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14 Hour Mortgage Broker 2006



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    14 Hour Mortgage Broker 2006 14 Hour Mortgage Broker 2006 Presentation Transcript

    • F lo r i d a M o r t g a g ebrokering/lending14-Hour continuinge d u c at i o n c o u r s e tuition only $39.95 2006 EDITIoN
    • CONVENIENCE • VALUE • SERVICE Florida statutes and Department rules No traffic, no stress. require all loan originators, principal Today our lives are busier than ever. representatives, associates, and mortgage Bert Rodgers Schools offers you two brokers to complete 14 hours of continuing education every two years. convenient ways to fulfill your The next deadline is August 31, 2006. mandatory 14-hour continuing education requirement – online or correspondence. Busy professionals can study on their Study on your schedule, at your pace. schedule, at home or work. There is no need to travel and attend class or seminars. Correspondence This book contains the 4-hour mandatory law and This book contains the 14-hour course you rule update plus additional modules on real estate need to complete your education, including finance and mortgages, FNMA, and fair housing. the 4-hour law and rule update. Optional Mail or fax your Registration Form/Affidavit to us end-of-module review questions provided and receive your official Certificate of Completion. to ensure your comprehension of the course material. No final exam required. Online Everything you need is online. Study, register, pay and print your official Certificate of Completion, all Take full advantage of the benefits of online! Any time of the day or night. distance learning! Bert Rodgers Schools offers the identical course online and by correspondence. At only $39.95 for 14 hours—online or correspondence—it is a true value. Providing high quality education to Florida licensed professionals since 1958, Bert Rodgers Schools is accredited by the Florida Department of Financial Services (Permit #MBS 2006-43). Rely on us for fast, friendly, professional service! Our friendly, knowledgeable staff is always ready to help. 800-432-0320 www.bertrodgers.com Toll-free instructor, technical, and administrative support are only a click or call away. Bert Rodgers Schools – Your Smart Choice! TEL (941) 378-2900 | FAX (941) 378-3883
    • FloridaMortgage Brokering/Lending 14-Hour Continuing Education Course 2006 Edition P.O. Box 4708, Sarasota, Florida 34230-4708
    • Bert Rodgers Schools of Real Estate, Inc.© 2005All rights reserved, including the right to reproduce this manual or any portion of this manualin any form, or to use it for teaching purposes without the express written consent of the copy-right holder.This publication is designed to provide accurate and authoritative information in regard to thesubject matter covered. It is provided with the understanding that the publisher is not engagedin rendering legal, accounting, or other professional service. If legal advice or other expertassistance is required, the services of a competent professional person should be sought.Bert Rodgers Schools of Real Estate, Inc. shall not be liable in any way for failure to receiveand/or process your Registration Form/Affidavit within any specific time period. It is yourresponsibility to ensure that you have complied with your license renewal requirements in atimely manner.Bert Rodgers Schools of Real Estate, Inc. recognizes and respects its students’ privacy. Courserecords are confidential, and the School does not sell or rent students’ names or other infor-mation to any company or organization.Cover design and photographs: Digital Ink Design GroupISBN: 1-891753-32-2Second PrintingPrinted in the United States of America
    • Florida Mortgage Table of Contents Brokering/Lending 14-Hour Module OneContinuing Education Florida Mortgage Brokerage and Lending Course Act Rules and Regulations 1 Bert Rodgers Schools Recent Changes in Florida Statutes Regulating of Real Estate, Inc. Mortgage Brokerage and Mortgage Lending 2 Founder Mortgage Brokerage License Law 3 Bert Rodgers Part I: General Provisions 4 President Part II and III: Mortgage Brokers and Lori J. Rodgers Mortgage Lenders 6 Part IV: Florida Fair Lending Act 6 Review Questions 11Administrative Vice President Module Two William E. Giffard Real Estate Finance and Mortgages 13 Executive Administrative Assistant Part I: Real Estate Finance 17 Kelli Finnigan Part II : Real Estate Mort gages 23 Website Coordinator Review Questions 30 Alison Harner Production Coordinator Module Three Lisa Lacey The Federal National Mortgage Association Production Support Laraine Jansen (Fannie Mae) 33 Instructor Review Questions 46 Janine Spiegelman Module Four Accountant Aaron Pulone Fair Housing 49 Typesetting Review Questions 57 Wild Dezign Registration Form/Affidavit 59 Printing Action Printing Cover Design Digital Ink Design Group Bert Rodgers Schools of Real Estate, Inc. iii
    • D I R E C T O R Y P.O. Box 4708, Sarasota, Florida 34230-4708 Tel. (941) 378-2900 Toll Free (800) 432-0320 Fax (941) 378-3883 Email: MBinfo@bertrodgers.com Website: www.bertrodgers.com Florida Office of Financial Regulation Division of Securities and Finance 200 East Gaines Street Tallahassee, Florida 32399-0372 Tel. (850) 410-9805 (Initial license or license renewal questions) Telephone Hours: 8:00 a.m. - 5:00 p.m. Monday through Friday Fax (850) 410-9748 For additional information, visit the Department website: www.flofr.com/licensing/MBlist.htmiv Bert Rodgers Schools of Real Estate, Inc.
    • Welcome to Bert Rodgers Schools! Online or Inside this Book … Everything You Need to Complete Your Continuing Education Requirement.CONTINUING EDUCATION HOW DO I RECEIVE MY CERTIFICATE OFPrincipal representatives, loan originators, associates COMPLETION?and mortgage brokers are required to complete Mail: Use the enclosed envelope and send yourfourteen (14) hours of continuing education every two Registration Form/Affadavit and payment to us. Weyears. Four hours of the total 14 must cover the laws will mail your certificate of completion the followingin Chapter 494, F.S., and the rules in Chapter 69V-40, business day.F.A.C. Module 1 of the Bert Rodgers Schools coursemeets this requirement. Fax: For even faster results, choose one of our con- venient FaxBack Services and receive your certificateThe deadline is August 31, 2006. same-day or next-day.IT’S EASY TO MEET YOUR REQUIREMENT Online: For immediate results, submit your paymentWITH BERT RODGERS SCHOOLS! and affidavit online, and print your official certificate!Study the course in this book, sent at no obligation, Important Note: Do not send your certificate of comple-or study online. No test is required! Complete the tion or any other type of notice to the Department unlessoptional review questions to measure your compre- otherwise requested. Retain your certificate of completionhension of the course material. for at least 4 years following the end of the renewal period.Correspondence. Simply complete the RegistrationForm/Affidavit and submit it with your payment by SUMMARYmail, or fax. Keep this book as a valuable reference! You may studyOnline. Register and pay by credit card at the 14-hour course with the book or online. You canwww.bertrodgers.com. Then complete and submit always rely on Bert Rodgers Schools for quality,the online Affidavit and print your official Certificate convenience, and value in continuing education.of Completion.NEED HELP?Call our toll-free number and talk to a real person! We will answer your administrative, technical, andinstructional questions quickly and professionally. If you prefer, email us 24/7.Administrative Support:Weekdays 8:30-5:15Technical Support:Weekdays 7-9, Weekends 9-5Toll Free: (800) 432-0320Local: (941) 378-2900Fax: (941) 378-3883Website: www.bertrodgers.comEmail administrative inquiries:MBinfo@bertrodgers.comEmail instructor inquiries:MBinstructor@bertrodgers.com Bert Rodgers Schools of Real Estate, Inc. v
    • vi Bert Rodgers Schools of Real Estate, Inc.
    • How to Complete Your Continuing Education RequirementOnline at www.bertrodgers.com Step 1: Study the 14-hour course in this book or online. Step 2: Register and Pay for the course affidavit. Click on Register For Courses. Choose a username and password and submit your credit card payment securely. Step 3: Enter your username and password and choose 14-Hour Course Including Affidavit. Finish the course by submitting your name, date and the time in hours to complete the course. Step 4: Upon successful completion of your course affidavit, print your official certificate of completion.Correspondence Step 1: Study the 14-hour course in this book. Step 2: Complete the Registration Form/Affidavit including the Course Completion Affidavit, Student Information, and Payment Method sections. If you choose an optional FaxBack Service, complete this section too. Step 3: Mail or fax the Registration Form/Affidavit to us and we mail your certificate the next business day. To receive a copy of your certificate sooner, choose one of our Priority FaxBack Services. Standard Tuition Your Registration Form/Affidavit is processed the same business day it is received, and your certificate of completion is sent to you by first-class mail the next business day. Priority FaxBack Services (optional) • Same-Day FaxBack ($10 service fee*, credit cards only). Fax your Registration Form/ Affidavit to us any business day by 12p.m. est. We will fax your certificate of completion to you by 4 p.m. the same day (continental United States only). • Next-Day FaxBack ($7 service fee*, credit cards only). Fax your Registration Form/ Affidavit to us any business day by 5p.m. est. We will fax your certificate of completion to you by 11 a.m. the following business day (continental United States only). *Priority FaxBack Service is available in the continental United States for the fees listed. For fax services outside of the continental United States, we charge an additional $10. Priority FaxBack Service Notes • To use the Priority FaxBack Service, payment must be made by credit card. • Fax your Registration Form/Affidavit to us at (941) 378-3883—be sure to provide your fax number. • Your certificate of completion will be faxed only if you pay for Priority FaxBack Service. • Priority grading includes three attempts to fax your certificate of completion. Bert Rodgers Schools of Real Estate, Inc. vii
    • Acknowledgments Bert Rodgers Schools of Real Estate, Inc. expresses our gratitude and appreciation to the authors, and otherswho have contributed to this mortgage brokering/lending distance learning program and the new edition of the14-Hour Mortgage Brokering/Lending Continuing Education Course. An additional thank you to our instructorJanine Spiegelman. Bert Rodgers Schools would also like to thank Julie Wild of Wild Dezign for her typesetting expertise andMark Mazzuki of Digital Ink Design Group for his cover design. Lori J. Rodgers and the Bert Rodgers Staffviii Bert Rodgers Schools of Real Estate, Inc.
    • MODULE 1 Florida Mortgage Brokerage and Act Rules and Regulations Janine Spiegelman, BS, received Clay Rodgers graduated from the her degree from the University of University of Florida with a B.S. Miami. A licensed Florida Mortgage degree in Business Administration, Broker, Janine worked for the majoring in Real Estate. He is State of Florida, Department of President of Rodgers Appraisal Banking and Finance (now known Services, Inc., and has more than as The Department of Financial 20 years experience serving the Services) as a Financial Examiner/ appraisal needs of Florida’s mort- Analyst II. gage brokers and lenders. LEARNING OBJECTIVESAfter completing this module, you should be able to:1. Summarize the changes in the rules regulating 6. Identify the prohibited practices pursuant to mortgage brokerage and mortgage lending. Chapter 494.2. Identify the educational requirements for licen- 7. Explain the purpose for the enactment of the sure in mortgage brokerage and lending. Florida Fair Lending Act.3. Summarize the organizational structure of the 8. Identify the types of transactions covered by the Florida Department of Financial Services, includ- Florida Fair Lending Act. ing the Financial Services Commission and the 9. Define a “high-cost home loan”. Office of Financial Regulations. 10. Identify the acts prohibited by the Florida Fair4. Explain the powers and duties of the Financial Lending Act. Services Commission and the Office of Financial Regulations. 11. Identify the disclosure requirements of the Florida Fair Lending Act.5. Explain the penalties, which could be imposed for a violation of Chapter 494, F.S. 12. Explain the enforcement and penalties of any violation of the Florida Fair Lending Act.INTRODUCTIONThe Department of Financial Services regulates and 2004. The purpose of this module is to reviewmortgage brokers (MB), mortgage brokerage busi- Florida mortgage brokerage rules and regulations.nesses (MBB), mortgage lenders (ML), and cor- In 2002, the Florida Legislature created therespondent mortgage lenders (CL) by the use of Financial Services Commission (Commission), con-Florida Statutes (F.S.) and the Florida Administrative sisting of the Governor and the elected Cabinet.Code (F.A.C.). Chapter 494, F.S., is known as the The Financial Services Commission serves as agencyFlorida Mortgage Brokerage and Lending Act Rules and head for the Office of Financial Regulation (OFR orRegulations. Chapter 494 originally became effective Office) and the Office of Insurance Regulation (OIR).in October 1991, and several significant amendments OFR and OIR are administratively housed within thehave been made since 1991. Chapter 69V-40 of the Department of Financial Services, headed by the ChiefFlorida Administrative Code (formerly Chapter Financial Officer. The Office of Financial Regulation3D-40 F.A.C.) is called Rules Regulating Mortgage has offices located in Miami, Fort Lauderdale, WestBrokerage. Certain minor changes to Chapter 69V- Palm Beach, Tampa, Orlando, Jacksonville, Pensacola40 were made effective on August 2, 2002, and a few and Fort Myers. The regional offices are primarilyminor amendments have been made through 2003 responsible for conducting examinations to ensure© 2005 Bert Rodgers Schools of Real Estate, Inc. 1
    • 2 Module 1regulatory compliance by financial institutions and The application form for Licensure as a Mortgagefinancial service companies. Broker has been changed to OFR-MB-101, and is The Office examines and regulates all state- available by mail from the OFR (69V-40.031(a),authorized or state-chartered banks, credit unions, F.A.C.). The fee, which must accompany the appli-trust companies, and foreign banking organizations to cant’s fingerprint card, has changed from $15.00 toensure they operate in a safe and sound manner and $23.00 (69V-40.031(c), F.A.C.). In the remainderin compliance with applicable statutes and rules. It of this section, all references to the Department ofreviews and processes new state financial institution Banking and Finance have been changed to the Officecharter or license applications as well as applications of Financial Regulation.relating to existing state financial institutions. The Office also regulates non-depository finan-cial service companies and related industries, includ- Application Procedure for Mortgageing securities dealers and investment advisers, retail NEW Brokerage Business Licenseinstallment sales businesses, consumer finance com- All applications for licensure as a mortgage broker-panies, mortgage brokers and lenders, collection age business must now be filed with the OFR. (69V-agencies and money transmitters; protects consumers 40.051, F.A.C.). The form that now must be used forfrom illegal financial activities; reviews all applications this application is OFR-MB-201, and can be obtainedto conduct business as a financial service company or by mail from the OFR or online. www.dbf.state.securities firm; reviews license applications for regu- fl.us/licensing/mbbapp.pdflated individuals; and imposes licensing restrictions 69V-40.051(2), F.A.C. regarding the fingerprintor denies licensure based on findings. The Office is cards and Biographical Summary, now provides as fol-responsible for conducting financial investigations lows:into allegations of suspected illegal financial activities Each ultimate equitable owner of 10%within jurisdiction of the Office. or greater interest, the chief executive offi- cer and each director of an entity applyingRECENT CHANGES IN FLORIDA STATUTES for licensure as a mortgage brokerage busi-REGULATING MORTGAGE BROKERAGE ness, shall submit a completed fingerprintAND MORTGAGE LENDING card and Biographical Summary, Form OFR-This section discusses the more significant changes MBB-BIO-1 (revised 10/99), to the Officein the rules regulating mortgage brokerage and of Financial Regulation along with a $23mortgage lending. The most significant change is nonrefundable processing fee. Form OFR-that all of Chapter 3D-40, F.A.C., Rules Regulating MBB-BIO-1 is hereby incorporated by refer-Mortgage Brokerage, including Chapter 3D-40.001 ence and available by mail from the Office ofthrough 3D-40.290, have been moved to a new chap- Financial Regulation, 200 East Gaines Street,ter entitled Chapter 69V-40, F.A.C. All references to Tallahassee, Florida 32399-0375.the Department of Banking and Finance have beenchanged to the Financial Services Commission and All former references to the Department ofthe Office of Financial Regulation, depending on the Banking and Finance have been changed in this sec-specific division of responsibility between the new tion to the Office of Financial Regulation.departments. The following are some of the impor-tant changes in these rules. Application Procedure for Change NEW in Ownership or Control of Saving NEW Books and Records Clause Mortgage Lending69V-40.170, F.A.C. was amended to substitute theOffice of Financial Regulation for all references to the In 69V-40.100, F.A.C., all references to theDepartment of Banking and Finance. Department of Banking and Finance have been changed to the Office of Financial Regulation. The application for Change in Ownership or Control of Application Procedure for Mortgage NEW Broker License Saving Clause Mortgage Lending must use the new form OFR-MLST. The form must be mailed to the69V-49.031(1), F.A.C. provides that all applications Office at the new address.for licensure as a mortgage broker must be filed with The same changes to the fingerprint card filingthe OFR. The new address is: and Biographical Summary that were made to the Office of Financial Regulation other license application regulations, (i.e. new form 200 East Gaines Street OFR-ML-BIO-1 and the new fee of $23), were also Tallahassee, Florida 32399-0375 made to this section.
    • Florida Mortgage Brokerage and Lending Act Rules and Regulations 3 Application Procedure for Mortgage Correspondent Mortgage Lender NEW Lender License NEW License and Branch Office License Renewal and Reactivation69V-40.200, F.A.C. has similarly been amended.The new application form for licensure as a mort- 69V-40.225, F.A.C. has been amended to change thegage lender has changed to OFR-ML-222 and is to applicable forms and new references to the Officebe mailed to the Office at the new address. Further, of Financial Regulation. The new renewal and reac-the surety bond must be submitted on new form tivation form for correspondent mortgage lenderOFR-ML-444, Mortgage Brokerage and Mortgage license is form OFR-CL-R. The new surety bondLending Act Surety Bond. The completed finger- form is OFR-ML-444. The new Mortgage Lenderprint card and Biographical Summary, new form and Correspondent Mortgage Lender Branch OfficeOFR-ML-BIO-1, and the new nonrefundable, pro- License Renewal and Reactivation form is OFR-ML-cessing fee of $23 must be submitted to the Office. RB. All forms must be filed with the Office.All references to the Department of Banking andFinance have been changed to the Office of Financial Application Procedure for MortgageRegulation. NEW Lender or Correspondent Mortgage Lender Branch Office License Mortgage Lender License, Mortgage NEW Lender License Pursuant to Saving 69V-40.240, F.A.C. has been amended to change the application form and new references to the Office Clause, and Branch Office License of Financial Regulation. The new application form Renewal and Reactivation for mortgage lender branch office or correspondent69V-40.205, F.A.C. has also been amended. The new mortgage lender branch office license is OFR-ML-form for renewal and reactivation of a mortgage lender 222B. All forms must be filed with the Office.license is OFR-ML-R, and the new form for renewaland reactivation of a mortgage lender license pursu- NEW Principal Representativeant to saving clause is OFR-ML-RS. The new form The regulations contained in 69V-40.242, F.A.C. havefor branch office renewal is OFR-ML-RB, Mortgage also been amended to change the applicable form andLender and Correspondent Mortgage Lender Branch new references to the Office of Financial Regulation.Office License Renewal and Reactivation Form. All The new Principal Representative Designation formnew forms must be filed with the Office. is now OFR-ML/CL-PR. All forms must be filed with the Office. Application Procedure for NEW Correspondent Mortgage Lender MORTGAGE BROKERAGE LICENSE LAW License Chapter 494, F.S., is now divided into five parts:69V-40.220, F.A.C. has been amended to change the Part I, General Provisions (494.001-494.00295);applicable forms, processing fees, and new references Part II, Mortgage Brokers (494.003-494.0043); Partto the Office of Financial Regulation. The new appli- III, Mortgage Lenders (494.006-494.0077); Part IV,cation form for licensure as a correspondent mort- Florida Fair Lending Act (494.0078-494.00797); andgage lender is OFR-CL-333. The new surety bond Part V, Loans Under the Florida Uniform Land Salesform is OFR-ML-444. The new fingerprint card and Practices Law (494.008).Biographical Summary form is OFR-CL-BIO-1, andthe processing fee is now $23. All forms must be filedwith the Office.
