Chapter 14: Real Estate Financing: Practices
Introduction to the Real Estate Financing Market Federal Reserve System Primary Market Secondary Market
Federal Reserve System Role Maintain sound credit conditions Counteract inflationary and deflationary trends Create favorable economic climate Open market operation Reserve requirements Discount rates
The Primary Mortgage Market Lenders that originate loans directly to borrower Income generated from Finance charges Interest payments Loan servicing fees
Major Primary Market Lenders Savings associations Commercial banks Life insurance companies Credit unions Pension funds Endowment funds Investment group financing Mortgage banking companies Mortgage brokers Individual lenders
The Secondary Mortgage Market Where mortgage loans are bought, serviced, and re-sold after being originated Fannie Mae Ginnie Mae Freddie Mac
Recent Financial Crisis Federal actions to stabilize and strengthen housing and lending markets Causes of crisis Prevalence of distressed property sales
Types of Mortgage Loans Conventional loans FHA-insured loans VA-guaranteed (GI) loans Rural Economic and Community Development Services
Conventional Loans Not backed by government agency Lowest loan-to-value ratio Conforming vs. non-conforming loans Private mortgage insurance (PMI)
FHA-Insured Loans Federal insurance on private money loans FHA does not make loans Mortgage insurance premium (MIP) can be financed Must use FHA-approved appraiser Construction minimum standards
FHA-Insured Loans (cont.) No prepayment penalties All FHA loans can be assumed Points and interest rates are set by lenders, not FHA Lead-based paint disclosure on houses built prior to 1978
FHA Loan Programs 203(b): fixed interest rate loans 234 : condominium purchases 245 : graduated payment loans 251 : adjustable rate loans
VA-Guaranteed (GI) Loans VA guarantees home loans for eligible veterans Certificate of eligibility No maximum VA loan limit 100% financing available
VA-Guaranteed Loans Assumable by anyone Restoration of entitlement No prepayment penalties Funding fee can be financed
Rural Economic & Community Development Services (USDA) Under Dept. of Agriculture For low- to moderate-income families in rural areas Guaranteed or direct loans
Other Types of Loans Purchase-money mortgages Package loans Blanket mortgages Wraparound loans Open-end mortgages Construction loans Sale and leaseback Buydowns Home equity loans Reverse-annuity mortgages
Mortgage Priorities Priority usually in order of recordation Senior vs. junior mortgages Subordination agreement
Residential Lending Practices and Procedures Application for Credit Credit score Credit history Prequalifying Buyers Automated underwriting Conventional loans FHA loans VA loans
Financing Legislation Truth-in-Lending Act and Regulation Z Federal Equal Credit Opportunity Act Fair Credit Reporting Act NC Predatory Lending Act Real Estate Settlement Procedures Act (RESPA)
Truth-in-Lending Act Full disclosure of all finance charges Must disclose APR 4 Chief Disclosures in Federal Box Regulation Z regulates advertising Penalties
Equal Credit Opportunity Act Prohibits discrimination against credit applicants Protected classes Race Color Religion National origin Sex Marital status Age
Fair Credit Reporting Act Gives individuals right to check and correct personal credit reports Information limited to last 7 years, except bankruptcies for last 10 years One free report a year available
NC Predatory Lending Act Addresses permissible fees charged on primary home loans secured by 1 st mortgage or deed of trust Prohibits unfair and deceptive practices by lenders Public education about predatory lending
Loan Fraud Legislation Any misrepresentation to lender for the purpose of securing larger loan than guidelines allow Apply to all residential and commercial transactions Federal felony punishable by fines up to $1 million and/or 30 years in prison NC Residential Mortgage Fraud Act
Real Estate Settlement Procedures Act (RESPA) Disclosure of all settlement charges in residential transactions involving new loan Discussed in Chapter 15