Nontraditional Mortgage Productsfhatraining.com/wp-content/uploads/2013/04/MLPP4e... ·...

2/1/2013

1

1

Nontraditional

Mortgage Products

Chapter 8

Mortgage Principles and

Practices 4th Edition

(02/21/2012)

Chapter 8: Nontraditional Mortgage

Products

2

Nontraditional Mortgage Products



(02/21/2012)


Products

• SAFE Act

–Anything other than a 30-year fixed rate mortgage

• Interagency Guidance on Nontraditional Mortgage Product Risks

–Mortgage products that allow borrowers to defer principal and, sometimes, interest

3

Chapter Objectives

• Describe the advantages and disadvantages of

buydown plans.

• Identify the elements that make up an adjustable

rate mortgage.

• Identify characteristics of a reverse mortgage.

• Identify factors that define a subprime loan.

• Discuss agency guidelines on lending and subprime

loans.

• Contrast various types of alternative financing.



(02/21/2012)


Products

2/1/2013

2

4

Deferring Higher Interest Rate/Payment

• Growth Equity Mortgage (GEM)– Fixed rate mortgage set up like a 30-year conventional loan

– Payments increase over time with predictable and scheduled escalation

– Good for borrower with expected increases in income

– 100% of scheduled payment increases reduce principal balance

• Reduction Option Mortgage– Fixed rate loan with limited opportunity to reduce interest rate

– Avoids certain refinancing costs, such as for an appraisal

• Shared Appreciation Mortgage (SAM)– Lender charges below-market interest in exchange for a share of

the gains the borrower realizes when the property is eventually sold

– Shared risks/rewards, especially on commercial projects



(02/21/2012)


Products

5

Buydown Plans • Point = 1% loan amount

• Discount points: Paid upfront to lower interest rate

• Buydown may be paid by:

– Borrower

– Seller

– Interested third party

• If borrower, appears on GFE as borrower charge

• Advantages:

– Lower monthly payment

– May allow qualification on reduced payment



(02/21/2012)


Products

6

Case in Point

• Borrower financing $180,000• Quoted 6.5% interest rate for 30-year conventional

loan• Payments would be $1,137.72 per month• At 6.25% for the same $180,000 30-year loan,

payments would be only $1,108.29• Paying discount points up front to buy down the

interest rate 1/4%, buyer saves $29.43 / month • May help borrower qualify for the home loan• Makes mortgage payments more attractive• 2 points cost approximately $3,600• 123 months to recapture upfront discount points



(02/21/2012)


Products

2/1/2013

3

7

Buydown Plans: Paid by Seller

• Less money to seller

• May help close the deal

• Buydown amount subtracted from loan proceeds

• Reflected on HUD-1 as charge to seller

• Buyer signs note for full amount



(02/21/2012)


Products

8

Permanent Buydown

• Points paid to lender to reduce the interest

rate and loan payments for the entire life of

the loan

• Interest rate written into promissory note

• Nominal rate (or coupon rate) stated in the

note will be the actual reduced interest rate



(02/21/2012)


Products

9

Temporary Buydown

• Funds deposited at closing to supplement monthly payment

• Short-term discount

• Lender receives full payment

– Borrower’s discounted payment

– Supplemented by “deposited” funds

• When “deposited” funds run out, borrower makes full payment

• Underwriters generally consider payments using fully indexed rate, not starting rate



(02/21/2012)


Products

2/1/2013

4

10

Temporary Buydown: Level

• Level payment reduction plan: Constant throughout

buydown period



(02/21/2012)


Products

11

Temporary Buydown: Graduated

• Payments increase every year, as per note, until

sufficient to amortize loan

– 2-1 buydown: Subsidized for 2 years

– 3-2-1 buydown: Subsidized for 3 years



(02/21/2012)


Products

12

Buydowns: Fannie / Freddie Limits

• Limits interested party contributions (IPCs) to % of sale price or

appraised value, whichever is less

• Excessive contributions deducted from maximum loan amount

• Contributions from employers or immediate family members

usually not subject to limits

Property Type LTV/CLTV Max. IPC

Investment All CLTV ratios 2%

Principal residence or second home

Greater than 90%

75.01% to 90%

Less than 75%

3%

6%

9%Mortgage Principles and


(02/21/2012)


Products

2/1/2013

5

13

Buydowns: FHA / VA Limits

• FHA:

– Will not underwrite at temporary buydown rate

– Unless permanent, borrower must qualify at note rate

– Reduction limited to 2% below note rate

– Allows maximum interest party contribution of 6%

– Excess contribution deducted from maximum loan

amount

– Excludes family and employer contributions

• VA has no set limits



(02/21/2012)


Products

14

Mortgage Exercise 8-1

A borrower wants to buy a $150,000

home, and is going to make a $15,000

down payment. The borrower is seeking

a conventional loan, but doesn’t want to

pay more than 6 1/2% interest. The

lender agrees to 6 1/2% interest if the

loan has three discount points and the

loan origination fee is 2%.



