Chapter 8
Influences on
Real Estate Values
Chapter 8: Objectives
• After completing this chapter, students will
be able to:
– Identify the differences between the four
broad forces and how these forces and
perceptions affect the value of real estate
Key Terms
•
•
•
•
Asbestos
Clean Air Act
Clean Water Act
Comprehensive
Environmental
Response,
Compensation, and
Liability Act
(CERCLA)
• Electromagnetic
Fields (EMFs)
• Environmental
Hazard
• Environmental
Protection Agency
(EPA)
Key Terms
• External
Environmental
Hazards
• External
Obsolescence
• Internal
Environmental
Hazards
cont.
• Lead-Based Paint
Hazard Reduction Act
(Title X)
• Linkages
• Methamphetamine
• Mold
• National Environmental
Policy Act (NEPA)
• Nuisance
• Radon
Key Terms
• Resource
Conservation and
Recovery Act
(RCRA)
• Safe Drinking
Water Act (SDWA)
• Sick Building
Syndrome
cont.
• Stigmatized
Property
• Underground
Storage Tanks
(USTs)
• Urea-Formaldehyde
• Urea-Formaldehyde
Foam Insulation
(UFFI)
• Wetlands
Four Forces Influencing
Real Estate Values
• PEGS:
– Physical forces
– Economic forces
– Governmental forces
– Social forces
Physical Forces
• May also be referred to as environmental
and geographic forces
• May include conditions:
– On a property (specific)
– External to the property (broad)
(Physical)
Environmental Forces
• Many are controlled at the federal level
through federal laws and regulations
– Other environmental issues are controlled at
the state or local level
• Certain inspections and/or disclosures
may be required
Environmental Protection
at the Federal Level
•
•
•
•
•
National Environmental Policy Act (NEPA)
Environmental Protection Agency (EPA)
Clean Air Act (CAA)
Clean Water Act (CWA)
Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA)
• Superfund Amendments and Reauthorization
Act (SARA)
Resource Conservation and Recovery Act
(RCRA)
• Safe Drinking Water Act (SDWA)
Environmental
Protection—Wetlands
• Ecosystems where the land is permeated
with water, and are commonly referred to
as swamps, bogs, and marshes
• Protected under the federal Clean Water
Act
– Enforced by the U.S. Army Corps of
Engineers
• Some activities are prohibited and require
a permit if they could permanently change
or destroy the wetland habitat
Environmental Protection—
Property Hazards
• Internal and external hazards
• Nuisance: Anything emitting from the
outside of the property that interferes with
the owner’s right of quiet enjoyment
– If a nuisance is permanent, it is an external
obsolescence
• Environmental hazard: A situation that
exists with potential for harm to persons or
property from conditions that exist outside
or within a property
Common
Environmental Hazards
•
•
•
•
•
•
•
•
•
Asbestos
Electromagnetic fields (EMFs)
Lead
Methamphetamine
Poor air quality (sick building syndrome)
Underground storage tanks (USTs)
Urea-formaldehyde
Mold
Radon
(Physical) Geographic Forces
• Characteristics related to the environment
surrounding the property that either can
contribute or detract from value
– Topography
– Soil conditions
– Water
– Location and view (linkages)
– Climate
– Natural features and barriers
Work Problem
What are some uses or locations where
various types of natural features and barriers
can either be a benefit or a hindrance to
property value?
Possible examples include (but are not limited to):
• Ski slopes
• Mountain resorts
• Waterfront businesses and housing sites
• Nature preservations and resorts
Economic Forces
•
•
•
•
•
World events
Energy costs
War
Terrorist activities
Cost and availability
of credit
• Employment levels
• Availability of
employment
• Earnings levels
• Taxes
• Inflation
Government Forces
•
•
•
•
•
Government services
Revenue generating law (right of taxation)
Right to regulate laws (police power)
Governmental fiscal and monetary policies
Secondary mortgage markets and
government mortgage programs
Social Forces
•
•
•
•
Demographic changes
Migrations of the population
Social trends
Buyers tastes and standards
Stigmatized Properties
• Properties held to be undesirable by most
people because of a past event or
condition
– Crime, murder, suicide, drug activity, past
environmental hazards (methamphetamine,
fire, chemical spill)
• Determining value influence can be time
intensive and require significant
knowledge of market reaction
– Being objective is ultimately important
Chapter 8 Quiz
1. Radon gas
a. can indicate the presence of a toxic
uranium dump close to the property.
b. can present a problem indoors if allowed to
build up to dangerous levels.
c. is a man-made waste byproduct.
d. makes a house worthless because it must
be condemned by the EPA.
