1. California Real Estate Finance Fesler & Brady 10th Edition
Chapter 3
NonInstitutional Lenders and The California Real Property Loan Law

2. Objectives After completing this chapter, you should be able to:
List five major non-institutional lenders.
Describe major provisions of the California Real Property Loan Law.
Discuss the role that mortgage correspondents, mortgage bankers, mortgage companies, and mortgage brokers play in real estate finance.
Discuss why pensions, trust funds, and credit unions are increasing in importance in the financing process.
Describe how and why the role of the real estate broker as financial advisor is becoming increasingly challenging.

3. Outline Private Party Lenders Usury Law Mortgage Companies
Real Property Loan Law
Syndications
Real Estate Investment Trusts and Endowment Funds
Credit Unions and Finance Companies
Financial Advisory Role of the Real Estate Broker

4. Private Party Lenders (Slide 1 of 2)
Direct
Indirect
Use mortgage brokers
Sellers as Private Lenders
Carry back loans (exempt from usury)

5. Private Party Lenders (Slide 2 of 2)
Characteristics
Less formal, highly subjective decisions
High interest rates
Second trust deeds primarily
Rarely in prime or construction loans
Single family dwellings
Within geographic area
Balloon payments
Collections through mortgage company
Seller carrybacks

6. Usury Law
Greater of 10% or 5% above Federal Reserve Bank discount rate
Exemptions
Banks
Loan Correspondents
Thrift institutions
Life insurance companies
Mortgage companies
Industrial loan companies
Credit unions
Personal property brokers
Owners who carry back
Any transaction using a real estate broker
Not exempt
Direct private lenders

7. Mortgage Companies (Slide 1 of 2)
Mortgage Bankers
Make loans with own funds
Originates
Finances
Closes
Sells to institutional investors
Could be a correspondent for others
Might service loan
Mortgage Loan Brokers
Locate borrowers and lenders
Arrange loans between them
Do not service loans

8. Mortgage Companies (Slide 2 of 2)
Characteristics
Must follow correspondent rules
Licensed by Department of Corporations or Department of Real Estate
Affected by Recovery Act of 2008 (Chapter 5)
Also do
Brokerage
Development
Construction
Property management

9. Real Property Mortgage Loan Law
Enacted to protect the borrower
Buyer must get Mortgage Loan Disclosure Statement
Exemptions
Regulated institutional lenders
Purchase money transactions (carrybacks)
Loans secured by first trust deeds of >$30K
Loans secured by junior trust deeds of >$20K
Maximum commissions
Maximum charges
Balloon payments (more than twice smallest installment) prohibited
Term of loan < six years
Loan secured by dwelling place of borrower
Insurance
Not required to purchase credit life or disability
Lender can ask for fire and hazard
Mortgage brokers are prohibited from charging loan servicing fees to be paid by borrower

10. Percentage Commission
Maximum Commissions
Percentage Commission
Type of Loan
< 2 years
> 2 < 3 years
> 3 years
Exempt transactions
First trust deeds 5%
10%
Loans >$30,000
Junior trust deeds
15%
Loans >$20,000

11. Maximum charges Loan amount <$7,801 $7,801 - $13,999
$14,000 - $29,999
First loans >$30,000
Junior Loans >$20,000
Maximum charges
$390
5% of loan
$700
No legal limitations
But not to exceed actual costs and expenses

12. Syndications Two or more people who combine financial resources
Organized as
Usually limited partnerships
But could be
General partnership
Corporation
Real Estate Investment Trust
Joint venture
Improved purchasing power
Better bargaining power
Diversification
Professional management and administration
Types
Equity
Debt
Hybrid

13. Real Estate Investment Trusts
REITs
Equity
Income property
Mortgage
Interest returns
Hybrid
Combo of above
>100 shareholders
95% of taxable income be distributed to avoid double taxation
Other favorable income tax incentives
Used for
Land development
Take out loans for large projects

14. Pension Funds & Endowment Funds
California State Teachers Retirement Fund
United Auto Workers
Helping members to buy houses in high priced areas
PERS & STRS took big hits in 2008
Endowment funds
Colleges & universities
Hospitals
Cemeteries
Charitable foundations

15. Credit Unions & Finance Companies
Usually short term loans
Finance Companies
High risk loans
High rate loans
Short duration (<7 years)
Junior trust deeds

16. Financial Advisory Role of the Broker
Computerized loan origination
Details from many different lenders
Use of Internet
Only worked for “A” borrowers

17. Questions and Comments?