(02/21/2012)


Products

15


1. What’s the total amount of points (in dollars and

percentage) that the lender will receive for making this

loan?

– Points are based on the loan amount, in this case, $135,000

($150,000 - $15,000 down).

– The lender is charging a total of 5 points, or 5% of the loan.

– Discount points total $4,050 ($135,000 x .03) and the loan

origination fee is $2,700 ($135,000 x .02).

– The total the lender will receive in points is $6,750 ($4,050 +

$2,700).



(02/21/2012)


Products

2/1/2013

6

16


2. If the seller agrees to pay the discount

points, how much will the seller net from the

transaction? (Assume the seller pays no

other costs.)

– The seller net is the sale price minus any seller-

paid points, so the seller will net $145,950

($150,000 - $4,050).



(02/21/2012)


Products

17


3. What will the borrower’s note state as the interest rate on the loan? What dollar amount will the note say was borrowed?

– The loan note rate will be 6.500% since this is not a temporary buydown.

– The amount on the note equals the loan amount, not the sale price, so it’s $135,000 ($150,000 - $15,000).

– The note amount does not reflect the seller-paid points.



(02/21/2012)


Products

18


4. Can the lender sell this loan to Fannie Mae

or Freddie Mac on the secondary market?

Why or why not?

– Yes, the lender should be able to sell this loan

to Fannie Mae/Freddie Mac on the secondary

market because it has less than the 6% seller

assistance limit that the programs allow with a

90% LTV.



(02/21/2012)


Products

2/1/2013

7

19

Adjustable Rate Mortgages (ARMs)

• Frees lender from being locked into fixed rate

• Interest rates may adjust to reflect fluctuations in cost of money

• May allow borrower to qualify more easily

• Allows lenders to pass risk on to borrowers

• Lenders may charge lower starting interest rate than for fixed

• Must adhere to guidelines of appropriate regulatory agency, Fannie Mae/Freddie Mac, FHA, and private mortgage insurers



(02/21/2012)


Products

20

ARM Elements

• Index

• Margin

• Rate adjustment period

• Mortgage payment adjustment period

• Interest rate cap/floor (if any)

• Mortgage payment cap (if any)

• Negative amortization cap (if any)

• Conversion option (if any)



(02/21/2012)


Products

21

ARM Elements: Index

• Statistic consumer can examine• Generally reliable indicator of cost of money, e.g.:

– Average One-Year Treasury Constant Maturity Index (TCM)

– Cost of Funds Index (COFI) (used by Fannie Mae)

– London Interbank Offered Rate (LIBOR)

• Interest rate adjustments based on up / down movement of index

• Index must be:

– Independent of lender

– Affected by market conditions

– Regularly listed in major publication



(02/21/2012)


Products

2/1/2013

8

22

ARM Elements: Margin• Difference between index value and interest rate

charged (margin + index = interest rate)

• Generally remains fixed; negotiated with lender



(02/21/2012)


Products

23

ARM Elements: Adjustment Periods

• Rate adjustment period: Length of time between at

which interest rate changes– Often every six months or 1 year

• Payment adjustment period: Length of time between

payment adjustments– Can range from months to several years

• May be adjusted parallel to rate adjustment• May be adjusted less frequently than rate

adjustment– Negative amortization: Interest paid insufficient to

pay interest accrued from previous month– Excess interest paid may be applied to principal



(02/21/2012)


Products

24

ARM Elements: Interest Rate Cap• Discounted indexed rate or teaser rate

– Start rate lower than fully indexed rate– Makes ARMs more attractive to borrowers– Could result in significant payment shock

• Interest rate caps limit % points rate can increase• May be shown as 2 numbers, such as 2/6:

– 1st number: Max. increase at adjustment

– 2nd number: Max. lifetime increase• May be shown as 3 numbers, such as 5/2/6:

– 1st number: Max. increase at 1st adjustment

– 2nd number: Max. increase at subsequent adjustments

– 3rd number: Max. lifetime increase

• May also limit how much interest rate can decrease



(02/21/2012)


Products

2/1/2013

9

25

ARM Interest Rates

• 1-year ARM loan for $100,000 for 30 years

• 5/2/6 interest rate cap

• Current index rate is 4.5%; margin is 3%; discounted

start rate is 4%.



