Principles and Practice Module 7 PowerPoint

1. Real Estate Principles &
Practices
Module 7
February 2015

2. Chapter 11
Fair Housing
February 2015

3. Key Terms
• Blockbusting
• Disparate Impact
• Exclusionary Zoning
• Redlining
• Steering
• Title VIII
February 2015

4. Civil Rights Act of 1866
• Prohibits racial discrimination in any
property transaction in the U.S.
• Enforcement
– Injunctions
– Compensatory damages
– Punitive damages
February 2015

5. Federal Fair Housing Act
• Title VIII of the Civil Rights Act of 1968
• Prohibits discrimination based on race,
color, religion, sex, national origin,
disability, or familial status in the sale or
lease of residential property
– Also prohibits discrimination in advertising,
real estate brokerage, lending, and some
other services associated with residential
transactions
February 2015

6. Federal Fair Housing
Act Exemptions
• Single-family home sold/rented by individual owner
– Owner may not own more than three such homes
– No discriminatory advertising may be used
– No real estate professional may be used
• Rental of a room or unit in a dwelling with no more
than four units (“Mrs. Murphy Exemption”)
– Owner must occupy one unit
– No discriminatory advertising may be used
– No real estate professional may be used
February 2015

7. Federal Fair Housing
Act Exemptions
• Religious organizations/nonprofit organizations
dealing with their own property in noncommercial
transactions
– Occupancy may be limited or given preference to their
own members provided membership is not restricted
based on race, color, or national origin
• Private clubs with lodging not open to the public
and not operated for commercial purpose
– May limit occupancy or give preference to their own
members
cont.
February 2015

8. Americans with
Disabilities Act (ADA)
• Requires compliance in five general areas
of service/operation:
– Employment
– Public services
– Public accommodations
– Private entities
– Telecommunications
February 2015

9. Prohibited Acts
• Steering
– Channeling prospective buyers or tenants to particular
neighborhoods based upon their race, religion, national
origin, or ancestry
• Blockbusting (panic selling)
– The practice of predicting the entry of minorities into the
neighborhood, and stating or implying this will result in
undesirable consequences
• Redlining
– Refusal to make loans secured by property in certain
neighborhoods for discriminatory reasons
February 2015

10. Enforcement of Federal
Fair Housing Act
• Complaint may be filed with:
– Office of Equal Opportunity (OEO) of HUD
– State agency with similar responsibilities (e.g.,
Ohio Civil Rights Commission)
• If efforts at voluntary resolution are
unsuccessful:
– Dispute may be decided by HUD’s
administrative law judges
– Within two years, person may file civil suit
February 2015

11. Ohio Civil Rights Law
• Prohibits housing discrimination on the
basis of race, color, religion, sex,
ancestry, national origin, disability,
familial status, or military status
• Applies to:
– Sale or lease of any building used as a
residence
– Vacant land offered for sale or lease
February 2015

12. Prohibited Acts
• Blockbusting and steering
• Discriminatory advertising and restrictive
covenants
• Interference with a person’s enjoyment of
his civil rights
• Discrimination by MLS or insurance
companies (homeowners, fire)
• Redlining and other lending discrimination
February 2015

13. Exemptions
• Religious organizations (same as under
the Federal Fair Housing Act)
• Private or fraternal organizations (same as
under the Federal Fair Housing Act)
• Ohio Civil Rights Law does not recognize
the “Mrs. Murphy Exemption” or allow the
seller or lessor of a single-family home to
discriminate
February 2015

14. Enforcement of Ohio
Civil Rights Law
• Charge may be filed with the Ohio Civil Rights
Commission
– Must be in writing, under oath, and filed within one
year after incident occurred
• If there is evidence of violation, Commission will
negotiate voluntary compliance with the Law
– If voluntary compliance is not reached, a formal
hearing will be held
February 2015

15. Fair Housing and
Ohio’s License Law
• 1st offense: Suspension or revocation of
real estate license
– Licensee must have been found guilty by a
court
• 2nd offense: Suspension of license for 2
months or revocation of license
• Subsequent offenses: License must be
revoked
February 2015

16. Checkers (Testers)
• People working with a fair housing
organization who pretend to be interested
in buying or renting property from
someone suspected of unlawful
discrimination
• Suspension/revocation rules do not apply
if the case involves checkers/testers
February 2015

17. Examples of Discrimination
• Discrimination in renting
• Discrimination in selling
• Discrimination in advertising
– Racial steering
• Discrimination in municipal actions
– Exclusionary zoning
– Disparate impact
February 2015

18. Liability for Discrimination
• Individuals/groups with standing to sue for
violation of the Act:
– Buyers
– Sellers
– Renters
– Fair housing organization
– Checkers
February 2015

19. Protection Against
Fair Housing Violations
• Agents should:
– Let clients choose what areas they do/don’t
want to see
– Direct clients to third parties for answers to
questions of quality, safety, etc.
– Avoid rating one area over another
– Keep good records of all meetings, phone
calls, appointments (kept or missed)
February 2015

