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14 Hour Mortgage Broker 2007

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  • 1. Mortgage Brokering/Lending 14-Hour Continuing Education Course 2 0 0 7 E d i t i o n 14-Hour Continuing Education Course 14-Hour Continuing Education Course ATTENTION! Our mortgage brokering/lending course is expiring 9-30-2007!
  • 2. vi     Bert Rodgers Schools of Real Estate, Inc. Acknowledgements Bert Rodgers Schools of Real Estate, Inc. expresses our gratitude and appreciation to the thousands of Mortgage Professionals who have completed our 14-hour course to fulfill their continuing education requirements. We would like to thank the author of this edition, Janine Spiegelman. We recognize her expertise and appreciate her participation. We also want the Student Services Department—both the customer contact employees and those “behind the scenes” processing all the paperwork—to know how much we appreciate their hard work, day after day, making sure our valued students are satisfied customers. And we certainly are grateful to our Publications Department staff. No matter what obsta- cles you encounter in putting together these editions, you always create a product that, year after year, our customers say is by far the best in the industry. Finally, Bert Rodgers Schools would like to thank Julie Wild of Wild Dezign for her typeset- ting expertise and patience, and Mark Mazzuki of Digital Ink Design Group for his cover design of this edition and his design of all our marketing materials. Lori J. Rodgers, President
  • 3. Table of Contents Founder Bert Rodgers President Lori J. Rodgers Administrative Vice President William E. Giffard Director of Operations Tom Harner Director of Information Systems Alison M. Harner Director of Finance Aaron Pulone Project managers Valerie Churchillo Lisa Lacey Instructor Janine Spiegelman Project Coordinators Michelle Headley Jerry Schmitt Product Support Manager Kelli Finnigan Student Services supervisor Patti Pasquini Student Services representatives Barbara Dolnick Anthony Fasciano Colletta Finnigan Mark Forsman Jenncie Grove Laraine Jansen Mary Killoran Shirley Samson Kayla Smillie Christopher Smith Roman Vizvary Typesetting Wild Dezign Printing Action Printing 14-Hour MORTGAGE BROKERING/LENDING Continuing Education Course w MODULE 1 Florida Mortgage Brokerage and Lending Act Rules and Regulations | 1 w MODULE 2 Credit Scores and Credit Scoring | 17 w MODULE 3 Exotic and Nontraditional Mortgages | 23 w MODULE 4 Subprime Loans and Prepayment Penalties | 31 w MODULE 5 Lack of Credit Documentation Promotes Mortgage Fraud | 39 w MODULE 6 Updates on Flood and Hazard Insurance | 45 w MODULE 7 Affordable Housing | 55 w MODULE 8 New and Updated Fannie Mae/Freddie Mac Appraisal and Property Report Forms | 61 Registration/Affidavit Form
  • 4. viii     Bert Rodgers Schools of Real Estate, Inc. Janine Spiegelman has been a licensed Florida Mortgage Broker since 1987 and has taught the mortgage pre-licensure course since 1999. She has worked for the State of Florida, Department of Banking and Finance as a Financial Examiner/Analyst II. In the mortgage field, she has held every position possible–processor, closer, underwriter, post closer, mort- gage broker, and wholesale account executive. She has her own real estate brokerage and enjoys working with first-time home buyers. Janine is our continuing education instructor for real estate and mortgage brokering/lending. Bert Rodgers Schools of Real Estate, Inc. ©2007 All rights reserved, including the right to reproduce this manual or any portion of this manual in any form, or to use it for teaching purposes without the express written consent of the copyright holder. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance 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 receive and/or process your Registration/Affidavit Form within any specific time period. It is your responsibility to ensure that you have complied with your license renewal requirements in a timely manner. Bert Rodgers Schools of Real Estate, Inc. recognizes and respects its students’ privacy. Course records are confidential, and the School does not sell or rent students’ names or other information to any company or organization. Cover design: Digital Ink Design Group ISBN: 1-891753-40-1 Printed in the United States of America Author Biography
  • 5. © 2007 Bert Rodgers Schools of Real Estate, Inc. Learning Objectives After completing this module, you should be able to: Florida Mortgage Brokerage and Lending Act Rules and Regulations M O D U L E 1 1. Summarize the changes made to Chapter 494 F.S. effective October 1, 2006. 2. List the changes to Chapter 69V-40 Florida Administrative Code made through 2004. 3. Summarize the organizational structure of the Florida Department of Financial Services, including the Financial Services Commission and the Office of Financial Regulation. 4. Explain the powers and duties of the Financial Services Commission and the Office of Financial Regulation. 5. Explain the penalties, which could be imposed for a violation of Chapter 494, F.S. 6. Identify the prohibited practices pursuant to Chapter 494. 7. Explain the purpose for the enactment of the Florida Fair Lending Act. 8. Identify the types of transactions covered by the Florida Fair Lending Act. 9. Define a high-cost home loan. 10. Identify the acts prohibited by the Florida Fair Lending Act. 11. Identify the disclosure requirements of the Florida Fair Lending Act. 12. Explain the enforcement and penalties of any violation of the Florida Fair Lending Act. The Department of Financial Services regulates mortgage broker individuals (MB), mortgage broker- age businesses (MBB), mortgage lenders (ML), and correspondent mortgage lenders (CL) by the use of Florida Statutes (F.S.) and the Florida Administrative Code (F.A.C.). Chapter 494, F.S., is known as the Florida Mortgage Brokerage and Mortgage Lending Act Rules and Regulations. Chapter 494 originally became effective in October 1991, and several sig- nificant amendments have been made since 1991. Chapter 69V-40 of the Florida Administrative Code (formerly Chapter 3D-40 F.A.C.) is called Rules Regulation Mortgage Brokers. Certain minor changes to Chapter 69V-40 were made effective on August 2, 2002, and a few minor amendments were made between 2003 and 2004. The purpose of this module is to review Florida mortgage brokerage rules and regulations including changes effective October 1, 2006. In 2002, legislation placed the regulation of bank- ing, securities, and insurance under two appointed officials who are selected by the Financial Services Commission. The Financial Services Commission serves as agency head for the Office of Financial Regulation (OFR or Office) and the Office of Insurance Regulation (OIR). The commission is composed of the governor and Cabinet. The com- mission appoints the commissioner of the OFR and the commissioner of the OIR. Although both offices are administratively housed within the Department of Financial Services, they report directly to the Financial Services Commission, headed by the newly elected Chief Financial Officer, Alex Sink. The Office of Financial Regulation has offices located in Miami, Fort Lauderdale, West Palm Beach, Tampa, Orlando, Jacksonville, Pensacola, and Fort Myers. The regional offices are primarily responsible for conducting exam- inations to ensure regulatory compliance by financial institutions and financial service companies. The Office is dedicated to safeguarding the private financial interests of the public by licensing, char- tering, examining, and regulating financial institu- tions and financial service companies in the State of Florida. The Office strives to protect consumers from financial fraud while preserving the integrity of Florida’s markets and financial service industries. INTRODUCTION
  • 6.      Module 1 This is the Office’s mission statement found at www.flofr.com/Director/abouttheoffice.htm Within the Office are 2 Divisions. The first is the Division of Financial Institutions. This division licenses, examines, and regulates all state-authorized or state-chartered financial institutions to ensure they operate in a safe and sound manner and in compliance with applicable statutes and rules. Those institutions include commercial banks, credit card banks, credit unions, non-deposit trust companies, savings banks, savings and loans, and international bank offices. The second division within the Office is the Division of Securities and Finance. Within this division are three Bureaus— the Bureau of Financial Regulation; the Bureau of Securities Regulation; and the Bureau of Regulatory Review. The Bureau of Finance Regulation regulates retail installment sales busi- nesses, consumer finance companies, mortgage bro- kers and lenders, collection agencies, and money transmitters. The bureau provides consumer protec- tion from illegal or improper activities performed by these companies. The Bureau of Securities Regulation protects the public from investment and securities fraud. The Bureau of Regulatory Review reviews all applications for a financial services firm or a securi- ties firm, reviews individual applications, and either approves, places licensing restrictions, or denies licen- sure based upon its findings (See Figure 1.1). RECENT CHANGES IN FLORIDA STATUTES REGULATING MORTGAGE BROKERAGE AND MORTGAGE LENDING This section discusses the more significant changes in the Florida Statute Chapter 494 regulating mortgage brokerage and mortgage lending effective October 1, 2006. N E W Definition Control person means an individual, partnership, corporation, trust, or other organization that possesses the power, directly or indirectly, to direct the man- agement or policies of a company, whether through ownership of securities, by contract, or otherwise. A person is presumed to control a company if, with respect to a particular company, that person: (a) Is a director, general partner, or officer exercising executive responsibility or having similar status or functions; (b) Directly or indirectly may vote 10 percent or more of a class of voting securities or sell or direct the sale of 10 percent or more of a class of voting secu- rities; or (c) In the case of a partnership, may receive upon dis- solution or has contributed 10 percent or more of the capital (Chapter 494.001(9)(a-c), F.S.). Commissioner Financial Regulation Deputy Commissioner Financial Regulation Chief, Financial Investigations General Counsel Inspector General Director Division of Financial Institutions Director Division of Securities Office of Financial Regulation Chief, Bank Regulation District I Chief, Credit Union Regulation Chief, Securities Regulation Chief, Finance Regulation Chief, Regulatory Review Chief, Money Transmitter Director, Cabinet Legislative Affairs Director Division of Finance Chief, Bank Regulation District II Chief, Regulatory Review Director of Auditing Figure 1.1 Source: www.flofr.com/Director/OFRorgchart.pdf Office of Financial Regulation Flow Chart
  • 7. Florida Mortgage Brokerage and Lending Act Rules and Regulations     N E W Powers and Duties of the Commission and Office Allows the Office to require the electronic filing of applications, renewals, and fees, unless granted a waiver by OFR due to a hardship. Prior to this change, the only license type that could file an application online was a mortgage broker (Chapter 494.0011(2)(6), F.S.). N E W Books, Accounts, and Records; Maintenance; Examinations by the Office Authorizes the commission to adopt rules for the requirements for the destruction of records main- tained by licensees after the retention period has expired ( Chapter 494.0016(4), F.S.). N E W Mortgage Business Schools Requires permitted mortgage business schools to electronically report to the Office the names of pupils who have successfully completed required training courses (Chapter 494.0029(4), F.S.). N E W Licensure as a Mortgage Brokerage Business; Mortgage Broker’s License Provides that applications are not deemed received until all required fees are received (Chapters 494.0031(2)(a); 494.0033(2)(c), F.S.). N E W Renewal of Mortgage Brokerage Business License or Branch Office License The license for a branch office must be renewed in conjunction with the renewal of the mortgage broker- age business license (Chapter 494.0032(1)). N E W Mortgage Broker’s License Allows the Office to contract with a third party ven- dor to administer the mortgage broker test. This will allow the test to be conducted electronically at mul- tiple locations several times a week versus the old once a month process at limited locations (Chapter 494.0033(2)(b), F.S.). N E W Mortgage Brokerage Business Branch Offices; Principal Place of Business Requirements Deleted Chapter 494.0036(3), F.S. and Chapter 494.0039(3), F.S. Eliminated from the statute the requirement to display main office, branch office, and individual licenses. N E W Requirements of Licensees Provides that each licensee shall report any change in the principal broker, principal representative, offi- cers, partners, members, joint venturers, directors, control persons or any individual who is the ultimate equitable owner of 10% or greater interest (Chapter 494.004(6). F.S.). Provides that a change of control whether through the power to direct management, ownership or oth- erwise shall require an application to be submitted to the OFR unless a waiver has been granted (Chapter 494.004(6)(a-d), F.S.). N E W Administrative Penalties and Fines; License Violations Authorizes disciplinary action if fees are paid with a bad check. (Chapters 494.0041(2)(s) and 494.0072(2)(s), F.S.). Provides grounds for disciplinary action when a final judgment is entered against an applicant or licensee in a civil action upon grounds of fraud, embezzlement, misrepresentation, or deceit (Chapters 494.0041(2)(t) and 494.0072(2)(t), F.S.). Provides grounds for disciplinary action when action is taken by other federal and state regulatory organiza- tions located in or outside the State of Florida involving securities, insurance, real estate, mortgage brokers and lenders, or other related or similar industries (Chapters 494.0041(2)(u)1.2. and 494.0072(2)(u)1.2.,F.S.). N E W Mortgage Lender’s License Requirements; Correspondent Mortgage Lender’s License Requirements; Savings Clause; Branch Offices Provides that applications are not deemed received until all required fees are received (Chapters 494.0061(2)(b), 494.0062(2)(b), 494.0065(3)(5)(b) and 494.0066(2), F.S.). Audited financial statements of all licensed lend- ers have to be in accordance with United States
  • 8.      Module 1 generally accepted accounting principles (Chapters 494.0061(2)(c), 494.0062(2)(c) and 494.0065(2)(5)(c), F.S.). Provides under certain conditions that existing principal representatives can be grandfathered in without class or testing requirements (Chapters 494.0061(2)(f)(8-9) and 494.0062(2)(f)(11-12) and 494.0065(4)(c)1.2.(10), F.S.). N E W Renewal of Mortgage Lender’s License; Branch Office License Renewal Chapter 494.0064(1)(b), F.S. deleted. Eliminated the requirement to report the continuing education of loan associates when renewing a lender’s license. N E W Requirements of Licensees Under Chapters 494.006-.0077 Chapter 494.0067(1), F.S. deleted. Eliminated from the statute the requirement to display main and branch office licenses. Provides that each licensee shall report any change in the officers, partners, members, joint venturers, direc- tors, or control persons. (Chapter 494.0067(4), F.S). Provides that a change of control whether through the power to direct management, ownership or oth- erwise shall require an application to be submitted to the OFR unless a waiver has been granted. (Chapter 494.0067(4)(a-d),F.S). Changes between 2002 and 2004 to the Rules of the Florida Administrative Code The most significant changes were that the Rules Regulation Mortgage Brokers were moved from 3D- 40 F.A.C. to a new chapter 69V-40 F.A.C. and all ref- erences to the Department of Banking and Finance were replaced with the Financial Services Commission and the Office of Financial Regulation, depending upon the specific division of responsibility between the departments. See Table 1.1 To access any of the required forms, go to website and select the appropriate form. www.flofr.com/licensing/MBlist.htm To access Chapter 494 online, go to www. leg.state.fl.us/Statutes/index.cfm?App_ mode=Display_StatuteURL=Ch0494/ titl0494.htmStatuteYear=2006Title=- 2006-Chapter%20494 To access the Florida Administrative Code, Rules69V-40,gotowww.flofr.com/licensing/ RulesStatutes/Rule69V-40.htm Table 1.1 Updates to the Rules of the Florida Administrative Code between 2002 and 2004 Books and Records 69V-40.170 Amended to substitute the Office of Financial Regulation for all references to the Department of Banking and Finance. Application Procedure for Mortgage Broker License 69V-49.031(1) Provides that all applications for licensure as a mortgage bro- ker must be filed with the OFR. The address is: Office of Financial Regulation 200 East Gaines Street Tallahassee, Florida 32399-0375 69V-40.031(1)(a) The application form for Licensure as a Mortgage Broker changed to OFR-MB-101, and is available by mail from the OFR. 69V-40.031(1)(c) The fee which must accompany the applicant’s fingerprint card changed from $15.00 to $23.00. In the remainder of this section, all references to the Department of Banking and Finance changed to the Office of Financial Regulation. Application Procedure for Mortgage Brokerage Business License 69V-40.051 All applications for licensure as a mortgage brokerage busi- ness must now be filed with the OFR. The form that must be used for this application is OFR-MB-201, and can be obtained by mail from the OFR or accessed online at http://www.flofr. com/licensing/Forms/MBBapp.pdf
  • 9. Florida Mortgage Brokerage and Lending Act Rules and Regulations     Table 1.1 Updates to the Rules of the Florida Administrative Code between 2002 and 2004 69V-40.051(2) Regarding the fingerprint cards and Biographical Summary, now provides as follows: Each ultimate equitable owner of 10% or greater inter- est, the chief executive officer and each director of an entity applying for licensure as a mortgage brokerage business, shall submit a completed fingerprint card and Biographical Summary, Form OFR-MBB-BIO-1 (revised 10/99), to the Office of Financial Regulation along with a $23 nonrefundable processing fee. Form OFR-MBB-BIO-1 is hereby incorporated by reference and available by mail from the Office of Financial Regulation, 200 East Gaines Street, Tallahassee, Florida 32399-0375. All former references to the Department of Banking and Finance have been changed in this section to the Office of Financial Regulation. Application Procedure for Change in Ownership or Control of Saving Clause Mortgage Lending 69V-40.100 All references to the Department of Banking and Finance have been changed to the Office of Financial Regulation. The ap- plication for Change in Ownership or Control of Saving Clause Mortgage Lending must use the form OFR-MLST. The form must be mailed to the Office at the address. The same changes to the fingerprint card filing and Biographical Summary that were made to the other license application regula- tions, (i.e. form OFR-ML-BIO-1 and the fee of $23), were also made to this section. Application Procedure for Mortgage Lender License 69V-40.200 The application form for licensure as a mortgage lender changed to OFR-ML-222 and is to be mailed to the Office at the address. Further, the surety bond must be submitted on form OFR-ML-444, Mortgage Brokerage and Mortgage Lending Act Surety Bond. The completed fingerprint card and Biographical Summary form OFR- ML-BIO-1, and the nonrefundable, processing fee of $23 must be submitted to the Office. All references to the Department of Banking and Finance have been changed to the Office of Finan- cial Regulation. Mortgage Lender License, Mortgage Lender License Pursuant to Saving Clause, and Branch Office License Renewal and Reactivation 69V-40.205 The form for renewal and reactivation of a mortgage lender license is OFR-ML-R, and the form for renewal and reactivation of a mortgage lender license pursuant to saving clause is OFR-ML- RS. The form for branch office renewal is OFR-ML-RB, Mort- gage Lender and Correspondent Mortgage Lender Branch Office License Renewal and Reactivation Form. All forms must be filed with the Office. Application Procedure for Correspon- dent Mortgage Lender License 69V-40.220 Changed the applicable forms, processing fees, and references to the Office of Financial Regulation. The application form for licensure as a correspondent mortgage lender is OFR-CL-333. The surety bond form is OFR-ML-444. The fingerprint card and Biographical Summary form is OFR-CL-BIO-1, and the processing fee is now $23. All forms must be filed with the Office. Correspondent Mortgage Lender License and Branch Office License Renewal and Reactivation 69V-40.225 Changed the applicable forms and references to the Office of Financial Regulation. The renewal and reactivation form for correspondent mortgage lender license is form OFR-CL-R. The surety bond form is OFR-ML-444. The Mortgage Lender and Cor- respondent Mortgage Lender Branch Office License Renewal and Reactivation form is OFR-ML-RB. All forms must be filed with the Office. Application Procedure for Mortgage Lender or Correspondent Mortgage Lender Branch Office License 69V-40.240 Changed the application form and references to the Office of Financial Regulation. The application form for mortgage lender branch office or correspondent mortgage lender branch office license is OFR-ML-222B. All forms must be filed with the Office. Principal Representative 69V-40.242 Changed the applicable form and references to the Office of Financial Regulation. The Principal Representative Designation form is OFR-ML/CL-PR. All forms must be filed with the Office. Source: Compiled by author.
  • 10.      Module 1 PART I: GENERAL PROVISIONS (494.001-494.00295) The Financial Services Commission As introduced at the beginning of this module, the Financial Services Commission serves as agency head for the Office of Financial Regulation (OFR or Office) andtheOfficeofInsuranceRegulation(OIR).OFRand OIR are administratively housed within the Depart­- ment of Financial Services, headed by the Chief Financial Officer. The Office is responsible for con- ducting financial investigations into allegations of sus- pected illegal financial activities within its jurisdiction. Powers and Duties of the Commission and Office The Office of Financial Regulation is responsible for the administration and enforcement of Chapter 494.001-494.0077, F.S. The Financial Services Com­­mission may adopt rules pursuant to Chapters 120.563(1), F.S and 120.54, F.S to implement Chapters 494.001-494.0077, F.S. The Commission may adopt rules requiring electronic submission of any forms, documents, or fees required by this act if such rules reasonably accommodate technological or financial hardship. The Commission may prescribe by rule requirements and procedures for obtaining an exemption due to a technological hardship. The Commission may also adopt rules to accept certifica- tion of compliance with requirements of Chapter 494, F.S. in lieu of requiring submission of documents. The grant or denial of any license under this chapter must be in accordance with Chapter 120.60, F.S. The Office: has the power to issue and to serve subpoenas and subpoenas duces tecum to compel the attendance of witnesses and the production of all books, accounts, records, and other documents and materials rel- evant to an examination or investigation. or its duly authorized representative, has the power to administer oaths and affirmations to any person. may conduct an investigation of any person when- ever the Office has reason to believe, either upon complaint or otherwise, that any violation of 494.001-494.0077 F.S. has been committed or is about to be committed. • • • may, at intermittent periods, conduct examinations of any licensee or other person under the provi- sions of 494.001-494.0077 F.S. may bring action through its own counsel in the name and on behalf of the state against any person who has violated or is about to violate any provi- sion of 494.001-494.0077 F.S. or any rule of the commission or order of the Office issued under 494.001-494.0077 F.S. to enjoin the person from continuing in or engaging in any act in furtherance of the violation. has the power to issue and serve upon any person an order to cease and desist and to take corrective action whenever it has reason to believe the per- son is violating, has violated, or is about to violate any provision of 494.001-494.0077 F.S., any rule or order issued under 494.001-494.0077 F.S., or any written agreement between the person and the Office. All procedural matters relating to issuance and enforcement of such a cease and desist order are governed by the Administrative Procedure Act. has the power to order the refund of any fee directly or indirectly assessed and charged on a mortgage loan transaction which is unauthorized or exceeds the maximum fee specifically authorized in 494.001-494.0077 F.S. may prohibit the association by a mortgage broker business, or the employment by a mortgage lender or correspondent mortgage lender, of any person who has engaged in a pattern of misconduct while an associate of a mortgage brokerage business or an employee of a mortgage lender or correspondent mortgage lender. For the purpose of this subsec- tion, the term “pattern of misconduct” means the commission of three or more violations of ss. 494.001-494.0077 or the provisions of Chapter 494 in effect prior to October 1, 1991, during any one year period or any criminal conviction for violating ss. 494.001-494.0077 or the provisions of Chapter 494 in effect prior to October 1, 1991. Penalties Chapter 494.0018 provides whoever knowingly vio- • • • • • MORTGAGE BROKERAGE LICENSE LAW Chapter 494, F.S., is divided into five parts: Part I, General Provisions (494.001-494.00295); Part II, Mortgage Brokers (494.003-494.0043); Part III, Mortgage Lenders (494.006-494.0077); Part IV, Florida Fair Lending Act (494.0078-494.00797); and Part V, Loans Under the Florida Uniform Land Sales Practices Law (494.008).
  • 11. Florida Mortgage Brokerage and Lending Act Rules and Regulations     lates any provision of Chapters 494.0041(2)(e), (f), or (g); 494.0072 (2)(e), (f), or (g); or 494.0025 (1), (2), (3), (4), or (5), is guilty of a felony of the third degree, except that any person convicted of a violation of any provision of 494.001-494.0077 F.S., in which viola- tion the total value of money and property unlawfully obtained exceeded $50,000 and there were five or more victims, is guilty of a felony of the first degree. All the violations are punishable as provided in Chapters 775.082 F.S., 775.083 F.S., or 775.084 F.S. Each such violation constitutes a separate offense. In addition, if a mortgage transaction is made in violation of any pro- vision of Chapters 494.001-494.0077 F.S., the person making the transaction and every licensee, director, or officer who participated in making the transaction are jointly and severally liable to every party to the transaction in an action for damages incurred by the party or parties. However, a person is not liable under this section upon showing that such person’s licens- ees, officers, and directors who participated in making the transaction, if any, acted in good faith and with- out knowledge and, with the exercise of due diligence, could not have known of the act committed in viola- tion of Chapters 494.001-494.0077, F.S. Prohibited Practices Chapter 494.0025 F.S. provides that it is unlawful for any person: (1) To act as a mortgage lender in this state without a current, active license issued by the Office pur- suant to 494.006-494.0077, F.S. (2) To act as a correspondent mortgage lender in this state without a current, active license issued by the Office pursuant to 494.006-494.0077, F.S. (3) To act as a mortgage broker in this state without a current, active license issued by the Office pur- suant to 494.003-494.0043, F.S. (4) In any practice or transaction or course of busi- ness relating to the sale, purchase, negotiation, promotion, advertisement, or hypothecation of mortgage transactions, directly or indirectly: (a) To knowingly or willingly employ any device, scheme, or artifice to defraud; (b) To engage in any transaction, practice, or course of business which operates as a fraud upon any person in connection with the pur- chase or sale of any mortgage loan; or (c) To obtain property by fraud, willful misrep- resentation of a future act, or false promise. (5) In any matter within the jurisdiction of the Office, to knowingly and willfully falsify, con- ceal, or cover up by a trick, scheme, or device a material fact, make any false or fraudulent state- ment or representation, or make or use any false writing or document, knowing the same to con- tain any false or fraudulent statement or entry. (6) To violate 655.922(2) F.S., subject to 494.001- 494.0077 F.S. (7) Who is required to be licensed under ss. 494.006 - 494.0077, to fail to report to the Office the failure to meet the net worth requirements of 494.0061 F.S., 494.0062 F.S., or 494.0065 F.S. within 48 hours after the person’s knowledge of such failure or within 48 hours after the person should have known of such failure. (8) To pay a fee or commission in any mortgage loan transaction to any person or entity other than a mortgage brokerage business, mortgage lender, or correspondent mortgage lender, operating under an active license, or a person exempt from licensure under this chapter. (9) To record a mortgage brokerage agreement or any other document, not rendered by a court of competent jurisdiction, which purports to enforce the terms of the mortgage brokerage agreement. (10) To use the name or logo of a financial institution, as defined in 655.005(1), F.S., or its affiliates or subsidiaries when marketing or soliciting exist- ing or prospective customers if such marketing materials are used without the written consent of the financial institution and in a manner that would lead a reasonable person to believe that the material or solicitation originated from, was endorsed by, or is related to or the responsibility of the financial institution or its affiliates or sub- sidiaries.
