14 Hour Mortgage Broker 2007 2008
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14 Hour Mortgage Broker 2007 2008

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14 Hour Mortgage Broker 2007 2008 14 Hour Mortgage Broker 2007 2008 Document Transcript

  • Mortgage Brokering/Lending14-Hour Continuing Education Course 2 0 0 7- 2 0 0 8 E D i t i o n
  • 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, Presidentii Bert Rodgers Schools of Real Estate, Inc.
  • table of Contents 14-Hour MorTGAGE BroKErING/LENDING CoNTINuING EDuCATIoN CoursEFOuNDER w MODULE 1 Bert Rodgers Florida Mortgage Brokerage andPRESIDENT Lori J. Rodgers Lending Act Rules and Regulations | 1ADMINISTRATIVE VICEPRESIDENT William E. Giffard w MODULE 2DIRECTOR OF OPERATIONS Credit Scores and Credit Scoring | 17 Tom HarnerDIRECTOR OFINFORMATION SYSTEMS w MODULE 3 Alison M. HarnerDIRECTOR OF FINANCE Exotic and Nontraditional Mortgages | 23 Aaron PulonePROjECT MANAgERS w MODULE 4 Valerie Churchillo Lisa Lacey Subprime Loans and PrepaymentINSTRuCTOR Penalties | 31 Janine SpiegelmanPROjECT COORDINATORS Michelle Headley w MODULE 5 Jerry Schmitt Lack of Credit DocumentationPRODuCT SuPPORT MANAgER Kelli Finnigan Promotes Mortgage Fraud | 39STuDENT SERVICESSuPERVISOR w MODULE 6 Patti PasquiniSTuDENT SERVICES Updates on Flood and Hazard Insurance | 45REPRESENTATIVES Barbara Dolnick Anthony Fasciano w MODULE 7 Colletta Finnigan Mark Forsman Affordable Housing | 55 Jenncie Grove Laraine Jansen Mary Killoran w MODULE 8 Shirley Samson Kayla Smillie New and Updated Fannie Mae/Freddie Mac Christopher Smith Roman Vizvary Appraisal and Property Report Forms | 61TYPESETTINg Wild DezignPRINTINg Registration/Affidavit Form Action Printing
  • Author Biography 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 Americaiv Bert Rodgers Schools of Real Estate, Inc.
  • MODULE 1 Florida Mortgage brokerage and Lending act rules and regulations Learning ObjectivesAfter completing this module, you should be able to: 1. Summarize the changes made to Chapter 494 6. Identify the prohibited practices pursuant to F.S. effective October 1, 2006. Chapter 494. 2. List the changes to Chapter 69V-40 Florida 7. Explain the purpose for the enactment of the Administrative Code made through 2004. Florida Fair Lending Act. 3. Summarize the organizational structure of 8. Identify the types of transactions covered by the Florida Department of Financial Services, the Florida Fair Lending Act. including the Financial Services Commission 9. Define a high-cost home loan. and the Office of Financial Regulation. 10. Identify the acts prohibited by the Florida Fair 4. Explain the powers and duties of the Financial Lending Act. Services Commission and the Office of 11. Identify the disclosure requirements of the Financial Regulation. Florida Fair Lending Act. 5. Explain the penalties, which could be imposed 12. Explain the enforcement and penalties of any for a violation of Chapter 494, F.S. violation of the Florida Fair Lending Act.intrODUctiOnThe Department of Financial Services regulates serves as agency head for the Office of Financialmortgage broker individuals (MB), mortgage broker- Regulation (OFR or Office) and the Office ofage businesses (MBB), mortgage lenders (ML), and Insurance Regulation (OIR). The commission iscorrespondent mortgage lenders (CL) by the use of composed of the governor and Cabinet. The com-Florida Statutes (F.S.) and the Florida Administrative mission appoints the commissioner of the OFR andCode (F.A.C.). Chapter 494, F.S., is known as the the commissioner of the OIR. Although both officesFlorida Mortgage Brokerage and Mortgage Lending are administratively housed within the DepartmentAct Rules and Regulations. Chapter 494 originally of Financial Services, they report directly to thebecame effective in October 1991, and several sig- Financial Services Commission, headed by the newlynificant amendments have been made since 1991. elected Chief Financial Officer, Alex Sink. The OfficeChapter 69V-40 of the Florida Administrative of Financial Regulation has offices located in Miami,Code (formerly Chapter 3D-40 F.A.C.) is called Fort Lauderdale, West Palm Beach, Tampa, Orlando,Rules Regulation Mortgage Brokers. Certain minor Jacksonville, Pensacola, and Fort Myers. The regionalchanges to Chapter 69V-40 were made effective on offices are primarily responsible for conducting exam-August 2, 2002, and a few minor amendments were inations to ensure regulatory compliance by financialmade between 2003 and 2004. The purpose of this institutions and financial service companies.module is to review Florida mortgage brokerage rules The Office is dedicated to safeguarding the privateand regulations including changes effective October financial interests of the public by licensing, char-1, 2006. tering, examining, and regulating financial institu-In 2002, legislation placed the regulation of bank- tions and financial service companies in the Stateing, securities, and insurance under two appointed of Florida. The Office strives to protect consumersofficials who are selected by the Financial Services from financial fraud while preserving the integrityCommission. The Financial Services Commission of Florida’s markets and financial service industries.© 2007 Bert Rodgers Schools of Real Estate, Inc. 1
  • 2 Module 1This is the Office’s mission statement found at recent cHanges in FLOriDa statUtes regULating MOrtgage brOKerage www.flofr.com/Director/abouttheoffice.htm anD MOrtgage LenDing This section discusses the more significant changes inWithin the Office are 2 Divisions. The first is the the Florida Statute Chapter 494 regulating mortgageDivision of Financial Institutions. This division brokerage and mortgage lending effective October 1,licenses, examines, and regulates all state-authorized 2006.or state-chartered financial institutions to ensure theyoperate in a safe and sound manner and in compliance NEWwith applicable statutes and rules. Those institutions Definitioninclude commercial banks, credit card banks, creditunions, non-deposit trust companies, savings banks, Control person means an individual, partnership,savings and loans, and international bank offices. corporation, trust, or other organization that possesses the power, directly or indirectly, to direct the man-The second division within the Office is the Division agement or policies of a company, whether throughof Securities and Finance. Within this division are ownership of securities, by contract, or otherwise.three Bureaus— the Bureau of Financial Regulation; A person is presumed to control a company if, withthe Bureau of Securities Regulation; and the Bureau respect to a particular company, that person:of Regulatory Review. The Bureau of FinanceRegulation regulates retail installment sales busi- (a) Is a director, general partner, or officer exercisingnesses, consumer finance companies, mortgage bro- executive responsibility or having similar status orkers and lenders, collection agencies, and money functions;transmitters. The bureau provides consumer protec- (b) Directly or indirectly may vote 10 percent or moretion from illegal or improper activities performed by of a class of voting securities or sell or direct thethese companies. The Bureau of Securities Regulation sale of 10 percent or more of a class of voting secu-protects the public from investment and securities rities; orfraud. The Bureau of Regulatory Review reviews all (c) In the case of a partnership, may receive upon dis-applications for a financial services firm or a securi- solution or has contributed 10 percent or more ofties firm, reviews individual applications, and either the capital (Chapter 494.001(9)(a-c), F.S.).approves, places licensing restrictions, or denies licen-sure based upon its findings (See Figure 1.1). Office of Financial Regulation Office of Financial regulation Flow chart Commissioner Financial Regulation Chief, Financial Director, Cabinet & General Counsel Inspector General Investigations Legislative Affairs Director of Deputy Commissioner Auditing Financial Regulation Director Director Director Division of Financial Division of Securities Division of Finance Institutions Chief, Bank Chief, Bank Chief, Credit Union Chief, Securities Chief, Regulatory Chief, Finance Chief, Money Chief, Regulatory Regulation District I Regulation District II Regulation Regulation Review Regulation Transmitter ReviewFigure 1.1 Source: www.flofr.com/Director/OFRorgchart.pdf
  • Florida Mortgage Brokerage and Lending Act Rules and Regulations  NEW NEWPowers and Duties of the commission and Mortgage brokerage business branch Offices;Office Principal Place of business requirementsAllows the Office to require the electronic filing Deleted Chapter 494.0036(3), F.S. and Chapterof applications, renewals, and fees, unless granted 494.0039(3), F.S. Eliminated from the statute thea waiver by OFR due to a hardship. Prior to this requirement to display main office, branch office, andchange, the only license type that could file an individual licenses.application online was a mortgage broker (Chapter494.0011(2)(6), F.S.). NEW requirements of Licensees NEW Provides that each licensee shall report any changebooks, accounts, and records; Maintenance; in the principal broker, principal representative, offi-examinations by the Office cers, partners, members, joint venturers, directors, control persons or any individual who is the ultimateAuthorizes the commission to adopt rules for the equitable owner of 10% or greater interest (Chapterrequirements for the destruction of records main- 494.004(6). F.S.).tained by licensees after the retention period hasexpired ( Chapter 494.0016(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 NEW the OFR unless a waiver has been granted (ChapterMortgage business schools 494.004(6)(a-d), F.S.).Requires permitted mortgage business schools toelectronically report to the Office the names of pupils NEWwho have successfully completed required trainingcourses (Chapter 494.0029(4), F.S.). administrative Penalties and Fines; License violations Authorizes disciplinary action if fees are paid with a bad NEW check. (Chapters 494.0041(2)(s) and 494.0072(2)(s), F.S.).Licensure as a Mortgage brokerage business; Provides grounds for disciplinary action when a finalMortgage broker’s License judgment is entered against an applicant or licensee inProvides that applications are not deemed received a civil action upon grounds of fraud, embezzlement,until all required fees are received (Chapters misrepresentation, or deceit (Chapters 494.0041(2)(t)494.0031(2)(a); 494.0033(2)(c), F.S.). and 494.0072(2)(t), F.S.). Provides grounds for disciplinary action when action is taken by other federal and state regulatory organiza- NEW tions located in or outside the State of Florida involvingrenewal of Mortgage brokerage business securities, insurance, real estate, mortgage brokers andLicense or branch Office License lenders, or other related or similar industries (ChaptersThe license for a branch office must be renewed in 494.0041(2)(u)1.2. and 494.0072(2)(u)1.2.,F.S.).conjunction with the renewal of the mortgage broker-age business license (Chapter 494.0032(1)). NEW Mortgage Lender’s License requirements; NEW correspondent Mortgage Lender’s LicenseMortgage broker’s License requirements; savings clause; branch OfficesAllows the Office to contract with a third party ven- Provides that applications are not deemed receiveddor to administer the mortgage broker test. This will until all required fees are received (Chaptersallow the test to be conducted electronically at mul- 494.0061(2)(b), 494.0062(2)(b), 494.0065(3)(5)(b) andtiple locations several times a week versus the old 494.0066(2), F.S.).once a month process at limited locations (Chapter Audited financial statements of all licensed lend-494.0033(2)(b), F.S.). ers have to be in accordance with United States
  • 4 Module 1generally accepted accounting principles (Chapters the power to direct management, ownership or oth-494.0061(2)(c), 494.0062(2)(c) and 494.0065(2)(5)(c), erwise shall require an application to be submitted toF.S.). the OFR unless a waiver has been granted. (Chapter 494.0067(4)(a-d),F.S).Provides under certain conditions that existingprincipal representatives can be grandfathered in changes between 2002 and 2004 to the ruleswithout class or testing requirements (Chapters of the Florida administrative code494.0061(2)(f)(8-9) and 494.0062(2)(f)(11-12) and494.0065(4)(c)1.2.(10), F.S.). 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- NEW erences to the Department of Banking and Financerenewal of Mortgage Lender’s License; were replaced with the Financial Services Commissionbranch Office License renewal and the Office of Financial Regulation, dependingChapter 494.0064(1)(b), F.S. deleted. Eliminated the upon the specific division of responsibility betweenrequirement to report the continuing education of the departments. See Table 1.1loan associates when renewing a lender’s license. To access any of the required forms, go to website and select the appropriate form. NEW www.flofr.com/licensing/MBlist.htmrequirements of Licensees Under chapters494.006-.0077 To access Chapter 494 online, go to www.Chapter 494.0067(1), F.S. deleted. Eliminated from leg.state.fl.us/Statutes/index.cfm?App_the statute the requirement to display main and mode=Display_Statute&URL=Ch0494/branch office licenses. titl0494.htm&StatuteYear=2006&Title=- >2006->Chapter%20494Provides that each licensee shall report any change inthe officers, partners, members, joint venturers, direc- To access the Florida Administrative Code,tors, or control persons. (Chapter 494.0067(4), F.S). Rules 69V-40, go to www.flofr.com/licensing/ RulesStatutes/Rule69V-40.htmProvides that a change of control whether through 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 69v-49.031(1) Provides that all applications for licensure as a mortgage bro- broker License ker must be filed with the OFR. The address is: Office of Financial regulation 200 East Gaines Street Tallahassee, Florida 299-075 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 $2.00. 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 69v-40.051 All applications for licensure as a mortgage brokerage busi- brokerage business License 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
  • Florida Mortgage Brokerage and Lending Act Rules and Regulations 5 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 $2 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 299-075. 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 69v-40.100 All references to the Department of Banking and Finance have in Ownership or control of saving been changed to the Office of Financial Regulation. The ap- clause Mortgage Lending 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 $2), were also made to this section. application Procedure for Mortgage 69v-40.200 The application form for licensure as a mortgage lender changed Lender License 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 $2 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 69v-40.205 The form for renewal and reactivation of a mortgage lender Lender License Pursuant to saving license is OFr-ML-r, and the form for renewal and reactivation of clause, and branch Office License a mortgage lender license pursuant to saving clause is OFr-ML- renewal and reactivation 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- 69v-40.220 Changed the applicable forms, processing fees, and references dent Mortgage Lender License 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 69v-40.225 Changed the applicable forms and references to the Office of License and branch Office License Financial Regulation. The renewal and reactivation form for renewal and reactivation 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 69v-40.240 Changed the application form and references to the Office of Lender or correspondent Mortgage Financial Regulation. The application form for mortgage lender Lender branch Office License 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.
  • 6 Module 1MOrtgage brOKerage License LaWChapter 494, F.S., is divided into five parts: Part I, General Provisions (494.001-494.00295); Part II, MortgageBrokers (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). Part i: generaL PrOvisiOns (494.001-494.00295)the Financial services commission • may, at intermittent periods, conduct examinationsAs introduced at the beginning of this module, the of any licensee or other person under the provi-Financial Services Commission serves as agency head sions of 494.001-494.0077 F.S.for the Office of Financial Regulation (OFR or Office) • may bring action through its own counsel in theand the Office of Insurance Regulation (OIR). OFR and name and on behalf of the state against any personOIR are administratively housed within the Depart- who has violated or is about to violate any provi-ment of Financial Services, headed by the Chief sion of 494.001-494.0077 F.S. or any rule of theFinancial Officer. The Office is responsible for con- commission or order of the Office issued underducting financial investigations into allegations of sus- 494.001-494.0077 F.S. to enjoin the person frompected illegal financial activities within its jurisdiction. continuing in or engaging in any act in furtherance of the violation.Powers and Duties of the commission and • has the power to issue and serve upon any personOffice an order to cease and desist and to take correctiveThe Office of Financial Regulation is responsible action whenever it has reason to believe the per-for the administration and enforcement of Chapter son is violating, has violated, or is about to violate494.001-494.0077, F.S. The Financial Services any provision of 494.001-494.0077 F.S., any ruleCommission may adopt rules pursuant to Chapters or order issued under 494.001-494.0077 F.S., or120.563(1), F.S and 120.54, F.S to implement any written agreement between the person and theChapters 494.001-494.0077, F.S. The Commission Office. All procedural matters relating to issuancemay adopt rules requiring electronic submission of and enforcement of such a cease and desist orderany forms, documents, or fees required by this act if are governed by the Administrative Procedure Act.such rules reasonably accommodate technological or • has the power to order the refund of any feefinancial hardship. The Commission may prescribe directly or indirectly assessed and charged on aby rule requirements and procedures for obtaining mortgage loan transaction which is unauthorizedan exemption due to a technological hardship. The or exceeds the maximum fee specifically authorizedCommission may also adopt rules to accept certifica- in 494.001-494.0077 F.S.tion of compliance with requirements of Chapter 494,F.S. in lieu of requiring submission of documents. • may prohibit the association by a mortgage brokerThe grant or denial of any license under this chapter business, or the employment by a mortgage lendermust be in accordance with Chapter 120.60, F.S. or correspondent mortgage lender, of any person who has engaged in a pattern of misconduct whileThe Office: an associate of a mortgage brokerage business or an• has the power to issue and to serve subpoenas and employee of a mortgage lender or correspondent subpoenas duces tecum to compel the attendance of mortgage lender. For the purpose of this subsec- witnesses and the production of all books, accounts, tion, the term “pattern of misconduct” means records, and other documents and materials rel- the commission of three or more violations of ss. evant to an examination or investigation. 494.001-494.0077 or the provisions of Chapter 494• or its duly authorized representative, has the power in effect prior to October 1, 1991, during any one to administer oaths and affirmations to any person. year period or any criminal conviction for violating ss. 494.001-494.0077 or the provisions of Chapter• may conduct an investigation of any person when- 494 in effect prior to October 1, 1991. ever the Office has reason to believe, either upon complaint or otherwise, that any violation of Penalties 494.001-494.0077 F.S. has been committed or is about to be committed. Chapter 494.0018 provides whoever knowingly vio-
  • Florida Mortgage Brokerage and Lending Act Rules and Regulations 7lates any provision of Chapters 494.0041(2)(e), (f), or course of business which operates as a fraud(g); 494.0072 (2)(e), (f), or (g); or 494.0025 (1), (2), upon any person in connection with the pur-(3), (4), or (5), is guilty of a felony of the third degree, chase or sale of any mortgage loan; orexcept that any person convicted of a violation of any (c) To obtain property by fraud, willful misrep-provision of 494.001-494.0077 F.S., in which viola- resentation of a future act, or false promise.tion the total value of money and property unlawfullyobtained exceeded $50,000 and there were five or more (5) In any matter within the jurisdiction of thevictims, is guilty of a felony of the first degree. All the Office, to knowingly and willfully falsify, con-violations are punishable as provided in Chapters ceal, or cover up by a trick, scheme, or device a775.082 F.S., 775.083 F.S., or 775.084 F.S. Each such material fact, make any false or fraudulent state-violation constitutes a separate offense. In addition, if ment or representation, or make or use any falsea mortgage transaction is made in violation of any pro- writing or document, knowing the same to con-vision of Chapters 494.001-494.0077 F.S., the person tain any false or fraudulent statement or entry.making the transaction and every licensee, director,or officer who participated in making the transaction (6) To violate 655.922(2) F.S., subject to 494.001-are jointly and severally liable to every party to the 494.0077 F.S.transaction in an action for damages incurred by theparty or parties. However, a person is not liable under (7) Who is required to be licensed under ss. 494.006this section upon showing that such person’s licens- - 494.0077, to fail to report to the Office theees, officers, and directors who participated in making failure to meet the net worth requirements ofthe transaction, if any, acted in good faith and with- 494.0061 F.S., 494.0062 F.S., or 494.0065 F.S.out knowledge and, with the exercise of due diligence, within 48 hours after the person’s knowledge ofcould not have known of the act committed in viola- such failure or within 48 hours after the persontion of Chapters 494.001-494.0077, F.S. should have known of such failure. (8) To pay a fee or commission in any mortgage loanProhibited Practices transaction to any person or entity other than aChapter 494.0025 F.S. provides that it is unlawful for mortgage brokerage business, mortgage lender,any person: or correspondent mortgage lender, operating under an active license, or a person exempt from (1) To act as a mortgage lender in this state without licensure under this chapter. a current, active license issued by the Office pur- suant to 494.006-494.0077, F.S. (9) To record a mortgage brokerage agreement or any other document, not rendered by a court (2) To act as a correspondent mortgage lender in of competent jurisdiction, which purports to this state without a current, active license issued by the Office pursuant to 494.006-494.0077, enforce the terms of the mortgage brokerage F.S. agreement. (3) To act as a mortgage broker in this state without (10) To use the name or logo of a financial institution, a current, active license issued by the Office pur- as defined in 655.005(1), F.S., or its affiliates or suant to 494.003-494.0043, F.S. subsidiaries when marketing or soliciting exist- ing or prospective customers if such marketing (4) In any practice or transaction or course of busi- materials are used without the written consent ness relating to the sale, purchase, negotiation, of the financial institution and in a manner that promotion, advertisement, or hypothecation of would lead a reasonable person to believe that mortgage transactions, directly or indirectly: the material or solicitation originated from, was (a) To knowingly or willingly employ any device, endorsed by, or is related to or the responsibility scheme, or artifice to defraud; of the financial institution or its affiliates or sub- (b) To engage in any transaction, practice, or sidiaries.
  •  Module 1 Part ii anD iii: MOrtgage brOKers anD MOrtgage LenDersAll the relevant changes made to Chapter 494, F.S. were discussed at the beginning of this module. Included hereis a brief recap of the changes to Chapter 494.003-494.0077, F.S.• Allows the Office to contract with a third party ven- principal representatives can be grandfathered in dor to administer the mortgage broker test. without class or testing requirements.• Provides that applications are not deemed received • Eliminates the requirement to display main and until all required fees are received. Authorizes dis- branch office licenses. ciplinary action if fees are paid with a bad check. • Eliminates the requirement to display individual• Provides that each licensee shall report any change mortgage broker licenses. in the principal broker, principal representative, • Eliminates the requirement to report the continu- officers, partners, members, joint venturers, direc- ing education of loan “Associates” when renewing tors, control persons or any individual who is the a lender’s license. ultimate equitable owner of 10% or greater inter- est. • Provides grounds for disciplinary action when a final judgment is entered against an applicant or• Provides that a change of control whether through licensee in a civil action upon grounds of fraud, the power to direct management, ownership or oth- embezzlement, misrepresentation, or deceit. erwise shall require an application to be submitted to OFR unless a waiver has been granted. • Provides grounds for disciplinary action when action is taken by other federal and state regula-• Audited financial statements of all licensed lend- tory organizations located in or outside the State of ers have to be in accordance with U.S. generally Florida involving securities, insurance, real estate, accepted accounting principles. and lending activities.• Provides under certain conditions that existing Part iv: FLOriDa Fair LenDing act abUsive MOrtgage LenDingIn 494.0078, F.S. the Florida Legislature found that: ate effectively for conventional mortgages, too many homeowners find themselves victims of overreach- “abusive mortgage lending has become a problem ing creditors who provide loans with unnecessarily in this state even though most high-cost home loans high costs and terms that are unnecessary to secure do not involve abusive mortgage practices. One of repayment of the loan. The Legislature finds that as the most common forms of abusive lending is the competition and self-regulation have not eliminated making of loans that are equity-based rather than the abusive terms from home-secured loans, the income-based. The financing of points and fees consumer protection provisions of this act are nec- in these loans provides immediate income to the essary to encourage fair lending.” originator and encourages creditors to repeatedly refinance home loans. As long as there is sufficient equity in the home, an abusive creditor benefits even DeFinitiOns if the borrower is unable to make the payments and Chapter 494.0079, F.S. sets forth the following defi- is forced to refinance. The financing of high points and fees causes the loss of equity in each refinanc- nitions. ing and often leads to foreclosure. Affliate: Any company that controls, is controlled by, Abusive lending has threatened the viability of or is in common control with another company, as set many communities and caused decreases in home forth in 12 U.S.C. 1841 et seq. and the regulations ownership. While the marketplace appears to oper- adopted thereunder.
  • Florida Mortgage Brokerage and Lending Act Rules and Regulations 9Annual percentage rate (APR): The annual percent- (B) the total points and fees payable by the con-age rate for the loan calculated according to the provi- sumer at or before closing will exceed thesions of 15 U.S.C. 1606 and the regulations adopted greater of—thereunder by the Federal Reserve Board. (i) 8 percent of the total loan amount; or (ii) $547.00, for the year 2007.Borrower: Any natural person obligated to repay a (2) (A) After the 2-year period beginning on theloan, including, but not limited to, a co-borrower, co- effective date of the regulations promulgatedsignor, or guarantor. under section 155 of the Riegle CommunityBridge loan: A loan with a maturity of less than 18 Development and Regulatory Improvementmonths that only requires the payment of interest Act of 1994, and no more frequently than bien-until such time as the entire unpaid balance is due and nially after the first increase or decrease underpayable. this subparagraph, the Board may by regula-Commission: The Financial Services Commission. tion increase or decrease the number of per- centage points specified in paragraph (1)(A),Office: The Office of Financial Regulation of the if the Board determines that the increase orcommission. decrease is—Lender: Any person who makes a high-cost home (i) consistent with the consumer protectionsloan or acts as a mortgage broker or lender, finance against abusive lending provided by thecompany, or retail installment seller with respect to a amendments made by subtitle B of title Ihigh-cost home loan, but shall not include any entity of the Riegle Community Developmentchartered by the United States Congress when engag- and Regulatory Improvement Act of 1994;ing in secondary market mortgage transactions as an andassignee or otherwise. (ii) warranted by the need for credit. (B) An increase or decrease under subparagraphResidential mortgage transaction: A transaction (A) may not result in the number of percent-in which a mortgage, deed of trust, purchase money age points referred to in subparagraph (A)security interest arising under an installment sales being—contract, or equivalent consensual security interest is (i) less that 8 percentage points; orcreated or retained against the consumer’s dwelling to (ii) greater than 12 percentage points.finance the acquisition or initial construction of such (C) In determining whether to increase or decreasedwelling. (15 U.S.C.) 1602(w) the number of percentage points referred to in subparagraph (A), the Board shall consultHigH-cOst HOMe LOans with representatives of consumers, including low-income consumers, and lenders.Definition (3) The amount specified in paragraph (1)(B)(ii) shall be adjusted annually on January 1 by the annualThe provisions of the Florida Fair Lending Act deal percentage change in the Consumer Price Index,primarily with high-cost home loans. as reported on June 1 of the year preceding suchHigh-cost home loans are defined by 15 U.S.C. adjustment.1602(aa), which provides in pertinent part as follows: (4) For purposes of paragraph (1)(B), points and fees(1) A mortgage referred to in this subsection means a shall include— consumer credit transaction that is secured by the (A) all items included in the finance charge, except consumer’s principal dwelling, other than a resi- interest or the time-price differential; dential mortgage transaction, a reverse mortgage (B) all compensation paid to mortgage brokers; transaction, or a transaction under an open end (C) each of the charges listed in section1605(e) of credit plan, if— this title (except an escrow for future payment (A) the annual percentage rate at consummation of taxes), unless— of the transaction will exceed by more than 10 (i) the charge is reasonable; percentage points the yield on Treasury secu- (ii) the creditor receives no direct or indirect rities having comparable periods of maturity compensation; and on the fifteenth day of the month immediately (iii) the charge is paid to a third party unaffili- preceding the month in which the application ated with the creditor; and for the extension of credit is received by the (D) such other charges as the Board determines to creditor; or be appropriate.
