Real Estate Finance Learning Objectives  Define the basic mortgage theories  Define and describe the essential elements and common provisions of the mortgage note and the mortgage instrument (deed of trust)  Describe common note payment plans  Describe the concepts of principal and interest, including calculations  Define the rights of the parties in mortgage instruments  Define three methods of sale of mortgaged property  Describe the characteristics, major programs and payment plans, and qualification requirements of the following: Conventional mortgage loans FHA-insured loans VA-guaranteed loans © OnCourse Learning. All Rights Reserved.

Real Estate Finance Learning Objectives  Describe the basic definitions, characteristics, and uses of other mortgage loans and payment methods  Describe common sources of financing  Describe the major players in the secondary mortgage market  Describe loan underwriting practices and procedures  Define and describe mortgage legislation: Truth-in-Lending Simplification and Reform Act Equal Credit Opportunity Act

Real Estate Finance Principal, Interest, Taxes, and Insurance (PITI)  Principal is the amount of money on which interest is either paid or received  Interest is the money paid for using someone’s else's money  Taxes and insurance are often paid to the lender in escrow to protect the lender from loss; either from priority liens arising from unpaid taxes or from catastrophic loss  Mortgage loan interest is almost always calculated in arrears. All conforming loans (those sold in the secondary mortgage market) are calculated in arrears  Amortization is the gradual reduction of a loan amount from the original amount of the loan to a zero balance through periodic payments  Debt Service – principal and interest only (no escrows for T&I) © OnCourse Learning. All Rights Reserved.

Real Estate Finance Principal, Interest, Taxes, and Insurance (PITI)  See Fig to calculate principal and interest necessary to amortize loan depending upon interest rate and number of years  See Fig to 11.6 to determine monthly interest, principal reduction, loan balances after first and second payments and total interest paid over life of loan  Figure 11.1 – Abbreviated amortization chart  Figure 11.2 – Use of amortization chart  Figure 11.3 – Interest paid per month  Figure 11.4 – Principal reduction  Figure Loan balance after first and second payments  Figure 11.6 – Total interest paid over the life of the loan © OnCourse Learning. All Rights Reserved.

Real Estate Finance

© OnCourse Learning. All Rights Reserved. Real Estate Finance

© OnCourse Learning. All Rights Reserved. Real Estate Finance

© OnCourse Learning. All Rights Reserved. Real Estate Finance

© OnCourse Learning. All Rights Reserved. Real Estate Finance

© OnCourse Learning. All Rights Reserved. Real Estate Finance

Principal, Interest, Taxes, and Insurance (PITI)  Equity: Difference between the market value of the property and what is owed on it  Usury: Interest charged in excess of the legal limit that is set by law  Discount points & yield: In making loans, lenders may charge discount points to increase the yield (profit) to the lender Each point charged to a loan will cost one of the parties 1% of the loan and will be paid at the time of closing Each point charged increases the loan yield by 1/8 % (0.125%) Lenders may charge points on Conventional, FHA, and VA loans © OnCourse Learning. All Rights Reserved. Real Estate Finance

© OnCourse Learning. All Rights Reserved. Real Estate Finance Principal, Interest, Taxes, and Insurance (PITI)

© OnCourse Learning. All Rights Reserved. Real Estate Finance Principal, Interest, Taxes, and Insurance (PITI)  Loan fees, loan values, and loan-to-value ratio: The best loan for any buyer depends on a number of factors including: Amount available for down payment and closing costs Buyer’s income and debt load Length of time buyer intends to occupy the property Buyer’s credit score Qualification for special down payment programs such as first-time buyer, etc.

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Mortgage: A “mortgage” is two separate legal documents “Promissory” note is a promise to pay (IOU) Deed of Trust – pledges real property as collateral  Mortgage Note (Promissory Note): The promissory note is a promise that the borrower will be personally liable for paying the amount of the money in the note and specifies the manner in which the debt is to be paid

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  A valid mortgage note must contain: A promise to pay a specific amount of money The terms of the repayment The signature of the buyer  Non-essential items often included in a mortgage note include: Acceleration clause: Provides the lender with the option of calling the entire loan due and payable at once if the buyer defaults or breaks the contract in any way

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Non-essential items often included in a mortgage note include: Prepayment penalty clauses: Penalty charged for paying off the loan at a faster rate Prohibited in government or conforming loans North Carolina prohibits prepayment penalties on first mortgages with an original balance of $150,000 or less Due-on-sale clause (Alienation): Stipulates in the event the property is sold, or otherwise conveyed the lender has the right to declare the entire loan balance due and payable immediately Prevents a future purchaser from assuming the loan without the lender’s permission