    • 4 Module 1 PART I: GENERAL PROVISIONS (494.001-494.00295)The Financial Services Commission of 494.001-494.0077 F.S. has been committed or is about to be committed, and may, at inter-The Financial Services Commission serves as agency mittent periods, conduct examinations of anyhead for the Office of Financial Regulation (OFR licensee or other person under the provisions ofor Office) and the Office of Insurance Regulation 494.001-494.0077 F.S.(OIR). OFR and OIR are administratively housed • may bring action through its own counsel in thewithin the Department of Financial Services, headed name and on behalf of the state against any per-by the Chief Financial Officer. The Office examines son who has violated or is about to violate anyand regulates all state-authorized or state-chartered provision of 494.001-494.0077 F.S. or any rulebanks, credit unions, trust companies, and foreign of the commission or order of the office issuedbanking organizations to ensure they operate in a safe under 494.001-494.0077 F.S. to enjoin the per-and sound manner and in compliance with applicable son from continuing in or engaging in any actstatutes and rules. The Office also regulates non- in furtherance of the violation.depository financial service companies and related • has the power to issue and serve upon any per-industries, including securities dealers and investment son an order to cease and desist and to takeadvisers, retail installment sales businesses, consumer corrective action whenever it has reason tofinance companies, mortgage brokers and lenders, believe the person is violating, has violated, orcollection agencies and money transmitters; protects is about to violate any provision of 494.001-consumers from illegal financial activities; reviews all 494.0077 F.S., any rule or order issued underapplications to conduct business as a financial service 494.001-494.0077 F.S., or any written agree-company or securities firm; reviews license applica- ment between the person and the Office. Alltions for regulated individuals; and imposes licensing procedural matters relating to issuance andrestrictions or denies licensure based on findings. The enforcement of such a cease and desist order areOffice is responsible for conducting financial investi- governed by the Administrative Procedure Act.gations into allegations of suspected illegal financialactivities within its jurisdiction. Note: The four provisions listed above are used for regu- lation of the Florida Fair Lending Act, under SectionPowers and Duties of the Commission and 494.00795, reviewed in section IV of this book.Office • has the power to order the refund of any feeThe Office of Financial Regulation is responsible for directly or indirectly assessed and charged on athe administration and enforcement of the Florida mortgage loan transaction which is unauthor-Statutes regulating both mortgage brokers and ized or exceeds the maximum fee specificallymortgage lenders (494.003-494.0077 F.S), while the authorized in 494.001-494.0077 F.S.Financial Services Commission has authority to adopt • may prohibit the association by a mortgagerules pursuant to 120.563(1) F.S and 120.54 F.S to broker business, or the employment by a mort-implement 494.001-494.0077 F.S. The Commission gage lender or correspondent mortgage lender,may adopt rules to allow electronic submission of any of any person who has engaged in a pattern offorms, documents, or fees required by Chapter 494. misconduct while an associate of a mortgageThe Commission may also adopt rules to accept cer- brokerage business or an employee of a mort-tification of compliance with requirements of Chapter gage lender or correspondent mortgage lender.494 in lieu of requiring submission of documents. • or its duly authorized representative, has the The Office: power to administer oaths and affirmations to • has the power to issue and to serve subpoenas any person. and subpoenas duces tecum to compel the atten- dance of witnesses and the production of all Penalties books, accounts, records, and other documents Whoever knowingly violates any provision of and materials relevant to an examination or 494.0041(2)(e), (f), or (g); 494.0072 (2)(e), (f), or (g); investigation. or 494.0025 (1), (2), (3), (4), or (5), is guilty of a felony • may conduct an investigation of any person of the third degree, except that any person convicted whenever the office has reason to believe, either of a violation of any provision of 494.001-494.0077 upon complaint or otherwise, that any violation F.S., in which violation the total value of money and
    • Florida Mortgage Brokerage and Lending Act Rules and Regulations 5property unlawfully obtained exceeded $50,000 and • To obtain property by fraud, willful misrepre-there were five or more victims, is guilty of a felony sentation of a future act, or false promise.of the first degree. Each such violation constitutes a In any matter within the jurisdiction of the office, toseparate offense. In addition, if a mortgage transac- knowingly and willfully falsify, conceal, or covertion is made in violation of any provision of 494.001- up by a trick, scheme, or device a material fact,494.0077 F.S., the person making the transaction and make any false or fraudulent statement or rep-every licensee, director, or officer who participated in resentation, or make or use any false writing ormaking the transaction are jointly and severally liable document, knowing the same to contain any falseto every party to the transaction in an action for dam- or fraudulent statement or entry.ages incurred by the party or parties. However, a per-son is not liable under this section upon a showing To violate 655.922(2) F.S., subject to 494.001-that such person’s licensees, officers, and directors who 494.0077 F.S.participated in making the transaction, if any, acted in Who is required to be licensed under 494.006 F.S.-good faith and without knowledge and, with the exer- 494.0077 F.S., to fail to report to the office thecise of due diligence, could not have known of the act failure to meet the net worth requirements ofcommitted in violation of 494.001-494.0077 F.S. 494.0061 F.S., 494.0062 F.S., or 494.0065 F.S. within 48 hours after the person’s knowledge ofProhibited Practices such failure or within 48 hours after the personSection 494.0025 F.S. provides that it is unlawful for should have known of such failure.any person: To pay a fee or commission in any mortgage loan transaction to any person or entity other than aTo act as a mortgage lender in this state without a cur- mortgage brokerage business, mortgage lender, rent, active license issued by the office pursuant to or correspondent mortgage lender, operating 494.001-494.0077, F.S. under an active license, or a person exempt fromTo act as a correspondent mortgage lender in this licensure under this chapter. state without a current, active license issued by To record a mortgage brokerage agreement or any the office pursuant to 494.006-494.0077, F.S. other document, not rendered by a court of com-To act as a mortgage broker in this state without a petent jurisdiction, which purports to enforce the current, active license issued by the office pursu- terms of the mortgage brokerage agreement. ant to 494.003-494.0043, F.S. To use the name or logo of a financial institution, asIn any practice or transaction or course of business defined in 655.005(1), F.S., or its affiliates or sub- relating to the sale, purchase, negotiation, pro- sidiaries when marketing or soliciting existing or motion, advertisement, or hypothecation of mort- prospective customers if such marketing materials gage transactions, directly or indirectly: are used without the written consent of the finan- • To knowingly or willingly employ any device, cial institution and in a manner that would lead a scheme, or artifice to defraud; reasonable person to believe that the material or solicitation originated from, was endorsed by, or • To engage in any transaction, practice, or course is related to or the responsibility of the financial of business which operates as a fraud upon any institution or its affiliates or subsidiaries. person in connection with the purchase or sale of any mortgage loan; or
    • 6 Module 1 PART II AND III: MORTGAGE BROKERS AND MORTGAGE LENDERSThe only relevant changes made to 494.003-494.797, F.S. were the substitution of the Financial ServicesCommission or the Office of Financial Regulation in place of the Department of Banking and Finance. PART IV: FLORIDA FAIR LENDING ACT ABUSIVE MORTGAGE LENDING In 494.0078, F.S. the Florida Legislature found Annual percentage rate: The annual percentagethat: rate for the loan calculated according to the provi- “abusive mortgage lending has become sions of 15 U.S.C. 1606 and the regulations adopted a problem in this state even though most thereunder by the Federal Reserve Board. high-cost home loans do not involve abusive Borrower: Any natural person obligated to repay a mortgage practices. One of the most com- loan, including, but not limited to, a coborrower, mon forms of abusive lending is the making cosignor, or guarantor. of loans that are equity-based rather than income-based. The financing of points and Bridge loan: A loan with a maturity of less than 18 fees in these loans provides immediate income months that only requires the payment of interest to the originator and encourages creditors to until such time as the entire unpaid balance is due and repeatedly refinance home loans. As long as payable. there is sufficient equity in the home, an abu- Commission: The Financial Services Commission. sive creditor benefits even if the borrower is unable to make the payments and is forced to Office: The Office of Financial Regulation of the refinance. The financing of high points and commission. fees causes the loss of equity in each refinanc- Lender: Any person who makes a high-cost home ing and often leads to foreclosure. loan or acts as a mortgage broker or lender, finance Abusive lending has threatened the viabil- company, or retail installment seller with respect to a ity of many communities and caused decreases high-cost home loan, but shall not include any entity in home ownership. While the marketplace chartered by the United States Congress when engag- appears to operate effectively for conven- ing in secondary market mortgage transactions as an tional mortgages, too many homeowners find assignee or otherwise. themselves victims of overreaching creditors Residential mortgage transaction: A transaction who provide loans with unnecessarily high in which a mortgage, deed of trust, purchase money costs and terms that are unnecessary to secure security interest arising under an installment sales repayment of the loan. The Legislature finds contract, or equivalent consensual security interest is that as competition and self-regulation have created or retained against the consumer’s dwelling to not eliminated the abusive terms from home- finance the acquisition or initial construction of such secured loans, the consumer protection pro- dwelling. 15 U.S.C. 1602(w) visions of this act are necessary to encourage fair lending.” HIGH-COST HOME LOANSDEFINITIONSSection 494.0079, F.S. sets forth the following defini- Definitiontions. The provisions of the Florida Fair Lending Act dealAffliate: Any company that controls, is controlled by, primarily with high-cost home loans. High-cost homeor is in common control with another company, as set loans are defined by 15 U.S.C. 1602(aa), which pro-forth in 12 U.S.C. 1841 et seq. and the regulations vides in pertinent part as follows:adopted thereunder. (1) A mortgage referred to in this subsection
    • Florida Mortgage Brokerage and Lending Act Rules and Regulations 7 means a consumer credit transaction that is fees shall include: secured by the consumer’s principal dwelling, (A) all items included in the finance charge, other than a residential mortgage transaction, except interest or the time-price differen- a reverse mortgage transaction, or a transac- tial; tion under an open end credit plan, if: (B) all compensation paid to mortgage bro- (A) the annual percentage rate at consum- kers; mation of the transaction will exceed by (C) each of the charges listed in section1605(e) more than 10 percentage points the yield of this title (except an escrow for future on Treasury securities having comparable payment of taxes), unless: periods of maturity on the fifteenth day (i) the charge is reasonable; of the month immediately preceding the (ii) the creditor receives no direct or indi- month in which the application for the rect compensation; and extension of credit is received by the cred- (iii) the charge is paid to a third party itor; or unaffiliated with the creditor; and (B) the total points and fees payable by the (D) such other charges as the Board deter- consumer at or before closing will exceed mines to be appropriate. the greater of: (i) 8 percent of the total loan amount; or PROHIBITED ACTS (ii) $528.(2) (A) After the 2-year period beginning on the Section 494.00791,F.S. provides for prohibited acts effective date of the regulations promul- involving high-cost loans. gated under section 155 of the Riegle Community Development and Regulatory Prepayment Penalties Improvement Act of 1994, and no more A high-cost home loan may not contain terms that frequently than biennially after the first require a borrower to pay a prepayment penalty for increase or decrease under this sub- paying all or part of the loan principal before the date paragraph, the Board may by regulation on which the payment is due. increase or decrease the number of per- Notwithstanding paragraph (a), a lender making centage points specified in paragraph a high-cost home loan may include in the loan con- (1)(A), if the Board determines that the tract a prepayment fee or penalty, for up to the first 36 increase or decrease is: months after the date of consummation of the loan, (i) consistent with the consumer protec- if: tions against abusive lending provided • The borrower has also been offered a choice of by the amendments made by subtitle another product without a prepayment penalty. B of title I of the Riegle Community Development and Regulatory • The borrower has been given, at least 3 business Improvement Act of 1994; and days prior to the loan consummation, a written (ii) warranted by the need for credit. disclosure of the terms of the prepayment fee or (B) An increase or decrease under subpara- penalty by the lender, including the benefit the graph borrower will receive for accepting the prepay- (A) may not result in the number of percent- ment fee or penalty through either a reduced age points referred to in subparagraph (A) interest rate on the loan or reduced points or being: fees. (i) less that 8 percentage points; or (ii) greater than 12 percentage points. Default Interest Rate (C) In determining whether to increase or A high-cost home loan may not provide for a higher decrease the number of percentage points interest rate after default on the loan. However, this referred to in subparagraph (A), the Board prohibition does not apply to interest rate changes in shall consult with representatives of con- a variable rate loan otherwise consistent with the pro- sumers, including low-income consumers, visions of the loan documents, provided the change in and lenders. interest rate is not triggered by a default or the accel-(3) The amount specified in paragraph (1)(B)(ii) eration of the interest rate. shall be adjusted annually on January 1 by the annual percentage change in the Consumer Price Index, as reported on June 1 of the year Balloon Payments preceding such adjustment. A high-cost home loan having a term of less than 10(4) For purposes of paragraph (1)(B), points and years may not contain terms under which the aggre-
    • 8 Module 1gate amount of the regular periodic payments would Refinancing Within an 18-Month Periodnot fully amortize the outstanding principal balance. A lender, its affiliate, or an assignee shall not refinanceHowever, this prohibition does not apply when the any high-cost home loan to the same borrower withinpayment schedule is adjusted to account for the sea- the first 18 months of the loan when the refinancingsonal or irregular income of the borrower or if the does not have a reasonable benefit to the borrowerloan is a bridge loan. considering all of the circumstances, including, but not limited to, the terms of both the new and refi-Negative Amortization nanced loans, the cost of the new loan, and the bor- rower’s circumstances.A high-cost home loan may not contain terms under A lender or assignee shall not engage in acts orwhich the outstanding principal balance will increase practices to evade this requirement, including a pat-at any time over the course of the loan because the tern or practice of arranging for the refinancing of theregular periodic payments do not cover the full lender’s or assignee’s own loans by affiliated or unaffil-amount of the interest due. iated lenders or modifying a loan agreement, whether or not the existing loan is satisfied and replaced by thePrepaid Payments new loan, and charging a fee.A high-cost home loan may not include terms underwhich more than two periodic payments required Open-Ended Loansunder the loan are consolidated and paid in advance A lender shall not make any loan as an open-endedfrom the loan proceeds provided to the borrower. loan in order to evade the provisions of this act unless such open-ended loans meet the definition in 12Extending Credit Without Regard to the C.F.R. s. 226.2(a)(20).Payment Ability of the Borrower Recommendation of DefaultA lender making a high-cost home loan shall notengage in any pattern or practice of extending high- A lender shall not recommend or encourage defaultcost home loans to borrowers based upon the bor- on an existing loan or other debt prior to and in con-rowers’ collateral without regard to the borrowers’ nection with the closing or planned closing of a high-ability to repay the loan, including the borrowers’ cost home loan that refinances all or any portion ofcurrent and expected income, current obligations, and such existing loan or debt.employment. Prohibited Door-To-Door LoansPayments to a Home Contractor A high-cost home loan may not be made as a direct result of a potential or future lender or its representa-A lender shall not make any payments to a contractor tive offering or selling a high-cost home loan at theunder a home improvement contract from amounts of residence of a potential borrower without a prear-a high-cost home loan other than: ranged appointment with the potential borrower or • in the form of an instrument that is payable to the expressed invitation of the potential borrower. the borrower or jointly to the borrower and the This subsection does not apply to mail solicitations contractor; or that may be received by the potential borrower. • at the election of the borrower by a third-party Late Payment Fees escrow agent in accordance with terms estab- lished in a written agreement signed by the bor- A lender may not charge a late payment fee for a rower, the lender, and the contractor prior to high-cost home loan except as provided in 494.0079 the date of payment. (13)(a)(b)(c), F.S.: A late payment fee:Due-On-Demand Clause • may not be in excess of 5 percent of the amount of the payment past due.A high-cost home loan may not contain a provisionthat permits the lender, in its sole discretion, to call or • may only be assessed for a payment past due foraccelerate the indebtedness. This provision does not 15 days or more.prohibit acceleration of the loan due to the borrower’s • may not be charged more than once with respectfailure to abide by the terms of the loan, or due to to a single late payment. If a late payment feefraud or material misrepresentation by the consumer is deducted from a payment made on the loanin connection with the loan. and such deduction causes a subsequent default
    • Florida Mortgage Brokerage and Lending Act Rules and Regulations 9 on a subsequent payment, no late payment fee balloon payment permitted under this section, may be imposed for such default. If a late pay- a statement that the interest rate and monthly ment fee has been imposed once with respect payment may increase, and the amount of the to a particular late payment, no such fee shall maximum monthly payment based upon the be imposed with respect to any future payment maximum interest rate allowed pursuant to law. which would have been timely and sufficient, but for the previous default. Notice to Purchasers and Assignees All high-cost home loans shall contain the followingModification or Deferral Fees notice:A lender may not charge a borrower any fees or other Notice: This is a mortgage subject to thecharges to modify, renew, extend, or amend a high- provisions of the Florida Fair Lending Act.cost home loan or to defer any payment due under the Purchasers and assignees of this mortgageterms of a high-cost home loan on a minimum of one could be liable for all claims and defenses withmodification, renewal, extension, or deferral per each respect to the mortgage which the borrower12 months of the length of the loan. could assert against the creditor.HIGH-COST LOAN DISCLOSURES Timing of DisclosureSection 494.00792, F.S. provides for required disclo- The disclosure required by this subsection shall besures for high-cost home loans. given not less than 3 business days prior to the con- A lender making a high-cost home loan shall pro- summation of the high-cost home loan.vide a notice to a borrower. (The required notice is New disclosures are required when, after disclo-found in Figure 1.1.) sure is made, the lender making the high-cost home loan changes the terms of the extension of credit,Annual Percentage Rate including if such changes make the original disclo-A lender making a high-cost home loan shall disclose: sures inaccurate, unless new disclosures are provided • In the case of a fixed mortgage, the annual that meet the requirements of this section. percentage rate and the amount of the regular A lender may provide new disclosures pursuant to monthly payment. paragraph (b) by telephone, if: • In the case of any other credit transaction, the 1. The change is initiated by the borrower. annual percentage rate, the amount of the reg- 2. At the consummation of the high-cost home ular monthly payment and the amount of any loan: Figure 1.1: Required Disclosure for High-Cost Home Loans In addition to other disclosures required by law, the following notice in conspicuous type, must be given to the borrower. Notice to borrower. If you obtain this high-cost home loan, the lender will have a mortgage on your home. You could lose your home and any money you have put into it if you do not meet your obligations under the loan. Mortgage loan rates and closing costs and fees vary based on many factors, including your particular credit and financial circumstances, your employment history, the loan-to-value requested, and the type of property that will secure your loan. The loan rate and fees could also vary based upon which lender or broker you select. As a borrower, you should shop around and compare loan rates and fees. You should also consider consulting a qualified independent credit counselor or other experienced financial adviser regarding the rates, fees, and provisions of this mortgage loan before you proceed. You should contact the United States Department of Housing and Urban Development for a list of credit counselors available in your area. You are not required to complete this agreement merely because you have received these disclosures or have signed a loan appli- cation. Borrowing for the purpose of debt consolidation can be an appropriate financial management tool. However, if you continue to incur significant new credit card charges or other debts after this high-cost home loan is closed and then experience financial difficulties, you could lose your home and any equity you have in it if you do not meet your mortgage loan obligations. Remember that property taxes and hom- eowners’ insurance are your responsibility. Not all lenders provide escrow services for these payments. You should ask your lender about these services. Also, your payments on existing debts contribute to your credit rating. You should not accept any advice to ignore your regular payments to your existing creditors. (Chapter 494.00792 F.S.)
    • 10 Module 1 • The lender provides the disclosures in writ- Enforcement of the Florida Fair Lending Act ing to the borrower. Section 494.00796 F.S. provides: • The lender and the borrower certify in writ- ing that the new disclosures were provided • Any person or the agent, officer, or other rep- by telephone no later than 3 days prior to the resentative of any person committing a mate- consummation of the high-cost home loan. rial violation of the provisions of this act shall forfeit the entire interest charged in the high- A creditor must disclose to any high-cost home cost home loan or contracted to be charged orloan borrower the rights of the borrower to rescind received, and only the principal sum of suchthe high-cost home loan within 3 business days pursu- high-cost home loan can be enforced in anyant to 15 U.S.C. s. 1635(a) and shall provide appro- court in this state, either at law or in equity.priate forms for the borrower to exercise his or her • A creditor in a home loan who, when acting inright to rescission. The notice, forms, and provisions good faith, fails to comply with the provisions ofthereof must be in accordance with the requirements this act shall not be deemed to have violated thisof 15 U.S.C. s. 1635(a). act if the creditor establishes that within 60 days after receiving any notice from the borrowerREGULATION OF THE FLORIDA FAIR of the compliance failure, which complianceLENDING ACT failure was not intentional and resulted fromThe Office of Financial Regulation and the Financial a bona fide error notwithstanding the mainte-Services Commission is responsible for the adminis- nance of procedures reasonably adapted to avoidtration and enforcement of The Florida Fair Lending such errors, the borrower has been notified ofAct. Duties include investigations, examinations, the compliance failure, appropriate restitutioninjunctions, and orders. has been made to the borrower, and appropri- ate adjustments are made to the loan. Bona fidePowers and Duties of the Commission and errors shall include, but not be limited to, cleri-Office cal, calculation, computer malfunction and pro- gramming, and printing errors. An error of legalIn addition to the provisions listed within the Powers judgment with respect to a person’s obligationsand Duties of The Commission and Office in Part I of under this section is not a bona fide error.this module, section 494.00795, F.S. provides: • The remedies provided in this section are cumu- • Any person having reason to believe that a pro- lative. vision of this act has been violated may file a written complaint with the office setting forth the details of the alleged violation. CONCLUSION • The office may conduct examinations of any In conclusion, it is important to be aware of current person to determine compliance with this act. rules and regulations governing the mortgage lend- • Whenever the office finds a person in violation ing business and the extent to which they affect daily of this act, it may enter an order imposing a fine practice. These rules and regulations apply to a wide in an amount not exceeding $5,000 for each range of topics, including licensure requirements, count or separate offense, provided that the continuing education requirements, and penalties for aggregate fine for all violations of this act that violations of the rules. The Department of Financial could have been asserted at the time of the order Services is responsible for regulating the activities of imposing the fine shall not exceed $500,000. mortgage brokers, mortgage brokerage businesses, • Any violation of this act shall also be deemed mortgage lenders, and correspondent mortgage lend- to be a violation of chapter 494, chapter 516, ers by the use of Florida Statutes and the Florida chapter 520, chapter 655, chapter 657, chapter Administrative Code and, when necessary, for impos- 658, chapter 660, chapter 663, chapter 665, or ing penalties on licensees found to be in violation. chapter 667. The commission may adopt rules to enforce this subsection.
    • Florida Mortgage Brokerage and Lending Act Rules and Regulations 11 REVIEW QUESTIONS—MODULE ONEFollowing are review questions. While you are not required to answer these questions to complete the 14-hourcourse, they are intended to help you evaluate your comprehension of the material. Choose the best response toeach review question. The answers to the review questions are found at the end of each section.1. The Financial Services Commission serves as agency head for which of the following? a. Office of Financial Regulation (OFR or Office) b. Office of Insurance Regulation (OIR) c. both the Office of Financial Regulation and the Office of Insurance Regulation d. neither the Office of Financial Regulation and the Office of Insurance Regulation2. Which of the following is now responsible for the administration and enforcement of the Florida Statutes regulating both mortgage brokers and mortgage lenders? a. Department of Banking and Finance b. Office of Financial Regulation c. Financial Services Commission d. Division of Securities and Finance3. Which of the following has the authority to adopt rules to implement the provisions of Chapter 494 F.S.? a. Department of Banking and Finance b. Office of Financial Regulation c. Financial Services Commission d. Division of Securities and Finance4. Which of the following has the authority to conduct investigations of any person who has allegedly violated the provisions of Chapter 494 F.S.? a. Department of Banking and Finance b. Office of Financial Regulation c. Financial Services Commission d. Division of Securities and Finance5. A violation of any provision of 494.001-494.0077 in which violation the total value of money and property unlawfully obtained exceeded $50,000 and there were five or more victims, is guilty of a: a. misdemeanor of the second degree. b. misdemeanor of the first degree. c. felony of the second degree. d. felony of the first degree.6. Pursuant to the Florida Fair Lending Act, one of the most common forms of abusive lending is the making of loans that are: a. equity-based rather than income-based. b. income-based rather than equity-based. c. value-based rather than equity-based. d. value-based rather than income-based.7. The Florida Fair Lending Act deals primarily with what type of loans? a. no-cost home loans b. high-cost loans c. high-cost home loans d. any loan in which discount points are charged to the borrower Transfer your answers to the space provided on the Answer Sheet.
    • 12 Module 18. A mortgage referred to in the Florida Fair Lending Act means a consumer credit transaction that is secured by: a. the consumer’s principal dwelling, other than a residential mortgage transaction. b. any real property owned by the consumer. c. any property owned by the consumer, other than the consumer’s principal dwelling. d. the consumer’s principal dwelling, including a residential mortgage transaction.9. For purposes of the Florida Fair Lending Act, a “residential mortgage transaction” means any transaction in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against the consumer’s dwelling to finance: a. the construction of additions to the dwelling. b. any improvements made to the dwelling. c. an equity line-of-credit loan. d. the acquisition or initial construction of the dwelling.10. The Florida Fair Lending Act prohibits all of the following acts except: a. a home loan in which a higher rate of interest is charged after default on the loan. b. a home loan in which the outstanding principal balance will increase at any time over the course of the loan because the regular periodic payments do not cover the full amount of the interest due. c. a home loan which contains a prepayment clause allowing the borrower to prepay the outstanding principal balance before maturity, without a penalty. d. a home loan which was based upon the borrower’s collateral without regard to the borrower’s current and expected income, current obligations, and employment.11. The special disclosures required by the Florida Fair Lending Act must be provided to the borrower: a. not less than 3 days prior to the consummation of the high-cost home loan. b. not less than 5 days prior to the consummation of the high-cost home loan. c. not less than 3 business days prior to the consummation of the high-cost home loan. d. not less than 5 business days prior to the consummation of the high-cost home loan.12. What portion of the interest charged in a high-cost home loan must be forfeited by the person or the agent, officer, or other representative of any person committing a material violation of the provisions of the Florida Fair Lending Act? a. 25% b. 75% c. 100% d. none 1) c. 2) b. 3) c. 4) b. 5) d. 6) a. 7) c. 8) a. 9) d. 10) c. 11) c. 12) c. ANSWERS: Transfer your answers to the space provided on the Answer Sheet.