Chapter 8 Quiz
2. What statement about electromagnetic
fields is FALSE?
a. They are created by moving electrical
currents.
b. They can affect other charged objects.
c. They can be produced by high-tension
power lines.
d. They have been proven to cause cancer.
Chapter 8 Quiz
3. It is well known that a murder took
place in a house 40 years ago. This
could be an example of
a.
b.
c.
d.
an internal obsolescence.
neighborhood decline.
a stigmatism.
social force.
Chapter 8 Quiz
4. A trend of moving to a new
suburban area is an example of
a.
b.
c.
d.
economic forces
locational forces
physical forces
social forces
Chapter 8 Quiz
5. The state’s housing finance authority
has just issued a low-interest, firsttime homebuyer mortgage program.
Sales are spurred as a result of this
a.
b.
c.
d.
governmental force.
physical force.
social force.
supply and demand.
Chapter 8 Quiz
6. Which is an example of the
governmental force of revenue
generating laws?
a.
b.
c.
d.
cost of credit
earnings levels
permissibility of zoning
specific tax policies
Chapter 8 Quiz
7. Wetlands are protected under what
federal Act?
a. Clean Water Act
b. Federal Wetlands Protection and
Wildlife Act
c. SARA
d. U.S. Army Corps Act
Chapter 8 Quiz
8. Sick building syndrome is a
result of
a.
b.
c.
d.
a former traumatic act.
inadequate soil composition.
linkages to toxic waste dumps.
poor air quality.
Chapter 8 Quiz
9. The Comprehensive Environmental
Response, Compensation, and
Liability Act primarily addresses
a.
b.
c.
d.
abandoned waste sites.
air quality in public buildings.
properties ridden with mold.
safe drinking water.
Chapter 8 Quiz
10. Which is an example of linkages?
a. estimated driving time from populated areas
to major interstate highways
b. known relationship of environmental
concerns and terminal illness
c. proximity of hazardous substances to
populated areas
d. relationship of household members when
analyzing social forces
Chapter 9
Economic Principles
and Applications
Chapter 9: Objectives
• After completing this chapter, students will
be able to:
Apply economic principles when forming
value opinions
Key Terms
•
•
•
•
•
•
•
•
•
Amenity
Anticipation
Balance
Buyer’s Market
Change
Competition
Conformity
Contribution
Excess Land
• Four Agents of
Production
• Highest and Best
Use
• Interim Use
• Law of Diminishing
Returns
• Law of Increasing
Returns
• Market Equilibrium
Key Terms
• Market-Use
Property
• Opportunity Cost
• Principle of
Consistent Use
• Progression
• Regression
• Seller’s Market
cont.
• Single-Use Property
• Special-Use
Property
• Substitution
• Supply and Demand
• Surplus Land
• Surplus Productivity
Four Agents of Production
• CELL
– Capital
– Entrepreneurship
– Land
– Labor
Fundamental
Economic Principles
• Anticipation
• Change
• Supply and
demand
• Substitution
•
•
•
•
•
Competition
Balance
Contribution
Conformity
Externalities
Economic Principles
Exercises
1. Value constantly fluctuates due to the
principle of _______.
change
2. When demand exceeds supply, prices
will _____.
rise
3. Property uses that compliment each other are
evidence of the theory of __________.
conformity
4. Value is created through the expectation
of future benefits according to the theory
of ____________.
anticipation
Economic Principles
Exercises
True or False
5.To an investor, the greater the expectation of
benefits from a property, the less valuable it is
to the investor.
FALSE
6.Surplus productivity is realized after various
agents of productivity have been satisfied.
TRUE
Economic Principles
Exercises
7. Contribution, whether more or less than cost, is
measured by the law of __________
increasing and
____________
decreasing returns.
8. Name the four agents of production (hint: C-E-L-L):
a.Capital
b.Entrepreneurship
c.Land
d.Labor
Highest and Best Use
• There is only one highest and best use for
land at a given point in time.
