© 2012 Cengage Learning

Sources of Financing Chapter 12

© 2012 Cengage Learning In This Chapter You will identify various mortgage lenders, describe where these lenders get their money, and explain mortgage provisions.

© 2012 Cengage Learning Financing Primary Market – where lenders originate loans. Secondary Market – provides a way for lenders to sell a loan.

© 2012 Cengage Learning Primary Loan Sources Savings and loan Associations Commercial Banks Life Insurance Companies Mortgage Companies Mortgage Brokers Computerized Loan Origination Municipal Bonds Other Lenders

© 2012 Cengage Learning SAFE Act Secure And Fair Enforcement Act established minimum standards for mortgage training, both pre-licensing and continuing education.

© 2012 Cengage Learning SAFE Act Requires registration of residential mortgage loan originator employees with a federal banking agency having jurisdiction Law is broad and can cover seller financing Texas allows some exceptions for owner financing on up to 5 owner transactions

© 2012 Cengage Learning Mortgage Loan Originators must be Licensed One cannot work as a Mortgage Loan Originator (MLO) for a Mortgage Broker or Consumer Loan company until they have an active license Requires pre-licensing education & testing

© 2012 Cengage Learning Requirements for Texas licensed mortgage loan originators Complete at least 20 hours of pre-licensing education Pass a qualification exam (includes both a state and national component) Pass a background check Complete at least eight hours of continuing education on an annual basis

© 2012 Cengage Learning Requirements for federally chartered mortgage loan originators Pass a qualification exam (made up of both a state and national component) Pass a background check Complete at least eight hours of continuing education on an annual basis More information at

© 2012 Cengage Learning Texas Loan Programs Texas Veterans Land Fund Veterans’ Housing Assistance Program (VHAP) Veterans Home Improvement Program Texas Department of Housing and Community Affairs

© 2012 Cengage Learning Texas Loan Programs “Bootstrap” Homebuilder Loan Program Home Investment Partnerships Program (HOME) Housing Finance Corporation Fannie Mae REALTOR ® Programs Texas State Affordable Housing Corporation

© 2012 Cengage Learning Secondary MarketPrimary Market Mortgage Lenders Borrowers Financial Intermediaries Mortgage Investors The Secondary Mortgage Market

© 2012 Cengage Learning Mortgage Loan Delivery Systems

© 2012 Cengage Learning Secondary Loan Sources FNMA - Fannie Mae FHLMC - Freddie Mac FAMC - Farmer Mac GNMA - Ginnie Mae Farmer MAC

© 2012 Cengage Learning OFHEO The Office of Federal Housing Enterprise Oversight (OFHEO) was charged with ensuring the capital adequacy and financial safety and soundness of two government sponsored enterprises  the Federal National Mortgage Association (Fannie Mae)  the Federal Home Loan Mortgage Corporation (Freddie Mac)

© 2012 Cengage Learning The Housing and Economic Recovery Act of 2008 combined OFHEO and the Federal Housing Finance Board (FHFB) to form the new Federal Housing Finance Agency (FHFA)

© 2012 Cengage Learning Automated Underwriting Systems The computer age has introduced a whole new system in underwriting procedures as they apply to the relationship between the loan originator and the investor.

© 2012 Cengage Learning AVAILABILITY AND PRICE OF MORTGAGE MONEY Money pipelines between lenders and borrowers. These sources are savings generated by individuals and businesses as a result of their spending less than they earn (real savings) and government-created money, called fiat money or “printing press money.”

© 2012 Cengage Learning Usury State legislation that imposes an interest rate ceiling on loans. U.S. Congress passed legislation that exempts from state usury limits most first lien home loans made by institutional lenders.

© 2012 Cengage Learning Price to the Borrower The rate of interest the borrower must pay to obtain a loan is dependent on the cost of money to the lender.

© 2012 Cengage Learning Other Financing Conditions Due-on-Sale – call clause. Prepayment- penalty for the right to repay a loan early.

© 2012 Cengage Learning DUE-ON-SALE Lenders can use these clauses to increase the rate of interest on the loan when the property changes hands by threatening to accelerate the balance of the loan unless the new owner accepts a higher rate of interest.

© 2012 Cengage Learning PREPAYMENT Loan contracts sometimes call for a prepayment penalty in return for giving the borrower the right to repay the loan early. A typical pre-payment penalty amounts to the equivalent of six months interest on the amount that is being paid early. prepayment penalties are not allowed on FHA and VA loans.

© 2012 Cengage Learning Key Terms Alienation clause Automated underwriting system Computerized loan origination Disintermediation Fannie Mac Federal National Mortgage Association Freddie Mac Mortgage broker Mortgage company Participation certificates Primary market Secondary mortgage market Usury