Real Estate Lending Banking and Financial Services Finance Lesson Plan
Performance Objective Students will understand the processes involved in lending money for real estate. Specific Objectives  Understand the primary and secondary mortgage markets.  Identify terminology associated with real estate lending.  Identify the differences between government‐backed and government‐backed securities.  Understand mortgage‐backed securities. Terms  Real estate– land and what is on it, under it, and above it.  Mortgage– a loan to purchase real estate.  FHA– Federal Housing Administration; guarantees home loans.  VA– Veteran’s Administration; guarantees loans to qualified veterans.  Ginnie Mae– Government National Mortgage Association; backs loans made by FHA and VA.  Mortgage‐backed securities– loans that are packaged together and sold to investors.  Term– the number of months or years of a loan.  APR– annual percentage rate; actual interest percent paid during the life of a loan.  Finance charges– the total dollar amount of fees and interest paid on a loan.  Closing costs– fees paid when a loan is approved; includes taxes, recording fees, title fees, realtor fees, and other fees.  Equity– the difference between the value of a property and the amount owed on the property, or its loan amount.  Appraisal– the process of assessing the value of a property.  Cost approach– the idea of what a property would cost if it were replaced, that is, the cost of any structures and improvements on the property as well as landscaping.  Market data approach– looking at the sales of properties that are similar, or comparable, to the subject property, making cost allowances for differences in the properties.  Primary mortgage market– where lenders and borrowers come together and negotiate loan terms.  Secondary mortgage market– where loans that are originated in the primary market are sold to and then packaged with similar loans to be sold as Mortgage‐Backed Securities.  Mortgage‐Backed Securities– securities that are sold to investors that are comprised of a group of loans with similar features. Time When taught as written, this lesson should take approximately four to five days to teach. Copyright © Texas Education Agency, 2014. All rights reserved.
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Preparation
TEKS Correlations This lesson, as published, correlates to the following TEKS. Any changes/alterations to the activities may result in the elimination of any or all of the TEKS listed. 130.163 (c) Knowledge and Skills (5) The student monitors, plans, and controls the day‐to‐day activities within a banking organization in order to ensure secure operations. The student is expected to: (E) discuss real estate lending and servicing, including the involvement of financial institutions in the real estate industry and functions and responsibilities of the loan servicing departments. Interdisciplinary Correlations English‐English I  110.31 (b) (1) Reading/Vocabulary Development. Students understand new vocabulary and use it when reading and writing.  110.3 (b) (11) Reading/Comprehension of informational text/procedural texts. Students understand how to glean and use information in procedural texts and documents. Math‐Algebra I  111.32 (b) (1) (C) Interpret and make decisions, predictions, and critical judgments from functional relationships. Social Studies‐World Geography 113.34 (c) (20) (A) Describe the impact of new technologies, new markets, and revised perceptions of resources. Occupational Correlation (O*Net – www.onetonline.org/) Job Title: Appraisers, Real Estate O*Net Number: 13‐2021.02 Reported Job Titles: Staff Appraiser, Residential Real Estate Appraiser, Commercial Real Estate Appraiser Tasks 
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Prepare written reports that estimate property values, outline methods by which the estimations were made, and meet appraisal standards. Evaluate land and neighborhoods where properties are situated, considering locations and trends or impending changes that could influence future values. Obtain county land values and sales information about nearby properties to aid in establishment of property values. Copyright © Texas Education Agency, 2014. All rights reserved.
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Soft Skills Writing, Judgment and Decision Making, Complex Problem Solving Accommodations for Learning Differences It is important that lessons accommodate the needs of every learner. These lessons may be modified to accommodate your students with learning differences by referring to the files found on the Special Populations page of this website. Preparation  Review and familiarize yourself with the terminology and website links.  Have materials and websites ready prior to the start of the lesson. References  http://www.federalreserve.gov/boarddocs/supmanual/cch/respa.pdf  http://www.occ.gov/topics/consumer‐protection/mortgages/index‐mortgages.html  http://federalreserve.gov/bankinforeg/topics/real_estate.htm  Banking & Financial Systems. (2013). N.p.: Goodheart‐Willcox Publisher.