    • MODULE 2 Real Estate Finance and Mortgages Robert K. Strickland CCIM, GRI is a Certified Commercial Investment Member (CCIM) recognized as a professional in commercial real estate brokerage, valuation, and investment analysis. He is a state-licensed real estate instructor. A graduate of the U.S. Military Academy at West Point, Bob is a retired USAF Colonel serving on 160 combat missions in jet fighters in SEA. LEARNING OBJECTIVESAfter completing this module, you should be able to:1. Identify the mortgage programs available to the 3. Know the basic concepts of the mortgage amorti- real estate industry. zation process.2. Know how the Federal Truth in Lending Act 4. Be familiar with basic guidelines for qualifying (TILA), Real Estate Settlement Procedures Act for a real estate mortgage, the mortgage applica- (RESPA), and the Equal Credit Opportunity Act tion process, and the tax benefits of home own- (ECOA) apply to real estate and mortgage trans- ership. actions.GLOSSARY AND ACRONYMS Appraisal: This is an estimate of value of the property in question. It is made by a professional appraiser, andMany names used in real estate finance are referenced is usually the amount the lender will use to determineby acronyms. Also many financial terms often require a mortgage amount.more precise definitions than are normally used ineveryday conversation. These acronyms and terms Closing costs: All the charges associated with plac-are defined at the beginning of this module to assist ing a mortgage. They can include origination fees,in fully understanding the material presented. This discount points, appraisal fee, title search and insur-list is not all-inclusive, but does cover material used ance, survey, recording fees, cost of credit reports,in this module. Prior to studying the course material, search fees and special delivery costs. Closing, orit is suggested that the reader review the glossary. settlement costs, may add 3% to 6% to the mort- gage amount.Americans With Disabilities Act (ADA): The act Community Home Buyers Program (CHBP): Ato eliminate discrimination against individuals with program designed to give credit worthy buyers thedisabilities and allow them to enter the economic and opportunity to purchase a home if they earn up tosocial mainstream of society. Effective 1/26/1992 115% of an area’s median income. Generally more flexible than other mortgages and requires a downAnnual Percentage Rate (APR): The yearly interest payment as low as 5% of the mortgage.rate that reflects the actual cost of the mortgage. Itincludes points and other costs paid by the borrower, Community Reinvestment Act (CRA): Directsalmost always higher than the rate advertised, and lenders to work with community groups and localmust be disclosed to the borrower. The APR allows government officials to identify the credit needs ofa borrower to make a direct comparison of different the community. A CRA sign is required in the lobbymortgages. of the lender.© 2005 Bert Rodgers Schools of Real Estate, Inc. 13
    • 14 Module 2Consumer Credit Protection Act (TILA): A lender ify to participate in the VA programs. More infor-must disclose finance costs to the borrower with a mation on VA mortgages and homes available in theTruth-In-Lending disclosure within three business program may be found at www.vahomes.org/sp/.days of the loan application. The TILA is to ensure the Down Payment Assistance Programs (DAPs).:meaningful disclosure of credit and terms to poten- Programs designed to contribute funds necessary totial borrowers. It lists the APR, the finance charge, close the purchase of a home. These programs comeand any other costs of making the loan. Regulation in many shapes and sizes, and may include outrightZ enforces TILA through regulation of advertising grants to certain low-income buyers.credit availability by the advertiser and the creditor.For closed-end consumer credit advertisements, the Energy Efficient Mortgage (EEM): Energy mort-entire opportunity must be described; the sales price, gages offer special financing for homes that are desig-the amount or percentage of down payment, terms of nated energy efficient or can be made energy efficient.repayment, APR, and any other facts that will affect An official home energy rating or Home Energythe borrower’s loan if any of the specifics are given. Rating System (HERS) report is required to secure anFor example, if the APR is stated “8.75% APR”, the EEM.remaining terms must be stated. However, if only Equity: The value of the home minus all mortgages.general terms like “no down payment”, are used, it isnot necessary to disclose any other terms of the credit Escrow: Usually a third party (such as a title com-offering. pany or an attorney) account designated to hold funds deposited as “good faith money” during the sale nego-Conventional mortgages: Mortgages not insured or tiations. Escrow can also be defined as the funds col-guaranteed by FHA or the VA. lected by lenders in addition to mortgage payments,Credit score: A numerical measurement based on an to pay taxes and insurance with low loan to value ratioanalysis of the borrower’s credit report that reflects mortgages (below 80/20 LTV).the management of credit by the borrower. For infor- Equal Credit Opportunity Act (ECOA): Prohibitsmation used by the three major credit bureaus, con- discrimination and promotes the availability of credittact them at: to all credit worthy applicants regardless of race, Equifax, 800-525-6285 www.equifax.com; color, religion, national origin, sex, marital status, age, Experian, 888-397-3742 www.experian.com; receipt of public funds assistance, or good faith exer- TransUnion, 800-680-7289 www.transunion.com. cise of any rights under the Consumer Credit Protection Act.Debt ratio: This is a term used by Lenders to com-pare the total monthly income to the total monthly Each borrower must be evaluated under the sameobligations of a borrower. Debts included are monthly underwriting standards, and must be notified in writ-housing expenses, all monthly installment debts with ing within 30 days of the loan decision. Verbal denialsmore than 10 months to run, child support or alimony, are prohibited.all revolving credit, and any negative cash flows from Fair Housing Act: Prohibits lenders from discrimi-investment properties. For conventional mortgages, nation based on a borrower’s race, national origin,this ratio is calculated by dividing the total monthly color, religion, sex, handicap, or familial status. Noteobligations by the stable gross monthly income. It that individuals infected with AIDS, or are HIVshould not exceed 36%, but FHA allows up to 41%. positive must receive the same protection as otherDepartment of Housing and Urban Development protected groups. All applicants must be reviewed(HUD): A Federal Agency that provides a number of on the same underwriting standards, and all proper-guidelines and safeguards in the housing market for ties must be appraised so that the age or location oflenders, buyers, sellers, and tenants. HUD is involved the property does not discriminate in the estimate ofin a number of programs affecting real estate, and value. Lending practices of all lending institutions arelenders should be aware of the latest changes to HUD- reviewed periodically to insure compliance. Althoughenforced programs, particularly in the area of Civil this act and many others affecting lenders and theRights. The web site at www.hud.gov/homes/index. Public are Federal Laws and guidelines, each Statecfm can provide a wealth of useful information on has parallel laws and guidelines that will apply in theHUD and homes and communities involved with the mortgage marketplace as well. Check www.fairhous-various HUD programs. ing.com and HUD Resources for more information.Department of Veterans Affairs (VA): Guarantees Federal Home Loan Mortgage Corporationreal estate loans to qualified veterans, who may finance (FHLMC, Freddie Mac): A secondary mortgageup to 100% of the purchase price of a home. Lenders market entity that purchases conventional mortgagesin the private sector provide the funds and must qual- from the primary lenders.
    • Real Estate Finance and Mortgages 15Federal Housing Administration (FHA): A fed- Loan to Value Ratio (LTV): The ratio of borrowederal agency that helps people become homeowners money to the value of the property. For example, ifby providing special insurance, lower down payments the purchase price is $100,000 and the loan is $80,000,and more flexible qualifying standards for mortgages the LTV is 80/20 or 80% of the purchase price isgranted by qualified lenders. There are numerous financed.programs available from the FHA. A recent and very Loan discount points (points): Points representbeneficial addition to the paperwork required is the additional fees paid to the lender to add additionalFHA Home Inspection Notice Form, which puts the profit to the mortgage, or to lower a long-term inter-Buyer on notice that a home inspection, while not est rate based on the market. (More points paid uprequired, is a very prudent step prior to purchase. front give the lender an incentive to provide a lower aFederal National Mortgage Association (FNMA long term rate.) Each point represents 1% of the loanFannie Mae): A secondary market entity that pur- amount. Two points on a $100,000 loan is $2000, butchases conventional mortgages from primary lenders. each point paid changes the loan percentage amount by 1/8%. An 8% mortgage with one point wouldFixed rate mortgage: A mortgage that has an inter- actually be 8.125 % over the life of the loan.est rate that does not change (fixed) for the life of themortgage. Also monthly payments generally do not Mortgage Insurance Premium (MIP): This referschange. to the mortgage insurance premium charged by FHAGovernment National Mortgage Association Lenders as part of the up front costs of a mortgage(GNMA, Ginnie Mae): A secondary mortgage mar- and the monthly MIP charged as part of the PITI. Onket entity that purchases FHA and VA mortgages an FHA loan, the MIP is always higher than a con-from primary lenders. ventional mortgage, as FHA charges 1.5% of the pur- chase price up front and a renewal premium of .5%Home Mortgage Disclosure Act (HMDA): Lenders annually. Conventional lenders can be as low as .5%must maintain records by census tract of borrowers to up front, and .3% annually.whom they are making loans in their community. AnHMDA notice must be posted in the lender’s lobby Nehemiah Program: The largest down paymentadvising the public of the availability of these records. assistance program in the US. The down payment provided is usually 1% to 6% of the loan amount.Home Energy Rating System (HERS): An evalua-tion to determine the costs of energy improvements Negative amortization: A repayment of the loan thatas compared to the energy savings. does not cover the full amount of the interest owed, which results in an increasing principal amount dur-Housing payment: P & I, insurance, taxes and if ing the life of the loan.applicable, PMI, homeowners association dues, andother secondary mortgage payments. Non-recourse loan: A loan that does not require a personal guarantee from the borrower.Housing ratio: A measure of the percentage of theborrower’s stable monthly gross income which is used Origination fee: The fee charged by the lender forto pay PITI, other mortgage insurance, homeowner’s services performed in processing the initial applica-dues, and any secondary financing as compared to the tion for the loan.gross income: housing payment divided by stable gross Portfolio loan: In order to maintain liquidity, mostmonthly income should not exceed 28% for conven- lenders sell most of the loans they make to buyers,tional loans. FHA may allow up to 31%. (FNMA, GNMA, or FHLMC), in the secondaryInterest: The cost of borrowed money, paid to the market. At times however, a lender may choose tolender. make a loan, then retain it in its own portfolio. When a lender retains a loan, it is described as a portfolioLead-based paint disclosure rule: The lead-based loan. Reasons vary from property type to terms andpaint disclosure for all homes built prior to 1978 conditions of the mortgage.became mandatory is 1996. It is designed to protectchildren from lead poisoning and must be given to all Prepaids: Any funds paid prior to closing that reducebuyers or tenants prior to any offer to sell or lease. the amount required at closing, such as appraisal fees,In addition to providing the pamphlet, “Protect Your attorney fees, insurance, or interest.Family from Lead in Your Home”, the disclosure Prepaid interest: Interim interest paid at closing thatexplains the lead-base paint hazard and provides a accrues on the mortgage between the closing date andrecord of lead-based paint on the property if available, the payment date of the first mortgage payment.offers an inspection opportunity and puts a notice inany contract for sale or lease of a qualifying property. Prepayment penalties: Lenders sometimes place mortgages with attractive benefits that may change
    • 16 Module 2depending on the financial climate. To continue to payments to the owners and increase the mortgagereceive these benefits, a lender may put in a prepay- amount. Fannie Mae has a similar program for homement penalty to offset the loss of these benefits if the purchases called the “Home Keeper”. The buyersborrower pays the mortgage off before the due date. must have a substantial cash down payment but willFor example if a lender sets a rate near the top of the have no monthly payments. A typical scenario formarket, then the market falls significantly, it would this type of mortgage would look like this: Purchasebe to the borrowers advantage to refinance, but the price $158,000, down payment – $64,000. The lenderlender would lose the better rate. To recover the lost will hold the $94,000 balance as a first mortgage andinterest, the lender might require a cash payment in require no monthly payment. A danger is that theaddition to the payoff amount. homeowner will run out of equity. In both cases the lender owns the home less any equity remaining whenPrincipal: The actual amount of the mortgage or the final settlement is made.the amount remaining after payment begins- the faceamount of the loan. Self-employed borrowers. If a borrower has 25% or more ownership in a business and is not otherwisePITI (principal, interest, taxes and insurance): employed, he will be required to provide a 2-year selfAcronym for the individual parts of a typical monthly employment record to insure he has a stable employ-mortgage payment where taxes and insurance are ment record before a lender will consider his mort-escrowed. gage application.Private Mortgage Insurance (PMI): A mortgage Stable monthly income: This is the verified grossinsurance policy required by the lender that covers monthly income from all primary sources of employ-the top end of the mortgage, i.e. the loan amount over ment. Part time employment, commissions, bonuses,80% of the purchase price. It is generally required on and overtime will not be considered if appropriateall mortgages that have an LTV of less than 80/20. verification cannot be provided to show they will con-The policy insures the lender against losses where the tinue.borrower has less than 20% equity. If a borrower isrequired to have PMI at the beginning of a mortgage, Title insurance: An insurance policy purchased fromit can generally be dropped at the request of the bor- a Title Company that insures against errors in titlerower once the equity reaches 20%. When the equity search, and essentially guarantees that the title on thereaches 22%, the lender must remove the PMI. property insured has no outstanding recorded claims against it. Certain unrecorded claims may be covered.Real Estate Settlement Procedures Act (RESPA):Under RESPA, lenders must make full disclosure of Variable Rate Mortgage (VRM) - Adjustablethe estimated closing costs associated with the loan Rate Mortgage (ARM): The rate on a VRM/ARMthe borrower is applying for within three business is adjusted periodically to reflect the current market.days of the application. The lender must also provide The rate goes up or down as the market rates change.the HUD booklet, “Settlement Costs and You”, and There is a relatively new program called a two-stepa Uniform Settlement Statement must be prepared at mortgage that allows the borrower to take advantageclosing listing all the costs associated with the loan. of lower initial rates of an ARM, and then adjust to a fixed rate in the fifth or seventh year of the mortgage.Reverse mortgages: This is a special type of mort- There are also a wide variety of other ARM’s availablegage that allows senior citizens to use the equity in in the markettheir home as a source of income. Rather than mak-ing monthly payments, a lender will make monthly
    • Real Estate Finance and Mortgages 17 PART I: REAL ESTATE FINANCEIn the early years of this country, home buying was CONVENTIONAL MORTGAGESa very simple process. A person saved his money and Conventional mortgages are available from creditorsat some point he accumulated enough cash to buy a who regularly extend consumer credit that is subjecthome. This process, while simple for the frugal saver, to a finance charge, or payable by written agreementdid not offer enough opportunity for the average in more than four installments. Banks, savings andperson. Circumstances varied with every family and loan institutions, mortgage companies, and individu-demand increased to the point where conventional als make up this category of lenders and the loanslenders (banks, then S & L’s) began to offer interest may be insured or uninsured depending on the downonly loans so that a borrower paid only the interest payment, financial strength of the borrowers, andmonthly or annually until the balance or “the bal- the quality and location of the property. If a downloon” came due. Unfortunately many families could payment is less than 20% of the purchase price, thenot control their income to the point where they lender will generally require private mortgage insur-were able to accumulate the cash to pay the principal ance (PMI) to cover his risk above 80% of the valueoutstanding when the note came due. This was par- of the home. While a lender may match a loan to theticularly true in the Depression era, 1929-1934, when home, in an unlimited amount, there is a $417,0 0 0literally thousands lost their homes and farms. When limit on single family loans if they are to be sold toPresident Franklin D. Roosevelt came into office in Freddie Mac or Fannie Mae. There are as many loan1932, he realized that home ownership was a key fac- programs as lenders in this segment of the market, buttor in creating a strong national economy, as well as the basic categories are: fixed rate loans with terms uphelping people recover their personal wealth and their to 30 years, many varieties of ARMs, and interest onlyself-esteem. loans with balloon payments. Traditionally, conven- In 1934 President Roosevelt created the Federal tional mortgages required a fairly stringent qualify-Housing Administration (FHA) to help provide ing standard, 20% down payment and were amortizedadequate home financing and to encourage new over thirty years. New products in the market greatlyconstruction of housing. It was not a true financing expand the types of loans now offered from conven-program, but an insurance program to indemnify tional lenders.conventional lenders against losses and share some of Since it is almost impossible for a lender to holdthe risk in the event of default by the buyer. It was every mortgage it makes in its own portfolio, thealso the first time that lenders began to offer amortiz- Government found it necessary to establish a sec-ing loans. Since that time mortgage lending has gone ondary market to buy the loans from these primarythrough an incredibly evolutionary process, generated lenders to keep a ready supply of cash in market.not only by economic conditions, but also by the on- To implement a viable secondary marketplace, thegoing process of government involvement to protect Federal Government created FNMA, or Fannie Mae,the borrower population. It has also become very and FHLMC, or Freddie Mac, to buy these loans andobvious that licensees need to be very knowledgeable keep the primary lenders solvent. Further, to insureof the mortgage process, particularly since the major- quality and a standardized product, it was necessary toity of the home buying population today still requires create a wide variety of rules and regulations govern-a mortgage to own a home. ing initial qualifications for borrowers, loan approval Before discussing the types of mortgages avail- and processing procedures, and minimum propertyable, you should remember that all mortgages have standards. Other guidelines to match these mortgagestwo main documents, the actual mortgage and the to other laws governing banking standards, civil rightsnote. The mortgage pledges the property as collateral laws and environmental regulations were required asfor the debt, and the note is a promise to repay from well.the borrower. Depending on the ownership entity, thenote may be signed by only one party or by all par-ties who are bound in the purchase. A non-recourse FHA MORTGAGESnote indicates that the party signing will not be held FHA mortgages are mortgages granted by FHApersonally liable for repayment. In most residen- qualified lenders (HUD approved). The loans aretial purchases, the note will be a recourse loan, i.e., insured by the FHA, which removes much of the riskthe borrower will be held personally responsible for of default from the primary lender. Since 1934, FHArepayment. Today there are two types of mortgages has been supplying Americans of modest means withavailable for most residential purchases — conven- an opportunity for home ownership, either as a newtional and Government insured/guaranteed. purchase or to refinance an existing mortgage. These
    • 18 Module 2loans generally offer lower down payments and easier The FHA market tends to be most active in areasbuyer qualifying standards, but the home as well as of lower priced homes. Many lenders specialize in thisthe buyer must qualify. There are a number of spe- market and because of the many and changing rulescific requirements for FHA properties that will be for FHA loans, it is necessary to keep good lines ofinvestigated by the Lender to make sure the home communication open with loan officers who specializequalifies under FHA standards. A typical example is in FHA mortgages, including property qualifications.the requirement for the roof to have a certain amount Down payment assistance programs (DAPS) are loanof economic life remaining. Make sure the applicant programs designed to assist first time homebuyers.understands that these requirements are for his pro- Nehemiah, Hart, Neighborhood Gold, CHDAP, andtection, but may complicate a purchase if the home CHAFA are examples of programs for down paymentdoes not initially qualify for the FHA loan. Eligible assistance.properties include one to four unit houses and condo- As part of the FHA package, HUD now offersminiums. Under the single-family construction pro- homeowners age 62 and older a Reverse Mortgagegram, FHA assists builders in obtaining construction Program. If the homeowner has paid off his homefinancing by allowing buyers to be approved prior to mortgage or has only a small balance remaining, hethe start of construction. may borrow against the equity in his home. He can In the past few years conventional lenders have receive the payments as a lump sum, monthly, or asmodified their loans to resemble FHA loans, but there a line of credit. Unlike ordinary home equity loans,are still some major differences. For first time home- a HUD reverse mortgage does not have to be repaidbuyers, the minimum FHA cash down payment is 3% as long as the borrower lives in the home. The loan isof the value of the home, but part of this can be used recovered at sale of the home. The home’s value, agefor closing costs. Conventional lenders also offer a of the borrower and the interest rate determine the3% down payment loan, but it must be used for the amount of the loan. The older the borrower is, thepurchase price only. Qualifying standards are more greater the LTV. There are no income or asset limi-lenient as well, with alternative credit checks and tations on a reverse mortgage, but the total amountreduced waiting times after a bankruptcy or foreclo- is generally capped by the FHA maximum mortgagesure. FHA loans include higher payment to income limit for the area. Even with FHA MIP, the HUDratio. Conventional lenders require a range of 25%- reverse mortgage program is generally less expensive28%. FHA allows as much as 31%. The debt burden than a loan from a conventional lender.is also higher with FHA loans. Total debt payment FHA has an energy efficient mortgage programincluding debts with more than 10 months remain- that allows borrowers to be eligible for up to 97%ing can be as much as 43% of income while conven- financing including closing costs for including energytional lenders use 36% as a limit. Single family loan efficient components in the improvements to an exist-amounts are greatly reduced in the FHA programs. ing home or in new construction. The improvementsSome geographic areas may be higher as some coun- must be cost effective in that the cost is less than theties in Florida and for example, Alaska, Guam and total present value of the energy saved over the usefulHawaii. Interest rates tend to be similar, but a life of the energy improvement. The cost as comparedrecent analysis of national rates indicated FHA rates to the savings is determined by a home energy ratingare about .2 percentage points higher than system (HERS).conventional rates. FHA does insure ARM’s under A final point — if you are dealing with a buyerseveral of its programs (Sections 203b, 234c, and 203k). who has paid off an FHA mortgage in the past, he Probably the biggest difference is in the payment may have money owed to him. About 100,000 FHAof the mortgage insurance premium (MIP). FHA borrowers, or 1 in 10, left money in their escrowrequires an up-front payment of 1.5% of the purchase accounts when they paid off the loan. The averageprice, but it can be added to the loan. If the mortgage amount was $700 so it would be worthwhile to haveis longer than 15 years, an annual premium is required the buyer check the status of any previous FHA loans.as well. Conventional lenders that require insurance, Call 800-697-6967, or write: HUD, PO Box 23669,collect the premium monthly. GNMA buys FHA Washington, DC, 20026-3699.insured loans in the secondary market to keep the pri-mary lenders solvent. Generally, FHA mortgages can VA MORTGAGESbe reassigned to qualified borrowers, but conventionalloans are rarely assumable. Go to the FHA Connect- The Veterans Administration was an outgrowth ofion.at www.hud.gov/offices/hsg/connect.cfm World War II, when hundreds of veterans were return- ing to civilian life after service during the war. Most came back with few marketable skills and even less money, but they were ready to get on with their lives and looked to the Federal Government for help. Thus
    • Real Estate Finance and Mortgages 19the VA, now the Department of Veterans Affairs, was Should a Veteran have a bankruptcy, the VA creditformed to assist in a number of ways from education standards follow these guidelines:to mortgages. A VA loan is a real estate loan guaran- a. less than 3 years – loan not available unless sig-teed by the Department of Veterans Affairs. Funds for nificant credit re-established.these loans are provided by private sector VA qualifiedprimary Lenders. They are available only to qualified b. 3 to 5 years – some consideration, but accept-veterans and can be up to 100% of the purchase price able if reasonable credit re-established.of the home. The VA is very strict in determining c. Over 5 years – may be disregarded.who is qualified for a VA loan, and these qualifications Any VA loan can be prepaid without penalty.change as national events change military manpower To check on the status of any current entitlementrequirements. The current service dates for eligible or restoration of entitlement, a veteran can contactveterans with at least 90 days service: the nearest VA office and complete Form 26-1880.• WW II – 9/16/1940 to 7/25/1947 One unique feature of a VA loan is the requirement• Korea – 6/27/1950 to 1/31/1955 for the veteran to pay a “funding fee”. The purpose of the funding fee is to help the government offset the• Vietnam – 8/5/1964 to 5/7/1975 cost of any foreclosure. To encourage a larger down• Persian Gulf – after 7/2/1990 payment, the funding fee is calculated as a percentage• Gulf War – 8/2/1990 to Undetermined of the purchase price up to a maximum of 3.3% of the• 181 days continuous active duty for peacetime service loan amount, www.warms.vba.va.gov/pam26-7 ml. .ht Disabled veterans do not pay funding fees. Speciality• 2 years service for enlisted service after 9/7/1980 Adapted Housing grants up to $50,000 are available and officer service after 10/16/1981. to veterans with service connected disabilities who Members of Selected Reserves and National Guard have lost the use of both arms.are eligible after six years of service regardless of status- Regulations and documentation for a VA loanactive or discharged. application can be voluminous; therefore the licensee Based on current overseas assignments, would be well served to maintain close contact withthere will be a number of new military personnel a loan officer from a VA qualified lender who spe-eligible. Go to www.homeloans.va.gov/elig2.htm cializes in VA mortgages. GNMA buys these loansfor the latest information. in the secondary market to keep the primary lenders VA financing covers houses, town houses or con- solvent.dominiums in a VA approved project, new construc-tion, home improvement and energy improvement COMPARISON OF THE THREE LOANloans, refinancing of existing home loans and pur- PROGRAMSchase of a manufactured home and/or lot. A certificate As a quick comparison of the three types ofof eligibility is required as first step toward getting a loan programs, Ginnie Mae allows you to pre-VA loan. At that time the service record of the apply- pare a chart. (www.ginniemae.gov/ypth/index.ing veteran will be evaluated to determine eligibility. asp?Section=YPTH) While there are a wide vari- Another point that could further assist veterans in ety of loan products available in the market place, thisusing VA loans is the loan entitlement amount. A VA table compares only the basic loan for each program.loan is a guaranteed loan, thus the VA simply provides For example, the house under consideration meetsan entitlement amount, which is in effect a down pay- the criteria for each program and is offered for sale atment amount from the veteran. Since the early years $175,000. Mortgage available is a 30 year term, fixedof VA loans this entitlement amount has increased, rate at 6.5%. Monthly housing costs less mortgageor in many cases, the loan associated with the entitle- payment are set at $386. Cash required at closing wasment has been paid off the current maximum guar- estimated up front with the program calculating anyanteed loan is $60,000 but for loans in excess of overages.$144,000, the limit is 25% of the FHMLC conform- As you can see in Table 2.1 (page 20), there is aing loan limit of $417,000, or $104,250. There is no vast difference in cash required. The conventionallimit on the size of a VA guaranteed loan, provided mortgage has a lower monthly payment, but the downthe Veteran is qualified for the loan from a credit and payment will require a lot more cash. Also note thatincome standpoint. Lenders, however, will usually the VA purchase ends up with a larger mortgage thanlimit the maximum amount to 4 times the amount of the cost of the house. This will have a definite impactthe Veteran’s available entitlement plus any downpay- when the time comes to sell. Also timing may be a fac-ment. Adjustable rate and hybrid ARMs are now tor, as the VA and FHA loans may take longer to closeavailable under the VA. because of the additional paperwork. For a rent versus buy comparison, go to http://www.ginniemae.gov/
