REE 3043 Exam 3 UCF

Mortgage types

Conventional mortgages

FHA mortgages

VA mortgages

Home equity Loans

Other

Mortgage Decisions

Mortgage choice

Amount of leverage (loan size)

Refinancing

Default

Primary Mortgage Market

Where loans are created (originated)

Retail or street market

Primary Mortgage Market Players

Mortgage bankers

Mortgage brokers

Banks

Thrifts

On-line lenders (Quicken, Lendingtree, etc.)

Secondary Mortgage Market

Where existing home loans are resold

Wholesale market among lenders

Government Sponsored Enterprises (GSEs)

Fannie Mae and Freddie Mac

Government National Mortgage Association

(GNMA or "Ginnie Mae")

Conventional Mortgage Loans

Oldest form

Any standard home mortgage loan not insured by FHA or guaranteed by Department of Veterans Affairs

Revolutionized in 1940s by private mortgage insurance

Conforming conventional home loan

Meets the requirements for purchase by Freddie Mac or Fannie Mae

nonconforming loan

Does not meet GSE requirements in some respect

Private Mortgage Insurance (PMI)

Protects lender against losses due to default

Generally required for loans over 80% of value

Protects lender for losses up to 25% - 35% of loan

Insurer MAY allow termination of PMI if:

Loan falls below 80% of current value

And borrower is in good standing

Insurer MUST ALLOW termination of PMI if:

loan falls to 80% of original value (Homeowner's Insurance Act of 1999)

And borrower is in good standing

Insurer MUST TERMINATE PMI if:

loan falls to 78% of original value

And borrower is in good standing

Goals of the National Housing Act of 1949

Decent home and suitable living environment

Implemented mainly through mortgage markets

FHA

strictly a loan insurance program

FHA Insurance

Insures 100% of loan

After foreclosure, title is transferred to Housing and Urban Development (HUD)

Importance of FHA

Created the level payment mortgage

Influenced housing and subdivision standards

Continues to innovate: HECM program

Veterans Affairs Guarantees

Limited to qualified veterans of military service.

Maximum guarantee: One-fourth of the GSE loan limit.

Loan can be up to 100% of value

Fee is based on loan-to-value ratio and service status: 1.5 percent to 2.4 percent.

Loan covers funding fee, but not closing costs

Purchase Money Mortgage

Mortgage given by a property buyer simultaneous with receipt of title

Piggyback loan

A second mortgage paired with an underlying 1st mortgage to keep the 1st below 80 percent LTV, thus avoiding required mortgage insurance.

Home Equity Loans

Some are closed-end, fixed-term loans

Mostly open-end or line-of-credit loans (HELOC)

Tax deductible interest

Strength of the house as security provides favorable rate and longer term

Usually limited to total mortgage debt (sum of all mortgage loans) of 75% to 80% of value

Reverse Mortgage

Converts home equity to income without requiring borrower to move

Requires no payment

Traditional Mortgage

Building equity through amortization

Principal payments reduce loan balance

Interest-only with balloon

has interest-only payments for five to seven years, ending with a full repayment of principal

Interest-only amortizing

has interest-only payments for up to fifteen years, then converts to a fully amortizing payment for the remainder of the term.

Options ARM Example

Borrower could select among three types of payments: fully amortizing, interest-only, and minimum

Minimum payment based on a very low rate: say, 1.5 percent

Minimum payment increases 7.5 percent per year

Interest rate charged was adjustable, usually deeply reduced for the first few months

With minimum payment, the loan balance grew due to "negative amortization"

Hybrid ARM

Interest rate is fixed for some years, then becomes adjustable

Payment is set to be fully amortizing

Fixed rate period ranges from two to ten years

Fixed rate is higher as its term is longer

Inherently superior design

primary form of ARM loan

Subprime Loans

high-risk use

Mostly 2-28 hybrid, I-O, or option ARM

Almost all were adjustable rate

Low initial payment, large negative amortization

Started at very high loan-to-value ratio

Designed so that refinancing would become necessary due to severe payment increases

Wide-spread abandonment of prudent underwriting

Alt-A Loans

Even more "standard" in type than sub-prime

Usually relaxed one standard loan underwriting requirement

Majority were "no-doc" or "low-doc" loans

Refinancing investment decision equation

Net Benefit = Benefit of Interest Reductions - Cost of Refinancing

Two approaches to deductions under U.S. tax code

Standard deduction (lump sum amount)

