Chapter 13
SAM
IRLANDER
© 2009 by South-Western, Cengage Learning
Florida Real Estate:
Principles, Practices and
License Law
Chapter 13
Mortgage Market Operations
© 2009 by South-Western, Cengage Learning
Key Terms
Closing costs
Conforming loan
Discount points
Discount rate
Disintermediation
Entitlement
Intermediation
Loan-to-value (LTV)
Mortgage bankers
Mortgage brokers
Mortgage company
Office of Thrift
Supervision
Open-market operations
Origination fee
Primary mortgage market
PMI
PPM
Reserve requirements
Secondary mortgage
market
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Federal Reserve System
12 privately owned
regional Federal Reserve
banks & commercial
banks
Reserve requirements:
amount to be held on
deposit
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Federal Reserve System
Open market operations:
buys and sells securities
Discount rate: rate
charged to member
banks
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Federal Home Loan Bank
System
FHLB: governs savings
associations
Provider of reserve credit
Office of Thrift
Supervision: Charters
member savings
associations
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Federal Deposit Insurance
Corporation
Insures individual
accounts up to
$100,000
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Intermediation
Intermediation: Banks and
savings associations
receive money into saving
accounts
Funds are available for
mortgages
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Disintermediation
Disintermediation: Money
is withdrawn from banks
and savings associations
to achieve higher yields
Funds are scarce for
mortgages
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Primary and Secondary
Mortgage Markets
Savings & loan associations
Commercial banks
Insurance companies
Mortgage companies
Mortgage brokers
Mutual savings banks
Municipal bonds
Credit unions
Pension, endowment, and trust
funds
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Primary and Secondary
Mortgage Markets
5 major sources
Savings & loan
associations
Mortgage companies
Mortgage brokers
Commercial banks
Private lenders
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Primary and Secondary
Mortgage Markets
Loans on residential
property
Funds from depositors
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Primary and Secondary
Mortgage Markets
Use their own funds
Sell loans to investors
Retain the servicing
Primarily government
backed mortgages
Conventional loans
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Primary and Secondary
Mortgage Markets
Bring together borrower
and lender for a fee
Do not lend their own
money
Do not service the loans
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Primary and Secondary
Mortgage Markets
Lend depositor’s funds
Short-term loans
Higher risk & higher rates
Have become a significant
source for residential
loans
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Primary and Secondary
Mortgage Markets
Make 1st or 2nd mortgage
loans
Seller financing
Purchase money mortgage
(PMM)
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Primary and Secondary
Mortgage Markets
Invest policyholder’s
premiums
Large scale projects
Commercial and industrial
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Primary and Secondary
Mortgage Markets
Interest is tax exempt
Rates are 1% - 2% below
market
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Primary and Secondary
Mortgage Markets
Provides liquidity
for the primary
market
FNMA
GNMA
FHLMC
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Primary and Secondary
Mortgage Markets
Investors
or
Government
or
Other lenders
Figure 13.2
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Primary and Secondary
Mortgage Markets
Private for profit
corporation
Sells bonds to buy
loans
Buys FHA, VA, and
conventional loans
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Primary and Secondary
Mortgage Markets
Federal agency in
HUD
Guarantees
payment of
securities sold to
the public
FHA and VA loans
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The History of Loans
Federal Housing
Administration (FHA)
Federal National
Mortgage Association
(FNMA – Fannie Mae)
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Primary and Secondary
Mortgage Markets
Private corporation
Increases supply
of financing by
purchasing loans
Conventional
loans
Some FHA & VA
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The History of Loans
Longer term
Monthly not annual payments
Payments cover interest plus principal
r
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The History of Loans
Insures loans reducing
the lenders risk
FHA 203(b)
FHA 234(c)
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The History of Loans
Allowed lenders to
recoup funds
Original purpose:
purchase of FHA loans
Largest agency
purchasing lenders
loans
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Loan Discounting
Selling a loan for less than face value
Increases the yield (return on investment)
Prepaid interest at closing
1 discount point = 1% of the loan amount
Charged based on:
Other investments
What secondary lender will
pay for the loan
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Loan Discounting
Discount points are determined by supply
and demand for loan funds
Money supply low and demand high - points are
charged
Money supply high and demand is low – no or low
points
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Loan-T0-Value Ratio
LTV sets limits on how much can be
loaned
Expressed as:
Loan divided by sales price
Loan divided by appraised value
Whichever is lower
