Federal Housing Legislation and Mortgage Underwriting Principles

What are the four primary housing market issues addressed by federal legislation?

Affordability, efficiency and stability, competition, and equity.

What are the two main ways the federal government supports housing affordability?

Economic support of financial institutions and mortgage insurance, direct grants, and subsidies.

What was the primary purpose of the Federal Home Loan Bank Act of 1932?

To establish the FHLB Board and 12 district banks to provide liquidity to member associations.

How do Federal Home Loan Banks (FHLBs) obtain the funds they lend to thrifts?

Through the sale of FHLB bonds in the capital market.

What is the relationship between FHLB advances and deposit flows?

Advances rise when deposits slow and fall when deposit flows increase.

What organization was established by the National Housing Act of 1934?

The Federal Savings and Loan Insurance Corporation (FSLIC).

What is the primary benefit of deposit insurance for thrifts?

It insures consumer deposits against loss and allows thrifts to take on higher risks.

What factors influence the value of deposit insurance to an institution?

Interest rate volatility, asset-liability maturity mismatch, and capital-to-asset ratio.

What is the primary function of the Federal Housing Administration (FHA)?

To provide default insurance on various mortgage types.

What is the purpose of the FHA's loss-mitigation program?

To avoid losses on loans resulting from delinquency and foreclosure through forbearance, modification, and partial claims.

What is the purpose of Community Development Block Grants?

To provide funds to cities and urban counties for a wide range of community development projects.

What does the Urban Homesteading Program involve?

Transferring federally owned properties to local governments with approved homestead programs.

What is the goal of the Self-Help Homeownership Opportunity program (SHOP)?

To help low-income families gain homeownership through sweat equity.

What does the Brownfields Economic Development Initiative (BEDI) target?

The redevelopment of abandoned or underused industrial and commercial properties contaminated with hazardous materials.

What is the purpose of the HOPWA program?

To provide grants for projects that benefit low-income people diagnosed with AIDS.

How does the Section 8 Program function?

It pays the difference between what low-income households can afford and the approved rent for an adequate unit.

What is the primary advantage of the Section 8 Existing Housing Voucher Program?

It gives assisted families greater choice by allowing them to rent units with rents above the fair market rent.

What was the main goal of the Cranston-Gonzalez National Affordable Housing Act of 1990?

To increase the supply of affordable housing for low-income and very low-income families.

What is the structure of the HOME Investment Partnership Act (Title II)?

A loan arrangement where the federal government sets up a local Home Investment Trust Fund to increase low-income housing supply.

What is the purpose of the HOPE Program (Title IV)?

To provide grants for rehabilitating public housing and transferring ownership to eligible families.

What are Fannie Mae and Freddie Mac?

Government-sponsored enterprises (GSEs) that are private corporations with federal government charters.

What is the purpose of Rental Rehabilitation Grants?

To provide grants to cities and states to rehabilitate rental properties.

What is the purpose of Emergency Shelter Grants?

To provide grants to states and cities to rehabilitate and convert buildings into shelters for the homeless.

What is the primary goal of the National Minority Homeownership Agenda?

To challenge the mortgage finance industry to create new minority homeownership opportunities.

What is the purpose of the Affordable Rental Housing Leadership Initiative?

To increase investment in low-income multifamily housing.

Which program assists 'underwater' borrowers with refinancing?

The Keys to Recovery program.

What does the My Community Mortgage program offer?

Special features on conventional loans for low-income borrowers.

What entity funds the Housing Trust Fund (HTF) established by HERA?

Fannie Mae and Freddie Mac.

What are three benefits GSEs receive regarding their loan purchases?

Lower capital requirements, eligible debt securities for investment, and exemption from state/local taxes and SEC filing.

How is the mortgage interest deduction treated for tax purposes?

It is an itemized deduction.

What is the process of securitization?

Packaging individual, liquid mortgage loans into large, riskless securities sold on organized exchanges.

What was the purpose of the National Mortgage Association of Washington (1938)?

To create a secondary market for FHA loans.

What did the Emergency Home Finance Act (1970) achieve?

It created a liquid market for government-underwritten loans.

What act deregulated financial institutions to solve issues like Regulation Q limits?