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Negotiability of Note: Payable to bearer Allows the loan to be assumed A non-negotiable note names a particular individual or corporation  Hypothecation: Borrower pledges property as security for a loan without surrendering possession  Lien theory: Loan constitutes a lien against the real property A two party instrument in which the borrower gives a piece of paper (mortgage) to the lender in return for the borrowed funds Borrower is mortgagor Lender is mortgagee Most states are lien theory states

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Title theory: Disinterested third party holds legal title through a deed of trust. Trustee, usually an attorney, holds the rights conveyed by the borrower for the beneficiary Beneficiary is lender The grantor/trustor is borrower The defeasance clause obligates the trustee to return all rights conveyed by the trustor in the deed of trust The trustee’s power of sale gives the trustee the right to sell the property if the borrower defaults North Carolina is a title theory state

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Mortgage or Deed of Trust – Essential Elements: Must be in writing as required by the Statute of Frauds. All parties must be identified and have contractual capacity There must be a valid debt The mortgagor or trustor must have a valid interest in the property pledged or conveyed A legally acceptable description of the property Mortgaging clause Defeasance clause Proper execution of the mortgage or deed of trust Only borrower or trustor signs Delivered to and accepted by the mortgagee or trustee/beneficiary

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Clauses and Covenants: The note executed by the borrower includes the following clauses: Acceleration Alienation Due-on-sale Prepayment penalty The mortgage or deed of trust require the borrower to: Pay all real property taxes Keep the buildings in a proper state of repair and preservation Protect the buildings against loss with an insurance policy Insure the structures for 100% of the loan amount less the land value or other amount specified by the lender

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Clauses and Covenants: Both documents provide the right of foreclosure if the borrower defaults Covenants that borrower must have a good and marketable title to the property that is being pledged to secure payment of the note Alienation or due-on-sale clause Must provide for execution by the borrower Must provide for acknowledgement by the borrower to make document eligible for public recording

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Rights of borrower: Right to possession of the property during the mortgage term as long as the borrower is not in default Defeasance clause gives the borrower the right to redeem the title or have the mortgage lien released at any time prior to default by paying the debt in full Equity of redemption: Right of the borrower to pay off the outstanding loan balance and regain legal title to the property

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Rights of lender: Transfer or assign the mortgage or deed of trust Provides liquidity since the lender has the right to sell the loan Foreclosure in the event of default: Foreclosure: The liquidation of title to the real property pledged to recover funds to pay off the debt

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Rights of lender: Foreclosure in the event of default: Judicial foreclosure: Common in lien theory states Requires the lender to bring a lawsuit against the borrower Must obtain a judgment for the amount of debt the borrower owes Non-judicial foreclosure: Common in title theory states: Does not require the lender to bring a lawsuit against the defaulting borrower to obtain a judgment to foreclose

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Rights of lender: Foreclosure in the event of default: Strict foreclosure: Not used in North Carolina Deed in lieu of foreclosure (a friendly foreclosure): Borrower in default surrenders title to the lender Avoids foreclosure Does not eliminate other liens against property

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics  Rights of lender: The distribution of foreclosure sale proceeds: All expenses of the sale are paid Any delinquent real or personal property taxes are paid All other lien holders based on order of priority are paid Any surplus monies are paid to the borrower A deficiency judgment is a court order stating that the borrower still owes the lender money It is important to note that North Carolina does not allow deficiency judgments when a seller forecloses on a purchase money mortgage

 Rights of lender: The distribution of foreclosure sale proceeds: Non-recourse notes disallow the lender from pursuing a deficiency judgment: The borrower assumes no personal liability for paying the note and the lender can only look to the property pledged in the mortgage to obtain the money owed  Short Sale: A type of sale in which the borrower is unable or unwilling to pay off the mortgage loan Involves a situation where the borrower owes more money than the property is worth The lender allows the property to be conveyed free from the old loan © OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Basics

 Cash sales: Simplest real estate transaction Seller receives all cash for sale and pays off any outstanding loan balance  Loan assumption: Seller remains liable for the loan/payment of the note Can be released from liability by the lender Most conventional loans are not assumable FHA and VA loans generally are assumable with qualification  In taking title subject to a loan, the new purchaser does not become liable for payment of the note: Most notes have “Due on Sale Clause” which prevents title from being transferred “subject to” a loan  Most lenders require new financing. © OnCourse Learning. All Rights Reserved. Real Estate Finance Sales of Mortgaged Properties

© OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans  Two categories: 1.Conventional Loans in which there is no participation by an agency of the federal government 2.Government Participation Loans (FHA, VA, Rural Development and Farm Service Agency)

 Conventional loans: No participation from an agency of the federal government Uninsured conventional loan – the borrower has sufficient equity (20% +) to protect the lender in the event of default Conventional loans for more than 80% of the property value require the borrower to insure the lender against loss due to default Private Mortgage Insurance (PMI) – insurance that protects the lender (against losses) in the event of borrower default Required on mortgage loans for more than 80% LTV “Conforming” – conventional loans that comply with FMMA/HFLMC guidelines and use standardized forms “Non-conforming” – does not meet these standards (conforming) Qualifying for a conventional loan – See Figures & © OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans

© OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans  FHA – Insured Loans: FHA does not make direct loans Insures lenders against financial loss Buyer pays for this protection by paying Up-front mortgage insurance premium (UFMIP) Annual mortgage insurance premium (MIP)  FHA 203(b) Regular Loan Program: For the purchase or construction of 1 to 4 family dwellings The most popular FHA program FHA maximum loan amount: Maximum loan amounts are based on geographic regions Higher limits are allowed in high cost regions Must be owner occupied dwelling

© OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans  FHA 203(b) Regular Loan Program: FHA mortgage insurance premium: UFMIP is set at 1.50% of the loan amount UFMIP can be financed into the loan Maximum loan amount for the area can be exceeded by the UFMIP if financed into the loan FHA loan qualification: Total recurring monthly expenses (10 months or more in duration) and housing expenses may not exceed 41% of buyer’s monthly gross income Monthly housing expenses cannot exceed 29% of buyer’s gross income Monthly housing expenses include PITI, monthly MIP, and home owner association dues or assessments

© OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans  FHA 203(b) Regular Loan Program: FHA loan assumption policies: After 1989, a complete buyer qualification is required before an FHA loan can be assumed Rules for loan assumption qualification, release of liability, notification and time of payoffs differ according to when loan was unwritten Contract requirements FHA requires that sales contracts involving an FHA loan Contain specific wording regarding the FHA appraised value That the buyer be provided with a lead-based paint disclosure That the buyer sign the form, “For Your Protection: Get a Home Inspection” before signing the Offer to Purchase Funds for FHA loans come from the lender

© OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans  VA-guaranteed loans: VA guarantees repayment of the top portion of the loan to the lender in the event of borrower default Maximum loan amount in most circumstances is conforming loan limit (currently $417,000) Loan cannot exceed the VA’s certificate of reasonable value (CRV) Eligibility: Borrower must qualify as a veteran in order to be eligible for loan VA loans can be made to the unmarried surviving spouse of a veteran who died as a result of service related injuries You must be a veteran to obtain a VA loan but you do not have to be veteran to assume a VA loan Contract Requirements: Must have specific wording regarding the value of the property in the sales contract

© OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans  VA-guaranteed loans: VA funding fee: VA charges a funding fee of between 0.5% and 3.35% - amount depends upon: Amount of the down payment Whether veteran is active military, national guard, or reservist Whether it is a first or subsequent use Whether it is a refinance or loan assumption (0.5%) Members with service-connected disabilities are exempt from the funding fee Qualifying for VA loans: Qualify under the gross monthly income rule Qualify under a net family support standard

© OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans  VA-guaranteed loans: Restoration of Entitlement: Certificate of Eligibility (VA loan entitlement) Restoration of that entitlement after its use can be accomplished in one of two ways: The loan is paid in full and the veteran has disposed of the property A veteran purchaser who has as much eligibility as the original veteran used to obtain the original loan and also satisfies the VA requirements for income, credit, and occupancy may substitute his/her entitlement and assume the VA loan from the original veteran Release of Liability – procedure by which mortgage holder agrees not to hold original borrower responsible in a loan assumption Substitution of Entitlement – When a qualified veteran assumes a VA loan the original veteran can regain his entitlement under certain circumstances

