2. Nature and Cycle of California Real EstateFinanceChapter 1 2© 2010 Kaplan, Inc.
3. Historical Perspective• Might and power• English feudal system• Allodial system 3© 2010 Kaplan, Inc.
4. Nature of Real Estate Finance• Ownership of property – Property – Real property – Personal property – Commercial fixtures 4© 2010 Kaplan, Inc.
5. Estates in Realty• Freehold estate – Fee simple absolute – Time-shares; condominiums – Legal title; equitable title – Concurrent ownership – Tenants in common and partnerships – Community property – Joint tenancy• Leasehold estate 5© 2010 Kaplan, Inc.
6. Real Estate Characteristics• Physical• Economic• Social – Police powers – Eminent domain – Condemnation 6© 2010 Kaplan, Inc.
7. Characteristics of Real PropertyInvestments• Fixity• Longevity• Permanence• Risk• Market segmentation 7© 2010 Kaplan, Inc.
8. Purposes of Investing in Real Estate• To preserve capital• To earn a profit• To enjoy tax relief 8© 2010 Kaplan, Inc.
9. Advantages of Investing in Real Estate• Relatively high yields• Leveraging opportunities• Income tax flexibility• High degree of personal control 9© 2010 Kaplan, Inc.
10. Mortgage Lending Activities• Primary market• Credit system economy• Financing relationships• Local markets• National markets 10© 2010 Kaplan, Inc.
11. Real Estate Cycles• Supply and Demand – Real estate – Money• Population Characteristics• Political attitudes 11© 2010 Kaplan, Inc.
12. Money and the Monetary SystemChapter 2 12© 2010 Kaplan, Inc.
13. What Is Money?• Medium of exchange or means of payment• Storehouse of purchasing power• Standard of value 13© 2010 Kaplan, Inc.
14. The Use of Paper Money• As long as the public can exchange symbolic paper money for commodities of like value, the system works. 14© 2010 Kaplan, Inc.
15. The Supply and Cost of Money• M1 includes cash and checking accounts• M2 adds money market mutual funds and savings and time deposits of less than $100,000• M3 adds large time deposits at all depository institutions• Creating money through credit 15© 2010 Kaplan, Inc.
16. The Federal Reserve System (Fed)• Central banking system that provides a rising standard of living through controlled growth of money and credit.• Lender of last resort 16© 2010 Kaplan, Inc.
17. Organization of the Fed• Twelve Federal Reserve districts• Each district includes Federal Reserve Bank• Directed by board of governors• Membership 17© 2010 Kaplan, Inc.
18. Functions of the FED• Reserve requirements to protect depositors• Discount rates to regulate the cost of funds• Federal Funds Rate at which the Fed lends money to member• Open market operations• Truth-in-Lending Act (Regulations Z) 18© 2010 Kaplan, Inc.
19. The United States Treasury• Balancing government’s income against its long-term and short-term debt instruments has a direct effect on the monetary and credit climate of the country.• The Office of the Comptroller of the Currency (OCC)• Nation’s fiscal manager• The Treasury’s role• Office of the Comptroller of the Currency (OCC)• The Federal Deposit Insurance Corporation (FDIC)• Office of Thrift Supervision (OTS) 19© 2010 Kaplan, Inc.
20. The Federal Home Loan Bank System(FHLB)• Organization• Activities – Provides its members a national market for their securities 20© 2010 Kaplan, Inc.
21. California Financial Agencies• Department of Savings and Loans• California Housing Finance Agency (CalHFA)• Department of Financial Institutions• Department of Insurance• Department of Corporations (DOC)• Department of Real Estate (DRE)• Office of Real Estate Appraiser (OREA) 21© 2010 Kaplan, Inc.
22. Institutional Lenders for Real EstateFinanceChapter 3 22© 2010 Kaplan, Inc.
23. Commercial Banks• Origins – Goldsmiths and money lending – Advent and evolution of checking system – Underwriting• Organization and operation• Mortgage loan activities – Interim financing (construction loans) – Home improvement loans – Manufactured home loans – Equity loans• Mortgage banking• Trust department activities 23© 2010 Kaplan, Inc.