The Depository Institutions Deregulation and Monetary Control Act (1980).

What does the Interstate Land Sales Full Disclosure Act (ILSFDA) require?

Disclosure of specific information to HUD and prospective purchasers when offering certain land for sale in interstate commerce.

What is Regulation Z?

Regulatory requirements established by the Federal Reserve (now overseen by the CFPB) regarding truth in lending.

What two loan features must be disclosed to consumers under Regulation Z?

Total finance charges and the annual percentage rate (APR).

What is the definition of APR in the context of a loan?

The effective yield on a loan.

What right does a borrower have under Regulation Z after a credit transaction is consummated?

The right to rescind the transaction within a short period.

Which agency currently oversees Regulation Z?

The Consumer Financial Protection Bureau (CFPB).

What is the purpose of the Home Ownership and Equity Protection Act (HOEPA)?

To stop elusive or predatory lending practices for borrowers borrowing against their home equity.

What is the primary purpose of the Real Estate Settlement Procedures Act (RESPA)?

To address consumer complaints regarding the costs of completing residential property transactions.

What are the three disclosure requirements mandated by RESPA?

A detailed booklet, a 'good faith estimate' of settlement charges, and the Uniform Settlement Statement.

Does RESPA provide a right of rescission for real estate sales or loan agreements?

No, it does not affect the validity or enforceability of sales or loan agreements.

Why is there potential for overpricing in settlement services?

Because the demand for these services is not responsive to price, and suppliers have no incentive to advertise to the public.

What are Computer Loan Origination systems (CLOs)?

Systems that allow borrowers to view and apply for loans from an extensive list provided by lenders.

What is the main focus of legislation designed to foster mortgage market stability?

Creating liquid, efficient markets and deregulating the market.

What happens when the mortgage market is not integrated?

Shifts in supply and demand cause mortgage rates and capital market rates to diverge.

What is the primary function of the Housing Trust Fund (HTF)?

To provide housing for low-income families.

What is the proposed 'one-package rule' by HUD?

A rule allowing lenders to package all closing costs to reduce settlement costs for the consumer.

What is the primary trend in the future of settlement services?

One-stop shopping, provided kickbacks are not involved.

What does the Homeowners Protection Act (HPA) of 1998 require of lenders?

To inform borrowers up front and annually of their right to request mortgage insurance cancellation.

How does the HPA define equity for the purpose of mortgage insurance cancellation?

The original purchase price of the residence less the current loan balance.

Why is the HPA's definition of equity significant?

It excludes home appreciation, meaning equity only builds through loan amortization.

What is the 1968 Fair Housing Act?

Legislation that prohibits discrimination in the sale or rental of residential dwellings.

What is the 1974 Equal Credit Opportunity Act (ECOA)?

Legislation that prohibits discrimination in the financing of houses.

What are the two legal remedies provided by the Fair Housing Act?

Filing a complaint with HUD for informal reconciliation or filing a civil suit in federal district court.

What are two types of harassment defined by HUD in 2016 regarding the Fair Housing Act?

Quid pro quo harassment and hostile environment harassment.

What is a violation of the Fair Housing Act regarding zoning regulations?

Prohibiting housing development based on the belief that residents are members of a protected class.

What information is a lender prohibited from requesting under the ECOA?

Information regarding marital status, alimony, child support, or whether the applicant has children.

What is the 'effects method' of identifying discriminatory lending?

Discrimination exists if minority groups are underrepresented among credit recipients.

What is the 'intent approach' to identifying discriminatory lending?

Discrimination exists when a lender fails to adhere to established lending procedure guidelines.

What is the 'taste for discrimination' model in economics?

When firms act as though they are willing to pay a cost to be associated with certain types of people and not others.

How does the 'economics of information' explain potential discrimination?

When the cost of obtaining accurate information about a borrower exceeds the potential benefits, leading to discriminatory assumptions.

What does empirical evidence suggest about differential loan rates based on group membership?

There is no evidence that lenders charged differential loan rates based on membership in a particular group.

What is the predicted long-run effect of discrimination in competitive markets?

Economic theory predicts that discrimination is costly for firms in long-run competitive markets.

What has been the impact of the Fair Housing Act on housing access?

It appears to have resulted in greater access to housing for minorities.