    • 20 Module 2 Table 2.1: Comparison of FHA, VA and Conventional Loans LOAN A LOAN B LOAN C FHA VA CONV Sale Price $175,000 $175,000 $175,000 Loan Amount $173,569 $178,588 $148,750 Monthly Mtge. Payment $ 1,365 $ 1,326 $ 1,242 Monthly Expense $ 386 $ 386 $ 386 Total Monthly Cost $ 1,752 $ 1,712 $ 1,629 Downpayment $ 5,250 $ 0 $ 26,250 Closing Costs $ 1,736 $ 6,723 $ 6,112 Total Cash $ 6,986 $ 0 $ 32,362Source: http://www.ginniemae.gov/2_prequal/le_intro_quesitons.asprent_vs_buy/rent_vs_buy_calc.asp?. Annual percentage rate (APR): The APR is the cost of credit as expressed as an annual percentage rate. ItFEDERAL TRUTH IN LENDING ACT (TILA) is calculated by including all the costs of the loan into a new annual rate. It is almost always higher than the(15 U.S.C. 1601 et seq.) initial quoted, or base rate and represents a uniformThe purpose of the TILA is to assure that consum- true cost of credit which can then be compared toers are fully informed of the terms and cost of credit other purchase options, so the consumer can shop forin typical consumer credit transactions which include the best credit terms.home mortgages, home equity loans and home Total amount of payments: This figure is a totalimprovement loans as well as other types of credit such amount that will be paid over the life of the loan. It isas credit cards, auto purchases, store credit and install- the total of the interest and the principal and is calcu-ment loans. The Board of Governors of the Federal lated by multiplying the monthly P & I by the num-Reserve System is authorized to administer and imple- ber of payments.ment TILA rules and regulations regarding consumercredit. Regulation Z, published by the Board, requires Payment schedule: A statement which sets forth thea very specific explanation and description of the cost monthly payment amount and the payment due date.of credit both in dollars and percentage rates. It also In addition to the above information, lenders areincludes some very specific requirements when adver- required to disclose late payment penalties and whentising credit for the above listed loans. they apply, any prepayment penalties, variable interest rates, and if the lender is being given a security inter-TERMS est in the property or merchandise being financed.Before a consumer or homebuyer enters into an There is a three-day “cooling off” period for refinanc-installment credit contract, the consumer must be ing principal residences.given the following information in a format that iseasy to understand. REGULATION ZTotal sale price: This number must include the Under Regulation Z, advertisers and lenders mustoffered price, down payment, or trade-in, and any also clearly state the exact terms of any credit beinginterest or other charges. offered in order for the consumer to be able to make direct comparisons of various credit opportunities.Amount financed: The borrowed amount plus the While consumer credit is divided into open-end andcost of any extended warranties. closed end categories, real estate lending is consid-Finance charges: A dollar amount of the cost of credit ered closed-end, and is credit extended for personal,such as interest, credit life insurance, loan origination family or household purposes, but does not includefees, discount, etc. It does not include credit applica- business and agricultural loan or loans over $25,000tion fee, title work, cost of credit report, application that are not secured by real property. It is tradition-fees, attorney’s fees, or escrow payments. ally extended by a creditor that regularly extends con-
    • Real Estate Finance and Mortgages 21sumer credit subject to a finance charge and meets RESPA is one of a number of federal consumer pro-other conditions usually associated with real estate tection statutes that are designed to make consumerslending or general consumer credit. If an advertise- more knowledgeable about real estate transactions,ment promotes closed-end credit through a creditor, and to reduce the cost of real estate settlement ser-both the advertiser and the creditor must comply with vices. RESPA was first passed in 1974 and its primarythe requirements of Regulation Z. Seller financing purposes were to help consumers become better shop-usually does not meet the definition of a creditor, and pers for settlement services and to eliminate kickbacksdoes not have to comply with Regulation Z. and referral fees that increased the costs of real estate There are some other advertising rules that apply settlement services. HUD is responsible for enforcingunder the Federal guidelines that must be considered RESPA, and it covers several types of loans on one towhen advertising properties that fall under HUD four family residential properties. Specifically, homeguidelines. Under Part 109 of the Federal Fair Housing purchase loans, mortgage assumptions, refinancing,Act, HUD publishes an outline of phrases, symbols, property improvement, and equity lines of credit fallwords, and visual aids that may convey discrimina- under RESPA.tory preferences or limitations. For example, words At the time of application or within three days,that imply blindness, deafness, mental illness, physical lenders and mortgage brokers must provide potentialhandicap, etc. or, words like “restricted”, “exclusive”, borrowers the following information:“private”, “integrated” and similar terms that indi- • The Special Information Booklet, “Settlementcate one race, a language other than English or other Costs and You”, which provides the borrowernational origin indicators should be avoided. Even with consumer information on real estate ser-advertising property as ‘distressed, needs repairs, etc.” vices to be provided in the purchase transac-may be discriminatory under some conditions. To get tions only.a current list of words and phrases that are considered • A good faith estimate (GFE) of the settlementdiscriminatory, go to www.fairhousing.com/ (or closing) costs for the transaction. Actual There are some very specific financial disclosures charges may differ.that are required under Regulation Z if certain finan-cial terms are used in an ad. Similarly, other terms • A Mortgage Servicing Disclosure Statement as to the lender’s intent to sell or hold the mort-do not trigger the full disclosure requirement under gage.the Regulation. For example if the terms “No downpayment, easy monthly payments, no closing costs, • Information on how to submit a complaint andor financing available” or similar non-specific words complaint resolution.are used, there are no further disclosures required. If the lender intends to refer the potential bor-If, however, specific terms such as “ 10% down, 95% rower to another service provider, the borrower mustfinancing, or low 7.5% mortgage, etc.” are used, the be given an Affiliated Business Arrangement (AfBA)remaining details of the financing opportunity must disclosure that describes the business arrangementbe disclosed – “sales price $125,000, monthly payment with the original lender and the fees to be charged.$578 P & I, APR-8.5%, mortgage amortized over As the transaction proceeds toward closing, the30 years” etc. In summary, all details of the offered closing agent prepares a settlement statement describedfinancing must be disclosed – monthly payment in as a HUD-1 Settlement Statement. This is a standard-either PI, PIT or PITI, down payment in percent if ized form that clearly shows all charges imposed onprice is given or amount, APR, and term of the loan the borrower and the seller in connection with thein order for the consumer to compare credit offerings settlement. One day prior to closing the lender orand make knowledgeable decisions. closing agent must provide the borrower a copy of The variety of loan products in the market today the completed HUD-1 closing statement, using infor-including ARM/VRMs, buydowns, and other special mation available at that time. At the time of closing,features of mortgages make it imperative that credi- the lender also provides the borrower with an Initialtors and advertisers fully understand the requirements Escrow Statement showing the escrow payment andfor advertising financial opportunities in Regulation Z the amount to be deposited at closing for the escrowand how they apply to the product offered, and then account. After closing the lender must provide ancomply accordingly. There are significant penalties escrow statement annually and the borrower mustfor violation of these rules, both civil and criminal. be notified (by a Servicing Transfer Statement) if the lender sells or assigns the servicing and/or the mort-REAL ESTATE SETTLEMENT PROCEDURES gage to another party.ACT (RESPA) There are several other sections of the RESPA that licensees need to understand:12 U.S.C. 2601 Section 6. Borrowers who have problems with
    • 22 Module 2 their account or the escrow should contact their To start the process for acquiring a loan, a lender loan server in writing. The server must acknowl- can request the applicant provide the following infor- edge the complaint within 20 days, and resolve it mation: within 60 days. • A list of current credit accounts to include Section 8. Kickbacks, fee splitting and referral names and address of contact person. fees for referrals of settlement services for fed- • Names previously used by the applicant to erally related mortgage loans are not allowed. secure credit. Penalties include civil and criminal violations. • The source of any income to be used to deter- Section 9. A seller cannot force a buyer to use mine the applicant’s creditworthiness. a specific title company as a condition of sale. The evaluation of the application can use the fol- Buyers have the right to sue a seller who violates lowing information as long as it is not used in a dis- this provision for up to three times the settlement criminatory manner. charges for title insurance. • Age (Elderly applicants must not be discrimi- Section 10. Monthly escrow accounts payments nated against.) are limited to one-twelfth the annual sum required to service all escrow disbursements, however the • Existing utility service lender can collect a cushion amount not to exceed • Income sources from the credit application and one sixth of the annual disbursement. RESPA the probable longevity of these sources. does not require escrow accounts, but the lenders • Credit history. may. • Any other information that would indicate cred- HUD, the State Attorney General or the State itworthiness.Insurance Commissioner can bring court actions toenforce the above sections. Complaints should be In the process of evaluating the potential cred-filed with: itworthiness of an applicant, the creditor may not refuse credit based on sex, marital status, physical or Director, Interstate Land Sales/RESPA Division mental disability or any other classification protected Office of Consumer and Regulatory Affairs from discrimination. Lenders may not inquire about US Dept. of Housing and Urban Development birth control practices or future plans for children. Room 9146 Further a creditor cannot require the signature of a 451 7th Street, SW spouse or other guarantor if the applicant qualifies Washington, DC 20410 under the creditor’s standards for the amount and term of the loan. Property owned jointly and used as collateral will require the signature of all joint own-EQUAL CREDIT OPPORTUNITY ACT (ECOA) ers, however. Finally, lenders must notify an applicant12 CFR 202.2 that they have a right to receive a copy of the appraisal on a qualified property. Fair housing violations areThe ECOA has been in existence since 1972, and was enforced by HUD, and must be filed within one yearwritten to make certain discriminatory practices by with HUD and within two years in state and federalcreditors unlawful. Under ECOA and Regulation Z, courts. Any violations should be reported to:creditors are prohibited from denying credit, eitherthrough mortgages or credit transactions, to any- U.S. Department of Housing andone based on religion, race, national origin, gender, Urban Developmentmarital status, or source of income. It is designed to 451 Seventh St., SWprevent discrimination in granting credit by requiring Washington, DC 20024banks and other creditors to extend credit equally toall credit worthy applicants with fairness and impar-tially. If an applicant has demonstrated an ability andwillingness to repay borrowed money, he is consideredcreditworthy. A creditor is given 30 days to determineif the applicant meets the creditworthy standard. Atthat time the creditor must make a commitment deci-sion, and if credit is denied must state in writing thereason.
    • Real Estate Finance and Mortgages 23 PART II: REAL ESTATE MORTGAGESAn average person in this country might buy three • Copy of divorce papers if paying or receivingor four homes in a lifetime. As a result, the mortgage alimony or child support.application process is almost always a new experi- • If there is income in addition to a salary, bringence. Because lenders are getting more demanding in proof to document source and frequency.their evaluation of potential borrowers, it is impera- • If self employed or on commission, bring lasttive to be prepared to provide thorough guidance to two years of federal tax returns and W-2s, 1099sthe borrower. When the decision is made to purchase or other documentation, plus corporate returnsreal estate, a potential borrower may pre-qualify for a and P & L for past two years. Also bring updatedmortgage, or may wait until they find a suitable prop- personal financial statement.erty. In any case, the first stop is a lender or mortgagecompany that will provide a checklist of information • If salaried or on an hourly wage, bring past twoneeded to complete the application and the actual years W-2s, and one month’s pay receipts.application. • Bring the last two month’s bank statements. If the borrower is refinancing a mortgage there are several additional items required:MORTGAGE APPLICATIONS • copy of current title policyThe decision to enter the real estate market is notmade lightly by most people. In most cases, emotion • warranty deedprovides the incentive, and the financial consider- • copy of surveyations are not clearly understood early in the process. • copy of current insurance policyUsually a buyer’s first exposure to a mortgage appli- • any other information that would enhance thecation is a bit overwhelming; thus an experienced value of the property such as signed leases, ter-mortgage broker or loan officer can be a calming mite inspections, new roof contract, etc.influence to get the buyer started in the right direc-tion. The list below is typical, but because lenders The five-page standard form (Fannie Mae Formhave varying requirements, it may not be complete for 1003/Rev. 7/05 or Freddie Mac Form 65/Rev. 7/05)all mortgages. mortgage application is lengthy, because it covers Items that may be required to complete an appli- all the items above even though some may not becation: required for all applications. The mortgage applica- tion process is neither simple nor quick. It will take • A check to cover the appraisal report and the time for the potential borrower to assemble the credit report. These are prepaid costs, and gen- information, and in some cases it may not be read- erally not refundable. ily available because of lost or damaged records, lack • For borrower, and co-borrower if applicable, a of understanding of exactly what is needed, or other two year employment history with names and reasons. A knowledgeable lender can be a great help addresses of employers. in getting the application fully completed. Filling • Residence addresses from last two years and in the appropriate blanks of the application is really landlord’s name and address if applicable. only the first step in getting the loan, however. At this • A list of all bank, S&L and credit union accounts point the application is submitted to a lender who with numbers, balances, and addresses, etc. must review and evaluate the data to make sure the borrower has the ability to repay the potential loan. • A list of all contractual debts to include credit cards, auto loans, personal loans and other BORROWERS PRE-QUALIFICATION monthly obligations. GUIDELINES • Information on mortgages now or previously owned in last two years. The most important factor in a credit approval is determining the borrower’s willingness to repay the • Complete information on any owned real estate loan. The lender uses an evaluation tool called a credit to include mortgage information, market value, score. In use for more than 30 years, the credit score rental information and location. is a numerical measurement developed from the • List of assets such as stocks, bonds, CD’s, etc. credit report, which allows the lender to rank the bor- • List of autos owned if free and clear and less rower’s management of credit against a standard used than three years old. by that particular lender. Some lenders use different
    • 24 Module 2standards for different type loans. Also, some lenders Isaac & Co. According to Chris Larsen, Chairman ofcreate scores in-house directly from the credit appli- online lender E-Loan, “the FICO score is the No.1cation while others use scores generated by one of the piece of data to determine how much you will pay onmajor bureaus. There is no good or bad score, as the a loan and whether you’ll get credit.” Table 2.3 showsrisk evaluation indicated by the score may preclude how these scores are established based on propertycertain types of loans, but allow a lender to offer a dif- type and level of underwriting. If FICO scoring isferent product. Table 2.2 describes a typical credit used, Freddie Mac requires the primary lender to fol-scoring process based on the five main types of credit low one of the review (or underwriting) levels showninformation. below. Note that the risk of default goes up as the Obviously payment history closely followed by scores go down.outstanding debt information are the main concerns. A concern for lenders when using credit scoresNote also that wages earned are not a factor in devel- is that the scores discriminate against minorities. Ifoping a credit score. Further, a credit score may not application guidelines are strictly followed, and theinclude information concerning the borrowers race, financial information used to create the scores comesreligion, gender, marital status, personal description, from credit repository reports, the process actuallyaddress or birthplace. promotes fair lending and non-discriminatory prac- As mentioned, many lenders use different scores tices. The three different credit bureaus that compilein their underwriting process, but since FHLMC, in these reports are Equifax, TransUnion and Experian.the secondary market, buys most of the mortgages Using only these credit reports, minority and non-created by the primary lenders, Freddie Mac recom- minority applicants will most likely receive the samemends the use of FICO scores as developed by Fair score. Low scores, however, do not necessarily prevent Table 2.2: Credit - Scoring Process Credit Information Factors Weight Payment History Late payments, 35% Judgments, Bankruptcy Collection action Outstanding debt Number of open balances, 30% Average open balance, Open balance as compared to limits Credit history Age of the open accounts 15% Number of inquiries To open new credit or new accounts and time since 10% last inquiry Type of credit Finance company vs. revolving 10%Source: Compiled by author Table 2.3: FICO Scores Based on Level of Underwriting and Property Type Level of Recommended Approach to Property FICO Underwriting Reviewing Credit Type Score Basic Review to confirm willingness to repay 1-unit over 660 2-units over 680 3-4 units over 700 Comprehensive Review all aspects of credit history 1-unit 620-660 To establish willingness to repay 2-units 640-680 3-4 units 660-700 Cautious Perform a detailed review of total credit history to 1-unit less than 620 clearly define willingness to repay. Without compen- 2-units less than 640 sating circumstances, willingness to repay is in ques- 3-4 units less than 660 tion, and risk is high for a default.Source: Compiled by author
    • Real Estate Finance and Mortgages 25the borrower from getting a loan. There are numer- tion on Buying and Selling Mortgages, the amorti-ous Down Payment Assistance Programs (DAPS) zation process will be discussed in detail. One of thethat assist the low- to moderate-income and first time tools a lender should master is a financial calculator.homebuyer in acquiring a mortgage. Anyone can get With a financial calculator it is extremely easy to dothis information from loan offices or directly from a a very complete analysis of nearly any mortgage. Onnumber of local sources. To check your own credit a financial calculator, there are five keys – presentscore as compiled by Equifax, go to www.myfico. value or loan amount (PV), number of payments (N),com. If you have a problem with the score, request annual interest rate (I/YR), payment amount (PMT),reports from the other two agencies to compare the and future value (FV) – that are used to calculate alldata. According to a recent article in U.S News and the parts of an amortizing loan. There are many newWorld Report (June 17, 2002), there is another reason calculators on the market that are easy to master andto keep close track of your credit score. “The prop- inexpensive. It is particularly important to get a calcu-erty insurance industry is using this score as an indi- lator that allows the above data to be entered in anycator of risk, and subsequently bases their premiums order and that will calculate any of the entries if threeon this tool. In fact, industry representatives acknowl- or four are entered. Many REALTOR® Associationsedge that some insurers use credit scores as the sole offer regular training programs for financial calcula-underwriting criteria, ignoring other indicators such tors. A typical full featured and widely available modelas prior claims and auto accident records.” As a mort- is the HP-10B II from Hewlett Packard, which sellsgage professional, you have an obligation to the public for under $35 and takes about two hours to learn toto make sure they understand the role a credit score operate.can play in a real estate transaction. Additional infor- Where a financial calculator can also be a real helpmation on credit scores and availability of free credit is working with buyers who come into the market withreports is available on line at www.annualcreditreport a .set budget, and little knowledge of what that budget.com/cra/index.jsp can buy. A quick calculation on a financial calculator can determine a market price range, and can also helpBASIC AMORTIZATION AND MORTGAGE in determining what kind of mortgage would betterCOMPARISON serve the borrower.Lenders offer loan packages that represent the most For example, the buyers say they have $25,000profitable transaction for the lender, but they often for a down payment, and they can pay no more thanhave enough flexibility to make modest changes to a $1500 per month for housing expenses. The ini-loan offering that will add significant benefit for the tial assumption would be to determine a mortgageborrower if someone is knowledgeable enough to ask. amount based on an 80/20 loan amortized over 30Unfortunately many borrowers do not fully under- years. Assuming the pre-paids will not exceed $1000,stand the mortgage application process or the basic that leaves a down payment of $24,000, a potentialloan amortization and will not ask questions for fear mortgage of $96,000, and an estimated purchase priceof exposing their lack of understanding. The lender of $120,000.should understand this reluctance and be ready toassist in comparing the various lenders’ products, even $25,000 - 1,000 = $24,000 down payment availableif the questions are very basic. $24,000 = 20% of the purchase price as a down pay- mentMortgage Amortization $24000 / .2= $120,000 purchase priceModern investment and financial theory rests firmly $96,000 first mortgage.on the concept of compound interest and the pro- 30 year amortization at 7.25% annuallycess of discounting. Amortization and amortizationschedules are part of this financial theory. The fixed Using a financial calculator:payment for an amortized mortgage consists of a PV = 96000principal repayment and interest charge. At the begin- N = 360 (30 yrs equals 360 payments.)ning of the payment schedule, the interest charged Quoted Interestmakes up the majority of the payment, but as the loan Rate (I/YR) = 7.25%matures, the principal gets larger as the interest por- Payment (PMT) = $654.89 per monthtion gets smaller. Over the life of a loan, whether to Monthly budget = $1500 - $654.89 = $845.11 formaturity or some interim stop, the amount of interest other expenses.paid is significant in the early years when there is alarge balance remaining on the loan. The borrowing The question then becomes “Is this a realistic sit-public often does not understand the process, or the uation, or will I have to modify the mortgage to meetreal costs they pay for borrowing money. In the sec- the financial needs of the buyer?” The best part of
    • 26 Module 2this scenario is that it can be done before starting the not change regards any loss in the sale of a principalmortgage qualification process, and will really focus residence. Such a loss is not tax deductible, but if thethe buyer on a property and a mortgage he can actu- taxpayer itemizes his tax return, all home mortgageally afford. If the initial circumstances do not fit, it is interest and real estate taxes are deductible.very easy to recalculate using different LTV ratios, Tax treatment of gain from the sale of a principalinterest rates and even adjustable rate mortgage calcu- residence. Single sellers may receive up to $250,000lations to find the right mortgage opportunity. of capital gain from the sale or exchange of a princi- Another feature of a financial calculator is the pal residence tax-free and for joint filers the tax-freeability to determine loan payoff amounts by using the amount is $500,000. The old rules regarding “over 55“FV” or future value key. This feature will be very years of age”, and “once in a lifetime exemption”, oruseful when considering buying or selling a mortgage, “reinvest the proceeds” no longer apply. Sellers mayand again, is a very easy process. After the mortgage claim this exemption no more than once every twoinformation has been entered in the calculator, enter years as a general rule, but the “unforeseen circum-the length of time the mortgage has been held and stances rule” may apply. Also any improvements andpress the “FV” key. The remaining balance will be alterations should be added to the cost of the propertycalculated and displayed. to adjust the basis and lower the gain realized. Selling An important additional service a lender should costs are deductible from the sale price to reduce thebe able to perform is to help a potential borrower amount realized but routine maintenance costs areevaluate a variety of mortgage opportunities, using not deductible. Because of the increased limits for theboth a financial calculator and TILA/Regulation Z. exemption, it is no longer necessary for title compa-As you recall, under RESPA a lender is required to nies or brokers to file IRS Form 1099S informationprovide the borrower a clear description of the cost of return for principal residence transactions with a sell-credit in both dollar and percentage amounts within ing price of over $500,000, or $250,000 for a singlethree days after the application is submitted. The seller. (See Example on page 27.)APR is calculated based on the finance charge addedto the loan and paid in installments over the life of Capital gain rules – New rates. In the event a sale ofthe loan. (Remember, when you pay points on a loan, a principal residence generates capital gain in excess ofeach point is equivalent to 1% of the loan amount, the exclusion amount, the Taxpayer Relief Act of 1997and it changes the lender’s yield by one eighth percent changed the capital gains tax rate from 28% to 20%annually.) Since the APR is routinely higher than the for those tax payers in the brackets above 15% andquoted rate, the lender can provide guidance on what 10% for those in the 15% bracket. All assets must beis included and what the total numbers really mean to held for more than 12 months to be eligible for thesea borrower in terms of costs he will have to pay for the rates, otherwise the standard tax rate applies. Currentcredit. Also by comparing APRs, it is possible to make rates are 15% and 5% if a five-year holding period isa direct comparison of a variety of loan products. met. Fifteen percent property must be acquired after December 31, 2000 to be eligible. Five percent prop-OTHER MORTGAGE OPPORTUNITIES erty simply needs to be held for five years regardless of acquisition date. The capital gain tax rates applyTaxes and Homeownership to other types of real estate as well, but the exclusionThe Taxpayer Relief Act of 1997. Home owner- applies only to primary residences.ship has always provided some significant tax ben- Office in the home. If any portion of the home isefits, both from a capital gains point of view and used for business purposes, and depreciated on anin IRS tax exemptions. The Act provides even annual basis, that portion of the gain is taxed at 25%.more benefits, particularly concerning the principal The homeowner still has the $250,000 or $500,000residence of the homeowner. The definition of a exemption, but the accumulated depreciation for theprincipal residence is the homeowner’s primary office portion is fully taxable at the 25% rate. Becausedwelling. It can be an owner occupied house, con- IRS rules change frequently and “office in the home”dominium, boat, mobile home or even a recreation rules change as well, it is advised that a professionalvehicle, as long as it has a kitchen, bath and sleeping tax expert be contacted for the latest information onfacilities. On the other hand, the homeowner can have this subject.only one principal residence and to be eligible for thetax benefits, the owner must have occupied it at least Other comments on taxes. Under the old law, thetwo out of the last five years. There can be excep- rates ranged from 15% to 39.6%, but by 2006 thetions such as job transfers, or “unforeseen circum- rates will range from 10 % to 35%. FICA taxes willstances”, that could allow prorated benefits, but for not be affected. The estate tax is repealed, but it willan accurate application of these rules a tax specialist not be effective until 2010. In the meantime, the max-should be consulted. One part of the tax rules that did imum current rate of 55% for estates over $3 million
    • Real Estate Finance and Mortgages 27will fall to 45% and the exempt amount will increase Refinancingto $3.5 million. In 2010 there will be no inheritance When interest rates go down, it is often to the advan-taxes, but in 2011, the $675,000 exempt amount will tage of the homeowner to refinance an existing higherbe reinstated. Remember, these rates are for income rate mortgage. There are several factors at work herelevels, not capital gains, which will remain as described in making the personal as well as the financial deci-above. An interesting point here is that the whole tax sion. First, is there a need for additional cash forcut bill will be repealed January 1, 2011. The reason home improvement or other major expenses? Second,has to do with Senate budget preparation and some is there a lower rate and/or lower cost mortgage avail-obscure, tangled rules that must be followed. Tax pol- able that would reduce your monthly payments sig-icy has always been a political football and the next nificantly? Third, are you prepared to go throughfew years will see a very lively game, particularly if the mortgage application process? And finally, whatworld events continue to be unsettled, and the politi- are your intentions as to how long you will keep yourcal arena remains in turmoil. home?Special rules for reporting cash payments over If you need additional cash, you might consider$10,000. If a real estate broker receives more than a home equity loan, as lenders will often be reluctant$10,000 in cash in a single transaction, the details of to let you take cash out of the mortgage if the ratiosthis deposit must be reported to the IRS on Form are close to the limits. Home equity loans are par-8300. For purposes of this report, cash is considered ticularly attractive if you have a large equity in yourany currency of the United States or another coun- home, and you plan to upgrade or expand your home.try, cashier’s checks, bank drafts, traveler’s checks and Generally, a home equity loan will be less expensivemoney orders. Personal checks are not included in and somewhat easier to get than going through thethis definition, nor are single instruments issued by full refinancing process. Using a home equity loan forbanks, S & L’s, etc. since the issuing entity will meet non-capital expenses, however, is generally not a goodthe reporting requirement. If several items above are idea, unless you have a clear plan to repay the loan.presented with individual values of less than $10,000 Years ago, there was a rule of thumb in the marketbut collectively greater than $10,000, the transac- that said if you have a “2-2-2” advantage you shouldtion must be reported as well. Penalties for failure to refinance. The thinking was that if the rate was 2%report these transactions are both civil and criminal below your current mortgage rate, you would have toand can be severe. Brokers must carefully comply with pay two points or less for a new mortgage, and youthese rules as drug smugglers and dealers may use planned to stay in the house two or more years, youthese transactions to launder money. should refinance. Today, that rule has been overtaken Example: Tax Treatment of Gain from the Sale of Principal Residence A married couple purchased a home in 1992 for $210,000. In 1994, they added a pool and second story for $75,000. They sold the home in April 2000 for $525,000. Cost of sale was $40,000. Net Sales price $525,000 - $40,000 = $485,000 Adjusted (cost) basis $210,000 + $75,000 = $285,000 Taxable Capital Gain Net Sales Price $485,000 Less Adjusted Basis $285,000 Gain on Sale $200,000 Exclusion $500,000 Tax Due $0 Note: If the full amount of the exclusion is not used it cannot be carried forward. A point of caution here—when you calculate your gain under the new rules, you have to include the gains you rolled over into your current house. Say you have owned three houses in the past 15 years and each one appreciated $100,000 during the time you owned it. Since you probably rolled each profit into the next house, you will have a gain of $300,000. For singles, that is a taxable amount of $50,000, but for joint filers you are still under the limit. Your gain must include all the profit you have made on any houses you have owned. See IRS Pub. 523 for the appropriate worksheets. You will need Form 2119 from previous tax filings.