24. Savings and Loan Associations/Thrifts• Origins and development• Organization• Mortgage lending activities• California chartered savings and loan associations 24© 2010 Kaplan, Inc.
25. Life Insurance Companies• Seek safety and long-term stability of an investment• Participation financing• Purchase of blocks of single-family mortgages or securities from the secondary mortgage market 25© 2010 Kaplan, Inc.
26. Pension and Retirement Programs• Pension monies collect routinely, usually from payroll deductions, and are held in trust until needed at retirement• Pension fund managers invest assets from accounts 26© 2010 Kaplan, Inc.
27. Credit Unions• Members deposit savings, usually through payroll deductions• Members borrow at interest rates below competition• Expanding in real estate finance 27© 2010 Kaplan, Inc.
28. Noninstitutional LendersChapter 4 28© 2010 Kaplan, Inc.
29. Mortgage Brokers and Bankers• Mortgage brokers match up borrowers and lenders• Mortgage bankers are intermediaries (known as correspondents) originate new loans, collect payments, periodically inspect the collateral, and supervise foreclosure, if necessary. – Development; Interest only loans with balloon payments – High level of defaults during Great Depression – Formation of Federal Housing Administration (FHA) in 1934• Operation• Servicing a loan• Assignment of loan• Activities 29© 2010 Kaplan, Inc.
30. Real Estate Trusts• Designed to provide vehicles by which real estate investors can enjoy the special income tax benefits granted to mutual funds and other regulated investment companies – Real estate investment trust (REIT) – Real estate mortgage trust (REMT) – Combination trust 30© 2010 Kaplan, Inc.
31. Trust Qualifications(1 or 2) – Trust must not hold property primarily for sale to customers in the ordinary course of business. – Trust must be owned beneficially by at least 100 investors. – Trust must not have fewer than five persons who own more than 50 percent of the beneficial interest. – Trust’s beneficial interests must be evidenced by transferable shares or certificates of interest – Ninety-five percent of the trust’s gross income must be derived from its investments. 31© 2010 Kaplan, Inc.
32. Trust Qualifications(2 or 2) – Seventy-five percent of the trust’s gross income must be derived from real estate investments. – No more than 30 percent of the trust’s gross income may result from sales of stocks and securities held for less than 12 months or from the sale of real estate held for less than four years. – Ninety-five percent of the trust’s gross income must be distributed in the year it is earned. – All trust income must be considered passive by the IRS. 32© 2010 Kaplan, Inc.
33. Real Estate Investment Trusts (REITS)• Invest in improved income properties• Income derived from rents and capital gains• Individual investors pay income tax only at participant level 33© 2010 Kaplan, Inc.
34. Real Estate Mortgage Trusts (REMTs)• Expand their financial base with strong credit at their commercial banks.• Make mortgage loans on commercial income properties.• Income from mortgage interest, origination fees, and profits made from buying and selling mortgages. 34© 2010 Kaplan, Inc.
35. Balanced Trusts o Combine REIT with REMT, earning profits from rental income and increased property values as well as mortgage interest and placement fees. 35© 2010 Kaplan, Inc.
36. California Syndication• Organizations of investors pooling capital for real estate investments• Can be corporations, general partnerships, or limited partnerships• Investment conduits that pass profits and losses through to investors in proportion to their ownership shares 36© 2010 Kaplan, Inc.
37. California Syndication• Controlled by the California Department of Corporations• Limited partners may become liable for the total debts of the partnership if they take an active role in the management of the partnership• Limited liability company (LLC) combines single- level tax benefit of partnership with organizational structure and limited liability of limited partnerships and corporations. 37© 2010 Kaplan, Inc.
38. Real Estate Bonds• Can be used to secure funds for financial real estate projects through 1) issuance and sale of mortgage bonds and 2) issuance and sale of municipal, county, or state bonds for purposes of financing community improvements. 38© 2010 Kaplan, Inc.