 VA-guaranteed loans: Negotiability of VA Loan Rate: The interest rate of VA loans is negotiable just like any other loan  Other aspects of FHA and VA loans: Escrow account – borrower must pay an impound into this account each month to accumulate money to pay the annual real property tax bill and the annual homeowner’s insurance policy premium. Down payment – borrower must pay anything over the maximum loan amount in FHA or VA loans: Down payment cannot be financed unless the down payment is secured by collateral other than the property and that loan is disclosed to the lender Funds for VA loans come from the lender Miscellaneous Both VA and FHA loans are assumable (with qualification) VA and FHA mortgages never require a pre-payment penalty © OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans

© OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans  Rural Development (RD) and Farm Service Agency (FSA) loans: Direct loans: Funds actually come from the government RD guaranteed loans: Funds come from mortgage lenders Contrast with FHA and VA loans where all funds come from lenders Purpose of Rural Development: Provide financing in designated rural areas Improve rural housing Develop community facilities Maintain and create rural employment

© OnCourse Learning. All Rights Reserved. Real Estate Finance Types of Loans  Rural Development (RD) and Farm Service Agency (FSA) loans: RD loans are 100% loans Terms of up to 33 years Fully or partially subsidized loans below prevailing market rates RD loans are for the purchase, repair, and rehabilitation of single and multifamily residences RD loans can also be used to assist “self-help” housing projects The FSA provides loans to purchase and operate family-sized farms: Some FSA loans can be amortized over a term of up to 40 years Upper limits for qualifying income are established for each local area, and the loan payments are based on the buyer’s ability to pay

© OnCourse Learning. All Rights Reserved. Real Estate Finance Typical Loan Repayment Plan  Fixed rate: Level payment plan Interest rate is fixed P&I payment is fixed Most widely used type of loan  Adjustable (variable) interest rates (ARMs): Interest rate based on a standard index plus a certain margin Contain two limits: Adjustment period cap: Caps the maximum interest rate increase per period Lifetime cap: Limits the total amount of increase over the life of the loan Vast majority of ARM lenders do not allow negative amortization

© OnCourse Learning. All Rights Reserved. Real Estate Finance Typical Loan Repayment Plan  Graduated payment plans: Monthly payments are lower early in the loan Increase until they begin amortizing the loan Allows for negative amortization  Buy-down loan: Allows for a temporary or permanent decrease in the interest rate Temporary buy-down, borrower or someone else will deposit any shortfall in escrow Lender draws against the escrow account, decreases the interest rate Permanent reduction, the borrower or someone else can pay discount points to decrease the interest rate

© OnCourse Learning. All Rights Reserved. Real Estate Finance Typical Loan Repayment Plan  Term loan: Borrower pays interest-only payments for a specified term Most common example is the construction loan  Growing equity mortgage: Allows the loan to be paid off much faster than normally scheduled Borrower begins with monthly payments calculated at the fixed rate level then encounters pre-stipulated increases in payments  Balloon payment plan (partially amortized): Final loan payment is substantially larger than any previous payment

 Purchase money mortgage: Owner financing Mortgage given by a buyer to the seller to cover part or all of the purchase price Seller is not entitled to a deficiency judgment in the event of foreclosure  Construction loan: Interim, or temporary, short-term financing Used to obtain the funds needed to create improvements on land The most common example of a term loan  Takeout loan: Permanent financing needed after the short-term financing of a construction loan is ended  Open-end mortgage: Can be refinanced without rewriting the mortgage and incurring closing costs Home equity line of credit © OnCourse Learning. All Rights Reserved. Real Estate Finance Other Types of Loans

© OnCourse Learning. All Rights Reserved. Real Estate Finance Other Types of Loans  Blanket mortgage: Two or more parcels of real estate are pledged as security for payment of a mortgage debt Typically involves a deed of release  Package mortgage: Personal AND real property pledged to secure payment  Reverse mortgage: Opposite of the amortizing mortgage Homeowner does not pay the lender Homeowner receives income payments from the lender Useful for a retiree who has a large equity position in a property but may have limited income Must be 62 years of age to qualify

© OnCourse Learning. All Rights Reserved. Real Estate Finance Other Types of Loans  First mortgage: May be the only mortgage Mortgage that is higher in priority than all other mortgages on the same property  Junior mortgage: Recorded after (or with lower priority than) the first mortgage May be a second, or even third, mortgage Further down in the chain of priority Represent a larger risk for lenders Usually have higher interest rates and shorter terms