  • 10 Module 1PrOHibiteD acts required under the loan are consolidated and paid in advance from the loan proceeds providedChapter 494.00791,F.S. provides for prohibited acts to the borrower.involving high-cost loans. (6) Extending Credit Without Regard To The (1) Prepayment Penalties Payment Ability Of The Borrower (a) A high-cost home loan may not contain A lender making a high-cost home loan shall not terms that require a borrower to pay a pre- engage in any pattern or practice of extending payment penalty for paying all or part of the high-cost home loans to borrowers based upon loan principal before the date on which the the borrowers’ collateral without regard to the payment is due. borrowers’ ability to repay the loan, including (b) Notwithstanding paragraph (a), a lender the borrowers’ current and expected income, making a high-cost home loan may include current obligations, and employment. in the loan contract a prepayment fee or penalty, for up to the first 36 months after (7) Payments To A Home Contractor the date of consummation of the loan, if: A lender shall not make any payments to a con- 1. The borrower has also been offered a tractor under a home improvement contract choice of another product without a pre- from amounts of a high-cost home loan other payment penalty. than: 2. The borrower has been given, at least 3 (a) In the form of an instrument that is payable business days prior to the loan consum- to the borrower or jointly to the borrower mation, a written disclosure of the terms and the contractor; or of the prepayment fee or penalty by the (b) At the election of the borrower by a third- lender, including the benefit the bor- party escrow agent in accordance with terms rower will receive for accepting the pre- established in a written agreement signed by payment fee or penalty through either the borrower, the lender, and the contractor a reduced interest rate on the loan or prior to the date of payment. reduced points or fees. (8) Due-On-Demand Clause A high-cost home loan may not contain a provi- (2) Default Interest Rate sion that permits the lender, in its sole discre- A high-cost home loan may not provide for a tion, to call or accelerate the indebtedness. This higher interest rate after default on the loan. provision does not prohibit acceleration of the However, this prohibition does not apply to loan due to the borrower’s failure to abide by interest rate changes in a variable rate loan oth- the terms of the loan, or due to fraud or material erwise consistent with the provisions of the loan misrepresentation by the consumer in connec- documents, provided the change in interest rate tion with the loan. is not triggered by a default or the acceleration of the interest rate. (9) Refinancing Within an 18-Month Period (a) A lender, its affiliate, or an assignee shall not (3) Balloon Payments refinance any high-cost home loan to the A high-cost home loan having a term of less than same borrower within the first 18 months 10 years may not contain terms under which the of the loan when the refinancing does not aggregate amount of the regular periodic pay- have a reasonable benefit to the borrower ments would not fully amortize the outstanding considering all of the circumstances, includ- principal balance. However, this prohibition ing, but not limited to, the terms of both the does not apply when the payment schedule is new and refinanced loans, the cost of the adjusted to account for the seasonal or irregular new loan, and the borrower’s circumstances. income of the borrower or if the loan is a bridge (b) A lender or assignee shall not engage in loan. acts or practices to evade this requirement, (4) Negative Amortization including a pattern or practice of arrang- A high-cost home loan may not contain terms ing for the refinancing of the lender’s or under which the outstanding principal balance assignee’s own loans by affiliated or unaffili- will increase at any time over the course of the ated lenders or modifying a loan agreement, loan because the regular periodic payments do whether or not the existing loan is satisfied not cover the full amount of the interest due. and replaced by the new loan, and charging a fee. (5) Prepaid Payments A high-cost home loan may not include terms (10) Open-Ended Loans under which more than two periodic payments A lender shall not make any loan as an open-
  • Florida Mortgage Brokerage and Lending Act Rules and Regulations 11 ended loan in order to evade the provisions of to a borrower in substantially the following this act unless such open-ended loans meet the form: definition in 12 C.F.R. s. 226.2(a)(20). If you obtain this high-cost home loan, the lender will have a mortgage on your(11) Recommendation of Default home. You could lose your home and any A lender shall not recommend or encourage money you have put into it if you do not default on an existing loan or other debt prior meet your obligations under the loan. Mortgage loan rates and closing costs and to and in connection with the closing or planned fees vary based on many factors, includ- closing of a high-cost home loan that refinances ing your particular credit and financial all or any portion of such existing loan or debt. circumstances, your employment history, the loan-to-value requested, and the type(12) Prohibited Door-To-Door Loans of property that will secure your loan. The A high-cost home loan may not be made as a loan rate and fees could also vary based direct result of a potential or future lender or upon which lender or broker you select. its representative offering or selling a high-cost As a borrower, you should shop around home loan at the residence of a potential bor- and compare loan rates and fees. You should also consider consulting a quali- rower without a prearranged appointment with fied independent credit counselor or other the potential borrower or the expressed invita- experienced financial adviser regarding tion of the potential borrower. This subsection the rates, fees, and provisions of this mort- does not apply to mail solicitations that may be gage loan before you proceed. You should received by the potential borrower. contact the United States Department of Housing and Urban Development for a(13) Late Payment Fees list of credit counselors available in your A lender may not charge a late payment fee for area. You are not required to complete a high-cost home loan except as provided in this this agreement merely because you have received these disclosures or have signed subsection. A late payment fee: a loan application. Borrowing for the (a) may not be in excess of 5 percent of the purpose of debt consolidation can be an amount of the payment past due. appropriate financial management tool. (b) may only be assessed for a payment past due However, if you continue to incur sig- for 15 days or more. nificant new credit card charges or other (c) may not be charged more than once with debts after this high-cost home loan is closed and then experience financial dif- respect to a single late payment. If a late ficulties, you could lose your home and payment fee is deducted from a payment any equity you have in it if you do not made on the loan and such deduction causes meet your mortgage loan obligations. a subsequent default on a subsequent pay- Remember that property taxes and home- ment, no late payment fee may be imposed owners’ insurance are your responsibility. Not all lenders provide escrow services for such default. If a late payment fee has for these payments. You should ask your been imposed once with respect to a par- lender about these services. Also, your ticular late payment, no such fee shall be payments on existing debts contribute to imposed with respect to any future payment your credit rating. You should not accept which would have been timely and suffi- any advice to ignore your regular pay- cient, but for the previous default. ments to your existing creditors.(14) Modification or Deferral Fees (b) Annual percentage rate A lender may not charge a borrower any fees A lender making a high-cost home loan shall or other charges to modify, renew, extend, or disclose: amend a high-cost home loan or to defer any 1. In the case of a fixed mortgage, the payment due under the terms of a high-cost annual percentage rate and the amount home loan on a minimum of one modifica- of the regular monthly payment. tion, renewal, extension, or deferral per each 12 2. In the case of any other credit transac- months of the length of the loan. tion, the annual percentage rate, the amount of the regular monthly payment and the amount of any balloon paymentHigH-cOst LOan DiscLOsUres permitted under this section, a statementChapter 494.00792 F. S. provides: that the interest rate and monthly pay- (1) In addition to other disclosures required by law ment may increase, and the amount of and in conspicuous type: the maximum monthly payment based (a) Notice to borrower. A lender making a upon the maximum interest rate allowed high-cost home loan shall provide a notice pursuant to law.
  • 12 Module 1 (c) Notice to purchasers and assignees and Office are responsible for the administration and All high-cost home loans shall contain the enforcement of this act. The Commission may adopt following notice: rules pursuant to ss. 120.536(1) and 120.54 to imple- Notice: This is a mortgage subject to the ment this act. The Commission may adopt rules to provisions of the Florida Fair Lending Act. allow electronic submission of any forms, documents, Purchasers and assignees of this mortgage or fees required by this act. could be liable for all claims and defenses The Office: with respect to the mortgage which the borrower could assert against the creditor. • may conduct an investigation of any person when- ever the Office has reason to believe, upon com- (2) Timing of Disclosure plaint or otherwise, that any violation of the act has (a) The disclosure required by this subsection shall be given not less than 3 business days occurred. prior to the consummation of the high-cost • any person having reason to believe that a provision home loan. of this act has been violated may file a written com- (b) New disclosures are required when, after plaint with the Office setting forth the details of the disclosure is made, the lender making the alleged violation. high-cost home loan changes the terms of • may conduct examinations of any person to deter- the extension of credit, including if such mine compliance with this act. changes make the original disclosures inac- curate, unless new disclosures are provided • may bring action through its own counsel in the that meet the requirements of this section. name and on behalf of the state against any person (c) A lender may provide new disclosures pur- who has violated or is about to violate any provision suant to paragraph (b) by telephone, if: of this act or any rule or order issued under the act 1. The change is initiated by the borrower. to enjoin the person from continuing in or engag- 2. At the consummation of the high-cost ing in any act in furtherance of the violation. home loan: • in any injunctive proceeding, the court may issue a. The lender provides the disclosures in a subpoena or subpoenas duces tecum, requiring the writing to the borrower. attendance of any witnesses and the production of b. The lender and the borrower cer- any books, accounts, records, and other documents tify in writing that the new disclosures were provided by telephone no later and materials that appear necessary to the expedi- than 3 days prior to the consumma- tious resolution of the application for injunction. tion of the high-cost home loan. • may issue and serve upon any person an order to (d) A creditor must disclose to any high-cost cease and desist and to take corrective action when- home loan borrower the rights of the bor- ever it has reason to believe the person is violating, rower to rescind the high-cost home loan has violated, or is about to violate any provision within 3 business days pursuant to 15 U.S.C. of this act, or any written agreement between the s. 1635(a) and shall provide appropriate person and the Office. All procedural matters relat- forms for the borrower to exercise his or ing to issuance and enforcement of such cease and her right to rescission. The notice, forms, desist orders are governed by the Administrative and provisions thereof must be in accor- Procedure Act. dance with the requirements of 15 U.S.C. s. 1635(a). • 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 orregULatiOn OF tHe FLOriDa Fair separate offense, provided that the aggregate fineLenDing act for all violations of this act that could have beenThe Office of Financial Regulation and the Financial asserted at the time of the order imposing the fineServices Commission are responsible for the adminis- shall not exceed $500,000.tration and enforcement of The Florida Fair Lending Any violation of this act shall also be deemed to be aAct. Duties include investigations, examinations, violation of Chapter 494, Chapter 516, Chapter 520,injunctions, and orders. Chapter 655, Chapter 657, Chapter 658, Chapter 660, Chapter 663, Chapter 665, or Chapter 667. The com-Powers and Duties of the commission mission may adopt rules to enforce this subsection.and Office; investigations; examinations;injunctions; Orders enforcement of the Florida Fair Lending actChapter 494.00795, F.S. provides that the Commission Chapter 494.00796, F.S. provides:
  • Florida Mortgage Brokerage and Lending Act Rules and Regulations 1(1) Any person or the agent, officer, or other repre- cOncLUsiOn sentative of any person committing a material vio- In conclusion, it is important to be aware of current lation of the provisions of this act shall forfeit the rules and regulations governing the mortgage lend- entire interest charged in the high-cost home loan ing business and the extent to which they affect daily or contracted to be charged or received, and only practice. These rules and regulations apply to a wide the principal sum of such high-cost home loan range of topics, including licensure requirements, can be enforced in any court in this state, either at continuing education requirements, and penalties for law or in equity. violations of the rules. The Department of Financial(2) A creditor in a home loan who, when acting in Services is responsible for regulating the activities of good faith, fails to comply with the provisions of mortgage brokers, mortgage brokerage businesses, this act shall not be deemed to have violated this mortgage lenders, and correspondent mortgage lend- act if the creditor establishes that within 60 days ers by the use of Florida Statutes and the Florida after receiving any notice from the borrower of Administrative Code and, when necessary, for impos- the compliance failure, which compliance failure ing penalties on licensees found to be in violation. was not intentional and resulted from a bona fide error notwithstanding the maintenance of proce- resOUrces dures reasonably adapted to avoid such errors, the borrower has been notified of the compliance fail- To access any of the required forms, go to www.flofr. ure, appropriate restitution has been made to the com/licensing/MBlist.htm and select the appropri- borrower, and appropriate adjustments are made ate license type. to the loan. Bona fide errors shall include, but not To access Chapter 494 online, go to be limited to, clerical, calculation, computer mal- www.leg.state.fl.us/Statutes/index.cfm?App_ function and programming, and printing errors. mode=Display_Statute&URL=Ch0494/titl0494. An error of legal judgment with respect to a per- h t m & S t a t u t e Ye a r = 2 0 0 6 & T i t l e = - > 2 0 0 6 - > son’s obligations under this section is not a bona Chapter%20494 fide error. To access the Florida Administrative Code, Rules (3) The remedies provided in this section are cumu- 69V-40, go to www.flofr.com/licensing/Rules lative. Statutes/Rule69V-40.htm
  • 14 Module 1 MODULe revieW eXercises Use the exercise questions to review the module material. The answers are found on the bottom of the next page. 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. Transfer your answers to the space provided on the Answer Sheet.
  • Florida Mortgage Brokerage and Lending Act Rules and Regulations 157. 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. 1) b 2) c 3) c 4) b 5) a 6) d 7) d ANSWERS: Transfer your answers to the space provided on the Answer Sheet.
  • 16 Module 1
  • MODULE 2 credit scores and credit scoring Learning ObjectivesAfter completing this module, you should be able to: 1. Define the terms credit score and credit 3. Discuss what counts in a credit score, what scoring. can be done to raise a credit score, and how 2. List the consumer’s rights under the Fair Credit to create one through the use of nontraditional Reporting Act (FCRA) and the Fair and Accurate credit. Credit Transaction Act (FACT ACT). 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 creDit scOresMaking payments on time creates a solid credit rat- When consumers apply for a mortgage loan today,ing, but it takes time to build. However, getting into the lender is looking for a certain minimum credita bad credit situation can happen very quickly by pay- score to make an automated underwriting decision. Aing accounts late or not at all. If one of the accounts credit score is determined by a complex mathematicalis a mortgage loan, the lender can foreclose on the equation that evaluates the information contained inproperty to recover their loss, and the consumer will a consumer’s credit file. Myfico.com defines a creditno longer have a home. score as: …a number generated by a statistical model which isWho Uses credit scores? used to objectively evaluate information that pertains toThe 3 national consumer reporting companies sell making a credit decision.the information in the report to creditors, insurers,employers, and other businesses that use it to evalu- credit bureausate applications for credit, insurance, employment, Equifax, Experían, and TransUnion, are nationalor renting a home. Since a credit report includes credit reporting agencies that maintain credit reportsinformation on where the applicant has lived, how in the United States and work independently of eachthey pay their bills, and whether they have been sued, other to gather information from businesses andarrested, or filed for bankruptcy, all types of creditors update consumer credit profiles. Each bureau haspull credit reports and use credit scoring. a name for the score model they use. Experían uses the FICO score, created by Fair Isaac and Company.Mortgage lenders use credit scores to help them Equifax uses the Beacon score model. TransUnionevaluate a borrower’s request quickly and efficiently uses the Empirica score model.through automated means. Higher scores normallymean better interest rate and terms. In fact, the inter- Until 2005, the 3 major credit bureaus only providedest rate offered is normally directly related to the these scores to lenders. That changed when the Fair and Accurate Credit and Transaction Act (FACTcredit score. ACT), effective September 1, 2005 allowed con-Insurance companies use credit scores to determine sumers to receive once a year, upon request, a freeauto and home owner policy premiums. Car dealers, copy of their credit report. Consumers can alwaysfurniture stores, cell phone service companies, credit receive a free copy of their credit report if they havecard companies, and landlords use credit scores. been denied credit due to information contained in a© 2007 Bert Rodgers Schools of Real Estate, Inc. 17
  • 1 Module 2credit bureau within 60 days of being denied credit. rizing disclosure for an employer to access the fileThe Equal Credit Opportunity Act (ECOA) requires is required.that the creditor provide a notice disclosing the rea- • Consumers can limit prescreened offers by optingson the loan was rejected. The Fair Credit Reporting out.Act (FRCA) requires the creditor to give the name,address, and phone number of the consumer report- • Consumers can seek damages from violators.ing company that supplied the information. • Identity theft victims and active duty military per- sonnel have additional rights. www.annualcreditreport.com www.equifax.com The Federal Trade Commission (FTC) handles www.experian.com consumer complaints. Their contact information is www.transunion.com below: Phone: (877) -FTC-HELP (382-4357)credit scoring Mail: Federal Trade CommissionThis process of evaluating past credit performance CRC-240to predict future credit performance is called credit Washington, D.C. 20580scoring. Credit scores for mortgage purposes rangefrom 300 – 850. Higher credit scores are indicative of Online complaint form: https://rn.ftc.gov/better credit performance and lower scores indicative pls/dod/wsolcq$.startup?Z_ORG_CODE=of possible default in the future. Since it is based on PU01statistics and real data, it is more reliable than sub-jective methods as it treats each subject objectively. What counts in a credit score?Under the ECOA, a credit scoring system may notuse race, sex, marital status, national origin, or reli- When a credit score is provided, 4 reason codes aregion as factors. The ECOA states that a person cannot also provided to explain the scoring decision. It alsobe denied credit or have credit terminated because of gives insight on how the score may be improved.their age. However, creditors are allowed to use age in Each bureau places different weight on different fac-a properly designed system but must give equal weight tors. Some look more heavily upon installment loansto elderly applicants. and others on collections. If a credit report is used in making a decision to accept or reject a mortgageconsumer credit rights loan, then the customer must be provided a National Credit Score Disclosure. The National Credit ScoreThe federal FCRA promotes the accuracy, fairness, Disclosure provides the reason codes that were usedand privacy of information in the files of consumer most heavily in determining the score. See a samplereporting agencies. Consumer reporting agen- disclosure in Exhibit I.cies include credit bureaus and specialty agencies.Specialty agencies include agencies that sell informa- FICO Score. According to FICO, a consumer’stion about check writing histories, medical records, credit score is composed of 5 factors each weightedand rental history records. Consumers’ rights under differently.the FCRA include: 1. 35% of the FICO score is determined by how the• Consumers must be told if information in their consumer pays their credit accounts. Late pay- credit file has been used against them. ments, bankruptcies, and other negative items con-• Consumers have the right to know what is in their tribute negatively to the score. file. 2. 30% of the FICO score is determined by how much is owed on all outstanding accounts, the number of• Consumers have the right to ask for a credit score. accounts, and how much available credit is being• Consumers have the right to dispute incomplete or utilized. The more owed, the lower the score. inaccurate information. 3. 15% of the FICO score is determined by the length• Consumer reporting agencies must correct or of the credit history. However a short credit history delete inaccurate, incomplete, or unverifiable infor- with successful financial management will reflect mation. positively in the score.• Consumer reporting agencies may not report out- 4. 10% of the FICO score is determined by open- dated negative information. ing new accounts. Too many inquiries that do not result in the extension of credit will reflect nega-• Access to the file is limited to people with a valid tively in the score. Interest rate shopping should be need. done in a short period of time to minimize lower-• Written signed disclosure by the consumer autho- ing the score.
  • Credit Scores and Credit Scoring 19 exhibit i: national credit score Disclosure FormSource: Calyx
  • 20 Module 25. 10% of the FICO score comes from having a mix of like a credit card, a car loan, or mortgage are consid- credit like credit cards, a mortgage, and an install- ered unscoreable at the bureaus. Because of the lack of ment loan. traditional credit reporting, the model cannot provideThis chart shows how the Fair Isaac Corp. values the a numerical determination. These borrowers may bevarious parts of your credit management to determine placed into subprime loans with higher rates and feesyour credit score. because the lender cannot determine the risk associ- ated with lending to this borrower. Figure 2.1 What counts in a credit score? 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 toSource: Fair Isaac Corp., www.myfico.com demonstrate their creditworthiness without the need to go into debt (www.prbc.com ).How can a credit score be improved? In addition to receiving payment data from creditorsCredit scores change as new information is reported and financial institutions’ bill payment services, PRBCin the consumer’s credit file. In order to improve the has partnered with the National Credit Reportingscore, a consumer should consider: Association to verify trade line accounts and up to• paying bills on time. 3 years worth of prior payments that are reported directly by consumers to PRBC.• keeping balances low on credit cards in relation to available credit. Lenders can purchase a PRBC ReportSM depicting a• paying down revolving debt. consumer’s bill payment history either on a stand- alone basis, or merged with Equifax, Experían, and• applying for new credit only when necessary. TransUnion credit reports. Each report is accompa-• if any payments have been missed, get current and nied by a PRBC Bill Payment ScoreSM (BPSSM). PRBC stay current. Reports and the BPS are used in the absence of, orThe credit file should be checked periodically to be as a supplement to a traditional credit report, to gaincertain there are no errors and to help guard against a more complete and accurate risk assessment of anidentity theft. If an identity thief opens an account in applicant. A PRBC Report may also be used as ayour name and does not pay the bill, the bad credit nontraditional mortgage credit report which exceedscould be reported under your name. If any of the secondary market standards for documenting cred-information is incorrect, then under the FCRA, both itworthiness. PRBC does not charge consumers orthe consumer reporting agency and the creditor are small businesses a fee to enroll in the service or to viewresponsible for correcting inaccurate or incomplete their own payment data at any time. The main objec-information. Once the consumer sends written proof tive is to automate the mortgage application processof the mistake to the credit reporting agency, the for hard-to-score borrowers so they may qualify foragency has 30 days to investigate the information. better loan products and pricing.The credit reporting agency must delete the con-tested information when the agency does not receive aresponse from the creditor or if the creditor is out of vantagescoreSMbusiness and the information cannot be verified. In 2006, the 3 national repositories introduced the jointly developed new credit score, VantageScoreSMUnder the FCRA, consumer reporting agencies must designed to simplify and enhance the credit process forcorrect or delete unverifiable, inaccurate, or incom- both consumers and credit grantors. VantageScoreSMplete information within 30 days of notification by the can provide consumers and businesses with a highlyconsumer. Negative information or bad credit will be predictive, consistent score that is easy to understand.reported for 7 years. Bankruptcies and judgments will Scores range from 501 to 990. with higher scoresbe reported for 10 years. indicative of lower risk. A type of report card has beenBorrowers who do not have traditional credit accounts created with grades A to F.
  • Credit Scores and Credit Scoring 21A = 901 – 990 nies obtaining credit profiles. The intention of pre-B = 801 – 900 screening is supposed to be able to offer a firm offerC = 701 – 800 of credit. But, just having a credit score is not enoughD = 601 – 700 to obtain a mortgage other factors to be consideredF = 501 – 600 include income and property acceptability. Therefore, lead generation companies cannot make offers ofVantageScoreSM is able to more effectively provide credit and may contribute to identity theft if the creditpredictive scores on thin-file consumers—those with profiles wind up in the wrong hands.little consumer credit—which is useful in risk man-agement. cOncLUsiOnThe VantageScoreSM is determined by: Using credit wisely can enrich the consumer giv-• Payment history 32%: Have you consistently paid ing him or her more buying power at lower interest your accounts in a timely manner? rates, and having more offers of credit extended. For those who do not pay their bills on time and have• Utilization 23%: How much of the total credit negative items reported on their credit report, financ- available to you are you currently using? ing becomes increasingly more difficult. Just like in• Balances 15%: What is the total of your current school, good grades count. The better your grades, and delinquent account balances? the better your job opportunities. A higher credit• Depth of credit 13%: How long is your credit his- score brings better offers and terms. tory and do you have a mix of credit types?• Recent credit 10%: How many recently opened resOUrces credit accounts and credit inquiries do you have? The Consumer Division of Fair Isaac• Available credit 7%: What is the total amount of www.myfico.com credit to which you currently have access? Order your free credit report from all three bureaus each year at www.annualcreditreport.com Figure 2.2 Determining Your vantagescoresM 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 ComplaintSource: www.vantagescore.com/consumerinfo.html Forms https://rn.ftc.gov/pls/dod/wsolcq$.startup? Z_ORG_CODE=PU01Prescreening FOr MOrtgage Help consumers develop credit scores based on alter-PrODUcts sOLicitatiOn native credit www.prbc.comPrescreening is a tool used by institutions to solicit Obtain a tri-bureau generic credit scoring systempre-identified, potential customers for mortgage www.vantagescore.com/consumerinfo.htmlproducts. The 3 national repositories compile lists of The Federal Trade Commission (FTC) handlesnew customers, sometimes called a trigger list, based consumer complaints. Their contact information ison specific criteria provided by the institution. Once below:someone’s credit has been pulled, an inquiry appears. Phone: (877) -FTC-HELP (382-4357)Then, the bureau knows that the customer might be Mail: Federal Trade Commissionlooking for a mortgage. This trigger, or customer’s CRC-240name, is then sold to the institution be it a mortgage Washington, D.C. 20580broker, lender, or lead generation company. The insti-tution then sends the customer a prescreened offer. Pay Rent Build Credit, Inc. (PRBC) www.prbc.comAlthough prescreening is allowed under the FCRA,there is some concern about lead generation compa- Calyx Software www.calyxsupport.com
  • 22 Module 2 MODULe revieW eXercises Use the exercise questions to review the module material. The answers are found on the bottom of the page.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 FMultiple-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 Multiple Choice: 1) b 2) c 3) b 4) d 5) c True or False: 1) F 2) T 3)T 4) F 5) T 6) T 7) F ANSWERS:
  • MODULE  exotic and nontraditional Mortgages Learning ObjectivesAfter completing this module, you should be able to: 1. Define each of the terms in the glossary. 3. Identify the type of borrowers these products 2. Discuss the history of how these loans have should be marketed to. evolved. 4. Explain why these products are often costly and complex.gLOssarY anD acrOnYMs (COFI), and 12-Month Treasury Average (MTA).1st adjustment cap: The percentage the interest rate Indexed rate: The lender uses the published rate ofwill change after its initial fixed period. the index and adds it to a fixed margin to determine the current interest rate on an adjustable rate mortgage.Adjustable rate mortgage (ARM): A mortgage inwhich the interest rate is not fixed and is adjusted Initial fixed period: The number of months the loanperiodically based on a predetermined index. This will be fixed at the initial interest rate.results in changes to the monthly payment amount, Interest-only mortgage (I/O): A mortgage wherethe outstanding mortgage balance, and/or the mort- the monthly payment does not include any repay-gage term. ment of principal for a predetermined, fixed periodAdjustment period: The number of months the of time. The payment consists of interest only. Theinterest rate is fixed between each interest rate adjust- payment can be fixed for the interest-only period orment for an adjustable rate mortgage. the payment can adjust (increase) during the interest- only period. During the interest-only period, the loanAmortization: Repayment of a mortgage in periodic balance remains unchanged.installments of principal and interest that will pay offthe mortgage at the end of the mortgage term. Life cap: The maximum percentage that the initial interest rate can increase or decrease during the lifeDeferred interest: The dollar amount that is added of the loan.to the original amount borrowed because the monthlymortgage payment is insufficient to cover the inter- Margin: The amount a lender adds to the indexest costs. This is a common feature in pay-option on an adjustable rate mortgage to establish the newARM’s. adjusted interest rate. The margin when added to the index equals the fully indexed note rate.Equity: The difference between the property’s valueand the owner’s indebtedness. Negative amortization: When the monthly mort- gage payments do not cover all of the interest. TheIndex: A rate set by market forces and published by a interest portion that is not covered is added to theneutral third party. The index fluctuates up and down principal balance. The borrower owes more thandue to market factors. Lenders use the index to deter- originally borrowed.mine the interest rate on an adjustable rate mortgageby adding it to the margin. Some examples of indexes Nontraditional mortgage: A mortgage where theare the prime lending rate, 1-, 3-, or 5- year U.S. borrower pays only the mortgage loan interest orTreasury security yields (CMT), the London Inter possibly an even lesser amount of the interest thatBank Offering Rate (LIBOR), Certificate of Savings is due each month resulting in deferred interest andIndex (COSI), 11th District Cost of Funds Index negative amortization.© 2007 Bert Rodgers Schools of Real Estate, Inc. 2
  • 24 Module Payment cap: The maximum percentage that the to make larger payments in the future when the I/Ointerest rate can increase or decrease for each adjust- period expires.ment period. Normally, it is 7.5% more than the The I/O payment is normally fixed for a period of timeprevious month’s payment. This keeps the payment lasting anywhere from the first 3 years to 10 years.artificially lower than interest rate caps which limit After the fixed interest-only period, the monthly pay-how high or low the interest rate can adjust. ment will increase even when the interest rate is fixedPay-option adjustable rate mortgage (pay-option for the life of the loan. For example, if the mortgageARM): An adjustable rate mortgage with the flex- is a 30-year fixed rate at 6.25% with interest only foribility of making several different monthly mortgage the first 10 years of the mortgage, then the borrower’spayments each month based on the borrower’s cash monthly payment will be lower in the first 10 yearsflow. The borrower can pay the minimum payment, and increase in years 11–30. If the borrower paysthe interest only payment, or the fully amortized note $200,000 for the home and puts $10,000 down, or arate payment. 5% down payment, then $190,000 will be financed. The monthly mortgage payment in years 1–10 willPrepayment penalty: A charge the lender makes be $989.58 ($190,000 x 6.25% ÷ 12). At the end ofwhen a mortgage is repaid before a certain period of 10 years, the borrower still owes the same $190,000time elapses or when the borrower repays a certain they borrowed. Then, for the remaining term of theadditional amount of principal before a certain period mortgage, the borrower’s monthly payment will beof time elapses. With soft prepayment penalties, if increased to $1,388.76 so the mortgage will be paidthe borrower sells the home during the prepayment in full (principal and interest) at the end of 30 years.period, then no penalty is assessed but if the borrower See Table 3.1refinances, a penalty is assessed. With hard prepay-ment penalties, whether the house is sold or refinanced table 3.1: Payment schedule forduring the penalty period, a penalty will be assessed. 10 Years interest Only, 30 Years FixedThe penalty also applies if the borrower repays more # of interest Monthly Mortgagethan 20% of the principal in any 12-month period. payments rate payment balancePrincipal: The amount of money borrowed or the 120 6.25% $99.5 $190,000outstanding balance of a loan, not including interest. 240 6.25% $1,.76 $0.00The portion of the monthly payment that is used toreduce the loan balance. adjustable rate Mortgage (arM)Recast: Increasing the monthly mortgage payment tobe computed on the fully indexed rate when the loan Let’s say that the interest rate in the above examplebalance reaches the maximum negative amortization. was not fixed but was a 5/1 adjustable rate mortgageThe loan can be re-amortized several times through- (ARM) with 5 years of interest only. With an ARM,out the term. As this occurs, the increased monthly the interest rate fluctuates according to a predeter- mined index plus basis points, called a margin. Apayment overrides the monthly amount set by the basis point is 1/100th of 1%. A standard margin ispayment cap. 275 basis points or 2.75%. The higher the margin is,Traditional mortgage: Mortgages that require the the greater the yield to the lender. The new interestborrower to repay part of the principal, in addition to rate at adjustment is the current index plus the mar-paying interest on the money borrowed. gin. For example, if the index is 5% and the margin is 2.75%, then the new indexed rate is the sum of 5%interest-OnLY anD PaY-OPtiOn and 2.75% which equals 7.75%. Lenders use differentaDjUstabLe rate MOrtgages indexes to base the adjustments to the interest rate. Some indexes move more slowly than others.interest-Only Mortgage Some of the more common indexes used with theseNormal home appreciation is around 6% per year. products are the Prime Lending Rate, the LondonHowever, the past few years have seen appreciation at Inter Bank Offering Rate (LIBOR), the Cost of Savings20% levels or higher but incomes have not kept pace. Index (COSI), the Cost of Funds Index (COFI), andInterest-only mortgages (I/O) help people purchase the 12- Month Treasury Average (MTA). The MTAtheir first home because of the lower initial monthly is a relatively new index and is the 12-month averagepayment of interest only that allows consumers to of the monthly average yields of U.S. Treasury securi-qualify with a lower monthly payment. I/O’s are for ties. The current rate of these indexes can be foundborrowers who want a lower initial monthly pay- in the business section of the local newspaper, in thement, and have great confidence that they will be able Wall Street Journal, or online at www.wsj.com.