20. Chapter 11 Quiz
1.) The Civil Rights Act of 1866 prohibits
a. ethnic discrimination in all property
transactions.
b. racial discrimination in all property
transactions.
c. both ethnic and racial discrimination in all
property transactions.
d. neither ethnic nor racial discrimination in all
property transactions.
February 2015

21. Chapter 11 Quiz
2.) The Federal Fair Housing Act prohibits
discrimination based on
a. race, color, religion, sex, age, national origin,
disability, or familial status.
b. race, color, religion, sex, ancestry, national origin,
disability, familial status, or handicap.
c. race, color, religion, sex, marital status, national
origin, disability, or familial status.
d. race, color, religion, sex, national origin, disability,
or familial status.
February 2015

22. Chapter 11 Quiz
3.) Which exemption to the Federal Fair
Housing Act is recognized in Ohio?
a. lodging offered by nonprofit religious,
fraternal, or charitable organizations
b. the Mrs. Murphy exemption
c. refusing to sell to someone whose family
originated in Italy
d. the sale or rental of a single-family home
by a private individual
February 2015

23. Chapter 11 Quiz
4.) Which statement appears on the Equal
Housing Poster?
a. “Blockbusting is also illegal.”
b. “Puffing is also illegal.”
c. “Redlining is also illegal.”
d. “Steering is also illegal.”
February 2015

24. Chapter 11 Quiz
5.) Steering is
a. channeling prospective buyers or tenants to
particular neighborhoods based on their race,
religion, or ethnic background.
b. refusing to make loans secured by property located
in certain neighborhoods for discriminatory reasons.
c. trying to induce owners to sell their homes by
saying that the ethnic or racial makeup of an area is
changing—implying that property values will
decline.
d. none of the above
February 2015

25. Chapter 11 Quiz
6.) Blockbusting is
a. channeling prospective buyers or tenants to
particular neighborhoods based on their race,
religion, or ethnic background.
b. refusing to make loans secured by property
located in certain neighborhoods for
discriminatory reasons.
c. trying to induce owners to sell their homes by
saying that the ethnic or racial makeup of an
area is changing—implying that property
values will decline.
d. none of the above
February 2015

26. Chapter 11 Quiz
7.) Redlining is
a. channeling prospective buyers or tenants to
particular neighborhoods based on their race,
religion, or ethnic background.
b. refusing to make loans secured by property
located in certain neighborhoods for
discriminatory reasons.
c. trying to induce owners to sell their homes by
saying the ethnic or racial makeup of an area is
changing—implying that property values will
decline.
d. none of the above
February 2015

27. Chapter 11 Quiz
8.) J is selling his store but he refuses to
sell it to A because he is a Muslim. J has
violated the
a. Civil Rights Act of 1866.
b. Federal Fair Housing Act.
c. Ohio Civil Rights Law.
d. none of the above
February 2015

28. Chapter 11 Quiz
9.) D is selling his store but he refuses to
sell it to L because she is Buddhist,
Chinese, and has bad credit. D has
violated the
a. Civil Rights Act of 1866.
b. Equal Credit Opportunity Act.
c. Federal Fair Housing Act.
d. Ohio Civil Rights Law.
February 2015

29. Chapter 11 Quiz
10.) Two checkers attempt to buy a
home and find evidence of
discrimination. What will happen to
the salesperson's license?
a. It will be placed on inactive status.
b. It will be revoked.
c. It will be suspended.
d. There is an insufficient amount of
information to determine what will
happen.
February 2015

30. Chapter 11 Quiz
11.) Which may NOT be held liable for
housing discrimination?
a. landlord who will not rent to alcoholics
b. multiple listing service
c. real estate licensee
d. seller who will not sell to Catholics
February 2015

31. Chapter 12
Overview of Real
Estate Finance
February 2015

32. Key Terms
• Adjustable Rate
Mortgage (ARM)
• Alienation Clause
• Amortized Loan
• Annual Percentage Rate
(APR)
• Assumption
• Buydown
• Conforming Loan
• Conventional Loan
• Federal Housing
Administration (FHA)
• Loan Origination Fee
• Negative Amortization
• Point
• Truth in Lending Act
(TILA)
• Veterans Administration
(VA)
February 2015

33. Primary Mortgage Markets
• Lenders who make mortgage loans
directly to borrowers:
– Commercial banks
– Savings and loans (S&Ls)
– Mortgage companies
• Other real estate lenders include: Mutual
savings banks, REITs, life insurance
companies, pension plans, private
individuals (e.g., seller financing,
investors)
February 2015

34. Secondary Mortgage Markets
• Private investors and government
agencies that buy and sell real estate
mortgages
• Buy real estate loans as investments from
all over the country
– Primary market is typically local in nature
February 2015