    • 28 Module 2by the times, because it is very easy to use a financial better understand the process, consider the followingcalculator to determine the financial advantage if you example.want to evaluate any refinancing opportunities. For You are considering the purchase of a seasonedexample, if your current mortgage payment is based mortgage that is five years old, and was originally cre-on a 30-year loan at 7.75%, and the original amount ated under the following terms and conditions.was $150,000, your P & I is $1,075 monthly. If a Original loan amount (PV) $60,000new rate of 6.25% is available, the savings would be Interest rate (I/YR) 8%approximately $151 per month. If it required one and Term (N) 20 yearsone half points or $2,025 as a cost of the new mortgage Monthly Payment (PMT) $501.86(One point is one percent of the mortgage amount. Remaining balance after 5 years (FV) $52,515.35One and one half points equals $2,250.) It would take15 months (2250 / 151 = 15 payments) to break even, Table 2.4 (on page 29) is a graph of the mortgageand then, from that point you would be ahead $151 payoff. The solid top line represents the total mort-every month. Make sure you do not exceed the 80/20 gage payment. The next line represents the interestLTV, as any down payment less than 20% of the pur- payments and next line is the mortgage balance. Thechase price will generally trigger private mortgage area below the interest line represents the total inter-insurance that will add to your costs unnecessarily. est paid and the area above that line represents theAnother caution; if you itemize your deductions on principal paid.your tax return, you will reduce your mortgage inter- By picking a point on the time line, it is easy to seeest deductions and cut your savings based on your tax how a discount is represented by the change in slopebracket. For example if you are in the 28% bracket, of the line as the principal of each payment increasesthe $151 savings in interest will be reduced by $43 in and the interest is reduced.tax deductions, so the benefit, if you itemize, will be To calculate the exact amount, follow the instruc-cut to $151 – $43 = $108, still a reasonable savings tions below:monthly. Any proceeds of the refinancing that come You desire to get a 10% return on the money youto the owner are not taxable at this time. invest. If you buy the mortgage with no discount it The final solution to the refinancing puzzle really would cost $52,515.35, which is the present value aftercomes down to financial as well as personal issues. It 60 payments have been made, but you would get onlyis important to save money, but it takes a lot of time the 8% or face value rate of return. You want to get aand effort to complete the mortgage application, plus higher rate to increase your return as well offset anyyour personal circumstances may be such that staying additional risk. In order to determine what you shouldin the home long enough to recoup the costs is not pay for the remaining balance of the 8% mortgage,guaranteed. If the overall benefits of refinancing don’t use a financial calculator. Enter the data for the origi-offset the actual dollar amount gained, do not do it. nal mortgage, then calculate the remaining balance One last comment on refinancing and home (FV) after five years -5 yellow key, N, then press FV.equity loans. Remember that many times a home may (FV = $52,515.35). This is what the remaining unpaidhave an existing second mortgage already in place. If balance of the 8% mortgage is after 60 payments.a home is refinanced, that mortgage must be retired. Now simply change the sign and make $52,515.35If the second mortgage is a home equity loan, it may the current value (PV), change the interest rate to thehave a prepayment penalty attached, or the first lender desired yield (I/YR = 10%), press FV for the futuremay not allow any kind of a second mortgage without value. The calculator will show $47,541.09, which isits approval. the amount you should pay for the mortgage to get a 10% return on your invested amount. The discount is $52,515.35 – $47,541.09 = $4,974.26. It is importantBuying And Selling Mortgages to remember at this point, that you have not createdMortgage professionals may buy and sell mortgages a new mortgage with a 10% rate. The original 8%as part of their personal investment portfolio. When mortgage is still in place, but the amount required tomortgages are bought and sold in this manner, they pay it off has been reduced thus increasing the yield.are not sold at face value, i.e., the full amount of the (The payments will continue until the $52,515.35 isremaining balance is the sales price of the mortgage. paid, but your investment was only $47,541.09!) WillUsually the buyer buys the mortgage at a discount, or the seller sell at this number? The answer is, try it andfor less than the full amount of the mortgage remain- see! Seller motivations span a wide gamut, and the olding. The discount is determined based on the return saying, “Nothing ventured-nothing gained” applies. Ifthe buyer wants to receive on his money, and what the the seller counters with a different sale price you canseller will accept. Any seasoned income stream, such enter this in the calculator as a new PV and ask theas a lease, can be purchased in the same way, but in calculator to determine the rate of return this pricethis discussion only mortgages will be covered. To will produce. The rate might still be acceptable for
    • Real Estate Finance and Mortgages 29your investment portfolio. your own account. However if you advertise to find From the above discussion, it is obvious that a these mortgages that triggers licensure [Rule 69V-40financial calculator is a vital tool. Not only does it .290(2)(e)(f)]provide timely financial information to you personally,but also its very presence indicates to clients and cus- CONCLUSIONtomers alike that you have the professional financial Lending practices and mortgages make the real estateskills to help them solve their mortgage problems. industry work. It is imperative that each practitioner Mortgage brokerage and real estate brokerage go have a thorough knowledge of the current mortgagehand in hand in the real world, but the actual busi- market and what the requirements are to successfullynesses must be separate. Mortgage brokers must have place a mortgage on a piece of real property. Further,a valid State mortgage broker license to receive com- a full understanding of discriminatory practices inpensation for placing a mortgage, just as they need a advertising, and mortgage qualification is impera-State real estate license to broker real estate for a fee. tive to comply with many of the Federal and StateNo license is required to buy and sell mortgages for statutes. Table 2.4: Mortgage Payoff 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Remaining Bal. Interest Annual PaymentSource: Compiled by author
    • 30 Module 2 REVIEW QUESTIONS – MODULE TWOFollowing are review questions. While you are not required to answer these questions to complete the 14-hourcourse, they are intended to help you evaluate your comprehension of the material. Choose the best response toeach review question. The answers to the review questions are found at the bottom of the next page.1. The Federal Housing Administration function is: a. to provide adequate home financing for all buyers. b. a mortgage insurance program. c. not available for qualified buyers. d. for “interest only” mortgages.2. FNMA and FHLMC: a. loan money to individual buyers. b. require PMI on every mortgage. c. are the main buyers of mortgages in the secondary market. d. are government owned corporations.3. A reverse mortgage: a. allows a homeowner to borrow against the equity in their home. b. does not have to be repaid as long as the borrower lives in the home. c. has no income or asset limitations. d. all of the above.4. When advertising properties that fall under HUD guidelines, advertisers should avoid which of the follow- ing words? a. restricted b. exclusive c. cozy d. both a. and b.5. What is the purpose of RESPA? a. to increase paperwork for lenders b. to reduce the cost of real estate settlement services c. to make consumers more knowledgeable about real estate transactions d. both b. and c.6. Which of the following is designed to prevent discrimination in granting credit by requiring banks and other creditors to extend credit equally to all creditworthy applicants with fairness and impartiality? a. Equal Credit Opportunity Act (ECOA) b. Federal Housing Administration (FHA) c. Federal National Mortgage Association (FNMA) d. Department of Housing and Urban Development (HUD)7. Which of the following does not factor into developing a credit score? a. payment history b. number of open balances c. wages earned d. type of credit
    • Real Estate Finance and Mortgages 318. If any portion of a home is used for business purposes and depreciated on an annual basis, that portion of the gain from the sale of the home is taxed at what rate? a. 15% b. 20% c. 25% d. 30%9. Single taxpayers filing an individual tax return may receive up to what amount of capital gain from the sale or exchange of their principal residence? a. $50,000 b. $75,000 c. $100,000 d. $250,00010. If a homeowner is considering refinancing his or her mortgage, what factors should he or she consider? a. how long he or she plans to continue owning the home b. whether there is a need for additional cash for home improvement or other major expense c. whether monthly payments would be significantly reduced d. all of the above 1) b. 2) c. 3) d. 4) d. 5.d. 6) a. 7) c. 8) c. 9) d. 10) d. ANSWERS: Transfer your answers to the space provided on the Answer Sheet.
    • 32 Module 2
    • MODULE 3 The Federal National Mortgage Association (Fannie Mae) Clay Rodgers graduated Janine Spiegelman, BS, received from the University of Florida her degree from the University of with a B.S. degree in Business Miami in 1986. She has been a Administration, majoring in licensed Florida Mortgage Broker Real Estate. He is President of since 1987. Janine worked for the Rodgers Appraisal Services, Inc., State of Florida, Department of and has more than 20 years expe- Banking and Finance (now known rience serving the appraisal needs as The Department of Financial of Florida’s mortgage brokers and Services) from 1994 to 1996 as a lenders. Financial Examiner/Analyst II. She has her own real estate bro- kerage company and enjoys work- ing with first time homebuyers. LEARNING OBJECTIVESAfter completing this module, you should be able to:1. Describe the origins of Fannie Mae. 8. Explain the origins and importance of private2. Explain the two primary lines of business that mortgage insurance (PMI). Fannie Mae is involved in to generate revenues. 9. Explain Fannie Mae property appraisal guide-3. Explain how the federal government regulates lines, including appraiser qualifications, Fannie Mae. appraisal documentation, the appraisal review process, and the approaches to value.4. Describe the process by which Fannie Mae provides a constant source of mortgage funds 10. Summarize mortgage eligibility requirements for to lenders but does not lend money directly to conventional loans. homebuyers. 11. Describe the process for calculating a bor-5. Explain the differences between the primary and rower’s earnings on Form 1005, Verification of secondary mortgage markets. Employment.6. Explain how Fannie Mae has taken steps to 12. Summarize acceptable sources of income in the eliminate predatory lending practices, including application process. a description of steering, excessive fees, prepay- 13. Summarize acceptable and unacceptable ment penalties, and full-file credit reporting. sources of funding in the application process.7. Summarize Fannie Mae mortgage loan limits for 14. Describe the monthly housing-expense-to each type of housing in 2005. income ratio.INTRODUCTION Fannie Mae relies on mortgage professionals to makeThe Federal National Mortgage Association, which loan-underwriting decisions that result in invest-is commonly known as Fannie Mae, is the oldest ment-quality loans. Such loans require a high level ofand largest secondary market investor in the nation. underwriting to ensure that the borrower is able andFannie Mae also is the largest single source of mort- willing to repay the mortgage debt and that the prop-gage credit to minority and low- and moderate- erty provides sufficient security for the mortgage.income families in the United States. The primary The purpose of this module is to provide a review ofmission of Fannie Mae is to make home ownership the historical background and mission of Fannie Maeavailable to a broad cross section of the population. and of the underwriting guidelines that it imposes.© 2005 Bert Rodgers Schools of Real Estate, Inc. 33
    • 34 Module 3HISTORICAL PERSPECTIVE Fannie Mae is limited by its charter to the resi- dential mortgage market. For this reason FannieFannie Mae was originally established by an act Mae purchases mortgage loans from primary lendersof Congress in 1938 and was a part of the Federal such as mortgage companies, savings institutions, andHousing Administration (FHA). Because of the GreatDepression, the national economy was in a state of commercial banks. The major sources of income fordisarray at that time. Fannie Mae was specifically cre- Fannie Mae come from two lines of business; mort-ated to bring stability back to the housing industry gage portfolio investments and guaranty fees on itsand was authorized to buy only FHA-insured loans to mortgage-backed securities (MBS). Mortgage port-replenish lenders’ supply of capital. In 1944, the role folio investments consist of mortgages purchasedof Fannie Mae was expanded to allow the purchasing throughout the United States from approved mort-of loans insured by the Department of Veterans Affairs gage lenders. Income is derived from the difference,(VA). Then, in 1968, Congress rechartered Fannie or spread, between the yield on the mortgage loansMae as a private company. The privatization process and the borrowing costs to fund the investments. Forwas completed in 1970, and FNMA started purchas- MBS, Fannie Mae reviews the quality of a large pooling conventional mortgages. In 1976 FNMA pur- of mortgage loans and then issues securities backed bychased more conventional mortgages than FHA and these loans. The corporation provides a guaranty ofVA mortgages for the first time. Congress mandated timely payment of interest and principal to the pur-that Fannie Mae operate with private capital on a self- chaser of the MBS in return for a guaranty fee.sustaining basis to enhance the flow of funds throughthe secondary market to American homebuyers. Since 1968, Fannie Mae has provided more than63 million families with mortgage financing. Fannie SECTION REVIEWMae receives no subsidy or appropriation from thefederal government, and it does not insure loans. Primary mission of Fannie Mae: The primary mis-Therefore, Fannie Mae securities are not backed by sion of Fannie Mae is to make home ownershipthe full faith and credit of the U. S. Government. available to a broad cross section of the UnitedFannie Mae operates exclusively in the secondary States population. Fannie Mae is the largest sin-mortgage market providing support to mortgage gle source of mortgage credit to minority andlending institutions in the primary market. low- and moderate-income families. Fannie Mae is also the oldest and largest secondaryOPERATIONAL STRUCTURE AND market investor in the nation.OBJECTIVES Fannie Mae established by Congress in 1938:Fannie Mae operates under a federal charter, which is • Originally part of the Federal Housingcalled the Federal National Mortgage Association Charter Administration (FHA); specifically createdAct. This act confers certain rights and responsibilities to bring stability back to the housing indus-on the company. Specifically, the charter requires that try and authorized to buy only FHA-insuredFannie Mae increase liquidity in the residential mort- loans.gage finance market and promote access to mortgagecredit throughout the country. Fannie Mae’s business • Fannie Mae’s role expanded in 1944 tois focused on those mortgages with an original prin- allow purchasing of loans insured by thecipal balance that is less than or equal to mandated Department of Veterans Affairs (VA).annual loan limits. The company also has a special • Rechartered as a private company byresponsibility to facilitate low- and moderate-income Congress in 1968, with privatization processfamilies and housing in underserved areas. complete in 1970. Congress mandated that Special benefits afforded Fannie Mae to assist it in Fannie Mae operate with private capital on afulfilling its missions include: self-sustaining basis Fannie Mae started pur- • exclusion from the Security and Exchange chasing conventional mortgages in 1970 and Commission’s registration requirements; by 1976 was purchasing more conventional • exemption from state and local income taxes; mortgages than FHA and VA. • the availability of debt as collateral for public Federal National Mortgage Association Charter Act: deposits; • Requires Fannie Mae increase liquidity in • the eligibility of securities for Federal Reserve the residential mortgage finance market and open market purchases; and promote access to mortgage credit through- out the nation. • the ability of the Treasury Department to pur- chase up to $2.25 billion in Fannie Mae debt.