  • Exotic and Nontraditional Mortgages 25Most ARMs have interest rate caps per adjustment the product they are marketing. They know the lowerand life of loan caps. A cap limits the increase or monthly payment helps them qualify more borrowersdecrease per adjustment. For example, the standard for more loans, which translates into a higher income5/1 LIBOR ARM has 2/6 caps, meaning the inter- for the mortgage broker/originator. For example, ifest rate cannot increase or decrease more than 2% the borrower chose a 30-year fixed rate mortgage atper adjustment and no more than 6% for the life of 6.25%, then their monthly mortgage payment wouldthe loan. The 5/1 LIBOR ARM is fixed for the first 5 be $1,170.40 for all 360 payments (12 payments peryears of the loan and then adjusts once annually based year x 30 years = 360 payments). The monthly pay-on the then going LIBOR index added to the fixed ment can be calculated by using a financial calculator,margin that was determined at the onset of the mort- and can also be done online at www.fool.com/calcs/gage. See Table 3.2, which assumes the worst case sce- calculators.htm or www.bankrate.com or by multi-nario in the interest rate adjusting. plying the loan amount by a numeric factor that pays the loan off at the end of 30 years ($190,000 x 6.16Some indexes move slower than others. A faster mov- {30 year factor}). See Table 3.4. A fixed rate mortgageing index will result in a higher payment at adjustment is the best product for someone who wants certaintytime. Table 3.3 shows the interest rate comparison of in their payment or is on a fixed income, like a retiredthe different indexes used. borrower.traditional vs nontraditional Mortgages Nontraditional mortgages are normally ARM’sWith traditional mortgages the borrower’s payment paired with amortization, without amortization (I/O),includes principal and interest and at the end of the and with negative amortization. They allow borrowersloan term, the loan will be paid off or extinguished. different amortization and different payment options.These are considered fully amortizing loans. Lenders A payment option adjustable rate mortgage (pay-have put a spin on different amortization types and option ARM) is based on the MTA index and willhave caused some confusion with detrimental conse- require the borrower’s first 3 months of payments toquences for unsophisticated borrowers. Even some be at a low, fixed rate or just for the first month atmortgage brokers/originators do not fully understand 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 Mortgage 1st adjustment 2.00% payment balance cap 60 6.00% $ 950.00 $ 190,000 1st change 60 months 12 .00% $1,466.45 $17,512.70 Adjustment cap 2.00% 12 10.00% $1,720.22 $15,52.20 Adjustment 12 months period 275 12% $1,92.5 $ 1,966.24 Life Cap 6.00% 1 12% $1,95.90 $ 0.00 table 3.3: comparison of common indexes table 3.4: PaYMent scHeDULe FOr 30 Year from today, a Month ago, and a Year ago FiXeD rate at 6.25%index today as of 1 month 1 year ago # of Interest Monthly Mortgage 2/26/07 ago Payments Rate Payment Balance1 year CMT 5.05% 5.06% 4.74% 60 6.25% $1,170.40 $0.00 year CMT 4.7% 4.79% 4.71%5 year CMT 4.69% 4.75% 4.66%6 month 5.9% 5.9% 4.94%LIBORPrime lending .25% .25% 7.50%rate11th District 4.96% 4.96% .624%COFI12-MTA 4.9% 4.9% 4.011%
  • 26 Module for first 3 months) or the second month (if fixed for $190,000, the borrower chooses a one-month MTAonly first month), the borrower can choose to make pay-option ARM with an introductory rate of 1%different payment arrangements. The borrower has 3 and margin of 2.75%. The borrower chooses optionoptions. 3 from above to make a minimum payment for the first 12 months. The minimum payment is calculatedOption 1. Pay the principal and interest due that will by amortizing the loan over 30 years at the start ratepay off the loan at the end of the term being 15, 30, or and loan amount. The minimum monthly payment40 years. This is considered a traditional mortgage pay- would be only $611.12. The I/O payment would bement where the principal balance decreases each month $1,227.08, which is calculated on the fully amortizingafter making a payment. Also called amortization. note rate of 7.75%. The 30-year fully amortizing pay-Option 2. An interest-only (I/O) payment. This pay- ment would be $1,358.95. See Table 3.5.ment arrangement does not decrease the amountowed but does allow the borrower to make a lower table 3.5: Payment Options for Pay-option armmonthly payment. Minimum payment $611.12 OPTION CHOSENThe interest only payment is calculated by multiplyingthe mortgage amount by the fully amortizing interest I/O payment $1,227.0rate and dividing by 12. The minimum monthly pay- 0 year fully amortizing $1,5.95ment is normally .55 multiplied by the fully amortiz- paymenting payment or the payment is computed by using 3%less than the fully amortizing note rate to determine The monthly payment of $611.12 is computed bythe payment. amortizing the amount borrowed over the loan term at the initial interest rate. The payment takes intoOption 3. Pay a minimum payment which is less than account the current index of the MTA and the fixedthe amount of interest due for the month and does margin of 2.75%. Assume that the MTA index isnot reduce the amount borrowed and the difference 4.98% in our example.will be added to the amount borrowed increasing theprincipal balance and causing negative amortization. $190,000.00 x 7.75% ÷ 12 = $1227.08 (loan amountPayment caps contribute to keeping the payment low, times interest rate divided by 12 to determine monthlyadding more deferred interest to the amount owed. interest portion). If the interest only period is for 10 years, then the amount borrowed remains the amountExample: In our same illustration of financing owed for 10 years. See Table 3.6. table 3.6: Partial amortization schedule through year 12 for Option 2 Ending Principal Year Total Payments Principal Paid Interest Paid 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  $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  $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 $1,717.60 $4,17.52 $14,50.0 $15,62.4 12 $1,717.60 $4,469.2 $14,247.7 $11,92.66$190,000.00 x 7.1523 (30 year factor for 7.75%) = $1358.95 (loan amount times factor equals monthly paymentthat 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
  • Exotic and Nontraditional Mortgages 27 table 3.7: interest Only Mortgage summary for Option 2 120 monthly payments of $1,227.0 Payments 240 monthly payments of $1,559.0 Loan amount $190,000.00 Interest rate 7.750% Interest only term 10 years Total Term (Including interest only period) 0 years Total payments $520,041.0 Total interest paid $1,602.1The payment of $1,227.08 is fixed for 10 years while interest, then the outstanding mortgage amountyour mortgage payments are interest only. After 10 could exceed the value of the borrower’s home. Thisyears of interest only payments, your monthly payment may affect their ability to refinance their loan or sellwill increase to $1,559.80. This will pay off the loan their home since they will owe more than what thebalance in full after a total of 30 years. See Table 3.7. home is worth. This is exactly what the current real estate market is experiencing this year. Home valuesThe worst-case scenario making minimum payments have remained flat and in some areas actually havewith a monthly payment cap increase of 7.5% per year decreased. A borrower who took out a loan like thisis shown in Table 3.8. who wants to sell right now might find that he or she needs to bring money to the closing, depending upon table 3.8: Making Minimum Payments how much negative amortization has accrued. Worst-case scenario Balance Monthly Payment owed selling a Home with a Loss of equity Year 1= $611.12 $197,500.00 In the previous example, at the end of the first year the borrower now owes more than $197,500 and decides Year 2= $656.95 = ($611.12 x 7.50%) $204,41.56 he wants to sell. However, values have gone down and Year = $706.2 = ($656.95 x 7.50%) $209,000.00 the home is now only worth $195,000, although he Year 4= $759.19 = ($706.2 x 7.50%) $209,000.00 paid $200,000. He has stripped himself of his equity. Year 5= $16.1 = ($759.19 x 7.50%) $209,000.00 Equity is the difference between the indebtedness on the property and what it is worth. With closingDuring the first year of the mortgage, $615.96 per costs and payment of a real estate sales commission,month is the amount of negative amortization that this borrower would need over $10,000 to get it sold.gets added to the principal balance. $615.96 is the dif- Borrowers who take out these types of loans are bank-ference between the I/O payment and the minimum ing on the fact that they will be making more moneypayment. $1,227.08 - $611.12 = $615.96. So, at the in the future and the home will appreciate in value,end of the first year, the borrower’s principal unpaid thereby counteracting the amount of the negativebalance would be more than $197,500! With every amortization that has accrued. If one or both of thesesuccessive year of making only minimum monthly situations does not occur, the borrower will be in seri-payments, the principal unpaid balance goes up even ous trouble if he or she can not make the monthlyhigher until the maximum limit specified in the mort- payment. The home could be lost in foreclosure.gage. If it was 110%, then once the principal unpaid Also, these loans may come with 1, 2 or 3, year prepay-balance reaches $209,000 ($190,000 x 110%), the ment penalties. A prepayment penalty is an additionalmortgage must be recast, that is re-amortized, and fee the lender charges if the loan is paid off or refi-the customer’s monthly payment will be increased to nanced within a predetermined period of time frombe able to pay off the loan at the end of the term. This the loan’s inception. The penalty is sometimes equalincreased payment can be higher than the payment to 6 months of interest payments. In this example, thecaps allow. This normally happens in increments penalty would equal $7,362.48 ($1227.08 x 6).of every 5 years. If the borrower defers payment of Note that in the examples above, the loan with the
  • 2 Module least amount of interest paid is the 30-year fixed rate WHO sHOULD aPPLY FOr an interestmortgage at 6.25%. See Table 3.9. OnLY MOrtgage anD a PaY-OPtiOn arM? table 3.9: interest cost comparison of 30 Year Fixed rate & 10 Year i/O Although these loans are risky to the unsophisticated borrower, they can be marketed to the following types Monthly interest paid total paid over payment over life of life of loan of borrowers. Individuals: loan • whose income will increase in the future. Examples $1,170.40 $21,44.00 $421,44.00 0 yr fix include a doctor or lawyer who just finished school and is still paying off student loans but in the future $99.5 $262.052.00 $452,052.00 10 years their incomes should go up considerably, allow- (1st 10 yrs) I/O ing them to devote more of their income to an$1,170.40 x 360 = $421,344 (total paid over life of loan) increased mortgage payment. - 190,000 (original loan amount) • who have a lot of equity in their home now and can $231,344 (interest paid) use the difference in the payment they are not mak- ing to apply to another investment.10 year interest only 30 year fixed at 6.25% • who are paid irregularly either through commis-$989.58 x 120 = $118,749.60 (interest) sions or seasonal earnings. They can devote more of their earnings to the payment in higher-income$1,388.76 x 240 = $333,302.40 (principal and interest) producing months or pay only the minimum in $190,000.00 (original loan amount) lower-income producing months. $143,302.40 (interest) WHO sHOULD NOT aPPLY FOr an$118,749.60 + $143,302.40 = $262,052. interest OnLY MOrtgage Or a PaY-There is $30,708 ($262,052.10 - $231,344) more paid OPtiOn arM?in interest charges when the borrower chooses the 10 Borrowers who are not careful could wind up in a badyear interest only option. If the borrower has the pay- financial situation in the later years of their life. Theoption ARM, then the additional interest costs are following should not apply for these types of prod-even higher. We saw that with the negative amorti- ucts. Individuals:zation loan that allows for 110% negative amortiza-tion. At the end of just 5 years, someone who borrows • who will not be able to make increased payments in$190,000 already owes over $209,000. the future. An example would be someone who will be retiring in the next 10 years. Their income willThe Federal Reserve Board has prepared a pamphlet become fixed at a lower amount and they will notentitled Interest-Only Mortgage Payments and Payment- be able to afford higher payments.Option ARMs-Are They for You? There is a lot of infor- • in a situation where the value of the home will notmation on these products and what to ask about and keep pace with the escalating unpaid principal bal-what to beware of. It is a great tool for you to pro- ance due to negative amortization caused by mak-vide your customers to help them better understand ing minimum monthly payments.these products. There is a mortgage shopping work-sheet that can be used to compare products for yourcustomers. The pamphlet and the worksheet can be WHY are tHese LOans cOstLY anDdownloaded in PDF format at cOMPLeX? www.federalreserve.gov/pubs/mortgage_ We saw with the standard 30-year fixed rate mortgage interestonly/default.htm that the borrower pays back a little over the amount borrowed at the end of the term. With the pay-optionOther brochures to help consumers include: Specialty ARM, the borrower owes more than 110% of what(Nontraditional) Mortgages: What Are the Risks and was borrowed plus interest in just 5 years by makingAdvantages?; and Traditional Mortgages: Understanding the minimum monthly payment. Many borrowers doYour Options. They can be downloaded at the follow- not realize that by paying interest only, the balance oning site: the mortgage does not decrease or increase. The only www.realtor.org/housopp.nsf/pages/ way the borrower may gain any equity in the home is mortgages?OpenDocument when values in the neighborhood appreciate.
  • Exotic and Nontraditional Mortgages 29cOncLUsiOn resOUrcesNothing is free. If you do not pay now, you will pay Search the financial indexeslater through higher interest costs. Although nontra- www.wsj.comditional mortgages start out with low monthly pay-ments, they are sensitive to rising interest rates. A Financial calculators onlinepay-option ARM might have a start rate of 1% but www.fool.com/calcs/calculators.htmthat only lasts for 1 month. The interest rate can rise www.bankrate.comeach month thereafter and could exceed 7% within Brochures to help borrowers make informed deci-7 months. Remember, although the interest rate sions:changes every month, the minimum payment only Interest-Only Mortgage Payments and Payment-Optionchanges once a year. That is why so much deferred ARMs-Are They for You? www.federalreserve.gov/interest accrues. If these payment options are used pubs/mortgage_interestonly/default.htmwisely, they can translate into increased buying powerin spite of rising real estate prices and/or interest rates. Specialty (Non-Traditional) Mortgages: What are theInstitutions need to offer nontraditional mortgages in Risks and Advantages?a safe and sound manner with clear, understandable Traditional Mortgages: Understanding Your Optionsdisclosures to help consumers make informed deci-sions. As the mortgage options available become more Learn About FHA Mortgagescomplicated, a well-educated mortgage expert can How to Avoid Predatory Lendinghelp the consumer chose the right product. www.realtor.org/housopp.nsf/pages/ mortgages?OpenDocument
  • 0 Module 2 MODULe revieW eXercises Use the exercise questions to review the module material. The answers are found on the bottom of the page.True or False1. Interest only payments lead to negative amortization. T F2. Interest only is for people who are retiring to a fixed income. T F3. Making minimum monthly payments for a pay-option ARM’s can lead to negative amortization. T F4. If the index is 5.5% and the margin is 2.75%, then the indexed rate is 8.25%. T F5. A borrower has different payment options with a nontraditional mortgage. T FMultiple-Choice1. 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 mortgage3. 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. Multiple Choice: 1) b 2) b 3) a 4) a 5) c True or False: 1) F 2) F 3) T 4) T 5) T ANSWERS:
  • MODULE 4 subprime Loans and Prepayment Penalties Learning ObjectivesAfter completing this module, you should be able to: 1. Define each of the terms in the glossary. 4. Explain why lenders charge prepayment penal- 2. Discuss the history of subprime loans and how ties and how they harm the consumer. they have evolved. 5. Identify a predatory lender and a foreclosure 3. Explain the different mortgage options avail- rescue scam. able.gLOssarY anD acrOnYMs during the prepayment period, then no penalty isBalloon mortgage: A partially amortizing mortgage assessed but if the customer refinances, there is a pen-with periodic installments of principal and interest alty assessed. Lenders have hard prepayment penaltieswith the balance of the mortgage due in a lump sum meaning whether the house is sold or refinanced dur-(balloon payment) at the end of the term. A balloon ing the penalty period, a penalty would be assessed.payment is anything more than two times the regu- The penalty also applies if the borrower repays morelarly scheduled mortgage payment. than 20% principal in any 12-month period.Conforming loan: A full documentation loan that Prime borrower: A customer with a minimum creditmeets certain underwriting criteria and loan limits. score of 620 and has placed a down payment on the purchase.Equity: The difference between the property’s valueand the owner’s indebtedness. Quitclaim deed: A document which indicates that the person who owns an interest in a property (grantor)Foreclosure: The legal process a lender uses to force transfers that interest to someone else (grantee). Thethe sale of the home to satisfy the delinquent mort- grantor offers no guarantees about the property titlegage debt. If the sale is for less than the debt, then to the grantee. The quitclaim deed is often used as athe lender receives a deficiency judgment against the simple way to give up all interest in a property.borrower for the difference in the sold amount andthe balance of the debt. Subprime borrower: A borrower with a lower credit score. Normally the lowest minimum acceptablePredatory lending: Intentionally placing borrowers credit score is 500. This borrower does not qualifyin loan products with significantly worse terms and/ for the best rates. Opposite of a prime borrower.or higher costs than loans offered to similarly quali-fied consumers for the primary purpose of enriching Subprime lender: A lender who charges higherthe broker/originator and with little or no regard for interest rates and/or fees to offset the risk associatedthe costs to the borrower. with lending to borrowers with bad credit.Prepayment penalty: A charge the lender makes Truth-in-Lending Act: Also known as Regulationwhen a mortgage is repaid before a certain period Z. A federal regulation that requires the disclosure ofof time elapses or when the borrower repays a cer- the annual percentage rate, certain finance charges,tain additional amount of principal before a certain certain additional disclosures when advertisingperiod of time elapses. Lenders have soft prepayment financing terms, and the three day right of rescissionpenalties which mean if the borrower sells the home when refinancing a primary residence.© 2007 Bert Rodgers Schools of Real Estate, Inc. 1
  • 2 Module 4HistOrY OF sUbPriMe MOrtgages Prime Loans vs subprime LoansIn recent years, subprime lending enabled borrowers Prime loans have delinquencies, too; however, a downwith less than perfect credit to attain the American payment is required, except for the Department ofDream of homeownership, at rates and terms previ- Veterans Affairs (VA) loans which only require aously unavailable. down payment for mortgages over $417,000. These prime loans all carry lower interest rates than the sub-Subprime loans are available at interest rates 2% to prime loans. A borrower can finance 95% loan-to-4% higher than the rates charged to borrowers with value with a conforming Federal National Mortgagegood credit. Once lenders started using credit scores Association (Fannie Mae) or Federal Home Loanand automated underwriting to review borrower and Mortgage Corporation (Freddie Mac) loan. A con-property worthiness in the early 1990s, many bor- forming loan is a full documentation loan that meetsrowers were rejected and fell through the cracks. certain underwriting criteria and loan limits. ForThey were considered subprime because they had bad example, if a borrower qualifies, they can receive acredit with a score of less than 620; filed bankruptcy loan up to $417,000 for a one-unit property. Thereand the discharge date was less than four years ago, are some first time homebuyer and community rede-or were unable to verify their income. In the 1990s an velopment mortgages that will allow the consumer toavalanche of lenders and mortgage wholesalers came, go slightly higher than 95% but not to 100%. Theready to lend to this group of borrowers. The risk Federal Housing Administration, (FHA,) will financeassociated with these borrowers brought a financial up to 97.75% loan-to-value in a single loan but hasreward to the lenders through higher interest rates and lower loan limits than Fannie Mae and Freddie Mac.fees. Prior to the plethora of subprime lenders, a bor- The VA will finance 100% in a single loan if you are arower would need to get private financing, pay cash, veteran, surviving spouse, or National Guard reservistor would be unable to buy a home. These sometimes up to $417,000.00marginally qualified, highly leveraged borrowers havea higher risk of default than the prime borrower. A Points. The market establishes the interest rate.prime borrower has a minimum credit score of 620 Everything is negotiable. A point is 1% of the mort-and placed a down payment on the purchase. gage amount. A loan without points carries a slightly higher interest rate than a loan where the customerDuring the late1990s, because of bad business prac- paid points to buy down the interest rate. Becausetices, including poor underwriting and borrower/bro- home values have increased very rapidly, some buyersker fraud, a large number of subprime lenders had to do not have enough money left after making a downmerge with another lender or go out of business. Now payment and paying closing costs to also pay points,in 2007, we see the same shrinkage in the subprime so they choose a loan without points. However, thelender arena. Although lenders had tightened their lender does not work for free, they are paid a pre-underwriting standards, the floodgates were already mium. Sometimes called a yield spread premiumopened to consumers who were probably not in the or par plus, this premium is a percentage of the loanposition to buy. amount, and the higher the interest rate offered, theSubprime loans pay the mortgage broker/origina- more money paid to the lender. This premium istor considerably more income than a prime loan so paid to the lender because the mortgage wholesalerlenders were offering 100% financing through loans feels servicing the loan is worth the additional money.called piggybacks or 80/20’s. The borrower would Because of competition a mortgage broker/originatorobtain a 1st mortgage at 80% loan- to-value and then cannot earn as much income on a prime borrower, orobtain a 2nd mortgage at 20% loan-to-value with the A paper, as on a subprime mortgage. The true sub-seller paying the buyer’s closing costs. The piggyback prime borrower has limited choices, normally payingborrower did not bring any money into the deal. The higher rates and fees with less of a bargaining positionborrower may have obtained these loans because it due to their bad credit.was easier for the mortgage broker to submit the filewith only the borrower’s stated income, and not verify interest rate and termsthe income, or they simply did not qualify through Subprime lenders equate the risk in financing bynormal channels. However, on a weekly basis now, charging higher interest rates and fees, including pre-subprime wholesalers are closing their doors unable payment penalties and balloon payments. Lendersto fund mortgages. Some have filed for bankruptcy. take into account the customer’s credit score, loanDelinquencies for subprime mortgages are on the rise type, loan amount, amortization, and property type toand these wholesalers and servicers do not have ade- price out a loan. The lower the credit score and thequate liquidity. higher the loan-to-value, the higher the interest rate offered to the customer. Lenders charge prepayment
  • Subprime Loans and Prepayment Penalties penalties because the risk that a subprime borrower years, the balance of the money owed on the mort-will refinance the loan rises as the borrower’s credit gage is due and payable. For example, if the secondscore improves. Even if interest rates do not change, mortgage amount was $100,000 and the terms wererefinancing still benefits the subprime borrower. 14.00%, 30 year amortization, due in 15 years, then the monthly payment would be $1184.87 and the lastHigher credit scores are being required and buyers payment will be the 180th payment, which would bewith blemished credit reports are finding it’s not as $90,157.52. That is more than 3/4 of what was bor-easy to receive a mortgage as it has been in the past rowed. If the customer is not in a position to sell orfew years. A 600 FICO score is needed to do a full refinance the mortgage, then in the 15th year, theydocumentation 80/20 loan, and interest rates are could lose the home if they cannot come up with thathigher than last year on these mortgages. Interest rates amount. Interest rates on second mortgages are muchon prime mortgages have remained about the same. A higher than interest rates on first mortgages due tocustomer with a credit score of 500 can get financing, the increased risk of default by the borrower. Balloonjust not 100% financing. Most lenders have increased mortgages, prepayment penalties, and limited docu-the minimum credit score to 660 for stated income mentation mortgages make subprime mortgage lend-borrowers. Interest only and pay option ARMs are ing vulnerable to foreclosure.still available, however, lenders are now qualifying theborrower at a higher monthly payment. Truth-In-Lending Disclosure. The Truth-in- Lending Disclosure is the only document that comesWith fewer lenders willing to lend money to fund close to advising the customer, at the time of appli-subprime mortgages, less options are available for the cation, that the monthly payment might not be fixedborderline customer. Lenders are feeling the financial or if a prepayment penalty is a condition of the loan.pain associated with providing the wrong customer Unfortunately, the language currently used in the dis-with the wrong mortgage. The layering of risk with closure is confusing. If you refer to Exhibit II - a 5/1low credit scores and high debt-to-income ratios just LIBOR ARM with 5 years of interest only, a margindoes not make sense in the current market of stagnant of 2.75%, a start rate of 6% and 2/6 caps – Area #4 ishome prices. where the lender can disclose if they will be chargingNot every borrower who has a subprime mortgage is a prepayment penalty. It says may or will not. It shouldrated as a subprime borrower. As mentioned earlier, say will or will not. May means the lender will chargesometimes a mortgage broker/originator will steer a prepayment penalty if they chose to exercise thata customer into a subprime mortgage to earn more option, or the lender might not. If the word may wasincome and/or because it is easier and faster. In the changed to will, it might not be as confusing. Area #1past year and a half, home values have not appreciated is where the lender gives the amount of the monthlyas rapidly as they did between the years 2000–2003. payment and if the payment can change, a worst-caseThe real estate slowdown is bringing a foreclosure example. Area #2 is to show if the loan has a demandboom. Loans with little money down and even less feature, shown as a prepayment penalty. If the loanlender verification have placed the borrower in a very has an adjustable rate feature, then Area #3 is wherevulnerable situation. Chances are they did not even this information should be entered.understand the loan terms and thought they were get-ting a mortgage with small, manageable payments. PreDatOrY LenDersViolá, they receive a letter that their monthly paymentis changing and they do not understand why. To add Predatory lending takes on several connotations. Itinsult to injury, the mortgage has a 3 year prepayment is considered charging excessive rates and fees to thepenalty. A prepayment penalty is an additional charge consumer. Sometimes it is considered predatory lend-made by a lender when the loan is paid off before its ing when placing a consumer in a mortgage productscheduled time. So borrowers find themselves in the they neither understand nor have the financial acu-situation where home values are down, it is taking a men to decipher. When loans are not in the home-lot longer to sell a home in the depressed market, and buyer’s best interest, it can quickly lead to bankruptcyhe or she might owe more money than originally bor- and foreclosure.rowed due to negative amortization and the hefty pre- Subprime lenders should escrow for taxes and insur-payment penalty. ance or at the least advise the borrower how muchAlthough a balloon payment is anything more than they should budget for these items. These lenders2 times the regularly scheduled payment, usually it do not normally collect and pay the amount for taxesis more than 3/4 of the original amount borrowed! and insurance. When these bills arrive requesting theOn the piggyback loans mentioned earlier, the sec- annual amount, it may be a large sum of money andond mortgage normally has a monthly payment that the homeowner may not be able to pay. If the home-is computed on a 30 year term, but at the end of 15 owner’s insurance is not paid, claims cannot be paid. If
  • 4 Module 4 } 1 2 3 4 exhibit ii 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.