• Land not devoted to highest and best use
results in a loss of income.
• Highest and best use gives the owner
maximum economic advantage.
Highest and Best Use cont.
• Highest and best use allocates land
resources efficiently; maximizing economic
return.
• Highest and best use gives economic
benefits to surrounding land (conformity).
• Highest and best use gives economic
benefits to the community (conserves a
scarce resource—land).
Four Tests of
Highest and Best Use
1. Is the ideal use legally permitted?
2. Is it physically possible for the ideal
structure to be built on the property?
3. Is the ideal use economically
(financially) feasible on the property?
4. Is the ideal use the maximally
productive use for the property?
Value of a Vacant Site or
As If the Land Were Vacant
Value of the
Land as Improved
Application Illustration 1
A corner lot with commercial zoning currently is improved with a
residential dwelling. Determine the appropriate highest and best
use recommendation if demand for the commercial site is
recognized immediately.
Improved value—$185,000
As vacant—$205,000
Demolition cost—$12,000
Recommendation: Raise the dwelling to make the site vacant.
$205,000 – $12,000 (demolition cost) = $193,000
$193,000 – $185,000 = $8,000 higher value
Application Illustration 2
A single-family residence is currently valued at $58,000. The
majority of properties within close proximity to the subject are
duplexes with typical values in the range of $79,000. If the cost of
converting the subject’s single-family residence into a duplex has
been estimated at $20,000, and the interior demolition is estimated
to be $1,000, what is the highest and best use conclusion?
Conclusion: The highest and best use of the property remains as a
single-family residence, since there is no entrepreneurial reward for the
owner upon completion of the conversion.
$58,000 + $20,000 + $1,000 = $79,000
Application Illustration 3
A real property appraiser is performing a highest and best use analysis
for a vacant parcel. The appraiser has determined that the highest and
best use of the parcel is for a two to four unit apartment building with
(per maximum lot coverage) exterior dimensions of 4,000. Which
improvement should the appraiser suggest?
•
Two, four-bedroom, three-bath units which could each rent for $1,250 per
•
month. Indicated value by the income approach is $42.50 per square foot and
cost of the 4,000 square foot building will be $67.00 per square foot.
Three, three-bedroom, two-bath units which could each rent for $950 per
month. Indicated value by the income approach is $50.59 per square foot and
cost of the 4,000 square foot building will be $49.00 per square foot.
•
Four, two-bedroom, two-bath units which could each rent for $750 per month.
Indicated value by the income approach is $44.25 per square foot and cost of
the 4,000 square foot building will be $45 per square foot.
Application Illustration 3
continued
Suggested unit type and mix: Three three-bedroom, two-bath
units
Two, four-bedroom, three-bath units
4,000 × $42.50 = $170,000
4,000 × $67.00 = $268,000
Three, three-bedroom, two-bath units
4,000 × $50.59 = $202,360
4,000 × $49.00 = $196,000
Four, two-bedroom, two-bath units
4,000 × $44.25 = $177,000
4,000 × $45.00 = $180,000
Application Illustration 4
A 20,000 square foot residential lot zoned for single-family or twofamily use is the subject of an appraisal assignment. The lot is
currently improved with a 1,800 square foot single-family
residence. What is the indicated highest and best use?
• Vacant land value—$0.75 per square foot
• Razing cost—$8,000
• Present value of single-family dwelling from paired data—$80 per
square foot.
• Potential monthly rent if converted to two-family—$800 each
• Indicated value by the income approach per square foot—$96
• Conversion cost to two-family—$28,000
Application Illustration 4
continued
Indicated highest and best use: Converted to two-units
Vacant: 20,000 square feet × $0.75 per square foot = $15,000
Razing cost: $8,000
$15,000 – $8,000 = $7,000
“As is”: 1,800 square feet × $80 = $144,000
Converted: 1,800 square feet × $96 =
$172,800 – $28,000 conversion = $144,800
Application Illustration 5
A single-family dwelling contains 1,860 square feet and is situated
on a commercially zoned lot that is 155’ x 220’.
If, through paired-data, the improved property has a per square
foot value of $58 and the commercial land value in this area is
$150,000 per acre, what is the highest and best use if the razing
cost is estimated to be $20,000?