  • 12.      Module 1 PART II AND III: MORTGAGE BROKERS AND MORTGAGE LENDERS All the relevant changes made to Chapter 494, F.S. were discussed at the beginning of this module. Included here is a brief recap of the changes to Chapter 494.003-494.0077, F.S. PART IV: FLORIDA FAIR LENDING ACT ABUSIVE MORTGAGE LENDING In 494.0078, F.S. the Florida Legislature found that: “abusive mortgage lending has become a problem in this state even though most high-cost home loans do not involve abusive mortgage practices. One of the most common forms of abusive lending is the making of loans that are equity-based rather than income-based. The financing of points and fees in these loans provides immediate income to the originator and encourages creditors to repeatedly refinance home loans. As long as there is sufficient equity in the home, an abusive creditor benefits even if the borrower is unable to make the payments and is forced to refinance. The financing of high points and fees causes the loss of equity in each refinanc- ing and often leads to foreclosure. Abusive lending has threatened the viability of many communities and caused decreases in home ownership. While the marketplace appears to oper- ate effectively for conventional mortgages, too many homeowners find themselves victims of overreach- ing creditors who provide loans with unnecessarily high costs and terms that are unnecessary to secure repayment of the loan. The Legislature finds that as competition and self-regulation have not eliminated the abusive terms from home-secured loans, the consumer protection provisions of this act are nec- essary to encourage fair lending.” DEFINITIONS Chapter 494.0079, F.S. sets forth the following defi- nitions. Affliate: Any company that controls, is controlled by, or is in common control with another company, as set forth in 12 U.S.C. 1841 et seq. and the regulations adopted thereunder. Allows the Office to contract with a third party ven- dor to administer the mortgage broker test. Provides that applications are not deemed received until all required fees are received. Authorizes dis- ciplinary action if fees are paid with a bad check. Provides that each licensee shall report any change in the principal broker, principal representative, officers, partners, members, joint venturers, direc- tors, control persons or any individual who is the ultimate equitable owner of 10% or greater inter- est. Provides that a change of control whether through the power to direct management, ownership or oth- erwise shall require an application to be submitted to OFR unless a waiver has been granted. Audited financial statements of all licensed lend- ers have to be in accordance with U.S. generally accepted accounting principles. Provides under certain conditions that existing • • • • • • principal representatives can be grandfathered in without class or testing requirements. Eliminates the requirement to display main and branch office licenses. Eliminates the requirement to display individual mortgage broker licenses. Eliminates the requirement to report the continu- ing education of loan “Associates” when renewing a lender’s license. Provides grounds for disciplinary action when a final judgment is entered against an applicant or licensee in a civil action upon grounds of fraud, embezzlement, misrepresentation, or deceit. Provides grounds for disciplinary action when action is taken by other federal and state regula- tory organizations located in or outside the State of Florida involving securities, insurance, real estate, and lending activities. • • • • •
  • 13. Florida Mortgage Brokerage and Lending Act Rules and Regulations     Annual percentage rate (APR): The annual percent- age rate for the loan calculated according to the provi- sions of 15 U.S.C. 1606 and the regulations adopted thereunder by the Federal Reserve Board. Borrower: Any natural person obligated to repay a loan, including, but not limited to, a co-borrower, co- signor, or guarantor. Bridge loan: A loan with a maturity of less than 18 months that only requires the payment of interest until such time as the entire unpaid balance is due and payable. Commission: The Financial Services Commission. Office: The Office of Financial Regulation of the commission. Lender: Any person who makes a high-cost home loan or acts as a mortgage broker or lender, finance company, or retail installment seller with respect to a high-cost home loan, but shall not include any entity chartered by the United States Congress when engag- ing in secondary market mortgage transactions as an assignee or otherwise. Residential mortgage transaction: A 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 the acquisition or initial construction of such dwelling. (15 U.S.C.) 1602(w) HIGH-COST HOME LOANS Definition The provisions of the Florida Fair Lending Act deal primarily with high-cost home loans. High-cost home loans are defined by 15 U.S.C. 1602(aa), which provides in pertinent part as follows: (1) A mortgage referred to in this subsection means a consumer credit transaction that is secured by the consumer’s principal dwelling, other than a resi- dential mortgage transaction, a reverse mortgage transaction, or a transaction under an open end credit plan, if— (A) the annual percentage rate at consummation of the transaction will exceed by more than 10 percentage points the yield on Treasury secu- rities having comparable periods of maturity on the fifteenth day of the month immediately preceding the month in which the application for the extension of credit is received by the creditor; or (B) the total points and fees payable by the con- sumer at or before closing will exceed the greater of— (i) 8 percent of the total loan amount; or (ii) $547.00, for the year 2007. (2) (A) After the 2-year period beginning on the effective date of the regulations promulgated under section 155 of the Riegle Community Development and Regulatory Improvement Act of 1994, and no more frequently than bien- nially after the first increase or decrease under this subparagraph, the Board may by regula- tion increase or decrease the number of per- centage points specified in paragraph (1)(A), if the Board determines that the increase or decrease is— (i) consistent with the consumer protections against abusive lending provided by the amendments made by subtitle B of title I of the Riegle Community Development and Regulatory Improve­ment Act of 1994; and (ii) warranted by the need for credit. (B) An increase or decrease under subparagraph (A) may not result in the number of percent- age points referred to in subparagraph (A) being— (i) less that 8 percentage points; or (ii) greater than 12 percentage points. (C) In determining whether to increase or decrease the number of percentage points referred to in subparagraph (A), the Board shall consult with representatives of consumers, including low-income consumers, and lenders. (3) The amount specified in paragraph (1)(B)(ii) 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 preceding such adjustment. (4) For purposes of paragraph (1)(B), points and fees shall include— (A) all items included in the finance charge, except interest or the time-price differential; (B) all compensation paid to mortgage brokers; (C) each of the charges listed in section1605(e) of this title (except an escrow for future payment of taxes), unless— (i) the charge is reasonable; (ii) the creditor receives no direct or indirect compensation; and (iii) the charge is paid to a third party unaffili- ated with the creditor; and (D) such other charges as the Board determines to be appropriate.
  • 14. 10     Module 1 PROHIBITED ACTS Chapter 494.00791,F.S. provides for prohibited acts involving high-cost loans. (1) Prepayment Penalties (a) A high-cost home loan may not contain terms that require a borrower to pay a pre- payment penalty for paying all or part of the loan principal before the date on which the payment is due. (b) Notwithstanding paragraph (a), a lender making a high-cost home loan may include in the loan contract a prepayment fee or penalty, for up to the first 36 months after the date of consummation of the loan, if: 1. The borrower has also been offered a choice of another product without a pre- payment penalty. 2. The borrower has been given, at least 3 business days prior to the loan consum- mation, a written disclosure of the terms of the prepayment fee or penalty by the lender, including the benefit the bor- rower will receive for accepting the pre- payment fee or penalty through either a reduced interest rate on the loan or reduced points or fees. (2) Default Interest Rate A high-cost home loan may not provide for a higher interest rate after default on the loan. However, this prohibition does not apply to interest rate changes in a variable rate loan oth- erwise consistent with the provisions of the loan documents, provided the change in interest rate is not triggered by a default or the acceleration of the interest rate. (3) Balloon Payments A high-cost home loan having a term of less than 10 years may not contain terms under which the aggregate amount of the regular periodic pay- ments would not fully amortize the outstanding principal balance. However, this prohibition does not apply when the payment schedule is adjusted to account for the seasonal or irregular income of the borrower or if the loan is a bridge loan. (4) Negative Amortization A high-cost home loan may not contain terms under 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. (5) Prepaid Payments A high-cost home loan may not include terms under which more than two periodic payments required under the loan are consolidated and paid in advance from the loan proceeds provided to the borrower. (6) Extending Credit Without Regard To The Payment Ability Of The Borrower A lender making a high-cost home loan shall not engage in any pattern or practice of extending high-cost home loans to borrowers based upon the borrowers’ collateral without regard to the borrowers’ ability to repay the loan, including the borrowers’ current and expected income, current obligations, and employment. (7) Payments To A Home Contractor A lender shall not make any payments to a con- tractor under a home improvement contract from amounts of a high-cost home loan other than: (a) In the form of an instrument that is payable to the borrower or jointly to the borrower and the contractor; or (b) At the election of the borrower by a third- party escrow agent in accordance with terms established in a written agreement signed by the borrower, the lender, and the contractor prior to the date of payment. (8) Due-On-Demand Clause A high-cost home loan may not contain a provi- sion that permits the lender, in its sole discre- tion, to call or accelerate the indebtedness. This provision does not prohibit acceleration of the loan due to the borrower’s failure to abide by the terms of the loan, or due to fraud or material misrepresentation by the consumer in connec- tion with the loan. (9) Refinancing Within an 18-Month Period (a) A lender, its affiliate, or an assignee shall not refinance any high-cost home loan to the same borrower within the first 18 months of the loan when the refinancing does not have a reasonable benefit to the borrower considering all of the circumstances, includ- ing, but not limited to, the terms of both the new and refinanced loans, the cost of the new loan, and the borrower’s circumstances. (b) A lender or assignee shall not engage in acts or practices to evade this requirement, including a pattern or practice of arrang- ing for the refinancing of the lender’s or assignee’s own loans by affiliated or unaffili- ated lenders or modifying a loan agreement, whether or not the existing loan is satisfied and replaced by the new loan, and charging a fee. (10) Open-Ended Loans A lender shall not make any loan as an open-
  • 15. Florida Mortgage Brokerage and Lending Act Rules and Regulations     11 ended loan in order to evade the provisions of this act unless such open-ended loans meet the definition in 12 C.F.R. s. 226.2(a)(20). (11) Recommendation of Default A lender shall not recommend or encourage default on an existing loan or other debt prior to and in connection with the closing or planned closing of a high-cost home loan that refinances all or any portion of such existing loan or debt. (12) Prohibited Door-To-Door Loans A high-cost home loan may not be made as a direct result of a potential or future lender or its representative offering or selling a high-cost home loan at the residence of a potential bor- rower without a prearranged appointment with the potential borrower or the expressed invita- tion of the potential borrower. This subsection does not apply to mail solicitations that may be received by the potential borrower. (13) Late Payment Fees A lender may not charge a late payment fee for a high-cost home loan except as provided in this subsection. A late payment fee: (a) may not be in excess of 5 percent of the amount of the payment past due. (b) may only be assessed for a payment past due for 15 days or more. (c) may not be charged more than once with respect to a single late payment. If a late payment fee is deducted from a payment made on the loan and such deduction causes a subsequent default on a subsequent pay- ment, no late payment fee may be imposed for such default. If a late payment fee has been imposed once with respect to a par- ticular late payment, no such fee shall be imposed with respect to any future payment which would have been timely and suffi- cient, but for the previous default. (14) Modification or Deferral Fees A lender may not charge a borrower any fees or other charges to modify, renew, extend, or amend a high-cost home loan or to defer any payment due under the terms of a high-cost home loan on a minimum of one modifica- tion, renewal, extension, or deferral per each 12 months of the length of the loan. HIGH-COST LOAN DISCLOSURES Chapter 494.00792 F. S. provides: (1) In addition to other disclosures required by law and in conspicuous type: (a) Notice to borrower. A lender making a high-cost home loan shall provide a notice to a borrower in substantially the following form: 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, includ- ing 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 quali- fied independent credit counselor or other experienced financial adviser regarding the rates, fees, and provisions of this mort- gage 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 application. Borrowing for the purpose of debt consolidation can be an appropriate financial management tool. However, if you continue to incur sig- nificant new credit card charges or other debts after this high-cost home loan is closed and then experience financial dif- ficulties, 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 home- owners’ 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 pay- ments to your existing creditors. (b) Annual percentage rate A lender making a high-cost home loan shall disclose: 1. In the case of a fixed mortgage, the annual percentage rate and the amount of the regular monthly payment. 2. In the case of any other credit transac- tion, the annual percentage rate, the amount of the regular monthly payment and the amount of any balloon payment permitted under this section, a statement that the interest rate and monthly pay- ment may increase, and the amount of the maximum monthly payment based upon the maximum interest rate allowed pursuant to law.
  • 16. 12     Module 1 (c) Notice to purchasers and assignees All high-cost home loans shall contain the following notice: Notice: This is a mortgage subject to the provisions of the Florida Fair Lending Act. Purchasers and assignees of this mortgage could be liable for all claims and defenses with respect to the mortgage which the borrower could assert against the creditor. (2) Timing of Disclosure (a) The disclosure required by this subsection shall be given not less than 3 business days prior to the consummation of the high-cost home loan. (b) New disclosures are required when, after disclosure is made, the lender making the high-cost home loan changes the terms of the extension of credit, including if such changes make the original disclosures inac- curate, unless new disclosures are provided that meet the requirements of this section. (c) A lender may provide new disclosures pur- suant to paragraph (b) by telephone, if: 1. The change is initiated by the borrower. 2. At the consummation of the high-cost home loan: a. The lender provides the disclosures in writing to the borrower. b. The lender and the borrower cer- tify in writing that the new disclosures were provided by telephone no later than 3 days prior to the consumma- tion of the high-cost home loan. (d) A creditor must disclose to any high-cost home loan borrower the rights of the bor- rower to rescind the high-cost home loan within 3 business days pursuant to 15 U.S.C. s. 1635(a) and shall provide appropriate forms for the borrower to exercise his or her right to rescission. The notice, forms, and provisions thereof must be in accor- dance with the requirements of 15 U.S.C. s. 1635(a). REGULATION OF THE FLORIDA FAIR LENDING ACT The Office of Financial Regulation and the Financial Services Commission are responsible for the adminis- tration and enforcement of The Florida Fair Lending Act. Duties include investigations, examinations, injunctions, and orders. Powers and Duties of the Commission and Office; Investigations; Examinations; Injunctions; Orders Chapter 494.00795, F.S. provides that the Commission and Office are responsible for the administration and enforcement of this act. The Commission may adopt rules pursuant to ss. 120.536(1) and 120.54 to imple- ment this act. The Commission may adopt rules to allow electronic submission of any forms, documents, or fees required by this act. The Office: may conduct an investigation of any person when- ever the Office has reason to believe, upon com- plaint or otherwise, that any violation of the act has occurred. any person having reason to believe that a provision of this act has been violated may file a written com- plaint with the Office setting forth the details of the alleged violation. may conduct examinations of any person to deter- mine compliance with this act. may bring action through its own counsel in the name and on behalf of the state against any person who has violated or is about to violate any provision of this act or any rule or order issued under the act to enjoin the person from continuing in or engag- ing in any act in furtherance of the violation. in any injunctive proceeding, the court may issue a subpoena or subpoenas duces tecum, requiring the attendance of any witnesses and the production of any books, accounts, records, and other documents and materials that appear necessary to the expedi- tious resolution of the application for injunction. may issue and serve upon any person an order to cease and desist and to take corrective action when- ever it has reason to believe the person is violating, has violated, or is about to violate any provision of this act, or any written agreement between the person and the Office. All procedural matters relat- ing to issuance and enforcement of such cease and desist orders are governed by the Administrative Procedure Act. whenever the Office finds a person in violation of this act, it may enter an order imposing a fine in an amount not exceeding $5,000 for each count or separate offense, provided that the aggregate fine for all violations of this act that could have been asserted at the time of the order imposing the fine shall not exceed $500,000. Any violation of this act shall also be deemed to be a violation of Chapter 494, Chapter 516, Chapter 520, Chapter 655, Chapter 657, Chapter 658, Chapter 660, Chapter 663, Chapter 665, or Chapter 667. The com- mission may adopt rules to enforce this subsection. Enforcement of the Florida Fair Lending Act Chapter 494.00796, F.S. provides: • • • • • • •
  • 17. Florida Mortgage Brokerage and Lending Act Rules and Regulations     13 (1) Any person or the agent, officer, or other repre- sentative of any person committing a material vio- lation of the provisions of this act shall forfeit the entire interest charged in the high-cost home loan or contracted to be charged or received, and only the principal sum of such high-cost home loan can be enforced in any court in this state, either at law or in equity. (2) A creditor in a home loan who, when acting in good faith, fails to comply with the provisions of this act shall not be deemed to have violated this act if the creditor establishes that within 60 days after receiving any notice from the borrower of the compliance failure, which compliance failure was not intentional and resulted from a bona fide error notwithstanding the maintenance of proce- dures reasonably adapted to avoid such errors, the borrower has been notified of the compliance fail- ure, appropriate restitution has been made to the borrower, and appropriate adjustments are made to the loan. Bona fide errors shall include, but not be limited to, clerical, calculation, computer mal- function and programming, and printing errors. An error of legal judgment with respect to a per- son’s obligations under this section is not a bona fide error. (3) The remedies provided in this section are cumu- lative. CONCLUSION In conclusion, it is important to be aware of current rules and regulations governing the mortgage lend- ing business and the extent to which they affect daily practice. These rules and regulations apply to a wide range of topics, including licensure requirements, continuing education requirements, and penalties for violations of the rules. The Department of Financial Services is responsible for regulating the activities of mortgage brokers, mortgage brokerage businesses, mortgage lenders, and correspondent mortgage lend- ers by the use of Florida Statutes and the Florida Administrative Code and, when necessary, for impos- ing penalties on licensees found to be in violation. RESOURCES To access any of the required forms, go to www.flofr. com/licensing/MBlist.htm and select the appropri- ate license type. To access Chapter 494 online, go to www.leg.state.fl.us/Statutes/index.cfm?App_ mode=Display_StatuteURL=Ch0494/titl0494. htmStatuteYear=2006Title=-2006- Chapter%20494 To access the Florida Administrative Code, Rules 69V-40, go to www.flofr.com/licensing/Rules Statutes/Rule69V-40.htm
  • 18. 14     Module 1 Transfer your answers to the space provided on the Answer Sheet. 1. In Chapter 494, an individual, partnership, corporation, trust, or other organization that possesses the power to direct the management or policies of a company is referred to as a: a. joint venturer. b. control person. c. principal broker. d. principal representative. 2. The most significant change to the Rules Regulation Mortgage Brokers by 2004 was the creation of which new Chapters? a. 40-69V F.A.C. b. 96V-40 F.A.C. c. 69V-40 F.A.C. d. 3D-40 F.A.C. 3. Which of the following is not a relevant change to Chapter 494 that became effective October 1, 2006? a. Elimination of the need to display individual, main and branch office licenses. b. Provision that applications are not deemed received until all required fees are received and authorizes disci- plinary action if fees are paid with a bad check. c. Provision that grounds for no disciplinary action when action is taken by other federal and state regulatory organizations located in or outside the State of Florida involving securities, insurance, real estate, and lending activities. d. Allows the Office to contract with a third party vendor to administer the mortgage broker test. 4. Which of the following is not a prohibited act per Chapter 494? a. To act as a mortgage lender in this state without a current, active license issued by the Office pursuant to 494.006-494.0077, F.S. b. To record a mortgage brokerage agreement or any other document, rendered by a court of competent jurisdic- tion, which purports to enforce the terms of the mortgage brokerage agreement. c. To pay a fee or commission in any mortgage loan transaction to any person or entity other than a mortgage brokerage business, mortgage lender, or correspondent mortgage lender, operating under an active license, or a person exempt from licensure under this chapter. d. In any matter within the jurisdiction of the Office, to knowingly and willfully falsify, conceal, or cover up by a trick, scheme, or device a material fact, make any false or fraudulent statement or representation, or make or use any false writing or document, knowing the same to contain any false or fraudulent statement or entry. 5. Audited financial statements of lenders must be prepared according to: a. U.S. generally accepted accounting principles. b. U.S. generally accepted auditing principles. c. U.S. generally accounted accepted principles. d. audited financials are not required by lenders once licensed. 6. Electronic filing of applications, renewals, and fees can be done by: a. mortgage brokers. b. mortgage brokerage businesses. c. mortgage lenders. d. all of the above. M O D U L E REVIE W E X ERCISES Use the exercise questions to review the module material. The answers are found on the bottom of the next page.
  • 19. Florida Mortgage Brokerage and Lending Act Rules and Regulations     15 Transfer your answers to the space provided on the Answer Sheet. 7. A person is presumed to control a company if, with respect to a particular company, that person: a. is a director, general partner, or officer exercising executive responsibility or having similar status or functions. b. directly or indirectly may vote 10 percent or more of a class of voting securities or sell or direct the sale of 10 percent or more of a class of voting securities. c. in the case of a partnership, may receive upon dissolution or has contributed 10 percent or more of the capital. d. any of the above. ANSWERS: 1)b2)c3)c4)b5)a6)d7)d
  • 20. 16     Module 1
  • 21. © 2007 Bert Rodgers Schools of Real Estate, Inc. 17 Learning Objectives After completing this module, you should be able to: Credit Scores and Credit Scoring M O D U L E 2 1. Define the terms credit score and credit ­scoring. 2. List the consumer’s rights under the Fair Credit Reporting Act (FCRA) and the Fair and Accurate Credit Transaction Act (FACT ACT). 3. Discuss what counts in a credit score, what can be done to raise a credit score, and how to create one through the use of nontraditional credit. 4. List the entities that use credit scores as a tool to evaluate a borrower’s credit worthiness and how the credit score affects the terms offered. INTRODUCTION Making payments on time creates a solid credit rat- ing, but it takes time to build. However, getting into a bad credit situation can happen very quickly by pay- ing accounts late or not at all. If one of the accounts is a mortgage loan, the lender can foreclose on the property to recover their loss, and the consumer will no longer have a home. Who Uses Credit Scores? The 3 national consumer reporting companies sell the information in the report to creditors, insurers, employers, and other businesses that use it to evalu- ate applications for credit, insurance, employment, or renting a home. Since a credit report includes information on where the applicant has lived, how they pay their bills, and whether they have been sued, arrested, or filed for bankruptcy, all types of creditors pull credit reports and use credit scoring. Mortgage lenders use credit scores to help them evaluate a borrower’s request quickly and efficiently through automated means. Higher scores normally mean better interest rate and terms. In fact, the inter- est rate offered is normally directly related to the credit score. Insurance companies use credit scores to determine auto and home owner policy premiums. Car dealers, furniture stores, cell phone service companies, credit card companies, and landlords use credit scores. CREDIT SCORES When consumers apply for a mortgage loan today, the lender is looking for a certain minimum credit score to make an automated underwriting decision. A credit score is determined by a complex mathematical equation that evaluates the information contained in a consumer’s credit file. Myfico.com defines a credit score as: …a number generated by a statistical model which is used to objectively evaluate information that pertains to making a credit decision. Credit Bureaus Equifax, Experían, and TransUnion, are national credit reporting agencies that maintain credit reports in the United States and work independently of each other to gather information from businesses and update consumer credit profiles. Each bureau has a name for the score model they use. Experían uses the FICO score, created by Fair Isaac and Company. Equifax uses the Beacon score model. TransUnion uses the Empirica score model. Until 2005, the 3 major credit bureaus only provided these scores to lenders. That changed when the Fair and Accurate Credit and Transaction Act (FACT ACT), effective September 1, 2005 allowed con- sumers to receive once a year, upon request, a free copy of their credit report. Consumers can always receive a free copy of their credit report if they have been denied credit due to information contained in a
  • 22. 18     Module 2 credit bureau within 60 days of being denied credit. The Equal Credit Opportunity Act (ECOA) requires that the creditor provide a notice disclosing the rea- son the loan was rejected. The Fair Credit Reporting Act (FRCA) requires the creditor to give the name, address, and phone number of the consumer report- ing company that supplied the information. www.annualcreditreport.com www.equifax.com www.experian.com www.transunion.com Credit Scoring This process of evaluating past credit performance to predict future credit performance is called credit scoring. Credit scores for mortgage purposes range from 300 – 850. Higher credit scores are indicative of better credit performance and lower scores indicative of possible default in the future. Since it is based on statistics and real data, it is more reliable than sub- jective methods as it treats each subject objectively. Under the ECOA, a credit scoring system may not use race, sex, marital status, national origin, or reli- gion as factors. The ECOA states that a person cannot be denied credit or have credit terminated because of their age. However, creditors are allowed to use age in a properly designed system but must give equal weight to elderly applicants. Consumer Credit Rights The federal FCRA promotes the accuracy, fairness, and privacy of information in the files of consumer reporting agencies. Consumer reporting agen- cies include credit bureaus and specialty agencies. Specialty agencies include agencies that sell informa- tion about check writing histories, medical records, and rental history records. Consumers’ rights under the FCRA include: Consumers must be told if information in their credit file has been used against them. Consumers have the right to know what is in their file. Consumers have the right to ask for a credit score. Consumers have the right to dispute incomplete or inaccurate information. Consumer reporting agencies must correct or delete inaccurate, incomplete, or unverifiable infor- mation. Consumer reporting agencies may not report out- dated negative information. Access to the file is limited to people with a valid need. Written signed disclosure by the consumer autho- • • • • • • • • rizing disclosure for an employer to access the file is required. Consumers can limit prescreened offers by opting out. Consumers can seek damages from violators. Identity theft victims and active duty military per- sonnel have additional rights. The Federal Trade Commission (FTC) handles con­­­sumer complaints. Their contact information is below: Phone: (877) -FTC-HELP (382-4357) Mail: Federal Trade Commission CRC-240 Washington, D.C. 20580 Online complaint form: https://rn.ftc.gov/ pls/dod/wsolcq$.startup?Z_ORG_CODE= PU01 What Counts in a Credit Score? When a credit score is provided, 4 reason codes are also provided to explain the scoring decision. It also gives insight on how the score may be improved. Each bureau places different weight on different fac- tors. Some look more heavily upon installment loans and others on collections. If a credit report is used in making a decision to accept or reject a mortgage loan, then the customer must be provided a National Credit Score Disclosure. The National Credit Score Disclosure provides the reason codes that were used most heavily in determining the score. See a sample disclosure in Exhibit I. FICO Score. According to FICO, a consumer’s credit score is composed of 5 factors each weighted differently. 1. 35% of the FICO score is determined by how the consumer pays their credit accounts. Late pay- ments, bankruptcies, and other negative items con- tribute negatively to the score. 2. 30% of the FICO score is determined by how much is owed on all outstanding accounts, the number of accounts, and how much available credit is being utilized. The more owed, the lower the score. 3. 15% of the FICO score is determined by the length of the credit history. However a short credit history with successful financial management will reflect positively in the score. 4. 10% of the FICO score is determined by open- ing new accounts. Too many inquiries that do not result in the extension of credit will reflect nega- tively in the score. Interest rate shopping should be done in a short period of time to minimize lower- ing the score. • • •
  • 23. Credit Scores and Credit Scoring     19 Exhibit I: National Credit Score Disclosure Form Source: Calyx
  • 24. 20     Module 2 5. 10% of the FICO score comes from having a mix of credit like credit cards, a mortgage, and an install- ment loan. This chart shows how the Fair Isaac Corp. values the various parts of your credit management to determine your credit score. Figure 2.1 What Counts in a Credit Score? Source: Fair Isaac Corp., www.myfico.com How Can a Credit Score be Improved? Credit scores change as new information is reported in the consumer’s credit file. In order to improve the score, a consumer should consider: paying bills on time. keeping balances low on credit cards in relation to available credit. paying down revolving debt. applying for new credit only when necessary. if any payments have been missed, get current and stay current. The credit file should be checked periodically to be certain there are no errors and to help guard against identity theft. If an identity thief opens an account in your name and does not pay the bill, the bad credit could be reported under your name. If any of the information is incorrect, then under the FCRA, both the consumer reporting agency and the creditor are responsible for correcting inaccurate or incomplete information. Once the consumer sends written proof of the mistake to the credit reporting agency, the agency has 30 days to investigate the information. The credit reporting agency must delete the con- tested information when the agency does not receive a response from the creditor or if the creditor is out of business and the information cannot be verified. Under the FCRA, consumer reporting agencies must correct or delete unverifiable, inaccurate, or incom- plete information within 30 days of notification by the consumer. Negative information or bad credit will be reported for 7 years. Bankruptcies and judgments will be reported for 10 years. Borrowers who do not have traditional credit accounts • • • • • like a credit card, a car loan, or mortgage are consid- ered unscoreable at the bureaus. Because of the lack of traditional credit reporting, the model cannot provide a numerical determination. These borrowers may be placed into subprime loans with higher rates and fees because the lender cannot determine the risk associ- ated with lending to this borrower. Pay Rent Build Credit Pay Rent Build Credit, Inc. (PRBC) is a consumer reporting agency that collects, stores, scores, and reports bill payment data for permissible purposes under the FCRA. Their website is devoted to help- ing people develop credit scores based on alterna- tive credit. Their philosophy advocates that Payment Reporting Builds Credit.SM It is the first credit bureau to give consumers and small businesses the tools to demonstrate their creditworthiness without the need to go into debt (www.prbc.com ). In addition to receiving payment data from creditors and financial institutions’ bill payment services, PRBC has partnered with the National Credit Reporting Association to verify trade line accounts and up to 3 years worth of prior payments that are reported directly by consumers to PRBC. Lenders can purchase a PRBC ReportSM depicting a consumer’s bill payment history either on a stand- alone basis, or merged with Equifax, Experían, and TransUnion credit reports. Each report is accompa- nied by a PRBC Bill Payment ScoreSM (BPSSM ). PRBC Reports and the BPS are used in the absence of, or as a supplement to a traditional credit report, to gain a more complete and accurate risk assessment of an applicant. A PRBC Report may also be used as a nontraditional mortgage credit report which exceeds secondary market standards for documenting cred- itworthiness. PRBC does not charge consumers or small businesses a fee to enroll in the service or to view their own payment data at any time. The main objec- tive is to automate the mortgage application process for hard-to-score borrowers so they may qualify for better loan products and pricing. VantageScoreSM In 2006, the 3 national repositories introduced the jointly developed new credit score, VantageScoreSM designed to simplify and enhance the credit process for both consumers and credit grantors. VantageScoreSM can provide consumers and businesses with a highly predictive, consistent score that is easy to understand. Scores range from 501 to 990. with higher scores indicative of lower risk. A type of report card has been created with grades A to F.