  • Subprime Loans and Prepayment Penalties 5the taxes are not paid, a tax bill will be sold and after steps to take When Facing a Foreclosuretwo years the house will be set for a foreclosure sale. Being unable to make your monthly mortgage pay-Both these situations jeopardize the homeowner and ment as well as the risk of losing your home throughlender. foreclosure can be extremely stressful and financiallyTo protect consumers from a predatory lending and emotionally devastating. Lenders are in the busi-scheme, they should keep the following in mind. ness of loaning money, not owning real estate. The help lenders provide to borrowers depends on sev-• If it sounds too good to be true, then it probably is! eral factors, such as how much equity is in the home,• Research local home prices before purchasing. how long the borrower has lived there, and the local• When shopping for a lender, compare costs. economy. The Department of Housing and Urban Development (HUD) suggests taking the following• Beware of No Money Down loans that entice con- steps when you can no longer make your monthly sumers to purchase property that they cannot afford mortgage payment. and are not qualified to purchase. Step 1: Contact the lender immediately• Beware of the mortgage professional who falsely alters information to qualify the consumer for the The borrower should immediately contact the lender loan. when they cannot make the payment. Lenders have• Carefully review all the loan documents and do not options available to help borrowers get caught up in sign blank documents. their monthly mortgage payments when they are just several months behind. The further behind the bor-• Do not allow anyone to convince you to make false rower is, the less options will be available. The lender statements about your assets or income. will determine what or if they will offer after receiving• Be aware of costs and loan terms to be sure they are a written explanation of the borrower’s circumstances, what you agreed to. a list of the borrower’s household expenses, and theSources: www.fbi.gov borrower’s recent income documents. If the lender www.responsiblelending.org does not hear from the borrower, then the lender will be required to take legal action that will lead to fore-FOrecLOsUre rescUe scaMs closure. This will greatly increase the costs of bring- ing the mortgage current.A foreclosure scam is a real estate fraud scheme that Step 2: Talk to a housing counseling agencytargets homeowners in default on their mortgages andfalsely promises them help. Perpetrators mislead the A HUD-approved housing counselor can help youhomeowners into believing that they can save their assess your financial situation, determine your options,homes in exchange for a transfer of the deed, usu- and help negotiate with your lender. The counselorally in the form of a quitclaim deed, and up-front fees. can help you establish a budget so you can meet yourThe quitclaim deed transfers title to the perpetrator; obligations including your mortgage payment. To findhowever, the desperate homeowner is still obligated an approved counselor in Florida use this website:for the mortgage that is going into default. The per- www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm?petrator profits from these schemes by re-mortgaging webListAction=search&searchstate=FLthe property or pocketing fees paid by the homeownerwithout preventing the foreclosure. The victim suffers or call 1-800-569-4287 for a referral of three agenciesthe loss of the property as well as the up front fees. closest to your residence. Most agencies are reputableBe aware of offers to save homeowners who are at risk and provide their services free of charge or for a smallof defaulting on loans or whose houses are already in administrative fee that is tied to the repayment plan.foreclosure. It sounds like the perfect escape plan for Be sure to stay away from credit counseling agenciesa financially strapped homeowner. They transfer their that offer counseling for a large upfront fee or a dona-house over to the foreclosure rescue firm and get to tion. Make sure you ask if the agency has a chargerent their house for one year at which time they can before you sign any documents.get their house back if they have paid the rent on time. Step 3: Prioritize your debtsBut if they don’t pay the rent, which is higher than themortgage payment they could not make, they will be When you are unemployed, prioritizing your debtsevicted from the home and lose everything. in the following order makes the most sense – food, shelter, and utilities. Failing to pay your debts on timeA borrower who is in danger of losing their home negatively impacts your credit rating and credit score.should seek an attorney or qualified credit counselor. But losing your home through foreclosure is proba-
  • 6 Module 4bly worse. Extras and luxuries such as cable television sell the home; have a pre-foreclosure sale/short pay-and eating out should be reduced or eliminated at this off; have a new borrower assume their mortgage; ortime. If there is any extra income left over, then that give a deed in lieu of foreclosure to the lender. Theshould be applied to the mortgage. A credit counselor lender will require the borrower to sell their homemay reduce your monthly bills by negotiating a long by listing it with a real estate firm. The borrower willterm repayment plan with your creditors. be given a specific amount of time to sell their home. In addition, the borrower will be required to pay theStep 4: Explore different loan workout solutions total amount owed when a purchaser is found. ThisIf you are unable to keep the mortgage current, then option will work best if the borrower has some equitylenders can offer several options for temporary situ- in the home. That way they not only satisfy theirations that include reinstatement; forbearance; and mortgage debt owed to the lender but can also walka repayment plan. Options for long term situations away with some money. But if the property value hasinclude a mortgage modification; or a claim advance. declined or the home cannot be sold for enough toAll of these options help the borrower to keep their satisfy the amount owed, sometimes the lender willhome. accept less than what is owed by accepting just the amount for which the property sells. This is called aTo have the mortgage reinstated, the borrower must short payoff. FHA loans are assumable to borrowerspay everything owed in one lump sum. Everything who qualify. Most conventional fixed rate mortgagesowed could include principal, interest, late fees, and are not assumable but some conventional ARMs areattorneys’ fees. Lenders often combine reinstatement assumable.with forbearance. Forbearance is when the lenderrefrains from enforcing the debt until a time in the The lender may however, approve a qualified buyerfuture. Sometimes the lender suspends the monthly to assume the mortgage even if the mortgage is non-payments or reduces them for a short period of time assumable. A deed-in-lieu of foreclosure is when thewhen the borrower knows they will have additional borrower voluntarily signs the deed to give the homefunds in the future to bring the mortgage current. to the lender in exchange for the lender’s forgivenessLenders offer repayment plans that allow the bor- of the debt. The borrower must try to sell their homerower to make the regular monthly payment plus an for at least 90 days and be unable to repay the mort-additional amount each month until the mortgage is gage before this option is considered by the lender.brought current. The repayment plan is usually for Also, if the borrower has other judgments and liens ona limited amount of time which is usually 18 months the property, such as IRS liens or second mortgages,or less. Repayment plans are offered to borrow- then this option might not be available.ers who have had serious setbacks such as an illness, Step 5: Apply for disaster relief or military optionsinjury, or temporary layoff. Lenders will offer mort- if eligiblegage modifications when the situation is more longterm. A mortgage modification is where the lender Borrowers whose property has been damaged bychanges one or more terms of the original mortgage. a natural disaster or national tragedy, (i.e., the ter-Examples include lowering the interest rate; changing rorists acts of 9/11); and borrowers who have beenan adjustable rate mortgage to a fixed rate mortgage; called to active military duty may have additionaladding the missed mortgage payments to the existing assistance available to them to help avoid a fore-mortgage balance; and extending the number of years closure. If the borrower cannot make their mort-the borrower has to repay the mortgage. If the mort- gage payment because of a disaster or tragedy, thengage is insured, then the btorrower may qualify for the lender may stop or delay the foreclosure for 90an interest-free loan from the mortgage guarantor to days. The Servicemembers Civil Relief Act (SCRA)bring the mortgage account current. of 2003, which was formerly known as The Soldiers’ and Sailors’ Civil Relief Act of 1940, applies to activeMortgages that are insured include conventional loans duty military personnel who had a mortgage obliga-where the original loan to value was more than 80% tion prior to enlistment or prior to being ordered to(in one loan) and Federal Housing Administration active duty. The SCRA limits the interest that can be(FHA) loans. Sometimes, the repayment could be charged on mortgages. The military borrower mustdelayed for several years. This interest-free loan request the lender to drop the interest rate to no morebecomes a lien on the property and does not need to than 6% for the period of active duty. The change inbe satisfied until the home is sold or the first mortgage the interest rate is not a subsidy and the interest due inis satisfied, which is a big help to the borrower. excess of 6% is forgiven for the period of active duty.If the borrower will be unable to keep their home they Once active duty ends, the interest rate is restored toneed to contact their lender immediately and either the original rate.
  • Subprime Loans and Prepayment Penalties 7Step 6: Stay clear of foreclosure rescue scams and There are several bills pending in Congress thatpredatory lending schemes would require predatory lenders give easy to under- stand, written disclosures showing the fees and penal-Borrowers who cannot make their mortgage payments ties associated with obtaining these loans. This shouldoften become targets of foreclosure rescue scams and be helpful to the consumer. They should understandpredatory lenders. The borrower is normally desper- that their mortgage payment can and will increase inate to find a solution to pay what they owe and some- the future; if they sell or refinance their home within atimes they sign their house away via a quitclaim deed certain time frame based on the loan’s inception date,and receive no payment for it and still are foreclosed they could owe an additional penalty; and their loanupon because their loan was never satisfied by the per- balance could increase rather than decrease if theyson they signed their house over to and who promised only make the minimum monthly payments.to satisfy their loan. Or, lenders offer to refinance theloan balance that is behind and the borrower winds upwith a new loan that has higher rates and fees which resOUrcesthe borrower ultimately will not be able to keep up Federal Bureau of Investigationwith. Both situations steal the equity built up, if any, www.fbi.govfrom the borrower. Center for Responsible LendingStep 7: Look for other resources www.responsiblelending.orgOther resources available to borrowers include con- Gordon, Marcy. “Blame Flies for High Risktacting the loss mitigation department of the lender; Mortgage Meltdown” (March 22, 2007)employment information and assistance; federal gov- www.newsday.com/news/local/wire/ny-bc-cternment resources; and legal assistance. Borrowers --congress-riskymor0322mar22,0,7025278.storyshould make sure they speak with the loss mitigationdepartment and not the collections department of a Christie, Les. “How to Fend Off a Foreclosure”lender to try and work out a repayment plan. Many (April 3, 2007)local agencies help citizens get training and find jobs. http://money.cnn.com/2007/03/26/real_estate/Both FHA and the Department of Veteran’s Affairs losing_the_house/index.htm(VA) work with the borrower to avoid foreclosure if Help for homeowners facing the loss of their homeat all possible. The National Consumer Law Center www.hud.gov/offices/hsg/sfh/econ/econ.cfm(NCLC) helps vulnerable borrowers by using con-sumer laws that help to build financial security. The Housing and Urban Development Approved Housing Counseling Agencies in FloridaIn conclusion, it is best to contact your lender to work www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm?webout a repayment plan when you are having trouble ListAction=search&searchstate=FLmaking your monthly mortgage payment than toignore their letter and calls and pretend that there The Servicemembers Civil Relief Act of 2003is nothing wrong. A foreclosure negatively impacts www.jagcnet.army.mil/JAGCNETInternet/everyone from the borrower and their credit rating, to Homepages/AC/Legal%20Assistance%20the lender and the losses they incur with attorney and Home%20Page.nsf/0/0806a532899687ceproperty management fees, to the communities that 852568a800531506?OpenDocumentare blighted with empty homes in disrepair. Department of Veteran’s Affairs answers to when you cannot make your mortgage paymentPOssibLe LegisLatiOn www.homeloans.va.gov/paytrbl.htmSenator Christopher Dodd, chairman of the Banking National Consumer Law CenterCommittee, feels the surge in home foreclosures www.nclc.orgrequires some immediate attention. He believes itstrips an important source of wealth away from many Predatory Mortgage LendingAmericans, the equity in their home. Equity is the www.consumerlaw.org/action_agenda/predatory_difference between the property’s value and the own- mortgageer’s indebtedness. Subprime loans with high adjust- U.S. Department of Labor webpage for jobseekersable interest rates have put a strain on the borrowers www.dol.gov/dol/audience/aud-unemployed.htmwho 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 depressedreal estate market (www.floridarealtors.org/newsandevents/n2-020807.cfm).
  •  Module 4 MODULe revieW eXercises Use the exercise questions to review the module material. The answers are found on the bottom of the page.True or False1. A predatory lender charges excessive rates and fees with no regard for the borrower. T F2. A quitclaim deed transfers ownership and the mortgage to the grantee. T F3. The Truth-in-Lending Disclosure is confusing if a prepayment penalty will be charged. T F4. Subprime borrowers have higher credit scores than prime borrowers. T F5. A prepayment penalty strips the borrower of the equity in the home. T FMultiple Choice1. What is the minimum credit score to do an 80/20 full documentation mortgage? a. 500 b. 550 c. 600 d. 6602. 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. Multiple Choice: 1) c 2) d 3) b True or False: 1) T 2) F 3) T 4) F 5) T ANSWERS:
  • MODULE 5 Lack of credit Documentation Promotes Mortgage Fraud Learning ObjectivesAfter completing this module, you should be able to: 1. Define each of the terms in the glossary. 4. Identify why mortgage fraud is the fastest grow- 2. Discuss the history of the reduced and no doc- ing white collar crime. umentation loans and how they have evolved. 5. List some of the common mortgage and real 3. Identify the differences in documentation estate fraud schemes. requirements for full, limited, and no verifica- 6. List some of the mortgage websites that are tion loans. devoted to exposing and eradicating fraud.gLOssarY anD acrOnYMs minimum credit score to simply state their income, and their assets on the mortgage application, withoutCredit score: A numerical value that helps a lender providing supporting documentation or verificationdetermine a borrower’s risk. by the lender.Fraud alert: Requires the lender to contact the cus- Stated income/verified assets loan (SIVA): A mort-tomer first before extending any credit. gage program that allows a borrower with a certainFull documentation loan: A mortgage program minimum credit score to simply state their income onthat verifies the income and assets disclosed on the the mortgage application without providing support-mortgage loan application through verifications of ing documentation, but the assets stated on the mort-employment, pay stubs, W-2’s, verifications of deposit gage application are verified by the lender.and bank statements.No documentation loan (No DOC): A mort- intrODUctiOngage program that allows a borrower with a certain This module is designed to familiarize both licensedminimum credit score to obtain a mortgage without mortgage brokers and loan officers with the reducedhaving to disclose any job, income, or assets and no or no documentation financing programs available toverification by the lender. consumers today. However, be cautious in trying toNo income/no asset loan (NINA): A mortgage pro- qualify and approve every buyer for a mortgage undergram that allows a borrower with a certain minimum the catchy acronym products. There are serious con-credit score to qualify for a mortgage by stating what sequences for material misstatements, misrepresenta-their job is, without having to disclose any income or tion, or omissions, including hefty fines and jail time.assets on the loan application, and no verification bythe lender. HistOrY OF stateD anD nONo income/verified assets loan (NIVA): A mort- DOcUMentatiOn MOrtgagesgage program that allows a borrower with a certain Until the early 1980s, if a consumer wanted to pur-minimum credit score to qualify for a mortgage by chase a home, he or she applied for a Federal Housingstating what their job is without having to disclose Administration (FHA) loan, a Department of Veteransany income on the loan application, but the assets Affairs (VA) loan if they were a qualified veteran orare stated on the loan application and verified by the surviving spouse, or a conventional loan. These loanslender. normally carried fixed rates but sometimes the ratesStated income/stated asset loan (SISA): A mort- were adjustable. These financing programs were con-gage program that allows a borrower with a certain sidered full documentation loans. The customer had© 2007 Bert Rodgers Schools of Real Estate, Inc. 9
  • 40 Module 5to provide income and asset information on the loan About 15 years ago lenders started offering alterna-application, which was subsequently verified by the tive documentation mortgages to self-employed bor-lender, through specific verification forms. A Fannie rowers with good credit, because the self-employedMae Form 1006, Verification of Deposit (VOD), borrowers usually had a lot of expenses with adjustedwould be mailed to the customer’s bank, credit union, gross incomes lower than their gross income. Theor other financial institution, for completion. There loans were stated income/stated assets (SISA) loans, statedwas no charge to complete these forms until the early income/verified assets loans (SIVA), no income/no assets1990s when banks began charging to complete these loans (NINA), no income/verified assets (NIVA), and noverifications. The cost for completion started out at documentation loans (No Doc).around $10 per verification, and then increased to $25.Customers did not feel it was fair that they had to pay Documentation requirementsthis fee. The potential borrowers suggested that they SISA loans require the borrower to state his monthlycould provide their bank statements to prove not only gross income and his assets on the loan applicationthat the money was their own, but also that they had without providing supporting documentation orsufficient funds to consummate the deal. direct verification by the lender.A Fannie Mae Form 1005, Verification of Employ- SIVA loans require the borrower to state her grossment (VOE), was normally mailed to the custom- monthly income and assets on the loan application.er’s employer. At that time there were no facsimile The lender only requires verification of the assets.machines or email, so the process took approximately NINA loans require the borrower to state her occupa-60 days from application to closing table. If the tion on the loan application without stating a monthlyemployment verification was returned completed in gross income amount or any asset information and notwo different color inks, which happened quite often direct verification by the lender.because one part of the verification was filled out byHuman Resources and the other was normally signed NIVA loans require the borrower to state his occu-by an officer of the company, the verification would pation and assets on the loan application. Only thebe mailed back with a note to be completed in only borrower’s assets are verified by the lender.one color ink. Also, if the employer made any mis- No Doc loans do not require any income or assettakes and used correction fluid for corrections, the information be disclosed on the loan application orverification was returned to the employer to be com- any verification by the lender.pleted again. The logic behind the returns was thepossibility that the document was fraudulent or com- All of these products require the borrower to havepromised. Sometimes borrowers provided fraudu- good credit and a certain minimum credit score. Alent tax returns, or the loan officer or loan processor credit score is a numerical value that helps a lenderamended the borrower-provided tax returns to help determine a borrower’s risk.the borrower qualify. Although the IRS Form 4506 These products were then extended to W-2 employ-has been in existence since December 1981, lenders ees, fixed-income borrowers, and marginal creditdid not start utilizing or requiring it as a condition of borrowers. Those within the mortgage industry com-loan approval until the early 1990s. IRS Forms 4506 monly refer to these loans as liar’s loans and their mis-and 4506-T (now being used) allow the lender to ver- use could have serious consequences for all parties. Ifify with the IRS that the information provided by the left unchecked, mortgage fraud could have repercus-borrower in the loan application is true with respect sions for the housing market as lenders fearful of theto the income disclosed. growing problem, make it harder for homebuyers toSelf-employed borrowers, as their own boss, needed get loans.to provide copies of their federal income tax returnsfor the previous two years along with a year-to-date MOrtgage FraUDprofit and loss statement. Lenders averaged the self-employed borrower’s adjusted gross income over Disclosing false information on a mortgage loanthe previous two years preceding the mortgage loan application is fraud. Mortgage fraud is one of the fast-application. This caused a lot of mortgage denials due est growing white-collar crimes according to the FBI,to insufficient income to qualify for the loan since quadrupling since 2001 (www.fbi.gov/pressrel/press-many of the self-employed used a Certified Public rel05/quickflip121405.htm). Mortgage fraud can beAccountant (CPA) to reduce the amount of income divided into two categories—fraud for property andtaxes they would pay the IRS, thereby reflecting a fraud for profit.lower adjusted gross income on their federal income Fraud for property generally involves material mis-tax returns. representations or omission of information with the
  • Lack of Credit Documentation Promotes Mortgage Fraud 41intent to deceive or mislead a lender into extending Pending legislation for the Florida 2007 legislativecredit that would probably not be offered if the true session includes several bills to create the Floridafacts were known. Fraud is normally committed by Residential Mortgage Fraud Act. SB 240 is spon-homebuyers for their personal use. sored by Senator Bullard; HB 349 is sponsored by Representative Dan Gelber; and SB 352 is sponsoredFraud for profit is normally committed by industry by Senator Gwen Margolis. If passed, the offense ofinsiders including mortgage brokers, property apprais-ers, real estate licensees, and closing agents who ben- residential mortgage fraud would be created.efit financially from the scheme. extent of Mortgage Fraudreasons for the increase in Mortgage Fraud The extent of mortgage fraud is not fully known.The reasons why mortgage fraud cases are increasing There is not a central database to check to see if some-are numerous. Over 20 years ago, you would need to one has been involved with mortgage fraud. Lendersgo to the local bank and make application in person. can subscribe to MARI at their website.Today, you can still apply in person, or you can sub-mit your information and sign the documents on line www.mari-inc.com.or through overnight mail. The lender and applicantnever need to meet. You can be using someone else’s The Financial Crimes Enforcement Networkinformation and the lender would not know until (FinCEN) gathers information on mortgage fraud.after the loan is funded and it becomes a first payment However, only federally insured agencies are requireddefault (no monthly mortgage payments are ever made to report activity through a Suspicious Activity Reporton the loan). Lenders should do more due diligence on (SAR) so those are the only ones submitted to thethe front end but they are pressured to make profits, FinCEN. Mortgage brokers and mortgage companieswhich they do by making quick decisions and funding can remain under the radar as far as disclosing mort-the loans. gage fraud, since they are not federally insured.Committing fraud is made easier by the use of com- Criminal background checks, national, minimumputers, scanners, and tax software preparation pro- licensing requirements, and educational standards,grams. It is very easy to manipulate the information or along with the creation of a national database thatjust prepare a W-2 with the income that is necessary to includes all mortgage originators would be a greatqualify the borrower. The mortgage industry is loosely start to combat mortgage fraud and predatory lend-regulated. Some states conduct criminal background ing. The patchwork of enforcement makes it very easychecks and some do not. Although Florida does a to cause damage without being punished or receivingcriminal background check if you want to become a punishment commensurate with the damage caused.licensed mortgage broker, they do not for an employee However, the Internal Revenue Service (IRS) has spe-of a lender as a W-2 employee in the capacity of a loan cial agents that are equipped to investigate mortgageoriginator, loan officer, or mortgage consultant. The fraud and illegal real estate crimes. From fiscal yearMortgage Asset Research Institute (MARI) maintains 2004 through fiscal year 2006 the amount of real estatea database of industry individuals and companies who fraud cases opened by the criminal investigators dou-have submitted files with fraud or material misrepre- bled. The incarceration rate for people convicted ofsentations and/or have had public or legal action taken real estate fraud was an average 89.83% for the sameagainst them. 3-year period. The average prison term served was 47 months for fiscal year 2006. (www.irs.gov/compliance/The penalties section of Chapter 494, 494.0018(1) F.S. enforcement/article/0,,id=162992,00.html).states: Whoever knowingly violates any provision of s. 494.004(2)(e), (f), or (g); s. 494.0072(2)(e), (f), or (g) or common Mortgage and real estate Fraud 494.0025(1), (2), (), (4), (5), except as provided in sub- schemes section (2) of this section, is guilty of a felony of the The three common real estate schemes found by the third degree, punishable as provided in s. 775.02, s. 775.0, or s. 775.04. Each such violation constitutes IRS include property flipping, two sets of settlement state- a separate offense. ments, and fraudulent qualifications.Chapter 494.0018(2), F.S. states: Property flipping. A person buys an inexpensive property and quickly sells it at a high profit using a Any person convicted of a violation of any provision of ss.494.001- 494.0077, in which violation the total value straw buyer with falsified documents. A straw buyer of money and property unlawfully obtained exceeded is someone who lets the defrauding person use their $50,000 and there were five or more victims, is guilty name and good credit and executes the documents of a felony of the first degree, punishable as provided in but never intends to live in the property nor make any s. 775.02, s.775.0, or s.775.04. mortgage payments. The straw buyer is normally paid
  • 42 Module 5a nominal fee by the ring leaders. They might receive the country are targets of this scheme.just $1,000 for the use of their name, credit, and forexecuting the closing documents. Sometimes the straw identity theftbuyers are not using their own credit profiles but have When a purse or wallet is stolen, the criminal is notbeen provided someone else’s profile. This profile looking for cash or credit cards, the criminal is morecould have been obtained through identity theft. interested in stealing someone’s identity. By assum-Two (2) sets of settlement statements. The lender ing the person’s identity, the criminal can apply foris provided a settlement statement showing an inflated loans and mortgages and make a lot more moneyselling price. The seller is provided the correct settle- than by just using or selling stolen credit card num-ment statement with the true selling price. The lender bers. Identity theft occurs when someone uses yourloans more than the property is worth and at funding name, Social Security number, credit card number, orthe proceeds are divided between the conspirators. other personal information to commit fraud and other crimes without your permission. This crime can alsoFraudulent qualifications. Real estate licensees and happen on line through phishing, spyware, and hackers.mortgage brokers help buyers, who would not other-wise qualify, by fabricating their employment history, Phishing is defined by Webopedia.com as the act ofcredit, or down payment. sending an email to a user falsely claiming to be an established legitimate enterprise in an attempt to scamIn many real estate fraud cases, the income that is the user into surrendering private information thatearned by the fraudsters is laundered to hide the pro- will be used for identity theft. The email directs theceeds from the IRS. Money laundering is a process user to visit a website where they are asked to updateof making money earned illegally look like it was personal information, such as passwords and creditlegitimately earned. Money laundering is considered card, social security, and bank account numbers thattax evasion by the IRS, and their investigators focus the legitimate organization already has. The website,on finding and prosecuting the perpetrators. however, is bogus and set up only to steal the user’s information.Other real estate schemes Spyware is software that gathers user’s informationOther common schemes include appraisal fraud, without the user’s knowledge. It can capture key-broker fraud, borrower fraud, recording fraudulent strokes to include account numbers and passwords.deeds, and identity theft. If fraudulent appraisers arepressured to report a higher appraised value, they may Hackers are individuals who gain unauthorized accessuse noncomparable properties or photos from another to computer systems for the purpose of stealing.property and submit them as if it is the property under Identity thieves normally target older homeown-contract to fool the lender into believing that they are ers who have a lot of equity. It is easier to obtain amaking the right investment. home equity line of credit than it is to do a cash-outOr, a mortgage broker/originator discovers the cus- refinance. For homes valued under $250,000, sometomer’s documentation is not sufficient to qualify lenders require less paperwork and do not requirethe potential borrower for the loan if submitted. So, appraisals. The thief targets the county public recordswith the help of computers, scanners, and tax soft- and local tax databases to learn all he can about theware preparation programs, it has become easy for homeowner and the property. Once the thief has allthe fraudulent mortgage broker to provide the lender the information necessary, he or she creates fraudu-the necessary documents to qualify for the mortgage. lent documentation and then applies for the homeSometimes the borrower prepares and provides the equity line of credit online or over the telephone. Infraudulent documents to the mortgage broker/origi- an extreme version of this scam, identity thief numbernator. Or the borrower states she is receiving a gift one assumes the owner’s identity and sells the houseof money with no repayment necessary and the donor to thief number two who applies for a mortgage. Theysigns a gift letter to this effect. The lender verifies split the mortgage proceeds and vanish.that this is not a loan when in fact it is. It is possible Identity theft victims are not liable to repay the stolenthe funds were not even provided by the donor, but by funds and don’t lose their homes but the lender is outthe seller under the guise of a gift from the borrower’s the money. Because senior citizens are frequent vic-family member. tims of these scams, they can have their credit reportSometimes fraudsters record false quitclaim or war- flagged with a fraud alert. A fraud alert requires theranty deeds to obtain title to a property. They can lender to contact the customer first before extendingthen refinance the home and obtain the proceeds or any credit. A red flag should go up if you receive asell the home to an unsuspecting buyer and keep the package from the Welcome Wagon, a company thatproceeds. Homeowners that live out of state or out of welcomes new homeowners to the neighborhood