35. Secondary Markets: Function
• To buy and sell the mortgages of primary
market lenders
• Buying and selling mortgages can make
more funds available to be loaned again
– This stabilizes local real estate markets
February 2015

36. How Secondary Markets Work
• Standardized underwriting criteria are
used to qualify borrowers and property
• Three agencies responsible for most of the
secondary mortgage market activity:
– Fannie Mae—The Federal National Mortgage
Association (FNMA)
– Ginnie Mae—The Government National
Mortgage Association (GNMA)
– Freddie Mac—The Federal Home Loan
Mortgage Corporation (FHLMC)
February 2015

37. Fannie Mae
• Nation’s largest investor in residential mortgages
• Funds operation by securitization
• Guarantees conventional loans with full and
timely payments of principal and interest
• Buys mortgages or interests of pools of
mortgages from lenders
• Loans sold to Fannie Mae are usually serviced
by originating lender or mortgage servicing
company
February 2015

38. Ginnie Mae
• Primary functions:
– To promote investment by guaranteeing the payment
of principal and interest on FHA and VA mortgages
through its mortgage-backed securities program
– To serve low- and moderate-income homebuyers
• Provides assistance to the Department of
Agriculture’s Rural Housing Loans
• Provides “special assistance” financing for urban
renewal and housing projects with below-market
interest rates to low-income families
February 2015

39. Freddie Mac
• Currently under the conservatorship of the
Federal Housing Finance Agency (FHFA)
• Does not guarantee payment of its
mortgages
• Primary function:
– Help savings and loans acquire additional
funds for lending in the mortgage market by
purchasing the mortgages they already held
• May deal in FHA, VA, and conventional
mortgages
February 2015

40. Secondary Mortgage
Market Quality Control
• Lenders wanted to sell their loans to
secondary agencies must follow the
underwriting guidelines of those agencies:
– Loan-to-value (LTV) ratios
– Income-expense ratios
• Inspires confidence in purchasers of the
mortgage-backed securities
February 2015

41. Types of Financing
• Financing programs used in Ohio:
– Conventional financing
– Government financing
– Nontraditional financing tools
February 2015

42. Conventional Financing
• When real estate is paid for or financed
with a conventional loan
– Any loan not insured or guaranteed by a
government agency
February 2015

43. Traditional Conventional Loans
• Typically long term, fully amortized, with a
fixed rate
– 80% conventional loan
– 90% conventional loan
– 95% conventional loan
February 2015

44. Private Mortgage Insurance (PMI)
• Offered by private companies to insure a lender
against default on a loan by a borrower
• Mortgage insurance company shares part of the
lender’s risk (e.g., 20%-25% of the loan amount)
• Premiums may be:
– Monthly (added to mortgage payment)
– One-time payment
– A higher interest rate on the loan (no PMI
premium)
February 2015

45. Cancelling PMI
• Once the increased risk of borrower
default is gone, PMI has fulfilled its
purpose
• Homeowners Protection Act of 1998
– For all loans made after July 29, 1999,
lenders must automatically cancel PMI when
a home has been paid down to 78% of its
original value (provided borrower is not
delinquent)
February 2015

46. Secondary Financing
• When a buyer borrows money form
another source (sometimes the primary
lender) to pay part of the purchase price or
closing costs.
– Sometimes referred to as 80-10-10 loans
• The seller often “carries” the extra
financing
February 2015

47. Assumption of Conventional Loans
• Assumption: When one party takes over
responsibility for the loan of another party
and the terms of the loan/note remain
unchanged
• Usually lender approval is needed in
addition to a release
– Without a release, the original party remains
secondarily liable for the loan
February 2015

48. Assumption of Conventional Loans
• Often not possible with loans written today
• When requesting an assumption, the
lender may:
– Accept and leave the loan terms intact
– Accept but charge an assumption fee and/or
increase the loan’s interest rate
– Not allow the assumption and call the note
(a call provision clause must be stated in
the note or mortgage to do so)
cont.
February 2015

49. Prepayment Penalties
• Fees a lender chargers the borrower for
paying off a loan early
• Standard Fannie Mae and Freddie Mac
notes/mortgages do not have prepayment
penalties
• Prohibited in FHA and VA loans
February 2015

50. Conforming vs.
Nonconforming Loans
• Conforming loans:
– Meet Fannie Mae/Freddie Mac underwriting
standards and can be sold on the secondary
market
– Allows option of liquidating real estate loans
• Nonconforming loans:
– Do not meet Fannie Mae/Freddie Mac
underwriting standards and cannot be sold to
Fannie Mae or Freddie Mac
– May be sold on other secondary markets
February 2015

51. Government Financing
• Real estate loans are insured, guaranteed,
or sponsored by government programs
• Two basic government finance programs
are loans insured by the:
– FHA
– VA
February 2015

52. FHA-Insured Loans
• Insured by the federal government through
the Department of Housing and Urban
Development (HUD).
• The FHA is:
– A government agency under HUD that
actually insures the loans
– A federal mortgage insurance agency
February 2015