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Conventional loans
Not issued, insured or
guaranteed by the government
Costs paid by buyer or seller
80%, 90%, or 95% LTV
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Conventional loans
Private mortgage insurance
PMI: protects the lender
against loss
Loans greater than 80% LTV
Insurance premium
1% or less at origination
Less than 1% annually
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Conventional loans
LTV of 80% or less = 80% Loan
LTV greater than 80% up to and
including 90% = 90% Loan
LTV greater than 90% up to and
including 95% = 95% Loan
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Conventional loans
Step 1
$82,000 Sales price
- 6,000 Down payment
$76,000 Loan amount
Step 2
$76,000 Loan amount
= 92.7%
$82,000 Sales price
95% LTV
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Conventional loans
Step 1
$70,000 Sales price
- 16,000 Down payment
$54,000 Loan amount
Step 2
$54,000 Loan amount
= 77.1%
$70,000 Sales price
80% LTV
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Conventional loans
Step 1
$120,000 Sales price
- 17,000 Down payment
$103,000 Loan amount
Step 2
$103,000 Loan amount
= 85.8%
$120,000 Sales price
90% LTV
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Conventional loans
Step 1
Calculate the loan amount
Round down to the nearest 100
Step 2
Subtract the loan amount from
the sales price
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Conventional loans
Step 1
$110,500 Sales price
X 90% LTV
$ 99,450
Round down to the nearest 100
$99,400 Loan amount
Step 2
Subtract the loan amount form
the sales price
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Conventional loans
Step 1
$87,500 Sales price
X 95% LTV
$ 83,125
Round down to the nearest 100
$83,100 Loan amount
Step 2
$87,500 Sales price
- 83,100 Loan amount
$ 4,400 Down payment
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Conventional loans
90%, 95%, and some 80% LTV
Protects the lender against loss
Premiums are a % of the loan
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Conventional loans
Paid by either buyer or seller
Seller
In cash at closing
Buyer
In cash at closing
Financed
Paid part in cash and part
financed
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Conventional loans
Step 1 $88,500 Sales price
X 90% LTV
Step 2
$79,650
Round down to the next lowest 100
$79,600
Step 3
$79,600 Loan amount
X 2% (for 90% LTV)
$1,592 PMI premium
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Conventional loans
Step 1 $60,000 Sales price
X 95% LTV
$57,000
Step 2 $57,000 Loan amount
X 2.5 % (for 95% LTV)
$1425 PMI premium
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Conventional loans
Step 1 $80,000 Sales price
X 90% LTV
$72,000 Loan amount
Step 2 $72,000 Loan amount
X .0025 factor
$ 180 Annual PMI
Step 3 $180 Annual PMI
= $15 Monthly
12
PMI
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Conventional loans
Step 1 $66,900 Sales price
X 95% LTV
$63,555 Loan amount
Step 2 round down to $63,500
Loan amount
Step 3 $63,500
X .0025
Factor
$ 158.75 Annual PMI
Step 4 $158.75 Annual = $13.23 Mon.
12
PMI
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FHA Loans (Nonconventional)
Federal Housing
Administration
Improve housing
standards
Stabilize the mortgage
market
Provide mortgage
insurance
FHA does not make loans
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FHA Loans (Nonconventional)
FHA insures loans
Mortgage Insurance
Premiums (MIP)
Loan programs:
Section 203(b) - Standard
Veterans
Section 245 - Graduated
payment loan
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FHA Loans (Nonconventional)
1- 4 Family residential
Owner occupied
properties
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FHA Loans (Nonconventional)
Low down payment
0% on the first $25,000
5% between $25,000 $125,000
10% over $125,000
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FHA Loans (Nonconventional)
Initial payments are low
and increase over a
period of years
Single family owner
occupied
30 year maximum term
Maximum loan amount
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FHA Loans (Nonconventional)
% Yearly
Increase
Year to Reach
Maximum Payment
Plan I
2.5%
5
Plan II
5%
5
Plan III
7.5%
5
Plan IV
2%
10
Plan V
3%
10
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203 (B)
Standard Loan Program
Borrower defaults
Lender forecloses
Property is sold
FHA pays the difference
between proceeds and
loan balance
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203 (B)
Standard Loan Program
LTV
30-Year Loans
15-Year Loans
Below 90%
1.50% up front plus
1.5% up front
0.5% monthly
No monthly premium
1.50 up front plus
1.50% up front plus
0.5% monthly
0.25% monthly
1.5% up front plus
1.5% up front plus
0.5% monthly
0.25% monthly
90% - 95%
Over 95%
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203 (B)
Standard Loan Program
Includes the down
payment
Less than conventional
loans
3% of sales price or
appraised value
Whichever is lower
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203 (B)
Standard Loan Program
Maximum amount
depends on location
Sales price or appraised
value plus % of closing
costs
LTV typically greater than
95%
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203 (B)
Standard Loan Program
Rates set by lender and
borrower
Market conditions
Paid by buyer or seller
Historically lower rates
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203 (B)
Standard Loan Program
30 Years
Same items as
conventional loans
Paid by buyer or seller
Required monthly
payments for taxes and
insurance
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203 (B)
Standard Loan Program