(02/21/2012)


Products

9% 7% 9% 10%

26

ARM Elements: Interest Rate Caps

• Fannie Mae: 2% per year / 6% lifetime

• Freddie Mac: 2% per year / 5% lifetime

• FHA: 1% per year / 5% lifetime

• VA:

– 1% per year / 5% lifetime on traditional ARMs (adjusts annually)

– 2% per year / 6% lifetime on hybrid ARM (fixed for at least five years)



(02/21/2012)


Products

27

ARM Elements: Payment Cap

• Protects a borrower from large payment

increases

• Limits magnitude of payment changes with

interest rate adjustments

• Some lenders only use interest rate caps;

others use both rate and payment caps

• Could allow for negative amortization if

current interest rate exceeds payment cap



(02/21/2012)


Products

2/1/2013

10

28

ARM Elements: Negative Amortization Cap

• Negative amortization: Loan balance grows

because payments don’t cover the accrued interest due on the loan

– Most likely to occur with frequent rate changes and less frequent payment adjustments

• Cap limits growth of loan balance beyond a certain point

• Maintains manageable LTV

• May require readjustment (recast) of monthly payments



(02/21/2012)


Products

29

ARM Elements: Conversion Option

• Gives the borrower the right to convert from

an adjustable rate loan to a fixed rate loan

• Conversion option note normally includes:

– Higher interest rate

– Limited time to convert

– Conversion fee

• If sold to the secondary market, terms would

have to be honored by purchaser



(02/21/2012)


Products

30

ARM Standardization• Most lenders follow secondary market guidelines• Loan-to-value a consideration

– May not make higher LTV if chance of negative amortization

– Higher LTV generally requires occupancy• Fannie Mae / Freddie Mac require occupancy

for all ARM loans – Credit scores may be considered

• Appraisal must not be influenced by financing concessions

• May use smaller housing expense and debt-to-income ratios for qualifying



(02/21/2012)


Products

2/1/2013

11

31

ARM Disclosures

• Index / where to find it

• How interest rate and payment are determined

• Suggestion to ask about current margin / interest rate

• Initial discount rate and suggestion to ask about amount of discount

• Rate / payment adjustment periods

• Rate and payment caps

• Statement payment caps may result in negative amortization

• Statement if loan has demand provision

• Description / time of adjustment notice

• Availability of other ARM loan disclosures

• Maximum interest rate / payment

• Initial interest rate / payment

• Conversion option details

• Example based on $10,000 loan



(02/21/2012)


Products

• Disclose APR to comply with TILA (Reg Z)• CHARM Handbook discloses (as appropriate):

• Advance notice of change in payment / interest rate

32

ARM: Annual Percentage Rate

• Annual percentage rate (APR): Relationship between

the cost of borrowing money and the total amount financed, represented as a percentage

• Disclosure cannot be made based solely on ARM’s initial rate

• Must reflect the finance charges and fees as well as the composite annual percentage rate

– Based on initial payment rate and fully indexed rate that could exist for the remaining loan term

– Lets consumers comparison shop for rates among lenders



(02/21/2012)


Products

33

ARM: Payment Option• Allows borrowers to pick a payment option each

month– Traditional payment of principal and interest

• Reduces the amount owed– Interest only payment

• Pays interest due but does not reduce principal – Minimum (or limited) payment

• May be less than the amount of interest due • Balloon payment may be required

• Built-in recalculation period, e.g., every 5 years– New minimum payment amortizes loan

• Uncommon today; could result in negative amortization



(02/21/2012)


Products

2/1/2013

12

34

ARM: Hybrid ARM• Loan has a fixed rate for a specified number of years,

then interest rate adjusts regularly for remainder of

loan term according to note

• May be designated by:– Number years fixed and adjustable:

• 2/28 or 3/27 ARM – fixed for first 2 or 3 years;

interest rate adjusts at predetermined point

– Number of years fixed and adjustment period:

• 3/1, 5/1, 7/1, or 10/1 ARM -- fixed for first 3, 5, 7,

or 10 years with annual adjustment after

CAUTION: Be careful when using the term “fixed”



(02/21/2012)


Products

35


• A borrower received a 30-year ARM mortgage loan for $120,000.