  • 25. Credit Scores and Credit Scoring     21 A = 901 – 990 B = 801 – 900 C = 701 – 800 D = 601 – 700 F = 501 – 600 VantageScoreSM is able to more effectively provide predictive scores on thin-file consumers—those with little consumer credit—which is useful in risk man- agement. The VantageScoreSM is determined by: Payment history 32%: Have you consistently paid your accounts in a timely manner? Utilization 23%: How much of the total credit available to you are you currently using? Balances 15%: What is the total of your current and delinquent account balances? Depth of credit 13%: How long is your credit his- tory and do you have a mix of credit types? Recent credit 10%: How many recently opened credit accounts and credit inquiries do you have? Available credit 7%: What is the total amount of credit to which you currently have access? Figure 2.2 Determining Your VantageScoreSM Source: www.vantagescore.com/consumerinfo.html PRESCREENING FOR MORTGAGE PRODUCTS SOLICITATION Prescreening is a tool used by institutions to solicit pre-identified, potential customers for mortgage products. The 3 national repositories compile lists of new customers, sometimes called a trigger list, based on specific criteria provided by the institution. Once someone’s credit has been pulled, an inquiry appears. Then, the bureau knows that the customer might be looking for a mortgage. This trigger, or customer’s name, is then sold to the institution be it a mortgage broker, lender, or lead generation company. The insti- tution then sends the customer a prescreened offer. Although prescreening is allowed under the FCRA, there is some concern about lead generation compa- • • • • • • nies obtaining credit profiles. The intention of pre- screening is supposed to be able to offer a firm offer of credit. But, just having a credit score is not enough to obtain a mortgage other factors to be considered include income and property acceptability. Therefore, lead generation companies cannot make offers of credit and may contribute to identity theft if the credit profiles wind up in the wrong hands. Conclusion Using credit wisely can enrich the consumer giv- ing him or her more buying power at lower interest rates, and having more offers of credit extended. For those who do not pay their bills on time and have negative items reported on their credit report, financ- ing becomes increasingly more difficult. Just like in school, good grades count. The better your grades, the better your job opportunities. A higher credit score brings better offers and terms. RESOURCES The Consumer Division of Fair Isaac www.myfico.com Order your free credit report from all three bureaus each year at www.annualcreditreport.com Equifax www.equifax.com 1-800-685-1111 Experían www.experian.com 888-397-3742 TransUnion www.transunion.com 1-800-916-8800 Federal Trade Commission’s Consumer Complaint Forms https://rn.ftc.gov/pls/dod/wsolcq$.startup? Z_ORG_CODE=PU01 Help consumers develop credit scores based on alter- native credit www.prbc.com Obtain a tri-bureau generic credit scoring system www.vantagescore.com/consumerinfo.html The Federal Trade Commission (FTC) handles consumer complaints. Their contact information is below: Phone: (877) -FTC-HELP (382-4357) Mail: Federal Trade Commission CRC-240 Washington, D.C. 20580 Pay Rent Build Credit, Inc. (PRBC) www.prbc.com Calyx Software www.calyxsupport.com
  • 26. 22     Module 2 True or False 1. The best way to get a free copy of your credit report is to file a request with the FTC. T F 2. According to the FACT ACT, consumers are allowed to receive a free credit report once per year. T F 3. According to FICO, payment history is the most heavily weighted category in determining a credit score. T F 4. According to VantageScoreSM the most heavily weighted category that determines a credit score is credit utilization. T F 5. Paying bills on time and keeping the balances low on credit cards contribute positively to credit scores. T F 6. The 3 national credit reporting agencies compile trigger lists. T F 7. The Equal Credit Opportunity Act states an applicant can be denied credit based on age. T F Multiple-Choice 1. __________ promotes the accuracy, fairness, and privacy of information in the files of consumer reporting agencies. a. ECOA b. FCRA c. FACT ACT d. TILA 2. The process of evaluating past credit performance to predict future credit performance is called: a. credit scaring. b. credit rating. c. credit scoring. d. credit evaluation. 3. Consumers who have thin credit files can now build a credit profile and have a credit score developed by which company? a. Pay Rent Build Highway b. Pay Rent Build Credit c. Pick Rates Buy Cars d. Pick Rates Better Credit 4. Which of the following creditors use credit scores? a. mortgage lenders b. cell phone providers c. landlords d. all of the above 5. Per the Fair Credit Reporting Act (FCRA), a credit bureau has _____ days to investigate an inquiry of inaccurate or incomplete information. a. 10 b. 15 c. 30 d. 60 ANSWERS: TrueorFalse:1)F2)T3)T4)F5)T6)T7)FMultipleChoice:1)b2)c3)b4)d5)c M O D U L E REVIE W E X ERCISES Use the exercise questions to review the module material. The answers are found on the bottom of the page.
  • 27. © 2007 Bert Rodgers Schools of Real Estate, Inc. 23 Learning Objectives After completing this module, you should be able to: Exotic and Nontraditional Mortgages M O D U L E 3 1. Define each of the terms in the glossary. 2. Discuss the history of how these loans have evolved. 3. Identify the type of borrowers these products should be marketed to. 4. Explain why these products are often costly and complex. GLOSSARY AND ACRONYMS 1st adjustment cap: The percentage the interest rate will change after its initial fixed period. Adjustable rate mortgage (ARM): A mortgage in which the interest rate is not fixed and is adjusted periodically based on a predetermined index. This results in changes to the monthly payment amount, the outstanding mortgage balance, and/or the mort- gage term. Adjustment period: The number of months the interest rate is fixed between each interest rate adjust- ment for an adjustable rate mortgage. Amortization: Repayment of a mortgage in periodic installments of principal and interest that will pay off the mortgage at the end of the mortgage term. Deferred interest: The dollar amount that is added to the original amount borrowed because the monthly mortgage payment is insufficient to cover the inter- est costs. This is a common feature in pay-option ARM’s. Equity: The difference between the property’s value and the owner’s indebtedness. Index: A rate set by market forces and published by a neutral third party. The index fluctuates up and down due to market factors. Lenders use the index to deter- mine the interest rate on an adjustable rate mortgage by adding it to the margin. Some examples of indexes are the prime lending rate, 1-, 3-, or 5- year U.S. Treasury security yields (CMT), the London Inter Bank Offering Rate (LIBOR), Certificate of Savings Index (COSI), 11th District Cost of Funds Index (COFI), and 12-Month Treasury Average (MTA). Indexed rate: The lender uses the published rate of the index and adds it to a fixed margin to determine the current interest rate on an adjustable rate mortgage. Initial fixed period: The number of months the loan will be fixed at the initial interest rate. Interest-only mortgage (I/O): A mortgage where the monthly payment does not include any repay- ment of principal for a predetermined, fixed period of time. The payment consists of interest only. The payment can be fixed for the interest-only period or the payment can adjust (increase) during the interest- only period. During the interest-only period, the loan balance remains unchanged. Life cap: The maximum percentage that the initial interest rate can increase or decrease during the life of the loan. Margin: The amount a lender adds to the index on an adjustable rate mortgage to establish the new adjusted interest rate. The margin when added to the index equals the fully indexed note rate. Negative amortization: When the monthly mort- gage payments do not cover all of the interest. The interest portion that is not covered is added to the principal balance. The borrower owes more than originally borrowed. Nontraditional mortgage: A mortgage where the borrower pays only the mortgage loan interest or possibly an even lesser amount of the interest that is due each month resulting in deferred interest and negative amortization.
  • 28. 24     Module 3 Payment cap: The maximum percentage that the interest rate can increase or decrease for each adjust- ment period. Normally, it is 7.5% more than the previous month’s payment. This keeps the payment artificially lower than interest rate caps which limit how high or low the interest rate can adjust. Pay-option adjustable rate mortgage (pay-option ARM): An adjustable rate mortgage with the flex- ibility of making several different monthly mortgage payments each month based on the borrower’s cash flow. The borrower can pay the minimum payment, the interest only payment, or the fully amortized note rate payment. Prepayment penalty: A charge the lender makes when a mortgage is repaid before a certain period of time elapses or when the borrower repays a certain additional amount of principal before a certain period of time elapses. With soft prepayment penalties, if the borrower sells the home during the prepayment period, then no penalty is assessed but if the borrower refinances, a penalty is assessed. With hard prepay- ment penalties, whether the house is sold or refinanced during the penalty period, a penalty will be assessed. The penalty also applies if the borrower repays more than 20% of the principal in any 12-month period. Principal: The amount of money borrowed or the outstanding balance of a loan, not including interest. The portion of the monthly payment that is used to reduce the loan balance. Recast: Increasing the monthly mortgage payment to be computed on the fully indexed rate when the loan balance reaches the maximum negative amortization. The loan can be re-amortized several times through- out the term. As this occurs, the increased monthly payment overrides the monthly amount set by the payment cap. Traditional mortgage: Mortgages that require the borrower to repay part of the principal, in addition to paying interest on the money borrowed. INTEREST-ONLY AND PAY-OPTION ADJUSTABLE RATE MORTGAGES Interest-Only Mortgage Normal home appreciation is around 6% per year. However, the past few years have seen appreciation at 20% levels or higher but incomes have not kept pace. Interest-only mortgages (I/O) help people purchase their first home because of the lower initial monthly payment of interest only that allows consumers to qualify with a lower monthly payment. I/O’s are for borrowers who want a lower initial monthly pay- ment, and have great confidence that they will be able to make larger payments in the future when the I/O period expires. The I/O payment is normally fixed for a period of time lasting anywhere from the first 3 years to 10 years. After the fixed interest-only period, the monthly pay- ment will increase even when the interest rate is fixed for the life of the loan. For example, if the mortgage is a 30-year fixed rate at 6.25% with interest only for the first 10 years of the mortgage, then the borrower’s monthly payment will be lower in the first 10 years and increase in years 11–30. If the borrower pays $200,000 for the home and puts $10,000 down, or a 5% down payment, then $190,000 will be financed. The monthly mortgage payment in years 1–10 will be $989.58 ($190,000 x 6.25% ÷ 12). At the end of 10 years, the borrower still owes the same $190,000 they borrowed. Then, for the remaining term of the mortgage, the borrower’s monthly payment will be increased to $1,388.76 so the mortgage will be paid in full (principal and interest) at the end of 30 years. See Table 3.1 Table 3.1: Payment Schedule for 10 Years Interest Only, 30 Years Fixed # of payments Interest rate Monthly payment Mortgage balance 120 6.25% $989.58 $190,000 240 6.25% $1,388.76 $0.00 Adjustable Rate Mortgage (ARM) Let’s say that the interest rate in the above example was not fixed but was a 5/1 adjustable rate mortgage (ARM) with 5 years of interest only. With an ARM, the interest rate fluctuates according to a predeter- mined index plus basis points, called a margin. A basis point is 1/100th of 1%. A standard margin is 275 basis points or 2.75%. The higher the margin is, the greater the yield to the lender. The new interest rate at adjustment is the current index plus the mar- gin. For example, if the index is 5% and the margin is 2.75%, then the new indexed rate is the sum of 5% and 2.75% which equals 7.75%. Lenders use different indexes to base the adjustments to the interest rate. Some indexes move more slowly than others. Some of the more common indexes used with these products are the Prime Lending Rate, the London Inter Bank Offering Rate (LIBOR), the Cost of Savings Index (COSI), the Cost of Funds Index (COFI), and the 12- Month Treasury Average (MTA). The MTA is a relatively new index and is the 12-month average of the monthly average yields of U.S. Treasury securi- ties. The current rate of these indexes can be found in the business section of the local newspaper, in the Wall Street Journal, or online at www.wsj.com.
  • 29. Exotic and Nontraditional Mortgages     25 Most ARMs have interest rate caps per adjustment and life of loan caps. A cap limits the increase or decrease per adjustment. For example, the standard 5/1 LIBOR ARM has 2/6 caps, meaning the inter- est rate cannot increase or decrease more than 2% per adjustment and no more than 6% for the life of the loan. The 5/1 LIBOR ARM is fixed for the first 5 years of the loan and then adjusts once annually based on the then going LIBOR index added to the fixed margin that was determined at the onset of the mort- gage. See Table 3.2, which assumes the worst case sce- nario in the interest rate adjusting. Some indexes move slower than others. A faster mov- ing index will result in a higher payment at adjustment time. Table 3.3 shows the interest rate comparison of the different indexes used. Traditional vs Nontraditional Mortgages With traditional mortgages the borrower’s payment includes principal and interest and at the end of the loan term, the loan will be paid off or extinguished. These are considered fully amortizing loans. Lenders have put a spin on different amortization types and have caused some confusion with detrimental conse- quences for unsophisticated borrowers. Even some mortgage brokers/originators do not fully understand the product they are marketing. They know the lower monthly payment helps them qualify more borrowers for more loans, which translates into a higher income for the mortgage broker/originator. For example, if the borrower chose a 30-year fixed rate mortgage at 6.25%, then their monthly mortgage payment would be $1,170.40 for all 360 payments (12 payments per year x 30 years = 360 payments). The monthly pay- ment can be calculated by using a financial calculator, and can also be done online at www.fool.com/calcs/ calculators.htm or www.bankrate.com or by multi- plying the loan amount by a numeric factor that pays the loan off at the end of 30 years ($190,000 x 6.16 {30 year factor}). See Table 3.4. A fixed rate mortgage is the best product for someone who wants certainty in their payment or is on a fixed income, like a retired borrower. Nontraditional mortgages are normally ARM’s paired with amortization, without amortization (I/O), and with negative amortization. They allow borrowers different amortization and different payment options. A payment option adjustable rate mortgage (pay- option ARM) is based on the MTA index and will require the borrower’s first 3 months of payments to be at a low, fixed rate or just for the first month at a low, fixed rate. Then in the fourth month (if fixed Table 3.2: Payment Schedule for 5 Years of Interest Only, 5/1 LIBOR Arm Index, Start Rate = 6.00%, Margin = 2.75% # of payments Interest rate Monthly payment Mortgage balance 1st adjustment cap 2.00% 60 6.00% $ 950.00 $ 190,000 1st change 60 months 12 8.00% $1,466.45 $187,512.70 Adjustment cap 2.00% 12 10.00% $1,720.22 $185,532.20 Adjustment period 12 months 275 12% $1,982.53 $ 1,966.24 Life Cap 6.00% 1 12% $1,985.90 $ 0.00 Table 3.3: Comparison of Common Indexes from Today, a Month Ago, And A Year Ago Index Today as of 2/26/07 1 month ago 1 year ago 1 year CMT 5.05% 5.06% 4.74% 3 year CMT 4.73% 4.79% 4.71% 5 year CMT 4.69% 4.75% 4.66% 6 month LIBOR 5.39% 5.39% 4.94% Prime lending rate 8.25% 8.25% 7.50% 11th District COFI 4.396% 4.396% 3.624% 12-MTA 4.983% 4.983% 4.011% Table 3.4: PAYMENT SCHEDULE FOR 30 YEAR FIXED RATE AT 6.25% # of Payments Interest Rate Monthly Payment Mortgage Balance 360 6.25% $1,170.40 $0.00
  • 30. 26     Module 3 Table 3.6: Partial Amortization Schedule through year 12 for Option 2 Year Total Payments Principal Paid Interest Paid Ending Principal Balance $190,000.00 1 $14,724.96 $0.00 $14,724.96 $190,000.00 2 $14,724.96 $0.00 $14,724.96 $190,000.00 3 $14,724.96 $0.00 $14,724.96 $190,000.00 4 $14,724.96 $0.00 $14,724.96 $190,000.00 5 $14,724.96 $0.00 $14,724.96 $190,000.00 6 $14,724.96 $0.00 $14,724.96 $190,000.00 7 $14,724.96 $0.00 $14,724.96 $190,000.00 8 $14,724.96 $0.00 $14,724.96 $190,000.00 9 $14,724.96 $0.00 $14,724.96 $190,000.00 10 $14,724.96 $0.00 $14,724.96 $190,000.00 11 $18,717.60 $4,137.52 $14,580.08 $185,862.48 12 $18,717.60 $4,469.82 $14,247.78 $181,392.66 $190,000.00 x 7.1523 (30 year factor for 7.75%) = $1358.95 (loan amount times factor equals monthly payment that will pay off the amount borrowed plus interest at the end of the term) Notice how the balance owed does not decrease until year 11. This is just an example through year 12. Also, notice that $14,724.96 ÷ 12 = $1227.08 for first 3 months) or the second month (if fixed for only first month), the borrower can choose to make different payment arrangements. The borrower has 3 options. Option 1. Pay the principal and interest due that will pay off the loan at the end of the term being 15, 30, or 40 years. This is considered a traditional mortgage pay- ment where the principal balance decreases each month after making a payment. Also called amortization. Option 2. An interest-only (I/O) payment. This pay- ment arrangement does not decrease the amount owed but does allow the borrower to make a lower monthly payment. The interest only payment is calculated by multiplying the mortgage amount by the fully amortizing interest rate and dividing by 12. The minimum monthly pay- ment is normally .55 multiplied by the fully amortiz- ing payment or the payment is computed by using 3% less than the fully amortizing note rate to determine the payment. Option 3. Pay a minimum payment which is less than the amount of interest due for the month and does not reduce the amount borrowed and the difference will be added to the amount borrowed increasing the principal balance and causing negative amortization. Payment caps contribute to keeping the payment low, adding more deferred interest to the amount owed. Example: In our same illustration of financing $190,000, the borrower chooses a one-month MTA pay-option ARM with an introductory rate of 1% and margin of 2.75%. The borrower chooses option 3 from above to make a minimum payment for the first 12 months. The minimum payment is calculated by amortizing the loan over 30 years at the start rate and loan amount. The minimum monthly payment would be only $611.12. The I/O payment would be $1,227.08, which is calculated on the fully amortizing note rate of 7.75%. The 30-year fully amortizing pay- ment would be $1,358.95. See Table 3.5. Table 3.5: Payment Options for Pay-option Arm Minimum payment $611.12 OPTION CHOSEN I/O payment $1,227.08 30 year fully amortizing payment $1,358.95 The monthly payment of $611.12 is computed by amortizing the amount borrowed over the loan term at the initial interest rate. The payment takes into account the current index of the MTA and the fixed margin of 2.75%. Assume that the MTA index is 4.98% in our example. $190,000.00 x 7.75% ÷ 12 = $1227.08 (loan amount times interest rate divided by 12 to determine monthly interest portion). If the interest only period is for 10 years, then the amount borrowed remains the amount owed for 10 years. See Table 3.6.
