California Real Estate Finance
Fesler & Brady
10th Edition
Chapter 3
NonInstitutional Lenders and
The California Real Property
Loan Law
© 2016 OnCourse Learning
Objectives
• After completing this chapter, you should be able to:
– List five major non-institutional lenders.
– Describe major provisions of the California Real Property
Loan Law.
– Discuss the role that mortgage correspondents, mortgage
bankers, mortgage companies, and mortgage brokers play in
real estate finance.
– Discuss why pensions, trust funds, and credit unions are
increasing in importance in the financing process.
– Describe how and why the role of the real estate broker as
financial advisor is becoming increasingly challenging.
Outline
Private Party Lenders
Usury Law
Mortgage Companies
Real Property Loan Law
Syndications
Real Estate Investment Trusts and Endowment
Funds
• Credit Unions and Finance Companies
• Financial Advisory Role of the Real Estate Broker
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Private Party Lenders (Slide 1 of 2)
• Direct
• Indirect
– Use mortgage brokers
• Sellers as Private Lenders
– Carry back loans (exempt from usury)
Private Party Lenders (Slide 2 of 2)
• Characteristics
– Less formal, highly subjective
decisions
– High interest rates
– Second trust deeds primarily
– Rarely in prime or construction loans
– Single family dwellings
– Within geographic area
– Balloon payments
– Collections through mortgage company
– Seller carrybacks
Usury Law
• Greater of 10% or 5% above
Federal Reserve Bank discount
rate
• Exemptions
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Banks
Loan Correspondents
Thrift institutions
Life insurance companies
Mortgage companies
Industrial loan companies
Credit unions
Personal property brokers
Owners who carry back
Any transaction using a real
estate broker
• Not exempt
– Direct private lenders
Mortgage Companies (Slide 1 of 2)
• Mortgage Bankers
Make loans with own funds
Originates
Finances
Closes
Sells to institutional
investors
– Could be a correspondent
for others
– Might service loan
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• Mortgage Loan Brokers
– Locate borrowers and
lenders
– Arrange loans between them
– Do not service loans
Mortgage Companies (Slide 2 of 2)
• Characteristics
– Must follow correspondent rules
– Licensed by Department of Corporations or Department
of Real Estate
– Affected by Recovery Act of 2008 (Chapter 5)
– Also do
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Brokerage
Development
Construction
Property management
Real Property Mortgage Loan Law
• Enacted to protect the borrower
• Buyer must get Mortgage Loan Disclosure Statement
• Exemptions
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Regulated institutional lenders
Purchase money transactions (carrybacks)
Loans secured by first trust deeds of >$30K
Loans secured by junior trust deeds of >$20K
• Maximum commissions
• Maximum charges
• Balloon payments (more than twice smallest installment) prohibited
– Term of loan < six years
– Loan secured by dwelling place of borrower
• Insurance
– Not required to purchase credit life or disability
– Lender can ask for fire and hazard
• Mortgage brokers are prohibited from charging loan servicing fees to be
paid by borrower
Maximum Commissions
Percentage Commission
Type of Loan
< 2 years > 2 < 3 years
> 3 years
Exempt
transactions
First trust deeds
5%
5%
10%
Loans
>$30,000
Junior trust
deeds
5%
10%
15%
Loans
>$20,000
Maximum charges
Loan
amount
<$7,801 $7,801 $13,999
Maximum $390
charges
5% of
loan
$14,000 - First loans
$29,999 >$30,000
Junior Loans
>$20,000
$700
But not to exceed actual costs and expenses
No legal
limitations
Syndications
• Two or more people who combine financial resources
• Organized as
– Usually limited partnerships
– But could be
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General partnership
Corporation
Real Estate Investment Trust
Joint venture
Improved purchasing power
Better bargaining power
Diversification
Professional management and administration
Types
– Equity
– Debt
– Hybrid
Real Estate Investment Trusts
• REITs
– Equity
• Income property
– Mortgage
• Interest returns
– Hybrid
• Combo of above
• >100 shareholders
• 95% of taxable income be distributed to avoid double
taxation
• Other favorable income tax incentives
• Used for
– Land development
– Take out loans for large projects
Pension Funds & Endowment Funds
• Pension funds
– California State Teachers
Retirement Fund
– United Auto Workers
– Helping members to buy
houses in high priced
areas
– PERS & STRS took big hits
in 2008
• Endowment funds
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Colleges & universities
Hospitals
Cemeteries
Charitable foundations
Credit Unions & Finance Companies
• Credit Unions
– Usually short term loans
• Finance Companies
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High risk loans
High rate loans
Short duration (<7 years)
Junior trust deeds
Financial Advisory Role of the Broker
• Computerized loan origination
– Details from many different lenders
• Use of Internet
– Only worked for “A” borrowers
Questions and Comments?