That Lower Score
Late payments
Too many credit cards
Excessive potential credit
Maxed-out cards
Liens, judgments, foreclosure
Multiple inquiries
48
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
49
Required Homeowner
Insurance
Disaster impact
Accelerating rates
Flood Insurance
50
Conventional Mortgage
Loans
 Standard Conforming Loans
 Affordable Loan Products
 Non-conforming Loans
 Adjustable Rate Mortgage (ARM)
 Growing Equity Mortgage (GEM)
51
Standard Conforming Loans
Guidelines established by Fannie
Mae and Freddie Mac
Made homeownership possible for
more people
52
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
53
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
54
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
55
Affordable Loan Products
 Fannie Mae Mortgage Solutions

Biweekly Mortgage

Expanded Approval™

Flexible 97 and Flex 100™

MyCommunity Mortgage™
56
Affordable Loan Products
 Freddie Mac
Home Possible



Home Possible 97
and 100
Neighborhood
Solution™
Initial Interest
Fixed-rate
57
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”
58
Special Community Programs
 Attract essential workers into community
 Encourage low & moderate income first-
time homebuyers
 Help to move from subsidized housing
 Promote revitalization
59
Adjustable Rate Mortgages
 Index
 Margin
 Note Rate
 Initial Rate
 Adjustment period
 Caps
 Assumable
 Convertable
60
Example of a 1-year ARM
 Index (T-bill)
 Margin
 Note rate
 Initial rate
 Caps
4.0
2.5
6.5
4.5
2/6
“Worst-case scenario”
 Yr. 1 = 4.5
 Yr. 2 = 6.5
Yr. 3 = 8.5
Life of loan = 10.5
61
Benefits & Disadvantages
Benefits
Disadvantages
 Qualify for more
 Payments
loan
 Lower monthly
payment
 Good for shortterm planning
increase
 More interest paid
 Sharing risk with
lender
62
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 month’s payment
63
Formulas Using Rate Factor
Formula One
Formula Two
 Determine principal
 Determine loan
and interest payment
 Multiply loan amount
by rate factor
 $200,000 x 6.65 =
$1330.00
amount
 Divide PI dollars by
rate factor
 $1330 divide by 6.65
= $200,000
64
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
65
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
66
Case Study #2 - Greenberg
 Income - $36,000
 Debts -
$335
 Savings - $3,000
 7% interest, 30 yr.
 33/38 ratios
67
Case Study #3 - Gonzalezs
 Income - $70,000
 Debts -
$ 500
 Savings - $15,000
 8%, 30 yr loan
 33/38 ratios
 8%, 15 yr loan
68
Government Insured or
Guaranteed Loans
 Federal Housing Administration
(FHA)
 Dept. of Veterans Affairs (VA)
 State or Local Programs
69
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
70
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
71
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
72
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)
73
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
74
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

75
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
76
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
77
VA Funding Fee
First Use
Subsequent
2.15%
3.30%
5-10% down 1.50%
1.50%
10%+ down 1.25%
1.25%
0-5% down
RESERVISTS/NATIONAL GUARD
0-5% down
2.40%
3.30%
5-10% down 1.75%
1.75%
10%+ down 1.50%
1.50%
78
Case Study #1 - Browns
 Sales price: $142,000
 Mortgage: $137,740
 Calculate payment for FHA loan
 FHA or MyCommunity
Mortgage™?
79
Case Study #2 - Wong
 Income: $40,000
 Debt:
$725
 Current rent: $850
 Compensating factors?
80
Case Study #3 - Martinez
 Income: $28,000
 Debt:
$80
 Savings: $2000
 VA eligible?
81
Special Financing
Alternatives
 Seller Financing
 Low/Doc or No/Doc Loans
 Loans for Self-employed
 Alternative Sources of Cash
 Reverse Annuity Mortgage
82
Seller Financing
 First or Second
Mortgage (Trust)
 Lease-
Purchase
Option
83
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
84
Loans for Self-Employed
 The Problem!
 Solutions

Low/doc loan

Tax returns

Profit & Loss

Balance sheet
85
Alternate Sources of Cash
 Gift
 CD, Stocks, Bonds
 IRA
 401(k)
86
Reverse Annuity Mortgage
 Payments to
owner based on
equity in home
 Benefit to elderly
needing cash
 Lump sum
 Payments
 Line of Credit
87
Available RAM Programs
 Private lender
 FHA Home Equity Conversion
Mortgage (HECM)
 Fannie Mae HomeKeeper®
88