  • 31. Exotic and Nontraditional Mortgages     27 The payment of $1,227.08 is fixed for 10 years while your mortgage payments are interest only. After 10 years of interest only payments, your monthly payment will increase to $1,559.80. This will pay off the loan balance in full after a total of 30 years. See Table 3.7. The worst-case scenario making minimum payments with a monthly payment cap increase of 7.5% per year is shown in Table 3.8. Table 3.8: Making Minimum Payments Worst-Case Scenario Monthly Payment Balance owed Year 1= $611.12 $197,500.00 Year 2= $656.95 = ($611.12 x 7.50%) $204,341.56 Year 3= $706.23 = ($656.95 x 7.50%) $209,000.00 Year 4= $759.19 = ($706.23 x 7.50%) $209,000.00 Year 5= $816.13 = ($759.19 x 7.50%) $209,000.00 During the first year of the mortgage, $615.96 per month is the amount of negative amortization that gets added to the principal balance. $615.96 is the dif- ference between the I/O payment and the minimum payment. $1,227.08 - $611.12 = $615.96. So, at the end of the first year, the borrower’s principal unpaid balance would be more than $197,500! With every successive year of making only minimum monthly payments, the principal unpaid balance goes up even higher until the maximum limit specified in the mort- gage. If it was 110%, then once the principal unpaid balance reaches $209,000 ($190,000 x 110%), the mortgage must be recast, that is re-amortized, and the customer’s monthly payment will be increased to be able to pay off the loan at the end of the term. This increased payment can be higher than the payment caps allow. This normally happens in increments of every 5 years. If the borrower defers payment of interest, then the outstanding mortgage amount could exceed the value of the borrower’s home. This may affect their ability to refinance their loan or sell their home since they will owe more than what the home is worth. This is exactly what the current real estate market is experiencing this year. Home values have remained flat and in some areas actually have decreased. A borrower who took out a loan like this who wants to sell right now might find that he or she needs to bring money to the closing, depending upon how much negative amortization has accrued. Selling a Home with a Loss of Equity In the previous example, at the end of the first year the borrower now owes more than $197,500 and decides he wants to sell. However, values have gone down and the home is now only worth $195,000, although he paid $200,000. He has stripped himself of his equity. Equity is the difference between the indebtedness on the property and what it is worth. With closing costs and payment of a real estate sales commission, this borrower would need over $10,000 to get it sold. Borrowers who take out these types of loans are bank- ing on the fact that they will be making more money in the future and the home will appreciate in value, thereby counteracting the amount of the negative amortization that has accrued. If one or both of these situations does not occur, the borrower will be in seri- ous trouble if he or she can not make the monthly payment. The home could be lost in foreclosure. Also, these loans may come with 1, 2 or 3, year prepay- ment penalties. A prepayment penalty is an additional fee the lender charges if the loan is paid off or refi- nanced within a predetermined period of time from the loan’s inception. The penalty is sometimes equal to 6 months of interest payments. In this example, the penalty would equal $7,362.48 ($1227.08 x 6). Note that in the examples above, the loan with the Table 3.7: Interest Only Mortgage Summary for Option 2 Payments 120 monthly payments of $1,227.08 240 monthly payments of $1,559.80 Loan amount $190,000.00 Interest rate 7.750% Interest only term 10 years Total Term (Including interest only period) 30 years Total payments $520,041.80 Total interest paid $331,602.81
  • 32. 28     Module 3 least amount of interest paid is the 30-year fixed rate mortgage at 6.25%. See Table 3.9. Table 3.9: Interest Cost Comparison of 30 Year Fixed Rate 10 Year I/O Monthly payment Interest paid over life of loan Total paid over life of loan $1,170.40 $231,344.00 $421,344.00 30 yr fix $989.58 (1st 10 yrs) $262.052.00 $452,052.00 10 years I/O $1,170.40 x 360 = $421,344 (total paid over life of loan) - 190,000 (original loan amount) $231,344 (interest paid) 10 year interest only 30 year fixed at 6.25% $989.58 x 120 = $118,749.60 (interest) $1,388.76 x 240 = $333,302.40 (principal and interest) $190,000.00 (original loan amount) $143,302.40 (interest) $118,749.60 + $143,302.40 = $262,052. There is $30,708 ($262,052.10 - $231,344) more paid in interest charges when the borrower chooses the 10 year interest only option. If the borrower has the pay- option ARM, then the additional interest costs are even higher. We saw that with the negative amorti- zation loan that allows for 110% negative amortiza- tion. At the end of just 5 years, someone who borrows $190,000 already owes over $209,000. The Federal Reserve Board has prepared a pamphlet entitled Interest-Only Mortgage Payments and Payment- Option ARMs-Are They for You? There is a lot of infor- mation on these products and what to ask about and what to beware of. It is a great tool for you to pro- vide your customers to help them better understand these products. There is a mortgage shopping work- sheet that can be used to compare products for your customers. The pamphlet and the worksheet can be downloaded in PDF format at www.federalreserve.gov/pubs/mortgage_ interestonly/default.htm Other brochures to help consumers include: Specialty (Nontraditional) Mortgages: What Are the Risks and Advantages?; and Traditional Mortgages: Understanding Your Options. They can be downloaded at the follow- ing site: www.realtor.org/housopp.nsf/pages/ mortgages?OpenDocument WHO SHOULD APPLY FOR AN INTEREST ONLY MORTGAGE AND A PAY-OPTION ARM? Although these loans are risky to the unsophisticated borrower, they can be marketed to the following types of borrowers. Individuals: whose income will increase in the future. Examples include a doctor or lawyer who just finished school and is still paying off student loans but in the future their incomes should go up considerably, allow- ing them to devote more of their income to an increased mortgage payment. who have a lot of equity in their home now and can use the difference in the payment they are not mak- ing to apply to another investment. who are paid irregularly either through commis- sions or seasonal earnings. They can devote more of their earnings to the payment in higher-income producing months or pay only the minimum in lower-income producing months. WHO SHOULD NOT APPLY FOR AN INTEREST ONLY MORTGAGE OR A PAY- OPTION ARM? Borrowers who are not careful could wind up in a bad financial situation in the later years of their life. The following should not apply for these types of prod- ucts. Individuals: who will not be able to make increased payments in the future. An example would be someone who will be retiring in the next 10 years. Their income will become fixed at a lower amount and they will not be able to afford higher payments. in a situation where the value of the home will not keep pace with the escalating unpaid principal bal- ance due to negative amortization caused by mak- ing minimum monthly payments. WHY ARE THESE LOANS COSTLY AND COMPLEX? We saw with the standard 30-year fixed rate mortgage that the borrower pays back a little over the amount borrowed at the end of the term. With the pay-option ARM, the borrower owes more than 110% of what was borrowed plus interest in just 5 years by making the minimum monthly payment. Many borrowers do not realize that by paying interest only, the balance on the mortgage does not decrease or increase. The only way the borrower may gain any equity in the home is when values in the neighborhood appreciate. • • • • •
  • 33. Exotic and Nontraditional Mortgages     29 CONCLUSION Nothing is free. If you do not pay now, you will pay later through higher interest costs. Although nontra- ditional mortgages start out with low monthly pay- ments, they are sensitive to rising interest rates. A pay-option ARM might have a start rate of 1% but that only lasts for 1 month. The interest rate can rise each month thereafter and could exceed 7% within 7 months. Remember, although the interest rate changes every month, the minimum payment only changes once a year. That is why so much deferred interest accrues. If these payment options are used wisely, they can translate into increased buying power in spite of rising real estate prices and/or interest rates. Institutions need to offer nontraditional mortgages in a safe and sound manner with clear, understandable disclosures to help consumers make informed deci- sions. As the mortgage options available become more complicated, a well-educated mortgage expert can help the consumer chose the right product. RESOURCES Search the financial indexes www.wsj.com Financial calculators online www.fool.com/calcs/calculators.htm www.bankrate.com Brochures to help borrowers make informed deci- sions: Interest-Only Mortgage Payments and Payment-Option ARMs-Are They for You? www.federalreserve.gov/ pubs/mortgage_interestonly/default.htm Specialty (Non-Traditional) Mortgages: What are the Risks and Advantages? Traditional Mortgages: Understanding Your Options Learn About FHA Mortgages How to Avoid Predatory Lending www.realtor.org/housopp.nsf/pages/ mortgages?OpenDocument
  • 34. 30     Module 2 True or False 1. Interest only payments lead to negative amortization. T F 2. Interest only is for people who are retiring to a fixed income. T F 3. Making minimum monthly payments for a pay-option ARM’s can lead to negative amortization. T F 4. If the index is 5.5% and the margin is 2.75%, then the indexed rate is 8.25%. T F 5. A borrower has different payment options with a nontraditional mortgage. T F Multiple-Choice 1. The indexed note rate is computed by: a. adding the initial interest rate to the margin. b. adding the current index to the margin. c. subtracting the initial interest rate from the current index. d. adding the initial interest rate to the cap. 2. A/an ___________would be the best product to offer someone retiring in the next five5 years. a. pay-option arm b. fixed rate mortgage c. interest only mortgage d. adjustable rate mortgage 3. Making minimum monthly payments can lead to: a. negative amortization. b. no reduction in the principal balance. c. a decrease in the principal balance. d. extending the repayment period. 4. What is the difference between a fixed rate mortgage and an interest only mortgage? a. With an interest only mortgage, the payments are lower in the first years of the mortgage. b. With an interest only mortgage, you build negative amortization. c. With a fixed rate mortgage, you build negative amortization d. With a fixed rate mortgage, you have different payment options. 5. A buyer concerned about how much the lender can change the monthly payments on an adjustable rate mortgage should ask for: a. life of loan caps. b. an initial teaser rate. c. payment caps. d. negative amortization. ANSWERS: TrueorFalse:1)F2)F3)T4)T5)TMultipleChoice:1)b2)b3)a4)a5)c M O D U L E REVIE W E X ERCISES Use the exercise questions to review the module material. The answers are found on the bottom of the page.
  • 35. © 2007 Bert Rodgers Schools of Real Estate, Inc. 31 Learning Objectives After completing this module, you should be able to: Subprime Loans and Prepayment Penalties M O D U L E 4 1. Define each of the terms in the glossary. 2. Discuss the history of subprime loans and how they have evolved. 3. Explain the different mortgage options avail- able. 4. Explain why lenders charge prepayment penal- ties and how they harm the consumer. 5. Identify a predatory lender and a foreclosure rescue scam. GLOSSARY AND ACRONYMS Balloon mortgage: A partially amortizing mortgage with periodic installments of principal and interest with the balance of the mortgage due in a lump sum (balloon payment) at the end of the term. A balloon payment is anything more than two times the regu- larly scheduled mortgage payment. Conforming loan: A full documentation loan that meets certain underwriting criteria and loan limits. Equity: The difference between the property’s value and the owner’s indebtedness. Foreclosure: The legal process a lender uses to force the sale of the home to satisfy the delinquent mort- gage debt. If the sale is for less than the debt, then the lender receives a deficiency judgment against the borrower for the difference in the sold amount and the balance of the debt. Predatory lending: Intentionally placing borrowers in loan products with significantly worse terms and/ or higher costs than loans offered to similarly quali- fied consumers for the primary purpose of enriching the broker/originator and with little or no regard for the costs to the borrower. Prepayment penalty: A charge the lender makes when a mortgage is repaid before a certain period of time elapses or when the borrower repays a cer- tain additional amount of principal before a certain period of time elapses. Lenders have soft prepayment penalties which mean if the borrower sells the home during the prepayment period, then no penalty is assessed but if the customer refinances, there is a pen- alty assessed. Lenders have hard prepayment penalties meaning whether the house is sold or refinanced dur- ing the penalty period, a penalty would be assessed. The penalty also applies if the borrower repays more than 20% principal in any 12-month period. Prime borrower: A customer with a minimum credit score of 620 and has placed a down payment on the purchase. Quitclaim deed: A document which indicates that the person who owns an interest in a property (grantor) transfers that interest to someone else (grantee). The grantor offers no guarantees about the property title to the grantee. The quitclaim deed is often used as a simple way to give up all interest in a property. Subprime borrower: A borrower with a lower credit score. Normally the lowest minimum acceptable credit score is 500. This borrower does not qualify for the best rates. Opposite of a prime borrower. Subprime lender: A lender who charges higher interest rates and/or fees to offset the risk associated with lending to borrowers with bad credit. Truth-in-Lending Act: Also known as Regulation Z. A federal regulation that requires the disclosure of the annual percentage rate, certain finance charges, certain additional disclosures when advertising financing terms, and the three day right of rescission when refinancing a primary residence.
  • 36. 32     Module 4 HISTORY OF SUBPRIME MORTGAGES In recent years, subprime lending enabled borrowers with less than perfect credit to attain the American Dream of homeownership, at rates and terms previ- ously unavailable. Subprime loans are available at interest rates 2% to 4% higher than the rates charged to borrowers with good credit. Once lenders started using credit scores and automated underwriting to review borrower and property worthiness in the early 1990s, many bor- rowers were rejected and fell through the cracks. They were considered subprime because they had bad credit with a score of less than 620; filed bankruptcy and the discharge date was less than four years ago, or were unable to verify their income. In the 1990s an avalanche of lenders and mortgage wholesalers came, ready to lend to this group of borrowers. The risk associated with these borrowers brought a financial reward to the lenders through higher interest rates and fees. Prior to the plethora of subprime lenders, a bor- rower would need to get private financing, pay cash, or would be unable to buy a home. These sometimes marginally qualified, highly leveraged borrowers have a higher risk of default than the prime borrower. A prime borrower has a minimum credit score of 620 and placed a down payment on the purchase. During the late1990s, because of bad business prac- tices, including poor underwriting and borrower/bro- ker fraud, a large number of subprime lenders had to merge with another lender or go out of business. Now in 2007, we see the same shrinkage in the subprime lender arena. Although lenders had tightened their underwriting standards, the floodgates were already opened to consumers who were probably not in the position to buy. Subprime loans pay the mortgage broker/origina- tor considerably more income than a prime loan so lenders were offering 100% financing through loans called piggybacks or 80/20’s. The borrower would obtain a 1st mortgage at 80% loan- to-value and then obtain a 2nd mortgage at 20% loan-to-value with the seller paying the buyer’s closing costs. The piggyback borrower did not bring any money into the deal. The borrower may have obtained these loans because it was easier for the mortgage broker to submit the file with only the borrower’s stated income, and not verify the income, or they simply did not qualify through normal channels. However, on a weekly basis now, subprime wholesalers are closing their doors unable to fund mortgages. Some have filed for bankruptcy. Delinquencies for subprime mortgages are on the rise and these wholesalers and servicers do not have ade- quate liquidity. Prime Loans vs Subprime Loans Prime loans have delinquencies, too; however, a down payment is required, except for the Department of Veterans Affairs (VA) loans which only require a down payment for mortgages over $417,000. These prime loans all carry lower interest rates than the sub- prime loans. A borrower can finance 95% loan-to- value with a conforming Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Corporation (Freddie Mac) loan. A con- forming loan is a full documentation loan that meets certain underwriting criteria and loan limits. For example, if a borrower qualifies, they can receive a loan up to $417,000 for a one-unit property. There are some first time homebuyer and community rede- velopment mortgages that will allow the consumer to go slightly higher than 95% but not to 100%. The Federal Housing Administration, (FHA,) will finance up to 97.75% loan-to-value in a single loan but has lower loan limits than Fannie Mae and Freddie Mac. The VA will finance 100% in a single loan if you are a veteran, surviving spouse, or National Guard reservist up to $417,000.00 Points. The market establishes the interest rate. Everything is negotiable. A point is 1% of the mort- gage amount. A loan without points carries a slightly higher interest rate than a loan where the customer paid points to buy down the interest rate. Because home values have increased very rapidly, some buyers do not have enough money left after making a down payment and paying closing costs to also pay points, so they choose a loan without points. However, the lender does not work for free, they are paid a pre- mium. Sometimes called a yield spread premium or par plus, this premium is a percentage of the loan amount, and the higher the interest rate offered, the more money paid to the lender. This premium is paid to the lender because the mortgage wholesaler feels servicing the loan is worth the additional money. Because of competition a mortgage broker/originator cannot earn as much income on a prime borrower, or A paper, as on a subprime mortgage. The true sub- prime borrower has limited choices, normally paying higher rates and fees with less of a bargaining position due to their bad credit. Interest Rate and Terms Subprime lenders equate the risk in financing by charging higher interest rates and fees, including pre- payment penalties and balloon payments. Lenders take into account the customer’s credit score, loan type, loan amount, amortization, and property type to price out a loan. The lower the credit score and the higher the loan-to-value, the higher the interest rate offered to the customer. Lenders charge prepayment
  • 37. Subprime Loans and Prepayment Penalties    33 penalties because the risk that a subprime borrower will refinance the loan rises as the borrower’s credit score improves. Even if interest rates do not change, refinancing still benefits the subprime borrower. Higher credit scores are being required and buyers with blemished credit reports are finding it’s not as easy to receive a mortgage as it has been in the past few years. A 600 FICO score is needed to do a full documentation 80/20 loan, and interest rates are higher than last year on these mortgages. Interest rates on prime mortgages have remained about the same. A customer with a credit score of 500 can get financing, just not 100% financing. Most lenders have increased the minimum credit score to 660 for stated income borrowers. Interest only and pay option ARMs are still available, however, lenders are now qualifying the borrower at a higher monthly payment. With fewer lenders willing to lend money to fund subprime mortgages, less options are available for the borderline customer. Lenders are feeling the financial pain associated with providing the wrong customer with the wrong mortgage. The layering of risk with low credit scores and high debt-to-income ratios just does not make sense in the current market of stagnant home prices. Not every borrower who has a subprime mortgage is rated as a subprime borrower. As mentioned earlier, sometimes a mortgage broker/originator will steer a customer into a subprime mortgage to earn more income and/or because it is easier and faster. In the past year and a half, home values have not appreciated as rapidly as they did between the years 2000–2003. The real estate slowdown is bringing a foreclosure boom. Loans with little money down and even less lender verification have placed the borrower in a very vulnerable situation. Chances are they did not even understand the loan terms and thought they were get- ting a mortgage with small, manageable payments. Violá, they receive a letter that their monthly payment is changing and they do not understand why. To add insult to injury, the mortgage has a 3 year prepayment penalty. A prepayment penalty is an additional charge made by a lender when the loan is paid off before its scheduled time. So borrowers find themselves in the situation where home values are down, it is taking a lot longer to sell a home in the depressed market, and he or she might owe more money than originally bor- rowed due to negative amortization and the hefty pre- payment penalty. Although a balloon payment is anything more than 2 times the regularly scheduled payment, usually it is more than 3/4 of the original amount borrowed! On the piggyback loans mentioned earlier, the sec- ond mortgage normally has a monthly payment that is computed on a 30 year term, but at the end of 15 years, the balance of the money owed on the mort- gage is due and payable. For example, if the second mortgage amount was $100,000 and the terms were 14.00%, 30 year amortization, due in 15 years, then the monthly payment would be $1184.87 and the last payment will be the 180th payment, which would be $90,157.52. That is more than 3/4 of what was bor- rowed. If the customer is not in a position to sell or refinance the mortgage, then in the 15th year, they could lose the home if they cannot come up with that amount. Interest rates on second mortgages are much higher than interest rates on first mortgages due to the increased risk of default by the borrower. Balloon mortgages, prepayment penalties, and limited docu- mentation mortgages make subprime mortgage lend- ing vulnerable to foreclosure. Truth-In-Lending Disclosure. The Truth-in- Lending Disclosure is the only document that comes close to advising the customer, at the time of appli- cation, that the monthly payment might not be fixed or if a prepayment penalty is a condition of the loan. Unfortunately, the language currently used in the dis- closure is confusing. If you refer to Exhibit II - a 5/1 LIBOR ARM with 5 years of interest only, a margin of 2.75%, a start rate of 6% and 2/6 caps – Area #4 is where the lender can disclose if they will be charging a prepayment penalty. It says may or will not. It should say will or will not. May means the lender will charge a prepayment penalty if they chose to exercise that option, or the lender might not. If the word may was changed to will, it might not be as confusing. Area #1 is where the lender gives the amount of the monthly payment and if the payment can change, a worst-case example. Area #2 is to show if the loan has a demand feature, shown as a prepayment penalty. If the loan has an adjustable rate feature, then Area #3 is where this information should be entered. PREDATORY LENDERS Predatory lending takes on several connotations. It is considered charging excessive rates and fees to the consumer. Sometimes it is considered predatory lend- ing when placing a consumer in a mortgage product they neither understand nor have the financial acu- men to decipher. When loans are not in the home- buyer’s best interest, it can quickly lead to bankruptcy and foreclosure. Subprime lenders should escrow for taxes and insur- ance or at the least advise the borrower how much they should budget for these items. These lenders do not normally collect and pay the amount for taxes and insurance. When these bills arrive requesting the annual amount, it may be a large sum of money and the homeowner may not be able to pay. If the home- owner’s insurance is not paid, claims cannot be paid. If
  • 38. 34     Module 4 1 } 2 3 4 1. Worst-case scenario monthly payment schedule. 2. Any type of demand feature is disclosed here. 3. When the loan has an adjustable rate feature, this is where it is disclosed. 4. Where lender discloses if a prepayment penalty may be charged. Exhibit II
  • 39. Subprime Loans and Prepayment Penalties    35 the taxes are not paid, a tax bill will be sold and after two years the house will be set for a foreclosure sale. Both these situations jeopardize the homeowner and lender. To protect consumers from a predatory lending scheme, they should keep the following in mind. If it sounds too good to be true, then it probably is! Research local home prices before purchasing. When shopping for a lender, compare costs. Beware of No Money Down loans that entice con- sumers to purchase property that they cannot afford and are not qualified to purchase. Beware of the mortgage professional who falsely alters information to qualify the consumer for the loan. Carefully review all the loan documents and do not sign blank documents. Do not allow anyone to convince you to make false statements about your assets or income. Be aware of costs and loan terms to be sure they are what you agreed to. Sources: www.fbi.gov www.responsiblelending.org FORECLOSURE RESCUE SCAMS A foreclosure scam is a real estate fraud scheme that targets homeowners in default on their mortgages and falsely promises them help. Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usu- ally in the form of a quitclaim deed, and up-front fees. The quitclaim deed transfers title to the perpetrator; however, the desperate homeowner is still obligated for the mortgage that is going into default. The per- petrator profits from these schemes by re-mortgaging the property or pocketing fees paid by the homeowner without preventing the foreclosure. The victim suffers the loss of the property as well as the up front fees. Be aware of offers to save homeowners who are at risk of defaulting on loans or whose houses are already in foreclosure. It sounds like the perfect escape plan for a financially strapped homeowner. They transfer their house over to the foreclosure rescue firm and get to rent their house for one year at which time they can get their house back if they have paid the rent on time. But if they don’t pay the rent, which is higher than the mortgage payment they could not make, they will be evicted from the home and lose everything. A borrower who is in danger of losing their home should seek an attorney or qualified credit counselor. • • • • • • • • Steps to Take When Facing a Foreclosure Being unable to make your monthly mortgage pay- ment as well as the risk of losing your home through foreclosure can be extremely stressful and financially and emotionally devastating. Lenders are in the busi- ness of loaning money, not owning real estate. The help lenders provide to borrowers depends on sev- eral factors, such as how much equity is in the home, how long the borrower has lived there, and the local economy. The Department of Housing and Urban Development (HUD) suggests taking the following steps when you can no longer make your monthly mortgage payment. Step 1: Contact the lender immediately The borrower should immediately contact the lender when they cannot make the payment. Lenders have options available to help borrowers get caught up in their monthly mortgage payments when they are just several months behind. The further behind the bor- rower is, the less options will be available. The lender will determine what or if they will offer after receiving a written explanation of the borrower’s circumstances, a list of the borrower’s household expenses, and the borrower’s recent income documents. If the lender does not hear from the borrower, then the lender will be required to take legal action that will lead to fore- closure. This will greatly increase the costs of bring- ing the mortgage current. Step 2: Talk to a housing counseling agency A HUD-approved housing counselor can help you assess your financial situation, determine your options, and help negotiate with your lender. The counselor can help you establish a budget so you can meet your obligations including your mortgage payment. To find an approved counselor in Florida use this website: www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm? webListAction=searchsearchstate=FL or call 1-800-569-4287 for a referral of three agencies closest to your residence. Most agencies are reputable and provide their services free of charge or for a small administrative fee that is tied to the repayment plan. Be sure to stay away from credit counseling agencies that offer counseling for a large upfront fee or a dona- tion. Make sure you ask if the agency has a charge before you sign any documents. Step 3: Prioritize your debts When you are unemployed, prioritizing your debts in the following order makes the most sense – food, shelter, and utilities. Failing to pay your debts on time negatively impacts your credit rating and credit score. But losing your home through foreclosure is proba-
  • 40. 36     Module 4 bly worse. Extras and luxuries such as cable television and eating out should be reduced or eliminated at this time. If there is any extra income left over, then that should be applied to the mortgage. A credit counselor may reduce your monthly bills by negotiating a long term repayment plan with your creditors. Step 4: Explore different loan workout solutions If you are unable to keep the mortgage current, then lenders can offer several options for temporary situ- ations that include reinstatement; forbearance; and a repayment plan. Options for long term situations include a mortgage modification; or a claim advance. All of these options help the borrower to keep their home. To have the mortgage reinstated, the borrower must pay everything owed in one lump sum. Everything owed could include principal, interest, late fees, and attorneys’ fees. Lenders often combine reinstatement with forbearance. Forbearance is when the lender refrains from enforcing the debt until a time in the future. Sometimes the lender suspends the monthly payments or reduces them for a short period of time when the borrower knows they will have additional funds in the future to bring the mortgage current. Lenders offer repayment plans that allow the bor- rower to make the regular monthly payment plus an additional amount each month until the mortgage is brought current. The repayment plan is usually for a limited amount of time which is usually 18 months or less. Repayment plans are offered to borrow- ers who have had serious setbacks such as an illness, injury, or temporary layoff. Lenders will offer mort- gage modifications when the situation is more long term. A mortgage modification is where the lender changes one or more terms of the original mortgage. Examples include lowering the interest rate; changing an adjustable rate mortgage to a fixed rate mortgage; adding the missed mortgage payments to the existing mortgage balance; and extending the number of years the borrower has to repay the mortgage. If the mort- gage is insured, then the btorrower may qualify for an interest-free loan from the mortgage guarantor to bring the mortgage account current. Mortgages that are insured include conventional loans where the original loan to value was more than 80% (in one loan) and Federal Housing Administration (FHA) loans. Sometimes, the repayment could be delayed for several years. This interest-free loan becomes a lien on the property and does not need to be satisfied until the home is sold or the first mortgage is satisfied, which is a big help to the borrower. If the borrower will be unable to keep their home they need to contact their lender immediately and either sell the home; have a pre-foreclosure sale/short pay- off; have a new borrower assume their mortgage; or give a deed in lieu of foreclosure to the lender. The lender will require the borrower to sell their home by listing it with a real estate firm. The borrower will be given a specific amount of time to sell their home. In addition, the borrower will be required to pay the total amount owed when a purchaser is found. This option will work best if the borrower has some equity in the home. That way they not only satisfy their mortgage debt owed to the lender but can also walk away with some money. But if the property value has declined or the home cannot be sold for enough to satisfy the amount owed, sometimes the lender will accept less than what is owed by accepting just the amount for which the property sells. This is called a short payoff. FHA loans are assumable to borrowers who qualify. Most conventional fixed rate mortgages are not assumable but some conventional ARMs are assumable. The lender may however, approve a qualified buyer to assume the mortgage even if the mortgage is non- assumable. A deed-in-lieu of foreclosure is when the borrower voluntarily signs the deed to give the home to the lender in exchange for the lender’s forgiveness of the debt. The borrower must try to sell their home for at least 90 days and be unable to repay the mort- gage before this option is considered by the lender. Also, if the borrower has other judgments and liens on the property, such as IRS liens or second mortgages, then this option might not be available. Step 5: Apply for disaster relief or military options if eligible Borrowers whose property has been damaged by a natural disaster or national tragedy, (i.e., the ter- rorists acts of 9/11); and borrowers who have been called to active military duty may have additional assistance available to them to help avoid a fore- closure. If the borrower cannot make their mort- gage payment because of a disaster or tragedy, then the lender may stop or delay the foreclosure for 90 days. The Servicemembers Civil Relief Act (SCRA) of 2003, which was formerly known as The Soldiers’ and Sailors’ Civil Relief Act of 1940, applies to active duty military personnel who had a mortgage obliga- tion prior to enlistment or prior to being ordered to active duty. The SCRA limits the interest that can be charged on mortgages. The military borrower must request the lender to drop the interest rate to no more than 6% for the period of active duty. The change in the interest rate is not a subsidy and the interest due in excess of 6% is forgiven for the period of active duty. Once active duty ends, the interest rate is restored to the original rate.