    • The Federal National Mortgage Association (Fannie Mae) 35 able housing goals, monitors the fulfillment of those • Special responsibility to facilitate low- and goals, and approves new loan programs. The Office moderate-income families and housing in of Federal Housing Enterprise Oversight (OFHEO) underserved areas. is an independent agency within HUD that is respon- • Charter limits Fannie Mae to the residential sible for the financial safety and soundness of Fannie mortgage market Mae. In accordance with legislation enacted in 1992, OFHEO develops regulations to implement risk- Two lines of business: based capital standards. • Mortgage portfolio investments consist of In 2003 Fannie Mae stated their total business mortgages purchased throughout the United volume grew by 68% and their total book of busi- States from approved mortgage lenders. ness grew by over 20%. However, on December 22, Income derived by the spread between the 2004 Fannie Mae announced that its previously issued yield on the mortgage loans and the borrow- financial statements should not be relied upon in light ing costs to fund the investments. of the SEC’s determination that the financial state- • Mortgage-backed securities (MBS) are securi- ments were prepared applying accounting practices ties issued backed by a large pool of mort- that did not comply with generally accepted account- gage loans. Fannie Mae provides a guaranty ing principles, or GAAP. of timely payment of interest and principal to In 2004 the OFHEO classified Fannie Mae as sig- the purchaser in return for a guaranty fee. nificantly undercapitalized. The OFHEO directed Fannie Mae to submit a capital restoration plan that would provide for compliance with its minimumRegulation of Fannie Mae capital requirement, as well as a 30% capital sur-Fannie Mae is regulated by two principal federal plus. Fannie Mae formally began its capital restora-agencies. The Department of Housing and Urban tion program December 2004 by issuing $5 billion inDevelopment (HUD) is the mission regulator for the preferred stock. In addition, the company reduced itscorporation. HUD is responsible for ensuring that the first quarter 2005 common stock dividend by 50% tocorporation fulfills its mission to increase liquidity in accelerate capital restoration.the residential mortgage finance market, sets afford- Fannie Mae worked with OFHEO to develop and Table 3.1 FNMA Fortune 500 Ranking % CHANGE PREVIOUS FORTUNE 500 DATA $ MILLIONS FROM 2003 RANK RANK Revenues 53,766.9 1.6 20 16 Profits 7,904.9 71.1 11 15 Assets 1,009,568.5 — 2 2 Stockholders’ Equity 22,373.3 — 33 44 Market Value 75,061.3 — 30 — Employees 5,032 — 460 — Previous Earnings Per Share Profits as % of % Rank Rank 2003 ($) 7.91 Revenues 14.7 56 99 2002 ($) 4.53 Assets 0.8 392 — % change 74.6 Stockholders’ Equity 35.3 32 — 10-year growth rate (%) 16.6 Total Return to Investors % Rank 2003 19.6 325 10-year annual rate 16.5 102Source: www.Fortune.com
    • 36 Module 3submit a proposed capital restoration plan, and hav- are loaned to borrowers. Lenders within the primarying obtained the agency’s approval, the company will market include mortgage companies, savings and loanwork closely and cooperatively with OFHEO to carry associations, commercial banks, credit unions, andout the requirements of the plan. local housing finance agencies. These lenders sell Fannie Mae is a private, shareholder-owned com- mortgages in the secondary mortgage market. Thispany that endeavors to provide mortgage money for is where mortgages are bought and sold by a varietypeople in all communities throughout the United of investors, including Fannie Mae, insurance com-States. Rather than lending money directly to home- panies, pension funds, securities dealers, mortgagebuyers, Fannie Mae cooperates with lenders to make investment trusts, and other financial entities andsure that they have a constant source of mortgage institutions.funds. In addition to providing mortgage credit to After a mortgage has been originated, the lenderhomebuyers in all areas of the country under all eco- has two choices. Either the mortgage can be held innomic conditions, Fannie Mae also demonstrably the lender’s own portfolio, or it can be sold to second-lowers mortgage interest rates. The corporation has ary market investors, including Fannie Mae. Whenapproximately 5,100 full- and part-time employees lenders sell a mortgage, they are able to replenishcombined, and the company stock is actively traded their funds so that they can lend more money to moreon the New York Stock Exchange under the stock homebuyers. However, loans that are sold to Fanniesymbol FNM. The company stock is also a part of the Mae must be in full compliance with the company’sStandard & Poor’s 500 Composite Stock Price Index. guidelines and loan limits. Its underwriting guidelinesIn 2004, Fannie Mae was ranked 20th by the Fortune are very thorough, and loan limits are adjusted each500. See Table 3.1. year in response to changes in housing affordability. Fannie Mae operates exclusively within the secondaryFNMA’s Primary Lines of Business mortgage market to ensure the availability of mort- gage funds in two ways. First, the company pays cashFannie Mae has three principal lines of business: for mortgages that are purchased from lenders andsingle-family business, multifamily business, and then held in the company portfolio. Second, Fanniehousing and community development. Mae issues MBS in exchange for pools of mortgagesSingle-family business. Fannie Mae buys single- from lenders. These securities provide lenders with afamily home loans from mortgage bankers, sav- more liquid asset to either hold or sell.ings and loan associations, commercial banks, creditunions, state and local housing finance agencies(HFA’s), and other financial institutions. This provides SECTION REVIEWthese institutions with a steady stream of funds avail- Department of Housing and Urban Developmentable for lending, so that even more loans can be made (HUD): Mission regulator for Fannie Mae.to potential homebuyers. Responsible for ensuring that Fannie Mae fulfills its mission to increase liquidity in the residen-Multifamily business. Fannie Mae also pro- tial mortgage finance market, sets affordablevides financing for the multifamily housing market housing goals, monitors the fulfillment of thosethroughout the United States. Multifamily housing is goals, and approves new loan programs.defined as being rental housing consisting of five ormore dwelling units. Through a network of approved Office of Federal Housing Enterprise Oversightlenders, the corporation provides financing options (OFHEO): Independent agency within HUDon rental housing. This results in an enhanced level responsible for the financial safety and sound-of flexibility and liquidity within the rental housing ness of Fannie Mae. Develops regulations tomarket overall. implement risk-based capital standards. Single-family business: Single-family home loansHousing and community development. On a larger are purchased from mortgage bankers, sav-scale, Fannie Mae operates as a catalyst for community ings and loan associations, commercial banks,development by expanding the opportunities for home credit unions, state and local housing financeownership throughout the nation. A recent example of agencies, and other financial institutions.this capability is the company’s $2 trillion American Provides these institutions with a steady streamDream Commitment, which is a ten-year plan to of funds available for lending.increase the nation’s home ownership rate to unprec- Multifamily business: Multifamily housing isedented levels. The plan was unveiled in March 2000 defined as rental housing consisting of fiveand specifically targets 18 million American families. or more dwelling units. Fannie Mae provides The lenders that do business with Fannie Mae are several financing options for rental housinga part of the primary mortgage market. The primary through a network of approved lenders.market is where mortgages are originated and funds
    • The Federal National Mortgage Association (Fannie Mae) 37 an interest rate or fee reduction. Housing and community development: Fannie • The borrower should be offered the choice of Mae operates as a catalyst for community another mortgage product that does not require development by expanding opportunities for payment of such a premium. home ownership. Example is American Dream Commitment. • The terms of the mortgage provision that requires a prepayment penalty should be ade- Primary market: Market in which mortgages are quately disclosed to the borrower. originated and funds are loaned to borrowers. Secondary market: Market in which mortgages • The prepayment penalty should not be charged are bought and sold by a variety of investors. when the mortgage debt is accelerated as the Fannie Mae operates exclusively in the second- result of the borrower’s default in making the ary market. mortgage payments. Additional RequirementsUnacceptable Lending Practices Fannie Mae requires that lenders who are servic- ing any Fannie Mae loan must report on a monthlyAs part of the $2 trillion American Dream basis to the credit repositories the status of each loan.Commitment, Fannie Mae has made a conscious effort Fannie Mae believes that it is important for a bor-to eliminate predatory lending practices through their rower’s entire payment history be reported, since thatmortgage consumer rights agenda. Lending practices gives a borrower with a good payment history morethat are considered predatory and are not acceptable opportunities to obtain new financing.to Fannie Mae include the following: Fannie Mae requires loan servicers to maintainSteering. Lenders are required to offer mortgage escrow deposit accounts for the monthly deposit ofapplicants a full range of products for which they qual- funds to pay taxes, ground rents, and mortgage insur-ify and should specifically avoid the steering of bor- ance premiums.rowers to high-cost products that are designed for less Fannie Mae loan limits are linked to the Federalcreditworthy borrowers if the applicants can qualify for Housing Finance Board’s (FHFB) October single-lower-cost products. In addition, consumers who seek family price survey. Loan limits are adjusted each yearfinancing through a lender’s higher-priced subprime in accordance with the results of this housing survey.lending channel should be offered or directed toward Effective January 1, 2006 first mortgage loan limitsthe lender’s standard mortgage product line if they are are as summarized within Table 3.2.able to qualify for one of the standard products. Table 3.2: 2006 First Mortgage Loan LimitsExcessive fees. For loans delivered to Fannie Mae,points and fees charged to a borrower should not Loan Type Loan Limitexceed 5% of the loan amount, except where this One-Family Loans $417,000would result in an unprofitable origination, such Two-Family Loans $533,850as with a very small loan size. In addition, FannieMae will not purchase a mortgage if it is subject to Three-Family Loans $645,300the requirements of the Home Ownership and Equity Four-Family Loans $801,950Protection Act of 1994 (HOEPA) that apply to highcost Source: Compiled by author.mortgages. Loan limits for one-to-four-family first mort-Prepaid single-premium credit life insurance gages in Alaska, Guam, Hawaii, and the U.S. Virginpolicies. Fannie Mae will not purchase or securitize Islands are 50% higher than the limits for the remain-any mortgage for which a prepaid single-premium der of the country. The maximum allowable originalcredit life insurance policy was sold to the borrower loan amount for a second mortgage is $208,500. Thisin connection with the origination of the mortgage second mortgage limit is $312,750 in Alaska, Guam,loan, regardless of whether the premium is financed Hawaii, and the U.S. Virgin Islands. In addition, theas a part of the mortgage amount or paid from the sum of the original loan amounts for the first and sec-borrower’s funds. ond mortgages cannot exceed $417,000 within thePrepayment penalties. Fannie Mae will only con- continental United States, and $625,500 in Alaska,sider prepayment penalties under the terms of a nego- Guam, Hawaii, and the U.S. Virgin Islands.tiated contract, or where the lender adheres to the (www.fanniemae.com)following criteria: With regard to mortgage delinquency, Fannie Mae takes every possible step to avoid foreclo- • A mortgage with a prepayment penalty should sure proceedings. It is recognized that when there provide some benefit to the borrower, such as is a problem with a loan, foreclosure is the least
    • 38 Module 3desirable solution for all parties. In addition to being the Desktop Underwriter (DU) system. Fannie Maean unpleasant experience for the borrower, it is also also introduced the True Cost Calculator, which is anthe most costly solution for Fannie Mae and for the Internet-based tool that can be used by consumers toloan servicer. Fannie Mae has instructed its lenders shop for the best mortgage terms in their area.and servicers to avoid foreclosure whenever possibleby offering borrowers a variety of alternatives. Thesealternatives may include temporary forbearance, loanmodifications, and preforeclosure sales. Fannie Mae SECTION REVIEWpolicies regarding private mortgage insurance (PMI) Unacceptable lending practices:are consistent with the PMI cancellation legislation • steering;that was passed by Congress in 1998. This law appliesto all mortgages originated after July 29, 1999, and • excessive fees;requires lenders to disclose to borrowers their rights • prepaid single-premium credit life insuranceto termination of mortgage insurance. Fannie Mae policies; andrequires automatic cancellation of a borrower’s PMI • prepayment penalties.on all single-family residences that are the borrower’ First mortgage loan limits: From $417,000 for one-principal residence when the outstanding loan balance family loans to $801,950 for four-family loans.reaches 78% of the original property value, provided Loan limits are 50% higher in Alaska, Guam,that loan payments are current at that time. Hawaii, and the U.S. Virgin Islands. Fannie Mae policies also extend beyond the Private mortgage insurance: Fannie Mae requiresrequirements of the law. For existing mortgages that automatic PMI cancellation when the outstand-have reached their half-life, which would be the 15th ing loan balance reaches 78% of original prop-year of a 30-year mortgage for example, PMI is auto- erty value, or when existing mortgages havematically terminated. reached their half-life. In 1994, Fannie Mae initiated a new programcalled the Partnership Office Initiative. Througha series of Partnership Offices around the country,the corporation is able to create long-term relation- UNDERWRITING GUIDELINESships with lenders, local governments, public officials,housing organizations, community nonprofit groups, Fannie Mae has very specific underwriting guidelinesbuilders, and developers. As of August 2003, Fannie that must be adhered to at all times. A review of allMae had opened 54 Partnership Offices, representing Fannie Mae guidelines would extend well beyond themore than $320 billion in investment plans to help scope of this module, since they are very extensive.more than 3.5 million families obtain affordable hous- For the purposes of this module, we will reviewing in these locations. the more pertinent Fannie Mae guidelines relating to In January 2000, Fannie Mae announced the cre- appraisals, mortgage eligibility for conventional mort-ation of the Mortgage Consumer Bill of Rights, which gages, and underwriting for principal residences.is intended to help promote consumer protection forhomebuyers. According to this document, consumers Property and Appraisal Guidelineshave the following rights: Obtaining an accurate and reliable appraisal of the real estate serving as security for the loan is a cru- • the right to have access to mortgage credit; cial component of the loan underwriting process. • the right to the lowest-cost mortgage credit for For this reason, Fannie Mae has very detailed guide- which the consumer can qualify; lines regarding every aspect of the appraisal process. • the right to know the true cost of a mortgage; This includes how to select a reputable appraiser, • the right to be free of regulatory burden; and what the responsibilities of the appraiser are, what information is required for an appraisal, and how to • the right to know what a lender’s mortgage deci- review an appraisal report. A good understanding of sion is based upon. these appraisal guidelines serves to facilitate both the The Mortgage Consumer Bill of Rights is appraisal process and the underwriting process.intended to be the cornerstone of Fannie Mae’s www.fanniemae.comAmerican Dream Commitment, which was dis- Appraiser qualifications. The first step in the processcussed earlier in this module. Also introduced with is to ensure that a well-qualified appraiser is chosenthe Mortgage Consumer Bill of Rights was Fannie to estimate the market value of the property. UnlikeMae’s open-book approach to automated underwrit- the FHA, Fannie Mae does not approve individualing. This includes disclosure of all loan fees used by appraisers. It is the responsibility of the lender to obtain an independent, disinterested examination and
    • The Federal National Mortgage Association (Fannie Mae) 39valuation of the property that secures the mortgage A partial list of unacceptable appraisal practicesthat is intended to be sold to Fannie Mae. Therefore, includes the following:the lender is responsible for selecting the appraiserand ordering the appraisal for each mortgage transac- • development of and/or reporting an opinion oftion. value that is not supportable by market data or The appraiser must not be selected by any other that is misleading;party who has an interest in the transaction such as • inclusion of inaccurate factual data about thethe property seller or the real estate broker. In addi- subject neighborhood, site, improvements, ortion, the lender must not attempt to influence the comparable sales;appraiser in any way. The appraiser must be allowedto estimate the market value of the subject property • failure to comment on negative factors withbased upon market data available for analysis as of the respect to the subject neighborhood, subjectdate of valuation. Since lenders are solely accountable property, or proximity of the subject property tofor the performance of the appraiser selected for each adverse influences; andtransaction, the lender must take appropriate steps to • creation of comparable sales by combiningensure that the appraiser selected is qualified to per- vacant land sales with the contract purchaseform appraisals for the particular types of property price of a home that has been built or will beand the property locations being considered. built on the land. Lenders typically will consider the appraiser’s edu-cation and experience levels, as well as reviewing sam- Appraisal documentation. The lender is required tople work products and taking into consideration any make the appraiser aware of any and all informationprofessional references and professional affiliations the concerning the subject property that it is aware of, ifappraiser may have. Professional appraisal designations the information could affect either the marketabilitycan be helpful in analyzing an appraiser’s qualifications, of the property or the appraiser’s opinion of value.but federal law prohibits a lender from selecting an This information is usually conveyed by providing theappraiser based solely on the appraiser’s membership appraiser with a copy of the sales contract involvingin any particular appraisal organization. The appraiser the property. In order for the appraisal to be valid, itmust be experienced in appraising the types of prop- must have been prepared no more than 12 monthserties for which the lender intends to use his or her prior to the date of the note and mortgage.services. A lender must not assume that an appraiser is If an appraisal report is more than four monthsadequately qualified based only on his or her member- old, the appraiser is required to inspect the exterior ofship in a particular organization or on the fact that the the property and review current market data to deter-appraiser is state-licensed or state-certified. mine whether the value of the property has declined Fannie Mae also requires that lenders use apprais- since the date of the original appraisal. If the appraiserers who are state-licensed or state-certified in accor- believes that the value of the property has declined, adance with Title XI of the Financial Institutions new appraisal is required. If the appraiser believes thatReform, Recovery, and Enforcement Act of 1989 the value of the property has not declined, the lender(FIRREA). Lenders must ensure that any appraisers is required to request an update of the appraisal basedthey retain are appropriately licensed. Proof of licen- upon an exterior inspection of the improvements.sure must be documented by the lender by retaining Appraisal reports must be prepared in conformancein its office files a copy of the license of each appraiser with the Uniform Standards of Professional Appraisalused. The appraiser is also required to note his or her Practice (USPAP). Fannie Mae also has certain report-license or certification number on each individual ing requirements that extend beyond USPAP require-appraisal report prepared. ments. Fannie Mae has five different appraisal forms Lenders must ensure that appraisers describe the that can be used to manually underwrite mortgages,subject property and the neighborhood in factual, depending upon the property type. The mostunbiased, and specific terms. Fannie Mae assumes commonly used form is Form 1004, the Uniformthat professional appraisers understand that discrimi- Residential Appraisal Report, which is designed fornatory valuation and appraisal reporting practices are one-family properties in planned unit developments.illegal and unethical. Appraisers must not use subjec- A list of commonly used Fannie Mae forms can betive terms in their reports, such as pride of ownership, found in Table 3.4. Forms may be viewed at www.efanniemae.com/sf/forms/index.jsppoor neighborhood, or crime-ridden area. In addi-tion, since Fannie Mae holds lenders responsible forthe quality of the appraisals it uses, the lender mustensure that the appraiser does not engage in any unac-ceptable appraisal practices.
    • 40 Module 3 Table 3.4: Commonly Used Fannie Mae Forms 1025 (3/05) Small Residential Income Property Appraisal Report 1073 (3/05) Individual Condominium Unit Appraisal Report 1075 (3/05) Exterior-Only Inspection Individual Condominium Unit Appraisal Report 2055 (3/05) Exterior-Only Inspection Residential Appraisal Report 2075 Desktop Underwriter Property Inspection Report 2090 (3/05) Individual Cooperative Interest Appraisal Report 2095 (3/05) Exterior-Only Inspection Individual Cooperative Interest Appraisal ReportSource: Compiled by authorReviewing the appraisal report. The subject prop- located in the country or anywhere beyond the subur-erty data section of an appraisal report is designed ban area is considered to be rural. All properties mustto allow for a very specific identification of the sub- be accessible by roads that meet local standards.ject property. Appraisers are required to describe the Related to property location are the degree oflocation of the property and to provide information development and the growth rate for the area. Theconcerning property taxes, the occupancy status of degree of development of an area may indicatethe property, the property rights being appraised, the whether the property being appraised is residentialcurrent property owner, and the client. The subject in nature. This is an important consideration, sinceproperty should be identified by its complete legal Fannie Mae does not purchase or securitize mortgagesdescription and property address. Identification via secured by agricultural properties. The lender mustthe use of a post office box number is not accept- carefully review the appraisal report for propertiesable. Appraisers must also identify the property rights that have sites larger than those typical for residentialbeing conveyed, such as fee simple interest or leased properties in the area. Particular attention should befee interest. Appraisers must disclose if the subject paid to the description of the subject neighborhood,property is located within a planned unit development zoning, and the highest and best use conclusion for(PUD) and whether the appraisal is being used for a the property.refinance transaction. Appraisers are required to report the predomi- Appraisers are responsible for adequately nant type of occupancy in the area of the property,researching market data from all reasonably available including owner or tenant, as well as the percent-and appropriate sources of information. These sources age of occupancy in the area. This information caninclude public records, proprietary data sources, mul- be used to determine the appropriateness of locationtiple listing services, and interviews with active mar- adjustments made within the valuation section of theket participants in the area such as real estate brokers. report.Failure to consider all relevant market data can result Appraisers are required to report the price rangein an appraisal that is of poor quality and potentially and predominant price of properties within the sub-misleading. ject neighborhood. This information can be used to Appraisers are also required to understand and determine whether the subject property representsrelate to the reader the fundamental characteristics an overimprovement in the area, which relates to theof the neighborhood in which the subject property principle of conformity.is located. Neighborhood information of particular Appraisers are also required to report the ageinterest includes neighborhood boundaries, which can range and predominant age of properties in the neigh-be natural or man-made, neighborhood character- borhood, present land uses, changes in land use, andistics, and neighborhood factors that can impact the competitive properties in the area. Analysis of the sub-marketability of the subject property. These charac- ject site is also important. It should include a discus-teristics can include the proximity of the property to sion of the property size, configuration, topography,employment centers and amenities, employment sta- availability of utilities, street improvements, and otherbility in the area, and market appeal. amenities. These property characteristics can enhance The location of the property being appraised must or diminish the marketability of the subject propertybe identified as urban, suburban, or rural. An urban and should be examined in appropriate detail.location means that the property is located within a Appraisers are responsible for reporting the cur-city, while a suburban location means that the prop- rent zoning of the subject property as of the date oferty is located adjacent to a city. A property that is valuation. It is also necessary to determine whether
    • The Federal National Mortgage Association (Fannie Mae) 41the subject property’s improvements represent a legal understood of the three typical approaches to value.nonconforming use. Zoning regulations determine the The sales comparison approach is relied upon mostlegally permissible use of the property, which leads to heavily in the appraisal of single-family residences,the highest and best use conclusion for the property. and is based upon the principle of substitution, whichHighest and best use is considered to be the reason- states that a knowledgeable purchaser will not payable and probable use that supports the highest pres- more for a property than the price he or she wouldent value on the effective date of the appraisal. For pay for a similar property of equal desirability andimprovements to represent the highest and best use, utility if purchased without undue delay. The salesthey must be legally permissible, financially feasible, comparison approach involves the analysis of recentphysically possible, and must provide more profit sales of properties considered similar to the subject(return) than any other use of the site would generate. property, with adjustments made to the sales account- Other site-related information pertinent to the ing for characteristic differences such as location, size,appraisal include the availability of utilities, the exis- and condition.tence of off-site improvements such as sidewalks The foundation of the sales comparison approachand street lights, the particular characteristics of the is high-quality market data. Therefore, it is imperativelot itself, and flood hazard information. The subject that appraisers exercise due diligence while research-property’s improvements must also be inspected and ing and verifying appropriate market data.analyzed closely so that a detailed description can be Fannie Mae requires appraisers to use a minimumincluded within the report. This description should of three comparable sales as part of the sales compari-include a general overall description as well as specific son approach; however additional sales may be sub-descriptions of the exterior, foundation, basement, mitted if the appraiser considers them to be pertinentinsulation, interior surfaces, heating and cooling sys- to the analysis. Appraisers are encouraged to use salestems, kitchen equipment, attic, amenities such as a that have occurred within the preceding 12 months,swimming pool, and car storage (garage or carport). but older sales can be used if their use is justified andThe appraiser should determine whether the improve- explained within the appraisal report. The appraiserments are in conformance with the neighborhood in is required to comment on the use of any sale that isterms of age, design, and construction materials. older than six months. Sales that have occurred within For example, a single-family residence that is 30 the subdivision in which the subject property is locatedyears old will not be in conformance with the neigh- are usually the best indicators of value and should beborhood if the predominant property age in the area used if at all possible. If the appraiser uses sales out-is 10 years. The appraiser should report both the side the subdivision, an explanation is required.actual age and the effective age of the improvements. In the sales comparison approach, adjustments areWhen properly maintained, improvements can have made to the comparable sale properties in comparisonan effective age that is considerably less than their to the subject property. Adjustments are made for dif-actual age. This is an important consideration, since ferences relating to sales and financing concessions,Fannie Mae does not place a restriction on the actual location, terms and conditions of sale, date of sale,age of dwellings. and the physical characteristics of the property such The gross living area and the gross building as size and condition. Adjustments for the passage ofarea of the subject property’s improvements must be time, commonly referred to as time adjustments, arereported within the appraisal report. Gross living area intended to reflect changes in market conditions overrelates to above-grade heated and cooled living space, time, if any. These adjustments should be supportedwhile gross building area relates to the total finished by market evidence whenever possible. The subjectarea of the improvements, including common areas, property is the standard against which the comparablestairways, and hallways, based upon exterior build- sales are compared. Therefore, a comparable sale withing measurements. It is important for the appraiser to an inferior property characteristic requires a positiveuse consistent techniques when comparing the build- adjustment in comparison with the subject property.ing area of comparable sale properties to the subject Conversely, a comparable sale with a superior prop-property. Inconsistent measurement or comparison erty characteristic requires a negative adjustment intechniques can result in misleading appraisal results. comparison with the subject property. Fannie Mae has established guidelines for the net and gross per-Approaches to Value centage adjustments that underwriters may rely on as general indicators of whether a property should beThe three approaches to value include the sales used as a comparable sale in an appraisal.comparison approach, the cost approach, and the income Generally, the dollar amount of the net adjust-approach. ments for each comparable sale should not exceedSales comparison approach. The sales comparison 15% of the sales price for the comparable sale. If theapproach is the most straightforward and most easily adjustments exceed 15%, the appraiser is required
    • 42 Module 3to offer an explanation for the severity of the adjust- indicated value estimates. Each approach to value willments that have been made. In addition, the dollar have certain strengths and weaknesses. The appraiseramount of the gross adjustments for each comparable must weigh these factors to arrive at a final estimate ofsale should not exceed 25% of the sales price of the market value for the subject property as of the date ofcomparable sale. The gross adjustment is measured valuation. The reconciliation process is never an aver-without regard for positive or negative adjustments. aging technique.Cost approach. The cost approach, which is alsobased upon the principle of substitution, assumes thata potential purchaser will consider building a substi- SECTION REVIEWtute residence that has the same utility as the propertythat is being appraised. The cost approach measures Property and appraisal guidelines:the cost of production, and its reliability is a function • Fannie Mae does not approve individualof well-supported replacement cost estimates, depre- appraisers; lenders have the responsibilityciation estimates, and an estimate of market value of selecting the appraiser and ordering thefor the underlying land. Fannie Mae will not accept appraisal.appraisals that are based solely upon the cost approach. • Federal law prohibits a lender from selectingIn addition, the cost approach is not required in the an appraiser based solely on the appraiser’sappraisal of a unit in a condominium or cooperative membership in any particular appraisal orga-project because of its inherent impracticality. nization. The cost approach is best suited for the appraisalof newer properties that do not suffer from high lev- • Lenders are required to select state-licensedels of accrued depreciation. As the effective age of the or state-certified appraisers.subject property increases, the reliability of the cost • Appraisals must be prepared no more thanapproach as an indicator of value decreases. This is 12 months prior to the date of the note anddue primarily to the subjectivity associated with the the mortgage.estimation of accrued depreciation suffered by the • Property location is described as urban, sub-improvements. Accrued depreciation consists of urban, or rural. Fannie Mae does not pur-physical deterioration, functional obsolescence, and chase or securitize mortgages secured byexternal obsolescence. Physical deterioration and agricultural properties.functional obsolescence are caused by characteristicsof the subject property itself. External obsolescence, • Approaches to value include sales compari-which is also commonly referred to as economic obso- son, cost, and income approaches. For mostlescence, is caused by factors outside the subject prop- residential properties, the sales comparisonerty, which might include, for example, an economic approach is the most useful approach todownturn or proximity to negative influences such as value.a prison facility or landfill.Income approach. The income approach is usedonly for income-producing investment properties. It Mortgage Eligibility for Conventional Loansis not applicable in the appraisal of owner-occupiedsingle-family residences. The income approach is Fannie Mae purchases and securitizes conventionalbased upon the principle of anticipation, which states first and second mortgages that meet the qual-that the market value of a property is related to the ity standards private institutional investors apply torent or income that the property is capable of gener- mortgages of similar lien types. Unless specified toating. A market rental rate is estimated for the subject the contrary, these eligibility requirements apply toproperty based upon an analysis of comparable rental both types of mortgages. Fannie Mae purchases andproperties in the area. The market value of the prop- securitizes conventional first mortgages that provideerty can then be estimated by using one of a variety of for either a fixed interest rate or an adjustable inter-comparison techniques, including gross rent multipli- est rate. As for conventional second mortgages, onlyers, net income multipliers, or direct capitalization of fixed-rate mortgages are considered by the corpora-the net operating income into a market value estimate tion. Purchase money transactions are those in whichfor the property. the proceeds are used to finance the purchase of real The final step in the appraisal process is the rec- property. A refinance transaction is not a purchaseonciliation and final value estimate. In this section of money transaction. A refinance transaction involvesthe report, the appraiser must reconcile the reason- the repayment of an existing debt from the proceedsableness and reliability of each applicable approach to of a new mortgage that has the same borrower andvalue, as well as the reasonableness and validity of the the same property as security for the mortgage.