53. FHA Loans vs. Conventional Loans
• FHA loans require borrower make a minimum
3.5% down payment with no secondary
financing
• Mortgage insurance (MIP) is required for FHA
loans, regardless of down payment size
• FHA loans are assumable (with credit checks
for those made after Dec. 1, 1986)
• FHA loans do not have prepayment penalties
February 2015

54. Advantages of FHA-Insured Loans
• Low down payments
• Assumable
• Less stringent qualifying requirements
• No prepayment penalties
February 2015

55. FHA Loan Programs
• FHA Standard Section 203(b) loans
• FHA ARM loans
February 2015

56. VA-Guaranteed Loans
• For veterans, active duty military personnel, and
certain members of the Reserves and the National
Guard
• Guaranteed by the government
• Can be used to buy single-family homes or multi-
family residences with up to four units
• A veteran purchasing a single-family home must
occupy it as his primary residence
• A veteran purchasing a multi-family property must
occupy one of the units
February 2015

57. Advantages of
VA-Guaranteed Loans
• May be obtained with no down payment
• Secondary financing is permitted
• Assumable, provided the assumer is
qualified
• No prepayment penalties
• Do not require MIP or PMI (although there
is a variable funding fee, which may not be
financed)
February 2015

58. Aspects of VA Loans
• Certificate of Reasonable Value (CRV)
– Established maximum mortgage amount a veteran
may have on a VA loan for that property
• VA loan guaranty amount (entitlement)
– Determines how much guaranty assistance a veteran
can get on a VA loan
• VA loan eligibility
– DD-214 (Discharge Papers or Report of Separation)
– Certificate of Eligibility (COE)
February 2015

59. VA Loan Assumption
• A veteran will be released from liability on
a loan only if the following conditions are
met:
– The loan must be current
– The buyer must be an acceptable credit risk
– The buyer must agree, in writing, assume the
liabilities and obligations of the veteran,
including the indemnity obligation
– The VA must issue a release
February 2015

60. Nontraditional Financing Tools
• Buy downs
– Temporary or permanent
• Discount points
– A point is one percent of the loan amount
– Add to the lender’s yield
• ARMs
• Bi-weekly mortgages
• Reverse mortgages (Home Equity Conversion)
• Seller financing
February 2015

61. Adjustable Rate Mortgages (ARMs)
• Permit lender to periodically adjust the interest
rate so it reflects fluctuations in the cost of
money
• Elements of ARMs:
– Index
– Margin
– Rate and mortgage payment adjustment period
– Caps on interest rate, mortgage payment, negative
amortization
– Conversion option
February 2015

62. Fannie Mae/Freddie Mac
Guidelines for ARMs
• Stricter LTV guidelines than for fixed-rate
loans
– LTV ratios may not exceed 95%
– Require owner occupancy
February 2015

63. ARM Disclosures
• Must comply with federal guidelines under
Regulation Z of the Truth in Lending Act
– A general brochure must be given to
borrowers
– Certain specific disclosures must be made if
relevant to the specific ARM program
– The annual percentage rate (APR) must be
disclosed
February 2015

64. Client Questions
About ARM Financing
• What will my interest rate be?
• How often will my interest rate change?
• How often will my payment change?
• Is there a limit to how much my interest rate can
increase?
• Is there a limit to how much my payment can
increase at any one time?
• What is the probability of runaway negative
amortization?
• Can my ARM be converted to a fixed-rate loan?
February 2015

65. Seller Financing
• When a seller extends credit to a buyer to
finance the purchase price of the property
• The seller may:
– Charge below-market interest rates
– Offer financing to a buyer considered a credit
risk by other lenders
• Purchase money mortgages
• Unencumbered property
February 2015

66. Seller Financing—Assumptions
• An assumption might be an agreement
strictly between the buyer and the seller
– Buyer assumes responsibility for the loan
– Seller remains secondarily liable
– Seller must get a release from the lender to
be relieved of liability
• A loan is not assumable if it has an
alienation clause (also called a due-on-
sale clause)
February 2015

67. Other Nontraditional Financing
• Wraparound financing
• Purchase money second mortgage
• Land contracts
• Lease/option
February 2015

68. Federal Regulations
on Real Estate Finance
• Discrimination
– Civil Rights Act of 1866, Federal Fair Housing
Act of 1968 (Title VIII)
• Financing disclosures
– Truth in Lending Act (TILA), Regulation Z,
RESPA
– Right to rescind
February 2015

69. Truth in Lending
Act—Advertisement
• If an advertisement uses a “trigger” phrase,
disclosures are needed to tell everything about
the loan:
– Amount of the down payment (e.g., “20% down”)
– Amount of any payment (e.g., “Pay less than $700 per
month”)
– Number of payments (e.g., “Only 360 monthly
payments”)
– Period of repayment (e.g., “30-year financing
available”)
– Amount of any finance charge (e.g., “1% finance
charge”)
February 2015