  • Lack of Credit Documentation Promotes Mortgage Fraud 4with small gifts and coupons from local merchants. Operation ‘Quick Flip’,” Press Release (DecemberYou may have been a victim of such a crime. 14, 2005) www.fbi.gov/pressrel/pressrel05/quick- flip121405.htmconsequences of Fraud Florida StatutesWhat happens in all these scams is that the lender http://www.leg.state.fl.us/Statutes/index.cfm?loses money. Communities may become blighted App_mode=Display_Statute&URL=Ch0494/when homes deteriorate due to nonexistent hom- titl0494.htm&StatuteYear=2004&Title=->2004-eowners. We all pay through higher rates and fees. >Chapter%20494Just as in the automobile insurance industry, it is saidevery $200 of an annual premium goes to fraudulent Online dictionary and search engineclaims. In the mortgage industry, because of the fraud www.webopedia.comand foreclosures, less people will be offered credit and Attorney General of Florida’s websitefees will increase to offset these costs. www.myfloridalegal.comRamifications to communities due to mortgage fraud Mortgage News Watch. “Not for Profit to Provideinclude: higher property taxes because homes have Services for Fraud Victims,” (March 20, 2007)been sold at inflated values, raising the tax rate, the www.mortgagenewswatch.com/newsviewer.php?inability to sell the home because it was purchased at ppa=%3Aqsvv%5F%5BlqqnqqrZUfb%216%3C%an inflated price, and abandoned properties with the 22bfem%5E%21possibility of increased criminal activity. www.fbi.gov/pressrel/pressrel05/quickflip121405.Florida consumers who have complaints about a mort- htmgage scam may call the Florida Attorney General’sFraud Hotline at 1-866-9-NO-SCAM (1-866-966- Florida Attorney General’s Fraud Hotline7226). Complaints can also be filed at: 1-866-9-NO-SCAM (1-866-966-7226) www.myfloridalegal.com www.myfloridalegal.com Websites devoted to the education and eradication of mortgage fraudresOUrces www.stopmortgagefraud.comFannie Mae www.fincen.gov/dgssearch/search.php?q=mortgwww.efanniemae.com age+fraud&r=10; www.mortgagenewsdaily.com/ mortgage_fraud;Federal Housing Administrationwww.fha.gov www.mortgagenewsdaily.com/mortgage_fraud/ report_Florida.asp;Department of Veterans Affairswww.homeloans.va.gov/ www.fraud.org;Internal Revenue Service www.mortgagefraud.com;www.irs.gov www.fraudblogger.com; andFederal Bureau of Investigation. “Mortgage Fraud www.nationalfraudconstable.com/
  • 44 Module 5 MODULe revieW eXercises Use the exercise questions to review the module material. The answers are found on the bottom of the page.True or False1. An indirect result of mortgage fraud is higher property taxes. T F2. Stated income loans were created to accommodate self employed borrowers with good credit. T F3. Fraud for property is normally committed by industry insiders. T F4. Stated income loans mean you can state the necessary income needed to qualify for the loan. T F5. Disclosing false information on a mortgage application is fraud. T FMultiple-Choice1. 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 thief3. 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 Multiple Choice: 1) b 2) a 3) d 4) d 5) d True or False: 1) T 2) T 3) F 4) F 5) T ANSWERS:
  • MODULE 6 Updates on Flood and Hazard insurance Learning ObjectivesAfter completing this module, you should be able to: 1. Describe the various types of flood insurance 4. Identify the maximum amount of flood insur- policies available to property owners. ance coverage available for property owners 2. Discuss what flood insurance does and does and structures. not cover. 5. Identify the problems homeowners face when 3. Define the National Flood Insurance Program, their community does not participate in the Special Flood Hazard Area, Flood Insurance National Flood Insurance Program. Rate Map, LOMA, 100 Year Flood, and 6. Explain the purpose of the Florida Hurricane Participating Community. Catastrophe Fund.gLOssarY anD acrOnYMs Participating community Communities that agree to manage flood hazard areas100-Year Flood by adopting minimum standards contained in SectionThe flood elevation has a 1% chance of being equaled 60.3 of the NFIP regulations.or exceeded each year. ReinsuranceCitizens Property Insurance Corporation (CPIC) A means by which an insurance company can pro-Provides insurance to, and serves the needs of, home- tect itself against the risk of losses. It is the insuranceowners in high-risk areas and others who cannot find company’s insurance.coverage in the open, private insurance market. Special Flood Hazard Area (SFHA)Federal Emergency Management Agency The area expected to be inundated by a 1% annual(FEMA) chance flood.FEMA works with state and local agencies to coor-dinate all facets of disaster relief, as well as programsinvolving safety and prevention. intrODUctiOnFlood Insurance Rate Map (FIRM) Florida saw very active hurricane seasons in 2004 withIssued by FEMA, the maps identify areas of the 100- Hurricanes Charley, Frances, and Jeanne and in 2005year flood hazard in a community based on detailed with Hurricanes Katrina, Rita, and Wilma. Theyor approximate analyses. caused considerable damage throughout the state.Letter of Map Amendment (LOMA) The National Flood Insurance Program paid nearlyA surveyor determines that the elevation of the $1.4 billion in flood insurance claims to homeowners,ground is higher than the base flood elevation docu- business owners, and renters during the 2004 hurri-mented in an elevation certificate. cane season and nearly $16 billion during the 2005 hurricane season. Thankfully, the 2006 hurricane sea-National Flood Insurance Program (NFIP) son was mild and did not see the devastation that wasThe NFIP makes federally backed flood insurance experienced in the preceding two years.available to homeowners, owners of condominiumsand co-ops, renters, and business owners who live or www.floodsmart.gov/floodsmart/pages/own property in participating communities. nfip_statistics.jsp© 2007 Bert Rodgers Schools of Real Estate, Inc. 45
  • 46 Module 6natiOnaL FLOOD insUrance PrOgraM The NFIP is the primary source for flood insurance in the United States. Approximately 20,000 commu-Floods are the most common natural disaster in the nities participate in the NFIP by adopting and enforc-United States. When the U.S. Congress passed the ing floodplain management ordinances to reduceNational Flood Insurance Act in 1968, the National future flood damage. The NFIP is based on the vol-Flood Insurance Program (NFIP) was established. untary participation of communities of all sizes. In theThe NFIP makes federally-backed flood insurance context of this program, a community is a politicalavailable to homeowners, owners of condominiums entity—whether an incorporated city, town, town-and co-ops, renters, and business owners who live ship, borough, or village, or an unincorporated area ofor own property in participating communities. In a county or parish—that has legal authority to adopt1974, the Disaster Relief Act enabled the President and enforce floodplain management ordinances forof the United States to declare disasters, thereby the area under its jurisdiction.allowing the necessary funds and supplies to reachthe affected areas immediately. There were so many Some of the things a standard flood policy will coveragencies involved in handling disasters that in 1979 include:Congress consolidated many of them into the new • structural damage;Federal Emergency Management Agency (FEMA). In • furnace, water heater, and air conditioner;March of 2003, FEMA was incorporated into the newDepartment of Homeland Security. Today, FEMA • flood debris clean up;works with state and local agencies to coordinate all • floor surfaces such as carpeting and tile.facets of disaster relief, as well as programs involving You can also buy a flood insurance policy to cover thesafety and prevention. contents of your home, such as furniture, collectibles, clothing, jewelry, and artwork (www.floodsmart.gov/ www.fema.gov/about/history.shtm floodsmart/pages/whatfloodins.jsp).The NFIP provides affordable flood insurance Homeowners can insure their home up to $250,000through insurance companies and individual insur- and its contents up to $100,000. Nonresidential prop-ance agents. The NFIP covers damage by hurricanes, erty owners can insure their building up to $500,000rivers, or tidal waters only when at least two adjacent and its contents up to $500,000. The only people whoproperties in the area have been flooded. In November may have trouble finding flood coverage are residents2005, President Bush signed legislation increasing the of the coastal barrier resource system area and com-borrowing authority of the NFIP from $3.5 billion to munities that do not participate in the NFIP. Table 6.1$18.5 billion to settle flood insurance claims for 2005. shows the maximum amount of coverage for a stan-This allowed insurance companies to continue pay- dard flood policy.ing claims from the 2005 hurricane season. The NFIPhas had more claims from recent storms than from all table 6.1: Maximum amount of Flood coveragestorms combined since 1968. coverage type coverage Limit www.fema.gov/news/newsarchive.fema? 1 to 4-family structure $250,000 year=2005&month=11 1 to 4-family home contents $100,000What Does Flood insurance cover? Other residential structures $250,000Unlike a standard homeowner’s policy that includes Other residential contents $100,000coverage for when rain enters through a wind-dam- Business structure $500,000aged door or window or through a hole in the wall orroof, flood insurance only covers losses to your prop- Business contents $500,000erty caused by flooding. Damage from puddles caused Renter contents $100,000by rain entering a wind-damaged door or window ora hole in the wall or roof are considered windstorm Source: www.floodsmart.gov/floodsmart/pages/faq_related, not flooding. Flood insurance covers devasta- types.jsp#A1tion caused by storm surge, wave wash, tidal waves,or the overflow of any body of water on normally dry nFiP standard insuranceland. Flood insurance is available to a homeowner The NFIP offers 3 Standard Flood Insurance Policyonly if the community they live in participates in the forms. These forms provide policyholders with aNFIP, regardless if their flood risk is low, medium, or description of their coverage and other importanthigh. coverage information.
  • Updates on Flood and Hazard Insurance 47Dwelling Policy Form. The dwelling policy is used to special Flood Hazard areainsure residential structures and their contents, includ- The 100-year flood is the standard used by most fed-ing individual condominium units. The eligible struc- eral and state agencies including the NFIP, for flood-tures include single family structures, 1 to 4-family plain management and to determine if flood insurancestructures, condominium units, manufactured homes, is needed. The 100-year flood does not mean atownhouse/row house structures, and timeshares. flood will occur every 100 years, but instead, that theGeneral Property Policy Form. The general prop- flood elevation has a 1% chance of being equaled orerty policy is used to insure other residential and exceeded each year. The Special Flood Hazard Areanonresidential structures and their contents. Eligible (SFHA) is the area expected to be inundated by a 1%structures include apartment buildings, schools, and annual chance flood.miscellaneous structures, commercial structures, and A structure located within a SFHA shown on a NFIPcooperative associations. map has a 26% chance of suffering flood damageResidential Condominium Building Association during the term of a 30-year mortgage. If a lendingPolicy Form. The residential condominium building institution is federally regulated or making federallyassociation policy is used for residential condomin- backed loans, it must review the NFIP maps to deter-ium building associations to cover the entire build- mine if the building is located in a SFHA. If the lend-ing under one policy, all units, improvements within ing institution makes such a determination, it must require the borrower to purchase flood insurance.the units, and personal property owned in common Most lending institutions require borrowers to pur-is covered with a contents policy. The policy does chase flood insurance if the property improvementsnot protect the individual owner from loss to per- are located in Zones A or V but not in Zones B, C, orsonal property owned exclusively by the unit owner. X. To be removed from the floodplain shown on theEligible structures include high-rise and low-rise con- Flood Insurance Rate Map (FIRM), a structure mustdominium buildings and condominium associations. be on land that is not subject to flooding by the 1%A unique situation arises if a unit owner’s mortgage annual chance flood. However, more severe floods canlender determines that the coverage purchased under and do happen. Even if a structure is found to be onthis policy form is insufficient to meet the manda- high ground, it could still be damaged by an extremetory purchase requirements. The mortgage lender flood; 20% to 25% of all flood insurance claims arecan request the borrower to ask the association to filed in low- to moderate-risk areas (www.fema.gov/carry adequate limits or require purchase of a separate business/nfip).unit owner’s building coverage policy. If the associa- Letter of Map Amendment. If the lot or buildingtion does not have this policy form and the mort- site is on natural ground that is higher than the basegage lender requires coverage, then the unit owner is flood elevation shown on the FIRM, the owner mayrequired to purchase an individual unit owner’s build- request a Letter of Map Amendment (LOMA). Toing policy under the dwelling form; otherwise, they support the request, a surveyor needs to determine thewill not be able to get a mortgage loan (www.fema. elevation of the ground next to the building and com-gov/business/nfip/sfip.shtm). plete an elevation certificate. If the ground is higher than the base flood elevation, then FEMA will issue agovernment subsidies LOMA. With a LOMA, the lending institution mayFlood insurance is subsidized by the U.S. Government choose to waive the flood insurance requirement.for communities that agree to manage flood hazardareas by adopting minimum standards. A community’s Letter of Map Revision based on fill. If a structure was built on fill that was placed after the FIRM wasparticipation in the NFIP allows their citizens to pur- prepared, then a Letter of Map Revision Based on Fillchase flood insurance. The standards are contained in (LOMR-F) can be requested. Just like the LOMA, anSection 60.3 of the NFIP regulations. Communities elevation certificate completed by a land surveyor isthat do not participate are subject to the sanctions required. If the filled ground is higher than the basein Section 202(a) of the Flood Disaster Protection flood elevation, and there is no basement, then FEMAAct of 1973. Section 202(a) makes flood insurance, may issue a LOMR-F, and the lending institution mayfederal grants and loans, federal disaster assistance, choose to waive the flood insurance requirement.and federal mortgage insurance unavailable for the The lending institution is not required to waive theacquisition or construction of structures located in flood insurance requirement even though a LOMAthe floodplain shown on the NFIP maps. Issued by was obtained from FEMA (www.floodsmart.gov/FEMA, Flood Insurance Rate Maps (FIRMs) identify floodsmart/pages/policycoverage.jsp).areas of the 100-year flood hazard in a communitybased on detailed or approximate analyses (www.fema. Since flood insurance requirements only apply togov/hazard/map/firm.shtm). insurable structures, flood insurance is only required if
  • 4 Module 6the property improvements are located in the SFHA. flood damage and losses in all areas in the US,If the land is in the SFHA but the improvements are the NFIP will need to update its flood mapsnot, then flood insurance would not be required. with the latest technology;Locate participating communities. To verify if the (5) the maximum coverage limits for floodproperty is in a participating community go to: insurance policies should be increased to reflect inflation and the increased cost of housing; http://msc.fema.gov/webapp/wcs/stores/ servlet/FemaWelcomeView?storeId=10001 (6) significant reforms to the NFIP required &catalogId=10001&langId=-1 in the Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 have yet to beEnter the property address in the upper right hand implemented; andcorner and click product search. A page will load thatallows you to view the FIRM for the entire commu- (7) despite reforms required in the Bunning-nity and also prepare and print one map just for the Bereuter-Blumenauer Flood Insurance Reformspecific address. Any amendments since the FIRM Act of 2004, the NFIP requires a modernizedwas first issued can also be viewed. and updated administrative model to ensure that the people of the US have continued access to flood insurance (http://thomas.loc.gov/cgi-bin/FeDeraL LegisLatiOn query/z?c109:H.R.4320.IH: and http://thomas. loc.gov/home/c110query.html).The Bunning-Bereuter-Blumenauer Flood InsuranceReform Act of 2004 was signed into law June 30, citizen’s Property insurance corporation2004. Its purpose is to help people who have experi-enced serious and repetitive flood damage solve their In 2002, the Florida Legislature passed a law thatproblems with financial assistance from the NFIP combined the Florida Residential Property andin partnership with communities and states; end the Casualty Joint Underwriting Association (FRPCJUA)abuses by those who misuse the program causing all and the Florida Windstorm Underwriting Associationpolicyholders to pay more for flood insurance; and (FWUA) creating the Citizens Property Insuranceimprove consumer understanding and rights of NFIP Corporation (CPIC). Chapter 627.351(6) F.S. CPICpolicyholders. The act also reauthorized the NFIP provides insurance more efficiently and effectively anduntil September 30, 2008 (www.floods.org/home/ serves the needs of homeowners in high-risk areas anddefault.asp). others who cannot find coverage in the open, private insurance market (www.citizensfla.com/index.asp).In a previous session of Congress in November 2005,a bill entitled the National Flood Insurance Program By law, CPIC must charge more than other insuranceCommitment to Policyholders & Reform Act of 2005, companies because, as a state company, it is meant towas introduced by the U.S. House of Representatives be an insurer of last resort. After the 2004 and 2005to restore the financial solvency of the NFIP, and hurricane seasons and projections for increased hur-for other purposes, called H. R. 4320. After two ses- ricane activity, most insurers have raised premiumssions of Congress since the bill’s introduction, it never causing CPIC to raise rates to remain the most expen-became a law. However, Congress did make the fol- sive option (www.insurancejournal.com/news/south-lowing findings to introduce this bill: east/ 2006/05/22/68645.htm). As the rate increases took effect many homeown- (1) the amount of the flood insurance claims ers throughout the State of Florida were very angry. resulting from Hurricanes Katrina and Rita will Some people were at risk to lose their homes because likely exceed the aggregate amount of all claims they could not afford the increased insurance and tax previously paid in the history of the NFIP, and payments. In January 2007, Governor Charlie Crist will require an increase in the program’s bor- held a special session with the Florida Legislature. rowing authority; They were able to pass legislation requiring insurers (2) flood insurance policyholders have a legiti- to pass along savings to policy holders. The average mate expectation that they will receive fair and state-wide savings is 24.3%. However, State Farm and timely compensation for losses covered under CPIC policyholders will only see savings between 7% their policies; and 10% because of the amount of reinsurance State Farm and CPIC purchase. State Farm buys reinsur- (3) substantial flooding has occurred, and will ance from their parent company so their customers likely occur again, outside of the areas desig- have already seen the savings. CPIC buys reinsurance nated as the 100-year floodplain; from the state so there is no corresponding savings (4) to adequately and correctly assess potential costs to negate. In addition, Citizen’s’ policyholders
  • Updates on Flood and Hazard Insurance 49are already enjoying a rate rollback which froze 2007 • Non-homestead property. Allows non-homesteadrates to the premiums that were being charged on properties to be eligible for CPIC coverage.December 13, 2006, unless the January rate change • Multi perils. Authorizes CPIC to write multi perilresulted in an even lower premium. policies in the wind pool.More Floridians will have the chance to be insured Floridians will have the chance to be insured withwith CPIC; consumers now have the choice to stay CPIC; policyholders who already paid the higher pre-with CPIC or go with a new company; and there will miums will receive a refund; and there will be newbe new coverage and payment options available. coverage and payment options available. Consumers now have the choice to stay with CPIC or go with ainsurance industry accountability and new company. Previously, consumers didn’t have thatconsumer Protection act choice.A brief recap of the recent changes due to the www.myfloridahouse.gov/FileStores/Insurance Industry Accountability and Consumer We b / H o u s e C o n t e n t / A p p r o v e d /Protection Act signed into law by Governor Crist on Announcements/Uploads/Documents/ins/January 25, 2007: insurance_acts.pdf• Insurance report card. Requires the Insurance www.floir.com/PresumedFactor/Statewide Consumer Advocate to assign a letter grade to AverageSavings.pdf insurance companies based on claims, payment practices, and other company operations. http://www.floir.com/PresumedFactor/ PresumedFactorReport.pdf• Windstorm insurance coverage. Allows hom- eowners to exclude windstorm coverage from their www.fldfs.com/ica/News&Media.asp policies. www.citizensfla.com/documents/leg_faq/• Deductible options. Eliminates caps on deduct- cons_faq.swf ibles under certain conditions.• Contents coverage. Allows policyholders to cLUe reports exclude contents coverage. Don’t be fooled by inexpensive insurance. Probably• Age of home. Prohibits property insurers from the worst thing that could happen is that the insur- denying coverage based solely on the age of the ance company is not licensed to do business in home. Florida. Although you have been faithfully paying the• Cherry picking. Requires insurers that offer home- premiums, you actually have no coverage at all. If the owners policies in other states and offer auto insur- insurance company is insolvent, then you cannot even ance in Florida to sell homeowners insurance in make a claim against the state guarantee fund. Go to Florida. the Florida Department of Financial Services (FDFS) website and click on the button “Verify before you• Low income insurance coverage assistance. Buy” button to make sure the company is licensed. Instructs the Legislature in the regular 2007 session to create a program to help low income homeown- www.fldfs.com/consumers/verify_before_ ers pay their insurance premiums. you_buy/• Uniform grading system. Requires the state to Not only is insurance very expensive, it is some- develop a uniform home grading scale to grade a times unavailable because the property has had too home’s hurricane resistance. many claims. Yes, the property, not the homeowner• Panhandle exemption. Eliminates the Panhandle has had too many claims! The Comprehensive Loss exemption to the Florida Building Code. Underwriting Exchange (CLUE) is a loss history• CPIC rate increase. Repeals the January 1, 2007 information exchange that enables insurance com- rate increase and freezes rates to the December 13, panies to access prior loss information. Just like the 2006 level. credit bureau compiles information on how you pay your bills, and the medical information bureau com-• Commercial policies. Eliminates the Property and piles information of your health and health claims, Casualty Joint Underwriters Association (PCJUA) there is an insurance clearinghouse of information and allows CPIC to write statewide commercial on claims made. A prudent buyer should make their insurance policies. The CPIC Board will determine contract contingent upon receiving a CLUE report the policy limits and premiums. from the seller. Only the property owner can order• CPIC rate floors. Removes the requirement that the report due to federal and privacy laws. The report CPIC has to charge the highest rates. gives a 5-year history of dates and types of losses and
  • 50 Module 6amount paid for each loss. For more information, visit homeowner insurance costs and ensure liquidity inthe following link: www.choicetrust.com the insurance market. The Brown-Waite Buchanan bill will establish a federal reinsurance catastrophicFlorida Hurricane catastrophe Fund fund as a federal backstop for future natural disasters.After Hurricane Andrew in 1992, the residential prop- Although homeowners’ insurance is primarily handlederty insurance market experienced many problems. at the state level, there are important roles for theReinsurance capacity contracted and many insurers federal government to play, including the establish-were forced to re-evaluate their exposure in Florida. ment of a national catastrophic fund. The bill wouldThe citizens looked to the State for help in stabilizing encourage states to create catastrophic funds by pro-the market. The Florida Hurricane Catastrophe Fund viding a federal backstop for those that voluntarily(FHCF) was created in Chapter 215.555, F.S. to pro- create funds. As proposed in the bill’s predecessor,vide a stable and ongoing source of reimbursement to the fund would be called the Consumer Hurricaneinsurers for a portion of their catastrophic hurricane and Earthquake Protection Fund, or HELP fund.losses in order to provide additional insurance capacity It is hoped the creation of the federal catastrophicfor the state. The FHCF acts as a state-administered reinsurance fund funded by contributions from thereinsurance program and is mandatory for residential state catastrophe funds, would eliminate the need forproperty-insurers writing covered policies in Florida. federal taxpayers to pay the enormous cost of natu- ral disasters (http://brown-waite.house.gov/news/Residential property insurance policies provide wind DocumentSingle.aspx?DocumentID=54995).or hurricane coverage on structures located in Florida,including the contents and additional living expenses.In addition, certain collateral protection policies cov- FDFs MeDiatiOnering personal residences are also considered covered The Florida Department of Financial Servicespolicies if they meet the requirements of Chapter (FDFS) established a mediation program to resolve215.555 (2)(c), F.S. The FHCF supports a public- claim disputes between insurers and Florida policy-private partnership that preserves the private sector’s holders arising as a result of damages caused to resi-role as the primary risk bearer. The FHCF is financed dential property by hurricanes and tropical stormsby reimbursement premiums charged to participating during 2004. At the time claims are filed, insurersinsurers, investment earnings, and emergency assess- are required to notify policyholders of their right toments on Florida property and casualty insurers (www. request mediation if the claim has not been resolvedfloir.com/fhcf.htm). in a timely manner (www.fldfs.com/Consumers/lit- erature/Mediation_Brochure.pdf).Proposed national insurance catastropheFund bills Mediation allows a third, unbiased person to helpIn 2005, the U.S. House of Representatives introduced settle disputes between consumers and insurancepending legislation for a national insurance catastro- companies. Mediation at no cost, is non-binding,phe fund based on Florida’s version. The intent was to and does not prevent consumers from participatingcut homeowner insurance costs and ensure insurance in other resolution procedures. Insurance companiesmarket liquidity. Most states do not have catastrophe are required to notify the consumer in writing of theirfunds. The proposed federal legislation encouraged right to mediation. For further information, you maystates to establish catastrophe funds to prepare for contact the FDFS at 800-22-STORM or online atnatural disasters. The fund, administered by the U.S. www.fldfs.com/.Department of Treasury, would share the cost of cata-strophic losses after states’ catastrophe funds had been condo Mediationexhausted. Numerous condominium associations suffered con- siderable damage during the 2005 hurricane season.That legislation did not pass (“Statement from CFO Many struggled with their insurance companies toTom Gallagher On: Federal Legislation to Create a settle claims so the damage could be repaired with-National Catastrophe Fund,” Florida Department of out issuing a special assessment or increasing theirFinancial Services Media Release [November 17, 2005] condominium fees. Since legislation was passed in thewww.fldfs.com/pressoffice/ViewMediaRelease. 2005 session expanding the FDFS mediation programasp?ID=2172). to condominium associations, Tom Gallagher, theIn 2007, Congresswoman Ginny Brown-Waite and former chief financial officer of Florida and formerCongressman Vern Buchanan of the U.S. House of head of the FDFS, issued a press release on DecemberRepresentatives introduced a similar bill called the 1, 2005, announcing a partnership between theHomeowners’ Insurance Protection Act of 2007. Department of Business and Professional RegulationIf passed, it would help reduce American families’ (DBPR) and the FDFS. Both departments urge con-
  • Updates on Flood and Hazard Insurance 51dominium associations to participate in the mediation resOUrcesprogram to help facilitate prompt and fair settlementof outstanding claims. The goal of the program is to Government statistics on floodsoffer a no-cost dispute resolution alternative to resolv- www.floodsmart.gov/floodsmart/pages/nfip_ing hurricane claims and to help with recovery from statistics.jspcatastrophic damage. Federal Emergency Management Agency historySince 2004, the program has helped more than 11,000 www.fema.gov/about/history.shtmstorm victims reach satisfactory settlements on their Press Release Number HQ-05-sta1. “On Presidenthurricane claims. The mediations are free of charge. Bush Signing Flood Insurance Act” (November 22,Using the program does not preclude an association’s 2005)right to take the dispute to court or to invoke their www.fema.gov/news/newsrelease.fema?id=20805policy appraisal clause. When the FDFS receivesa request for mediation, the insurance company is What is flood insurance?informed it has 21 days to settle the claim, or it will www.floodsmart.gov/floodsmart/pages/whathave to appear at mediation with the policyholder or floodins.jsphis or her legal representative. (“Gallagher AnnouncesNew Option For Condominium Communities To Types of flood insuranceResolve Hurricane Claims,” Florida Department www.floodsmart.gov/floodsmart/pages/faq_types.of Financial Services Media Release [December 1, jsp#A12005] www.fldfs.com/PressOffice/CondoMediation/ What is a flood insurance rate map?CondoMediation.htm). www.fema.gov/hazard/map/firm.shtmFlorida’s insurance consumer advocate The National Flood Insurance Program www.fema.gov/business/nfip/On March 5, 2007, General Bob Milligan tookthe position of Florida’s new Insurance Consumer Types of flood policies and coverageAdvocate. The website www.fldfs.com/ica/ was www.floodsmart.gov/floodsmart/pages/policyunveiled by Chief Financial Officer Alex Sink and coverage.jspGeneral Milligan to educate Floridians about thenew position and how it serves the people. General Flood Insurance Rate Maps search queryMilligan was Florida’s Comptroller from 1994–2002 http://msc.fema.gov/webapp/wcs/stores/servlet/and helped create the position CFO Sink now holds. FemaWelcomeView?storeId=10001&catalogId=1In 2002, voters changed the Florida Constitution to 0001&langId=-1eliminate the Comptroller, merging the Department Association of State Floodplain Managersof Insurance, Treasury, State Fire Marshall, and the www.floods.org/home/default.aspDepartment of Banking and Finance into the newDepartment of Financial Services. General Milligan’s Citizens Property Insurance Corporationgoal as the Florida Insurance Consumer Advocate is www.citizensfla.com/index.aspto educate and help defend the rights of Floridians Insurance Journal. “Citizens Property Insurancewhen it comes to insurance. The Insurance Consumer Unveils Breakdown of Proposed County-by-CountyAdvocate will be proactive in finding solutions to the Rate Increases.” (December 1, 2005) www.insuranceinsurance issues that face Floridians; to call attention journal.com/news/southeast/2005/12/01/62629.to any questionable insurance practices; and to go htmlhead-to-head with insurance companies seeking unfairor unjustified rate increases. As an advocate for the Insurance Industry Accountability and Consumerconsumer, General Milligan will listen to Floridians Protection Actand propose innovative ideas. His office will examine www.myfloridahouse.gov/FileStores/Web/Housethe complaints and concerns of Floridians to help him Content/Approved/Announcements/Uploads/monitor and identify any negative trends or question- Documents/ins/insurance_acts.pdfable business practices and provide solutions. By add-ing enhanced legal rights to the Insurance Consumer Statewide average rate of savings on overall premiumAdvocate’s Office, General Milligan will have clear www.floir.com/PresumedFactor/Statewideauthority to fight for consumers (www.fldfs.com/ AverageSavings.pdfPressOffice/ViewMediaRelease.asp?ID=2591). Florida Insurance Consumer Advocate www.fldfs.com/ica/News&Media.asp
  • 52 Module 6Frequently asked questions about new legislationeffective January 2007 for Citizens Property InsuranceCorporationwww.citizensfla.com/documents/leg_faq/cons_faq.swfVerify if your insurance agent, broker or company islicensed to do business in Floridahttp://www.fldfs.com/consumers/verify_before_you_buy/Comprehensive Loss Underwriting ExchangeReportswww.choicetrust.comFlorida Hurricane Catastrophe Fundhttp://www.floir.com/fhcf.htmFlorida Department of Financial Services. “Statementfrom CFO Tom Gallagher on: Federal Legislation toCreate a National Catastrophe Fund.” Media Release(November 17, 2005)www.fldfs.com/pressoffice/ViewMediaRelease.asp?ID=2172Congresswoman Ginny Brown-Waite’s website.“Reps. Brown-Waite and Buchanan IntroduceNational Catastrophic Insurance Proposal.” MediaRelease (January 4, 2007)http://brown-waite.house.gov/news/DocumentSingle.aspx?DocumentID=54995Florida Department of Financial Services.www.fldfs.comFlorida Department of Financial Services MediaRelease “Gallagher Announces New Option ForCondominium Communities To Resolve HurricaneClaims,” (December 1, 2005) www.fldfs.com/PressOffice/CondoMediation/CondoMediation.htmFlorida Insurance Consumer Advocatewww.fldfs.com/ica/Florida Department of Financial Services MediaRelease “CFO Alex Sink and General Milligan,Insurance Consumer Advocate, Unveil New Websitefor Floridians” (March 5, 2007)www.fldfs.com/PressOffice/ViewMediaRelease.asp?ID=2591
  • Updates on Flood and Hazard Insurance 5 MODULe revieW eXercises Use the exercise questions to review the module material. The answers are found on the bottom of the next page.True or False1. A homeowner’s insurance policy covers flood damage. T F2. 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 F3. Flood insurance requirements only apply to insurable structures. T F4. The Comprehensive Loss Underwriting Exchange (CLUE) is a loss-history information exchange that enables insurance companies to access prior loss information. T F5. The condo mediation program offers a no-cost dispute resolution alternative to resolving hurricane claims. T F6. Most states have catastrophe funds. T FMultiple-Choice1. _________________are the most common natural disaster in the United States. a. Tornados b. Hurricanes c. Floods d. Tsunamis2. 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/$500,0003. 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.
