ESSENTIALS OF REAL ESTATE FINANCE

10th Edition Revised

David SirotaDoris Barrell, Consulting Editor

Nature of Real Estate Finance

• Construction Influence

• Credit System Economy

• Primary & Secondary Markets

Cycles of Real Estate Finance

Supply & Demand of Housing

Supply & Demand of Money

Factors Affecting Cycles

Housing Supply

Supply of Money

Business Activities

Factors Affecting Cycles

Demographics

Tax Rules

Social Attitudes

Money and the Monetary System

The Federal Reserve—the Monetary Manager of the Nation’s Economy

Money and the Monetary System

The Fed’s Functions

• Regulates Reserves• Determines Discount Rates• Balances Economy Through

Open-Market Operations• Supervises Truth-in-Lending Act

United States Treasury

The Nation’s “Fiscal Manager”

Treasury Bills, Notes, and Bonds

FIRREAFDIC

BIF SAIF OTS

Federal Home Loan Bank System

• Patterned After Federal Reserve–12 District Banks–Loans Money–Sets Reserves

• Provides National Market for Member Securities

Primary Activities of HUD

FH A

G inn ie M ae

Fann ie M ae &Fredd ie M ac

Ind ian H ousing

C D B G &S ection 8

R E S P A &F a ir H o u s in g

H U D

Interstate Land Sales

“Year-Round Sunshine”

“Good soil for crops!”

“Just sign here!”

Federal Legislation

• Equal Credit Opportunity Act

• Real Estate Settlement Procedures Act

• Community Reinvestment Act

Agricultural Lending

• Cyclical Requirements

• Farm Credit System

• USDA Rural Development

Secondary Mortgage Market

• Federal National Mortgage Association—“Fannie Mae”

• Federal Home Loan Mortgage Corporation—“Freddie Mac”

• Government National Mortgage Association—“Ginnie Mae”

Fannie Mae

• Originated as Government Agency in 1934

• Reorganized as Private Corporation in 1968

Fannie Mae

• Purchases Loan Packages Through Administered Price System

• Sells Mortgage-Backed Securities

Fannie Mae Underwriting

• Conforming and Nonconforming Loans

• Desktop Underwriter®

“Jumbo Loan”

Credit Scoring

“Perfect Score” 800-850Optimum Score High 700sPreferred Score 680Marginal Score 620Questionable Score Under 620“Forget It” Score Under 400

Ways to Improve Score

• Pay Bills on Time

• Have Fewer Cards

• Do Not “Max Out” Cards

• Correct Errors on Credit Reports

Freddie Mac

• Established in 1970 to Provide Secondary Market for Savings Associations

• Loan Prospector® Electronic Underwriting

• Sells Participation Certificates

Affordable Loan Products

Fannie Mae

• Community Home Buyer®

• Fannie 97

• Flex 97

Freddie Mac

• Affordable Gold®

• Alt 97

Secondary Market Participants

• “Ginnie Mae”—Guarantees FHA and VA Mortgage-Backed Securities

• “Farmer Mac”—Underwrites Farm Loans

• REMIC—Multiclass Securities

Financial Fiduciaries

• Commercial Banks

• Savings Associations/Thrifts

• Life Insurance Companies

• Pension Funds

• Credit Unions

Semi and Nonfiduciaries

• Mortgage Brokers and Bankers

• REITs and REMTs

• Real Estate Bonds

• Individuals/Sellers

• Private Loan Companies

Instruments of Real Estate

• Encumbrances and Liens

–Easements

–Covenants

–Voluntary and Involuntary Liens

–Specific and General Liens

Instruments of Real Estate

• Interests Secured

–Note and Deed of Trust

–Note and Mortgage

–Mortgage

–Contract for Deed

–Junior Instruments

Special Provisions

• Late Payment Penalty

• Prepayment Privilege

• Prepayment Penalties

• Assumption vs. Subject to

Special Provisions (cont.)

• Lock-in Clause

• Due-on-Sale Clause

• Subordination Clause

• Release Clause

• Exculpatory Clause

• Nonrecourse Clause

Conventional Loans

• 30-Year Fixed Rate

• Adjustable-Rate

• Private Mortgage Insurance

• Buydowns

Special Conventional Programs

• Community Home Buyer®

• Affordable Gold®

• Zero Down Payment

• Automatic Rate Reduction

0%!

8%

6%

7%

More Special Programs

• Subprime Loan

• Track Record Adjusted

• Refinancing

• Electronic Loan Services

FHA-Insured Loans

• Special Programs: 203(b), 203(v), 251, 203(k)

• Underwriting Guidelines

• Mortgage Insurance203(k)

Candidate?

VA-Guaranteed Loans

• Eligibility/Entitlement

• Guarantee

• Partial Entitlement

• Certificate of Reasonable Value

VA-Guaranteed Loans (cont.)

• Income Qualifying Requirements: 41% of Gross Monthly Income

• Closing Costs (May Not Be Included in VA Loans)

• Funding Fee (May Be Paid in Cash or Included in Loan Amount)

Processing Real Estate Loans

T h e P ro c e ss

P ro c e s s o r U n d e rw r ite r C lo s in g

L oa n O ffic er

Qualifying the Borrower

• Loan Application

–Assets, Liabilities

–Deposits, Employment

• Credit Report

• Qualifying Ratios

Qualifying the Collateral

• Definition of Value• The Appraisal Process

–Direct Sales Comparison–Cost Approach–Income Approach–Gross Rent Multiplier–Reconciliation

Qualifying the Title

• Abstract and Opinion

• Title Insurance

• Torrens System

• Title Faults

• Survey

Closing the Loan

• Costs at Settlement–Points–Escrow Account–Property Taxes,

Insurance, Interest–Prorations–Fees

Interest Payments on a Loan

I = PRTTerm Loan

• Interest Only• Balloon

Payment

Amortized Loan• Equal Payments• Principal and

Interest• Loan “Dies” at End

Adjustable-Rate Mortgage

• Adjustment Period

• Initial Rate, Qualifying Rate

• Index, Margin

• Note Rate

• Rate Caps, Payment Caps

Reverse Annuity Mortgage

• Lender Pays Borrower!

–Monthly Checks

–Initial Lump Sum

–Line of Credit

• HUD-Insured RAM

• Fannie Mae Senior Programs

Variations in Format

• Open End Mortgage

• Construction Mortgage

• Blanket Mortgage

• Package Mortgage

• Mobile Home Mortgage

Tax-Free Mortgage Lending

• Refinance

• Installment Sale

• Option to Buy

• 1031 Exchange

Defaults

• Delinquencies–Principal and Interest, Property

Taxes, Insurance• Adjustments

–Moratorium–Recasting

• Deed in Lieu

Foreclosures

• Judicial–Conventional, FHA-Insured,

VA-Guaranteed• Power-of-Sale

–Deed of Trust, Mortgage• Strict Foreclosure• Tax Impact