39. Nature of Bonds• Secured and unsecured (debentures)• Coupon; registered coupon• Classification by nature of issuer, nature of security, or by maturity date• Issuance of banks• Market prices of bonds• Ratings 39© 2010 Kaplan, Inc.
40. Uses for Bond Issues• Use has faded since depression of 1930s• Many companies today use debenture bonds as a source of raising long-term funds 40© 2010 Kaplan, Inc.
41. Bonds• General obligation bonds• Tax privilege of exempting interest income earned on state and local securities• Industrial revenue bonds• Industrial development bonds• Mortgage revenue bonds• Zero coupon bonds• Mortgage loan bonds 41© 2010 Kaplan, Inc.
42. California Bonds• Issued by Community Redevelopment Agencies• Money used to make below-market interest rate loans to qualified developers of low- income and medium-income residential projects• Mortgage-backed bonds issued by savings associations 42© 2010 Kaplan, Inc.
43. Endowment Funds• Provides a permanent source of income• Managers responsible to develop income while preserving capital 43© 2010 Kaplan, Inc.
44. Private Loan Companies• Usually deal in junior finance• Often charge higher than market interest rates• Must adhere to Truth-In-Lending laws 44© 2010 Kaplan, Inc.
45. California Real Property Loan Law• Limits on amount of commission and fees that can be charged for making or arranging a hard money loan 45© 2010 Kaplan, Inc.
46. Individuals• Sellers as lenders• Families as lenders• Other lenders 46© 2010 Kaplan, Inc.
47. Conventional, Insured, and GuaranteedLoansChapter 5 47© 2010 Kaplan, Inc.
48. Conventional Loans(1 or 2)• Fixed-rate loans• Interest-only loans• Private Mortgage Insurance (PMI)• Permanent/temporary (escrow) buydown Plan• Borrower’s qualifications – Four Fannie Mae and Freddie Mac guidelines 48© 2010 Kaplan, Inc.
49. Conventional Loans(2 or 2)• Jumbo loans• Home equity loans• Automatic rate reduction• Subprime loans 49© 2010 Kaplan, Inc.
51. Home Ownership and Equity Protection Act of1994• Addresses deceptive and unfair practices in home equity lending 51© 2010 Kaplan, Inc.
52. Refinancing Existing Conventional Loans• Costs of refinancing are unregulated and vary dramatically among lenders• Alternative is loan modification with existing lender 52© 2010 Kaplan, Inc.
53. Electronic Real Estate Loan Services• Borrower can arrange for a residential loan on the computer• Still requires filing of a loan application and the probably submission of ancillary documents 53© 2010 Kaplan, Inc.
54. FHA Organization and Requirements• Lenders must grant long-term, self-amortizing loans at market interest rates• All properties must meet minimum standards of acceptability• Careful loan application review• Comprehensive written appraisal report on property• Borrower required to receive and sign a form entitled ―For Your Protection: Get a Home Inspection‖ 54© 2010 Kaplan, Inc.
55. FHA Program Summary• Not a direct lender• Reduced the down payment obstacle for cash-short borrowers• Helps stabilize the mortgage market 55© 2010 Kaplan, Inc.
56. Existing FHA Programs• Title I—light or moderate rehabilitation of properties; manufactured homes, developed lot, or combination of lot and home.• Title II – Section 203(b)—Mortgage Insurance for One-Family to Four-Family – Section 203(k)—Rehabilitation Mortgage Insurance – Section 234(c)—Mortgage Insurance for Condominium Units – Section 251—Insurance for Adjustable Rate Mortgages – Other Title II programs 56© 2010 Kaplan, Inc.
57. Special HUD/FHA Programs• Energy Efficient Mortgage (EEM)• Home Equity Conversion Mortgage (HECM)• Good Neighbor Next Door• Homeownership Vouchers• Native American Housing 57© 2010 Kaplan, Inc.
58. Underwriting Guidelines• Maximum loan limitations• Down payment requirements• Borrowers’ income qualifications• Non-traditional credit• Mortgage insurance premium (MIP)• Allowable closing costs• Second mortgage/buydowns 58© 2010 Kaplan, Inc.