  • 54 Module 66. 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 Multiple Choice: 1) c 2) b 3) c 4) b 5) a 6) c 7) b 6) F True or False: 1) F 2) T 3) T 4) T 5) T ANSWERS:
  • MODULE 7 affordable Housing Learning ObjectivesAfter completing this module, you should be able to: 1. Describe the growing need for affordable 3. List several of the available low down payment housing. financing programs. 2. Explain the features of the financing programs 4. Describe the benefits of these programs, who that require no borrower contribution. they serve, and the qualifying criteria.intrODUctiOn www.hud.gov/offices/hsg/sfh/ins/203h-dft. cfmAttainable, affordable housing for teachers, policeofficers, firefighters and other members of Florida’sworkforce is an issue that concerns real estate profes- gOOD neigHbOr neXt DOOrsionals and community leaders throughout the state.The tremendous demand has driven home price val- The U.S. Department of Housing and Urbanues to unprecedented levels in many markets making Development (HUD) wants to strengthen America’sit more difficult than ever for entrants to find afford- communities. The Good Neighbor Next Doorable housing. If people can’t afford to live where they (GNND) Program helps make this goal a reality bywork, then families and communities will suffer. The encouraging valuable professional public servantsrising cost of gasoline makes long work commutes to become homeowners in revitalization areas. Theexpensive and possibly prohibitive. GNND Program offers HUD-owned single-fam- ily homes to law enforcement officers, firefighters,The Federal Housing Administration (FHA), Federal emergency medical technicians and teachers at a 50%National Mortgage Association (FNMA, Fannie Mae), discount. The program’s goal is to prevent crime, pro-and Federal Home Loan Mortgage Corporation mote neighborhood safety, and keep role models in(FHLMC, Freddie Mac) have mortgage financing economically distressed communities.programs to assist buyers with low or no down pay-ment. These programs are for customers who cannot The qualified borrower is able to purchase a singlesave enough money for a down payment and/or clos- family home found in a revitalization area owneding costs, not the credit impaired. 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 borrowerFHa’s 100% Financing PrOgraM FOr must sign a silent second mortgage for the discountedDisaster victiMs amount. No payments are due on this silent second mortgage as long as the borrower remains in the homeThe FHA 203(h) program allows the FHA to insure for three years. After that time, the home may be soldno-down-payment mortgages made by qualified lend- and any profit retained.ers to victims of a major, presidentially declared disas-ter area who lost their homes and are in the process ofrebuilding or buying another home. Anyone, a renter eligibility requirementsor homeowner, who resided in the disaster area can Officer Next Door. Full-time law enforcement offi-use this program to purchase a home anywhere in the cers are eligible, including those who work for federal,country, subject to qualification. state, a unit of general local government, or an Indian© 2007 Bert Rodgers Schools of Real Estate, Inc. 55
  • 56 Module 7tribal government. They must be sworn to uphold then adjusts once annually thereafter. The 7/1 is fixedand make arrests for violations of federal, state, tribal, for the first 7 years and the 10/1 is fixed for the firstcounty, township or municipal law. 10 years and then adjusts annually. Eligible borrow- ers may purchase attached or detached one-unit pri-Teacher Next Door. Eligible borrowers include mary residences including condominiums, PUDs, andthose who work full-time for state-accredited or pri- leaseholds.vate schools that provide direct services to studentsin grades pre-kindergarten through 12. The public w w w. e f a n n i e m a e . c o m / s f / m o r t g a g eor private school that employs the teacher must serve products/fixed/flex97100.jspstudents from the area where the home being pur-chased is located. interestFirst™ MortgageFirefighter and Emergency Medical Technician In 2001, Fannie Mae introduced InterestFirst™,Next Door. Eligible borrowers must be employed as a a program that allowed borrowers to make lowerfull-time firefighter or emergency medical technician monthly payments for the first years of a fixed-rateby a fire department or emergency medical services or adjustable-rate mortgage by offering an interest-responder unit of a federal, state, or general local gov- only period followed by a fully amortizing period ofernment, or an Indian tribal government serving the principal and interest. Fannie Mae retired this prod-area where the home is located. uct effective January 30, 2007. However, Fannie Mae www.hud.gov/offices/hsg/sfh/reo/goodn/ now includes interest only as a feature with many of particip.cfm its mortgage products, including the Flexible 97®, Flexible 100™, and 40-year mortgages.Fannie Mae MOrtgage sOLUtiOns http://www.efanniemae.com/sf/guides/ ssg/annltrs/pdf/2006/0626.pdfIf buyers are concerned about not having enoughmoney for a down payment, several programs offeredby FNMA may help. They include the Flexible 97®, expanded approval® with timely PaymentFlexible 100™, Expanded Approval® with Timely Pay- rewards®ment Rewards®, and 40-year mortgages. 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-FLeXibLe 97® anD FLeXibLe 100™ ment history for 24 consecutive months may becomeThese products allow lenders to offer more options to eligible for an automatic reduction in their interestborrowers with a no or low down payment and more rate. Prior to the introduction of Expanded Approval®flexibility in the source of funds for down payment with Timely Payment Rewards®, a qualified borrowerand closing costs. The Flexible 100™ requires no might have received nontraditional financing at higherdown payment. The maximum loan-to-value (LTV) interest rates and possibly early prepayment penalties.is 100% and up to 105% combined loan-to-value w w w. e f a n n i e m a e . c o m / s f / m o r t g a g e(CLTV) when combined with a Community Seconds® products/arm/ea.jspmortgage. Community Seconds® is a second mort-gage program offered by FNMA. Borrowers havethe option of contributing $500 of their own funds 40-Year Mortgagestowards closing costs and the balance of funds needed FNMA will now purchase 40-year fixed-rate andmay come from flexible sources or the seller. Gifts, hybrid adjustable rate mortgages (ARMS) with ini-grants, unsecured loans from relatives or employers, tial fixed periods of 3, 5, 7, or 10 years. Although thepublic agencies, nonprofits or secured loans are per- interest costs are greater over the life of a 40-yearmitted to meet the minimum borrower requirement. mortgage and equity builds very slowly, the monthly payment is lower. This is a good choice for someoneThe Flexible 97® requires a 3% down payment which who will not be in the home very long or will not havecan come from flexible sources. Also, the remainder the loan very long. A serious risk would be if interestof funds needed may come from flexible sources just rates rise substantially or house prices decline, leavinglike the Flexible 100™. Both products offer fixed the borrower locked into the long-term loan.rates and adjustable rates. The adjustable plans avail-able are 5/1, 7/1, and 10/1. The 5/1 has an interest w w w. e f a n n i e m a e . c o m / s f / m o r t g a g erate that is fixed for the first 5 years of the loan and products/fixed/40year.jsp
  • Affordable Housing 57FreDDie Mac’s HOMe POssibLe® paids can come from the seller or be a gift or grant.MOrtgages Only one-unit primary residences are allowed. Prop- erty types include single family, condominiums, andFreddie Mac’s Home Possible® Mortgages help meet PUDs. Successful completion of an approved home-the home financing needs of borrowers looking for ownership education course is not required to below down payments and flexible sources of funds, completed by at least one borrower prior to closing,including first-time homebuyers, move-up borrow- but is encouraged.ers, retirees, families in underserved areas, new immi-grants and others. Greater flexibility to those who Different amortization types are available includingserve our communities so well—like teachers, fire- fixed rate and ARMs. The ARMs available are the 5/1,fighters, healthcare workers and law enforcement offi- 7/1, and 10/1. This means that the initial interest ratecers are also offered. is fixed for the first 5, 7, or 10 years and then adjusts up or down annually according to a predeterminedThe no- or low-down payment programs offered by index plus a margin. The 5/1, 7/1, and 10/1 ARMsFHLMC include Home Possible® 100 Mortgage, must have annual interest rate caps of 2%, meaningHome Possible® 97, Home Possible® Neighborhood the interest rate cannot go up or down by more thanSolution 100 Mortgage, and the Home Possible® 2% from the initial interest rate at the time of adjust-Neighborhood Solution 97 Mortgage. ment. The life of the loan cap must be 5%, meaning www.freddiemac.com/singlefamily/ the interest rate can never be higher than the initial mortgages/homepossible/products.html 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 orHome Possible® 100 Mortgage less than the area median income. Income eligibil-This type of mortgage offers maximum financing ity requirements may be different in high cost areas.of 100% LTV and up to 105% total loan-to-value An exception to the income requirements exists for(TLTV) when combined with a second mortgage properties located in designated underserved areas.from Affordable Seconds®, another FHLMC product. Underserved areas are located at the census tract level.If the second mortgage is not an Affordable Seconds®, Use the following link to search by county for incomethen it must meet certain requirements. In addition, eligibility and census tract:it cannot be a home equity line of credit (HELOC); can-not be provided by the seller; the terms must allow ww3.freddiemac.com/ds2/sell/affgold.nsf/for prepayment at any time without any penalty; and frmState?OpenForm&State=FLORIDAif it is a variable interest rate then the monthly pay- If the census tract number is not known, then enterment must remain constant for each 12-month period the property address at:and the change in the interest rate must be limitedto an increase of 1% or less during each 12-month www.ffiec.gov/geocode/default.htmperiod. There is no minimum borrower contributionrequired.Reserves, borrower assets available after closing, are Source: www.freddiemac.com/singlefamily/mortgages/not required, but they are recommended. One month’s homepossible/hp100.htmlreserves are equal to the proposed housing payment(principal, interest, and escrow deposits). Reserves are Home Possible® 97liquid or near liquid financial assets that a borrower The Home Possible® 97 mortgage can be used tocan readily access—such as funds in the borrower’s purchase 1- to 4-unit properties, including condo-checking or savings accounts; investments in stocks, miniums, PUDS, and certain manufactured homes.bonds, mutual funds, certificates of deposit, and This type of mortgage offers maximum financingmoney market funds; the amount vested in a retire- of 97% LTV on 1- to 2-unit properties with 105%ment savings account; the cash value of a vested life TLTV when combined with a second mortgage frominsurance policy, etc. For example, if the borrowers Affordable Seconds® or other approved secondaryproposed housing payment is $1,000 per month, then financing. For 3- to 4-unit properties, the maximumthe borrower needs to have at least $1,000 remain- LTV is 95% and the TLTV is 105%. For manufac-ing after closing. The mortgage insurance coverage tured homes, the maximum LTV and TLTV is 95%.level is only 20%. As a result, the borrower’s monthly The secondary financing rules are the same as in themortgage insurance premium will not be very high. Home Possible® 100 product. No reserves are requiredFlexible sources for other closing costs and pre- for 1-unit properties but they are recommended. Two
  • 5 Module 7months reserves are required for 2 to 4-unit prop- after closing and may be from a gift. The borrowererties. For 1-unit properties, there is no borrower does not need to contribute any personal funds.contribution required. For 2-4-unit properties the Successful completion of homeownership education isrequired borrower contribution is 3% of the value not required, but is recommended. The following is aand for manufactured homes, the required borrower list of eligible borrower types:contribution is 5% of value. The required borrower Educators. An employee of an accredited or state-contribution must be the borrowers personal funds recognized private or public school; a certifiedor other borrower funds. FHLMC classifies source teacher or administrator in an education agency; or anof funds into the following three categories: borrower employee of a post-secondary level educational insti-personal funds, other borrower funds, and flexible sources tution.of funds. Borrower personal funds include fundson deposit in a checking, savings, or money market Law enforcement officers and firefighters. Anaccount, proceeds from a secured loan, and verifiable employee of a law enforcement agency or fire depart-cash deposit towards the purchase. Other borrower ment administered by a state or local government; orfunds include gifts, grants, and the Affordable a sworn law enforcement officer responsible for crimeSeconds®. Flexible sources of funds include seller prevention and detection, or criminal incarceration;concessions and lender paid costs through premium or a sworn member of a fire department involved infinancing. Premium financing is charging the bor- fire suppression or prevention, emergency medicalrower a slightly higher interest rate that pays the response, hazardous materials incident response, orlender a percentage of the loan amount. management/response to terrorism.The closing costs and prepaids can be paid with bor- Healthcare workers. A certified, accredited, orrower personal funds, other borrower funds, or flexi- licensed healthcare worker who is a medical resi-ble sources of funds. Successful completion of landlord dent or fellow; a nurse, nursing assistant, pharmacist,education and homeownership education is required pharmacy technician, physician’s assistant, or medicalfor at least one qualifying borrower prior to closing technician, technologist or therapist.when purchasing a 2-4-unit property. The mortgage www.freddiemac.com/singlefamily/homeinsurance coverage level is only 20%. possible/ns100.html www.freddiemac.com/singlefamily/home possible/hp97.html Military personnel. A member of the United States Armed Forces who is on full-time active duty; a mem-Home Possible® neighborhood solution 100 ber of a reserve component of the United States Armed Forces or a former member of the UnitedMortgage States Armed Forces or a reserve component of theThe Home Possible® Neighborhood Solution 100 United States Armed Forces who has been separatedMortgage is designed for law enforcement officers, or retired from either active duty or a reserve com-firefighters, educators, healthcare workers, and effec- ponent for no more than two years at the time of thetive October 2006, military personnel who want to mortgage application.live and work in the same community. This type ofmortgage offers maximum financing of 100% LTV www.freddiemac.com/singlefamily/home-and up to 105% TLTV when combined with a second possible/ns100.htmlmortgage from Affordable Seconds®. Only a 1-unitprimary residence is allowed. Property types include a Home PossiblesM neighborhood solution 97single family home, condominiums, and PUDs. Fixed Mortgagerate mortgages are available in 15, 20, 30, and 40- Just like the Home PossibleSM Neighborhood Solutionyears. The ARM plans and the secondary financing 100 Mortgage, the Home PossibleSM Neighborhoodterms are exactly the same as the Home PossibleSM Solution 97 Mortgage is designed for law enforce-100 Mortgage. The mortgage insurance coverage level ment officers, firefighters, educators, healthcareis only 20%. Temporary subsidy buydowns are avail- workers, and effective October 2006, military person-able. The initial interest rate will be 1.5% below the nel who want to live and work in the same commu-note rate and increase .5% annually for the first three nity. However, eligible property types include 1- andyears. However, temporary subsidy buydowns are not 2-unit primary residences, including single family,allowed if the customer selects the 5/1 ARM or has condominiums, PUDs, and manufactured homes.secondary financing with a variable interest rate. The Home PossibleSM Neighborhood Solution 97All borrowers must be occupants and must meet area Mortgage has all the same characteristics as the Homemedian income limits unless the property is in an PossibleSM Neighborhood Solution 100 Mortgageunderserved area. One month of reserves is required except for LTV/TLTV and down payment require-
  • Affordable Housing 59ments. A 1- to 2-unit property has a maximum LTV Fannie Mae Announcement 06-26of 97% and a TLTV of 105%. A manufactured home www.efanniemae.com/sf/guides/ssg/annltrs/has a maximum LTV and TLTV of 95%. There is no pdf/2006/0626.pdfminimum borrower contribution. For 2-unit proper-ties, the borrower must contribute 3% of the property Fannie Mae Expanded Approval™value from personal funds. If the property is a manu- www.efanniemae.com/sf/mortgageproducts/arm/factured home, then the borrower must contribute ea.jsp5% of the property value from their personal funds. Fannie Mae 40 year fixed rate mortgage www.freddiemac.com/singlefamily/home www.efanniemae.com/sf/mortgageproducts/ possible/ns97.html fixed/40year.jsp Fannie Mae Home Possible® Product Fact Sheetsspecialty License Plate www.freddiemac.com/singlefamily/mortgages/The Florida Association of REALTORS® (FAR) spon- homepossible/products.htmlsored the creation of a Florida specialty license platetitled “Support Homeownership for All” that high- Florida search by county for income eligibilitylights the problem of affordable housing in Florida. ww3.freddiemac.com/ds2/sell/affgold.nsf/frmStatThe license plate costs an additional $27.00 and the e?OpenForm&State=FLORIDAfunds collected will provide down payment assistanceand other workforce housing programs to our state’s Geocoding by property addressworkforce. Based on the State of Florida’s adminis- www.ffiec.gov/geocode/default.htmtrative requirements, the “Support Homeownership Freddie Mac Home Possible® 100 Mortgagefor All” specialty tag was submitted to the Florida www.freddiemac.com/singlefamily/mortgages/Legislature in March 2006, passed, and was signed homepossible/hp100.htmlinto law July 2006. The license plates are availablein early 2007. This is just one more small and fairly Freddie Mac Home Possible® 97 Mortgageinexpensive way of funding the huge problem of www.freddiemac.com/singlefamily/homepossible/affordable housing in Florida. hp97.html www.floridarealtors.org/upload/finalre- Freddie Mac Home Possible Neighborhood port06.pdf Solution® 100 Mortgage www.freddiemac.com/singlefamily/homepossible/ ns100.htmlcOncLUsiOnAlthough home values have outpaced incomes, there Freddie Mac Home Possible Neighborhoodare numerous financing programs available for poten- Solution® 97 Mortgagetial homeowners to obtain the American dream. FHA, www.freddiemac.com/singlefamily/homepossible/FNMA, and FHLMC have updated their require- ns97.htmlments to allow more people to qualify for no- and Florida Association of Realtors Final Report on thelow-down payment mortgages. Real estate profes- 2006 Legislaturesionals should advise prospective buyers to consult www.floridarealtors.org/upload/finalreport06.pdftheir financial advisers as well as lending professionalsto determine the most appropriate loan type.resOUrcesFHA Section 203(h) mortgageswww.hud.gov/offices/hsg/sfh/ins/203h-dft.cfmThe Good Neighbor Next Door Programwww.hud.gov/offices/hsg/sfh/reo/goodn/particip.cfmFannie Mae Flexible 97® & 100™www.efanniemae.com/sf/mortgageproducts/fixed/flex97100.jsp
  • 60 Module 7 MODULe revieW eXercises Use the exercise questions to review the module material. The answers are found on the bottom of the page.True or False1. The Federal Housing Administration, Fannie Mae, and Freddie Mac have mortgage financing programs to assist buyers with low or no down payment. T F2. The Flexible 100™ requires a significant down payment. T F3. The Home PossibleSM 97 mortgage can be used to purchase 1- to 4-unit properties, including condominiums, PUDS, and certain manufactured homes. T F4. 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 F5. FHA, FNMA, and FHLMC have updated their requirements to allow more people to qualify for no- and low-down payment mortgages. T FMultiple-Choice1. 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 2453. 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 Mortgage5. 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 Multiple Choice: 1) b 2) b 3) c 4) c 5) a True or False: 1) T 2) F 3) T 4) T 5) T ANSWERS:
  • MODULE  new and Updated Fannie Mae/Freddie Mac appraisal and Property report Forms Learning ObjectivesAfter completing this module, you should be able to: 1. Describe the significant changes to the 3. Define the terms appraisal, market value, and appraisal forms effective for use after scope of work. November 1, 2005, for Fannie Mae and after 4. Identify the key areas of focus in reviewing January 1, 2006, for Freddie Mac. appraisal or property inspection reports. 2. Evaluate the impact to appraisers by using these new forms.intrODUctiOn appraisal reports regarding who the specific intended users are. On October 10, 2005, the AARO byFannie Mae and Freddie Mac, the government-spon- unanimous vote called upon Fannie Mae to addresssored enterprises that create the mechanism for the the issue, recognize the potential problem the mat-secondary mortgage market, revised their appraisal ter creates for the real property appraiser regulatoryand property report forms in March of 2005, and officials, and to take immediate corrective actionalso added 3 new report forms. The use of the forms (www.efanniemae.com/sf/guides/ssg/annltrs/pdf/became mandatory November 1, 2005, for Fannie 2005/05-02.pdf and www.efanniemae.com/sf/forms-Mae, and January 1, 2006, for Freddie Mac. docs/forms/index.jsp).Fannie Mae’s primary objective in revising the reportforms was to more clearly communicate Fannie Mae’s cHanges tO tHe aPPraisaL rePOrtexpectations for the property appraisal and reporting FOrMsprocesses; to help the appraisers comply with those Fannie Mae says the changes are intended to holdexpectations; to clarify the appraiser’s accountability appraisers accountable for the quality of their workfor the quality of their work to those who rely on it; and and to combat fraud. Appraisers say the changesto help appraisers comply with the Uniform Standards unfairly shift liability to them. The following are 4of Professional Appraisal Practice (USPAP). However, significant changes to the appraisal report forms:there has been some controversy over certificationsrequired by appraisers, specifically Certification • Each report form is used for a specific property23 in the Fannie Mae 1004 and similar certifica- type and inspection type. For example, appraiserstions in other newly revised forms. Certification will use Form 2055 to report an appraisal with an23 references intended user (www.efanniemae.com exterior-only inspection of a single-family resi-/sf/formsdocs/forms/pdf/sellingtrans/appraisal dence that is not a manufactured home or a condo-faqs.pdf and http://aaro.net/pdf/AARO_2005-10- minium unit.10_FNMA_Resolution.pdf Last accessed 3/10/2007). • Each report form states the minimum scope ofAlthough Fannie Mae’s position is that modifica- work the appraiser is expected to complete for mosttions or deletions to the certifications are not per- assignments. The appraiser may complete moremitted, the Association of Appraisal Regulatory than the minimum. In addition, specific appraisalOfficials (AARO) position is that appraisers must assignments may require more than the minimumcomply with the USPAP and appraisers are regulated scope of work.by the state that licensed them. Therefore, apprais- • The reporting format is consistent across all theers must provide supplemental clarification in their forms which should make reporting and under-© 2007 Bert Rodgers Schools of Real Estate, Inc. 61
  • 62 Module  writing the results of the appraisal easier for the cost or income approaches to value for all appraisal appraiser and the lender. assignments. However, many brokers, lenders, and• The Statements of Assumptions and Limiting insurance companies rely on the cost approach to Conditions and the Appraiser’s Certifications have determine the appropriate amount of hazard insur- been revised and incorporated into each report ance the borrower will be required to purchase. The form. The most notable revision to the certifica- hazard insurance should provide for claims to be paid tions acknowledges that the report may be distrib- on a replacement cost basis. Brokers and lenders that uted to parties other than the Intended Users, and rely on the appraiser to provide a replacement cost that the other parties may rely on the report as part estimate to determine the level of hazard insurance coverage need to request that the appraiser provide of any mortgage finance transaction that involves the information in the Cost Approach to Value sec- these parties. tion or to report that information as an attachment.The revised appraisal report forms clarify that the Then, brokers and lenders can use the value indicatedscope of work is defined by the complexity of the on the Total Estimate of Cost New line to determineappraisal assignment and the reporting requirements the appropriate amount of insurance coverage.of the appraisal report form. This includes the statedpurpose of the appraisal to provide the lender/client OvervieW OF tHree neW aPPraisaLwith an accurate and adequately supported opinion of rePOrt FOrMsmarket value of the subject property based on FannieMae’s definition of market value. Fannie Mae defines Manufactured Home appraisal reportmarket value as the most probable price which a – Fannie Mae Form 1004c/Freddie Mac Formproperty should bring in a competitive and open mar- 70b (03/05)ket under all conditions requisite to a fair sale, the www.efanniemae.com/sf/formsdocs/forms/buyer and seller, each acting prudently, knowledge- pdf/sellingtrans/1004c.pdfably and assuming the price is not affected by unduestimulus. Use. This report form is designed to report anFannie Mae states that the revised format is more effi- appraisal of a 1-unit manufactured home; includingcient to review and process the appraisal reports. The a manufactured home in a planned unit developmentexpanded areas for comments will eliminate the need (PUD), based on an interior and exterior inspec-for additional addenda. Direct questions have been tion of the subject property. A manufactured homeadded to the report forms requiring the appraiser to located in either a condominium or cooperativeanswer the following in a yes/no format: project requires the appraiser to inspect the project and complete the project information section of the• Whether the subject property is currently offered Individual Condominium Unit Appraisal Report or for sale or if it was offered for sale in the 12 months the Individual Cooperative Interest Appraisal Report prior to the effective date of the appraisal. and attach it as an addendum to this report.• Whether the appraiser analyzed the contract for Modifications, additions, or deletions. Modifica- sale of the subject property for a purchase money tions, additions, or deletions are not permitted to transaction. the intended use, intended user, definition of mar-• Whether the subject property has any adverse ket value, or assumptions and limiting conditions. physical deficiencies or conditions. For example, if Based on the complexity of this appraisal assign- the subject property needs any repairs and if these ment, the appraiser may expand the scope of work to repairs affect the livability, soundness, or structural include any additional research or analysis necessary. integrity of the property. Modifications or deletions to the certifications are not permitted. However, additional certifications that do• Whether the subject property generally conforms not constitute material alterations to this appraisal to the neighborhood. report are permitted, such as those required by law or• Whether the appraiser researched, analyzed, and those related to the appraiser’s continuing education reported on the sale or transfer history for the sub- or membership in an appraisal organization. ject property and comparable sales (www.efannie- Scope of work. The complexity of this appraisal mae.com/sf/formsdocs/forms/2055.jsp). assignment and the reporting requirements of thisFannie Mae requires that the valuation analysis be appraisal report form define the scope of work. Thisbased on the sales comparison approach because they includes the definition of market value, statement ofbelieve it is the best indicator of value for 1 to 4 unit assumptions and limiting conditions, and certifica-properties. In order to reduce time and costs, Fannie tions.Mae does not require the appraiser to develop the The appraiser must, at a minimum:
  • New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms 61. Perform a complete visual inspection of the inte- 2. Perform an exterior inspection of the subject prop- rior and exterior areas of the subject property. erty from at least the street.2. Inspect the neighborhood. 3. Research, verify, and analyze current market data3. Inspect each of the comparable sales from at least in order to determine if the property has declined the street. in value since the effective date of the original4. Research, verify, and analyze data from reliable appraisal. public and/or private sources. Required exhibits. The required exhibits include5. Report their analysis, opinions, and conclusions in clear, descriptive photographs, in black and white or this appraisal report. color, of the completed improvements for new or pro-Required exhibits. The required exhibits include: posed construction and any other data as an attach- ment or addendum to the appraisal report form that• a street map that shows the location of the subject are necessary to provide an adequately supported property and of all comparables that the appraiser opinion of market value. used.• an exterior building sketch of the improvements two- to Four-Unit residential appraisal Field that indicates the dimensions. The appraiser review report – Fannie Mae Form 2000a/ must also include calculations to show how he or Freddie Mac Form 1072 (03/05) she arrived at the estimate for gross living area. A www.efanniemae.com/sf/formsdocs/forms/ floor plan sketch that indicates the dimensions is pdf/sellingtrans/2000a.pdf required instead of the exterior building sketch or unit sketch if the floor plan is atypical or function- Use. This report form is intended to provide the ally obsolete. lender/client with an opinion on the accuracy of the• clear, descriptive photographs in black and white or appraisal report under review. A lender uses this form color that show the front, back, and a street scene for the spot-check appraisal component of its quality of the subject property, and that are appropriately control process. identified. Photographs must be originals that Scope of work. The complexity of this appraisal are produced either by photography or electronic assignment and the reporting requirements of this imaging. appraisal report form define the scope of work. This• clear, descriptive photographs in black and white or includes the definition of market value, statement of color that show the front of each comparable sale assumptions and limiting conditions, and certifica- and that are appropriately identified. Generally, tions. photographs should be originals that are produced by photography or electronic imaging; however, The appraiser must, at a minimum: copies of photographs from a multiple listing ser- 1. Read the entire appraisal report under review. vice or from the appraiser’s files are acceptable if 2. Perform a visual inspection of the exterior areas of they are clear and descriptive. the subject property from at least the street.• any other data as an attachment or addendum to the 3. Inspect the neighborhood. appraisal report form that are necessary to provide 4. Inspect each of the comparable sales from at least an adequately supported opinion of market value. the street. 5. Perform data research and analysis to determineappraisal Update and/or completion report the appropriateness and accuracy of the data in the appraisal report.– Fannie Mae Form 1004D/Freddie Mac 6. Research, verify, and analyze data from reliableForm 442 (03/05) public and/or private sources. www.efanniemae.com/sf/formsdocs/forms/ 7. Determine the accuracy of the opinion of value. pdf/sellingtrans/1004d.pdf 8. Assume the property condition reported in the appraisal report is accurate unless there is evidenceUse. This report form is intended to provide the to the contrary.lender/client with an accurate update of a prior If the review appraiser determines that the opinion ofappraisal and/or to report a certification of comple- value in the report under review is not accurate, thention. The appraiser must identify the service or ser- he or she is required to provide an opinion of marketvices provided by selecting the appropriate report value.type. Required exhibits. The required exhibits include:Scope of work. The appraiser must, at a minimum: • a street map that shows the location of the subject1. Concur with the original appraisal. property and of all comparables included in the