Time varies
Usually longer than
conventional
Minimum property
requirements (MPR’s)
FHA-approved
independent appraisers
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203 (B)
Standard Loan Program
2 Purposes:
Established value
Conditional commitment
Conditional Commitment
FHA will insure loan if
borrower qualifies
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203 (B)
Standard Loan Program
Ordered by the lender
Paid in cash
Sets maximum amount of
loan
Identifies needed repairs
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203 (B)
Standard Loan Program
Good for specified
period:
Existing properties: 6
months
Proposed construction:
12 months
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203 (B)
Standard Loan Program
Contract contingent upon
appraisal
If sales price is less than
appraised value
Void contract & return
earnest money
Pay the difference in cash
Renegotiate price
Reconsideration of
appraisal
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203 (B)
Standard Loan Program
Cash down payment
No prepayment penalty
No due on sale clause
Loans are assumable
Originated after Dec. 15,
1989 requires qualification
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VA Loans (Nonconventional)
GI Bill to provide
assistance for returning
WWII veterans
VA guarantees loans
Veteran defaults
Lender forecloses
Property is sold
VA pays the difference
between proceeds and
loan balance up to a
certain limit
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VA Loans (Nonconventional)
Limits of VA guarantee:
Up to $45,000 - 50% of loan
amount
$45,000 - $144,000
40% of loan amount OR
$36,000 (whichever is less)
$22,500
Greater than $144,000 –
25% of the loan amount
Maximum of $104,250
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VA Loans (Nonconventional)
Entitlement: amount of
guarantee to an eligible
veteran
Maximum amount:
$104,250
May use all or part
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VA Loans (Nonconventional)
None
Lenders typically lend 4X
the guarantee with no down
payment
4X the guarantee = $417,000
Sales price in excess of
$417,000
Requires 25% down payment
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VA Loans (Nonconventional)
None required
100% LTV
Historically lower rates
Paid by buyer or seller
Same items as conventional
loans
Paid by buyer or seller
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VA Loans (Nonconventional)
Offsets claims under the guarantee program
Down Payment
Funding Fee
No down payment
2.00% of loan amount
5% down payment
1.50% of loan amount
10% down payment
1.25% of loan amount
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VA Loans (Nonconventional)
Fee will increases
With subsequent use
Military reserves
Paid by buyer or seller
Can be included in loan
Waived for service
related disability
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VA Loans (Nonconventional)
Required monthly
payments for taxes and
insurance
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VA Loans (Nonconventional)
Liable for default
Remains liable upon
assumption by a nonveteran
Liability and entitlement
may be transferred to
another veteran
No prepayment penalty
No alienation clause
May 1, 1988
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VA Loans (Nonconventional)
VA standards
VA- approved appraiser
Certificate of reasonable
value (CRV)
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VA Loans (Nonconventional)
Purpose:
Determines acceptability
Establishes value
Identifies repairs
Loan cannot be greater
than appraised value
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VA Loans (Nonconventional)
Fee paid in cash and in
advance
Good for specified
periods
Existing properties: 6
months
Proposed construction:
12 months
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VA Loans (Nonconventional)
Contract contingent upon
appraisal
If sales price is less than
appraised value
Void contact & return
earnest money
Pay the difference in cash
Renegotiate price
Reconsideration of
appraisal
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VA Loans (Nonconventional)
1 – 4 family owner
occupied properties
No Investors
100% LTV
Loans cannot exceed
appraised value
No maximum loan amount
Loans 4X entitlement
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Assumption Methods
Down payment equal to Seller’s equity
Buyer takes over seller’s loan
Two Methods
Assume and agree to pay
Subject to the existing loan
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Assumption Methods
Most common
Buyer becomes liable for loan
Seller may obtain a judgment for any
deficiency
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Assumption Methods
Buyer does not become liable for the loan
Inform Seller:
Buyer is not liable
Seek legal advise
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Assumption Methods
Alienation Clause may:
Require loan be paid in full upon transfer
Allow rate increase
Require qualification of buyer
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Assumption Methods
Buyer’s cash to close at contract
$100,000 Sales price
- $80,000 Loan balance
$ 20,000 Cash required
Buyer’s cash to close at closing
$100,000 Sales Price
$79,000 Loan balance
$21,000 Cash required
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Assumption Methods
Price to control: the selling price is set
and will control the cash to be paid by
buyer
Cash to control: a fixed amount to be
paid by the buyer. Sales price is not
set until closing
Second Mortgage: seller financing
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Assumption Methods
Is loan assumable?
