CH 16Residential and Commercial Property Financing

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Outline

I. The Mortgage ConceptII. The US Housing Finance System III. Residential Mortgage UnderwritingV. Commercial Mortgage Underwriting

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I. The Mortgage Concept

Definitions:- secured vs. unsecured debt

- hypothecation

- The loan on a house has 2 parts:

mortgage promissory note -mortgagor - prepayment clause

vs. - acceleration clause - mortgagee - due-on-sale clause

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Foreclosures

Foreclosure is the process of seizing

and using the proceeds from its sale to satisfy the defaulted debt.

Title vs. lien theory:In title theory states, the lender receivesthe in the case of default.

In lien theory states (such as FL), the lenderhas a in the case of default and has to go through a court ordered process to foreclose on the property.

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Foreclosures

Alternative to foreclosure:

Def: ”The sale of a property by a financially distressed borrower for less than the outstanding mortgage balance due, where the proceeds from the sale will be used to repay the lender.”

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Alternative Ways to Buy Real Estate

Trust Deeds: Title to a property is held by a .

Land Contracts: The real estate transaction is financed by the .

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II. The U.S. Housing Finance System

Definition: all the arrangements and institutions that have the purpose of

. The process of creating a new loan agreement

between a borrower and lender is known as , which occurs in

the mortgage market. The secondary mortgage market consists of

transactions involving existing loans being sold from to or from to .

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Federal Housing Administration (FHA)

Created in 1934 to help restore.

The FHA established 3 things:1.

2. 3.

FHA loans have maximum loan amount restrictions and up-front and annual premiums.

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Private Mortgage Insurance (PMI)

Borrowers pay a premium to purchase an insurance policy that limits the risk faced by the lender in the event of default by the borrower. PMI is required when the down payment is

. PMI loans are available for loan

amounts than FHA insurance.

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VA-guaranteed Loans

The Department of Veterans Affairs guarantees these loans made to veterans with down payment and interest rates.

VA and FHA loans are called:

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Federal National Mortgage Association

Fannie Mae was created as a government agency in 1938.Its purpose was to: 1)

2)

Converted to a private company in 1968. In 1970, started trading under the symbol “FNM” on the

NYSE. In 2008 the US government placed FNM into

“conservatorship”. In 2010, started trading OTC under the symbol “FNMA”. Fannie Mae buys all types of loans and repackages them

into .

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Government National Mortgage Association

Created in 1968 as a government agency. GNMA’s purpose was to

In 1970, GNMA introduced a program that guarantees

on FHA and VA mortgages.

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Federal Home Loan Mortgage Corporation

Freddie Mac was created in 1970 to create and operate

. In 1989, Freddie Mac started trading under the

symbol “FRE” on the NYSE. In 2008, the US government placed FRE into

“conservatorship”. In 2010, started trading OTC under the symbol

“FMCC”. Freddie Mac competes with in the

market for all types of mortgages and mortgage backed securities.

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III. Residential Mortgage Underwriting Mortgage debt outstanding in the U.S.:

2010: $14.10 trillion2008: $14.72 trillion 2003: $9.40 trillion2000: $6.78 trillion

Source: The Federal Reserve Board

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Residential Mortgage Market Participants

Loans are originated by: - mortgage bankers- mortgage lenders

(- correspondent lenders) - mortgage brokers, now: mortgage originators- commercial banks- savings institutions- credit unions

16Source: The Federal Reserve Board

17Source: The Federal Reserve Board

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Residential Loan Applications

Uniform Residential Loan Application:A standardized loan application form that complies with the requirements imposed on lenders by

and .

The application collects information about the borrower’s income, other debts, other assets, employment history, etc.

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Federal Legislation Related to Residential Loan Applications

Equal Credit Opportunity Act Consumer Credit Protection Act Real Estate Settlement Procedures Act (RESPA)

1. HUD booklet2. good faith estimate of settlement costs3. no kickbacks/referral fees4. copy of appraisal report5. HUD-1 settlement statement6. Loan sold in secondary market? 7. Limit on escrow funds

Flood Disaster Protection Act Fair Credit Reporting Act

ww.transunion.com, www.equifax.com, www.experian.com, www.annualcreditreport.com

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Def. of Residential Mortgage Underwriting

The process of evaluating the of an applicant and the

property being pledged as collateral and deciding whether or not to

.

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Residential Mortgage Underwriting Cont’d

Properties are evaluated by obtaining an independent of the market value of the property.

Applicants are evaluated based on: - 1. - 2. - 3.

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Residential Mortgage Underwriting Cont’d

Two Debt Ratios: Mortgage Debt Ratio (MDR) =

PITI / GMI max: % for a conventional mortgage

% for a FHA-insured mortgage. Total Debt Ratio (TDR) =

PITI and other monthly debt obligations/GMImax: % for a conventional mortgage or

% for a FHA-insured mortgage.

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Residential Mortgage Underwriting Example

What is the LTV ratio of a property that was purchased for $140,000 if the bank will provide a $115,000 loan?

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Residential Mortgage Underwriting Example

Assume a borrower has gross annual income of $108,000 and is applying for a mortgage that will require monthly payments of $2,250. Taxes and insurance on the property will total $2,400 per year. The borrower has to pay monthly child support of $500 and make $450 of monthly car payments.What is the MDR and the TDR? Would the borrower qualify for the loan?

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V. Commercial Underwriting

Commercial loan underwriters are more concerned with the

to repay the debt than they are concerned with the borrower’s income.

Debt coverage ratio = NOI/debt service payments minimum requirement: maximum loan-to-value ratio for commercial loans: typically %.

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Commercial UnderwritingExample

Assume a commercial property has gross rental income of $10,000 per month and monthly operating expenses of $6,500. If the debt service payment is $2,500 per month, would the property’s income qualify for a commercial loan?