  • 41. Subprime Loans and Prepayment Penalties    37 Step 6: Stay clear of foreclosure rescue scams and predatory lending schemes Borrowers who cannot make their mortgage payments often become targets of foreclosure rescue scams and predatory lenders. The borrower is normally desper- ate to find a solution to pay what they owe and some- times they sign their house away via a quitclaim deed and receive no payment for it and still are foreclosed upon because their loan was never satisfied by the per- son they signed their house over to and who promised to satisfy their loan. Or, lenders offer to refinance the loan balance that is behind and the borrower winds up with a new loan that has higher rates and fees which the borrower ultimately will not be able to keep up with. Both situations steal the equity built up, if any, from the borrower. Step 7: Look for other resources Other resources available to borrowers include con- tacting the loss mitigation department of the lender; employment information and assistance; federal gov- ernment resources; and legal assistance. Borrowers should make sure they speak with the loss mitigation department and not the collections department of a lender to try and work out a repayment plan. Many local agencies help citizens get training and find jobs. Both FHA and the Department of Veteran’s Affairs (VA) work with the borrower to avoid foreclosure if at all possible. The National Consumer Law Center (NCLC) helps vulnerable borrowers by using con- sumer laws that help to build financial security. In conclusion, it is best to contact your lender to work out a repayment plan when you are having trouble making your monthly mortgage payment than to ignore their letter and calls and pretend that there is nothing wrong. A foreclosure negatively impacts everyone from the borrower and their credit rating, to the lender and the losses they incur with attorney and property management fees, to the communities that are blighted with empty homes in disrepair. POSSIBLE LEGISLATION Senator Christopher Dodd, chairman of the Banking Committee, feels the surge in home foreclosures requires some immediate attention. He believes it strips an important source of wealth away from many Americans, the equity in their home. Equity is the difference between the property’s value and the own- er’s indebtedness. Subprime loans with high adjust- able interest rates have put a strain on the borrowers who took out these loans. The borrower cannot refi- nance because the payoff with the prepayment pen- alty far exceeds the value of the home in a depressed real estate market (www.floridarealtors.org/newsand events/n2-020807.cfm). There are several bills pending in Congress that would require predatory lenders give easy to under- stand, written disclosures showing the fees and penal- ties associated with obtaining these loans. This should be helpful to the consumer. They should understand that their mortgage payment can and will increase in the future; if they sell or refinance their home within a certain time frame based on the loan’s inception date, they could owe an additional penalty; and their loan balance could increase rather than decrease if they only make the minimum monthly payments. RESOURCES Federal Bureau of Investigation www.fbi.gov Center for Responsible Lending www.responsiblelending.org Gordon, Marcy. “Blame Flies for High Risk Mortgage Meltdown” (March 22, 2007) www.newsday.com/news/local/wire/ny-bc-ct --congress-riskymor0322mar22,0,7025278.story Christie, Les. “How to Fend Off a Foreclosure” (April 3, 2007) http://money.cnn.com/2007/03/26/real_estate/ losing_the_house/index.htm Help for homeowners facing the loss of their home www.hud.gov/offices/hsg/sfh/econ/econ.cfm The Housing and Urban Development Approved Housing Counseling Agencies in Florida www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm?web ListAction=searchsearchstate=FL The Servicemembers Civil Relief Act of 2003 www.jagcnet.army.mil/JAGCNETInternet/ Homepages/AC/Legal%20Assistance%20 Home%20Page.nsf/0/0806a532899687ce 852568a800531506?OpenDocument Department of Veteran’s Affairs answers to when you cannot make your mortgage payment www.homeloans.va.gov/paytrbl.htm National Consumer Law Center www.nclc.org Predatory Mortgage Lending www.consumerlaw.org/action_agenda/predatory_ mortgage U.S. Department of Labor webpage for jobseekers www.dol.gov/dol/audience/aud-unemployed.htm
  • 42. 38     Module 4 True or False 1. A predatory lender charges excessive rates and fees with no regard for the borrower. T F 2. A quitclaim deed transfers ownership and the mortgage to the grantee. T F 3. The Truth-in-Lending Disclosure is confusing if a prepayment penalty will be charged. T F 4. Subprime borrowers have higher credit scores than prime borrowers. T F 5. A prepayment penalty strips the borrower of the equity in the home. T F Multiple Choice 1. What is the minimum credit score to do an 80/20 full documentation mortgage? a. 500 b. 550 c. 600 d. 660 2. In order to determine the interest rate on a subprime mortgage, lenders take into account: a. credit score. b. loan type. c. loan amount. d. all of the above. 3. 100% financing is the same as: a. 80/15. b. 80/20. c. 70/25 d. 75/15. ANSWERS: TrueorFalse:1)T2)F3)T4)F5)TMultipleChoice:1)c2)d3)b M O D U L E REVIE W E X ERCISES Use the exercise questions to review the module material. The answers are found on the bottom of the page.
  • 43. © 2007 Bert Rodgers Schools of Real Estate, Inc. 39 Learning Objectives After completing this module, you should be able to: Lack of Credit Documentation Promotes Mortgage Fraud M O D U L E 5 1. Define each of the terms in the glossary. 2. Discuss the history of the reduced and no doc- umentation loans and how they have evolved. 3. Identify the differences in documentation requirements for full, limited, and no verifica- tion loans. 4. Identify why mortgage fraud is the fastest grow- ing white collar crime. 5. List some of the common mortgage and real estate fraud schemes. 6. List some of the mortgage websites that are devoted to exposing and eradicating fraud. GLOSSARY AND ACRONYMS Credit score: A numerical value that helps a lender determine a borrower’s risk. Fraud alert: Requires the lender to contact the cus- tomer first before extending any credit. Full documentation loan: A mortgage program that verifies the income and assets disclosed on the mortgage loan application through verifications of employment, pay stubs, W-2’s, verifications of deposit and bank statements. No documentation loan (No DOC): A mort- gage program that allows a borrower with a certain minimum credit score to obtain a mortgage without having to disclose any job, income, or assets and no verification by the lender. No income/no asset loan (NINA): A mortgage pro- gram that allows a borrower with a certain minimum credit score to qualify for a mortgage by stating what their job is, without having to disclose any income or assets on the loan application, and no verification by the lender. No income/verified assets loan (NIVA): A mort- gage program that allows a borrower with a certain minimum credit score to qualify for a mortgage by stating what their job is without having to disclose any income on the loan application, but the assets are stated on the loan application and verified by the lender. Stated income/stated asset loan (SISA): A mort- gage program that allows a borrower with a certain minimum credit score to simply state their income, and their assets on the mortgage application, without providing supporting documentation or verification by the lender. Stated income/verified assets loan (SIVA): A mort- gage program that allows a borrower with a certain minimum credit score to simply state their income on the mortgage application without providing support- ing documentation, but the assets stated on the mort- gage application are verified by the lender. INTRODUCTION This module is designed to familiarize both licensed mortgage brokers and loan officers with the reduced or no documentation financing programs available to consumers today. However, be cautious in trying to qualify and approve every buyer for a mortgage under the catchy acronym products. There are serious con- sequences for material misstatements, misrepresenta- tion, or omissions, including hefty fines and jail time. HISTORY OF STATED AND NO DOCUMENTATION MORTGAGES Until the early 1980s, if a consumer wanted to pur- chase a home, he or she applied for a Federal Housing Administration (FHA) loan, a Department of Veterans Affairs (VA) loan if they were a qualified veteran or surviving spouse, or a conventional loan. These loans normally carried fixed rates but sometimes the rates were adjustable. These financing programs were con- sidered full documentation loans. The customer had
  • 44. 40     Module 5 to provide income and asset information on the loan application, which was subsequently verified by the lender, through specific verification forms. A Fannie Mae Form 1006, Verification of Deposit (VOD), would be mailed to the customer’s bank, credit union, or other financial institution, for completion. There was no charge to complete these forms until the early 1990s when banks began charging to complete these verifications. The cost for completion started out at around $10 per verification, and then increased to $25. Customers did not feel it was fair that they had to pay this fee. The potential borrowers suggested that they could provide their bank statements to prove not only that the money was their own, but also that they had sufficient funds to consummate the deal. A Fannie Mae Form 1005, Verification of Employ­ ment (VOE), was normally mailed to the custom- er’s employer. At that time there were no facsimile machines or email, so the process took approximately 60 days from application to closing table. If the employment verification was returned completed in two different color inks, which happened quite often because one part of the verification was filled out by Human Resources and the other was normally signed by an officer of the company, the verification would be mailed back with a note to be completed in only one color ink. Also, if the employer made any mis- takes and used correction fluid for corrections, the verification was returned to the employer to be com- pleted again. The logic behind the returns was the possibility that the document was fraudulent or com- promised. Sometimes borrowers provided fraudu- lent tax returns, or the loan officer or loan processor amended the borrower-provided tax returns to help the borrower qualify. Although the IRS Form 4506 has been in existence since December 1981, lenders did not start utilizing or requiring it as a condition of loan approval until the early 1990s. IRS Forms 4506 and 4506-T (now being used) allow the lender to ver- ify with the IRS that the information provided by the borrower in the loan application is true with respect to the income disclosed. Self-employed borrowers, as their own boss, needed to provide copies of their federal income tax returns for the previous two years along with a year-to-date profit and loss statement. Lenders averaged the self- employed borrower’s adjusted gross income over the previous two years preceding the mortgage loan application. This caused a lot of mortgage denials due to insufficient income to qualify for the loan since many of the self-employed used a Certified Public Accountant (CPA) to reduce the amount of income taxes they would pay the IRS, thereby reflecting a lower adjusted gross income on their federal income tax returns. About 15 years ago lenders started offering alterna- tive documentation mortgages to self-employed bor- rowers with good credit, because the self-employed borrowers usually had a lot of expenses with adjusted gross incomes lower than their gross income. The loans were stated income/stated assets (SISA) loans, stated income/verified assets loans (SIVA), no income/no assets loans (NINA), no income/verified assets (NIVA), and no documentation loans (No Doc). Documentation Requirements SISA loans require the borrower to state his monthly gross income and his assets on the loan application without providing supporting documentation or direct verification by the lender. SIVA loans require the borrower to state her gross monthly income and assets on the loan application. The lender only requires verification of the assets. NINA loans require the borrower to state her occupa- tion on the loan application without stating a monthly gross income amount or any asset information and no direct verification by the lender. NIVA loans require the borrower to state his occu- pation and assets on the loan application. Only the borrower’s assets are verified by the lender. No Doc loans do not require any income or asset information be disclosed on the loan application or any verification by the lender. All of these products require the borrower to have good credit and a certain minimum credit score. A credit score is a numerical value that helps a lender determine a borrower’s risk. These products were then extended to W-2 employ- ees, fixed-income borrowers, and marginal credit borrowers. Those within the mortgage industry com- monly refer to these loans as liar’s loans and their mis- use could have serious consequences for all parties. If left unchecked, mortgage fraud could have repercus- sions for the housing market as lenders fearful of the growing problem, make it harder for homebuyers to get loans. MORTGAGE FRAUD Disclosing false information on a mortgage loan application is fraud. Mortgage fraud is one of the fast- est growing white-collar crimes according to the FBI, quadrupling since 2001 (www.fbi.gov/pressrel/press- rel05/quickflip121405.htm). Mortgage fraud can be divided into two categories—fraud for property and fraud for profit. Fraud for property generally involves material mis- representations or omission of information with the
  • 45. Lack of Credit Documentation Promotes Mortgage Fraud     41 intent to deceive or mislead a lender into extending credit that would probably not be offered if the true facts were known. Fraud is normally committed by homebuyers for their personal use. Fraud for profit is normally committed by industry insiders including mortgage brokers, property apprais- ers, real estate licensees, and closing agents who ben- efit financially from the scheme. Reasons for the Increase in Mortgage Fraud The reasons why mortgage fraud cases are increasing are numerous. Over 20 years ago, you would need to go to the local bank and make application in person. Today, you can still apply in person, or you can sub- mit your information and sign the documents on line or through overnight mail. The lender and applicant never need to meet. You can be using someone else’s information and the lender would not know until after the loan is funded and it becomes a first payment default (no monthly mortgage payments are ever made on the loan). Lenders should do more due diligence on the front end but they are pressured to make profits, which they do by making quick decisions and funding the loans. Committing fraud is made easier by the use of com- puters, scanners, and tax software preparation pro- grams. It is very easy to manipulate the information or just prepare a W-2 with the income that is necessary to qualify the borrower. The mortgage industry is loosely regulated. Some states conduct criminal background checks and some do not. Although Florida does a criminal background check if you want to become a licensed mortgage broker, they do not for an employee of a lender as a W-2 employee in the capacity of a loan originator, loan officer, or mortgage consultant. The Mortgage Asset Research Institute (MARI) maintains a database of industry individuals and companies who have submitted files with fraud or material misrepre- sentations and/or have had public or legal action taken against them. The penalties section of Chapter 494, 494.0018(1) F.S. states: Whoever knowingly violates any provision of s. 494.004(2)(e), (f), or (g); s. 494.0072(2)(e), (f), or (g) or 494.0025(1), (2), (3), (4), (5), except as provided in sub- section (2) of this section, is guilty of a felony of the third degree, punishable as provided in s. 775.082, s. 775.083, or s. 775.084. Each such violation constitutes a separate offense. Chapter 494.0018(2), F.S. states: Any person convicted of a violation of any provision of ss.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 felony of the first degree, punishable as provided in s. 775.082, s.775.083, or s.775.084. Pending legislation for the Florida 2007 legislative session includes several bills to create the Florida Residential Mortgage Fraud Act. SB 240 is spon- sored by Senator Bullard; HB 349 is sponsored by Representative Dan Gelber; and SB 352 is sponsored by Senator Gwen Margolis. If passed, the offense of residential mortgage fraud would be created. Extent of Mortgage Fraud The extent of mortgage fraud is not fully known. There is not a central database to check to see if some- one has been involved with mortgage fraud. Lenders can subscribe to MARI at their website. www.mari-inc.com. The Financial Crimes Enforcement Network (FinCEN) gathers information on mortgage fraud. However, only federally insured agencies are required to report activity through a Suspicious Activity Report (SAR) so those are the only ones submitted to the FinCEN. Mortgage brokers and mortgage companies can remain under the radar as far as disclosing mort- gage fraud, since they are not federally insured. Criminal background checks, national, minimum licensing requirements, and educational standards, along with the creation of a national database that includes all mortgage originators would be a great start to combat mortgage fraud and predatory lend- ing. The patchwork of enforcement makes it very easy to cause damage without being punished or receiving punishment commensurate with the damage caused. However, the Internal Revenue Service (IRS) has spe- cial agents that are equipped to investigate mortgage fraud and illegal real estate crimes. From fiscal year 2004 through fiscal year 2006 the amount of real estate fraud cases opened by the criminal investigators dou- bled. The incarceration rate for people convicted of real estate fraud was an average 89.83% for the same 3-year period. The average prison term served was 47 months for fiscal year 2006. (www.irs.gov/compliance/ enforcement/article/0,,id=162992,00.html). Common Mortgage and Real Estate Fraud Schemes The three common real estate schemes found by the IRS include property flipping, two sets of settlement state- ments, and fraudulent qualifications. Property flipping. A person buys an inexpensive property and quickly sells it at a high profit using a straw buyer with falsified documents. A straw buyer is someone who lets the defrauding person use their name and good credit and executes the documents but never intends to live in the property nor make any mortgage payments. The straw buyer is normally paid
  • 46. 42     Module 5 a nominal fee by the ring leaders. They might receive just $1,000 for the use of their name, credit, and for executing the closing documents. Sometimes the straw buyers are not using their own credit profiles but have been provided someone else’s profile. This profile could have been obtained through identity theft. Two (2) sets of settlement statements. The lender is provided a settlement statement showing an inflated selling price. The seller is provided the correct settle- ment statement with the true selling price. The lender loans more than the property is worth and at funding the proceeds are divided between the conspirators. Fraudulent qualifications. Real estate licensees and mortgage brokers help buyers, who would not other- wise qualify, by fabricating their employment history, credit, or down payment. In many real estate fraud cases, the income that is earned by the fraudsters is laundered to hide the pro- ceeds from the IRS. Money laundering is a process of making money earned illegally look like it was legitimately earned. Money laundering is considered tax evasion by the IRS, and their investigators focus on finding and prosecuting the perpetrators. Other Real Estate Schemes Other common schemes include appraisal fraud, broker fraud, borrower fraud, recording fraudulent deeds, and identity theft. If fraudulent appraisers are pressured to report a higher appraised value, they may use noncomparable properties or photos from another property and submit them as if it is the property under contract to fool the lender into believing that they are making the right investment. Or, a mortgage broker/originator discovers the cus- tomer’s documentation is not sufficient to qualify the potential borrower for the loan if submitted. So, with the help of computers, scanners, and tax soft- ware preparation programs, it has become easy for the fraudulent mortgage broker to provide the lender the necessary documents to qualify for the mortgage. Sometimes the borrower prepares and provides the fraudulent documents to the mortgage broker/origi- nator. Or the borrower states she is receiving a gift of money with no repayment necessary and the donor signs a gift letter to this effect. The lender verifies that this is not a loan when in fact it is. It is possible the funds were not even provided by the donor, but by the seller under the guise of a gift from the borrower’s family member. Sometimes fraudsters record false quitclaim or war- ranty deeds to obtain title to a property. They can then refinance the home and obtain the proceeds or sell the home to an unsuspecting buyer and keep the proceeds. Homeowners that live out of state or out of the country are targets of this scheme. Identity Theft When a purse or wallet is stolen, the criminal is not looking for cash or credit cards, the criminal is more interested in stealing someone’s identity. By assum- ing the person’s identity, the criminal can apply for loans and mortgages and make a lot more money than by just using or selling stolen credit card num- bers. Identity theft occurs when someone uses your name, Social Security number, credit card number, or other personal information to commit fraud and other crimes without your permission. This crime can also happen on line through phishing, spyware, and hackers. Phishing is defined by Webopedia.com as the act of sending an email to a user falsely claiming to be an established legitimate enterprise in an attempt to scam the user into surrendering private information that will be used for identity theft. The email directs the user to visit a website where they are asked to update personal information, such as passwords and credit card, social security, and bank account numbers that the legitimate organization already has. The website, however, is bogus and set up only to steal the user’s information. Spyware is software that gathers user’s information without the user’s knowledge. It can capture key- strokes to include account numbers and passwords. Hackers are individuals who gain unauthorized access to computer systems for the purpose of stealing. Identity thieves normally target older homeown- ers who have a lot of equity. It is easier to obtain a home equity line of credit than it is to do a cash-out refinance. For homes valued under $250,000, some lenders require less paperwork and do not require appraisals. The thief targets the county public records and local tax databases to learn all he can about the homeowner and the property. Once the thief has all the information necessary, he or she creates fraudu- lent documentation and then applies for the home equity line of credit online or over the telephone. In an extreme version of this scam, identity thief number one assumes the owner’s identity and sells the house to thief number two who applies for a mortgage. They split the mortgage proceeds and vanish. Identity theft victims are not liable to repay the stolen funds and don’t lose their homes but the lender is out the money. Because senior citizens are frequent vic- tims of these scams, they can have their credit report flagged with a fraud alert. A fraud alert requires the lender to contact the customer first before extending any credit. A red flag should go up if you receive a package from the Welcome Wagon, a company that welcomes new homeowners to the neighborhood
  • 47. Lack of Credit Documentation Promotes Mortgage Fraud     43 with small gifts and coupons from local merchants. You may have been a victim of such a crime. Consequences of Fraud What happens in all these scams is that the lender loses money. Communities may become blighted when homes deteriorate due to nonexistent hom- eowners. We all pay through higher rates and fees. Just as in the automobile insurance industry, it is said every $200 of an annual premium goes to fraudulent claims. In the mortgage industry, because of the fraud and foreclosures, less people will be offered credit and fees will increase to offset these costs. Ramifications to communities due to mortgage fraud include: higher property taxes because homes have been sold at inflated values, raising the tax rate, the inability to sell the home because it was purchased at an inflated price, and abandoned properties with the possibility of increased criminal activity. Florida consumers who have complaints about a mort- gage scam may call the Florida Attorney General’s Fraud Hotline at 1-866-9-NO-SCAM (1-866-966- 7226). Complaints can also be filed at: www.myfloridalegal.com RESOURCES Fannie Mae www.efanniemae.com Federal Housing Administration www.fha.gov Department of Veterans Affairs www.homeloans.va.gov/ Internal Revenue Service www.irs.gov Federal Bureau of Investigation. “Mortgage Fraud Operation ‘Quick Flip’,” Press Release (December 14, 2005) www.fbi.gov/pressrel/pressrel05/quick- flip121405.htm Florida Statutes http://www.leg.state.fl.us/Statutes/index.cfm? App_mode=Display_StatuteURL=Ch0494/ titl0494.htmStatuteYear=2004Title=-2004- Chapter%20494 Online dictionary and search engine www.webopedia.com Attorney General of Florida’s website www.myfloridalegal.com Mortgage News Watch. “Not for Profit to Provide Services for Fraud Victims,” (March 20, 2007) www.mortgagenewswatch.com/newsviewer.php? ppa=%3Aqsvv%5F%5BlqqnqqrZUfb%216%3C% 22bfem%5E%21 www.fbi.gov/pressrel/pressrel05/quickflip121405. htm Florida Attorney General’s Fraud Hotline 1-866-9-NO-SCAM (1-866-966-7226) www.myfloridalegal.com Websites devoted to the education and eradication of mortgage fraud www.stopmortgagefraud.com www.fincen.gov/dgssearch/search.php?q=mortg age+fraudr=10; www.mortgagenewsdaily.com/ mortgage_fraud; www.mortgagenewsdaily.com/mortgage_fraud/ report_Florida.asp; www.fraud.org; www.mortgagefraud.com; www.fraudblogger.com; and www.nationalfraudconstable.com/
  • 48. 44     Module 5 True or False 1. An indirect result of mortgage fraud is higher property taxes. T F 2. Stated income loans were created to accommodate self employed borrowers with good credit. T F 3. Fraud for property is normally committed by industry insiders. T F 4. Stated income loans mean you can state the necessary income needed to qualify for the loan. T F 5. Disclosing false information on a mortgage application is fraud. T F Multiple-Choice 1. Mortgage fraud for profit is normally committed by: a. homebuyers. b. industry insiders. c. never. d. builders. 2. A _________ lets the thief use their name and good credit and executes the documents but never intends to live in the property or make any mortgage payments. a. straw buyer b. industry insider c. straw seller d. straw thief 3. Committing fraud is made easier by the use of: a. computers. b. scanners. c. tax software preparation programs. d. all of the above. 4. Today, you have to make a mortgage application: a. in person. b. online. c. through overnight mail. d. any of the above. 5. ________ loans do not require any income or asset information be disclosed on the loan application or any verification by the lender. a. SISA b. SIVA c. NINA d. No DOC ANSWERS: TrueorFalse:1)T2)T3)F4)F5)TMultipleChoice:1)b2)a3)d4)d5)d M O D U L E REVIE W E X ERCISES Use the exercise questions to review the module material. The answers are found on the bottom of the page.