70. Chapter 12 Quiz
1.) Which is NOT a function of the
secondary market?
a. buying and selling mortgages of primary
lenders
b. establishing loan standards
c. giving primary lenders a place to invest
surplus funds
d. making loans to low-income families
February 2015

71. Chapter 12 Quiz
2.) Which secondary market organization is
the largest?
a. Federal Home Loan Mortgage Corporation
b. Federal National Mortgage Association
c. Federal Reserve Board
d. Government National Mortgage
Association
February 2015

72. Chapter 12 Quiz
3.) A fully amortized loan means that the
loan will be paid off in
a. equal monthly installments over 30
years.
b. equal monthly installments with a
balloon payment.
c. monthly installments covering interest
only.
d. monthly installments that pay off the
entire balance during the loan term.
February 2015

73. Chapter 12 Quiz
4.) Joe wants to buy a $100,000 home with a
conventional loan but cannot come up with the
required minimum 5% down payment he needs
from his own cash reserves. Joe has also used
up his VA loan eligibility. What option does Joe
have?
a. ask the seller for secondary financing
b. buy more PMI (private mortgage insurance)
c. pay more points at closing to lower the interest rate
d. start looking at cheaper houses
February 2015

74. Chapter 12 Quiz
5.) The purpose of private mortgage
insurance is to
a. share all of the lender’s risk of default by
insuring the entire loan amount.
b. share none of the lender’s risk of default by
checking the borrower’s credit.
c. share some of the lender’s risk of default by
insuring part of the loan amount.
d. take over all of the lender’s risk of default by
servicing the loan.
February 2015

75. Chapter 12 Quiz
6.) A conforming loan is one that follows
the
a. criteria and guidelines of the lender making
the loan.
b. criteria established by the FHA and VA.
c. criteria established by national secondary
market investors—primarily Fannie Mae
and Freddie Mac.
d. Truth in Lending Act.
February 2015

76. Chapter 12 Quiz
7.) A discount point costs 1% of the
a. appraised value.
b. down payment.
c. loan amount.
d. sale price.
February 2015

77. Chapter 12 Quiz
8.) Which would NOT be a reason for
charging points?
a. The borrower wants to lower the interest
rate.
b. The broker wants to make extra
commission.
c. The lender wants a bigger yield.
d. The lender wants extra loan origination
fees.
February 2015

78. Chapter 12 Quiz
9.) A Buy-Down means the
a. buyer purchased mortgage insurance.
b. lender charged extra points to lower the
interest rate.
c. lender had special rates because of the
Community Reinvestment Act.
d. seller helped the buyer with a down
payment
February 2015

79. Chapter 12 Quiz
10.) Which is NOT a characteristic of
adjustable rate mortgages?
a. An index is stated in the contract that will
determine the interest rate adjustment.
b. The lender will add a margin to the index to
determine the interest rate.
c. Negative amortization can never occur
because of federal regulations.
d. The rate or payment changes can be
capped.
February 2015

80. Chapter 12 Quiz
11.) The annual percentage rate (APR) is
a. both the interest rate and fees being
charged on the loan.
b. the fees being charged on the loan only.
c. the interest rate being charged on the
loan only.
d. neither the interest rate nor the fees
being charged on the loan.
February 2015

81. Chapter 12 Quiz
12.) Which lender practice is outlawed by
the Federal Fair Housing Act?
a. blockbusting
b. conversion
c. redlining
d. steering
February 2015

82. Chapter 12 Quiz
13.) An advertisement for a home says, "No
Down Payment." What other disclosures
are required?
a. the annual percentage rate
b. the terms of repayment only
c. both the annual percentage rate and the
terms of repayment
d. neither the annual percentage rate nor the
terms of repayment
February 2015

83. Chapter 13
Mortgage Basics
February 2015

84. Key Terms
• Acceleration Clause
• Alienation Clause
• Defeasance Clause
• Equitable Right of
Redemption
• Holder in Due Course
• Land Contract
• Mortgage
• Negotiable Instrument
• PITI
• Promissory Note
• Residual Income
• Security Instrument
• Subordination Clause
• Trust Deed
February 2015

85. Types of Real Estate Instruments
• Instruments are written legal documents
that establish the rights and duties of the
parties involved in a transaction:
– Promissory notes
– Mortgages
– Trust deeds
– Land contracts
February 2015

86. Promissory Notes
• An instrument that evidences a promise to pay a
specific amount of money to a specific person
within a specific time frame
• Include:
– The date
– The names of the parties
– The amount of debt
– How and when the money is to be paid
– What happens in the event of default
– The signature of the maker
February 2015

87. Negotiable Instruments
• Promissory notes or other finance
instruments that are freely transferable
from one party to another
– A lender or other creditor can sell the note to
obtain immediate cash
• Governed by the Uniform Commercial
Code (UCC)
• Secondary market investors will buy only
negotiable instruments because they want
to be a holder in due course
February 2015