  • 64 Module  appraisal report under review and any additional 2. Inspect the neighborhood. comparable sales provided by the review appraiser. 3. Inspect each of the comparable sales from at least• clear, descriptive photographs in black and white or the street. color that show the front, back, and a street scene 4. Research, verify, and analyze data from reliable of the subject property, and that are appropriately public and/or private sources. identified. Photographs must be originals that 5. Report their analysis, opinions, and conclusions in are produced either by photography or electronic this appraisal report. imaging. Required exhibits. The required exhibits include:• clear, descriptive photographs in black and white • a street map that shows the location of the subject or color that show the front of each comparable property and of all comparables that the appraiser sale included in the appraisal report under review used. and any additional comparable sales described in the appraisal field review report. Generally, pho- • an exterior building sketch of the improvements tographs should be originals that are produced by that indicates the dimensions. The appraiser photography or electronic imaging; however, cop- must also include calculations to show how he or ies of photographs from a multiple listing service or she arrived at the estimate for gross living area. A from the appraiser’s files are acceptable if they are floor plan sketch that indicates the dimensions is clear and descriptive. required instead of the exterior building sketch or unit sketch if the floor plan is atypical or function-OvervieW OF tHe KeY POints tO tHe ally obsolete.eXisting aPPraisaL rePOrt FOrMs • clear, descriptive photographs in black and white or color that show the front, back, and a street sceneUniform residential appraisal report of the subject property, and that are appropriately– Fannie Mae Form 1004/Freddie Mac Form identified. Photographs must be originals that70 (03/05) are produced either by photography or electronic imaging. www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/1004.pdf • clear, descriptive photographs in black and white or color that show the front of each comparable saleUse. This report form is designed to report an and that are appropriately identified. Generally,appraisal of a 1-unit property or a 1-unit property photographs should be originals that are producedwith an accessory unit. This includes a unit in a PUD. by photography or electronic imaging; however,An interior and exterior inspection of the subject copies of photographs from a multiple listing ser-property is required. vice or from the appraiser’s files are acceptable if they are clear and descriptive.Modifications, additions, or deletions. Modifi-cations, additions, or deletions are not permitted to • any other data as an attachment or addendum to thethe intended use, intended user, definition of mar- appraisal report form that are necessary to provideket value, or assumptions and limiting conditions. an adequately supported opinion of market value.Based on the complexity of this appraisal assign-ment, the appraiser may expand the scope of work to exterior-Only inspection residentialinclude any additional research or analysis necessary. appraisal report – Fannie Mae /Freddie MacModifications or deletions to the certifications are not Form 2055 (03/05)permitted. However, additional certifications that do www.efanniemae.com/sf/formsdocs/forms/not constitute material alterations to this appraisal pdf/sellingtrans/2055.pdfreport are permitted, such as those required by law orthose related to the appraiser’s continuing education Use. This report form is designed to report anor membership in an appraisal organization. appraisal of a 1-unit property or a 1-unit property with an accessory unit. This includes a unit in a PUD.Scope of work. The complexity of this appraisal assign- Only an exterior inspection from the street of the sub-ment and the reporting requirements of this appraisal ject property is required.report form define the scope of work. This includesthe definition of market value, statement of assump- Modifications, additions, or deletions. Modifi-tions and limiting conditions, and certifications. cations, additions, or deletions are not permitted to the intended use, intended user, definition of mar-The appraiser must, at a minimum: ket value, or assumptions and limiting conditions.1. Perform a complete visual inspection of the inte- Based on the complexity of this appraisal assign- rior and exterior areas of the subject property. ment, the appraiser may expand the scope of work to
  • New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms 65include any additional research or analysis necessary. Use. This report form is designed to report anModifications or deletions to the certifications are not appraisal of a unit in a condominium project or a con-permitted. However, additional certifications that do dominium unit in a PUD based on an interior andnot constitute material alterations to this appraisal exterior inspection of the subject property.report are permitted, such as those required by law or Modifications, additions, or deletions. Modifi-those related to the appraiser’s continuing education cations, additions, or deletions are not permitted toor membership in an appraisal organization. the intended use, intended user, definition of mar-Scope of work. The complexity of this appraisal ket value, or assumptions and limiting conditions.assignment and the reporting requirements of this Based on the complexity of this appraisal assign-appraisal report form define the scope of work. This ment, the appraiser may expand the scope of work toincludes the definition of market value, statement of include any additional research or analysis necessary.assumptions and limiting conditions, and certifica- Modifications or deletions to the certifications are nottions. permitted. However, additional certifications that do not constitute material alterations to this appraisalThe appraiser must, at a minimum: report are permitted, such as those required by law or1. Perform a complete visual inspection of the exte- those related to the appraiser’s continuing education rior areas of the subject property from at least the or membership in an appraisal organization. street. Scope of work. The complexity of this appraisal2. Inspect the neighborhood. assignment and the reporting requirements of this3. Inspect each of the comparable sales from at least appraisal report form define the scope of work. This the street. includes the definition of market value, statement of4. Research, verify, and analyze data from reliable assumptions and limiting conditions, and certifica- public and/or private sources. tions.5. Report his or her analysis, opinions, and conclu- sions in this appraisal report. The appraiser must, at a minimum:The appraiser must be able to obtain adequate infor- 1. Perform a complete visual inspection of the inte-mation about the physical characteristics of the sub- rior and exterior areas of the subject unit.ject property from the exterior-only inspection and 2. Inspect and analyze the condominium project.reliable public and/or private sources to perform this 3. Inspect the neighborhood.appraisal. The appraiser should use the same type 4. Inspect each of the comparable sales from at leastof data sources that he or she uses for comparable the street.sales such as, but not limited to, multiple listing ser- 5. Research, verify, and analyze data from reliablevices, tax and assessment records, prior inspections, public and/or private sources.appraisal files, and information provided by the prop- 6. Report their analysis, opinions, and conclusions inerty owner. this appraisal report.Required exhibits. The required exhibits include: The condominium is classified as a new project or an established project. A new project includes new• a street map that shows the location of the subject units and recently converted units. For new projects, property and all comparables that the appraiser the appraiser must compare the subject property to used. other properties in its general market area as well as• clear, descriptive photographs in black and white or to properties within the subject project. This com- color that show the front of the subject property, parison should demonstrate market acceptance of new and are appropriately identified. Photographs must developments and the properties within them. The be originals that are produced either by photogra- appraiser should select one comparable sale from the phy or electronic imaging. subject project, one comparable sale from outside the• any other data as an attachment or addendum to the subject project, and one other comparable sale, which appraisal report form that are necessary to provide can be from inside or outside of the subject project. an adequately supported opinion of market value. The appraiser should keep in mind that resales from within the subject project are preferable to sales fromindividual condominium Unit appraisal outside the project as long as the developer or builderreport – Fannie Mae Form 1073/Freddie Mac of the subject property is not involved in the transac-Form 465 (03/05) tions. www.efanniemae.com/sf/formsdocs/forms/ For established projects, the appraiser should use pdf/sellingtrans/1073.pdf comparable sales from within the subject project if
  • 66 Module there are any available. Resale activity from within the Modifications, additions, or deletions. Modifi-subject project should be the best indicator of value cations, additions, or deletions are not permitted tofor properties in that project. If the appraiser uses the intended use, intended user, definition of mar-sales of comparable properties that are located outside ket value, or assumptions and limiting conditions.of the subject neighborhood, he or she must include Based on the complexity of this appraisal assign-an explanation with the analysis. ment, the appraiser may expand the scope of work to include any additional research or analysis necessary.Required exhibits. The required exhibits include: Modifications or deletions to the certifications are not• a street map that shows the location of the subject permitted. However, additional certifications that do property and of all comparables that the appraiser not constitute material alterations to this appraisal used. report are permitted, such as those required by law or• a sketch of the subject unit that must indicate inte- those related to the appraiser’s continuing education rior perimeter unit dimensions rather than exte- or membership in an appraisal organization. rior building dimensions. The appraiser must also Scope of work. The complexity of this appraisal assign- include calculations to show how he or she arrived ment and the reporting requirements of this appraisal at the estimate for gross living area; however, for a report form define the scope of work. This includes unit in a condominium project, the appraiser may the definition of market value, statement of assump- rely on the dimensions and estimate for gross liv- tions and limiting conditions, and certifications. ing area that is shown on the plat. In such cases, the appraiser does not need to provide a sketch of the The appraiser must, at a minimum: unit as long as he or she includes a copy of the plat 1. Perform a complete visual inspection of the exte- with the appraisal report. A floor plan sketch that rior areas of the subject property from at least the indicates the dimensions is required instead of the street. exterior building sketch or unit sketch if the floor 2. Inspect and analyze the condominium project. plan is atypical or functionally obsolete. 3. Inspect the neighborhood.• clear, descriptive photographs in black and white 4. Inspect each of the comparable sales from at least or color that show the front, back, and street scene the street. of the subject property, and that are appropriately 5. Research, verify, and analyze data from reliable identified. Photographs must be originals that public and/or private sources. are produced either by photography or electronic 6. Report their analysis, opinions, and conclusions in imaging. this appraisal report.• clear, descriptive photographs in black and white or The appraiser must be able to obtain adequate infor- color that show the front of each comparable sale mation about the physical characteristics of the sub- and that are appropriately identified. Photographs ject property from the exterior-only inspection and should be originals that are produced by photogra- reliable public and/or private sources to perform this phy or electronic imaging. Copies of photographs appraisal. The appraiser should use the same type from a multiple listing service or from the apprais- of data sources that he or she uses for comparable er’s files are acceptable if they are clear and descrip- sales such as, but not limited to, multiple listing ser- tive. vices, tax and assessment records, prior inspections,• any other data as an attachment or addendum to the appraisal files, and information provided by the prop- appraisal report form that are necessary to provide erty owner. an adequately supported opinion of market value. For new projects, the appraiser must compare the subject property to other properties in its generalexterior-Only inspection individual market area as well as to properties within the subjectcondominium Unit appraisal report – Fannie project. This comparison should demonstrate marketMae Form 1075/Freddie Mac Form 466 (03/05) acceptance of new developments and the properties www.efanniemae.com/sf/formsdocs/forms/ within them. The appraiser should select one com- pdf/sellingtrans/1075.pdf parable sale from the subject project, one comparable sale from outside the subject project, and one otherUse. This report form is designed to report an comparable sale, which can be from inside or outsideappraisal of a unit in a condominium project or a con- of the subject project. The appraiser should keep indominium unit in a PUD based on an exterior-only mind that resales from within the subject project areinspection of the subject property from at least the preferable to sales from outside the project as long asstreet. the developer or builder of the subject property is not involved in the transactions.
  • New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms 67For established projects, the appraiser should use 1. Perform a complete visual inspection of the inte-comparable sales from within the subject project if rior and exterior areas of the subject unit.there are any available. Resale activity from within the 2. Inspect and analyze the cooperative project.subject project should be the best indicator of value 3. Inspect the neighborhood.for properties in that project. If the appraiser uses 4. Inspect each of the comparable sales from at leastsales of comparable properties that are located outside the street.of the subject neighborhood, he or she must include 5. Research, verify, and analyze data from reliablean explanation with the analysis. public and/or private sources. 6. Report their analysis, opinions, and conclusions inRequired exhibits. The required exhibits include: this appraisal report.• a street map that shows the location of the subject For units in new or recently converted cooperative property and of all comparables that the appraiser projects, the appraiser must compare the subject prop- used. erty to other properties in its general market area as• clear, descriptive photographs in black and white or well as to properties within the subject project. This color that show the front of the subject property, comparison should demonstrate market acceptance and that are appropriately identified. Photographs of new developments and the properties within them. must be originals that are produced either by pho- The appraiser should select one comparable sale from tography or electronic imaging. the subject project, one comparable sale from out-• any other data as an attachment or addendum to the side the subject project, and one other comparable appraisal report form that are necessary to provide sale, which can be from inside or outside of the sub- an adequately supported opinion of market value. ject project. The appraiser should keep in mind that resales from within the subject project are preferableindividual cooperative interest appraisal to sales from outside the project as long as the devel-report – Fannie MaeForm 2090 (03/05) oper or builder of the subject property is not involved in the transactions. www.efanniemae.com/sf/formsdocs/forms/ pdf/sellingtrans/2090.pdf For established cooperative projects, the appraiser should use comparable sales from within the subjectUse. This report form is designed to report an project if there are any available. Resale activity fromappraisal of the cooperative interest, which includes within the subject project should be the best indicatorthe cooperative shares or other evidence of an own- of value for properties in that project. If the appraiserership interest in the cooperative corporation and uses sales of comparable properties that are locatedthe accompanying occupancy rights, in a cooperative outside of the subject neighborhood, he or she mustproject or the cooperative interest in a PUD based include an explanation with the analysis.on an interior and exterior inspection of the subject Required exhibits. The required exhibits include:property. • a street map that shows the location of the subjectModifications, additions, or deletions. Modifi- property and of all comparables that the appraisercations, additions, or deletions are not permitted to used.the intended use, intended user, definition of mar-ket value, or assumptions and limiting conditions. • a sketch of the subject unit that must indicate inte-Based on the complexity of this appraisal assign- rior perimeter unit dimensions rather than exte-ment, the appraiser may expand the scope of work to rior building dimensions. The appraiser must alsoinclude any additional research or analysis necessary. include calculations to show how he or she arrivedModifications or deletions to the certifications are not at the estimate for gross living area; however, forpermitted. However, additional certifications that do a unit in a cooperative project, the appraiser maynot constitute material alterations to this appraisal rely on the dimensions and estimate for gross livingreport are permitted, such as those required by law or area that are shown on the plat. In such cases, thethose related to the appraiser’s continuing education appraiser does not need to provide a sketch of theor membership in an appraisal organization. unit as long as he or she includes a copy of the plat with the appraisal report. A floor plan sketch thatScope of work. The complexity of this appraisal assign- indicates the dimensions is required instead of thement and the reporting requirements of this appraisal exterior building sketch or unit sketch if the floorreport form define the scope of work. This includes plan is atypical or functionally obsolete.the definition of market value, statement of assump-tions and limiting conditions, and certifications. • clear, descriptive photographs in black and white or color that show the front, back, and street sceneThe appraiser must, at a minimum: of the subject property, and that are appropriately
  • 6 Module  identified. Photographs must be originals that For units in new or recently converted cooperative are produced either by photography or electronic projects, the appraiser must compare the subject prop- imaging. erty to other properties in its general market area as• clear, descriptive photographs in black and white or well as to properties within the subject project. This color that show the front of each comparable sale comparison should demonstrate market acceptance and are appropriately identified. Photographs should of new developments and the properties within them. be originals that are produced by photography or The appraiser should select one comparable sale from electronic imaging. Copies of photographs from a the subject project, one comparable sale from out- multiple listing service or from the appraiser’s files side the subject project, and one other comparable are acceptable if they are clear and descriptive. sale, which can be from inside or outside of the sub- ject project. The appraiser should keep in mind that• any other data as an attachment or addendum to the resales from within the subject project are preferable appraisal report form that are necessary to provide to sales from outside the project as long as the devel- an adequately supported opinion of market value. oper or builder of the subject property is not involved in the transactions.exterior-Only inspection individualcooperative interest appraisal report For established cooperative projects, the appraiser– Fannie Mae Form 2095 (03/05) should use comparable sales from within the subject project if there are any available. Resale activity from www.efanniemae.com/sf/formsdocs/forms/ within the subject project should be the best indicator pdf/sellingtrans/2095.pdf of value for properties in that project. If the appraiser uses sales of comparable properties that are locatedUse. This report form is designed to report an outside of the subject neighborhood, he or she mustappraisal of the cooperative interest and the accompa- include an explanation with the analysis.nying occupancy rights in a cooperative project or the Required exhibits. The required exhibits include:cooperative interest in a PUD. • a street map that shows the location of the subjectModifications, additions, or deletions. Modifi- property and of all comparables that the appraisercations, additions, or deletions are not permitted to uses.the intended use, intended user, definition of mar-ket value, or assumptions and limiting conditions. • clear, descriptive photographs in black and white orBased on the complexity of this appraisal assign- color that show the front of the subject property,ment, the appraiser may expand the scope of work to and are appropriately identified. Photographs mustinclude any additional research or analysis necessary. be originals that are produced either by photogra-Modifications or deletions to the certifications are not phy or electronic imaging.permitted. However, additional certifications that do • any other data as an attachment or addendum to thenot constitute material alterations to this appraisal appraisal report form that are necessary to providereport are permitted, such as those required by law or an adequately supported opinion of market value.those related to the appraiser’s continuing educationor membership in an appraisal organization. small residential income Property appraisal – Fannie Mae Form 1025/Freddie Mac 72Scope of work. The complexity of this appraisal assign- (03/05)ment and the reporting requirements of this appraisalreport form define the scope of work. This includes www.efanniemae.com/sf/formsdocs/forms/the definition of market value, statement of assump- pdf/sellingtrans/1025.pdftions and limiting conditions, and certifications. Use. This report form is designed to report anThe appraiser must, at a minimum: appraisal of a 2- to 4-unit property, including a 2- to 4-unit property in a PUD. A 2- to 4-unit prop-1. Perform a visual inspection of the exterior areas of erty located in either a condominium or cooperative the subject unit from at least the street. project requires the appraiser to inspect the project2. Inspect and analyze the cooperative project. and complete the project information section of the3. Inspect the neighborhood. Individual Condominium Unit Appraisal Report or4. Inspect each of the comparable sales from at least the Individual Cooperative Interest Appraisal Report the street. and attach it as an addendum to this report.5. Research, verify, and analyze data from reliable public and/or private sources. Modifications, additions, or deletions. Modifi-6. Report their analysis, opinions, and conclusions in cations, additions, or deletions are not permitted to this appraisal report. the intended use, intended user, definition of mar-
  • New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms 69ket value, or assumptions and limiting conditions. • clear, descriptive photographs in black and whiteBased on the complexity of this appraisal assign- or color that show the front, back, and street scenement, the appraiser may expand the scope of work to of the subject property, and that are appropriatelyinclude any additional research or analysis necessary. identified. Photographs must be originals thatModifications or deletions to the certifications are not are produced either by photography or electronicpermitted. However, additional certifications that do imaging;.not constitute material alterations to this appraisal • clear, descriptive photographs in black and whitereport are permitted, such as those required by law or or color that show the front of each comparablethose related to the appraiser’s continuing education sale and are appropriately identified. Photographsor membership in an appraisal organization. should be originals that are produced by photogra-Scope of work. The complexity of this appraisal phy or electronic imaging. Copies of photographsassignment and the reporting requirements of this from a multiple listing service or from the apprais-appraisal report form define the scope of work. This er’s files are acceptable if they are clear and descrip-includes the definition of market value, statement of tive.assumptions and limiting conditions, and certifica- • any other data as an attachment or addendum to thetions. appraisal report form that are necessary to provideThe appraiser must, at a minimum: an adequately supported opinion of market value.1. Perform a visual inspection of the interior and Unit residential appraisal Field review exterior areas of the subject property. report – Fannie Mae Form 2000/Freddie Mac2. Inspect the neighborhood. Form 1032 (03/05)3. Inspect each of the comparable sales from at least www.efanniemae.com/sf/formsdocs/forms/ the street. pdf/sellingtrans/2000.pdf4. Research, verify, and analyze data from reliable public and/or private sources. Use. This report form is designed for lenders to5. Report their analysis, opinions, and conclusions in spot-check appraisals as part of their quality control this appraisal report. program. This field review is intended to provide theRequired exhibits. The required exhibits include: lender/client with an opinion on the accuracy of the appraisal report under review.• a street map that shows the location of the subject property and of all comparables that the appraiser Scope of work. The complexity of this appraisal used. assignment and the reporting requirements of this appraisal report form define the scope of work. This• an exterior building sketch of the improvements includes the definition of market value, statement of that indicates the dimensions. The appraiser must also include calculations to show how he or she assumptions and limiting conditions, and certifica- arrived at the estimate for gross building area. A tions. floor plan sketch that indicates the dimensions is The appraiser must, at a minimum: required instead of the exterior building sketch if the floor plan is atypical or functionally obsolete. 1. Read the entire appraisal report under review. 2. Perform a visual inspection of the exterior areas of• an operating income statement Fannie Mae Form the subject property from at least the street. 216 or a similar cash flow and operating income 3. Inspect the neighborhood. statement, if the property is an investment prop- 4. Inspect each of the comparable sales from at least erty including a 2- to 4-family property in which the street. the borrower will occupy 1 unit as a principal resi- 5. Perform data research and analysis to determine dence. The statement may be prepared by either the appropriateness and accuracy of the data in the the borrower or the appraiser. When the borrower appraisal report. prepares Fannie Mae Form 216, the appraiser’s 6. Research, verify, and analyze data from reliable comments on the reasonableness of the projected public and/or private sources. operating income must be included on the form. 7. Determine the accuracy of the opinion of value. When the appraiser prepares Form 216, the lender 8. Assume the property condition reported in the must make sure the appraiser has operating state- appraisal report is accurate unless there is evidence ments; expense statements related to mortgage to the contrary. insurance premiums, owners’ association dues, leasehold payments, or subordinate financing pay- If the review appraiser determines that the opinion of ments; and any other pertinent information related value in the report under review is not accurate, then to the property. he or she is required to provide an opinion of market
  • 70 Module value. The appraiser must present additional data that process for lenders and appraisers. The forms havehas been researched, verified, and analyzed to produce expanded comment areas and sections to report thean accurate opinion of value in accordance with the sales and listing histories of both the subject propertyapplicable sections of Standard 1 of the USPAP. and comparable sales.Required exhibits. The required exhibits include: The forms feature a single use for each form, a stan-• a street map that shows the location of the subject dardized format across all the forms, and expanded property and of all comparables included in the comment areas. However, reporting requirements appraisal report under review and any additional are more stringent, the preparation time could be comparable sales provided by the review appraiser. lengthened, and from the appraiser’s perspective, their potential liability to third parties is increased.• 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 resOUrces identified. Photographs must be originals that Fannie Mae’s FAQs for the Revised Property and are produced either by photography or electronic Appraisal Report Forms (November 1, 2005) imaging. www.efanniemae.com/sf/formsdocs/forms/pdf/• clear, descriptive photographs in black and white sellingtrans/appraisalfaqs.pdf or color that show the front of each comparable Resolution of the Association of Appraiser sale included in the appraisal report under review Regulatory Officials dated October 10, 2005 and any additional comparable sales described in http://aaro.net/pdf/AARO_2005-10-10_FNMA_ the appraisal field review report. Generally, pho- Resolution.pdf tographs should be originals that are produced by photography or electronic imaging; however, cop- Florida Real Estate Appraisal Board ies of photographs from a multiple listing service or www.myflorida.com/dbpr/re/freab_welcome.shtml from the appraiser’s files are acceptable if they are clear and descriptive. Fannie Mae Announcement 05-02 www.efanniemae.com/sf/formsdocs/forms/ www.efanniemae.com/sf/guides/ssg/annltrs/pdf/ pdf/sellingtrans/2000.pdf 2005/05-02.pdfTable 8.1 compares the old form numbers to the new Fannie Mae Formsform numbers and usage. www.efanniemae.com/sf/formsdocs/forms/a FinaL nOteThe revised appraisal forms offer additional consis-tency among industry participants that streamlines the table 8.1: comparison of new and Old Forms Old Fannie Old Freddie March 2005 March 2005 Property type Mae # Mac # inspection type Fannie Mae # 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 107 465 Interior/Exterior 107 465 Condominium Unit 2055 2055 Interior/Exterior 107 465 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 70BSource: Compiled by the author.
