Unit 13: Government Involvement in Real Estate Financing

A set of flashcards covering the key terms and concepts of government involvement in real estate financing, including primary and secondary mortgage markets, GSEs, various loan programs, and federal lending legislation.

Federal Reserve System (Fed)

The central banking system of the United States, acting through its Board of Governors to maintain sound credit conditions, counteract inflationary and deflationary trends, and create a favorable economic climate.

discount rate

The rate charged by the Federal Reserve for loans it makes to its member banks, which influences the prime rate charged for other forms of financing.

reserve requirements

The minimum level of funds that a depository institution must maintain, which the Fed can increase to improve lender solvency or decrease to make funding easier to obtain.

primary mortgage market

The market made up of lenders that originate mortgage loans and make money available directly to borrowers.

fiduciary lenders

Savings associations and commercial banks that have legal obligations to protect and preserve their depositors' funds.

Federal Deposit Insurance Corporation (FDIC)

An agency that covers deposits in insured institutions up to a specified limit, currently $250,000$ per depositor, per account.

mortgage banking companies

Firms that originate mortgage loans with money belonging to insurance companies, pension funds, or their own funds, with the intention of selling them to investors and receiving a fee for servicing the loans.

mortgage brokers

Intermediaries who bring borrowers and lenders together but are not lenders themselves and do not service loans once they are made.

secondary mortgage market

The marketplace where loans are bought and sold after they have been funded, helping lenders raise capital and freeing up funds for additional loans.

government-sponsored enterprises (GSEs)

Organizations created by the federal government, such as Fannie Mae and Freddie Mac, to increase loan opportunities for homebuyers by providing a secondary market.

Fannie Mae

Originally the Federal National Mortgage Association, a private shareholder-owned corporation under FHFA conservatorship that buys pools of mortgages to use as collateral for mortgage-backed securities.

Freddie Mac

Originally the Federal Home Loan Mortgage Corporation, a GSE that provides a secondary market for mortgage loans, primarily conventional loans.

Ginnie Mae

The Government National Mortgage Association, a division of HUD that administers special-assistance programs and guarantees investment securities backed by pools of FHA-insured and VA-guaranteed loans.

Farmer Mac

The Federal Agricultural Mortgage Corporation, which creates a secondary market for agricultural mortgage and rural utilities loans.

loan-to-value ratio (LTV)

The ratio of debt to the value of the property, where property value is the sales price or appraised value, whichever is less. Example: $\$180,000 \div \$200,000 = 90\%$.

conventional loan

A mortgage loan that is not government-insured or guaranteed, traditionally viewed as the most secure because they often have the lowest LTV ratios.

conforming loans

Loans that meet the strict criteria and maximum loan limits set by the Federal Housing Finance Agency (FHFA) to be sold to Fannie Mae and Freddie Mac.

private mortgage insurance (PMI)

Insurance used for conventional loans with less than a $20\%$ down payment to protect the top portion of the loan—usually $20\%$ to $30\%$—against borrower default.

FHA-insured loan

A loan made by an FHA-approved lending institution and insured by the Federal Housing Administration to protect the lender against loss from borrower default.

mortgage insurance premium (MIP)

An upfront and/or annual premium charged to the borrower for all FHA loans (except up-front for condominiums) to fund the FHA insurance program.

VA-guaranteed loan

A loan program authorized by the U.S. Department of Veterans Affairs providing residential financing for eligible veterans and their spouses with little or no down payment.

certificate of reasonable value (CRV)

A document issued by the VA stating the property's current market value based on an approved appraisal and placing a ceiling on the amount of a VA-guaranteed loan.

blanket loan

A loan covering more than one parcel or lot, usually including a partial release clause that allows the borrower to release a lot from the lien by repaying a certain amount of the loan.

package loan

A loan that includes both real property and personal property, such as furniture and kitchen appliances.

open-end loan

A loan that secures the initial amount borrowed and any future advances made by the lender to the borrower up to a maximum amount stated in the note.

construction loan

Short-term or interim financing where the lender commits to a full loan amount but disburses funds in progress payments called draws as work is completed.

sale-and-leaseback

A financing arrangement where the owner of a commercial or industrial property sells it to an investor and then leases it back, becoming a tenant to free up working capital.

buydown

A payment of a lump sum to a lender at closing to temporarily or permanently lower the interest rate on a mortgage.

home equity loan

A junior lien source of funds that uses the equity built up in a home, accessible either as a fixed loan amount or a home equity line of credit (HELOC).

Regulation Z

A regulation enacted by the Federal Reserve Board to enforce the Truth in Lending Act (TILA), requiring institutions to inform borrowers of the true cost of credit.

triggering terms

Specific credit terms in advertisements—such as down payment amount or number of payments—that require full disclosure of all relevant loan information under TILA.

Equal Credit Opportunity Act (ECOA)

Federal law prohibiting discrimination in granting credit based on race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.

Community Reinvestment Act of 1977 (CRA)

A law requiring financial institutions to help meet the credit and deposit needs of their entire community, including low-income and moderate-income housing.