88. Types of Notes
• Straight note
• Installment note
• Fully amortized installment note
• Adjustable rate note
• Partially amortized installment note
February 2015

89. Trust Deeds
• Also called deeds of trust
• Instruments held by a third party as
security for the payment of a note
• Three-party devices:
– Borrower = trustor
– Lender = beneficiary
– Independent third party = trustee
February 2015

90. Mortgages
• Instruments that create a lien against real
property as security for the payment of a
note
• Procedure in the event of default is
judicial foreclosure
February 2015

91. Judicial Foreclosure Procedure
• A borrower defaults on a loan
• Lender accelerates the due date of the
debt to the present and gives the debtor a
notice of default
• If debtor fails to pay the balance in full,
lender files a lawsuit (foreclosure action)
• Judge will issue an order of execution
February 2015

92. Judicial Foreclosure Procedure
• Public is notified of auction through advertising
• A public auction is held at the courthouse where
anyone can bid on the property
– Minimum bid is 2/3 of the appraised value
• A confirmation of sale is filed to finalize the sale
• A sheriff’s deed is issued to the purchaser of the
property, which is recorded like any other deed
• Creditor may obtain a deficiency judgment
cont.
February 2015

93. Redemption
• Equitable right of redemption (used in
Ohio)
– Debtor can redeem property from the time the
foreclosure action is brought up until the
confirmation of the foreclosure sale
• Statutory right of redemption
– Debtors can redeem themselves after the final
sale
February 2015

94. Voluntary Conveyance
• Also called deed in lieu of foreclosure
• Debtors still lose the property but by
returning it voluntarily to the lender before
the court action is final, they can avoid
having a foreclosure on their credit report
– After confirmation of sale, transfer of property
is final
February 2015

95. Short Sales
• A lender-approved sale in which the
proceeds are not sufficient to cover the
mortgage amount(s)
• Typically done to avoid foreclosure and its
inherent costs
February 2015

96. Mortgage Types and Terms
• First mortgage
• Second mortgage
• Senior/junior mortgage
• Conventional mortgage
• Purchase money mortgage
• Blanket mortgage
• Budget mortgage
February 2015

97. Mortgage Types and Terms
• Package mortgage
• Reverse mortgage
• Wraparound mortgage
• Adjustable rate mortgage (ARM)
• Construction mortgage
cont.
February 2015

98. Land Contracts
• Real estate installment agreements where
the buyer makes payments to the seller in
exchange for the right to occupy and use
the property
– No deed or title is transferred until all, or a
specified portion of, payments have been
made
– The buyer’s present interest in a land contract
is called equitable title
February 2015

99. Typical Clauses in
Finance Instruments
• Acceleration clause
• Alienation clause
• Defeasance clause
• Prepayment clause
• Subordination clause
February 2015

100. Pre-Qualification vs. Pre-Approval
• Pre-qualification:
– The process by which an agent or lender
reviews potential borrowers to determine if
they are likely to get approved for a loan for
approximately how much money
– Not binding on the lender
• Pre-approval:
– Process by which a lender determines if
potential borrowers can be financed, and for
what amount, through the lender
February 2015

101. The Loan Process
• Consult with the lender
• Complete the loan application
• Process the loan application
• Analyze the borrower and the subject
property
• Closing the loan
February 2015

102. Credit Scoring
• An objective means of determining the
creditworthiness of potential borrowers
based on a number system
• Used during the “analyzing the borrower”
stage of the loan process
February 2015

103. Equal Credit
Opportunity Act (ECOA)
• A federal law that prohibits discrimination in granting
credit to people based on:
– Sex
– Age
– Marital status
– Color
– Religion
– National origin
– Receipt of public assistance
– Exercised rights under the Consumer Protection Act
February 2015

104. Fannie Mae/Freddie Mac
Qualifying Standards
• Housing expense ratio
– Cannot exceed 28% of stable monthly income
• Total debt service ratio
– Cannot exceed 36% of stable monthly income
February 2015

105. Qualifying Standards
• Stable monthly income
• Co-borrowers
• Verifying income
• Net worth and reserves
• Credit history and scoring
• Explaining derogatory credit
• Bill consolidation and refinancing
February 2015

106. FHA Qualifying Standards
• Maximum housing expense ratio:
– 31% of stable monthly income
• Maximum total debt service ratio:
– 43% of stable monthly income
February 2015

107. VA Qualifying Standards
• Two separate figures must be determined
and analyzed:
– Total debt service ratio (max of 41%)
– Residual income (the amount of income a
borrower has remaining after subtracting
taxes, housing expenses, and all recurring
debts and obligations
February 2015

108. Subprime Loans (B/C Loans)
• Popular in the past, but became virtually
unavailable after the mortgage crisis of
2007
• Real estate professionals may encounter
clients who:
– Are still paying off a subprime loan
– Obtained them in the past and are curious as
to why they can’t obtain them now
February 2015