Highest and best use conclusion: as-improved
As-improved: 1,860 × $58 = $107,880
Vacant: 155 × 220 = 34,100 ÷ 43,560 = 0.7828 acre
0.7828 × $150,000 = $117,424 – $20,000 = $97,424
Interim Use
• A temporary use of property while it awaits
conversion to its highest and best use
– E.g., waiting for a zoning change or
accumulation of investment dollars
• Appraiser must observe the principle of
consistent use:
– Land cannot be valued for one use while the
improvements are valued for another use
Final Determination
of Highest and Best Use
Special Uses
• Single-use property
• Multiple-use property
• Special-use property
Surplus and Excess Land
• Surplus land
– Portion over and above what is necessary for
the highest and best use of the subject
property and does not have a stand-alone
highest and best use
• Excess land
– Land (or site) area that is not necessary to
support the use of the existing improvements
situated on the subject property
Highest and Best Use
Application Exercise
1. For an improved property, highest and best use analyzes
whether the current improvements should be
razed, converted, or left “as is.”
2. Zoning is one consideration of legally permissible.
3. Highest and best use gives the property owner maximum
economic advantage.
4. As a(n) interim use, the property could be held for future
development.
5. The four tests of highest and best use are:
1.
2.
3.
4.
Legally permissible
Physically possible
Financially feasible
Maximally productive
Case Study 9.1
Certified general appraiser, Max Riley, was performing a highest and best use analysis of a highvisibility corner commercial site that is located on Hightown’s primary commercial strip. Three
major shopping malls and strip centers are across the street from the subject. Another is located
adjacent to it on the same side of the street.
The subject parcel contains approximately one acre and is improved with a 1960’s automotive
service station that has not operated for a number of years. The site has been rented throughout
recent years to various vendors selling flowers, fruits and vegetables, and other seasonal
products. The fuel storage tanks have been removed from the site and the property has been
certified to be environmentally sound. The property owner, a private individual, realizes the
property is too valuable to continue its present use and has asked appraiser Riley to determine its
value for marketing purposes.
Appraiser Riley surveys the area and the market and has found no other sites immediately
available in this highly desirable area. His research has revealed that the last similar comparable
one-acre parcel sold approximately two years ago for $850,000. The comparable parcel—an
interior lot without the corner influence—was located approximately 1,000 feet from the subject.
On inquiry with the broker facilitating that transaction, he found the comparable property went
under contract to a restaurant enterprise, soon after being offered to the market. The broker also
noted that he received two additional backup offers for the property. One was for $850,000, and
the other was for $900,000. Both of these offers were from similar restaurant developers.
Case Study 9.1
Point Break
Of the characteristics effecting value, which
characteristics have been identified?
• Demand
• Utility
• Scarcity
cont.
Case Study 9.1
cont.
Further information obtained from the real estate broker indicated
that all offers for the comparable parcel were from restaurants that
required a site for which a liquor license could be obtained. The
broker also had interest from other non-liquor food service users
including fast-food facilities. But, none of these non-liquor vendors
would be willing to pay as much as those requiring a liquor license.
Appraiser Riley’s research confirms this trend with non-liquor
restaurants paying up to 50% less than those requiring a liquor
license. Additionally, appraiser Riley confirms with the state liquor
control board that a liquor license would be available for the site.
Case Study 9.1
cont.
Point Break
From this information, what conclusion could
be drawn about the highest and best use of
the subject property?
• Restaurant desiring to sell alcohol
Case Study 9.1
cont.
After performing a highest and best use analysis of the property, appraiser Riley
has determined that a restaurant use that requires a liquor license would be the
highest and best use of the property. The use as a site for a non-alcohol
restaurant was analyzed; after considering they typically pay substantially less for
a commercial site that option was eliminated. Alternative users, such as most
retail, typically pay up to 50% less than a non-alcohol product restaurant. After
considering supply and demand patterns, historic sales data, and the physical
characteristics of the subject parcel, the appraiser’s value opinion is a range of
$1,200,000 to $1,500,000.
Appraiser Riley holds a meeting with the property owner. After a presentation of
the marketability and value opinion of the property, the property owner offers that
there may be a problem. The property owner inherited the property from his
mother, a conservative lady who was strongly opposed to alcohol. He believes
there may be some restriction relating to alcohol and the use of the property.
Following up on this information, appraiser Riley finds a deed restriction stating
“the property may never be used for the sale or consumption of alcohol.”