What is the Home Mortgage Disclosure Act of 1975?

A notable piece of legislation related to housing and mortgage lending transparency.

What is the Community Reinvestment Act of 1897?

A notable piece of legislation aimed at encouraging financial institutions to help meet the credit needs of their communities.

Can a lender refuse to negotiate a sale to a protected group under the Fair Housing Act?

No, it is unlawful to refuse to sell, rent, or negotiate with protected groups.

Is it legal to advertise that a rental is available only to certain groups?

No, this is prohibited under the Fair Housing Act.

What is the role of HUD when a Fair Housing Act complaint is filed?

HUD seeks an informal reconciliation or refers the case to a state agency with similar laws.

Does the ECOA prohibit asking if an applicant has a listed telephone number?

Yes, it prohibits requesting that specific information.

What is the primary conclusion regarding the impact of the ECOA on credit availability?

It is doubtful that the ECOA has had a significant impact on making credit available to those previously cut out of the market.

What is the primary purpose of the Home Mortgage Disclosure Act (HMDA) and the Community Reinvestment Act (CRA)?

To ensure all citizens have access to credit markets regardless of their neighborhood.

What does Regulation C require of lending institutions?

It discourages avoiding certain neighborhoods and encourages active lending within their defined community.

What is the asset threshold for a depository institution to be required to report loan distribution under HMDA?

Assets exceeding $32 million.

What information must a depository institution compile under HMDA?

The distribution of its loans by number and dollar amount, within and outside of any Standard Metropolitan Statistical Area (SMSA) where it has offices.

What is the main requirement for federally regulated financial institutions under the CRA?

They must publicize their lending activities within their community.

What consequence can a financial institution face for failing to meet community credit needs under the CRA?

Federal regulators can deny their requests for expansion.

What term describes the discriminatory practice of avoiding lending in specific neighborhoods?

Redlining.

What are three common forms of redlining?

Making fewer total loans, fewer home improvement loans, and fewer conventional loans in certain neighborhoods.

What does the Fair Housing Amendments Act of 1988 prohibit regarding renting?

Discrimination based on age, number of children, gender of children, and disability.

How does the Fair Housing Amendments Act define 'familial status'?

A parent or other adult having custody of one or more children under the age of 18.

What types of dwellings are covered by the Fair Housing Amendments Act?

Apartment complexes, single-family units, condominiums, mobile home parks, and cooperative apartments.

What was the primary effect of the Housing for Older Persons Act (HOPA) of 1995?

It eliminated the requirement that senior housing must meet 'significant facilities and services' criteria.

What are housing providers required to do for persons with handicaps?

Make reasonable modifications to structures and reasonable accommodations in rules, policies, or services.

What specific protection does the Violence Against Women Act (VAWA) provide regarding evictions?

It prohibits the eviction of women who are victims of domestic violence, dating violence, or stalking.

What are the 'Three C's' of loan underwriting?

Capacity, Credit, and Collateral.

What factors are evaluated under the 'Capacity' component of underwriting?

Ability to Repay (ATR), Debt to Income Ratio (DTI), cash reserves, and loan characteristics.

What factors are evaluated under the 'Credit' component of underwriting?

Creditworthiness, credit history, and derogatory information.

What factors are evaluated under the 'Collateral' component of underwriting?

Collateral risk, equity, and property use.

What is the primary goal of borrower qualification and loan underwriting?

To determine and control default risk.

Name three tasks involved in credit analysis during loan underwriting.

Determining max loan amount, estimating settlement costs, and calculating effective income.

What is one common reason for a loan application to be rejected?

The borrower cannot support the payments.

What is a major red flag in a borrower's credit history that often leads to loan rejection?

A bad credit history, especially pertaining to previous mortgage repayment.

What tool do lenders primarily use to approve loans?

Credit scoring.

What factors does FICO use to determine a borrower's likelihood of repaying debt?

Credit history, income, outstanding debt, debt utilization, and access to credit.

What is the Ability-to-Pay Theory of default?

Default occurs when a borrower is unable to make their monthly loan payments.

What is the Equity Theory (Put Option) of default?

The belief that a borrower with substantial positive equity will not default, even if they cannot afford the monthly payment.