Chapter 14: Real Estate Financing: ... Dearborn Real Estate Education, 2012 Chapter 14: Real Estate...

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    Dearborn Real Estate Education, 2012

    Chapter 14: Real Estate Financing: Practices

    Dearborn Real Estate Education, 2012

    Introduction to the Real Estate Financing Market

    Governmental influence

    Federal Reserve System

    Home Land Bank System

    Office of Thrift Supervision

    Primary Market

    Secondary Market

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    Seeds of Todays Mortgage Industry

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    Early mortgage loans Large down payment Short-term Balloon payment or refinance

    Federal Reserve Act of 1913 Created the Federal Reserve System Allowed banks to make real estate loans Implemented a system allowing government to

    influence interest rates

    Other legislation Federal Home Loan Bank Act of 1932 Banking Act of 1933 (Glass-Steagall) created FDIC National Housing Act of 1934 created FSLIC

    Seeds of Todays Mortgage Industry

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    Federal Home Loan Banks 12 regional cooperative banks

    Expand credit opportunities

    Privately owned by members

    Federal Housing Administration (FHA) Created in 1934 to offer mortgage insurance

    Innovator of mortgage products/terms

    Part of Housing and Urban Development

    Largest insurer of mortgage loans

    Government-Sponsored Enterprises (GSEs) Established by Congress as financial intermediaries

    Federal Home Loan Banks, Fannie Mae, Freddie Mac

    Seeds of Todays Mortgage Industry

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    Mortgage: Written instruments using real property to secure repayment of a debt

    Primary market: Borrowers and lenders come together to negotiate terms for mortgages

    Commercial banks: Variety of financial services

    Historically demand deposits

    Regulation now allows more low risk mortgage loans

    Savings and Loan Associations (thrifts): Specialize in savings deposits and mortgage loans

    Traditionally major real estate lender; long-term, low-interest loans

    S & L crisis of 1980s led to massive restructure

    Primary Mortgage Market

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    Mortgage banker: Company, individual, or entity that originates, processes, underwrites, closes/funds, and services mortgage loans

    Mortgage broker: Company or individual who, for a fee, places loans with lenders, but does not service such loans

    Collect financial and other required information

    Analyze income and debt for maximum mortgage amount

    Explain available loan programs and loan process

    Fill out loan application and provide required disclosures

    Process loan file and submit to lenders

    Assist borrower response and participate in closing

    Mortgage Banking Companies

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    Private investors or government agencies that buy or sell real estate mortgages

    Established by federal government to moderate local real estate cycles

    Standardized loan criteria

    Purchased mortgage loans assembled into pools

    Mortgage-backed securities (MBS)

    Debt obligations that represent claims to the cash flows (principal and interest) from pools of mortgage loans

    Pass-through securities most common

    Secondary Mortgage Markets

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    Federal National Mortgage Association (1938)

    Also known as FNMA or Fannie Mae

    Largest investor in residential mortgages

    Buys pools of conforming conventional, FHA, VA

    Converts to guaranteed MBS

    Government National Mortgage Association (1968)

    Also known as GNMA or Ginnie Mae

    Pools federally insured/guaranteed loans; does not buy or sell

    MSB carry full faith and credit of U.S. government

    Secondary Mortgage Markets

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    Federal Home Loan Mortgage Corporation (1970)

    Also known as FHLMC or Freddie Mac

    Buys and pools, then actively sells MSB on open market

    Fannie Mae and Freddie Mac

    GSEs under conservatorship of Federal Housing Finance Agency

    Special authority to borrow from U.S. Treasury

    Secondary Mortgage Markets

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    Standardized underwriting criteria used to qualify borrowers and property

    Lenders conform in order to easily sell into secondary market

    Eliminates variations in loan quality, types of loans, and regional differences

    Create some confidence in quality of MBS Automated underwriting systems (AUS)

    Streamline and standardize underwriting Fannie Mae: Desktop Underwriter Freddie Mac: Loan Prospector

    Secondary Mortgage Markets

    Dearborn Real Estate Education, 2012

    Federal Reserve System

    Role Maintain sound credit conditions

    Counteract inflationary and deflationary trends

    Create favorable economic climate

    Open market operation

    Reserve requirements

    Discount rates

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    Monetary Policy and the FedMonetary Policy and the Fed