• The start rate was 3.50% and the loan adjusts every 12 months for the life of the mortgage.

• Rate caps are 3/2/6.

• The index used for this mortgage is the LIBOR. For this exercise, let’s say it was:

– 3.00% at the start of the loan

– 5.00% at the end of the first year

– 4.50% at the end of the second year

• The margin on the loan is 3.00%.



(02/21/2012)


Products

36


1. What’s the initial rate (start rate) and what is the interest rate after the first year?

– The start rate is 3.50%. The fully indexed rate after the first year is 8.00% (5.00% index + margin of 3.00% = 8.00%).

– BUT, the periodic maximum rates caps (in this example, annual) have to be taken in consideration also. In this mortgage, the maximum rate increase the first year is 3.00% (2.00% in all other years).

– So 3.50% + 3.00% = 6.50%, which will be the interest rate after the first adjustment.



(02/21/2012)


Products

2/1/2013

13

37


2. What is the fully indexed rate after the

second year?

– The fully indexed rate is 7.50% (LIBOR rate of

4.50% + 3.00% margin).



(02/21/2012)


Products

38


3. What is the borrower’s interest rate after the second adjustment?

– The borrower’s interest rate after the first adjustment period was 6.50%.

– Adding the periodic maximum adjustment cap of 2.00% = 8.50%.

– However, the borrower’s interest rate would be the LOWER of the two interest rates, which is 7.50%.



(02/21/2012)


Products

39


4. What is the maximum interest rate this loan

could have?

– The maximum interest rate equals the start

rate of 3.50% + the life of the loan cap of

6.00%, so the maximum interest rate this loan

could have is 9.50%.



(02/21/2012)


Products

2/1/2013

14

40


5. What would the LIBOR have to be to obtain

that interest rate?

– In order for this loan to get to that rate, the

LIBOR would have to increase 2.00% from its

current rate of 4.50% to 6.50%:

– 9.50% (maximum lifetime rate) – 3.00%

(margin) = 6.50% (LIBOR)



(02/21/2012)


Products

41

ARM: Be Prepared to Answer

1. What will my interest rate be?

2. How often will my interest rate change?

3. How often will my payment change?

4. Is there any limit to how much my interest rate can be increased?

5. Is there any limit to how much payments can be increased at any one time?

6. What is the probability of runaway negative amortization?

7. Can my ARM be converted to a fixed rate loan?



(02/21/2012)


Products

42

Advantages & Disadvantages

Advantages Disadvantages



(02/21/2012)


Products

2/1/2013

15

43



• Lower initial interest rate and

payments

• May be easier to qualify for loan

• Leverage buyer into a higher-priced home

• Payments may decrease over

time

• May be converted to a fixed-

rate loan

• Good in times of low inflation

or for short-term ownershipMortgage Principles and


(02/21/2012)


Products

44



• Lower initial interest rate and

payments

• May be easier to qualify for loan

• Leverage buyer into a higher-priced home

• Payments may decrease over

time

• May be converted to a fixed-

rate loan

• Good in times of low inflation

or for short-term ownership

• No interest rate guarantees

• No payment guarantees

• Buyer’s financial situation

may change

• Buyer may over-leverage

• Possibility of negative

amortization

• May have to pay a fee to

convert even if you choose

not to convert



(02/21/2012)


Products

45

Subprime Loans• Riskier than conforming loans

– Less creditworthy borrowers (also called B-C loans)

– Less documentation provided

• Rely on equity in property to offset credit risk, so may require larger down payment

• Requires experienced / specialized underwriter

• Allows lenders to charge higher interest / fees

• Borrowers showing good credit/payment history may be able to refinance at more favorable terms

• Rare in today’s market



(02/21/2012)


Products

2/1/2013

16

46

Interagency: Nontraditional Products

• Interagency Guidance on Nontraditional Mortgage Product Risks

• Mortgage products that allow borrowers to defer principal and, sometimes, interest, for example:– Interest only (IO) feature – Potential for negative amortization

• Qualifying standards/guiding principles:– Recognize potential impact of payment shock– Nontraditional loans may not be appropriate for high