  • New and Updated Fannie Mae / Freddie Mac Appraisal and Property Report Forms 71 MODULe revieW eXercises Use the exercise questions to review the module material. The answers are found on the bottom of the next page.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. 1) c 2) d 3) b 4) c 5) a 6) a ANSWERS:
  • 72 14-Hour Mortgage Brokering/Lending Continuing Education CourseInstructions Read the material, answer the end of module exercises, then complete your 100 question Final Examination. The cost of the course is $39.95. Fax or mail your Registration Form and Answer Sheet with appropriate payment. Use the reply envelope provided for mailing or mail to the address on the Registration Form. Upon receipt, Bert Rodgers Schools will process your Final Examination and your official certificate of completion will be mailed to you the next business day.Student Information Mortgage Brokers: Please enter the Audit # found on your current license. Principal Representatives and Loan Originators: Please create a unique Student ID by entering the last 5 digits of your Social Security Number.Priority Services Same-Day Priority with Email or Fax Certificate — $10 Fax your Registration Form with appropriate payment information and your completed Answer Sheet to us any business day by 3PM EST. We will email or fax your certificate of completion to you the same business day. A hard copy will also be mailed the next business day. Next-Day Priority with Fax Certificate — $7 Fax your Registration Form with appropriate payment information and your completed Answer Sheet to us any business day by 5PM EST. We will fax your certificate of completion to you by 11AM EST the next business day. A hard copy will also be mailed the next business day. Priority Grading Notes • Priority Grading is only available to those with a fax number or email address to receive the certificate of completion. • Fax your Registration Form and Answer Sheet to 941-378-3883. You must provide a legible fax number or email address. • BRS will attempt to fax your certificate of completion 3 times. • For email priority service, your certificate of completion is sent as a PDF attachment. You must have the free program Adobe Acrobat Reader® (www.acrobat.com) to view and/or print your certificate. • Make prioritygrading@bertrodgers.com a trusted source to prevent your email certificate from going into your junk email. • Please call our office if you have not received your certificate of completion by 5PM EST.Payment Method Bert Rodgers Schools accepts checks, money orders, Discover, Visa, MasterCard, American Express, and Visa or MasterCard check cards. Note: Your exam will not be processed unless complete payment is received. There are additional charges for Priority Service.Achievement Certificate — $5 To obtain your personalized Achievement Certificate, suitable for framing, check the Achievement Certificate box in the Tuition/Payment section of the Registration Form. Add a payment of $5 to your total. Your certificate is mailed to you.
  • 14-Hour Florida Mortgage Brokering/Lending Continuing Education Course 100 Question Final ExaminationTrue or False QuestionsAnswer each question by completely filling in the T or F circle on the Answer Sheet.1. The Office of Financial Regulation (OFR) can’t take disciplinary action if a licensee pays a fee with a bad check. T/F2. The OFR deems applications received when they have received all required fees. T/F3. Licensees must display their individual and business licenses. T/F4. The OFR 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 authorized by F.S. 494. T/F5. The Office of Financial Regulation may conduct an examination of any person to determine compliance under Part IV of Chapter 494, F.S. T/F6. Each credit bureau uses the same name for their credit score model. T/F7. Before 2005, the 3 major credit bureaus only provided credit scores to borrowers. T/F8. Credit scores range from 300-850. T/F9. Consumers can report their pay history directly to Pay Rent Build Credit. T/F10. A PRBC Report cannot be used as a nontraditional credit report. T/F11. The initial fixed period is the number of months the interest rate will be fixed at the initial interest rate. T/F12. Equity is the difference between the value of the property and the owner’s indebtedness. T/F13. During the interest-only period, the loan balance remains unchanged. T/F14. A prepayment privilege is a charge by a lender when a mortgage is repaid before a certain period of time elapses.T/F15. When a mortgage recasts, the increased monthly payment overrides the monthly amount set by the payment cap. T/F16. A partially amortizing mortgage with periodic installments of principal and interest with the balance of the mortgage due in a lump sum at the end of the term is a balloon mortgage. T/F17. A nonconforming loan is a full documentation loan that meets certain underwriting criteria and loan limits. T/F
  • 18. With fewer lenders willing to lend money to fund subprime mortgages, less options are available for the borderline customer. T/F19. A borrower who is in danger of losing their home should seek a qualified certified public accountant. T/F20. A borrower should contact the lender immediately when he or she cannot make the mortgage payment. T/F21. The further behind in the mortgage payments the borrower is, the less options available to cure the default. T/F22. In order for the lender to reinstate the mortgage, the borrower must pay everything owed in one lump sum. T/F23. After 1980, borrowers could only apply for an FHA, VA, or a conventional loan. T/F24. FHA and VA loans are considered full documentation loans. T/F25. According to the FBI, mortgage fraud is one of the slowest growing white-collar crimes. T/F26. A first payment default is when no monthly mortgage payments are made on the loan. T/F27. The mortgage industry is loosely regulated. T/F28. The IRS has special agents equipped to investigate mortgage fraud and illegal real estate crimes. T/F29. The State of Florida OFR does not conduct a criminal background check for individuals wanting to become a licensed mortgage broker. T/F30. Property flipping occurs when a person buys an expensive property and quickly sells it at a high profit using a straw buyer. T/F31. Money laundering is considered tax evasion by the IRS. T/F32. One ramification of mortgage fraud could be the inability to sell the home because of the inflated purchase price. T/F33. The Citizens Property Insurance Corporation provides insurance to, and serves the needs of, homeowners in high-risk areas and others who cannot find coverage in the open, private insurance market. T/F34. Flood insurance only covers losses to your property caused by flooding. T/F35. Residents of the coastal barrier resource system area don’t have trouble finding flood insurance coverage. T/F36. Flood insurance is subsidized by the U.S. Government for communities that agree to manage flood hazard areas by adopting minimum standards. T/F37. A structure located within a Special Flood Hazard Area shown on a National Flood Insurance Program map has a 36% chance of suffering flood damage during the term of a 30-year mortgage. T/F38. Floridians now have the choice to stay with the Citizens Property Insurance Corporation or go with a different provider. T/F
  • 39. The Insurance Industry Accountability and Consumer Protection Act allows homeowners to include windstorm coverage with their policies. T/F40. The Insurance Industry Accountability and Consumer Protection Act allows policyholders to exclude contents coverage. T/F41. A prudent buyer should make their sales contract contingent upon receiving a Comprehensive Loss Underwriting Report from the seller. T/F42. Mediation is binding. T/F43. Only renters who lived in a presidential declared disaster area can apply for an FHA 203(h) loan. T/F44. When a borrower obtains a Good Neighbor Next Door Program loan, they must live in the property for at least the first 3 years so they don’t have to repay the silent second mortgage they obtained at closing. T/F45. The monthly payment for a 30 year fixed rate mortgage is lower than the monthly payment for a 40 year fixed rate mortgage. T/F46. The Home Possible® 100 Mortgage allows for fixed rates and adjustable rates. T/F47. Flexible sources of funds include gifts and grants. T/F48. All borrowers must be occupants and meet area median income limits unless the property is in an underserved area for the Home Possible® Neighborhood Solution 100 Mortgage. T/F49. Fannie Mae says the changes to the appraisal report forms effective November 1, 2005, were intended to hold appraisers accountable for the quality of their work and to combat fraud. T/F50. Appraisers must use Fannie Mae Form 1075 for cooperative units. T/F
  • MULTIPLE CHOICE QUESTIONSAnswer each multiple-choice question by completely filling in the a, b, c, or d circle.51. With the use of the Florida Statutes and Administrative Code, the Department of Financial Services regulates mortgage: a. brokers. b. brokerage businesses. c. lenders and correspondent lenders. d. all of the above.52. The Financial Services Commission is composed of the: a. Governor and the Cabinet. b. Office of Financial Regulation. c. Office of Insurance Regulation. d. Office of Financial Regulation and by the Office of Insurance Regulation.53. The Office of Financial Regulation may take disciplinary action when a final judgment is entered against an applicant or licensee in a civil action upon grounds of fraud, misrepresentation, deceit, or: a. moral turpitude. b. embezzlement. c. securities misappropriation. d. culpable negligence.54. A high-cost home loan is a mortgage that is secured by: a. investment property. b. a second home. c. a principal dwelling. d. any of the above.55. A credit report includes information on: a. where the applicant has lived. b. how the applicant pays their bills. c. whether the applicant has been arrested or filed for bankruptcy. d. all of the above.56. When the creditor denies a loan request, the _________________ requires the creditor provide a notice disclosing the reason for the denial. a. Fair Credit Reporting Act b. Fair Isaac and Company c. Equal Credit Opportunity Act d. Regulation Z57. Consumers rights under the Fair Credit Reporting Act include the right to: a. know what is in their credit file. b. ask for a credit score. c. know if information in their credit file has been used against them. d. all of the above.
  • 58. Credit scores can be improved by paying bills on time, keeping balances low on credit cards in relation to the available credit, and: a. paying down revolving debt. b. applying for every new credit card available. c. missing a few payments and not getting current. d. none of the above.59. Which credit score provides a more predictive score for thin-file consumers? a. Fair Isaac and Company b. Pay Rent Build Credit c. Vantage Score(SM) d. Fair Credit Reporting Score60. The most common indexes used with ARMS are: a. The Prime Lending Rate, LIBOR, COFI, and MTA. b. COFFEE and the federal funds rate. c. The Prime Lending Rate, COFFEE, and the federal funds rate. d. COFI, the Prime Lending Rate, and COFFEE.61. What percentage is equal to 250 basis points? a. 25.00 % b. 2.50 % c. 0.250 % d. 0.0250 %62. At the end of the loan term for a traditional mortgage, the loan will be: a. paid on. b. extinguished. c. fully non-amortized. d. answers a and c63. LIBOR stands for: a. London Inter Bridges Of River. b. London I Believe Ollie Remains. c. London Inter Bank Offering Rate. d. none of the above.64. Examples of professionals that could benefit from a pay option ARM or an Interest Only Payment (I/O) include: a. recent medical school graduates. b. recent law school graduates. c. those paid irregularly through commissions or seasonal earnings. d. all of the above.65. Subprime lenders equate the risk in financing by: a. charging higher interest rates and fees. b. including prepayment penalties. c. including balloon payments. d. all of the above.
  • 66. A ________ is an additional charge made by a lender when the loan is paid off before its scheduled time. a. prepayment privilege b. prepayment penalty c. payment privilege d. payment penalty67. At the time of loan application, which document advises the customer that the monthly mortgage payment might not be fixed? a. Truth-In-Lending Disclosure b. Good Faith Estimate c. ECOA Statement d. Prepayment Penalty Statement68. When you are unemployed, prioritize your debts in the following order: a. food> shelter> utilities. b. shelter> utilities> food. c. shelter> food> utilities. d. utilities> food> shelter.69. Lenders can offer different loan workout solutions to help the borrower keep his or her home when the mortgage is past due, including: a. mortgage reinstatement. b. forbearance. c. repayment plan. d. all of the above.70. ___________ loans require borrowers with certain minimum credit scores to state what their job is without having to disclose any income or assets on the loan application and no verification by the lender. a. SISA b. SIVA c. NINA d. No DOC71. ________ loans require borrowers with certain minimum credit scores to simply state their income and their assets on the loan application without providing supporting documentation or verification by the lender. a. SISA b. SIVA c. NINA d. No Doc72. _________ loans require borrowers with certain minimum credit scores to state their occupation and assets on the loan application but only the borrower’s assets are verified by the lender. a. SISA b. SIVA c. NIVA d. NINA
  • 73. The Mortgage Asset Research Institute (MARI) maintains a database of industry individuals and companies that have: a. submitted files with fraud. b. submitted files with material misrepresentations. c. had public or legal action taken against them. d. all of the above.74. Three common mortgage and real estate schemes found by the IRS include: a. property flipping; 2 sets of settlement statements; and actual qualifications. b. property flipping; 3 sets of settlement statements; and fraudulent qualifications. c. flap jack flipping; 2 sets of settlement statements; and fraudulent qualifications. d. property flipping; 2 sets of settlement statements; and fraudulent qualifications.75. Fraudsters who record false quit claim or warranty deeds to obtain title to a property normally target homeowners who live: a. out of the state or out of the country. b. in state or out of the country. c. in this state. d. none of the above.76. Identity theft occurs when someone uses your _______, ______, and ______ to commit fraud and other crimes without your permission. a. blood type/ name/ Social Security number b. name/ Social Security number/ credit card number c. cell phone/ Social Security number/ pass key d. all of the above77. When at least 2 adjacent properties in the area have been flooded, the National Flood Insurance Program covers damage by: a. tropical depressions, tropical storms, or hurricanes. b. heavy rain storms, tropical storms, or tidal waters. c. hurricanes, rivers, or tidal waters. d. hurricanes, bad snow storms, or tidal waters.78. Standard flood policy coverage will include: a. structural damage. b. flood debris cleanup. c. floor surfaces such as carpeting and tile. d. all of the above.79. Nonresidential property owners can insure their building up to ______ and their contents up to _______. a. $250,000/$250,000 b. $500,000/$500,000 c. $500,000/$100,000 d. $1,000,000/$1,000,000
  • 80. Renters can insure their contents up to: a. $100,000. b. $250,000. c. $500,000. d. $1,000,000.81. What are the 3 standard policy forms offered by the National Flood Insurance Program? a. Habitat Policy, General Property Policy, and Dwelling Policy Forms. b. Dwelling Policy, General Property Policy, and Residential Condominium Building Association Policy Forms. c. Dwelling Policy, Specific Property Policy, and Residential Condominium Building Association Policy Forms. d. Habitat Policy, Dwelling Policy, and Residential Condominium Building Association Policy Forms.82. When condominium associations do not carry sufficient insurance acceptable to a mortgage lender, the buyer/borrower must purchase a/an __________ policy to obtain the mortgage. a. individual unit owner’s building b. group unit owner’s building c. nonresidential unit owner’s building d. renter’s policy83. Who issues Flood Insurance Rate Maps? a. National Flood Insurance Program b. Citizen’s Property Insurance Corporation c. Federal Emergency Management Agency d. Florida Hurricane Catastrophe Fund84. Most lending institutions do not require borrowers to purchase flood insurance if the property improvements are located in zones: a. A, V, or W. b. B, C, or X. c. A, B, or C. d. B, C, or D.85. When a homeowner obtains a Letter of Map Amendment from the Federal Emergency Management Agency, the lending institution may choose to: a. waive the flood insurance requirements. b. increase the flood insurance requirements. c. decrease the flood insurance requirements. d. decline the loan request.86. The Insurance Industry Accountability and Consumer Protection Act requires the Insurance Consumer Advocate to assign a letter grade to insurance companies based on: a. claims, mortgage practices, and other company operations. b. claims, payment practices, and other company operations. c. payment practices and another company’s operations. d. none of the above.
  • 87. When an insurer offers homeowners insurance in another state but only offers Floridians auto insurance, this called: a. apple picking. b. blueberry picking. c. cherry picking. d. cantaloupe picking.88. Which act removed the requirement that the Citizens Property Insurance Corporation had to charge the highest rates? a. The Bunning-Bereuter-Blumenauer Flood Insurance Reform Act of 2004 b. The National Flood Insurance Act of 1968 c. The Insurance Industry Accountability Act d. The Insurance Industry Accountability and Consumer Protection Act89. The Comprehensive Loss Underwriting Exchange report provides a ____ year history of dates, types of losses, and amounts paid for each loss for a particular property. a. 3 b. 4 c. 5 d. 790. The Florida Hurricane Catastrophe Fund was created to: a. cost the citizens of Florida more money. b. provide an unstable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses. c. provide a stable and ongoing source of reimbursement to insurers for a portion of their catastrophic hurricane losses. d. prevent catastrophic hurricanes from reaching Florida.91. The Insurance Consumer Advocate will be proactive in finding solutions to the insurance issues facing Floridians; to call attention to any questionable insurance practices; and to go: a. hand-in-hand with insurance companies seeking unfair or unjustified rate increases. b. head-to-head with insurance companies seeking fair or justified rate increases. c. head-to-head with insurance companies seeking unfair or unjustified rate increases. d. head-to-head with insurance companies seeking unfair or justified rate increases.92. Full-time law enforcement officers who are eligible to apply for the Officer Next Door Program include those who work for: a. federal, and local governments only. b. federal, state, or local governments only. c. federal, state, local or Indian tribal governments. d. state, local or Indian tribal governments only.93. Which loan product requires a 3% down payment? a. Flexible 97® b. Flexible 100™ c. Home Possible® 100 d. FHA 203(h)
  • 94. Who can apply for a Home Possible® Neighborhood Solution 100 Mortgage? a. educators b. law enforcement officers c. firefighters d. all of the above95. A police officer wants to purchase a condominium as his or her primary residence. If the officer wants 100% financing, he or she should attempt to qualify for the: a. Home Possible® Neighborhood Solution 100 Mortgage. b. Home Possible® Neighborhood Solution 97 Mortgage. c. FHA 203(b). d. none of the above.96. Fannie Mae’s mandatory use date for the new, revised appraisal forms was: a. January 1, 2005. b. November 1, 2005. c. January 1, 2006. d. November 1, 2006.97. Appraisers should use which Fannie Mae Form to prepare an appraisal report for a 1-unit manufactured home? a. 1004C b. 1004D c. 1007 d. 100898. When lenders spot-check appraisals, which Fannie Mae Form does the review appraiser use for 2-to-4 unit properties? a. 1004C b. 2000A c. 1004 d. 205599. The Fannie Mae Form 2055 requires the appraiser to: a. perform a complete visual inspection of the exterior area of the subject property from at least the street. b. inspect the neighborhood. c. inspect each of the comparable sales from at least the street. d. all of the above.100. Which Fannie Mae Form appraisal report form will an appraiser use for an exterior-only inspection of a condominium? a. 1004 b. 2055 c. 1075 d. 1032Please place your answers on your Registration Form/Answer Sheet.
  • 14-Hour Florida Mortgage Brokering/Lending Continuing Education Course Registration Form Course Completion Attest Statement (Required) I hereby certify that I personally (and without assistance) completed the 14-Hour Continuing Education Course in ____________ hours. Your signature is required on this Course Completion Attest Statement in order to complete your professional continuing education requirement. Signature _________________________________________________________________________________________STuDENT INFORMATION Please print clearly. Use blue or black ink.Mortgage Brokers and Associates Loan Originators and Principal RepresentativesAudit# (Found on your current license) Student ID# (Last five digits of Social Security Number)Name ________________________________________________________________________________________________________Address ______________________________________________________________________________________________________City ________________________________________________________________________ State ________ Zip ________________Day phone (_______) __________________________________ Email address ____________________________________________l Yes, I want to receive information from Bert Rodgers Schools via email.TuITION / PRIORITY SERVICES You must provide a fax number or email address to receive Priority Services.l 14-Hour Continuing Education Tuition3 $39.95 $39.95 ___________l Standard Service Included ___________l Same-Day Priority Grading Service - Email $10.00 ___________ In by 3 PM EST, M-F, emailed back the same business day Email my Certificate of Completion to: ____________________________________________l Same-Day Priority Grading Service - FaxBack $10.00 ___________ In by 3 PM EST, M-F, faxed back the same business dayl Next-Day Priority Grading Service - FaxBack $7.00 ___________ In by 5 PM EST, M-F, faxed back 11 AM EST the next business day Fax my Certificate of Completion to: (____________)__________________________________l Certificate of Achievement (optional) $5.00 ___________Thank you for choosing Bert Rodgers Schools! TOTAL ___________PAYMENT METhOD (make check or money order payable to Bert Rodgers Schools) Enclose your check, money order, or credit card information and this Registration Form along with your Answer Sheet in the envelope provided. If using a credit card you may fax this page to: (941) 378-3883. l Check # ______________ l VISA (13 or 16 digits) l American Express (15 digits) l Money Order l Discover (16 digits) l MasterCard (16 digits) Credit Card Expiration Number Date of Card 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 (Month) (Year) Signature of Cardholder (required)
  • Fax this Registration Form to 941-378-3883.
  • Answer Sheet 2007-2008 Florida Mortgage Brokering/Lending Continuing Education CourseName____________________________________ Phone # __________________________Your Registration Form must be included with this Answer Sheet. Answer each True or Falsequestion by completely filling in the T or F circle. 1. T F 11. T F 21. T F 31. T F 41. T F 2. T F 12. T F 22. T F 32. T F 42. T F 3. T F 13. T F 23. T F 33. T F 43. T F 4. T F 14. T F 24. T F 34. T F 44. T F 5. T F 15. T F 25. T F 35. T F 45. T F 6. T F 16. T F 26. T F 36. T F 46. T F 7. T F 17. T F 27. T F 37. T F 47. T F 8. T F 18. T F 28. T F 38. T F 48. T F 9. T F 19. T F 29. T F 39. T F 49. T F 10. T F 20. T F 30. T F 40. T F 50. T F Answer each multiple-choice question by completely filling in the a, b, c, or d circle.51. A B C D 61. A B C D 71. A B C D 81. A B C D 91. A B C D52. A B C D 62. A B C D 72. A B C D 82. A B C D 92. A B C D53. A B C D 63. A B C D 73. A B C D 83. A B C D 93. A B C D54. A B C D 64. A B C D 74. A B C D 84. A B C D 94. A B C D55. A B C D 65. A B C D 75. A B C D 85. A B C D 95. A B C D56. A B C D 66. A B C D 76. A B C D 86. A B C D 96. A B C D57. A B C D 67. A B C D 77. A B C D 87. A B C D 97. A B C D58. A B C D 68. A B C D 78. A B C D 88. A B C D 98. A B C D59. A B C D 69. A B C D 79. A B C D 89. A B C D 99. A B C D60. A B C D 70. A B C D 80. A B C D 90. A B C D 100. A B C D P.O. Box 4708, Sarasota, FL 34230-4708 Page 2 of 2 Toll-Free: 800-432-0320 ● 941-378-2900 Fax: 941-378-3883 ● www.bertrodgers.com
  • Fax this Answer Sheet to 941-378-3883.