  • 49. © 2007 Bert Rodgers Schools of Real Estate, Inc. 45 Learning Objectives After completing this module, you should be able to: Updates on Flood and Hazard Insurance M O D U L E 6 1. Describe the various types of flood insurance policies available to property owners. 2. Discuss what flood insurance does and does not cover. 3. Define the National Flood Insurance Program, Special Flood Hazard Area, Flood Insurance Rate Map, LOMA, 100 Year Flood, and Participating Community. 4. Identify the maximum amount of flood insur- ance coverage available for property owners and structures. 5. Identify the problems homeowners face when their community does not participate in the National Flood Insurance Program. 6. Explain the purpose of the Florida Hurricane Catastrophe Fund. GLOSSARY AND ACRONYMS 100-Year Flood The flood elevation has a 1% chance of being equaled or exceeded each year. Citizens Property Insurance Corporation (CPIC) Provides insurance to, and serves the needs of, home- owners in high-risk areas and others who cannot find coverage in the open, private insurance market. Federal Emergency Management Agency (FEMA) FEMA works with state and local agencies to coor- dinate all facets of disaster relief, as well as programs involving safety and prevention. Flood Insurance Rate Map (FIRM) Issued by FEMA, the maps identify areas of the 100- year flood hazard in a community based on detailed or approximate analyses. Letter of Map Amendment (LOMA) A surveyor determines that the elevation of the ground is higher than the base flood elevation docu- mented in an elevation certificate. National Flood Insurance Program (NFIP) The NFIP makes federally backed flood insurance available to homeowners, owners of condominiums and co-ops, renters, and business owners who live or own property in participating communities. Participating community Communities that agree to manage flood hazard areas by adopting minimum standards contained in Section 60.3 of the NFIP regulations. Reinsurance A means by which an insurance company can pro- tect itself against the risk of losses. It is the insurance company’s insurance. Special Flood Hazard Area (SFHA) The area expected to be inundated by a 1% annual chance flood. INTRODUCTION Florida saw very active hurricane seasons in 2004 with Hurricanes Charley, Frances, and Jeanne and in 2005 with Hurricanes Katrina, Rita, and Wilma. They caused considerable damage throughout the state. The National Flood Insurance Program paid nearly $1.4 billion in flood insurance claims to homeowners, business owners, and renters during the 2004 hurri- cane season and nearly $16 billion during the 2005 hurricane season. Thankfully, the 2006 hurricane sea- son was mild and did not see the devastation that was experienced in the preceding two years. www.floodsmart.gov/floodsmart/pages/ nfip_statistics.jsp
  • 50. 46     Module 6 NATIONAL FLOOD INSURANCE PROGRAM Floods are the most common natural disaster in the United States. When the U.S. Congress passed the National Flood Insurance Act in 1968, the National Flood Insurance Program (NFIP) was established. The NFIP makes federally-backed flood insurance available to homeowners, owners of condominiums and co-ops, renters, and business owners who live or own property in participating communities. In 1974, the Disaster Relief Act enabled the President of the United States to declare disasters, thereby allowing the necessary funds and supplies to reach the affected areas immediately. There were so many agencies involved in handling disasters that in 1979 Congress consolidated many of them into the new Federal Emergency Management Agency (FEMA). In March of 2003, FEMA was incorporated into the new Department of Homeland Security. Today, FEMA works with state and local agencies to coordinate all facets of disaster relief, as well as programs involving safety and prevention. www.fema.gov/about/history.shtm The NFIP provides affordable flood insurance through insurance companies and individual insur- ance agents. The NFIP covers damage by hurricanes, rivers, or tidal waters only when at least two adjacent properties in the area have been flooded. In November 2005, President Bush signed legislation increasing the borrowing authority of the NFIP from $3.5 billion to $18.5 billion to settle flood insurance claims for 2005. This allowed insurance companies to continue pay- ing claims from the 2005 hurricane season. The NFIP has had more claims from recent storms than from all storms combined since 1968. www.fema.gov/news/newsarchive.fema? year=2005month=11 What Does Flood Insurance Cover? Unlike a standard homeowner’s policy that includes coverage for when rain enters through a wind-dam- aged door or window or through a hole in the wall or roof, flood insurance only covers losses to your prop- erty caused by flooding. Damage from puddles caused by rain entering a wind-damaged door or window or a hole in the wall or roof are considered windstorm related, not flooding. Flood insurance covers devasta- tion caused by storm surge, wave wash, tidal waves, or the overflow of any body of water on normally dry land. Flood insurance is available to a homeowner only if the community they live in participates in the NFIP, regardless if their flood risk is low, medium, or high. The NFIP is the primary source for flood insurance in the United States. Approximately 20,000 commu- nities participate in the NFIP by adopting and enforc- ing floodplain management ordinances to reduce future flood damage. The NFIP is based on the vol- untary participation of communities of all sizes. In the context of this program, a community is a political entity—whether an incorporated city, town, town- ship, borough, or village, or an unincorporated area of a county or parish—that has legal authority to adopt and enforce floodplain management ordinances for the area under its jurisdiction. Some of the things a standard flood policy will cover include: structural damage; furnace, water heater, and air conditioner; flood debris clean up; floor surfaces such as carpeting and tile. You can also buy a flood insurance policy to cover the contents of your home, such as furniture, collectibles, clothing, jewelry, and artwork (www.floodsmart.gov/ floodsmart/pages/whatfloodins.jsp). Homeowners can insure their home up to $250,000 and its contents up to $100,000. Nonresidential prop- erty owners can insure their building up to $500,000 and its contents up to $500,000. The only people who may have trouble finding flood coverage are residents of the coastal barrier resource system area and com- munities that do not participate in the NFIP. Table 6.1 shows the maximum amount of coverage for a stan- dard flood policy. Table 6.1: Maximum Amount of Flood Coverage Coverage Type Coverage Limit 1 to 4-family structure $250,000 1 to 4-family home contents $100,000 Other residential structures $250,000 Other residential contents $100,000 Business structure $500,000 Business contents $500,000 Renter contents $100,000 Source: www.floodsmart.gov/floodsmart/pages/faq_ types.jsp#A1 NFIP Standard Insurance The NFIP offers 3 Standard Flood Insurance Policy forms. These forms provide policyholders with a description of their coverage and other important coverage information. • • • •
  • 51. Updates on Flood and Hazard Insurance     47 Dwelling Policy Form. The dwelling policy is used to insure residential structures and their contents, includ- ing individual condominium units. The eligible struc- tures include single family structures, 1 to 4-family structures, condominium units, manufactured homes, townhouse/row house structures, and timeshares. General Property Policy Form. The general prop- erty policy is used to insure other residential and nonresidential structures and their contents. Eligible structures include apartment buildings, schools, and miscellaneous structures, commercial structures, and cooperative associations. Residential Condominium Building Association Policy Form. The residential condominium building association policy is used for residential condomin- ium building associations to cover the entire build- ing under one policy, all units, improvements within the units, and personal property owned in common is covered with a contents policy. The policy does not protect the individual owner from loss to per- sonal property owned exclusively by the unit owner. Eligible structures include high-rise and low-rise con- dominium buildings and condominium associations. A unique situation arises if a unit owner’s mortgage lender determines that the coverage purchased under this policy form is insufficient to meet the manda- tory purchase requirements. The mortgage lender can request the borrower to ask the association to carry adequate limits or require purchase of a separate unit owner’s building coverage policy. If the associa- tion does not have this policy form and the mort- gage lender requires coverage, then the unit owner is required to purchase an individual unit owner’s build- ing policy under the dwelling form; otherwise, they will not be able to get a mortgage loan (www.fema. gov/business/nfip/sfip.shtm). Government Subsidies Flood insurance is subsidized by the U.S. Government for communities that agree to manage flood hazard areas by adopting minimum standards. A community’s participation in the NFIP allows their citizens to pur- chase flood insurance. The standards are contained in Section 60.3 of the NFIP regulations. Communities that do not participate are subject to the sanctions in Section 202(a) of the Flood Disaster Protection Act of 1973. Section 202(a) makes flood insurance, federal grants and loans, federal disaster assistance, and federal mortgage insurance unavailable for the acquisition or construction of structures located in the floodplain shown on the NFIP maps. Issued by FEMA, Flood Insurance Rate Maps (FIRMs) identify areas of the 100-year flood hazard in a community based on detailed or approximate analyses (www.fema. gov/hazard/map/firm.shtm). Special Flood Hazard Area The 100-year flood is the standard used by most fed- eral and state agencies including the NFIP, for flood- plain management and to determine if flood insurance is needed. The 100-year flood does not mean a flood will occur every 100 years, but instead, that the flood elevation has a 1% chance of being equaled or exceeded each year. The Special Flood Hazard Area (SFHA) is the area expected to be inundated by a 1% annual chance flood. A structure located within a SFHA shown on a NFIP map has a 26% chance of suffering flood damage during the term of a 30-year mortgage. If a lending institution is federally regulated or making federally backed loans, it must review the NFIP maps to deter- mine if the building is located in a SFHA. If the lend- ing institution makes such a determination, it must require the borrower to purchase flood insurance. Most lending institutions require borrowers to pur- chase flood insurance if the property improvements are located in Zones A or V but not in Zones B, C, or X. To be removed from the floodplain shown on the Flood Insurance Rate Map (FIRM), a structure must be on land that is not subject to flooding by the 1% annual chance flood. However, more severe floods can and do happen. Even if a structure is found to be on high ground, it could still be damaged by an extreme flood; 20% to 25% of all flood insurance claims are filed in low- to moderate-risk areas (www.fema.gov/ business/nfip). Letter of Map Amendment. If the lot or building site is on natural ground that is higher than the base flood elevation shown on the FIRM, the owner may request a Letter of Map Amendment (LOMA). To support the request, a surveyor needs to determine the elevation of the ground next to the building and com- plete an elevation certificate. If the ground is higher than the base flood elevation, then FEMA will issue a LOMA. With a LOMA, the lending institution may choose to waive the flood insurance requirement. Letter of Map Revision based on fill. If a structure was built on fill that was placed after the FIRM was prepared, then a Letter of Map Revision Based on Fill (LOMR-F) can be requested. Just like the LOMA, an elevation certificate completed by a land surveyor is required. If the filled ground is higher than the base flood elevation, and there is no basement, then FEMA may issue a LOMR-F, and the lending institution may choose to waive the flood insurance requirement. The lending institution is not required to waive the flood insurance requirement even though a LOMA was obtained from FEMA (www.floodsmart.gov/ floodsmart/pages/policycoverage.jsp). Since flood insurance requirements only apply to insurable structures, flood insurance is only required if
  • 52. 48     Module 6 the property improvements are located in the SFHA. If the land is in the SFHA but the improvements are not, then flood insurance would not be required. Locate participating communities. To verify if the property is in a participating community go to: http://msc.fema.gov/webapp/wcs/stores/ servlet/FemaWelcomeView?storeId=10001 catalogId=10001langId=-1 Enter the property address in the upper right hand corner and click product search. A page will load that allows you to view the FIRM for the entire commu- nity and also prepare and print one map just for the specific address. Any amendments since the FIRM was first issued can also be viewed. FEDERAL LEGISLATION The Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 was signed into law June 30, 2004. Its purpose is to help people who have experi- enced serious and repetitive flood damage solve their problems with financial assistance from the NFIP in partnership with communities and states; end the abuses by those who misuse the program causing all policyholders to pay more for flood insurance; and improve consumer understanding and rights of NFIP policyholders. The act also reauthorized the NFIP until September 30, 2008 (www.floods.org/home/ default.asp). In a previous session of Congress in November 2005, a bill entitled the National Flood Insurance Program Commitment to Policyholders Reform Act of 2005, was introduced by the U.S. House of Representatives to restore the financial solvency of the NFIP, and for other purposes, called H. R. 4320. After two ses- sions of Congress since the bill’s introduction, it never became a law. However, Congress did make the fol- lowing findings to introduce this bill: (1) the amount of the flood insurance claims resulting from Hurricanes Katrina and Rita will likely exceed the aggregate amount of all claims previously paid in the history of the NFIP, and will require an increase in the program’s bor- rowing authority; (2) flood insurance policyholders have a legiti- mate expectation that they will receive fair and timely compensation for losses covered under their policies; (3) substantial flooding has occurred, and will likely occur again, outside of the areas desig- nated as the 100-year floodplain; (4) to adequately and correctly assess potential flood damage and losses in all areas in the US, the NFIP will need to update its flood maps with the latest technology; (5) the maximum coverage limits for flood insurance policies should be increased to reflect inflation and the increased cost of housing; (6) significant reforms to the NFIP required in the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 have yet to be implemented; and (7) despite reforms required in the Bunning- Bereuter-Blumenauer Flood Insurance Reform Act of 2004, the NFIP requires a modernized and updated administrative model to ensure that the people of the US have continued access to flood insurance (http://thomas.loc.gov/cgi-bin/ query/z?c109:H.R.4320.IH: and http://thomas. loc.gov/home/c110query.html). Citizen’s Property Insurance Corporation In 2002, the Florida Legislature passed a law that combined the Florida Residential Property and Casualty Joint Underwriting Association (FRPCJUA) and the Florida Windstorm Underwriting Association (FWUA) creating the Citizens Property Insurance Corporation (CPIC). Chapter 627.351(6) F.S. CPIC provides insurance more efficiently and effectively and serves the needs of homeowners in high-risk areas and others who cannot find coverage in the open, private insurance market (www.citizensfla.com/index.asp). By law, CPIC must charge more than other insurance companies because, as a state company, it is meant to be an insurer of last resort. After the 2004 and 2005 hurricane seasons and projections for increased hur- ricane activity, most insurers have raised premiums causing CPIC to raise rates to remain the most expen- sive option (www.insurancejournal.com/news/south- east/ 2006/05/22/68645.htm). As the rate increases took effect many homeown- ers throughout the State of Florida were very angry. Some people were at risk to lose their homes because they could not afford the increased insurance and tax payments. In January 2007, Governor Charlie Crist held a special session with the Florida Legislature. They were able to pass legislation requiring insurers to pass along savings to policy holders. The average state-wide savings is 24.3%. However, State Farm and CPIC policyholders will only see savings between 7% and 10% because of the amount of reinsurance State Farm and CPIC purchase. State Farm buys reinsur- ance from their parent company so their customers have already seen the savings. CPIC buys reinsurance from the state so there is no corresponding savings costs to negate. In addition, Citizen’s’ policyholders
  • 53. Updates on Flood and Hazard Insurance     49 are already enjoying a rate rollback which froze 2007 rates to the premiums that were being charged on December 13, 2006, unless the January rate change resulted in an even lower premium. More Floridians will have the chance to be insured with CPIC; consumers now have the choice to stay with CPIC or go with a new company; and there will be new coverage and payment options available. Insurance Industry Accountability and Consumer Protection Act A brief recap of the recent changes due to the Insurance Industry Accountability and Consumer Protection Act signed into law by Governor Crist on January 25, 2007: Insurance report card. Requires the Insurance Consumer Advocate to assign a letter grade to insurance companies based on claims, payment practices, and other company operations. Windstorm insurance coverage. Allows hom- eowners to exclude windstorm coverage from their policies. Deductible options. Eliminates caps on deduct- ibles under certain conditions. Contents coverage. Allows policyholders to exclude contents coverage. Age of home. Prohibits property insurers from denying coverage based solely on the age of the home. Cherry picking. Requires insurers that offer home­ owners policies in other states and offer auto insur- ance in Florida to sell homeowners insurance in Florida. Low income insurance coverage assistance. Instructs the Legislature in the regular 2007 session to create a program to help low income homeown- ers pay their insurance premiums. Uniform grading system. Requires the state to develop a uniform home grading scale to grade a home’s hurricane resistance. Panhandle exemption. Eliminates the Panhandle exemption to the Florida Building Code. CPIC rate increase. Repeals the January 1, 2007 rate increase and freezes rates to the December 13, 2006 level. Commercial policies. Eliminates the Property and Casualty Joint Underwriters Association (PCJUA) and allows CPIC to write statewide commercial insurance policies. The CPIC Board will determine the policy limits and premiums. CPIC rate floors. Removes the requirement that CPIC has to charge the highest rates. • • • • • • • • • • • • Non-homestead property. Allows non-homestead properties to be eligible for CPIC coverage. Multi perils. Authorizes CPIC to write multi peril policies in the wind pool. Floridians will have the chance to be insured with CPIC; policyholders who already paid the higher pre- miums will receive a refund; and there will be new coverage and payment options available. Consumers now have the choice to stay with CPIC or go with a new company. Previously, consumers didn’t have that choice. www.myfloridahouse.gov/FileStores/ We b / H o u s e C o n t e n t / A p p r o v e d / Announcements/Uploads/Documents/ins/ insurance_acts.pdf www.floir.com/PresumedFactor/Statewide AverageSavings.pdf http://www.floir.com/PresumedFactor/ PresumedFactorReport.pdf www.fldfs.com/ica/NewsMedia.asp www.citizensfla.com/documents/leg_faq/ cons_faq.swf CLUE Reports Don’t be fooled by inexpensive insurance. Probably the worst thing that could happen is that the insur- ance company is not licensed to do business in Florida. Although you have been faithfully paying the premiums, you actually have no coverage at all. If the insurance company is insolvent, then you cannot even make a claim against the state guarantee fund. Go to the Florida Department of Financial Services (FDFS) website and click on the button “Verify before you Buy” button to make sure the company is licensed. www.fldfs.com/consumers/verify_before_ you_buy/ Not only is insurance very expensive, it is some- times unavailable because the property has had too many claims. Yes, the property, not the homeowner has had too many claims! The Comprehensive Loss Underwriting Exchange (CLUE) is a loss history information exchange that enables insurance com- panies to access prior loss information. Just like the credit bureau compiles information on how you pay your bills, and the medical information bureau com- piles information of your health and health claims, there is an insurance clearinghouse of information on claims made. A prudent buyer should make their contract contingent upon receiving a CLUE report from the seller. Only the property owner can order the report due to federal and privacy laws. The report gives a 5-year history of dates and types of losses and • •
  • 54. 50     Module 6 amount paid for each loss. For more information, visit the following link: www.choicetrust.com Florida Hurricane Catastrophe Fund After Hurricane Andrew in 1992, the residential prop- erty insurance market experienced many problems. Reinsurance capacity contracted and many insurers were forced to re-evaluate their exposure in Florida. The citizens looked to the State for help in stabilizing the market. The Florida Hurricane Catastrophe Fund (FHCF) was created in Chapter 215.555, F.S. to pro- vide a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses in order to provide additional insurance capacity for the state. The FHCF acts as a state-administered reinsurance program and is mandatory for residential property-insurers writing covered policies in Florida. Residential property insurance policies provide wind or hurricane coverage on structures located in Florida, including the contents and additional living expenses. In addition, certain collateral protection policies cov- ering personal residences are also considered covered policies if they meet the requirements of Chapter 215.555 (2)(c), F.S. The FHCF supports a public- private partnership that preserves the private sector’s role as the primary risk bearer. The FHCF is financed by reimbursement premiums charged to participating insurers, investment earnings, and emergency assess- ments on Florida property and casualty insurers (www. floir.com/fhcf.htm). Proposed National Insurance Catastrophe Fund Bills In 2005, the U.S. House of Representatives introduced pending legislation for a national insurance catastro- phe fund based on Florida’s version. The intent was to cut homeowner insurance costs and ensure insurance market liquidity. Most states do not have catastrophe funds. The proposed federal legislation encouraged states to establish catastrophe funds to prepare for natural disasters. The fund, administered by the U.S. Department of Treasury, would share the cost of cata- strophic losses after states’ catastrophe funds had been exhausted. That legislation did not pass (“Statement from CFO Tom Gallagher On: Federal Legislation to Create a National Catastrophe Fund,” Florida Department of Financial Services Media Release [November 17, 2005] www.fldfs.com/pressoffice/ViewMediaRelease. asp?ID=2172). In 2007, Congresswoman Ginny Brown-Waite and Congressman Vern Buchanan of the U.S. House of Representatives introduced a similar bill called the Homeowners’ Insurance Protection Act of 2007. If passed, it would help reduce American families’ homeowner insurance costs and ensure liquidity in the insurance market. The Brown-Waite Buchanan bill will establish a federal reinsurance catastrophic fund as a federal backstop for future natural disasters. Although homeowners’ insurance is primarily handled at the state level, there are important roles for the federal government to play, including the establish- ment of a national catastrophic fund. The bill would encourage states to create catastrophic funds by pro- viding a federal backstop for those that voluntarily create funds. As proposed in the bill’s predecessor, the fund would be called the Consumer Hurricane and Earthquake Protection Fund, or HELP fund. It is hoped the creation of the federal catastrophic reinsurance fund funded by contributions from the state catastrophe funds, would eliminate the need for federal taxpayers to pay the enormous cost of natu- ral disasters (http://brown-waite.house.gov/news/ DocumentSingle.aspx?DocumentID=54995). FDFS MEDIATION The Florida Department of Financial Services (FDFS) established a mediation program to resolve claim disputes between insurers and Florida policy- holders arising as a result of damages caused to resi- dential property by hurricanes and tropical storms during 2004. At the time claims are filed, insurers are required to notify policyholders of their right to request mediation if the claim has not been resolved in a timely manner (www.fldfs.com/Consumers/lit- erature/Mediation_Brochure.pdf). Mediation allows a third, unbiased person to help settle disputes between consumers and insurance companies. Mediation at no cost, is non-binding, and does not prevent consumers from participating in other resolution procedures. Insurance companies are required to notify the consumer in writing of their right to mediation. For further information, you may contact the FDFS at 800-22-STORM or online at www.fldfs.com/. Condo Mediation Numerous condominium associations suffered con- siderable damage during the 2005 hurricane season. Many struggled with their insurance companies to settle claims so the damage could be repaired with- out issuing a special assessment or increasing their condominium fees. Since legislation was passed in the 2005 session expanding the FDFS mediation program to condominium associations, Tom Gallagher, the former chief financial officer of Florida and former head of the FDFS, issued a press release on December 1, 2005, announcing a partnership between the Department of Business and Professional Regulation (DBPR) and the FDFS. Both departments urge con-
  • 55. Updates on Flood and Hazard Insurance     51 dominium associations to participate in the mediation program to help facilitate prompt and fair settlement of outstanding claims. The goal of the program is to offer a no-cost dispute resolution alternative to resolv- ing hurricane claims and to help with recovery from catastrophic damage. Since 2004, the program has helped more than 11,000 storm victims reach satisfactory settlements on their hurricane claims. The mediations are free of charge. Using the program does not preclude an association’s right to take the dispute to court or to invoke their policy appraisal clause. When the FDFS receives a request for mediation, the insurance company is informed it has 21 days to settle the claim, or it will have to appear at mediation with the policyholder or his or her legal representative. (“Gallagher Announces New Option For Condominium Communities To Resolve Hurricane Claims,” Florida Department of Financial Services Media Release [December 1, 2005] www.fldfs.com/PressOffice/CondoMediation/ CondoMediation.htm). Florida’s Insurance Consumer Advocate On March 5, 2007, General Bob Milligan took the position of Florida’s new Insurance Consumer Advocate. The website www.fldfs.com/ica/ was unveiled by Chief Financial Officer Alex Sink and General Milligan to educate Floridians about the new position and how it serves the people. General Milligan was Florida’s Comptroller from 1994–2002 and helped create the position CFO Sink now holds. In 2002, voters changed the Florida Constitution to eliminate the Comptroller, merging the Department of Insurance, Treasury, State Fire Marshall, and the Department of Banking and Finance into the new Department of Financial Services. General Milligan’s goal as the Florida Insurance Consumer Advocate is to educate and help defend the rights of Floridians when it comes to insurance. The Insurance Consumer Advocate will be proactive in finding solutions to the insurance issues that face Floridians; to call attention to any questionable insurance practices; and to go head-to-head with insurance companies seeking unfair or unjustified rate increases. As an advocate for the consumer, General Milligan will listen to Floridians and propose innovative ideas. His office will examine the complaints and concerns of Floridians to help him monitor and identify any negative trends or question- able business practices and provide solutions. By add- ing enhanced legal rights to the Insurance Consumer Advocate’s Office, General Milligan will have clear authority to fight for consumers (www.fldfs.com/ PressOffice/ViewMediaRelease.asp?ID=2591). RESOURCES Government statistics on floods www.floodsmart.gov/floodsmart/pages/nfip_ statistics.jsp Federal Emergency Management Agency history www.fema.gov/about/history.shtm Press Release Number HQ-05-sta1. “On President Bush Signing Flood Insurance Act” (November 22, 2005) www.fema.gov/news/newsrelease.fema?id=20805 What is flood insurance? www.floodsmart.gov/floodsmart/pages/what floodins.jsp Types of flood insurance www.floodsmart.gov/floodsmart/pages/faq_types. jsp#A1 What is a flood insurance rate map? www.fema.gov/hazard/map/firm.shtm The National Flood Insurance Program www.fema.gov/business/nfip/ Types of flood policies and coverage www.floodsmart.gov/floodsmart/pages/policy coverage.jsp Flood Insurance Rate Maps search query http://msc.fema.gov/webapp/wcs/stores/servlet/ FemaWelcomeView?storeId=10001catalogId=1 0001langId=-1 Association of State Floodplain Managers www.floods.org/home/default.asp Citizens Property Insurance Corporation www.citizensfla.com/index.asp Insurance Journal. “Citizens Property Insurance Unveils Breakdown of Proposed County-by-County Rate Increases.” (December 1, 2005) www.insurance journal.com/news/southeast/2005/12/01/62629. html Insurance Industry Accountability and Consumer Protection Act www.myfloridahouse.gov/FileStores/Web/House Content/Approved/Announcements/Uploads/ Documents/ins/insurance_acts.pdf Statewide average rate of savings on overall premium www.floir.com/PresumedFactor/Statewide AverageSavings.pdf Florida Insurance Consumer Advocate www.fldfs.com/ica/NewsMedia.asp
  • 56. 52     Module 6 Frequently asked questions about new legislation effective January 2007 for Citizens Property Insurance Corporation www.citizensfla.com/documents/leg_faq/cons_ faq.swf Verify if your insurance agent, broker or company is licensed to do business in Florida http://www.fldfs.com/consumers/verify_before_ you_buy/ Comprehensive Loss Underwriting Exchange Reports www.choicetrust.com Florida Hurricane Catastrophe Fund http://www.floir.com/fhcf.htm Florida Department of Financial Services. “Statement from CFO Tom Gallagher on: Federal Legislation to Create a National Catastrophe Fund.” Media Release (November 17, 2005) www.fldfs.com/pressoffice/ViewMediaRelease. asp?ID=2172 Congresswoman Ginny Brown-Waite’s website. “Reps. Brown-Waite and Buchanan Introduce National Catastrophic Insurance Proposal.” Media Release (January 4, 2007) http://brown-waite.house.gov/news/Document Single.aspx?DocumentID=54995 Florida Department of Financial Services. www.fldfs.com Florida Department of Financial Services Media Release “Gallagher Announces New Option For Condominium Communities To Resolve Hurricane Claims,” (December 1, 2005) www.fldfs.com/ PressOffice/CondoMediation/CondoMediation. htm Florida Insurance Consumer Advocate www.fldfs.com/ica/ Florida Department of Financial Services Media Release “CFO Alex Sink and General Milligan, Insurance Consumer Advocate, Unveil New Website for Floridians” (March 5, 2007) www.fldfs.com/PressOffice/ViewMediaRelease. asp?ID=2591
  • 57. Updates on Flood and Hazard Insurance     53 True or False 1. A homeowner’s insurance policy covers flood damage. T F 2. The 100-year flood is the standard used by most federal and state agencies for floodplain management and to determine if flood insurance is needed. T F 3. Flood insurance requirements only apply to insurable structures. T F 4. The Comprehensive Loss Underwriting Exchange (CLUE) is a loss-history information exchange that enables insurance companies to access prior loss information. T F 5. The condo mediation program offers a no-cost dispute resolution alternative to resolving hurricane claims. T F 6. Most states have catastrophe funds. T F Multiple-Choice 1. _________________are the most common natural disaster in the United States. a. Tornados b. Hurricanes c. Floods d. Tsunamis 2. Homeowners can insure their home up to_________ and the contents up to ________. a. $250,000/$250,000 b. $250,000/$100,000 c. $500,000/$100,000 d. $250,000/$500,000 3. The primary source for flood insurance in the United States is the: a. Federal Emergency Management Agency. b. Citizen’s Property Insurance Corporation. c. National Flood Insurance Program. d. Florida Hurricane Catastrophe Fund. 4. The 100-year flood means that: a. a flood will happen every 100 years. b. the flood elevation has a 1% chance of being equaled or exceeded each year. c. a flood will happen every other year. d. the flood elevation has a 100% chance of being equaled or exceeded each year. 5. Flood insurance requirements only apply to: a. insurable structures. b. uninsurable structures. c. properties in Flood Zone X. d. properties in the Gulf Coast region. M O D U L E REVIE W E X ERCISES Use the exercise questions to review the module material. The answers are found on the bottom of the next page.