Case Study 9.1
cont.
Point Break
How does this deed restriction impact the use
and value of the property?
• The number of interested users has
been affected by the restriction.
• Based on the data given, the
property's value diminishes by at
least 50%.
Case Study 9.1
cont.
Point Break
Are there potential remedies or alternatives?
•
Since the owner inherited the
property and the restriction, he
might be able to file for a court
action to have the restriction
removed
Case Study 9.1
cont.
Appraiser Riley suggests that the property owner seek legal
counsel to discuss the restriction and any potential solutions.
Legal counsel suggests that, in this particular case, a court action
could be filed to seek removal of the restriction claiming it is
unreasonable and has a significant and unreasonable impact on
the property value as alternative highest and best uses could
result in up to a 50% downward impact on it.
After deep consideration, the property owner was not willing to
challenge his mother’s request.
Case Study 9.1
Point Break
How does this information affect the highest
and best use?
• Changes the highest and best
use to an establishment that
does not sell liquor, such as fast
food
cont.
Case Study 9.1
cont.
With this decision, the appraiser now deems the highest and best
use to be as a food service facility that does not sell liquor. At this
point, the property owner tells appraiser Riley that he also owns
the land and building immediately next door to the subject. It was
built for and leased to a fast-food facility specializing in roast beef
sandwiches about 25 years ago. He also inherited this property.
The restaurant has been a good tenant and is currently engaged
in a lease with 10 years remaining. Appraiser Riley asks to review
the fast-food restaurant’s lease.
Case Study 9.1
Point Break
What type of information is appraiser Riley
looking for?
•
A non-compete agreement
cont.
Case Study 9.1
cont.
In the course of reviewing the lease, appraiser Riley finds what he
suspected—the non-compete agreement. The agreement states
that “during the term of this lease, no property owned by the
lessor, within a three mile radius, shall be sold or leased for the
sale or consumption of roast beef, hamburgers, chicken, and fish.”
Case Study 9.1
cont.
Point Break
How has the information impacted highest and best
use and the value of the property? What vital
characteristic of value is at issue, or not present?
• Eliminates most fast food users
• As the uses of a property
diminish, so does the property’s
value
The property was sold to chain of doughnut shops. They paid
$375,000 for the site.
Chapter 9 Quiz
1. Highest and best use
a. allocates land resources efficiently.
b. always considers the intended use of
the owner.
c. can be several different uses at any
given time.
d. results in a minimal loss of income.
Chapter 9 Quiz
2. Externalities can be a positive or
negative influence on value,
primarily due to the property
characteristic of
a.
b.
c.
d.
balance.
immobility.
level benefits.
surplus productivity.
Chapter 9 Quiz
3. An interim use might be determined
when
a. the appraiser is unable to make a
determination due to limited data.
b. the owner cannot make up his mind on
what to do.
c. a reasonable and probable change in
circumstances is forthcoming.
d. waiting for a volatile market to settle
before deciding.
Chapter 9 Quiz
4. Regarding “physically possible,”
which would NOT be considered?
a.
b.
c.
d.
building materials
building set back lines
parking requirements
size of the building
Chapter 9 Quiz
5. A school building might be an
example of a(n) __________
property.
a.
b.
c.
d.
commercial-use
multiple-use
special-use
utility-use
Chapter 9 Quiz
6. When the highest and best use of
the property is “vacant,” the current
improvements are
a. in a state of equilibrium.
b. lending no value to the vacant site.
c. taking away from the value of the
vacant site.
d. taking away from the vacant site value
by more than the cost to raze the
improvements.
Chapter 9 Quiz
7. When a buyer will not pay more for
something than its cost, the buyer
is influenced by
a.
b.
c.
d.
contribution.
opportunity cost.
substitution.
supply and demand.
Chapter 9 Quiz
8. Which is NOT one of the four
agents of production?
a.
b.
c.
d.
capital
gross profit
labor
land
Chapter 9 Quiz
9. The law of diminishing returns is
most directly linked to which
economic principle?
a.
b.
c.
d.
change
competition
contribution
substitution
Chapter 9 Quiz
10. When properties are listed at a certain
price in the neighborhood, that price
tends to set the limits of value for
other properties around it, according
to the concept of
a.
b.
c.
d.
balance.
competition.
contribution.
