Home Mortgage Loans Alonzo Jackson RES 301 Principles of Real Estate March 15, 2020 Introduction Final Paper: Housing Mortgage Loans According to the Census Bureau as of January 2020, approximately 65% of people in the United States are home owners. The American dream consists of owning a house. For most this will be the largest single purchase they will make, which means normally they must borrow money. A system of housing mortgage lending was developed where prospective homeowners could have borrowed these funds to have the money to buy houses. With mortgage credit, one could purchase a house now and pay them over years with interest. This made it easier for the average consumer to afford a house since they didn't need to pay for a home outright, but rather overtime. This paper will be discussing different aspects of mortgage loans for potential new homeowners. Importance of ethics A conflict of interest can be defined as “a situation that occurs when a person or company acts in a manner to promote self-interests rather than the established best interest of the business or customer”. A conflict of interest may cause a situation that is unethical, which could involve current policy or the law. The Office of the Comptroller of the Currency has a handbook on “Conflicts of Interest.” This handbook discusses different categories of conflicts of interest that could be applied to a financial company or real estate agent. ● Dealings involving insiders – Dealings with persons or companies connected in a manner that might affect judgment on representing a potential conflict of interest or self-dealing activity. ● Inappropriate financial benefit – Gain of an inappropriate financial benefit if it generates additional fee-based business by using an affiliated company’s income-producing 1 Final Paper: Housing Mortgage Loans services, charging undisclosed fees to accounts for security transactions, or by receiving payment for other services that are normally included. ● Employees’ unethical conduct – A company should publish a code of ethics for employees that clearly communicates the expectations. Management should have monitoring systems in place to detect actions or mannerisms that conflict with the company’s expectations. ● Bribes - Many organizations have a zero-tolerance to acceptance of gifts. Even a gift or gratuity of little monetary value, could potentially influence the actions of the receiver which could be considered a bribe. Some organizations follow the “de minimis benefits”. A de minimis benefit is “one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.” Legal analysis There are many types of home loans and the most common is a fixed rate loan that is repaid over 20 plus years. With a fixed rate loan, the monthly payment and interest stays the same for the entire loan. Other loans have adjustable interest rates, which means the payments and interest can fluctuate over time. Consumer protections for housing loans are usually determined by the type of loan. Below will discuss various laws and regulations that protect potential housing consumers. ● Fair Lending Laws - The Equal Credit Opportunity Act prohibits lenders from discriminating against credit applicants in any aspect of a credit transaction on the basis 2 Final Paper: Housing Mortgage Loans of race, color, religion, national origin, sex, marital status, age, or involement with a public assistance program. The Fair Housing Act also prohibits discrimination in residential real estate transactions on the basis of race, color, religion, sex, handicap, familial status, or national origin. Under ECOA and the Fair Housing Act, it is illegal for a lender to refuse a loan based on these characteristics or increase the charge for a loan based on any of the previously stated factors. ● Mortgage Disclosure Rule - The Consumer Financial Protection Bureau requires that lenders provide clear and accurate disclosures to consumers during the mortgage lending process. The “Know Before You Owe” rule was implemented to improve the process and content of mortgage disclosures that are communicated to potential or current consumers. The program was implemented to promote informed decision making by consumers during the mortgage process. The Know Before You Owe rules requires lenders to give consumers time to review and consider the information that is provided in the Loan Estimate and Closing Disclosure. This rule also requires the disclosures to provide fees accurately so that applicants can compare the costs of different loans offered by lenders. These laws, rules and regulations are important in protecting and educating consumers. Financial aspects There are several types of loans that a potential new homeowner can consider. Home mortgage loans can be divided into primary mortgages and secondary mortgages. Primary mortgage markets have several institutions that provide money to borrowers. Secondary 3 Final Paper: Housing Mortgage Loans mortgage markets include government sponsored enterprises. Below, I will discuss pros and cons of different mortgage loans. ● Conventional Home mortgage loan - This is the most common mortgage loan which entails a fixed rate. This would be good for someone who plans to stay in their house at least 10 years with a fixed rate that offers stability with monthly payments. Borrowing costs tend to be lower than other types of mortgages, even if interest rates are slightly higher. ● Jumbo mortgages - Jumbo mortgages are conventional loans that have nonconforming loan limits. Jumbo loans are more common in higher-cost areas and generally require more documentation to qualify. Some pros of this type