    • The Federal National Mortgage Association (Fannie Mae) 43 Only mortgages that have been made to natural Underwriting Guidelines for Principalpersons will be considered by Fannie Mae for purchase Residences and Second Homesor securitization. The borrower cannot be a legal entity Underwriters will consider all aspects of a borrower’ssuch as a corporation or general partnership. credit before approving or declining a mortgage appli- In addition, the borrower must have reached cation. To determine whether a particular borrowerthe age at which the mortgage note can be legally is eligible for Fannie Mae financing, lenders analyzeenforced in the jurisdiction in which the property is the borrower’s ability and willingness repay the mort-located. Mortgages cannot be made to minors; how- gage debt. Analyzing the ability to repay the debt isever there is no maximum age limit for borrowers. a fairly straightforward procedure, but analyzing the Fannie Mae will accept mortgages that have a co- borrower’s willingness to repay the debt is much moreborrower, and that individual is not required to take difficult to evaluate.title to the property. However, income from the co- A borrower’s income potential consists of manyborrower will not be accepted for qualifying purposes factors including occupation, employment tenure,unless he or she also signs the mortgage note. opportunities for future advancement, educational Three occupancy status definitions are used to background, and occupational training. Lenders typi-determine the eligibility of a conventional mort- cally use Form 1005, Verification of Employment,gage. A principal residence is defined as a one-to- to determine the adequacy and continuation of thefour-family property that is the borrower’s primary applicant’s income. If earnings shown on Form 1005residence. At least one of the borrowers must occupy are not shown as a gross monthly income, the lenderand take title to the property and execute the note must translate the information into a usable format.and mortgage. A second home is defined as a single- This can be accomplished by one of the followingfamily property that the borrower occupies in addition techniques:to his or her principal residence. When the property isclassified as a second home, rental income may not be • dividing annual income by 12;used for loan qualification purposes. An investment • multiplying weekly income by 52, and thenproperty is defined as a one-to-four-family property dividing by 12; orthat the borrower does not occupy. This definition • multiplying hourly income by the number ofis used whether or not the property is income pro- hours worked per week, then multiplying thisducing. Mortgage terms for one- to-four-family first result by 52, and then dividing by 12.mortgages may not extend more than 30 years beyondthe date of the first monthly payment. Fannie Mae The lender is required to verify the borrower’sgenerally requires a minimum down payment of 5% employment for the full two years that precede theof the purchase price for the property. The down pay- mortgage application. The borrower is required toment must consist of the borrower’s savings or other explain gaps in employment that extend beyond oneliquid assets. Donated funds are not acceptable for this month during this two-year period. When a borrowerpurpose. Loan-to-value ratios for most first mortgages is employed by a relative or family-owned business,are determined by dividing the mortgage balance at the lender will require the borrower to submit signedthe time the mortgage is submitted for purchase or federal income tax returns for the past two years.securitization by the property value. Property value is Underwriters must determine the probable stabilityconsidered to be the lower of the sales price or the and continuance of employment. A borrower whoappraised value. Fannie Mae requires mortgage insur- changes jobs frequently to advance within the sameance for first mortgages that have loan-to-value ratios profession and has a successful track record shouldgreater than 80%. Generally, the borrower pays for receive favorable consideration. However, frequentthe mortgage insurance coverage. job changes without advancement may be an indica- Fannie Mae will purchase or securitize first tion of unstable income.mortgages secured by manufactured housing units Sources of income that can be considered in theas long as they are legally classified as real property. application process include:This requires that the unit be permanently affixed to • military income;a foundation, and it must assume all the characteris- • commission income;tics of site-built housing. All wheels, axles, and trailerhitches must be removed when the unit is placed on its • overtime and bonus income;permanent site. Single-width manufactured housing • part-time or second job income;units must be located within a Fannie Mae-approved • retirement income;project. A multi-width unit may be located on an • social security income;individual lot or in any project. In most cases, projectapproval for multi-width units located on individual • alimony or child support;lots in subdivisions is not required. • notes receivable;
    • 44 Module 3 • interest and dividends; repayment is expected. Sale proceeds from the sale • mortgage differential payments; of currently owned property is a common source of funds, as are a variety of investments including retire- • trust income; ment accounts, bonds, stocks, and trust accounts. • VA benefits; Cash on hand is not considered an acceptable • unemployment and welfare income; source of funds since it has no paper trail attached. In • rental income; addition, sweat equity is not considered an acceptable source of funds. • automobile allowances; and • foster-care income. Credit report. One of the most important compo- nents of credit analysis is the credit report. Commission income, overtime and bonus income, Lenders will closely review the following compo-and Commission income, overtime and bonus income, nents of the credit report:and part-time, second job income can fluctuate fromone year to the next. For this reason, lenders scruti- • payment history on the previous mortgage;nize these sources of income carefully. Retirement • undisclosed debt;income and social security income are more easily • revolving accounts;verified. Income from alimony or child support must • judgments, garnishments, or liens;be expected to continue for at least the next threeyears in order to be considered. Rental income from • bankruptcy; andboarders (tenants) in a single-family residence cannot • previous mortgage foreclosure.be considered as acceptable income. However, rental The payment history on the previous mortgageincome received from other properties is acceptable, is a good indicator of the borrowers willingness andeven if the borrower occupies one of the units in a ability to repay the debt. If the credit report revealsmultiple-unit property. A borrower is considered to debts that were not initially disclosed by the bor-be self-employed if he or she has a 25% or greater rower, the underwriter will require a complete writ-ownership interest in a business. Self-employed bor- ten explanation of the discrepancy. Bankruptcy mustrowers will be required to submit additional docu- have been discharged fully and the borrower mustmentation as a part of the loan application process, have re-established good credit. Fannie Mae consid-including signed income tax returns for the past two ers an elapsed time of four years between dischargeyears, signed copies of business income tax returns for of the bankruptcy and the mortgage application tothe last two years, an individual credit report, a year- be a suf- ficient period of time to re-establish credit.to-date profit and loss statement, and a balance sheet The monthly housing expense-to-income ratio is thefor the past two years. Income from self-employment ratio between a borrower’s total monthly expensesis considered stable if the borrower has been self- and total monthly income. The benchmark monthlyemployed for at least two years. housing expense-to-income ratio for conventional Verification of funds is accomplished by the use mortgages is 28%. Since this ratio is intended to serveof Form 1006, Verification of Deposit. The lender as a guideline, lenders may use a higher ratio for anydetermines the amount of money required to close a given conventional mortgage if this is justified by fullymortgage transaction by adding the cash down pay- documented compensating factors. The total obliga-ment, borrower closing costs, and borrower loan fees. tions-to-income ratio is the ratio between a borrow- Typical sources of funding include: er’s debts and income sources. The benchmark total • deposit according to the sales contract; obligations-to-income ratio is 36% of the borrower’s stable income for conventional mortgages. • checking and savings accounts; • gifts from relatives; • grants; SECTION REVIEW • sales proceeds or anticipated sales proceeds; Principal residence: A one-to-four-family property • bridge loans; that is the owner’s primary residence. At least • retirement accounts; one of the borrower’s must occupy and take • government bonds, stocks, or trust accounts; title to the property and execute the note and mortgage. • borrowed funds against collateral. Second home: A single-family residence occupied Checking and savings account balances must be by the borrower in addition to the principalverified by the underwriter, and gifts from relatives residence. Not an investment property.must be accompanied by a gift letter stating that no
    • The Federal National Mortgage Association (Fannie Mae) 45 Investment property: A one-to-four-family property that the borrower does not occupy. This defi- nition applies whether the property is income producing or not.CONCLUSIONFannie Mae plays a vital role in making funds availableto homebuyers throughout the United States becauseof its involvement in the secondary mortgage market.Fannie Mae is the nation’s largest investor in homemortgages today and currently owns or holds in trustone out of every five mortgages in the United States.Because of its significant influence within the mort-gage lending business, it is important to be familiarwith the mission, operational structure, and under-writing requirements of Fannie Mae.
    • 46 Module 3 REVIEW Q U E S T I O N S — M O D U L E T H R E EFollowing are Review questions. While you are not required to answer these questions to complete the 14-hour course, theyare intended to help you evaluate your comprehension of the material. Choose the best response to each review question. Theanswers to the review questions are found at the end of each section.1. For 2006, the Fannie Mae mortgage loan limit for one-family loans within the continental United States is which of the following? a. $300,700 b. $322,700 c. $413,100 d. $417,0002. If an appraisal report is more than four months old and the appraiser determines that the value of the property has declined since the date of the original appraisal, what action is required by Fannie Mae? a. No action is required, because appraisals are valid for 12 months. b. The lender is required to request an update of the original appraisal based upon an exterior inspection of the subject property’s improvements. c. A new appraisal of the property is required. d. The lender is required to request an update of the original appraisal based upon an interior and exterior inspection of the subject property’s improvements.3. A borrower reports a gross weekly income of $1,250. Convert this to a monthly gross income figure as required on Form 1005, Verification of Employment. a. $5,000 b. $5,416.67 c. $6,000 d. $6,586.674. A borrower has several sources of income. Which of the following income sources cannot be considered in the application process? a. commission income b. social security income c. rental income from a four-unit residential property when one of the residential units is occupied by the bor- rower d. rental income from tenants in a single-family residence5. Fannie Mae considers the benchmark monthly housing-expense-to income ratio to be which of the following? a. 28% b. 30% c. 36% d. no housing-expense-to income ratio benchmark for lenders established by Fannie Mae6. Which of the following statements regarding the operational structure of Fannie Mae is correct? a. Fannie Mae stock is not permitted to be traded openly on the New York Stock Exchange. b. Fannie Mae is not regulated by the federal government in any way. c. Fannie Mae is a private, shareholder-owned company that cooperates with lenders to ensure the constant availability of funds. d. Fannie Mae lends money directly to individual home buyers.
    • The Federal National Mortgage Association (Fannie Mae) 477. Fannie Mae was established by an act of Congress in 1938 and was rechartered as a private company in what year? a. never rechartered as a private company b. 1968 c. 1952 d. 19428. For application purposes, a borrower is considered to be self-employed if: a. he or she has a 50% or greater ownership interest in a business and employs fewer than five other people. b. he or she works a second job for more than 20 hours per week. c. he or she has a 25% or greater ownership interest in a business. d. he or she has a 20% or less ownership interest in a business, regardless of the number of people employed by that business.9. Which of the following sources of funds cannot be considered in the application process? a. retirement accounts b. grants c. gifts from relatives d. cash on hand10. Fannie Mae purchases and securitizes which of the following types of loans? a. fixed-interest-rate conventional mortgages only b. conventional first mortgages with either fixed or adjustable interest rates and conventional second mortgages with fixed interest rates c. conventional first and second mortgages with fixed interest rates only d. conventional first mortgages with either fixed or adjustable interest rates and conventional second mortgages with adjustable interest rates 1) d. 2) c. 3) b. 4) d. 5) a. 6) c. 7) b. 8) c. 9) d. 10) b. ANSWERS:
    • 48 Module 3
    • MODULE 4 Fair Housing Deborah H. Long, DREI, Ed. D. has been a real estate educator for over 25 years and completed her doctorate in Educational Leadership in 1994. She is a licensed real estate instructor in more than 10 states. Dr. Long is the award-winning author of 16 books. She holds a Doctorate degree in Educational Leadership from Florida Atlantic University as well as a Master’s degree in English Education from the University of Illinois. LEARNING OBJECTIVESAfter completing this module, you should be able to:1. Explain the impact on real estate practices of the 4. Define terms such as steering, redlining, block- Civil Rights Act of 1866, the Fair Housing Act of busting, familial status, and discriminatory 1968, the Equal Credit Opportunity Act, and the advertising. Americans with Disabilities Act. 5. Cite government enforcement policies and2. List groups protected under and exemptions to procedures. the Fair Housing Act; 6. Provide examples of specific acts of discrimina-3. Cite the significant aspects of the Florida Fair tion. Housing Act and identify groups protected under this statute.INTRODUCTION Territory, as is enjoyed by the white citizens thereof,Many property owners, mortgage lending profession- to inherit, buy, sell, or lease all real and personalals and real estate licensees lack a clear understand- property” (42 U.S.C. 1981).ing of civil rights legislation or his or her role in the In a landmark 1968 case, Jones v. Mayer, theimplementation of fair housing laws. To make mat- Supreme Court applied the Civil Rights Act of 1866ters more complex, federal, state, and local discrimi- to affirm the prohibition of all racial discrimination,nation laws differ. Misinformation and confusion, as private as well as public, in the sale of real property.well as intentional discrimination, all create problems This ruling covers all real estate and does not limitfor minorities and the disabled seeking to purchase or itself to dwellings.rent homes. Fair Housing ActCHRONOLOGY OF ANTIDISCRIMINATION The second major federal law to prohibit discrimina-LEGISLATION REGARDING PROPERTY tion is the Fair Housing Act, officially known as Title VIII of the Civil Rights Act of 1968 (42 U.S.C. 3601).This section outlines the chronology of anti-discrim- This legislation prohibits discrimination in housingination legislation. on the basis of race, color, religion, or national ori- gin. A 1974 amendment added a prohibition of dis-Civil Rights Act of 1866 crimination on the basis of sex (or gender). The FairThe history of fair housing properly begins with the Housing Amendments Act of 1988 added provisions toCivil Rights Act of 1866, the first significant statute prevent discrimination based on mental or physicalto deal with equal housing opportunity. It states that handicap or familial status.“all citizens have the same right in every State and© 2005 Bert Rodgers Schools of Real Estate, Inc. 49
    • 50 Module 4 MATCHING EXERCISE Following is a matching exercise. While you are not required to do this exercise to complete the 14-hour course, it is intended to help verify your comprehension of the material. Fill in the letter of the correct defini- tion in Column II that matches the word(s) in Column I. The answers to the matching exercise are found on Page 56. COLUMN I COLUMN II a. can refer to an adult with children under 18, a pregnant person, or a ____ 1. Handicap person who has or is in the process of obtaining legal custody of a child ____ 2. Familial status b. year of first significant statute to deal with equal housing opportunity c. provisions added to prevent discrimination based on mental or physical ____ 3. Adults only handicap or familial status ____ 4. 1866 d. meets one or more of these criteria: (1) specifically designed and oper- ated to assist elderly persons, (2) all units occupied by individuals age 62 ____ 5. 1968 or older, or (3) at least 80% of the units are occupied by persons age 55 ____ 6. 1988 or older. e. any physical or mental impairment that substantially limits one or more life functions f. legislation enacted to prohibit discrimination in housing on the basis of race, color, religion, or national originDEFINITION OF TERMS “Adults Only” DefinedThis section summarizes the definitions of terms used In most circumstances, property owners and landlordsin the Fair Housing Amendments Act. are prohibited from advertising “Adults Only.” How- ever, a building or development can qualify for anHandicap Defined exemption if (1) the building owner(s) provides hous-The amendment defines handicap as any physical, ing under a state or federal program that the secretaryemotional, or mental impairment that substantially of HUD determines is specifically designed and oper-limits one or more life functions. Handicap also refers ated to assist elderly persons; (2) all units are occupiedto a record of having had such an impairment. by individuals age 62 or older; or (3) at least 80% of Landlords must allow disabled tenants to make the units are occupied by persons age 55 or older. Ifreasonable modifications to their apartments to the building or development meets any one or moreaccommodate their special needs. Tenants pay for the of these conditions, the units can be advertised asmodifications and for returning the premises to their “Adults Only.”original condition. As of 1988, new multifamily con-struction must provide certain accommodations for HUD AND ENFORCEMENTpeople with disabilities, for example, switches and The Fair Housing Amendments Act of 1988 addressedthermostats at wheelchair level. the enforcement issue missing from the original FairFamilial Status Defined Housing Act of 1968. Previously, HUD had to rely solely on persuasion, but now HUD can file formalFamilial status can refer to families in which one charges and refer complaints to an administrative lawor more children under 18 live with a parent, legal judge (ALJ). The ALJ who hears complaints regardingguardian, or someone given written permission by the fair-housing violations can impose fines of $10,000 toparent or guardian. Inclusion of familial status in the $50,000 for subsequent offenses. The U.S. Attorneyact also makes it illegal to discriminate against a preg- General now has an expanded role in initiating actionnant woman or a person who has or is in the process in the public interest and can seek fines as high asof securing legal custody of a child. $50,000 for the first offense in a pattern of discrimi- In Florida, this amendment has had a significant nation. Visit HUD’s website at <www.hud.gov>.impact upon homeowner associations, apartmentcomplexes, and condominiums. These property own-ers must have facilities adapted for children and can- Exemptions to Fair Housing Lawsnot discriminate against anyone on the basis of familial The Fair Housing Act exempts property owners instatus when leasing, selling, or renting property. some limited situations:
    • Fair Housing 51 1. The sale or rental of single-family homes when occupied and sold by the owner without the TRUE OR FALSE? use of a broker or public advertising, the rental Following are True or False questions. While of rooms or units in an owner-occupied dwell- you are not required to answer these ques- ing of four or fewer units, the sale or rental of tions to complete the 14-hour course, they are single-family homes owned by a private per- intended to help verify your comprehension of son who owns no more than three single-fam- the material. Circle (T)rue or (F)alse for each ily dwellings at any one time (except that only question below. The answers to the True or False one exemption can be taken in any 24-month questions are found on Page 56. period and no more than one house in which 1. HUD enforces the federal Fair Housing Act. the owner was not the most recent resident T F can be sold using an exemption during any 24- month period). 2. Property owners can use public advertising when they claim an exemption to the federal 2. Properties owned and operated by religious Fair Housing Act. T F organizations for the benefit of their mem- bers only, provided that the religion does not 3. Property owners cannot use the services of restrict its membership on the basis of race or a broker to rent or sell the property when national origin. they claim an exemption to the federal Fair Housing Act. T F 3. Properties owned by a private club as lodging 4. In some limited situations, property owners for the benefit of the membership and not for may be able to discriminate against mem- commercial purposes. bers of a group otherwise protected by fair Even individuals or organizations eligible for an housing laws. T Fexemption, cannot use public advertising or the ser- 5. Property owners entitled to claim an exemp-vices of a broker to rent or sell the property if they tion to the federal Fair Housing Act still maywant to be discriminatory. These limitations make it not discriminate on the basis of race. T Fvery difficult to market a property for rent or for sale 6. Properties owned and operated by religiousand to discriminate, because property owners then organizations for the benefit of their mem-have to rely on word-of-mouth referrals. Furthermore, bers only have an exemption under the fed-those property owners who wish to claim an exemp- eral Fair Housing Act. T Ftion and discriminate against minorities may not doso on the basis of race; the 1866 Civil Rights Act still 7. Private clubs that own commercial lodgingprohibits discrimination based on race and contains may discriminate against protected classes.no exemptions for individuals or organizations. T F HUD officials advise real estate practitioners toact as though there are no exemptions, inasmuch as race, color, religion, national origin, sex, dis-the exemptions are largely illusory. The landlord or ability, or familial status;seller loses the exemption as soon as he or she engagesbrokerage services. 3. Making, printing, or publishing, or causing to be made, printed, or published, any notice,PROHIBITED DISCRIMINATORY ACTS statement, or advertisement with respect toDEFINED BY THE FAIR HOUSING ACT the sale or rental of a dwelling that indicates any preference, limitation, or discrimination,The Fair Housing Act specifically prohibits the follow- or an intention to make any such preference,ing: limitation, or discrimination, based on race, 1. Refusal to sell or rent after the making of a color, religion, national origin, sex, disability, bona fide offer, or to refuse to negotiate for the or familial status; sale or rental of, or otherwise make unavailable 4. Representing to any person because of race, or deny, a dwelling to any person because of color, religion, national origin, sex, disability, race, color, religion, national origin, sex, dis- or familial status that any dwelling is not avail- ability, or familial status; able for inspection, sale, or rental when the 2. Discrimination against any person in the terms, dwelling is in fact available (steering); conditions, or privileges of sale or rental of 5. Inducing or attempting to induce, for profit, a dwelling, or in the provision or services of any person to sell or rent any dwelling by rep- facilities in connection therewith, because of resentation regarding the entry or prospec-
    • 52 Module 4 tive entry into the neighborhood of a person Duties of a Buyer-Broker and Steering or persons of a particular race, color, religion, While licensees have a duty to obey their clients, national origin, sex, disability, or familial status when a client asks a practitioner to disobey the law, (blockbusting); those requests must be ignored. A 1996 letter written 6. Denying or making different terms or condi- by Assistant Secretary of HUD Elizabeth Julian ini- tions as a commercial lender for home loans tially gave licensees some latitude in showing buyers/ (redlining); and clients property based on the ethnic or racial compo- sition of a neighborhood, but that letter was retracted. 7. Denying anyone the use of or participation in Real estate professionals should be careful to offer a any real estate services, such as broker orga- full range of properties that meet the price and size nizations, multiple listing services, and other criteria set by buyers and should not use any other resources related to the selling or renting of criteria for selecting property to show. housing. An Atlanta real estate broker achieved notori- Discriminatory Advertisingety by creating the first civil rights case in the nationtaken before an administrative law judge as authorized According to the Fair Housing Act, it is discrimina-by the Fair Housing Amendments Act of 1988. tory to make, print, or publish for the sale or rental of a dwelling any notice that indicates any preference,Blockbusting limitation, or discrimination based on race, color, reli- gion, national origin, sex, disability, or familial status.Blockbusting is the illegal practice of inducing own- Examples of violations include an advertisement forers to list property for sale or rent at distressed prices condo units or rental apartments with pictures thatby telling them that persons of a particular race, color, show owners or tenants of only one race, an apart-national origin, sex, religion, disability, or familial sta- ment advertisement that states “adults only” (unlesstus are moving into the area. Sometimes the licensee, the community meets federal guidelines), and an adwho stands to gain financially, claims that an impend- stating that the owner prefers male college studentsing change in the demographic composition of the as tenants. Terms such as mother-in-law suite and bach-neighborhood will cause property values to fall and elor pad may be considered discriminatory, howevercrime to increase. phrases such as great view, jogging trails, family room, or walk-in closet are not.Steering An amendment to the Fair Housing Act of 1968Steering is the practice of directing prospects to or requires that real estate brokers prominently displayaway from a particular neighborhood based on their the fair housing poster. Failure to do so could sug-race, color, religion, sex, national origin, disabil- gest lack of intent to comply with the federal law (24ity, or familial status. Directing prospective minor- C.F.R.110.10). Brokers should also use the fair hous-ity purchasers to currently integrated areas to avoid ing logo on large ads and on their websites.integration of nonintegrated areas or showing whiteprospects properties only in areas populated by whites Redliningare two examples. Sometimes real estate practitionerssteer with casual comments: “You don’t want to live in Discrimination in lending is also a violation of the fed-this neighborhood. You’d be the first. You’d be more eral Fair Housing Act. The courts have defined redlin-comfortable in the first neighborhood I showed you.” ing as the practice by lending institutions of cuttingThe following are additional examples of steering: funds to an area because of the integrated makeup of the community. The term originated in the prac- • showing African-American prospects properties tice by lenders of drawing red lines on maps to show only in integrated areas; which areas would not be financed. • placing tenants with disabilities in a separate The Equal Credit Opportunity Act (ECOA) of 1977 building; also prohibits discrimination by banks and other • having one swimming pool for adults only; lending institutions against applicants for credit on • assigning African-American sales associates to grounds of race, religion, national origin, age, sex, or offices in integrated neighborhoods and white receipt of income from a public assistance program salespeople to offices in nonintegrated areas; (15 U.S.C. 1691). Lending institutions cannot require and any of the following from a borrower: • advising purchasers to check out the neighbor- • information about a spouse or former spouse; hood for themselves by parking outside the • information about the applicant’s marital status; school building at dismissal time to see the mix of students. • information about the source of an applicant’s