Substitution.
Chapter 9 Quiz
11. Which economic principle
suggests that value is created
through expectation of future
benefits?
a.
b.
c.
d.
anticipation
balance
contribution
surplus productivity
Chapter 9 Quiz
12. Which of the following is likely to
contribute the most value?
a. adding 500 square feet to a 1,200 square feet
house, where 1,200 square feet is the
predominant square footage
b. adding a fence where fences are prohibited
c. adding a second bath to a three-bedroom
house, where three bedrooms, two baths is the
norm
d. changing granite countertops to laminate
Chapter 9 Quiz
13. The largest and most expensive
house in the neighborhood could
likely be experiencing regression
through which economic principle?
a.
b.
c.
d.
anticipation
conformity
substitution
surplus productivity
Chapter 9 Quiz
14. When might a residual physical
segment of a land parcel be
considered surplus site?
a. if it is needed for future expansion of the
subject’s improvements
b. if it would be legally permissible to have
another house built on it
c. when it cannot be legally sold separately
from the subject property
d. when it could freely transfer and be made
available to the open market
Chapter 9 Quiz
15. Which is included within the test
of “legally permissible”?
a.
b.
c.
d.
allowable to zoning
hazard insurance could be obtained
police protection is available
title is free of encumbrances
Chapter 10
Overview of
Market Fundamentals
Chapter 10: Objectives
• After completing this chapter, students will
be able to:
– Identify supply and demand model as part
governmental and part economic
– Describe the role of money and capital
markets
Key Terms
• Adjustable Rate
Mortgages (ARMs)
• Amortization
• Amortized Loans
• Balloon Mortgage
• Command Economic
System
• Conforming Loan
• Conventional Loan
•
•
•
•
•
•
Debt
Deficit Spending
Discount Rates
Economics
Equity
Federal Budget
Deficit
• Fed Funds Rate
Key Terms
• Federal Home Loan
Mortgage Corporation
(Freddie Mac)
• Federal National
Mortgage Association
(Fannie Mae)
• Federal Open Market
Committee (FOMC)
• Federal Reserve
Banks
cont.
• Federal Reserve
Board
• Fiscal Policy
• Government Loan
• Government National
Mortgage Association
(Ginnie Mae)
• Inflation
• Monetary Policy
• Moral Suasion
Key Terms
•
•
•
•
Mortgage
Mortgagee
Mortgagor
Nonconforming
Loan
• Open Market
Operations
• Portfolio Lenders
• Primary Mortgage
Markets
• Private Mortgage
Insurance (PMI)
• Purchase Money
Mortgage
• Reserve
Requirements
• Secondary
Mortgage Markets
• U.S. Treasury
Department
cont.
Broad Economic Concepts
• Economics: The study of how resources
are allocated
– Fiscal policy
– Monetary policy
Command Economy
vs. Market Economy
• Command economic system
– Government or other central authority makes
all decisions about production and distribution
• Market economic system
– Individual people and businesses are free to
make their own decisions about production
and distribution
Supply-Side vs.
Demand-Side Economics
• Supply-side economics
– Seeks to create economic activity by having
the government lower taxes
– Allow market forces to determine where the
most productive investment and job creation
should take place
• Demand-site economics
– Seeks to create economic activity through
government spending aimed at job creation
– Keynesian economics
Money Supply
• Fiscal policy
– U.S. Treasury Department, IRS
– Deficit spending, taxation
• Monetary policy
– Federal Reserve Board
– Prices, interest rates, financial markets
Monetary Policy
Implementation
• Four tools used by the FED (D O R M)
– Discount rates
– Open market operations
– Reserve requirements
– Moral suasion
Role of Money
and Capital Markets
• Competing investments
– Debt investors: Conservative and passive; favor
bonds and mortgages with a certain return and
repayment of principal
– Equity investors: Aggressive and open to more risk;
venture capital
• Sources of capital
– Debt and equity
– Cash, REITs, partnerships, syndications, joint
ventures, pension funds, insurance companies
Mortgage Markets
• Primary mortgage markets
– Lenders who make mortgage loans directly to
borrowers
– Portfolio lenders
• Secondary mortgage markets
– Private investors and government agencies
that buy and sell real estate mortgages
Function of Secondary
Mortgage Markets
• Buy and sell mortgages from primary market
lenders
• The primary lenders (e.g., local banks) then
have more money to lend to other potential
borrowers
• Local banks invest surplus funds in real estate
investments from other regions—real estate
cycles are then moderated by stable
investments from areas going through different
phases of the cycle
• Standardization loan criteria
The Agencies of
Secondary Mortgage Market
• Federal National Mortgage Association
(Fannie Mae)
• Government National Mortgage
Association (Ginnie Mae)
• Federal Home Loan Mortgage Corporation
(Freddie Mac)
Conforming vs.