Instructional Aids  Textbook  Lesson Presentation  Instructor Computer/Projection Unit  Websites Introduction
The main purposes of this lesson are to help students understand  how mortgage loans work;  what a real estate appraiser does; and  the costs involved in buying real estate. Ask students if they know the value of homes in their area. Ask students if they know how many people are actually involved in the real estate lending process. Copyright © Texas Education Agency, 2014. All rights reserved.
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Outline
I. II. III. IV. What is real estate? A. Real estate– land and what is on it, under it, and above it B. Mortgage– a loan to purchase real estate Types of loans A. Conventional B. FHA C. VA Characteristics of conventional loans A. Require a minimum credit score B. Not as many fees as with FHA and VA loans C. Sellers can only contribute up to 3% of closing costs D. PMI only required for loans > 80% loan‐to‐value E. Down payment of at least 20% required in many cases F. Loan not insured by the government For many people, real estate is the largest purchase they will ever make. Students may not have much experience with this area. Many of them may live in apartments or another form of rental property. There are terms that are beneficial for them to know regarding real estate. Ask students what banks they can think of that are in their area. Show them (via a website) if those particular banks make mortgage loans. Have students conduct a city data search to see the average price for a home in the area. The site may also show the percentage of people in the area own as opposed to rent. Characteristics of FHA loans A. Loans insured by the government B. Less strict borrower requirements C. Lower down payment D. Limits on amount borrowed E. Loans only on four units or less F. PMI required but less percentage than conventional Multiple Intelligences Guide
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
Copyright © Texas Education Agency, 2014. All rights reserved.
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Visual/Spatial
VI. VII. VIII. Characteristics of VA loans A. Loans guaranteed by the government B. Loans only for veterans who qualify and possibly spouses C. No income requirements D. No down payment required E. No PMI insurance required Mortgage programs A. Government‐backed 1. FHA 2. VA 3. Ginnie Mae B. Government‐sponsored 1. Fannie Mae 2. Freddie Mac Government‐backed A. FHA– Federal Housing Administration 1. Requires up to a 3% down payment 2. Does not make loans, but it backs loans 3. Requires mortgage insurance premiums B. VA – Veteran’s Administration 1. Also guarantees loans 2. Loans for qualified veterans C. Ginnie Mae– Government National Mortgage Association 1. Backs loans from FHA and VA 2. Packages loans into securities, called mortgage‐backed securities, and sells as bonds Have students (in pairs) research the differences between the different mortgage programs. Have them add any information that was not already presented by writing it on a board or paper to be shown on a document camera. Multiple Intelligences Guide
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
Copyright © Texas Education Agency, 2014. All rights reserved.
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Visual/Spatial
IX. X. Government‐sponsored A. Two publicly‐traded corporations that purchase mortgages from lenders and pay the lenders to continue to service the mortgages 1. Fannie Mae– Federal National Mortgage Association 2. Freddie Mac– Federal Home Loan Mortgage Corporation B. They do not originate loans Fannie versus Freddie A. Fannie Mae 1. Allows borrowers to own up to ten properties 2. Must have two months reserves for rental property loans 3. Allows for a 3% down payment B. Freddie Mac 1. Allows borrowers to own up to four properties 2. Must have six months reserves for rental property loans 3. Requires at least 5% down payment Ask students if they have ever heard about Fannie Mae or Freddie Mac. Have them conduct research about the two companies’ roles in the real estate industry. Also discuss with them their roles in the financial crisis of 2008 and where the two companies stand right now. Freddie Mac is in receivership and has been since 2009, which means it has been in bankruptcy. Conduct research and ask students questions about why the company had to file bankruptcy. Multiple Intelligences Guide
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
Copyright © Texas Education Agency, 2014. All rights reserved.