LTV, high DTI, and low credit scores– Analysis should consider fully indexed rate– Avoid over-reliance on credit scores



(02/21/2012)


Products

47

Interagency: Nontraditional Products

• Avoid collateral-dependent loans• Compensate risk layering with risk mitigating features• Reduced documentation – acceptable only if other risk

mitigating features available• Simultaneous seconds – minimal equity loans should not

allow delayed / negative amortization• Teaser rates – minimize early or disruptive recastings or

extraordinary payment shock• I/O feature – should evaluate ability to repay by final

maturity at fully indexed rate• Negative amortization – analysis should consider initial

loan amount + balance increases



(02/21/2012)


Products

48

Interagency: Statement on Subprime

• Promote consumer protection standards, particularly

on ARMs offered to subprime borrowers that have:

– Very high / no limits on payment amount / interest

rate increases

– Limited / no income documentation

– Features leading to frequent refinancing

– Prepayment penalties:

• Substantial

• Extend beyond initial fixed rate period



(02/21/2012)


Products

2/1/2013

17

49


• Provides consumer protection through

disclosure:

– Payment shock potential

– Prepayment penalties and how calculated,

imposed

– Balloon payments

– Cost of reduced documentation loans

– Responsibility for taxes and insurance



(02/21/2012)


Products

50


• Defines predatory lending as:

– Making loans based on foreclosure / liquidation value of collateral rather than on borrower’s ability to repay

– Inducing borrower to repeatedly refinance in order to charge high points and fees (“loan flipping” or “equity skimming”)

– Engaging in fraud or deception to conceal the true nature of the obligations from unsuspecting or unsophisticated borrower



(02/21/2012)


Products

51



(02/21/2012)


Products

Reverse Mortgages

• Allows borrower to convert equity in home without selling or making payments

• Funds may be used for virtually anything

• Also called reverse equity mortgage or reverse annuity mortgage (RAM)

• FHA’s Home Equity Conversion Mortgage (HECM) most popular

• Balance of loan rises as equity shrinks (rising debt, falling equity)

• At end of loan, all equity could be gone

2/1/2013

18

52



(02/21/2012)


Products

Reverse Mortgages: Eligibility

• No income requirements (must be able to pay continuing obligations related to property)

• All individuals with ownership interest must be at least 62 years old

• Generally, single-family homes, including condos and PUDs

– Mobile homes / co-ops not generally eligible

• Homeowner’s insurance at replacement value

• Principal residence with little or no mortgage balance

• Required pre-loan counseling

53



(02/21/2012)


Products

Reverse Mortgages: Amount

• Many factors:

– Appraisal of home value

– Amount of equity

– Payment options

– Interest rate

– Fees

• Age of borrower

– Older can borrow more

– Age of youngest borrower determines

54



(02/21/2012)


Products

Reverse Mortgages: Payment

• Payment options:

– Fixed monthly payments

– Lump sum

– Line of credit as needed

– Combination

• Spending options: Virtually anything

• Tax implications:

– Generally not considered income

– Interest deducted only at loan conclusion

– Could affect eligibility for other programs

2/1/2013

19

55



(02/21/2012)


Products

Reverse Mortgages: Repayment

• If not in breach, due when last surviving borrower:– Dies

– Sells the home

– Ceases to live in home for 12 consecutive months

• Total amount due (interest, insurance, fees, etc.)

• Any remaining equity belongs to estate

• Lender generally may not sell home during loan term

• Non-recourse– Cannot claim other assets

– Borrower cannot owe more than fair market value

• Repayment could be accelerated under some circumstances

56



(02/21/2012)


Products

Seller Financing / Purchase Money

• Seller extends some or all credit to purchase property– Buyer may not be able to get traditional financing

– Allows seller to enhance marketability

• Alienation (due on sale) clause gives lender certain rights upon transfer of some interest in property

• Purchase money mortgage - given to seller by buyer

• Sellers not bound by institutional policies– Can take any form, e.g., fixed, adjustable, etc.