Nonconforming Loan
• Conforming loan
– General terms of the mortgage loan application meet
the requirements of the secondary market’s
underwriting guidelines or a private investor’s lending
policy
– Considered low risk for the investor
• Nonconforming loan
– Have one or more underwriting indicators that fall
outside the acceptable range of guidelines
– Considered higher risk for the originating lender
Underwriting Standards
• Loan-to-value (LTV) ratios
• Income-expense ratios
• In order to sell mortgages on the
secondary market, lenders must conform
to underwriting guidelines
– Implements quality control
– Increases quality of the loans lenders make
Overview of Mortgages
• First mortgage
– A security instrument that has a first mortgage
lien position; has priority over all other
mortgages
• Second mortgage
– A security instrument in second lien position
– Also called junior mortgages
• Amortization
– The principal and interest of a loan is repaid in
installments
Types of Mortgages
• Conventional loans
– May have private mortgage insurance (PMI)
• Government loans
– FHA loans, VA loans
• Adjustable rate mortgages (ARMs)
• Purchase money mortgages
• Balloon mortgages
Chapter 10 Quiz
1. The federal government influences
the money supply through
a.
b.
c.
d.
fiscal and monetary policy.
physical and social factors.
rules of equilibrium.
supply and demand.
Chapter 10 Quiz
2. The Treasury Department is NOT
responsible for
a.
b.
c.
d.
federal spending.
managing the federal deficit.
tax collection.
secondary mortgage markets.
Chapter 10 Quiz
3. The Federal Reserve System has
how many regional Federal
Reserve Banks?
a.
b.
c.
d.
6
8
12
14
Chapter 10 Quiz
4. Tools used by the Fed to implement
monetary policy include
a. Congressional Acts.
b. discount rates and reserve
requirements.
c. fiscal assertiveness.
d. prime rates and subprime rates.
Chapter 10 Quiz
5. The U.S. Treasury is responsible
for __________ policy.
a.
b.
c.
d.
economic
fiscal
monetary
social
Chapter 10 Quiz
6. The amount a commercial bank
must keep on deposit is known as
a.
b.
c.
d.
equilibrium.
monetary policy.
reserve requirements.
supply and demand.
Chapter 10 Quiz
7. If the federal government spends
less money than revenue, which
would likely occur?
a. Interest rates would rise sharply for
mortgage loans.
b. Federal Reserve Board would not meet.
c. Market equilibrium would occur in the
Federal Reserve.
d. More funds would be available for real
estate loans.
Chapter 10 Quiz
8. Tax credits, such as those created
through the American Recovery and
Reinvestment Act of 2009, are an
example of which force influencing
the value of real property?
a.
b.
c.
d.
economic
governmental
physical
social
Chapter 10 Quiz
9. Which is NOT a source of equity
used as capital for acquisition of
investment real estate?
a.
b.
c.
d.
joint ventures
mortgages
partnerships
pensions funds
Chapter 10 Quiz
10. What is the lump-sum remaining
principle balance referred to that is
payable when a mortgage loan is
not fully amortized?
a.
b.
c.
d.
balloon balance
deficit balance
discount balance
passive balance
Chapter 10 Quiz
11. In general, conforming conventional
mortgage loans represent
a. less risk of loss to the lender.
b. a loan avenue for borrowers who have
a high debt to income ratio.
c. loans that are insured or guaranteed by
the government.
d. an opportunity to charge a higher
interest rate.
Chapter 10 Quiz
12. Which is an advantage of the
secondary mortgage market?
a. Lenders can sell existing lower interest
rate loans to free-up money.
b. The lender is only lending funds from their
institutions deposits.
c. Secondary market loans are only for
home equity loans, so there is less risk.
d. There are no national requirements for
the secondary market.