59. Frequently Used FHA Loans• Section 203(b): One-Family to Four-Family Mortgage Insurance• Section 234(c): Mortgage Insurance for Condominium Units• Section 251: Insurance for Adjustable-Rate Mortgages• Section 203(k): Rehabilitation Mortgage Insurance• Streamline Refinance 59© 2010 Kaplan, Inc.
60. Additional FHA Issues• Direct endorsement and coinsurance• Advantages of FHA mortgage• FHA contributions to real estate finance 60© 2010 Kaplan, Inc.
61. The U.S. Department of Veterans Affairs RealEstate Loan Guarantee Program• Program Application – Eligibility/entitlement – Certificate of eligibility – Partial entitlement – Certificate of reasonable value (CRV) – Interest – Income qualifying requirements 61© 2010 Kaplan, Inc.
62. The U.S. Department of Veterans Affairs RealEstate Loan Guarantee Program, cont.• Program Application – Closing costs—may not be included in DVA loans – Funding fee – Second mortgages – Buydowns – Assumptions – Release of liability/novation© 2010 Kaplan, Inc.
63. Additional DVA Loan Guarantee Programs• DVA Adjustable-Rate Mortgage (ARM)• DVA Streamline Refinance• Cash Out Refinance• Conventional to DVA Mortgage 63© 2010 Kaplan, Inc.
64. California Veterans Home and Farm PurchaseProgram (CAL-VET)• Funding and title• Eligibility requirements – All veterans are eligible – 90 days active service or meet other qualifications – Honorable discharge – Active service within designated periods – Veteran receiving approved medals during peacetime may also qualify – Un-remarried spouses of veterans killed in active duty also eligible 64© 2010 Kaplan, Inc.
65. California Veterans Home and Farm PurchaseProgram (CAL-VET)• Qualifying procedures – Maximum property values on single family homes, condos and mobile homes on owned lots – Maximum for manufactured homes – Maximum for self-supporting farms and ranches – Downpayment differs depending on type of loan – Most loans amortized over 30 years – Fixed an variable rate loans available – Insurance against floods and earthquakes required 65© 2010 Kaplan, Inc.
66. California Veterans Home and Farm PurchaseProgram (CAL-VET)• Special Conditions – New construction – Funds for Refinancing – Junior financing – Occupancy – Others© 2010 Kaplan, Inc.
67. Financial Agencies and Lending ProgramsChapter 6 67© 2010 Kaplan, Inc.
68. Agricultural Lending• Need for flexibility• Open-end mortgages• Moratorium on payments 68© 2010 Kaplan, Inc.
69. The Farm Credit System (FCS)• Farm Credit Administration (FCA)• Federal Agriculture Mortgage Corporation (Farmer Mac)• The U.S. Department of Agricultural Rural Development Program (USDA Rural Development) 69© 2010 Kaplan, Inc.
70. U.S. Department of Housing and UrbanDevelopment (HUD)• Supervises the Federal Housing Administration (FHA)• Directs Ginnie Mae• Directs development block grants• Enforces fair housing and RESPA regulations• Manages the Housing Choice Voucher Program• Regulates interstate land sales registration, urban renewal, and rehabilitation programs• Stabilization Project 70© 2010 Kaplan, Inc.
71. HUD Strategic Plan• Increase home ownership opportunities• Promote decent affordable housing• Strengthen communities 71© 2010 Kaplan, Inc.
72. HUD: Other Program• Urban renewal• Subsidized housing• Community Development Block Grants (CDBG)• Public Housing 72© 2010 Kaplan, Inc.
73. The Real Estate Settlement Procedures Act(RESPA)• Protects participants in a real estate transaction by providing closing cost information so they better understand the settlement procedures• Disclosures – At time of loan application – Before settlement closing – At settlement – After settlement 73© 2010 Kaplan, Inc.
74. The Federal Equal Credit Opportunity Act(ECOA)• Prohibits lenders from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, or dependency on public assistance. 74© 2010 Kaplan, Inc.