© OnCourse Learning. All Rights Reserved. Real Estate Finance Mortgage Priorities  Effect of recordation: All documents need to be recorded in order to be effective against third parties Priority of liens is established by the date of recordation Real property tax liens always take priority over other liens Mechanic’s liens take effect before actual recordation  Subordination of mortgages: Can be changed by agreement of the parties even after recording  Releases: Releases parties from the terms of original document Recording a release is important Failure to do so could cloud the title to the property

© OnCourse Learning. All Rights Reserved. Real Estate Finance Role of Federal Reserve Bank in Real Estate Control the amount of money in the economy to ensure economic stability and growth Accomplishes this by controlling monetary policy, most famously by its control of the discount rate Dictates reserve requirements for banks Controls the amount of funds in the banking system by open market operations The Fed also is responsible for enforcement of two laws directly related to the real estate profession: The Truth-in-Lending Simplification and Reform Act The Equal Credit Opportunity Act

 Savings & Loan associations: Lend money to construct, purchase, and improve housing  Savings banks: Difference between a savings bank and a commercial bank is that savings banks are depositor owned  Commercial banks: Can be federally or state chartered Sources of mortgage money for construction, purchase, and improvement of housing Prefers short-termed higher yield mortgage  Mortgage bankers & mortgage brokers: Most make FHA and VA loans Most also make conventional loans Mortgage bankers make and service loans Mortgage brokers bring together lender and borrower for a fee paid by the lender © OnCourse Learning. All Rights Reserved. Real Estate Finance Primary Sources of Mortgage Funds

© OnCourse Learning. All Rights Reserved. Real Estate Finance Primary Sources of Mortgage Funds  Life insurance companies: No longer make many direct loans More likely to provide funds to lenders or provide funds for large real estate projects  Credit unions: Offer mortgage loans to their membership at an interest rate often below the commercial rate at any given time  Real Estate Investment Trusts (REITs): Make loans secured by real property Owned by stockholders and enjoy certain income tax advantages. Invest in properties as owners and managers Lend money on projects owned by others Often used by large corporations with large real estate holdings to reduce the corporation’s tax burden

© OnCourse Learning. All Rights Reserved. Real Estate Finance Primary Sources of Mortgage Funds  Individual investors: Excellent source of mortgage funds for certain qualified buyers  Government agencies: RD and FSA also make mortgage loans Community development funds are sometimes available for down payments and closing cost assistance North Carolina Housing Finance Agency will sometimes provide down payment assistance and subsidize the mortgage rate through local lenders Mortgage Credit Certificate Program is available, but difficult to qualify for  Many employers provide closing cost assistance and/or bridge loans for transferees

© OnCourse Learning. All Rights Reserved. Real Estate Finance Secondary Mortgage Market  The secondary mortgage market buys and sometimes sells and services mortgages created in the primary mortgage market: Liquidity can be readily converted to cash by the lending institution Disintermediation – loss of funds available to lending institution for making mortgage loans caused by the withdrawal of funds by depositors for investment in higher-yield securities  Activities among lending institutions: The purchase and sale of mortgages among lending institutions facilitates movement of capital from institutions that have funds to invest to lenders wanting to make new mortgage loans

© OnCourse Learning. All Rights Reserved. Real Estate Finance Secondary Mortgage Market  Sales to organizations: The four organizations that participate in the sale of mortgages from lenders are FNMA, GNMA, FHLMC, and MGIC:  The Federal National Mortgage Association (FNMA or Fannie Mae): Oldest secondary mortgage institution Largest holder of home mortgages Purchases conventional, FHA, and VA mortgages Originally a government agency, now a publicly traded company. Sells interest bearing securities (bonds, notes, and debentures) to investors  The Government National Mortgage Association (GNMA or Ginnie Mae): Agency of the Department of Housing and Urban Development Purchases only FHA and VA mortgages Guarantees the “Ginnie Mae Pass-Through,” a mortgage-backed security in a pool of FHA interest and VA Guaranteed Mortgages

© OnCourse Learning. All Rights Reserved. Real Estate Finance Secondary Mortgage Market  The Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac): Created by the government with the express purpose of purchasing conventional loans Originally owned by an association of lenders, now a publicly traded company Sells Mortgage Participation Certificates (PC’s) and Guaranteed Mortgage Certificates (GMC’s) Both represent an undivided interest in specific pools of mortgages Guarantees both principal and interest to purchases of PC’s & GMC’s  Private Mortgage Insurers: Mortgage Guarantee Insurance Corporation (MGIC or Maggie Mae) Purchases conventional mortgages Originally only a provider of private mortgage insurance Later joined the secondary mortgage market