of mortgage is one can borrow more money to buy a home in an expensive area. Some barriers to this type of loan can be a higher amount in down payment, a higher FICO score and more assets to qualify. ● Government-insured mortgages - Three government agencies back loans: the Federal Housing Administration (FHA), the U.S. Department of Agriculture (USDA) and the U.S. Department of Veterans Affairs (VA). These types of agencies are helpful in financing a home when one does not qualify for a conventional loan. It is also beneficial that one does need a large down payment and it can be used for first time buyers as well as repeat buyers. In order to have this type of loan one may need to provide more documentation and higher overall borrowing costs. ● Fixed-rate mortgages - Fixed-rate mortgages keep the same interest rate, which means the monthly mortgage payment always stays the same. Fixed loans typically come in 4 Final Paper: Housing Mortgage Loans terms of 15 years, 20 years or 30 years. This type of loan tends to be longer in duration than conventional mortgage loans. This type of loan is beneficial in helping one budget monthly and yearly. Some potential cons are paying more interest with a longer-term, fixed-rate loan, taking a longer time to build equity, and typically higher interest rates when compared to adjustable rate mortgages. ● Adjustable-rate mortgages - Adjustable-rate mortgages have fluctuating interest rates that can go up or down with market conditions. This type of mortgage usually has a fixed interest rate for a few years before the loan is deemed to be flexible with circumstances. Pros of adjustable rate mortgages include a lower fixed rate in the first few years of homeownership and savings on interest payments. This does not offer the security that a conventional loan tends to and if the monthly mortgage payments could become unaffordable, it could result in a loan default. Real Estate market dynamics In the first quarter of 2020, experts are optimistic that the housing market will be promising for first-time homebuyers. This includes much-needed movement in new entry-level construction as well as the continuation of low interest rates. Homeowners also have something to look forward to in Q1: higher home values, which means an increase in equity, as home prices are expected to continue on their upward slope. Rates for the 30-year fixed are expected to hover around 3.8 percent, which is good news for homebuyers and those who want to refinance their existing mortgages. The Fed did unanimously vote to leave interest rates (the federal funds rate) on hold, staying put between 1.5 percent and 1.75 percent through to the end of 2020,” says Mark Turner, founder of Gold IRA Guide. “This can be regarded as a barometer of sorts, 2020 5 Final Paper: Housing Mortgage Loans will be a fairly stable, low-interest-rate environment.” The rapid growth of “Coronavirus” cases continues to create turbulence in the global economy and in domestic financial markets. It will be interesting to monitor the market for negative macroeconomic impacts on the demand for housing as well as the supply chain impacts that could adversely affect the cost of new home construction in the coming months and quarters. Real estate evaluation process Whether one is buying or selling a home, a crucial step of the process is the home appraisal. Part of getting a mortgage is having an appraisal performed to confirm the sales price for the lender. For sellers, a good appraisal is important to secure the best price possible for when the house is on the market. An appraisal is an unbiased, professional estimate of the value of a property for sale. Lenders always require a home appraisal before they'll issue a mortgage because they want to protect their investment; if the actual market value of a property is lower than the sales price and if the buyer defaults on the mortgage, the lender won't be able to sell the property for enough money to cover the loan. The appraisal usually happens after an offer has been made and the home has been inspected. Once it's complete, the report is usually sent directly to the lender. The average cost of a professional appraisal is from $300 to $400 as of 2019. The price can depend on your property type and location. More expensive homes or homes that have more than one unit will typically cost more. Expect the appraisal process to take from three to 10 business days. The appraiser should be a qualified professional who is licensed or certified to do the work and has no direct or indirect interest in the transaction. Conclusion 6 Final Paper: Housing Mortgage Loans Prospective homebuyers are confronted with a number of choices and options when deciding what type of mortgage financing to obtain. Conventional versus government-guaranteed financing is not the only mortgage choice potential borrowers face. They must also select a payment schedule that matches their risk tolerance and affordability concerns. Potential buyers should be aware of many alternative mortgage instruments that can alter the required payment schedule. As for default, naive financial theory again indicates that the borrower should default if and when the current market value of the property falls below the value of the outstanding mortgage. In reality, many homeowners with negative equity continue to make their monthly payments, perhaps because of the personal costs of default or because the house is providing services that have value greater than the mortgage payment. In addition, there is the possibility that changed market conditions could bring improved value to the residence. References 7