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Visual/Spatial
XI. Mortgage Markets A. Primary 1. Where the loan is originally made 2. Lender and borrower interaction 3. Services loans that are sold to the secondary market and are paid a fee B. Secondary 1. Purchases loans from lenders in the primary market 2. Fannie Mae & Freddie Mac buy loans but do not typically interact with borrowers 3. Some loans kept in‐house; others packaged with loans that have similar interest rates, terms, etc. and are sold to investors XII. Consumer Protections A. Truth in Lending Act of 1968– shows the true costs of borrowing 1. Discloses interest rate of the loan 2. Discloses the total finance charge B. Fair Credit Reporting Act of 1970 1. Individuals should be told why they have been denied credit Discuss the differences between the primary mortgage market and the secondary mortgage market. Money is made by the lenders when the loans are first made, from interest and fees. When the loans are packaged together into a security that has other loans with similar characteristics, then the loans are sold as investments. At this point, the lender who made the loan will receive fees to service the loan, or collecting the payments and paying taxes. The investors also make money on the interest they receive from the earnings on the securities they purchased. So the same loans are making money several times over for different groups of people. Obtain a Settlement sheet or Estimate of Closing Costs from a lender or print one off of the Internet. Make copies of it and distribute to the students. Go through the different fees involved and have them take notes on it or highlight the most common fees. Multiple Intelligences Guide
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
Copyright © Texas Education Agency, 2014. All rights reserved.
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Visual/Spatial
XIII. 2. Individuals must be told who has access to their information 3. Individuals have the right to dispute inaccurate or false information C. Equal Credit Opportunity Act of 1974– prevents discrimination when applying for a loan on the basis of: gender, religion, race, age, national origin, marital status D. Real Estate Settlement Procedures Act of 1974 1. Lender required giving borrowers a “good faith estimate” of closing costs for a mortgage loan 2. Revised in 2013 a. Payments to be applied promptly b. Prompt handling of complaints c. At least 45 days’ notice for forcibly‐placed insurance and cost should be reasonable There are closing cost calculators online that students can complete, with teacher direction, to see how much their costs can be, whether they are buying or selling property. Demonstrate mortgage loan calculators with the students so they can see how much the actual mortgage loan can cost them. With them, calculate the total costs over the term of the loan. Change the interest rate or the term and show them what happens to the total cost. Costs of real estate loans A. APR– annual percentage rate, actual interest percent paid during the life of the loan B. Finance charges– the total Multiple Intelligences Guide
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
Copyright © Texas Education Agency, 2014. All rights reserved.
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Visual/Spatial
XIV. dollar amount of fees and interest paid on a loan C. Closing cost – fees paid when a loan is approved, including taxes, recording fees, title fees, realtor fees, inspection fees, appraisal fees, etc. Interest Rates A. Fixed rate 1. Same rate for the term of the loan 2. Payment stays the same 3. Easier for bank to make income projections 4. Higher interest rate than adjustable‐rate B. Adjustable‐rate 1. Rate can change at periodic intervals 2. Usually a lower rate than a fixed rate 3. Usually has a cap, a limit on the increased monthly payment or a limit on the interest rate increase Show students bank websites and review their mortgage loan rates. Ask them which rates are higher–fixed rates or adjustable rates? XV. What is an equity loan? A. Also known as a Home Equity loan B. Raises additional cash C. Based upon the amount of equity in your property Copyright © Texas Education Agency, 2014. All rights reserved.