75. Interstate Land Sales• Established criteria for the dissemination of vital information to potential buyers of residential land. 75© 2010 Kaplan, Inc.
76. Federal Legislation• Fair Housing Act• Uhruh Civil Rights Act (Civil Code Section 51)• Community Reinvestment Act• The Home Mortgage Disclosure Act• Truth-in-Lending (Regulation Z) – Advertising – Right of rescission• Usury Laws – Federal – California 76© 2010 Kaplan, Inc.
77. State Financing Agencies• Industrial Development Agency• Community Redevelopment Agency (CRA) – Tax-increment financing – Mortgage revenue bonds – Special assessments 77© 2010 Kaplan, Inc.
78. California Housing Finance Agency(CALHFA)• Affordable housing bank to make low interest rate loans through the sale of tax- exempt bonds for eligible first-time homebuyers – Not a direct lender – Works through approved lenders 78© 2010 Kaplan, Inc.
79. City Of Los Angeles Home MortgageProgram• Provides mortgage loans to low-income and moderate-income first-time homebuyers who wish to purchase from selected new homes and condominiums. 79© 2010 Kaplan, Inc.
80. The Housing Financial Discrimination Act of1977 (Holden Act)• Offsets illegal practice of redlining• Prohibits discrimination• Encourages increased lending in areas where financing has been unavailable 80© 2010 Kaplan, Inc.
81. Junior Loans in Real Estate FinanceChapter 7 81© 2010 Kaplan, Inc.
82. Junior and Senior Liens• Distinguishing first and junior lien by date and time of recording• Junior financing by thrifts and commercial banks• Junior financing provides funds for land developers to pay for offsite improvements 82© 2010 Kaplan, Inc.
83. Anatomy of a Second Mortgage/Deed ofTrust• Second deed of trust is in junior position to an existing senior loan• Junior loan holder in higher-risk position• In event of default, senior lender will usually give junior lender a chance to make delinquent payments• Clauses protect junior lien holder’s position against that of senior lender• Junior loan risks• Junior loan interest rates and usury 83© 2010 Kaplan, Inc.
84. Home Equity Loans• Offered by many lenders• Interest is tax deductible, unlike interest on consumer debt, which is not• Attractive interest rates, sometimes for only short period of term• Face high default rates when economy slows• Freddie Mac has program for purchase of secured home improvement loans 84© 2010 Kaplan, Inc.
85. Loan Terms and Note PaymentsChapter 8 85© 2010 Kaplan, Inc.
86. Interest• Simple Interest—paid only on the amount of principal still owed.• Term Loan—requires payments of interest only with the entire principal being repaid at a specified time.• Amortization—payments include portions for both principal and interest.• Distribution of Principal and Interest 86© 2010 Kaplan, Inc.
87. Variations in Payments and Interest Rates• Graduated-Payment Mortgage (GPM)• Adjustable-Rate Mortgage (ARM) – Adjustment periods – Initial rate – Note rate – Qualifying rate – Index – Margin – Interest rate caps – Payment caps 87© 2010 Kaplan, Inc.
88. Innovative Payment Plans• The 15-Year Mortgage• Reverse Annuity Mortgage (RAM)• Fannie Mae Senior Housing Program• Fannie Mae’s Two-Step Mortgage Plan 88© 2010 Kaplan, Inc.
89. Variations in Formats• Open-end mortgage• Construction mortgage• Blanket mortgage• Release clauses• Leasehold mortgage• Package mortgage• Manufactured home mortgages• Purchase-money mortgage• Hard-money mortgage (equity mortgage)• Bridge loan• Wraparound encumbrance (Wrap)• Mortgage participation 89© 2010 Kaplan, Inc.
90. Tax-Deferred Mortgage Lending• Installment sales• Option to buy• Lease with option of buy• Exchanges—Internal Revenue Code Section 1031 90© 2010 Kaplan, Inc.