Itemized deductions

Interest rate spread rule

Refinance if "spread" between old loan interest rate and current rate is, for example, 2.0 percent

Payback period rule

Divide cost of refinancing by monthly savings to find "payback period"; then decide if the payback period is short enough

thrifts

Formerly backbone of home mortgage finance

Dominated mortgage lending

Extremely localized

Fatal flaw: Funded long-term loans with

short-term savings

Traded freedom for deposit insurance

Commercial Banks

Historically: Served real estate needs of business clients

Assumed former roles of thrifts

Large-scale construction lending

"Warehouse" credit lines for mortgage bankers

Effects of bank deregulation

Portfolio Lenders (depository institutions)

Banks

Thrifts

Large credit unions

Non-portfolio lenders

Mortgage bankers

Mortgage brokers

Mortgage banker

Not a bank - accepts no deposits

Originates loans to sell

Retains right to service the loan for a fee

Mortgage Broker

Brings borrower and lender together for a fee; never owns the loan

Pipeline risk

risk between loan commitment and loan sale

Fallout risk

If interest rate falls - Risk that loan applicant backs out

Interest rate/price risk

If interest rate rises - Risk that closed loans will fall in value before sold

Mortgage Backed Securities (MBS)

Multiple mortgage loans in a single pool or fund

Security entitles investor to pro rata share of all cash flows into the pool.

Importance of Fannie Mae and Freddie Mac

Brought about standardization in:

Mortgages and mortgage notes

Appraisal forms and practices

Underwriting procedures and standards

Also, influence practices and standards in nonconforming mortgage markets

What Was Wrong with Fannie and Freddie

Not capitalized to withstand declining home values

Said to wield too much political influence

Said to unsuccessfully mix private enterprise with housing subsidy programs

Said to divert the benefits of their efficiency advantage into the pockets of their management

Said to be unnecessary in a financial world now dominated by a few giant banks

Private Mortgage Conduits

Grew out of the market for non-conforming "Jumbo" loans

Small market share until sub-primes emerged

Grew explosively post-2000, mainly for sub-primes

Diminishing rapidly as sub-prime diminish

Continues as a conduit for "Jumbos"

The U.S. Home Mortgage System Today - Four Channels

Local depository lending (very limited)

FHA/VA - GNMA securitization process

Conforming conventional - GSE process

Non-conforming conventional - private security process

Underwriting

Process of determining whether the risks of a loan are acceptable

Three "Cs" of traditional underwriting

Collateral: URAR appraisal

Creditworthiness: Credit report

Capacity: Ability to pay (payment ratios)

Housing expense ratio

= PITI/GMI

PITI is principal, interest, (property) taxes and insurance

GMI is gross monthly income

Total Debt Ratio

(PITI + LTO) ÷ GMI

PITI is principal, interest, (property) taxes and insurance

GMI is gross monthly income

LTO is long-term obligation

Qualified Mortgage (QM)

Home mortgage class from the Dodd-Frank Act that focuses on ability to repay

What Do Brokers Do?

Bring buyers and sellers, owners and renters together to complete real estate transactions

Collect a commission for their services

Agency Relationship

When a person (principal) delegates authority to someone (agent) to act on their behalf

Can create a Fiduciary Relationship and Responsibility

Governed by Common Law, Statutory Law and Administrative Law

Types of Agents

Universal Agent, General Agent, Special Agent

Universal Agent

can act for the principal in ALL matters

General Agent

Can act for principal within a specific business

Special Agent

Can act for principal in a specific transaction

Fiduciary Duties and Responsibilities

Confidentiality

Obedience

Accounting

Loyalty

Full Disclosure

Skill and care

Transaction Broker

may work for buyer and/or seller (no fiduciary relationship)

Limited confidentiality

Disclosing all known facts...affecting value... that are not readily observable to buyer

Single agent

may work for either buyer or seller but not both in the same transaction (fiduciary relationship)

Confidentiality

Obedience

Loyalty

Disclosure (Full)

No Brokerage Relationship

does not represent either party just facilitates the transaction (no fiduciary relationship)

Is Dual Agency allowed in Florida?