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Multiple Intelligences Guide
Existentialist
Interpersonal
Kinesthetic/
Logical/
D. Counts as collateral because it is Intrapersonal
Bodily
Mathematical Musical/Rhythmic XVI. based on the value of the property E. Lender earns interest and fees on this type of loan in addition to the interest on fees on the original mortgage loan What is loan servicing? A. Payments are made according to the terms of the loan B. Payments are reported by lender to Credit Reporting Agencies C. Servicing can affect the borrower’s credit XVII. Property valuation A. To use the property as collateral for a loan, lenders must make sure the property is worth at least the amount being borrowed B. Appraisal– the process of assessing the value of a property C. Appraisal approaches 1. Cost– the idea of what a property would cost if it were replaced 2. Market data – looking at the sales of properties that are similar, or comparable, to the subject property Naturalist
Verbal/Linguistic
Visual/Spatial
A lender wants to make sure its loan is covered adequately by the value of the value of its collateral, so an appraisal of the property is done prior to approval. Explain that this can be accomplished by either estimating replacement cost of that property if it were damaged or destroyed, or by comparing recent sales in the area for properties with similar features. Show students how to research homes for sale in their area. Copyright © Texas Education Agency, 2014. All rights reserved.
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Multiple Intelligences Guide
Existentialist
Interpersonal
Intrapersonal
Kinesthetic/
Bodily
Logical/
Mathematical
Musical/Rhythmic
Naturalist
Verbal/Linguistic
Visual/Spatial
Application
Guided Practice Rent or mortgage payments should not exceed 25‐28 % of a borrower’s gross monthly income. Have students conduct research for a job either by looking at the bls.gov web site or searching job salaries. Remind them that the income level on these websites is after they have been on a job for a number of years, not a starting salary—unless they specifically search for starting salaries. Have them calculate their gross monthly income (divide the annual salary by 12), estimating 15‐20% for taxes, and then multiplying by .28 to see what monthly payment they could afford. This is obviously a very rough estimate but it gives them a generalization of how much a house payment could be. Independent Practice Have students research on bls.gov careers in real estate such as realtors or appraisers. There are also home inspectors and title company personnel. Have them report their results on a document, either typewritten or done manually. Summary
Review Ask students the following questions on exit tickets Question #1: List three characteristics of conventional loans. Answer #1: PMI for an 80% loan‐to‐value; at least a 20% down payment; not insured by the government Question #2: What are the government‐backed mortgage programs? Answer #2: FHA, VA, and Ginnie Mae Question #3: What are mortgage‐backed securities? Answer #3: Loans that are grouped together by similar characteristics and then sold to investors. Investors earn interest on the securities. Question #4: Which law discloses costs of borrowing money? Answer #4: The Truth in Lending Act Copyright © Texas Education Agency, 2014. All rights reserved.
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Question #5: What is a home equity loan based on? Answer #5: It is based on the value of a property. Evaluation
Informal Assessment Any and all of the following can be used as informal assessments.  Exit tickets with vocabulary  Pair‐share activities  Class discussion and participation Formal Assessment The following can be considered a formal evaluation  Mortgage Interest Rate Assignment #1 – Individually, students will research three different lenders to determine what their mortgage interest rates currently are for different terms. They will create a diagram of their choice (Venn diagram, table, etc.) displaying fixed and adjustable interest rates for different loan terms. Then they will select which one they would choose if they were applying for a loan and explain their reasoning. This can be done on a computer or by hand.  House for Sale Assignment #2 – Have students conduct online research for homes for sale in their area. They should locate at least four homes for sale. They will create a word processing table with columns that display the sale price, number of bedrooms, number of bathrooms, the garage size (2‐car, 3‐car, etc.) and amenities such as a pool. Then they will highlight each item that is the same on all four. They will then come up with their own price that they think is accurate based on their findings.  Mortgage Loan versus Home Equity Loan Assignment #3 – Students will create a diagram that displays the similarities and differences between a mortgage loan and a home equity loan. They will also conduct research as to the main purposes for getting a home equity loan and include a paragraph stating their findings and which purposes they see as the most important reason to get a home equity loan. Enrichment
Extension Have students interview or email a real estate appraiser and ask questions related to the process of assessing value of a property. Summarize your findings in a flowchart diagram that show each step of the process. Copyright © Texas Education Agency, 2014. All rights reserved.