LTV?
More likely assumption conditions:
Seller will finance
Mortgage money unavailable
Buyer cannot get a new loan
Property's value has decreased
Difference in interest rate
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Assumption Methods
Faster and less expensive
Lender requirements:
Loan transfer fee
Warranty deed
Insurance
Escrow account
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Assumption Methods
Seller advantages:
Lower closing costs
Possible release of liability
VA Loan: possible transfer of eligibility
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Assumption Methods
Buyer advantages
Possible lower interest rate
Lower closing costs
Less time to close
Less liability possible
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Assumption Methods
Buyer disadvantages:
Larger down payment
Inability to offer future assumption due to
increased equity
Seller disadvantages
Unless released, remains liable
Default may result in lawsuit
New loan application
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Qualifying the buyer
Evaluates:
Property value
Buyer’s ability to make:
Down payment
Repay loan
Guidelines:
Freddie Mac
FHA
VA
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Qualifying the buyer
Conforming loan:
approved under
FNMA/FHLMC guidelines
Four factors:
Income
Net worth and assets
Credit history
Documentation
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Qualifying the buyer
Borrower's income
Determines ability to pay
Income: base monthly plus
other sources
Employment record
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Qualifying the buyer
Borrower's income
Ratios:
Mortgage payment to
monthly income (28%)
$560 mortgage pymt.
$2,000 monthly income
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= 28%
Qualifying the buyer
Borrower's income
Ratios:
Mortgage payment to total
installment debt (36%)
$720 total debt
$2,000 monthly income
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= 36%
Qualifying the buyer
Net Worth and Assets
Down payment and
reserves
Net worth: difference
between assists and
liabilities
Liquid assets equal to 2
months of mortgage
payments
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Qualifying the buyer
Income ratios
Increased form 29/31 to
31/43
31% - new housing
expense to monthly
income
43% - total monthly debt
to monthly income
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Qualifying the buyer
Down Payment
Sales price minus loan
amount
Minimum cash investment
of 3%
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Qualifying the buyer
Underwriting
Different guidelines
Eligibility
War time: 90 days active
duty
Peacetime:
181 days prior to
9/8/1980
2 years after 9/7/1980
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Qualifying the buyer
Must list all debt on
application
Credit report
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Qualifying the buyer
Regular:
VOE: employment
verification
VOD: verification of
deposits
Credit report
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.
Qualifying the buyer
Alternative:
2 pay stubs and W-2 tax
form
3 bank statements
Credit report
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Qualifying the buyer
Establish value
Sales price or appraised
value whichever is less
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Qualifying the buyer
Determined by:
Available cash
Monthly payment
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Qualifying the buyer
Maximum conventional
loan with $10,000 down
payment
95% LTV - $190,000 loan
90% LTV - $90,000 loan
80% LTV - $40,000
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Loan Charges
Closing costs: loan charges
Variable costs
Lender’s title insurance
Origination fees
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Loan Charges
Fixed costs
Appraisal
Attorney fees
Credit report
Survey
Recording fees
Pictures
Amortization schedule
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Loan Charges
Title Insurance
Protects against loss
Required by lender not by law
Buyer’s title
Fees
Origination fee
Fees for processing the loan
% of loan amount
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Loan Charges
Appraisal fee
Determines property value for lender
Attorney fees
Legal services
Credit report fee
Evaluates credit risk
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Loan Charges
Survey
Required by some lenders
Recording fee
Charged by county
Pictures
Required by some lenders
Amortization schedule
Payment schedule
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Loan Charges
FHA & VA
Paid by buyer or seller
VA funding fee
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Loan Charges
Loan
application
Loan
analysis
Approval
and
processing
Closing
FIGURE 13.4
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Servicing