No

Activities Involving Compensation for Another Person that require real estate licensing

Advertise real estate services

Buy

Appraise (non-federally related transactions)

Rent or provide rental information or lists

Sell

Auction

Lease

Exchange

Sales Associate

A person who performs real estate services for compensation but who does so under the direction, control, or management of a broker or owner-developer

Broker

A person who, for another and for compensation or other consideration (or anticipation of aforementioned), performs real estate services

Broker Associate

A person who holds a broker's license but who chooses to register and work under the direction of another broker

Licensing Requirements

Minimum 18 years of age

High school diploma or its equivalent

Social Security number

Be honest, truthful, trustworthy, of good character, and have a reputation for fair dealing (Background check)

Be competent and qualified to make real estate transactions and conduct negotiations with safety to investors and others (Education)

Sales Associate Education Requirements

Complete 60 hour Pre-license course

70% or higher on end of course exam

75% or higher on State License Exam

Complete 45 hour Post-licensure course scoring 75% or higher on end of course exam before the first renewal of their license

Broker Experience Requirement

1) Hold an active sales associate license under one or more real estate brokers for at least 24 months during the five year period preceding application

2) Hold an active sales associate license while working as a salaried employee of a governmental agency for at least 24 months during the five year period preceding application

3) Held an active broker license in another state or in any foreign jurisdiction for at least 24 months during the five year period preceding application

Broker Education Requirements

Complete 69 hour Pre-license course

70% or higher on end of course exam

75% or higher on State License Exam

Complete 60 hour Post-licensure course scoring 75% or higher on end of course exam before the first renewal of their license

Licensure Continuing Education

14 hours of continuing education during every 2 year license period (after post-license education during initial renewal)

Active License

Licensees in good standing registered under an employing Broker. Required to perform any real estate duties for compensation

Voluntary inactive license

Results when a licensee is not registered under an employing broker. This is the initial state that all licensees have upon passing the exam

Involuntary inactive license

Results when a license is not renewed at the end of the license period

Void license

The license no longer exists. This occurs when the following situations occur (involuntary inactive for more than 2 years or revoked for disciplinary reason)

ineffective license

The license exists but the licensee cannot use it (inactive or suspended)

Cease to be in Force license

Certain events can cause a license to enter into this status, until DBPR is properly informed

Types of Real Estate Contracts

+Listing contracts

+Buyer brokerage agreements

+Option contracts

+Sale and purchase contracts

Listing Contracts

A broker earns a commission by finding a ready, willing and able buyer for the specified price and terms

A contract for services, not for real estate

Open Listing

Seller gives to any number of brokers who can work simultaneously to sell the owner's property

Only the broker who is the procuring cause earns commission

Seen most often with builders

Exclusive Agency Listing

Seller gives listing to one broker but reserves the right to sell the property themselves without paying a commission

Exclusive Right of Sale

Most advantageous listing for the broker

Seller gives listing to a single broker, who becomes the exclusive agent during the time of the listing contract

If property sells during that time, the broker receives a commission regardless of who sells the property

Net Listing

Can be any type of listing contract but the seller wishes to receive a specified net amount from the sale

Gross price = 𝑇𝑎𝑟𝑔𝑒𝑡 𝑛𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 /

(1 −𝐶𝑜𝑚𝑚𝑖𝑠𝑠𝑖𝑜𝑛 𝑟𝑎𝑡𝑒)

Buyer Brokerage Agreement

An employment contract between a buyer and a broker

Title VIII of the Civil Rights Act of 1968

prohibits discrimination by race, color, religion, national origin, and sex. The Fair Housing Amendment Act in 1988 added familial status, and handicap status

Contract for Sale

Determines price and terms of the transaction

Defines property interest being conveyed

Determines the grantee

Determines other conditions of the transaction

Required Elements of a Contract

All contracts:

-Competent parties

-Legal objective

-Offer and acceptance

-Consideration

-No defects to mutual assent

Contract for sale of real estate:

-In writing (per Statute of Frauds)

-Proper description of property

Legal title

Ownership of a freehold estate

Equitable title

Right to obtain legal title

Buyer obtains when a contract for sale of real estate is fully signed

Advantages of Form Contracts

Neutral (not prepared by opposite party)

Ready-made treatment of details

Local real estate boards are a good source

Components of a Form Contract

Part I: Points particular to the deal

Items to be negotiated (price, date of closing, distribution of expenses)

Items that characterize the property (water source, zoning, flood zone status)

Part II: Items that must be clear (the same for most transactions)

Contingent contract

Obligation of a party to perform depends on one or more conditions being met

Assignment

One party's contractual rights and obligations are transferred to someone else

Escrow agent

Third party who holds moneys or documents on behalf of contract parties

Specific performance

Buyer can force seller to convey title

Liquidated damages

Seller can retain deposit if buyer backs out

Rescission

Mutual agreement to cancel

Earnest money deposit

Buyer has prepaid