  • 58. 54     Module 6 ANSWERS: TrueorFalse:1)F2)T3)T4)T5)T6)FMultipleChoice:1)c2)b3)c4)b5)a6)c7)b 6. The purpose of the National Flood Insurance Act of 1968 is to: a. require every homeowner to buy flood insurance. b. force insurers to insure high risk properties. c. make federally backed flood insurance available to homeowners who live in participating communities. d. create the Federal Emergency Management Agency. 7. Who can order a Comprehensive Loss Underwriting Exchange report? a. anyone who pays for it b. only the property owner c. only the property purchaser d. only the mortgage lender
  • 59. © 2007 Bert Rodgers Schools of Real Estate, Inc. 55 Learning Objectives After completing this module, you should be able to: Affordable Housing M O D U L E 7 1. Describe the growing need for affordable ­housing. 2. Explain the features of the financing programs that require no borrower contribution. 3. List several of the available low down payment financing programs. 4. Describe the benefits of these programs, who they serve, and the qualifying criteria. INTRODUCTION Attainable, affordable housing for teachers, police officers, firefighters and other members of Florida’s workforce is an issue that concerns real estate profes- sionals and community leaders throughout the state. The tremendous demand has driven home price val- ues to unprecedented levels in many markets making it more difficult than ever for entrants to find afford- able housing. If people can’t afford to live where they work, then families and communities will suffer. The rising cost of gasoline makes long work commutes expensive and possibly prohibitive. The Federal Housing Administration (FHA), Federal National Mortgage Association (FNMA, Fannie Mae), and Federal Home Loan Mortgage Corporation (FHLMC, Freddie Mac) have mortgage financing programs to assist buyers with low or no down pay- ment. These programs are for customers who cannot save enough money for a down payment and/or clos- ing costs, not the credit impaired. FHA’S 100% FINANCING PROGRAM FOR DISASTER VICTIMS The FHA 203(h) program allows the FHA to insure no-down-payment mortgages made by qualified lend- ers to victims of a major, presidentially declared disas- ter area who lost their homes and are in the process of rebuilding or buying another home. Anyone, a renter or homeowner, who resided in the disaster area can use this program to purchase a home anywhere in the country, subject to qualification. www.hud.gov/offices/hsg/sfh/ins/203h-dft. cfm GOOD NEIGHBOR NEXT DOOR The U.S. Department of Housing and Urban Development (HUD) wants to strengthen America’s communities. The Good Neighbor Next Door (GNND) Program helps make this goal a reality by encouraging valuable professional public servants to become homeowners in revitalization areas. The GNND Program offers HUD-owned single-fam- ily homes to law enforcement officers, firefighters, emergency medical technicians and teachers at a 50% discount. The program’s goal is to prevent crime, pro- mote neighborhood safety, and keep role models in economically distressed communities. The qualified borrower is able to purchase a single family home found in a revitalization area owned by HUD at 50% below the asking price. All that is needed is a $100 down payment. The properties are only sold over the Internet. However, the borrower must sign a silent second mortgage for the discounted amount. No payments are due on this silent second mortgage as long as the borrower remains in the home for three years. After that time, the home may be sold and any profit retained. Eligibility Requirements Officer Next Door. Full-time law enforcement offi- cers are eligible, including those who work for federal, state, a unit of general local government, or an Indian
  • 60. 56     Module 7 tribal government. They must be sworn to uphold and make arrests for violations of federal, state, tribal, county, township or municipal law. Teacher Next Door. Eligible borrowers include those who work full-time for state-accredited or pri- vate schools that provide direct services to students in grades pre-kindergarten through 12. The public or private school that employs the teacher must serve students from the area where the home being pur- chased is located. Firefighter and Emergency Medical Technician Next Door. Eligible borrowers must be employed as a full-time firefighter or emergency medical technician by a fire department or emergency medical services responder unit of a federal, state, or general local gov- ernment, or an Indian tribal government serving the area where the home is located. www.hud.gov/offices/hsg/sfh/reo/goodn/ particip.cfm FANNIE MAE MORTGAGE SOLUTIONS If buyers are concerned about not having enough money for a down payment, several programs offered by FNMA may help. They include the Flexible 97®, Flexible 100™, Expanded Approval® with Timely Pay­ ment Rewards®, and 40-year mortgages. Flexible 97® and Flexible 100™ These products allow lenders to offer more options to borrowers with a no or low down payment and more flexibility in the source of funds for down payment and closing costs. The Flexible 100™ requires no down payment. The maximum loan-to-value (LTV) is 100% and up to 105% combined loan-to-value (CLTV) when combined with a Community Seconds® mortgage. Community Seconds® is a second mort- gage program offered by FNMA. Borrowers have the option of contributing $500 of their own funds towards closing costs and the balance of funds needed may come from flexible sources or the seller. Gifts, grants, unsecured loans from relatives or employers, public agencies, nonprofits or secured loans are per- mitted to meet the minimum borrower requirement. The Flexible 97® requires a 3% down payment which can come from flexible sources. Also, the remainder of funds needed may come from flexible sources just like the Flexible 100™. Both products offer fixed rates and adjustable rates. The adjustable plans avail- able are 5/1, 7/1, and 10/1. The 5/1 has an interest rate that is fixed for the first 5 years of the loan and then adjusts once annually thereafter. The 7/1 is fixed for the first 7 years and the 10/1 is fixed for the first 10 years and then adjusts annually. Eligible borrow- ers may purchase attached or detached one-unit pri- mary residences including condominiums, PUDs, and leaseholds. www.efanniemae.com/sf/mortgage products/fixed/flex97100.jsp InterestFirst™ Mortgage In 2001, Fannie Mae introduced InterestFirst™, a program that allowed borrowers to make lower monthly payments for the first years of a fixed-rate or adjustable-rate mortgage by offering an interest- only period followed by a fully amortizing period of principal and interest. Fannie Mae retired this prod- uct effective January 30, 2007. However, Fannie Mae now includes interest only as a feature with many of its mortgage products, including the Flexible 97®, Flexible 100™, and 40-year mortgages. http://www.efanniemae.com/sf/guides/ ssg/annltrs/pdf/2006/0626.pdf Expanded Approval® with Timely Payment Rewards® This product was designed to benefit borrowers with minimal funds and a history of minor credit problems. After closing, borrowers who develop a good pay- ment history for 24 consecutive months may become eligible for an automatic reduction in their interest rate. Prior to the introduction of Expanded Approval® with Timely Payment Rewards®, a qualified borrower might have received nontraditional financing at higher interest rates and possibly early prepayment penalties. www.efanniemae.com/sf/mortgage products/arm/ea.jsp 40-Year Mortgages FNMA will now purchase 40-year fixed-rate and hybrid adjustable rate mortgages (ARMS) with ini- tial fixed periods of 3, 5, 7, or 10 years. Although the interest costs are greater over the life of a 40-year mortgage and equity builds very slowly, the monthly payment is lower. This is a good choice for someone who will not be in the home very long or will not have the loan very long. A serious risk would be if interest rates rise substantially or house prices decline, leaving the borrower locked into the long-term loan. www.efanniemae.com/sf/mortgage products/fixed/40year.jsp
  • 61. Affordable Housing     57 FREDDIE MAC’S HOME POSSIBLE® MORTGAGES Freddie Mac’s Home Possible® Mortgages help meet the home financing needs of borrowers looking for low down payments and flexible sources of funds, including first-time homebuyers, move-up borrow- ers, retirees, families in underserved areas, new immi- grants and others. Greater flexibility to those who serve our communities so well—like teachers, fire- fighters, healthcare workers and law enforcement offi- cers are also offered. The no- or low-down payment programs offered by FHLMC include Home Possible® 100 Mortgage, Home Possible® 97, Home Possible® Neighborhood Solution 100 Mortgage, and the Home Possible® Neighborhood Solution 97 Mortgage. www.freddiemac.com/singlefamily/ mortgages/homepossible/products.html Home Possible® 100 Mortgage This type of mortgage offers maximum financing of 100% LTV and up to 105% total loan-to-value (TLTV) when combined with a second mortgage from Affordable Seconds®, another FHLMC product. If the second mortgage is not an Affordable Seconds®, then it must meet certain requirements. In addition, it cannot be a home equity line of credit (HELOC); can- not be provided by the seller; the terms must allow for prepayment at any time without any penalty; and if it is a variable interest rate then the monthly pay- ment must remain constant for each 12-month period and the change in the interest rate must be limited to an increase of 1% or less during each 12-month period. There is no minimum borrower contribution required. Reserves, borrower assets available after closing, are not required, but they are recommended. One month’s reserves are equal to the proposed housing payment (principal, interest, and escrow deposits). Reserves are liquid or near liquid financial assets that a borrower can readily access—such as funds in the borrower’s checking or savings accounts; investments in stocks, bonds, mutual funds, certificates of deposit, and money market funds; the amount vested in a retire- ment savings account; the cash value of a vested life insurance policy, etc. For example, if the borrowers proposed housing payment is $1,000 per month, then the borrower needs to have at least $1,000 remain- ing after closing. The mortgage insurance coverage level is only 20%. As a result, the borrower’s monthly mortgage insurance premium will not be very high. Flexible sources for other closing costs and pre- paids can come from the seller or be a gift or grant. Only one-unit primary residences are allowed. Prop­ erty types include single family, condominiums, and PUDs. Successful completion of an approved home­ ownership education course is not required to be completed by at least one borrower prior to closing, but is encouraged. Different amortization types are available including fixed rate and ARMs. The ARMs available are the 5/1, 7/1, and 10/1. This means that the initial interest rate is fixed for the first 5, 7, or 10 years and then adjusts up or down annually according to a predetermined index plus a margin. The 5/1, 7/1, and 10/1 ARMs must have annual interest rate caps of 2%, meaning the interest rate cannot go up or down by more than 2% from the initial interest rate at the time of adjust- ment. The life of the loan cap must be 5%, meaning the interest rate can never be higher than the initial interest rate plus 5%. The 7/1 and 10/1 ARMs have annual caps of 2% and 6% for the life of the loan. The borrower’s annual income must be equal to or less than the area median income. Income eligibil- ity requirements may be different in high cost areas. An exception to the income requirements exists for properties located in designated underserved areas. Underserved areas are located at the census tract level. Use the following link to search by county for income eligibility and census tract: ww3.freddiemac.com/ds2/sell/affgold.nsf/ frmState?OpenFormState=FLORIDA If the census tract number is not known, then enter the property address at: www.ffiec.gov/geocode/default.htm Source: www.freddiemac.com/singlefamily/mortgages/ homepossible/hp100.html Home Possible® 97 The Home Possible® 97 mortgage can be used to purchase 1- to 4-unit properties, including condo- miniums, PUDS, and certain manufactured homes. This type of mortgage offers maximum financing of 97% LTV on 1- to 2-unit properties with 105% TLTV when combined with a second mortgage from Affordable Seconds® or other approved secondary financing. For 3- to 4-unit properties, the maximum LTV is 95% and the TLTV is 105%. For manufac- tured homes, the maximum LTV and TLTV is 95%. The secondary financing rules are the same as in the Home Possible® 100 product. No reserves are required for 1-unit properties but they are recommended. Two
  • 62. 58     Module 7 months reserves are required for 2 to 4-unit prop- erties. For 1-unit properties, there is no borrower contribution required. For 2-4-unit properties the required borrower contribution is 3% of the value and for manufactured homes, the required borrower contribution is 5% of value. The required borrower contribution must be the borrowers personal funds or other borrower funds. FHLMC classifies source of funds into the following three categories: borrower personal funds, other borrower funds, and flexible sources of funds. Borrower personal funds include funds on deposit in a checking, savings, or money market account, proceeds from a secured loan, and verifiable cash deposit towards the purchase. Other borrower funds include gifts, grants, and the Affordable Seconds®. Flexible sources of funds include seller concessions and lender paid costs through premium financing. Premium financing is charging the bor- rower a slightly higher interest rate that pays the lender a percentage of the loan amount. The closing costs and prepaids can be paid with bor- rower personal funds, other borrower funds, or flexi- ble sources of funds. Successful completion of landlord education and homeownership education is required for at least one qualifying borrower prior to closing when purchasing a 2-4-unit property. The mortgage insurance coverage level is only 20%. www.freddiemac.com/singlefamily/home possible/hp97.html Home Possible® Neighborhood Solution 100 Mortgage The Home Possible® Neighborhood Solution 100 Mortgage is designed for law enforcement officers, firefighters, educators, healthcare workers, and effec- tive October 2006, military personnel who want to live and work in the same community. This type of mortgage offers maximum financing of 100% LTV and up to 105% TLTV when combined with a second mortgage from Affordable Seconds®. Only a 1-unit primary residence is allowed. Property types include a single family home, condominiums, and PUDs. Fixed rate mortgages are available in 15, 20, 30, and 40- years. The ARM plans and the secondary financing terms are exactly the same as the Home PossibleSM 100 Mortgage. The mortgage insurance coverage level is only 20%. Temporary subsidy buydowns are avail- able. The initial interest rate will be 1.5% below the note rate and increase .5% annually for the first three years. However, temporary subsidy buydowns are not allowed if the customer selects the 5/1 ARM or has secondary financing with a variable interest rate. All borrowers must be occupants and must meet area median income limits unless the property is in an underserved area. One month of reserves is required after closing and may be from a gift. The borrower does not need to contribute any personal funds. Successful completion of homeownership education is not required, but is recommended. The following is a list of eligible borrower types: Educators. An employee of an accredited or state- recognized private or public school; a certified teacher or administrator in an education agency; or an employee of a post-secondary level educational insti- tution. Law enforcement officers and firefighters. An employee of a law enforcement agency or fire depart- ment administered by a state or local government; or a sworn law enforcement officer responsible for crime prevention and detection, or criminal incarceration; or a sworn member of a fire department involved in fire suppression or prevention, emergency medical response, hazardous materials incident response, or management/response to terrorism. Healthcare workers. A certified, accredited, or licensed healthcare worker who is a medical resi- dent or fellow; a nurse, nursing assistant, pharmacist, pharmacy technician, physician’s assistant, or medical technician, technologist or therapist. www.freddiemac.com/singlefamily/home possible/ns100.html Military personnel. A member of the United States Armed Forces who is on full-time active duty; a mem- ber of a reserve component of the United States Armed Forces or a former member of the United States Armed Forces or a reserve component of the United States Armed Forces who has been separated or retired from either active duty or a reserve com- ponent for no more than two years at the time of the mortgage application. www.freddiemac.com/singlefamily/home- possible/ns100.html Home PossibleSM Neighborhood Solution 97 Mortgage Just like the Home PossibleSM Neighborhood Solution 100 Mortgage, the Home PossibleSM Neighborhood Solution 97 Mortgage is designed for law enforce- ment officers, firefighters, educators, healthcare workers, and effective October 2006, military person- nel who want to live and work in the same commu- nity. However, eligible property types include 1- and 2-unit primary residences, including single family, condominiums, PUDs, and manufactured homes. The Home PossibleSM Neighborhood Solution 97 Mortgage has all the same characteristics as the Home PossibleSM Neighborhood Solution 100 Mortgage except for LTV/TLTV and down payment require-
  • 63. Affordable Housing     59 ments. A 1- to 2-unit property has a maximum LTV of 97% and a TLTV of 105%. A manufactured home has a maximum LTV and TLTV of 95%. There is no minimum borrower contribution. For 2-unit proper- ties, the borrower must contribute 3% of the property value from personal funds. If the property is a manu- factured home, then the borrower must contribute 5% of the property value from their personal funds. www.freddiemac.com/singlefamily/home possible/ns97.html Specialty License Plate The Florida Association of REALTORS® (FAR) spon- sored the creation of a Florida specialty license plate titled “Support Homeownership for All” that high- lights the problem of affordable housing in Florida. The license plate costs an additional $27.00 and the funds collected will provide down payment assistance and other workforce housing programs to our state’s workforce. Based on the State of Florida’s adminis- trative requirements, the “Support Homeownership for All” specialty tag was submitted to the Florida Legislature in March 2006, passed, and was signed into law July 2006. The license plates are available in early 2007. This is just one more small and fairly inexpensive way of funding the huge problem of affordable housing in Florida. www.floridarealtors.org/upload/finalre- port06.pdf CONCLUSION Although home values have outpaced incomes, there are numerous financing programs available for poten- tial homeowners to obtain the American dream. FHA, FNMA, and FHLMC have updated their require- ments to allow more people to qualify for no- and low-down payment mortgages. Real estate profes- sionals should advise prospective buyers to consult their financial advisers as well as lending professionals to determine the most appropriate loan type. RESOURCES FHA Section 203(h) mortgages www.hud.gov/offices/hsg/sfh/ins/203h-dft.cfm The Good Neighbor Next Door Program www.hud.gov/offices/hsg/sfh/reo/goodn/particip. cfm Fannie Mae Flexible 97® 100™ www.efanniemae.com/sf/mortgageproducts/fixed/ flex97100.jsp Fannie Mae Announcement 06-26 www.efanniemae.com/sf/guides/ssg/annltrs/ pdf/2006/0626.pdf Fannie Mae Expanded Approval™ www.efanniemae.com/sf/mortgageproducts/arm/ ea.jsp Fannie Mae 40 year fixed rate mortgage www.efanniemae.com/sf/mortgageproducts/ fixed/40year.jsp Fannie Mae Home Possible® Product Fact Sheets www.freddiemac.com/singlefamily/mortgages/ homepossible/products.html Florida search by county for income eligibility ww3.freddiemac.com/ds2/sell/affgold.nsf/frmStat e?OpenFormState=FLORIDA Geocoding by property address www.ffiec.gov/geocode/default.htm Freddie Mac Home Possible® 100 Mortgage www.freddiemac.com/singlefamily/mortgages/ homepossible/hp100.html Freddie Mac Home Possible® 97 Mortgage www.freddiemac.com/singlefamily/homepossible/ hp97.html Freddie Mac Home Possible Neighborhood Solution® 100 Mortgage www.freddiemac.com/singlefamily/homepossible/ ns100.html Freddie Mac Home Possible Neighborhood Solution® 97 Mortgage www.freddiemac.com/singlefamily/homepossible/ ns97.html Florida Association of Realtors Final Report on the 2006 Legislature www.floridarealtors.org/upload/finalreport06.pdf
  • 64. 60     Module 7 True or False 1. The Federal Housing Administration, Fannie Mae, and Freddie Mac have mortgage financing programs to assist buyers with low or no down payment. T F 2. The Flexible 100™ requires a significant down payment. T F 3. The Home PossibleSM 97 mortgage can be used to purchase 1- to 4-unit properties, including condominiums, PUDS, and certain manufactured homes. T F 4. The Home PossibleSM Neighborhood Solution 97 Mortgage has all the same characteristics as the Home PossibleSM Neighborhood Solution 100 Mortgage except LTV/TLTV and minimum borrower contribution requirements. T F 5. FHA, FNMA, and FHLMC have updated their requirements to allow more people to qualify for no- and low-down payment mortgages. T F Multiple-Choice 1. Premium financing is: a. getting the customer the best deal. b. charging the borrower a slightly higher interest rate that pays the lender a percentage of the loan amount. c. charging the borrower a slightly lower interest rate that pays the lender a percentage of the loan amount. d. illegal. 2. A victim of a major disaster, such as a hurricane victim, can utilize which program to buy a home, subject to qualification? a. FHA 203(b) b. FHA 203(h) c. FHA 203(k) d. FHA 245 3. The FHA Officer Next Door and Teacher Next Door Programs allow eligible borrowers to purchase HUD- owned properties: a. at a 100% discount with $500 down. b. at a 50% discount with $500 down. c. at a 50% discount with $100 down. d. at a 100% discount with $100 down. 4. Which affordable lending product allows 100% LTV? a. Flexible 97® b. Home Possible® Neighborhood Solution 97 Mortgage c. Flexible 100™ d. Home Possible® 97 Mortgage 5. Kathy has been a firefighter for ten years. She wants to buy a duplex. Which program should she apply for? a. Home PossibleSM Neighborhood Solution 97 Mortgage b. FHA 203(h) c. Flexible 100™ d. Home PossibleSM Neighborhood Solution 100 Mortgage M O D U L E REVIE W E X ERCISES Use the exercise questions to review the module material. The answers are found on the bottom of the page. ANSWERS: TrueorFalse:1)T2)F3)T4)T5)TMultipleChoice:1)b2)b3)c4)c5)a
  • 65. © 2007 Bert Rodgers Schools of Real Estate, Inc. 61 Learning Objectives After completing this module, you should be able to: New and Updated Fannie Mae/Freddie Mac Appraisal and Property Report Forms M O D U L E 8 1. Describe the significant changes to the appraisal forms effective for use after November 1, 2005, for Fannie Mae and after January 1, 2006, for Freddie Mac. 2. Evaluate the impact to appraisers by using these new forms. 3. Define the terms appraisal, market value, and scope of work. 4. Identify the key areas of focus in reviewing appraisal or property inspection reports. INTRODUCTION Fannie Mae and Freddie Mac, the government-spon- sored enterprises that create the mechanism for the secondary mortgage market, revised their appraisal and property report forms in March of 2005, and also added 3 new report forms. The use of the forms became mandatory November 1, 2005, for Fannie Mae, and January 1, 2006, for Freddie Mac. Fannie Mae’s primary objective in revising the report forms was to more clearly communicate Fannie Mae’s expectations for the property appraisal and reporting processes; to help the appraisers comply with those expectations; to clarify the appraiser’s accountability for the quality of their work to those who rely on it; and to help appraisers comply with the Uniform Standards of Professional Appraisal Practice (USPAP). However, there has been some controversy over certifications required by appraisers, specifically Certification 23 in the Fannie Mae 1004 and similar certifica- tions in other newly revised forms. Certification 23 references intended user (www.efanniemae.com /sf/formsdocs/forms/pdf/sellingtrans/appraisal faqs.pdf and http://aaro.net/pdf/AARO_2005-10- 10_FNMA_Resolution.pdf Last accessed 3/10/2007). Although Fannie Mae’s position is that modifica- tions or deletions to the certifications are not per- mitted, the Association of Appraisal Regulatory Officials (AARO) position is that appraisers must comply with the USPAP and appraisers are regulated by the state that licensed them. Therefore, apprais- ers must provide supplemental clarification in their appraisal reports regarding who the specific intended users are. On October 10, 2005, the AARO by unanimous vote called upon Fannie Mae to address the issue, recognize the potential problem the mat- ter creates for the real property appraiser regulatory officials, and to take immediate corrective action (www.efanniemae.com/sf/guides/ssg/annltrs/pdf/ 2005/05-02.pdf and www.efanniemae.com/sf/forms- docs/forms/index.jsp). CHANGES TO THE APPRAISAL REPORT FORMS Fannie Mae says the changes are intended to hold appraisers accountable for the quality of their work and to combat fraud. Appraisers say the changes unfairly shift liability to them. The following are 4 significant changes to the appraisal report forms: Each report form is used for a specific property type and inspection type. For example, appraisers will use Form 2055 to report an appraisal with an exterior-only inspection of a single-family resi- dence that is not a manufactured home or a condo- minium unit. Each report form states the minimum scope of work the appraiser is expected to complete for most assignments. The appraiser may complete more than the minimum. In addition, specific appraisal assignments may require more than the minimum scope of work. The reporting format is consistent across all the forms which should make reporting and under- • • •
  • 66. 62     Module 8 writing the results of the appraisal easier for the appraiser and the lender. The Statements of Assumptions and Limiting Conditions and the Appraiser’s Certifications have been revised and incorporated into each report form. The most notable revision to the certifica- tions acknowledges that the report may be distrib- uted to parties other than the Intended Users, and that the other parties may rely on the report as part of any mortgage finance transaction that involves these parties. The revised appraisal report forms clarify that the scope of work is defined by the complexity of the appraisal assignment and the reporting requirements of the appraisal report form. This includes the stated purpose of the appraisal to provide the lender/client with an accurate and adequately supported opinion of market value of the subject property based on Fannie Mae’s definition of market value. Fannie Mae defines market value as the most probable price which a property should bring in a competitive and open mar- ket under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledge- ably and assuming the price is not affected by undue stimulus. Fannie Mae states that the revised format is more effi- cient to review and process the appraisal reports. The expanded areas for comments will eliminate the need for additional addenda. Direct questions have been added to the report forms requiring the appraiser to answer the following in a yes/no format: Whether the subject property is currently offered for sale or if it was offered for sale in the 12 months prior to the effective date of the appraisal. Whether the appraiser analyzed the contract for sale of the subject property for a purchase money transaction. Whether the subject property has any adverse physical deficiencies or conditions. For example, if the subject property needs any repairs and if these repairs affect the livability, soundness, or structural integrity of the property. Whether the subject property generally conforms to the neighborhood. Whether the appraiser researched, analyzed, and reported on the sale or transfer history for the sub- ject property and comparable sales (www.efannie- mae.com/sf/formsdocs/forms/2055.jsp). Fannie Mae requires that the valuation analysis be based on the sales comparison approach because they believe it is the best indicator of value for 1 to 4 unit properties. In order to reduce time and costs, Fannie Mae does not require the appraiser to develop the • • • • • • cost or income approaches to value for all appraisal assignments. However, many brokers, lenders, and insurance companies rely on the cost approach to determine the appropriate amount of hazard insur- ance the borrower will be required to purchase. The hazard insurance should provide for claims to be paid on a replacement cost basis. Brokers and lenders that rely on the appraiser to provide a replacement cost estimate to determine the level of hazard insurance coverage need to request that the appraiser provide the information in the Cost Approach to Value sec- tion or to report that information as an attachment. Then, brokers and lenders can use the value indicated on the Total Estimate of Cost New line to determine the appropriate amount of insurance coverage. OVERVIEW OF THREE NEW APPRAISAL REPORT FORMS Manufactured Home Appraisal Report – Fannie Mae Form 1004C/Freddie Mac Form 70B (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/1004c.pdf Use. This report form is designed to report an appraisal of a 1-unit manufactured home; including a manufactured home in a planned unit development (PUD), based on an interior and exterior inspec- tion of the subject property. A manufactured home located in either a condominium or cooperative project requires the appraiser to inspect the project and complete the project information section of the Individual Condominium Unit Appraisal Report or the Individual Cooperative Interest Appraisal Report and attach it as an addendum to this report. Modifications, additions, or deletions. Modi­fi­ca­ tions, additions, or deletions are not permitted to the intended use, intended user, definition of mar- ket value, or assumptions and limiting conditions. Based on the complexity of this appraisal assign- ment, the appraiser may expand the scope of work to include any additional research or analysis necessary. Modifications or deletions to the certifications are not permitted. However, additional certifications that do not constitute material alterations to this appraisal report are permitted, such as those required by law or those related to the appraiser’s continuing education or membership in an appraisal organization. Scope of work. The complexity of this appraisal assignment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assumptions and limiting conditions, and certifica- tions. The appraiser must, at a minimum:
  • 67. New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms     63 1. Perform a complete visual inspection of the inte- rior and exterior areas of the subject property. 2. Inspect the neighborhood. 3. Inspect each of the comparable sales from at least the street. 4. Research, verify, and analyze data from reliable public and/or private sources. 5. Report their analysis, opinions, and conclusions in this appraisal report. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and of all comparables that the appraiser used. an exterior building sketch of the improvements that indicates the dimensions. The appraiser must also include calculations to show how he or she arrived at the estimate for gross living area. A floor plan sketch that indicates the dimensions is required instead of the exterior building sketch or unit sketch if the floor plan is atypical or function- ally obsolete. clear, descriptive photographs in black and white or color that show the front, back, and a street scene of the subject property, and that are appropriately identified. Photographs must be originals that are produced either by photography or electronic imaging. clear, descriptive photographs in black and white or color that show the front of each comparable sale and that are appropriately identified. Generally, photographs should be originals that are produced by photography or electronic imaging; however, copies of photographs from a multiple listing ser- vice or from the appraiser’s files are acceptable if they are clear and descriptive. any other data as an attachment or addendum to the appraisal report form that are necessary to provide an adequately supported opinion of market value. Appraisal Update and/or Completion Report – Fannie Mae Form 1004D/Freddie Mac Form 442 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/1004d.pdf Use. This report form is intended to provide the lender/client with an accurate update of a prior appraisal and/or to report a certification of comple- tion. The appraiser must identify the service or ser- vices provided by selecting the appropriate report type. Scope of work. The appraiser must, at a minimum: 1. Concur with the original appraisal. • • • • • 2. Perform an exterior inspection of the subject prop- erty from at least the street. 3. Research, verify, and analyze current market data in order to determine if the property has declined in value since the effective date of the original appraisal. Required exhibits. The required exhibits include clear, descriptive photographs, in black and white or color, of the completed improvements for new or pro- posed construction and any other data as an attach- ment or addendum to the appraisal report form that are necessary to provide an adequately supported opinion of market value. Two- to Four-Unit Residential Appraisal Field Review Report – Fannie Mae Form 2000A/ Freddie Mac Form 1072 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/2000a.pdf Use. This report form is intended to provide the lender/client with an opinion on the accuracy of the appraisal report under review. A lender uses this form for the spot-check appraisal component of its quality control process. Scope of work. The complexity of this appraisal assignment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assumptions and limiting conditions, and certifica- tions. The appraiser must, at a minimum: 1. Read the entire appraisal report under review. 2. Perform a visual inspection of the exterior areas of the subject property from at least the street. 3. Inspect the neighborhood. 4. Inspect each of the comparable sales from at least the street. 5. Perform data research and analysis to determine the appropriateness and accuracy of the data in the appraisal report. 6. Research, verify, and analyze data from reliable public and/or private sources. 7. Determine the accuracy of the opinion of value. 8. Assume the property condition reported in the appraisal report is accurate unless there is evidence to the contrary. If the review appraiser determines that the opinion of value in the report under review is not accurate, then he or she is required to provide an opinion of market value. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and of all comparables included in the •