© OnCourse Learning. All Rights Reserved. Real Estate Finance Secondary Mortgage Market  Other aspects of the market: Primary lenders that sell mortgages to FNMA or FHLMC must use uniform loan documents that meet the criteria of FNMA and FHLMC Loans using this uniform documents are known as conforming loans Loans using these uniform loan documents must adhere to certain FNMA/FHLMC guidelines FNMA will assist sellers willing to accept purchase money mortgages This program guarantee’s to purchase the mortgage if the sellers/mortgagees desire to sell and get their money out without waiting to complete the loan amortization This adds considerable liquidity to purchase money mortgages making them much more attractive for sellers

© OnCourse Learning. All Rights Reserved. Real Estate Finance Residential Lending Practices and Procedures  Loan application procedures: Standardized mortgage application form Lender will usually require payment for appraisal fee and credit report Lender to prepare and provide a Good Faith Estimate (GFE) within 3 days Application details will be verified  Loan underwriting: Process by which an underwriter reviews: Loan documentation Buyer’s creditworthiness Value of the property to be pledged as security for the payment of the note

© OnCourse Learning. All Rights Reserved. Real Estate Finance Residential Lending Practices and Procedures  Property Analysis: Hires a state-licensed appraiser to estimate the value of the property Hires an attorney to perform a title search to Assure the title is clear Issue an opinion of title Obtain a title insurance policy to protect against loss due to a defect in the title  Borrower Analysis: The income, credit, and assets of the loan applicant are evaluated to ensure that the applicant has a stable and effective income sufficient To enable the borrower to make the loan payments Meet other recurring financial obligations This evaluation typically looks at two years of financial history

© OnCourse Learning. All Rights Reserved. Real Estate Finance Residential Lending Practices and Procedures  Prequalification of buyers by the agent is a part of the agent’s duty to the seller: The agent’s duty is to present only qualified buyers Prequalification of the buyer is an essential part of that duty  Loan Analysis: Determine if the mortgage meets the financial goals of the lender and to determine its’ ability to be sold within the secondary market place  Loan commitment and closing

© OnCourse Learning. All Rights Reserved. Real Estate Finance Financing Legislation  Dodd-Frank Wall Street Reform and Consumer Protection Act: Establishes the Bureau of Consumer Financial Protection (CFPB)  Consumer Financial Protection Bureau: Established to prevent lender abuses, predatory lending, and inappropriate fees on consumer loans CFPB incorporates federal regulations for consumer loans into one agency  Truth-in-Lending Act: Part of the Federal Consumer Credit Protection Act Enforced by the CFPB

 Regulation Z: Establishes the disclosure and advertising requirements, and penalties for non-compliance Applies to all personal, family, household, or agricultural loans Does not apply to commercial loans Disclosure requirements: Annual percentage rates (APRs) Finance charges Amount financed Total of payments Only specific thing that can be stated in advertising without making a full disclosure of all credit is the APR spelled out in full Other statement triggers the requirement for full disclosure Penalties for violation of Regulation Z: Fine of up to $5,000 AND/OR Imprisonment for up to one year © OnCourse Learning. All Rights Reserved. Real Estate Finance Financing Legislation

© OnCourse Learning. All Rights Reserved. Real Estate Finance Financing Legislation  Fair Credit Reporting Act (FCRA): Ensures consumer credit reporting agencies use reasonable procedures to collect and evaluate relevant consumer credit information Ensures information is fairly and impartially and used Items addressed by the FCRA include: Permissible uses of reports Requirements pertaining to information in reports Disclosure of information to consumers Procedure for disputing report’s accuracy Consumer report user requirements Civil liability for willful or negligent non-compliance with the Act Penalties for unauthorized disclosure by consumer credit reporting agencies

 Equal Credit Opportunity Act (ECOA): Implemented by Regulation B Prevents discrimination in the loan process by lenders Makes it unlawful to discriminate on the basis of: Race Color Religion Sex National origin Marital status Age Note: Marital status and age coverage in this Act differs from that of the state and federal fair housing acts Illegal to discriminate if: Part of the applicant’s income is derived from public assistance Applicant has availed themselves of any protection available through ECOA or TILSRA © OnCourse Learning. All Rights Reserved. Real Estate Finance Financing Legislation