91. Instruments of Real Estate FinanceChapter 9 91© 2010 Kaplan, Inc.
92. Terminology• Encumbrance—right or interest in a property held by one who is not the legal owner of the property• Lien—financial encumbrance; a charge against a specific property wherein the property is made the security for the performance of a certain act, usually the repayment of a debt – Voluntary liens and involuntary liens – General and specific liens 92© 2010 Kaplan, Inc.
93. Interests Secured by a Real Estate Loan• Fee simple ownership• Less than freehold interest• Title and lien theories – Equitable rights – Title theory in which lender’s rights are superior to borrower’s – Redemption right – Statutory redemption period – Lien theory recognizes the rights of lenders in collateral property being equitable rights, while borrowers retain their legal rights in the property – California has taken modified position between the title and lien theories• General requirement for a finance instrument 93© 2010 Kaplan, Inc.
94. Note and Deed of Trust (Trust Deed)• Deed of Trust—evolved to become the dominant security instrument for financiers of California real estate• Advantage of trust deed over mortgage is shorter foreclosure period• Judicial foreclosure; nonjudicial foreclosure; power-of-sale clause; naked title; beneficiaries 94© 2010 Kaplan, Inc.
95. Note Secured by Deed of Trust• Date signed• Participants’ identities• Promise to pay• Payment due dates• Amount and terms• Reference to security• Signatures and endorsements• Cosigners 95© 2010 Kaplan, Inc.
96. Deed of Trust• Executed by the trustor to transfer a form of legal fee ownership to the trustee to be held for the beneficiary, while the trustors maintain their equitable ownership. 96© 2010 Kaplan, Inc.
97. Covenants of California Deed of Trust • Preservation and maintenance • Fire insurance • Legal action • Taxes and assessments • Beneficiary and trustee expenditures • Condemnation • Late payments • Reconveyance • Extensions, subordination, and modifications • Assignment of rents 97© 2010 Kaplan, Inc.
98. Note and Mortgage• Note Secured by a Mortgage• Mortgage – Recording information – Participants – Pledge – Property description – Covenant of seisin – Note attachment 98© 2010 Kaplan, Inc.
99. Note and Mortgage• Mortgage, cont. – Mello-Roos disclosure – Property taxes – Insurance – Defeasance clause and acceleration – Maintenance of the collateral – Signatures and acknowledgement – Release of mortgage© 2010 Kaplan, Inc.
100. Real Property Sales Contract (LandContract)• Single, complete financing and sales agreement executed between buyer and seller 100© 2010 Kaplan, Inc.
101. Special Provision in Real Estate FinanceInstruments• Late payment penalty• Prepayment privilege• Prepayment penalties• Lock-in clause• Due-on-sale clause• Assumption versus subject to• Subordination clause• Release clause• Extensions and modifications 101© 2010 Kaplan, Inc.
102. Real Estate Loan UnderwritingChapter 10 102© 2010 Kaplan, Inc.
103. Underwriting• Estimating the value of the property being pledged as collateral to guarantee repayment and determining the ability of a borrower to repay the loan 103© 2010 Kaplan, Inc.
104. Definition of Value• Value in use• Value in exchange• Market value 104© 2010 Kaplan, Inc.
105. Appraisal• Estimate of property’s value at a specific point in time 105© 2010 Kaplan, Inc.
106. The Appraisal Process• Drive-by appraising• Defining the appraisal problem• Determining the purpose for the appraisal• Examining the neighborhood and property being appraised• Collecting the pertinent data• Applying approaches to estimate value• Reconciling values estimated• Preparing the report 106© 2010 Kaplan, Inc.
107. Appraisal Approaches• Direct sales comparison approach• Cost approach – Depreciation• Income capitalization approach• Gross rent multiplier (GRM)• Reconciliation of data and opinion of value 107© 2010 Kaplan, Inc.
108. Qualifying the Borrower• Loan application• Financial statement – Assets – Liabilities – Net worth 108© 2010 Kaplan, Inc.
109. Qualifying the Borrower, cont.• Data verification – Deposits – Employment – Credit report – Credit evaluation – Credit scoring – Loan qualifying income ratios 109© 2010 Kaplan, Inc.