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Real Estate Lending Mortgage Interest Rates Assignment #1 Student Name: _____________________________ CATEGORY 20 15 8 1 Attractiveness The diagram is exceptionally attractive in terms of design, layout, and neatness. The diagram is attractive in terms of design, layout, and neatness. The diagram is The diagram is acceptably distractingly attractive messy or very though it may be poorly designed. a bit messy. It is not attractive. Required Elements The diagram includes all required elements as well as additional information. All required elements are included on the diagram. All but one of Several required the required elements were elements is missing. included on the diagram. Knowledge Gained Student appears Student can Student can Student can to have accurately accurately accurately insufficient answer all answer most answer about questions related questions 75% of questions knowledge about to facts in the related to facts related to facts the facts or poster and in the poster and in the poster and processes used processes used processes used processes used in the diagram. to create the to create the to create the diagram. diagram. diagram. Content ‐ Accuracy At least four accurate rates from each lender are displayed on the diagram. Only three accurate rates from each lender are displayed on the diagram. Less than three At least one accurate rates lender is missing from each lender and only two or are displayed on less accurate the diagram. rates from the other lenders are displayed on the diagram. Summary Statement Summary clearly states which interest rate and term chosen and why. Summary states interest rate and term but no reasoning provided. Summary No summary missing interest provided. rate or term and no reason given. Maximum Points Possible: 100 Student Points: ___________ Copyright © Texas Education Agency, 2014. All rights reserved.
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Real Estate Lending House for Sale Assignment #2 Student Name: _____________________________ CATEGORY 20 15 8 1 Two to three of the required columns are missing from the table. Most, if not all, of the required elements are missing. Required Elements All required elements are present in the table. One of the required columns is missing from the table. Content ‐ Accuracy All facts in the table are accurate. 99‐90% of the 89‐80% of the Fewer than 80% facts in the table facts in the table of the facts in are accurate. are accurate. the table are accurate. Attractiveness & The table has Organization exceptionally attractive formatting and well‐organized information. The table has attractive formatting and well‐organized information. The table has well‐organized information. The table's formatting and organization of material are confusing to the reader. Knowledge Gained Students can Students can accurately accurately answer all answer most questions related questions to facts in the related to facts table. in the table. Students can accurately answer few questions related to facts in the table. Students can accurately answer no questions related to facts in the table. New Sale Price Student clearly understood how to calculate an average sales price from looking at comparable homes listed. Student was not clear how to calculate an average sales price from looking at comparable homes listed. Student did not attempt to calculate a sales price. Student somewhat understood how to calculate an average sales price from looking at comparable homes listed. Maximum Points Possible: 100 Student Points: ___________ Copyright © Texas Education Agency, 2014. All rights reserved.
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Real Estate Lending Mortgage Loan versus Home Equity Loan Assignment #3 Student Name: _____________________________ CATEGORY 20 15 Attractiveness The diagram is exceptionally attractive in terms of design, layout, and neatness. 8 1 The diagram is attractive in terms of design, layout, and neatness. The diagram is The diagram is acceptably distractingly attractive though messy or very it may be a bit poorly designed. messy. It is not attractive. Use of Class Time Used time well during each class period. Focused on getting the project done. Used time well during each class period. Usually focused on getting the project done. Used some of Did not use class the time well time to focus on during each class the project. period. There was some focus on getting the project done. Required Elements The diagram includes all required elements as well as additional information. All required elements are included on the diagram. All but one of the Several required required elements were elements is missing. included on the diagram. Grammar There are no grammatical mistakes on the diagram. There is one grammatical mistake on the diagram. There are two grammatical mistakes on the diagram. Content ‐ Accuracy At least five Three to four accurate facts for accurate facts each type of loan for each type of are displayed on loan are the diagram. displayed on the diagram. There are more than two grammatical mistakes on the diagram. Less than three Only one loan accurate facts type presented. for each type of loan are displayed on the diagram. Maximum Points Possible: 100 Student Points: ___________ Copyright © Texas Education Agency, 2014. All rights reserved.
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