109. Chapter 13 Quiz
1.) Which is NOT a security instrument for
real estate?
a. land contracts
b. Mortgages
c. promissory notes
d. trust deeds
February 2015

110. Chapter 13 Quiz
2.) To be a holder in due course, one
must
a. acquire a negotiable instrument in
good faith for consideration.
b. be a national secondary market
investor, such as Fannie Mae.
c. be the original mortgagor.
d. be an original payee on a promissory
note.
February 2015

111. Chapter 13 Quiz
3.) Upon debtor default, which remedy is
available to a mortgagee?
a. Forfeiture
b. judicial foreclosure
c. non-judicial foreclosure
d. power of sale clause
February 2015

112. Chapter 13 Quiz
4.) A debtor has an equitable right of
redemption until which event?
a. confirmation of sale issued
b. foreclosure action filed
c. order of execution issued
d. sheriff’s deed issued
February 2015

113. Chapter 13 Quiz
5.) Which is NOT a typical clause found
in a real estate mortgage?
a. acceleration clause
b. alienation clause
c. subliminal clause
d. subordination clause
February 2015

114. Chapter 13 Quiz
6.) What are the qualifying standards for
Fannie Mae/Freddie Mac 90% LTV
conventional loans?
a. housing expense ratio: 28%;
total debt service ratio: 33%
b. housing expense ratio: 28%;
total debt service ratio: 36%
c. housing expense ratio: 29%;
total debt service ratio: 41%
d. housing expense ratio: 36%;
total debt service ratio: 38%
February 2015

115. Chapter 13 Quiz
7.) What are the qualifying standards for
FHA loans?
a. housing expense ratio: 28%;
total debt service ratio: 33%
b. housing expense ratio: 28%;
total debt service ratio: 36%
c. housing expense ratio: 31%;
total debt service ratio: 43%
d. housing expense ratio: 36%;
total debt service ratio: 28%
February 2015

116. Chapter 13 Quiz
8.) In addition to total debt service ratios,
the VA loans rely on
a. cost averaging of housing.
b. housing expense averaging.
c. residual housing analysis.
d. residual income analysis.
February 2015

117. Chapter 14
Overview of Real
Estate Appraisal
February 2015

118. Key Terms
• Arm's Length
Transaction
• Conformity
• Contribution
• Highest and
Best Use
• Market Price
• Market Value
• Site
• Substitution
February 2015

119. The Need for Appraisal
• Appraisal: The act or process of developing
an opinion of value, or simply an opinion of
value
– Opinion of value must be defendable and
supported by objective data
– Opinion of value is as of a certain date
(effective date)
– Performed for loans, insurance, taxes
– Must be performed by a qualified real estate
appraiser
February 2015

120. Broad Market Factors
• Supply and demand
– For all products, goods, and services, when
supply exceeds demand, prices will fall and
when demand exceeds supply, prices will rise
• Uniqueness and scarcity
– Uniqueness: Each parcel of land, each
building, and each house are said to be
different
– Scarcity: Perceived supply of a good or
service relative to the demand for the item
February 2015

121. Property Specific Factors
• Highest and best use
• Location
• Substitution
• Conformity
– Progression and regression
• Contribution
February 2015

122. Market Value of Property
• Market value: Most probable price a
property should bring in a competitive and
open market
– An arm’s length transaction (a typical
transaction)
February 2015

123. Arm’s Length Transaction
• Buyer pays cash for property at closing or obtains a
mortgage through a lender so as to pay seller the agreed-
upon price at closing
• Seller doesn’t grant any unusual payment concessions
• Buyer and seller aren’t related in any way
• Buyer and seller are both acting in their own best interests
• Buyer and seller aren’t acting out of undue haste/duress
• Buyer and seller are both reasonably informed about all
aspects of the property and its potential uses, market value,
and market conditions
• Property has been available on the market for a reasonable
period of time
February 2015

124. Defining Value
• Market value: The expected price
• Market price: The actual price
• Loan value: Amount of money a lender is
willing to let someone borrow to finance a
property
• Insurance value: Amount of money the
property can be insured for
• Assessed value: Amount of value used to
calculate taxes due
February 2015

125. The Appraisal Process
1. Define the problem
2. Determine the scope of work
3. Collect and analyze relevant data
4. Determine highest and best use for subject property
5. Determine value of the land separate from the
structures
6. Apply the applicable approach(es) to value
7. Reconcile indications of value from approach(es) to
value
8. Report conclusions of the valuation process, including
all data used and the final value opinion
February 2015

126. Define the Problem
• Identifying information the appraiser uses
to determine the scope of work in an
assignment:
– Client and intended users
– Intended use
– Purpose of the appraisal
– Date of value opinion
– Relevant property characteristics
– Other assignment conditions
February 2015

127. Scope of Work
• An appraisal plan—an outline identifying
the work needed to complete the appraisal
– Regional, city, and neighborhood economic
data
– Government regulations (zoning laws)
– Construction cost information for the area
– Data on other recent property sales in the
area
February 2015