110. Processing Real Estate LoansChapter 11 110© 2010 Kaplan, Inc.
111. Qualifying the Title• Notices—constructive notice and actual notice• Abstracts and opinion of title• Title insurance• Title faults• Surveys 111© 2010 Kaplan, Inc.
112. Disclosures in California Real EstateTransactions• Real estate transfer disclosures• Delivery of a pest control inspection report• Disclosure of geological hazards• Disclosure of hazardous waste deposits• Thermal insulation disclosure 112© 2010 Kaplan, Inc.
113. Disclosures in California Real EstateTransactions, cont.• Special flood area disclosure• Special city and country ordinances• Foreign investment real estate tax• Condominium documents disclosure• Disclosure for real property loans 113© 2010 Kaplan, Inc.
114. Costs of Securing a Loan• RESPA requires good-faith estimate• Points• Placement or origination fee• Impound funds (escrow accounts)• Property taxes• Hazard insurance• Title insurance• Mortgage insurance• Assessment liens• Interest adjustments• Prepayment penalties 114© 2010 Kaplan, Inc.
116. Additional Processing Concerns• Closing statements• Servicing the loan• Assignment of the loan 116© 2010 Kaplan, Inc.
117. The Secondary Mortgage MarketChapter 12 117© 2010 Kaplan, Inc.
118. Introduction to Secondary Market• Originators of new loans are called primary lenders• Most loans created by primary lenders are sold in the secondary market – Lenders acquire money for new loans; avoid the risk of holding long-term fixed interest loans – Emergence of securitization of pools of mortgage loans 118© 2010 Kaplan, Inc.
119. Federal Housing Financing Agency (FHFA)• Regulates Fannie Mae, Freddie Mac, and Federal Home Loan Bank (FHLB)• Goal is to restore confidence in Fannie Mae and Freddie Mac; enhance their ability to fulfill their mission 119© 2010 Kaplan, Inc.
120. Fannie Mae• Shareholder-owner company• Purchases mortgages; enters into servicing agreement• Sells mortgages in open-market transactions• Administered price system• Mortgage-backed securities (MSBs) 120© 2010 Kaplan, Inc.
121. Underwriting Standards for Conventional LoansSold to Fannie Mae• Conforming and nonconforming loans• Automated underwriting system• Credit scoring 121© 2010 Kaplan, Inc.
122. Freddie Mac• Created to provide secondary mortgage market for lending institutions that were members of the Federal Home Loan Bank System• Generally follows Fannie Mae’s underwriting standards 122© 2010 Kaplan, Inc.
123. Ginnie Mae• Government National Mortgage Corporation,• Mission is to expand affordable housing by linking domestic and global capital markets to the nation’s housing markets• Offers mortgage backed securities (MSBs) – Pass-through certificates 123© 2010 Kaplan, Inc.
124. Loan Defaults and ForeclosuresChapter 13 124© 2010 Kaplan, Inc.
125. Defaults• Breach of one or more of the conditions or terms of a loan agreement• Acceleration clause activated• Lenders seek to avoid foreclosure• Acceleration and foreclosure as last resort 125© 2010 Kaplan, Inc.
126. Delinquencies• Principal and interest • Grace period • Late period charge• Property taxes• Other liens• Hazard insurance• Poor property management 126© 2010 Kaplan, Inc.
127. Adjustments• Workouts• The Soldiers and Sailors Civil Relief Act of 1940• The Housing Act of 1964• Avoiding a foreclosure• Moratoriums (forbearance) and recasting• Voluntary conveyance of deed 127© 2010 Kaplan, Inc.
128. Foreclosures• Process to recover lender’s collateral— borrower’s rights of redemption are eliminated and all interests in the subject are removed – Equitable redemption period – Strict forfeiture – Statutory redemption period 128© 2010 Kaplan, Inc.