  • 68. 64     Module 8 appraisal report under review and any additional comparable sales provided by the review appraiser. clear, descriptive photographs in black and white or color that show the front, back, and a street scene of the subject property, and that are appropriately identified. Photographs must be originals that are produced either by photography or electronic imaging. clear, descriptive photographs in black and white or color that show the front of each comparable sale included in the appraisal report under review and any additional comparable sales described in the appraisal field review report. Generally, pho- tographs should be originals that are produced by photography or electronic imaging; however, cop- ies of photographs from a multiple listing service or from the appraiser’s files are acceptable if they are clear and descriptive. OVERVIEW OF THE KEY POINTS TO THE EXISTING APPRAISAL REPORT FORMS Uniform Residential Appraisal Report – Fannie Mae Form 1004/Freddie Mac Form 70 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/1004.pdf Use. This report form is designed to report an appraisal of a 1-unit property or a 1-unit property with an accessory unit. This includes a unit in a PUD. An interior and exterior inspection of the subject property is required. Modifications, additions, or deletions. Modifi­ cations, additions, or deletions are not permitted to the intended use, intended user, definition of mar- ket value, or assumptions and limiting conditions. Based on the complexity of this appraisal assign- ment, the appraiser may expand the scope of work to include any additional research or analysis necessary. Modifications or deletions to the certifications are not permitted. However, additional certifications that do not constitute material alterations to this appraisal report are permitted, such as those required by law or those related to the appraiser’s continuing education or membership in an appraisal organization. Scope of work.Thecomplexityofthisappraisalassign­ ment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assump- tions and limiting conditions, and certifications. The appraiser must, at a minimum: 1. Perform a complete visual inspection of the inte- rior and exterior areas of the subject property. • • 2. Inspect the neighborhood. 3. Inspect each of the comparable sales from at least the street. 4. Research, verify, and analyze data from reliable public and/or private sources. 5. Report their analysis, opinions, and conclusions in this appraisal report. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and of all comparables that the appraiser used. an exterior building sketch of the improvements that indicates the dimensions. The appraiser must also include calculations to show how he or she arrived at the estimate for gross living area. A floor plan sketch that indicates the dimensions is required instead of the exterior building sketch or unit sketch if the floor plan is atypical or function- ally obsolete. clear, descriptive photographs in black and white or color that show the front, back, and a street scene of the subject property, and that are appropriately identified. Photographs must be originals that are produced either by photography or electronic imaging. clear, descriptive photographs in black and white or color that show the front of each comparable sale and that are appropriately identified. Generally, photographs should be originals that are produced by photography or electronic imaging; however, copies of photographs from a multiple listing ser- vice or from the appraiser’s files are acceptable if they are clear and descriptive. any other data as an attachment or addendum to the appraisal report form that are necessary to provide an adequately supported opinion of market value. Exterior-Only Inspection Residential Appraisal Report – Fannie Mae /Freddie Mac Form 2055 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/2055.pdf Use. This report form is designed to report an appraisal of a 1-unit property or a 1-unit property with an accessory unit. This includes a unit in a PUD. Only an exterior inspection from the street of the sub- ject property is required. Modifications, additions, or deletions. Modifi­ cations, additions, or deletions are not permitted to the intended use, intended user, definition of mar- ket value, or assumptions and limiting conditions. Based on the complexity of this appraisal assign- ment, the appraiser may expand the scope of work to • • • • •
  • 69. New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms     65 include any additional research or analysis necessary. Modifications or deletions to the certifications are not permitted. However, additional certifications that do not constitute material alterations to this appraisal report are permitted, such as those required by law or those related to the appraiser’s continuing education or membership in an appraisal organization. Scope of work. The complexity of this appraisal assignment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assumptions and limiting conditions, and certifica- tions. The appraiser must, at a minimum: 1. Perform a complete visual inspection of the exte- rior areas of the subject property from at least the street. 2. Inspect the neighborhood. 3. Inspect each of the comparable sales from at least the street. 4. Research, verify, and analyze data from reliable public and/or private sources. 5. Report his or her analysis, opinions, and conclu- sions in this appraisal report. The appraiser must be able to obtain adequate infor- mation about the physical characteristics of the sub- ject property from the exterior-only inspection and reliable public and/or private sources to perform this appraisal. The appraiser should use the same type of data sources that he or she uses for comparable sales such as, but not limited to, multiple listing ser- vices, tax and assessment records, prior inspections, appraisal files, and information provided by the prop- erty owner. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and all comparables that the appraiser used. clear, descriptive photographs in black and white or color that show the front of the subject property, and are appropriately identified. Photographs must be originals that are produced either by photogra- phy or electronic imaging. any other data as an attachment or addendum to the appraisal report form that are necessary to provide an adequately supported opinion of market value. Individual Condominium Unit Appraisal Report – Fannie Mae Form 1073/Freddie Mac Form 465 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/1073.pdf • • • Use. This report form is designed to report an appraisal of a unit in a condominium project or a con- dominium unit in a PUD based on an interior and exterior inspection of the subject property. Modifications, additions, or deletions. Modifi­ cations, additions, or deletions are not permitted to the intended use, intended user, definition of mar- ket value, or assumptions and limiting conditions. Based on the complexity of this appraisal assign- ment, the appraiser may expand the scope of work to include any additional research or analysis necessary. Modifications or deletions to the certifications are not permitted. However, additional certifications that do not constitute material alterations to this appraisal report are permitted, such as those required by law or those related to the appraiser’s continuing education or membership in an appraisal organization. Scope of work. The complexity of this appraisal assignment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assumptions and limiting conditions, and certifica- tions. The appraiser must, at a minimum: 1. Perform a complete visual inspection of the inte- rior and exterior areas of the subject unit. 2. Inspect and analyze the condominium project. 3. Inspect the neighborhood. 4. Inspect each of the comparable sales from at least the street. 5. Research, verify, and analyze data from reliable public and/or private sources. 6. Report their analysis, opinions, and conclusions in this appraisal report. The condominium is classified as a new project or an established project. A new project includes new units and recently converted units. For new projects, the appraiser must compare the subject property to other properties in its general market area as well as to properties within the subject project. This com- parison should demonstrate market acceptance of new developments and the properties within them. The appraiser should select one comparable sale from the subject project, one comparable sale from outside the subject project, and one other comparable sale, which can be from inside or outside of the subject project. The appraiser should keep in mind that resales from within the subject project are preferable to sales from outside the project as long as the developer or builder of the subject property is not involved in the transac- tions. For established projects, the appraiser should use comparable sales from within the subject project if
  • 70. 66     Module 8 there are any available. Resale activity from within the subject project should be the best indicator of value for properties in that project. If the appraiser uses sales of comparable properties that are located outside of the subject neighborhood, he or she must include an explanation with the analysis. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and of all comparables that the appraiser used. a sketch of the subject unit that must indicate inte- rior perimeter unit dimensions rather than exte- rior building dimensions. The appraiser must also include calculations to show how he or she arrived at the estimate for gross living area; however, for a unit in a condominium project, the appraiser may rely on the dimensions and estimate for gross liv- ing area that is shown on the plat. In such cases, the appraiser does not need to provide a sketch of the unit as long as he or she includes a copy of the plat with the appraisal report. A floor plan sketch that indicates the dimensions is required instead of the exterior building sketch or unit sketch if the floor plan is atypical or functionally obsolete. clear, descriptive photographs in black and white or color that show the front, back, and street scene of the subject property, and that are appropriately identified. Photographs must be originals that are produced either by photography or electronic imaging. clear, descriptive photographs in black and white or color that show the front of each comparable sale and that are appropriately identified. Photographs should be originals that are produced by photogra- phy or electronic imaging. Copies of photographs from a multiple listing service or from the apprais- er’s files are acceptable if they are clear and descrip- tive. any other data as an attachment or addendum to the appraisal report form that are necessary to provide an adequately supported opinion of market value. Exterior-Only Inspection Individual Condominium Unit Appraisal Report – Fannie Mae Form 1075/Freddie Mac Form 466 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/1075.pdf Use. This report form is designed to report an appraisal of a unit in a condominium project or a con- dominium unit in a PUD based on an exterior-only inspection of the subject property from at least the street. • • • • • Modifications, additions, or deletions. Modifi­ cations, additions, or deletions are not permitted to the intended use, intended user, definition of mar- ket value, or assumptions and limiting conditions. Based on the complexity of this appraisal assign- ment, the appraiser may expand the scope of work to include any additional research or analysis necessary. Modifications or deletions to the certifications are not permitted. However, additional certifications that do not constitute material alterations to this appraisal report are permitted, such as those required by law or those related to the appraiser’s continuing education or membership in an appraisal organization. Scope of work. The complexity of this appraisal assign­ ment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assump- tions and limiting conditions, and certifications. The appraiser must, at a minimum: 1. Perform a complete visual inspection of the exte- rior areas of the subject property from at least the street. 2. Inspect and analyze the condominium project. 3. Inspect the neighborhood. 4. Inspect each of the comparable sales from at least the street. 5. Research, verify, and analyze data from reliable public and/or private sources. 6. Report their analysis, opinions, and conclusions in this appraisal report. The appraiser must be able to obtain adequate infor- mation about the physical characteristics of the sub- ject property from the exterior-only inspection and reliable public and/or private sources to perform this appraisal. The appraiser should use the same type of data sources that he or she uses for comparable sales such as, but not limited to, multiple listing ser- vices, tax and assessment records, prior inspections, appraisal files, and information provided by the prop- erty owner. For new projects, the appraiser must compare the subject property to other properties in its general market area as well as to properties within the subject project. This comparison should demonstrate market acceptance of new developments and the properties within them. The appraiser should select one com- parable sale from the subject project, one comparable sale from outside the subject project, and one other comparable sale, which can be from inside or outside of the subject project. The appraiser should keep in mind that resales from within the subject project are preferable to sales from outside the project as long as the developer or builder of the subject property is not involved in the transactions.
  • 71. New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms     67 For established projects, the appraiser should use comparable sales from within the subject project if there are any available. Resale activity from within the subject project should be the best indicator of value for properties in that project. If the appraiser uses sales of comparable properties that are located outside of the subject neighborhood, he or she must include an explanation with the analysis. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and of all comparables that the appraiser used. clear, descriptive photographs in black and white or color that show the front of the subject property, and that are appropriately identified. Photographs must be originals that are produced either by pho- tography or electronic imaging. any other data as an attachment or addendum to the appraisal report form that are necessary to provide an adequately supported opinion of market value. Individual Cooperative Interest Appraisal Report – Fannie MaeForm 2090 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/2090.pdf Use. This report form is designed to report an appraisal of the cooperative interest, which includes the cooperative shares or other evidence of an own- ership interest in the cooperative corporation and the accompanying occupancy rights, in a cooperative project or the cooperative interest in a PUD based on an interior and exterior inspection of the subject property. Modifications, additions, or deletions. Modifi­ cations, additions, or deletions are not permitted to the intended use, intended user, definition of mar- ket value, or assumptions and limiting conditions. Based on the complexity of this appraisal assign- ment, the appraiser may expand the scope of work to include any additional research or analysis necessary. Modifications or deletions to the certifications are not permitted. However, additional certifications that do not constitute material alterations to this appraisal report are permitted, such as those required by law or those related to the appraiser’s continuing education or membership in an appraisal organization. Scope of work. The complexity of this appraisal assign­ ment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assump- tions and limiting conditions, and certifications. The appraiser must, at a minimum: • • • 1. Perform a complete visual inspection of the inte- rior and exterior areas of the subject unit. 2. Inspect and analyze the cooperative project. 3. Inspect the neighborhood. 4. Inspect each of the comparable sales from at least the street. 5. Research, verify, and analyze data from reliable public and/or private sources. 6. Report their analysis, opinions, and conclusions in this appraisal report. For units in new or recently converted cooperative projects, the appraiser must compare the subject prop- erty to other properties in its general market area as well as to properties within the subject project. This comparison should demonstrate market acceptance of new developments and the properties within them. The appraiser should select one comparable sale from the subject project, one comparable sale from out- side the subject project, and one other comparable sale, which can be from inside or outside of the sub- ject project. The appraiser should keep in mind that resales from within the subject project are preferable to sales from outside the project as long as the devel- oper or builder of the subject property is not involved in the transactions. For established cooperative projects, the appraiser should use comparable sales from within the subject project if there are any available. Resale activity from within the subject project should be the best indicator of value for properties in that project. If the appraiser uses sales of comparable properties that are located outside of the subject neighborhood, he or she must include an explanation with the analysis. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and of all comparables that the appraiser used. a sketch of the subject unit that must indicate inte- rior perimeter unit dimensions rather than exte- rior building dimensions. The appraiser must also include calculations to show how he or she arrived at the estimate for gross living area; however, for a unit in a cooperative project, the appraiser may rely on the dimensions and estimate for gross living area that are shown on the plat. In such cases, the appraiser does not need to provide a sketch of the unit as long as he or she includes a copy of the plat with the appraisal report. A floor plan sketch that indicates the dimensions is required instead of the exterior building sketch or unit sketch if the floor plan is atypical or functionally obsolete. clear, descriptive photographs in black and white or color that show the front, back, and street scene of the subject property, and that are appropriately • • •
  • 72. 68     Module 8 identified. Photographs must be originals that are produced either by photography or electronic imaging. clear, descriptive photographs in black and white or color that show the front of each comparable sale and are appropriately identified. Photographs should be originals that are produced by photography or electronic imaging. Copies of photographs from a multiple listing service or from the appraiser’s files are acceptable if they are clear and descriptive. any other data as an attachment or addendum to the appraisal report form that are necessary to provide an adequately supported opinion of market value. Exterior-Only Inspection Individual Cooperative Interest Appraisal Report – Fannie Mae Form 2095 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/2095.pdf Use. This report form is designed to report an appraisal of the cooperative interest and the accompa- nying occupancy rights in a cooperative project or the cooperative interest in a PUD. Modifications, additions, or deletions. Modifi­ cations, additions, or deletions are not permitted to the intended use, intended user, definition of mar- ket value, or assumptions and limiting conditions. Based on the complexity of this appraisal assign- ment, the appraiser may expand the scope of work to include any additional research or analysis necessary. Modifications or deletions to the certifications are not permitted. However, additional certifications that do not constitute material alterations to this appraisal report are permitted, such as those required by law or those related to the appraiser’s continuing education or membership in an appraisal organization. Scope of work. The complexity of this appraisal assign­ ment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assump- tions and limiting conditions, and certifications. The appraiser must, at a minimum: 1. Perform a visual inspection of the exterior areas of the subject unit from at least the street. 2. Inspect and analyze the cooperative project. 3. Inspect the neighborhood. 4. Inspect each of the comparable sales from at least the street. 5. Research, verify, and analyze data from reliable public and/or private sources. 6. Report their analysis, opinions, and conclusions in this appraisal report. • • For units in new or recently converted cooperative projects, the appraiser must compare the subject prop- erty to other properties in its general market area as well as to properties within the subject project. This comparison should demonstrate market acceptance of new developments and the properties within them. The appraiser should select one comparable sale from the subject project, one comparable sale from out- side the subject project, and one other comparable sale, which can be from inside or outside of the sub- ject project. The appraiser should keep in mind that resales from within the subject project are preferable to sales from outside the project as long as the devel- oper or builder of the subject property is not involved in the transactions. For established cooperative projects, the appraiser should use comparable sales from within the subject project if there are any available. Resale activity from within the subject project should be the best indicator of value for properties in that project. If the appraiser uses sales of comparable properties that are located outside of the subject neighborhood, he or she must include an explanation with the analysis. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and of all comparables that the appraiser uses. clear, descriptive photographs in black and white or color that show the front of the subject property, and are appropriately identified. Photographs must be originals that are produced either by photogra- phy or electronic imaging. any other data as an attachment or addendum to the appraisal report form that are necessary to provide an adequately supported opinion of market value. Small Residential Income Property Appraisal – Fannie Mae Form 1025/Freddie Mac 72 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/1025.pdf Use. This report form is designed to report an appraisal of a 2- to 4-unit property, including a 2- to 4-unit property in a PUD. A 2- to 4-unit prop- erty located in either a condominium or cooperative project requires the appraiser to inspect the project and complete the project information section of the Individual Condominium Unit Appraisal Report or the Individual Cooperative Interest Appraisal Report and attach it as an addendum to this report. Modifications, additions, or deletions. Modifi­ cations, additions, or deletions are not permitted to the intended use, intended user, definition of mar- • • •
  • 73. New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms     69 ket value, or assumptions and limiting conditions. Based on the complexity of this appraisal assign- ment, the appraiser may expand the scope of work to include any additional research or analysis necessary. Modifications or deletions to the certifications are not permitted. However, additional certifications that do not constitute material alterations to this appraisal report are permitted, such as those required by law or those related to the appraiser’s continuing education or membership in an appraisal organization. Scope of work. The complexity of this appraisal assignment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assumptions and limiting conditions, and certifica- tions. The appraiser must, at a minimum: 1. Perform a visual inspection of the interior and exterior areas of the subject property. 2. Inspect the neighborhood. 3. Inspect each of the comparable sales from at least the street. 4. Research, verify, and analyze data from reliable public and/or private sources. 5. Report their analysis, opinions, and conclusions in this appraisal report. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and of all comparables that the appraiser used. an exterior building sketch of the improvements that indicates the dimensions. The appraiser must also include calculations to show how he or she arrived at the estimate for gross building area. A floor plan sketch that indicates the dimensions is required instead of the exterior building sketch if the floor plan is atypical or functionally obsolete. an operating income statement Fannie Mae Form 216 or a similar cash flow and operating income statement, if the property is an investment prop- erty including a 2- to 4-family property in which the borrower will occupy 1 unit as a principal resi- dence. The statement may be prepared by either the borrower or the appraiser. When the borrower prepares Fannie Mae Form 216, the appraiser’s comments on the reasonableness of the projected operating income must be included on the form. When the appraiser prepares Form 216, the lender must make sure the appraiser has operating state- ments; expense statements related to mortgage insurance premiums, owners’ association dues, leasehold payments, or subordinate financing pay- ments; and any other pertinent information related to the property. • • • clear, descriptive photographs in black and white or color that show the front, back, and street scene of the subject property, and that are appropriately identified. Photographs must be originals that are produced either by photography or electronic imaging;. clear, descriptive photographs in black and white or color that show the front of each comparable sale and are appropriately identified. Photographs should be originals that are produced by photogra- phy or electronic imaging. Copies of photographs from a multiple listing service or from the apprais- er’s files are acceptable if they are clear and descrip- tive. any other data as an attachment or addendum to the appraisal report form that are necessary to provide an adequately supported opinion of market value. Unit Residential Appraisal Field Review Report – Fannie Mae Form 2000/Freddie Mac Form 1032 (03/05) www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/2000.pdf Use. This report form is designed for lenders to spot-check appraisals as part of their quality control program. This field review is intended to provide the lender/client with an opinion on the accuracy of the appraisal report under review. Scope of work. The complexity of this appraisal assignment and the reporting requirements of this appraisal report form define the scope of work. This includes the definition of market value, statement of assumptions and limiting conditions, and certifica- tions. The appraiser must, at a minimum: 1. Read the entire appraisal report under review. 2. Perform a visual inspection of the exterior areas of the subject property from at least the street. 3. Inspect the neighborhood. 4. Inspect each of the comparable sales from at least the street. 5. Perform data research and analysis to determine the appropriateness and accuracy of the data in the appraisal report. 6. Research, verify, and analyze data from reliable public and/or private sources. 7. Determine the accuracy of the opinion of value. 8. Assume the property condition reported in the appraisal report is accurate unless there is evidence to the contrary. If the review appraiser determines that the opinion of value in the report under review is not accurate, then he or she is required to provide an opinion of market • • •
  • 74. 70     Module 8 value. The appraiser must present additional data that has been researched, verified, and analyzed to produce an accurate opinion of value in accordance with the applicable sections of Standard 1 of the USPAP. Required exhibits. The required exhibits include: a street map that shows the location of the subject property and of all comparables included in the appraisal report under review and any additional comparable sales provided by the review appraiser. clear, descriptive photographs in black and white or color that show the front, back, and a street scene of the subject property, and that are appropriately identified. Photographs must be originals that are produced either by photography or electronic imaging. clear, descriptive photographs in black and white or color that show the front of each comparable sale included in the appraisal report under review and any additional comparable sales described in the appraisal field review report. Generally, pho- tographs should be originals that are produced by photography or electronic imaging; however, cop- ies of photographs from a multiple listing service or from the appraiser’s files are acceptable if they are clear and descriptive. www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/2000.pdf Table 8.1 compares the old form numbers to the new form numbers and usage. A FINAL NOTE The revised appraisal forms offer additional consis- tency among industry participants that streamlines the • • • process for lenders and appraisers. The forms have expanded comment areas and sections to report the sales and listing histories of both the subject property and comparable sales. The forms feature a single use for each form, a stan- dardized format across all the forms, and expanded comment areas. However, reporting requirements are more stringent, the preparation time could be lengthened, and from the appraiser’s perspective, their potential liability to third parties is increased. RESOURCES Fannie Mae’s FAQs for the Revised Property and Appraisal Report Forms (November 1, 2005) www.efanniemae.com/sf/formsdocs/forms/pdf/ sellingtrans/appraisalfaqs.pdf Resolution of the Association of Appraiser Regulatory Officials dated October 10, 2005 http://aaro.net/pdf/AARO_2005-10-10_FNMA_ Resolution.pdf Florida Real Estate Appraisal Board www.myflorida.com/dbpr/re/freab_welcome.shtml Fannie Mae Announcement 05-02 www.efanniemae.com/sf/guides/ssg/annltrs/pdf/ 2005/05-02.pdf Fannie Mae Forms www.efanniemae.com/sf/formsdocs/forms/ Table 8.1: Comparison of New and Old Forms Property Type Old Fannie Mae # Old Freddie Mac # Inspection Type March 2005 Fannie Mae # March 2005 Freddie Mac # Single Family/PUD 1004 70 Interior/Exterior 1004 70 Single Family 2055 2055 Interior/Exterior 1004 70 Single Family 2055 2055 Exterior-only 2055 2055 Condominium Unit 1073 465 Interior/Exterior 1073 465 Condominium Unit 2055 2055 Interior/Exterior 1073 465 Condominium Unit 2055 2055 Exterior-only 1075 466 Cooperative Unit 1075 NA Interior/Exterior 2090 NA Cooperative Unit 2095 NA Exterior-only 2095 NA 2-4 Units 1025 72 Interior/Exterior 1025 72 Manufactured Home 1004 70/465 Interior/Exterior 1004C 70B Source: Compiled by the author.
  • 75. New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms     71 1. The Fannie Mae form 1004 with a revised date of March 2005 is required for a: a. cooperative unit. b. 2-4 unit property. c. 1-unit property or 1-unit property plus an accessory unit, including a unit in a PUD. d. condominium unit. 2. Fannie Mae’s primary objective in revising their report forms was to more clearly communicate their expectation for the property appraisal and reporting processes, to help the appraisers comply with those expectations, to clarify the appraiser’s accountability for the quality of their work to those who rely on it, and to: a. lengthen the reporting process. b. help appraisers comply with the Uniform Standards of Professional Accounting Practices. c. help appraisers earn additional income through lengthened reporting requirements. d. help appraisers comply with the Uniform Standards of Professional Appraisal Practice. 3. The Fannie Mae form 2055 requires an: a. interior and exterior property inspection of the subject property. b. exterior only property inspection from at least the street of the subject property. c. interior only property inspection of the subject property. d. interior only property inspection of the comparables used. 4. The 3 new Fannie Mae appraisal and property report forms are: a. 1004C, 1004B, and 2055. b. 1004C, 1004D, and 200B. c. 1004C, 1004D, and 2000A. d. 1004, 1004D, and 2000A. 5. The expanded comment areas and sections on the new and revised forms: a. allow appraisers to report sales and listing histories of both the subject property and the comparable sales. b. are extra work for the appraisers. c. have caused a lot of controversy for appraisers. d. allow appraisers to report sales of comparable sales only. 6. The effective use of the new and revised appraisal forms dated March 2005 is: a. January 1, 2006 for Freddie Mac. b. November 1, 2005 for Freddie Mac. c. January 1, 2006 for Fannie Mae. d. November 1, 2006 for Freddie Mac. ANSWERS: 1)c2)d3)b4)c5)a6)a M O D U L E REVIE W E X ERCISES Use the exercise questions to review the module material. The answers are found on the bottom of the next page.