    Monetary policy: Government control over economy primarily through supply and cost of money

    Federal Reserve System

    Established by Federal Reserve Act of 1913

    Nations central bank; 12 Federal Reserve districts

    Controlled by 7-member Board of Governors (Federal Reserve Board)

    Federal Open Market Committee (FOMC) controls sale and purchase of government securities

    Monetary policy: Government control over economy primarily through supply and cost of money

    Federal Reserve System

    Established by Federal Reserve Act of 1913

    Nations central bank; 12 Federal Reserve districts

    Controlled by 7-member Board of Governors (Federal Reserve Board)

    Federal Open Market Committee (FOMC) controls sale and purchase of government securities

    Federal Reserve SystemFederal Reserve System

    Monetary Policy and the FedMonetary Policy and the Fed

    Federal Reserve Banks (FRBs)

    1 main office in each Fed district

    Bankers bank

    Store currency and coin

    Process checks and electronic payments

    National banks chartered by the federal government must join

    State-chartered banks and other depositories may join

    Feds primary mission: Ensure that money and credit are available to sustain economic growth without inflation

    Federal Reserve Banks (FRBs)

    1 main office in each Fed district

    Bankers bank

    Store currency and coin

    Process checks and electronic payments

    National banks chartered by the federal government must join

    State-chartered banks and other depositories may join

    Feds primary mission: Ensure that money and credit are available to sustain economic growth without inflation

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    Open Market OperationsOpen Market Operations

    Buying and selling U.S. government securities (bonds) on the open market

    Responsibility of Federal Open Market Committee (FOMC)

    Establishes target federal funds rate

    Affects short-term interest rate charged to banks borrowing in Fed funds market

    Selling securities

    Increases reserves

    Removes money from circulation

    Buying securities

    Decreases reserves

    Puts money into circulation

    Buying and selling U.S. government securities (bonds) on the open market

    Responsibility of Federal Open Market Committee (FOMC)

    Establishes target federal funds rate

    Affects short-term interest rate charged to banks borrowing in Fed funds market

    Selling securities

    Increases reserves

    Removes money from circulation

    Buying securities

    Decreases reserves

    Puts money into circulation

    Discount RatesDiscount Rates

    Discount rate: Interest rate the Federal Reserve Banks charge financial institutions for short-term loans of reserves

    Federal Funds Rate: Recommended rate set by the Fed for its member banks to charge when borrowing form each other.

    Borrowing direct from Fed discouraged unless: Bank is in trouble Unable to borrow from banks in open Fed funds

    market

    Discount rate: Interest rate the Federal Reserve Banks charge financial institutions for short-term loans of reserves

    Federal Funds Rate: Recommended rate set by the Fed for its member banks to charge when borrowing form each other.

    Borrowing direct from Fed discouraged unless: Bank is in trouble Unable to borrow from banks in open Fed funds

    market

    Discount RatesDiscount Rates

    Three discount window programs: Primary credit: Usually overnight to sound

    depository institutions Secondary credit: Meet short-term liquidity

    needs but at higher rate Seasonal credit: Extended to small

    depositories in agricultural or resort communities

    Set by Boards of Directors of FRBs; subject to approval by Board of Governors

    Less of a policy tool than open market operations

    Three discount window programs: Primary credit: Usually overnight to sound

    depository institutions Secondary credit: Meet short-term liquidity

    needs but at higher rate Seasonal credit: Extended to small

    depositories in agricultural or resort communities

    Set by Boards of Directors of FRBs; subject to approval by Board of Governors

    Less of a policy tool than open market operations

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    Reserve RequirementsReserve Requirements

    Percentage of funds held in reserve against specified deposit liabilities

    Cash or in an account at a FRB

    Intended to provide confidence that deposits are safe and accessible

    Set by the Fed for all: Commercial banks Savings banks Savings and loans Credit unions U.S. branches and agencies of foreign banks

    Percentage of funds held in reserve against specified deposit liabilities

    Cash or in an account at a FRB

    Intended to provide confidence that deposits are safe and accessible

    Set by the Fed for all: