CHAPT 16

Real Estate Finance

Primary Mortgage Market

  • The primary mortgage market consists of lenders who lend money directly to borrowers.

  • Loans originated in the primary mortgage market can be traded in the secondary mortgage market.

  • Primary lenders may sell their notes to generate funds for issuing more loans.

Secondary Mortgage Market

  • Important players in the secondary mortgage market include:

    • Ginnie Mae (Government National Mortgage Association - GNMA): A government agency.

    • Fannie Mae (Federal National Mortgage Association - FNMA): Former government agency, now a private corporation (since 1968).

    • Freddie Mac (Federal Home Loan Mortgage Corporation - FHLMC): A quasi-government agency.

Ginnie Mae

  • Operates within the Department of Housing and Urban Development (HUD).

  • Established in 1968 with the mission to create and manage a mortgage-backed security program for mortgages under the Federal Housing Administration and the Veterans Administration.

Fannie Mae

  • A shareholder-owned company ensuring the availability of mortgage funding across the country.

  • Does not lend money directly to home buyers; rather, it works with lenders to maintain liquidity.

  • Sets loan limits; any loan within these limits and meeting other guidelines is termed a conforming loan.

  • Nonconforming loans are those that do not meet applicable guidelines.

Freddie Mac

  • Introduced the first security backed by conventional loans in 1971.

  • Aims to provide stability, affordability, and opportunity in the housing market.

  • Focuses on making homeownership attainable for minority populations.

Truth in Lending Act

  • Title I of the Consumer Credit Protection Act, enforced by Regulation Z.

  • Requires lenders to disclose the true cost of credit to borrowers, enabling comparison between various lenders.

  • Violation of advertising requirements under Regulation Z can result in penalties:

    • Twice the finance charge, with a minimum penalty of $100, up to a maximum of $1,000.

Loan Approval Criteria

  • Lenders evaluate the following factors to determine loan approval:

    • The economy

    • Investment quality of the property

    • Borrower's ability to repay the loan

Risk Mitigation and Valuation

  • Lenders need to assess the value of the property used as collateral to mitigate risks related to borrower default.

  • Property must be inspected and appraised to ascertain market value accurately.

Loan-to-Value Ratio (LTV)

  • Defined as the ratio of the mortgage principal to the value of the property being purchased.

  • LTV ratios assist lenders in determining the maximum loan amounts they can issue.

Qualifying Standards for Borrowers

  • Borrowers must meet various qualifications set by lenders, including:

    • Income

    • Debt

    • Cash

    • Net worth

  • Borrowers are required to present sufficient creditworthiness to be considered an acceptable risk.

Predatory Lending Practices

  • Predatory lending often features practices such as:

    • Basing unaffordable loans on borrower assets rather than assessing their actual repayment ability.

    • Encouraging unethical refinancing, known as loan flipping, where lenders charge high fees and potentially higher interest rates than the original loan.

    • Utilizing fraud or deceptive practices to obscure the true obligations of the loan from borrowers.

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