ESSENTIALS OF
REAL ESTATE FINANCE
10th Edition Revised
David Sirota
Doris 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
Supply of
Money
Housing
Supply
Business
Activities
Factors Affecting Cycles
Tax Rules
Demographics
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”
FDIC
BIF
SAIF
FIRREA
OTS
Treasury Bills, Notes, and Bonds
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
HUD
FHA
Fannie Mae &
Freddie Mac
CDBG &
Section 8
Ginnie Mae
Indian Housing
RESPA &
Fair Housing
Interstate Land Sales
“Year-Round Sunshine”
“Just
sign
here!”
“Good
soil for
crops!”
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
• Desktop
and
Underwriter®
Nonconforming
Loans
“Jumbo Loan”
Credit Scoring
“Perfect Score”
Optimum Score
Preferred Score
Marginal Score
Questionable Score
“Forget It” Score
800-850
High 700s
680
620
Under 620
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 0%!
• Automatic Rate Reduction
8%
7%
6%
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 Insurance
203(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
The Process
Loan Officer
Processor
Underwriter
Closing
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 = PRT
Term 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