    • Fair Housing 53 income (unless they first disclose that informa- tion regarding alimony, child support, or sepa- WHICH OF THE rate maintenance is to be furnished only at the FOLLOWING IS UNLAWFUL? option of the applicant); or Following are Yes or No questions. While you • information about an applicant’s birth control are not required to answer these questions to practices. complete the 14-hour course, they are intended The ECOA does not prevent a creditor from to help verify your comprehension of the mate-asking any pertinent information necessary to evalu- rial. Circle (Y)es or (N)o for each questionate the creditworthiness of applicants, such as credit below. The answers to the Yes or No questionshistory, quantity and quality of income, and amounts are found on Page 56.of debt. However, all applicants must be evaluated on 1. Advertising “Perfect for Hispanic couple”the same basic information. Under the ECOA, lend- Y Ners must give precise reasons for the denial of credit,such as inability to verify applicant’s credit references, 2. Choosing neighborhoods for buyers basedtemporary or irregular employment, or insufficient on their financial needs Y Nincome. 3. Consistently advertising model homes with Failure to comply with the ECOA subjects a pictures of Asians only Y Nlending institution to civil liability for damages upto $10,000 in individual actions and the lesser of 4. Asking female loan applicants their marital$500,000 or 1% of the lender’s net worth in class status Y Nactions. 5. Advertising “big walk-in closets” Y NSTATE FAIR HOUSING ACTS 6. Advertising “perfect for biking, jogging professional person” Y NStates have the authority to pass their own civil rightsacts. State laws may protect the same groups from dis- 7. Responding to a buyer/client’s requestcrimination as do the federal laws, or they may pro- to see property near a bus stop Y Ntect other groups as well, such as those classified by 8. Responding to a buyer/client’s request tomarital status. If a state law is substantially the same as see only integrated neighborhoods Y Nfederal law, complaints based on the federal law mustbe referred to the state enforcement agency. State laws 9. Sending a marketing piece to potentialcannot add any exemptions to those permitted under listing clients letting them know that thethe federal law, but they may be more restrictive and neighborhood is in transition Y Nprovide for no exemptions. 10. Placing all families in the back of the apart- ment complex (property managers) Y NFlorida’s Fair Housing Act 11. Advertising “large family room” Y NThe objective of Florida’s Fair Housing Act (760.20-760.37, F.S.) is to provide for fair housing throughoutthe state by prohibiting discrimination on the basis of the Palm Beach County Fair Housing Ordinance pro-race, color, national origin, sex, disability, or religion hibits discrimination based on age and marital status.in the sale or rental of housing. The Florida Commis- Broward County prohibits discrimination on accountsion on Human Relations administers the State’s Fair of sexual orientation.Housing Act, which can be enforced by the Divisionof Administrative Hearings or through civil lawsuits ENFORCEMENTbrought by private individuals. Violators may be liable There are three types of evidence in fair housing liti-to the plaintiff for actual damages, punitive damages gation: testing (also called auditing or checking), testi-of not more than $1,000, court costs, and attorney mony by other sales associates and brokers about thefees. The State may also require guilty parties to take defendant’s past acts of discrimination, and the defen-affirmative action, such as community service, adver- dant’s statistical record of business.tisements concerning fair housing, or sponsorship Testing is a process for monitoring compli-of a seminar on fair housing. Licensees who violate ance. In one example of a test, a white couple acts asFlorida’s Fair Housing Act are subject to a $10,000 prospects to purchase a three-bedroom home in thefine for the first offense per violation; a second offense $100,00 to $110,000 range. The real estate practitio-within five years could bring a $25,000 fine. ner takes the couple to Rolling Hills subdivision. The Counties and municipalities throughout Florida white couple says that they will think about the prop-have their own fair housing ordinances. For example, erties they were shown in that area. The next week,
    • 54 Module 4 TRUE OR FALSE? TRUE OR FALSE? Following are True or False questions. While you Following are True or False questions. While you are not required to answer these questions to com- are not required to answer these questions to com- plete the 14-hour course, they are intended to help plete the 14-hour course, they are intended to help verify your comprehension of the material. Circle verify your comprehension of the material. Circle (T)rue or (F)alse for each question below. The (T)rue or (F)alse for each question below. The answers to the True or False questions are found on answers to the True or False questions are found on Page 56. Page 56. 1. State laws may delete protected classes, such as 1. If testing is used as evidence in fair housing race. T F litigation, it must be corroborated. T F 2. Florida prohibits discrimination on the basis of 2. The courts cannot use the testimony of sales race, color, national origin, sex, disability, or associatess and brokers who have worked religion in the sale or rental of housing. T F with or for a licensee accused of discrimination. T F 3. The Florida Commission on Human Relations administers the State’s Fair Housing Act. T F 3. The court can review the total record of listings and sales by a licensee to see if a pattern of 4. If a state law is substantially the same as discrimination is indicated. T F federal law, complaints based on the federal law must be referred to the state enforcement agency. T F AMERICANS WITH DISABILITIES ACT 5. Counties and municipalities throughout Florida On January 26, 1992, the Americans with Disabilities have their own fair housing ordinances. T F Act (ADA) became effective (42 U.S.C. 12101). The purpose of the ADA is to eliminate discrimination against individuals with disabilities and allow them tothe real estate practitioner shows properties in Jackson enter the economic and social mainstream of society.Heights – but not in Rolling Hills – to an Hispanic Disabilities are defined as physical or mental impair-couple who are also looking for a home with the same ments that substantially limit one or more of the majoramenities in the same price range. life activities of a person. While the ADA applies to The practitioner violated fair housing laws by individuals with obvious disabilities such as blindnesstreating the second couple differently from the first or a physical handicap, it also applies to those whosecouple for no apparent reason other than race. The disabilities are less evident, including those who testtesters will be witnesses to the discrimination. Civil positive for AIDS or who suffer from dyslexia, epi-rights groups perform testing of real estate licensees lepsy, alcoholism, or other such disabilities. By oneas part of a federally funded program organized by estimate, the ADA covers over 900 disabilities.HUD and the National Association of REALTORS® The ADA states that individuals with disabilities(NAR). cannot be denied access to public transportation, any The courts can use the testimony of sales associates commercial facility, or public accommodations. Thisand brokers who have worked with or for a licensee has particular significance to owners and operatorsaccused of discrimination. However, given the com- of public accommodations and commercial facilities,petitive nature of the real estate business, this type regardless of the facility’s size or number of employ-of testimony can be biased and is seldom used unless ees. The ADA also applies to all local and state gov-there is corroboration. ernment facilities. The courts can also review the statistical record Effective in 1993, all public accommodationsof business, or the total record of listings and sales, by and commercial facilities are to be designed and con-the accused licensee to see if a pattern of discrimina- structed, or altered, to meet the accessibility stan-tion is indicated. Again, this type of evidence must be dards of the new law, if readily achievable (easilycorroborated. accomplished and carried out without much difficulty To file a complaint, individuals may call HUD or expense). Existing public facilities had to removetoll free at (800) 669-9777, or they may use the online structural, architectural, and communication barrierscomplaint form at <www.hud.gov/complaints/ if removal was readily achievable. Examples of reason-housediscrim.cfm>. able accommodations are lowering a shelf to enable a disabled individual to reach it, rearranging furniture
    • Fair Housing 55and display units to widen access aisles, placing stick- A FINAL NOTEon Braille symbols next to elevator call buttons, and The purpose of fair housing legislation is to assistlowering water fountains to wheelchair height. qualified prospects by providing them the opportunity The ADA is enforced by the U.S. Attorney to purchase a home regardless of their race, religion,General, who can seek injunctions against a business, color, sex, national origin, disability, or familial status.fines of up to $50,000 for the first offense, and fines of Real estate professionals should use nothing but eco-$100,000 each for subsequent offenses. nomic factors to determine a prospect’s eligibility to Portions of the ADA were incorporated in Chapter live in the neighborhood of his or her choice. It is the553 of the Florida Statutes, the Florida Americans legal and ethical responsibility of all mortgage lend-with Disabilities Accessibility Implementation Act. This ing and real estate practitioners to be advocates of fairstatute, which covers all new single-family houses, housing and to give everyone an equal opportunity toduplexes, triplexes, condominiums, and townhouses, enjoy the American dream of home ownership.requires that at least one bathroom is accessible by thedisabled. Furthermore, barriers at common or emer-gency entrances and exits of business establishments SUGGESTED READING AND RESOURCESand commercial buildings must be removed. Visit the The ADA Answer Book: Answers to the 146 Most CriticalADA website at <www.usdoj.gov/crt/ada/adahom1. Questions About the Americans with Disabilities Act,htm>. Title III / edited by Lawrence G. Perry ... [et al.]. Washington, D.C.: BOMA International, 1992. Americans with Disabilities Act of 1990. U.S. Code. Vol. TRUE OR FALSE? 42, secs. 12101–213 (1990). <www.usdoj.gov/ crt/ada/adahom1.htm>. Following are True or False questions. While you are Williams, Martha R., and Marcia L. Russell. ADA not required to answer these questions to complete Hand-book: Employment and Construction Issues the 14-hour course, they are intended to help verify Affecting Your Business. Chicago: Real Estate your comprehension of the material. Circle (T)rue Education Company, 1991. or (F)alse for each question below. The answers to Berger, Warren. “The ADA in Practice.” Real Estate the True or False questions are found on Page 56. Today, September 1993, 22–25. 1. The ADA is a federal law. T F To complain of discrimination, call HUD toll free at (800) 669-9777. (For the hearing-impaired, (800) 2. The purpose of the ADA is to create jobs for 543-8294.) To complain about discrimination regard- individuals with disabilities. T F ing the ADA, call the Public Access Section, U.S. Department of Justice, at (202) 514-0301. The HUD 3. Disabilities are defined by the ADA as physical or website is located at <www.hud.gov>. mental impairments that substantially limit one For reference regarding ADA and compliance or more of the major life activities of a person. issues, go to <www.buildersreferences.com> and T F <www.boma.org>. 4. People who test positive for AIDS are not cov- ered by the ADA. T F 5. The ADA deals primarily with private residential housing. T F 6. The ADA deals with access to public transporta- tion, any commercial facility, or public accom- modations. T F 7. The ADA applies to all local and state govern- ment facilities. T F 8. A Florida statute requires that all new single- family houses, duplexes, triplexes, condo- miniums, and townhouses have at least one bathroom that is accessible by the disabled. T F
    • 56 Module 4 Module Answer Keys MATCHING EXERCISE, p. 50 TRUE OR FALSE, p. 54 1. e. 1. F 2. a. 2. T 3. d. 3. T 4. b. 4. T 5. f. 5. T 6. c. TRUE OR FALSE, p. 54 TRUE OR FALSE, p. 51 1. F 1. T 2. F 2. F 3. T 3. T 4. T 5. T TRUE OR FALSE, p. 55 6. T 1. T 7. F 2. F 3. T 4. F YES OR NO, p. 53 5. F 1. Y 6. T 2. N 7. T 3. Y 8. T 4. Y 5. N 6. Y 7. N 8. Y 9. Y 10. Y 11. N
    • Fair Housing 57 REVIEW Q U E S T I O N S — M O D U L E F O U RFollowing are Review questions. While you are not required to answer these questions to complete the 14-hour course, theyare intended to help you evaluate your comprehension of the material. Choose the best response to each review question. Theanswers to the review questions are found at the end of each section.1. The process that occurs when real estate sales associates induce owners to list property for sale or rent by telling them that persons of a particular race, color, national origin, sex, religion, disability, or familial status are moving into the area is termed: a. redlining. b. steering. c. blockbusting. d. blackballing.2. Each of the following is a criteria for allowing adults-only advertising except: a. the building owner(s) provides housing under a state or federal program that the secretary of HUD dete mines is specifically designed and operated to assist elderly persons. b. all units are occupied by individuals age 62 or older. c. at least 80% of the units are occupied by persons age 55 or older. d. 80% of the units are occupied by disabled individuals.3. The Equal Credit Opportunity Act prohibits lenders from requiring information about: a. a borrower’s spouse or former spouse. b. the applicant’s marital status. c. an applicant’s birth control practices. d. any of the above.4. Which of the following may have an exemption from the federal Fair Housing Act? a. property owners working with a broker to sell their property b. religious organizations with property for lease for the benefit of their members only c. private clubs with for-profit property for lease d. property owners who have four or more dwellings available for rent5. The Americans with Disabilities Act (ADA) mainly deals with: a. economic subsidies for the disabled. b. blind and deaf individuals. c. residential housing. d. places of public accommodation and commercial facilities. 1) c. 2) d. 3) d. 4) b. 5) d. ANSWERS:
    • 58 Module 4
    • Registration/Affidavit Form 59 Florida Mortgage Brokering/Lending 14-Hour Continuing Education Course Registration/Affidavit Form Course Expiration Date: December 31, 2006 Course Completion Affidavit I hereby certify that I personally (and without assistance) completed the 14-Hour Continuing Education Course in ____________ hours. Until you sign and return this Course Completion Affidavit with payment and receive your official Certificate of Completion, you have not fulfilled your continuing education requirement. You may also complete this affidavit and registration form online at www.bertrodgers.com. Signature _________________________________________________________________________________________ (required) Student Information❑ Principal Representative ❑ Loan Originator Student ID# (Last five digits of social security number)❑ Associate ❑ Mortgage Broker AUDIT# MB(Associates & Mortgage Brokers please submit your Audit number only)Name ________________________________________________________________________________________________________ (PLEASE PRINT CLEARLY)Address _____________________________________________________________________________________________________City ______________________________________________________________________ State ________ Zip ________________Day phone (_______) ________________________ Evening phone (_______) ________________________Email address _____________________________________________________ Payment Method and Fax ServicesEnclose your check, money order (payable to Bert Rodgers Schools), or credit card information, and this completed Registration/AffidavitForm. If you wish to take this course online, please register and complete your affidavit at www.bertrodgers.com.❑ Check # ________ (enclosed) ❑ Money order (enclosed) ❑ Visa (13 or 16 digits)❑ American Express ❑ Discover (16 digits) ❑ MasterCard (16 digits)Credit CardNumber 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Expiration Signature of cardholder ______________________________________________________Date (required) (month) (year)❑ Standard Tuition – $39.95 (Your Certificate of Completion will be mailed to the address above.) 39.95 $ ____________❑ Priority FaxBack Service – Tuition $39.95 + your choice of: ❑ $10 Same-Day FaxBack Service* (In by 12 noon EST, M-F, back by 4 P.M. the same business day.) + ___________ ❑ $7 Next-Day FaxBack Service* (In by 5 P.M. EST, M-F, back by 11 A.M. the next business day.) + ___________The fax number for Bert Rodgers Schools is (941) 378-3883Fax my Certificate of Completion to (_______) __________________ (your fax number)*Certificates will be faxed only if you pay for Priority Grading Service. Priority Grading includes three attempts to fax your Certificate of Completion. Total Payment $ ___________
    • 60 Registration/Affidavit Form
    • Registration/Affidavit Form 61 Florida Mortgage Brokering/Lending 14-Hour Continuing Education Course Registration/Affidavit Form Course Expiration Date: December 31, 2006 Course Completion Affidavit I hereby certify that I personally (and without assistance) completed the 14-Hour Continuing Education Course in ____________ hours. Until you sign and return this Course Completion Affidavit with payment and receive your official Certificate of Completion, you have not fulfilled your continuing education requirement. You may also complete this affidavit and registration form online at www.bertrodgers.com. Signature _________________________________________________________________________________________ (required) Student Information❑ Principal Representative ❑ Loan Originator Student ID# (Last five digits of social security number)❑ Associate ❑ Mortgage Broker AUDIT# MB(Associates & Mortgage Brokers please submit your Audit number only)Name ________________________________________________________________________________________________________ (PLEASE PRINT CLEARLY)Address _____________________________________________________________________________________________________City ______________________________________________________________________ State ________ Zip ________________Day phone (_______) ________________________ Evening phone (_______) ________________________Email address _____________________________________________________ Payment Method and Fax ServicesEnclose your check, money order (payable to Bert Rodgers Schools), or credit card information, and this completed Registration/AffidavitForm. If you wish to take this course online, please register and complete your affidavit at www.bertrodgers.com.❑ Check # ________ (enclosed) ❑ Money order (enclosed) ❑ Visa (13 or 16 digits)❑ American Express ❑ Discover (16 digits) ❑ MasterCard (16 digits)Credit CardNumber 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Expiration Signature of cardholder ______________________________________________________Date (required) (month) (year)❑ Standard Tuition – $39.95 (Your Certificate of Completion will be mailed to the address above.) 39.95 $ ____________❑ Priority FaxBack Service – Tuition $39.95 + your choice of: ❑ $10 Same-Day FaxBack Service* (In by 12 noon EST, M-F, back by 4 P.M. the same business day.) + ___________ ❑ $7 Next-Day FaxBack Service* (In by 5 P.M. EST, M-F, back by 11 A.M. the next business day.) + ___________The fax number for Bert Rodgers Schools is (941) 378-3883Fax my Certificate of Completion to (_______) __________________ (your fax number)*Certificates will be faxed only if you pay for Priority Grading Service. Priority Grading includes three attempts to fax your Certificate of Completion. Total Payment $ ___________
    • 62 Registration/Affidavit Form
    • Registration/Affidavit Form 63 Florida Mortgage Brokering/Lending 14-Hour Continuing Education Course Registration/Affidavit Form Course Expiration Date: December 31, 2006 Course Completion Affidavit I hereby certify that I personally (and without assistance) completed the 14-Hour Continuing Education Course in ____________ hours. Until you sign and return this Course Completion Affidavit with payment and receive your official Certificate of Completion, you have not fulfilled your continuing education requirement. You may also complete this affidavit and registration form online at www.bertrodgers.com. Signature _________________________________________________________________________________________ (required) Student Information❑ Principal Representative ❑ Loan Originator Student ID# (Last five digits of social security number)❑ Associate ❑ Mortgage Broker AUDIT# MB(Associates & Mortgage Brokers please submit your Audit number only)Name ________________________________________________________________________________________________________ (PLEASE PRINT CLEARLY)Address _____________________________________________________________________________________________________City ______________________________________________________________________ State ________ Zip ________________Day phone (_______) ________________________ Evening phone (_______) ________________________Email address _____________________________________________________ Payment Method and Fax ServicesEnclose your check, money order (payable to Bert Rodgers Schools), or credit card information, and this completed Registration/AffidavitForm. If you wish to take this course online, please register and complete your affidavit at www.bertrodgers.com.❑ Check # ________ (enclosed) ❑ Money order (enclosed) ❑ Visa (13 or 16 digits)❑ American Express ❑ Discover (16 digits) ❑ MasterCard (16 digits)Credit CardNumber 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16Expiration Signature of cardholder ______________________________________________________Date (required) (month) (year)❑ Standard Tuition – $39.95 (Your Certificate of Completion will be mailed to the address above.) 39.95 $ ____________❑ Priority FaxBack Service – Tuition $39.95 + your choice of: ❑ $10 Same-Day FaxBack Service* (In by 12 noon EST, M-F, back by 4 P.M. the same business day.) + ___________ ❑ $7 Next-Day FaxBack Service* (In by 5 P.M. EST, M-F, back by 11 A.M. the next business day.) + ___________The fax number for Bert Rodgers Schools is (941) 378-3883Fax my Certificate of Completion to (_______) __________________ (your fax number)*Certificates will be faxed only if you pay for Priority Grading Service. Priority Grading includes three attempts to fax your Certificate of Completion. Total Payment $ ___________
    • 64 Registration/Affidavit Form
    • Bert Rodgers Schools—Family-owned and operated since 1958 Looking for Real Estate Courses? Convenience, Service, Value… From Bert Rodgers Schools It’s New! Now you can study online at your pace, on your schedule. More than 800,000 students have trusted Bert Rodgers Schools for their real estate education since 1958. Join the tradition! cd ONLINE CLASSROOM CORRESPONDENCE CD SALES ASSOCIATE PRE- AND POST-LICENSE EDUCATION 63-Hour Pre-License Course State Exam Prep Course NEW! Mutual Recognition Exam Prep Course cd PASS Program (2 CD audio set) 45-Hour Post-License Course CONTINUING EDUCATION 14-Hour Real Estate Continuing Education Course (for Sales Associates, Broker Associates, and Brokers)Rely on us for BROKER PRE-LICENSE EDUCATION fast, friendly, NEW! 72-Hour Pre-License Course professional State Exam Prep Course Florida License Law Review service! NEW! Mutual Recognition Exam Prep Course COMING SOON! Broker Post-License Courses cd Electronic F.L.A.S.H. CD-ROM (Florida License Advanced Self Help) Computerized flash cards to test your knowledge and help you prepare for the Florida Licensing Exam. For more information on the Bert Rodgers Schools Post Office Box 4708 real estate education programs, contact Student Services today Sarasota, Florida 34230-4708 at (941) 378-2900 or toll-free (800) 432-0320. www.bertrodgers.com Career Opportunities… Tel (941) 378-2900 Check out the Career Opportunities page on our website to linkToll-Free (800) 432-0320 to leading real estate firms hiring real estate licensees in your area. Fax (941) 378-3883
    • 2006 EDITION 1 4 - H O U R M O RT G A G E B R O K E R I N G / L E N D I N G C E C O U R S E Florida Mortgage Brokering/Lending Continuing Education Online or Correspondence Course Includes • Latest updates to Florida laws and rules for the mortgage brokering/lending industry • Modules include FNMA, fair housing, and real estate finance and mortgages • Optional end-of-module review questions provided to ensure your comprehension of the material. No final exam required. • Accredited by the Florida Department of Financial Services (Permit #MBS 2006-43) Convenience • We send the book at no obligation—study the ONLINE OR modules in the book or online CORRESPONDENCE • Submit your Registration Form/Affidavit and tuition TUITION ONLY payment by mail, fax, or online • Toll-free instructor, technical, and administrative support $ 39 .95 Bert Rodgers Schools – The Smart Choice. Toll free 800-432-0320 or click: www.bertrodgers.com PRESORTED STANDARD U.S. POSTAGE PAID BERT RODGERS SCHOOLSPost Office Box 4708Sarasota, Florida 34230-4708www.bertrodgers.com