128. Collect and Analyze
the Relevant Data
• Data will cover P-E-G-S
• Most appraisers keep up-to-date files
regarding:
– Data on economic trends
– Changes in state/local laws
• Computer databases
• This information is collected and analyzed,
giving proper weight to each category
depending on the ultimate goal of the appraisal
February 2015

129. Determine the Highest and Best Use
• Determine whether the property is being
used for its most profitable permitted use
• Always considered in an appraisal
assignment
• Be aware of government restrictions in
addition to characteristics of the land
February 2015

130. Determine the Value of the Land
• Value of land, or site, should be
determined separately from the structure
that sits on it
• To do so, determine the property’s legal
description (to ensure correct property is
being valued):
– Government survey system
– Lot and block system
– Metes and bounds system
February 2015

131. Apply the Three
Approaches to Value
• Use the applicable approach(es) to value:
– Sales comparison approach (most useful
and accurate in determining market value)
– Cost approach (best suited for properties
that are unique or not sold often enough to
obtain adequate sales comparison data)
– Income approach (best suited for
commercial or investment properties)
February 2015

132. Reconciliation
• Indications of value from the approaches
that have been developed are reconciled
to arrive at a final value conclusion
• Involves giving each approach to value an
appropriate weight
– Depends on type of property being analyzed
and the amount and accuracy of data
available
February 2015

133. Report Conclusions
• Final step: Submit a report of the
conclusions:
– Self-Contained Appraisal Report—Most
detailed
– Summary Appraisal Report—Summarizes the
information
– Restricted Use Appraisal Report—Most
abbreviated
February 2015

134. Reports: Formats of Presentation
• The format of any of the three USPAP-
permitted report options could be:
– Narrative style
– Form reports (fill-in-the-blank forms)
February 2015

135. Uniform Residential
Appraiser Report (URAR)
• A standard appraisal report form used by
lenders and appraisers
• Considered a Summary Appraisal Report
under USPAP
• Developed and approved by secondary
mortgage market (Fannie Mae, Freddie
Mac)
• Used for residential appraisals
• Preferred by lenders
February 2015

136. Competitive Market Analysis (CMA)
• Also called a comparable market analysis
• Method of determining the recommended
listing price and/or anticipated sale price of
a property by comparing the subject to
other properties that have sold, are
presently for sale, or did not sell in a given
area
• Not the equivalent of an appraisal
• Performed by a real estate agent
February 2015

137. Chapter 14 Quiz
1.) An appraisal is valid
a. as of the effective date on the appraisal
report only.
b. for 30 days after it is completed.
c. for one year from the date stated on the
appraisal report.
d. indefinitely, until a new appraisal is
performed.
February 2015

138. Chapter 14 Quiz
2.) An appraisal
a. always determines market price.
b. does not allow the appraiser to use his
judgment skills.
c. is completely subjective in defining market
value.
d. is only an opinion of value supported by
objective data.
February 2015

139. Chapter 14 Quiz
3.) Which is an example of real estate
being put to its highest and best use?
a. a house in a residentially-zoned
subdivision
b. an old house on a major highway
surrounded by commercial development
c. a parking lot in a major city where
building sites are in demand
d. a vacant lot in a growing neighborhood
February 2015

140. Chapter 14 Quiz
4.) Which house is the best value?
a. a $50,000 house that overlooks a huge
landfill
b. a $500,000 house surrounded by
apartment complexes
c. the “best” house in the “worst”
neighborhood
d. the “worst” house in the “best”
neighborhood
February 2015

141. Chapter 14 Quiz
5.) Which would NOT be considered a
typical condition in the marketplace?
a. The buyer and the seller are not
related.
b. The buyer and the seller are
reasonably informed about the
property.
c. The buyer pays cash for real estate.
d. The property has been on the market
for seven years.
February 2015

142. Chapter 14 Quiz
6.) The first step in the appraisal
process is to
a. collect data.
b. define the problem.
c. determine the highest and best use.
d. estimate value.
February 2015

143. Chapter 14 Quiz
7.) When determining the highest
and best use of a property, the
appraiser must take into account
a. characteristics of the land.
b. governmental regulations.
c. whether the current structure should
be torn down.
d. all of the above
February 2015

144. Chapter 14 Quiz
8.) Which appraisal report option is
usually the most comprehensive?
a. Form Report
b. Restricted Use Report
c. Self-Contained Report
d. Summary Report
February 2015

145. Chapter 14 Quiz
9.) Which is NOT an official reporting
option specified by USPAP?
a. Narrative Report
b. Restricted Use Report
c. Self-Contained Report
d. Summary Report
February 2015

146. Chapter 14 Quiz
10.) A competitive market analysis is
___________ the equivalent of an
appraisal.
a. Always
b. Never
c. Sometimes
d. usually
February 2015

147. End Module 7
February 2015