129. Power-of-Sale Foreclosures• Deeds of trust – Beneficiary notices payment delinquencies; borrowers are unable to remedy – Beneficiary notifies trustee to foreclose – Trustee files Notice of Default – Reinstatement period – Notice of trustee’s sale and publication of date, time, and place of sale – Sale is held and highest cash bidder wins – Trustee’s deed is given to successful bidder© 2010 Kaplan, Inc. 129
130. Judicial Foreclosure and Sale • Conventional mortgages – Lender notifies delinquent mortgagor – If no solution, complaint is filed by mortgagee in county court – Title search made; lis pendens filed – Complaint brought before presiding judge – Judgment decree – Public sale • Conventional guaranteed mortgages • Equitable redemption • Statutory redemption 130© 2010 Kaplan, Inc.
131. Loans with Special ForeclosureRequirements• FHA-insured loans• DVA-guaranteed loans• Junior loans 131© 2010 Kaplan, Inc.
132. Investment Financing StrategiesChapter 14 132© 2010 Kaplan, Inc.
133. Sale-Leaseback• Owner of property sells it to an investor and, at the same time, leases it back.• Seller-lessees retain possession while obtaining full sales price; free capital frozen in equity• Investor-landlord receives fair return on and of the investment in the form of rent during the lease term and ownership of a depreciable asset already occupied by a ―good ― tenant; buying guaranteed income stream that can be sheltered through proper use of allowable deductions. 133© 2010 Kaplan, Inc.
134. Seller Refinances Prior to the Sale• Seller can refinance the property in order to secure a loan that can be assumed by the buyer 134© 2010 Kaplan, Inc.
135. Trading on Seller’s Equity• Buyer refinances property instead of assuming the existing loan 135© 2010 Kaplan, Inc.
137. Tax-Deferred Financing Concepts• Realized capital gains—the difference between the total consideration received and the adjusted book basis of the property transferred.• Recognized capital gains—profits that are actually taxable.• Owners can refinance their properties during their lifetimes, generating tax-deferred dollars for reinvestment. At time of death, properties receive step-up basis to fair market value and could be distributed to heirs free of potential income tax on any appreciation to time death. 137© 2010 Kaplan, Inc.
138. Pyramiding Through Refinancing• Periodically refinance properties already owned and use proceeds to purchase new properties• Anticipates that original property will increase in value over time• Capital gains are delayed through refinancing process 138© 2010 Kaplan, Inc.
139. Distribution to Heirs• Federal estate tax• California inheritance tax• Gift tax 139© 2010 Kaplan, Inc.
140. Mathematics of Real Estate FinanceChapter 15 140© 2010 Kaplan, Inc.
141. Interest• Rent—paid for the use of money 141© 2010 Kaplan, Inc.
142. Simple Interest• Paid only on the amount of principal still owed – Interest ceases on principal repaid – Derived from I=PRT 142© 2010 Kaplan, Inc.
143. Add-On Interest• Rent paid on the entire amount of principal for the entire period• Disregards any principal repaid• Acts to almost double contract rate• Derived from AIR=2IC/P (n+1) 143© 2010 Kaplan, Inc.
144. Nominal and Effective Rates of interest• Nominal rate of interest is contracted rate• Effective rate of interest is the actual rate paid by the borrower 144© 2010 Kaplan, Inc.
145. Compound Interest• Interest paid on interest earned 145© 2010 Kaplan, Inc.
146. Compound Worth of an Annuity• Calculating the future worth of a series of regular deposits, each made at the beginning of a period 146© 2010 Kaplan, Inc.
147. Time Value of Money• Money not received until some time in the future is worth less today• Present worth of money• Present worth of an annuity 147© 2010 Kaplan, Inc.
148. Payment Schedules• Amortization—systematic repayment of a debt• Annual payments• Monthly payments• Loan constants• Distribution of principal and interest• Total interest costs 148© 2010 Kaplan, Inc.
149. Measuring Profitability• Breakeven analysis• Return on investment (ROI)• Lender’s profitability calculations• Investor’s profitability calculations• Net present worth method 149© 2010 Kaplan, Inc.
150. Discounting Trust Deeds and Mortgages• Point—one percent of loan amount• Discounts – Rule-of-thumb method – Discount cash flow method 150© 2010 Kaplan, Inc.