– Cannot violate laws, e.g., usury laws

57



(02/21/2012)


Products

Seller Financing

• Assumption: One party agrees to take over payments of another party’s debt, with terms of the note staying unchanged

– FHA / VA loans require approval of lender

– Buyer becomes primarily liable but lender may have recourse against seller upon default without release

• Wraparound financing: Seller retains existing loan on the property while giving the buyer a second loan

– Buyer pays seller full amount; seller pays original lender, keeps excess

– Original mortgage must:

• Be assumable with lender approval or

• Not have an alienation clause

2/1/2013

20

58



(02/21/2012)


Products

Land Contracts

• Installment agreement where buyer pays seller for right to occupy and use property– Also called land installment contracts, installment sales contracts,

land sales contracts, real estate contracts

• No deed or title is transferred until all, or a specified portion, of the payments have been made

• Seller (vendor) holds legal title to property as security• Buyer/debtor (vendee) may possess and enjoy land, but

is not legal owner (equitable title)• No institutional loan qualifying standards• Cannot be sold to Fannie Mae / Freddie Mac• Generally require vendor to provide annual statement

59



(02/21/2012)


Products

Lease / Option

• Property lease for specific term with option to buy at a

predetermined price during lease term

– Lease: Rent in exchange for possession of real estate

– Option: Contract giving right to do something within a

designated time period, without obligation

– Optionee: Prospective purchaser

– Optionor: Property owner

• May credit any portion of rent that is above established

market for comparable property toward:

– Down payment

– Loan amount

– Sales price

60



(02/21/2012)


Products

Lease / Purchase

• Seller leases property for specific term; tenant

agrees to buy property at set price during or

following the lease term

• Equivalent of a sale where purchase agreement: – Locks in a predetermined price

– Sets date for sale transaction

• Reasons for lease / purchase include buyer:– Needs time to acquire cash

– Will qualify once circumstances change

– Will take advantage of rent credit

2/1/2013

21

61



(02/21/2012)


Products

Equity Exchanges

• Value in one property traded for another• Also called tax-deferred or tax-free exchange,

like-kind exchange, Section 1031• Properties must be:

– Exchanged, or qualify as delayed exchange

– Like-kind property (real estate for real estate)

– Held for use in a trade, business, or investment

• Seller defers paying tax until profit is realized from transaction

• Legal and tax advice should always be consulted

62



(02/21/2012)


Products

Participation Plans

• Partnership between buyer and another investor (or seller, lender, etc.)

• Investor provides cash; receives percentage of equity in lieu of or in addition to interest

• Buyer pays principal (or it is deferred)• Things to negotiate:

– Loan application– Equity calculation– Investor’s equity percentage– Investor repayment– Handling improvements– Responsibility for taxes and insurance

63



(02/21/2012)


Products

Homebuyer Assistance Programs

• May provide:– Down payment assistance– Subsidized mortgage interest rates– Help with closing costs

• Offered by government, non-profits, lenders• Program funding usually limited• Lender programs developed to provide financing

flexibility– First time homebuyer – Community homebuyer

• Positive: Help get people into homes• Negative: Potential for default

2/1/2013

22

64

Key Term Review

• Adjustable Rate Mortgage (ARM)

• Buydown

• Caps

• Equity Exchange

• Estoppel

• Index

• Land Contract

• Lease/Option

• Lease/Purchase

• Margin

• Option

• Participation Plan

• Points

• Rate Adjustment Period

• Reverse Mortgage

• Subprime Loan

• Teaser Rate



(02/21/2012)


Products

65

Summary

1. Nontraditional mortgage products

– Defined by the SAFE Act as anything other than

30-year fixed rate loans.

– Defined by Interagency Guidance on

Nontraditional Mortgage Products as mortgage

products that allow borrowers to defer principal

and, sometimes, interest.

– Such products can help buyers qualify for larger

loans or help them reach other financial goals.



(02/21/2012)


Products

66

Summary

2. Buydowns are additional money (discount points) paid to the lender at the start of a loan to lower interest rate and payments.

– Make up the difference between the market interest rate and the rate a borrower gets in the note.

– A permanent buydown (for life of loan) has a reduced rate stated in the note.

– A temporary buydown (early in loan) can be level payment or graduated payment.

– Buyer can qualify 2% below market rate. FHA requires buyers to qualify at note rate, not buydown rate.

– Fannie Mae, Freddie Mac, and FHA limit points and other interested party contributions (IPCs) that can be paid.



(02/21/2012)


Products

2/1/2013

23

67

Summary

3. Adjustable rate mortgages (ARMs)– Borrowers select index (statistical report reflecting cost of money),

lenders add a margin (spread) = fully indexed rate paid on the loan. – Loan documents must state: Rate, index, margin, and payment

adjustment period; caps (if any) on rate, payments or negative amortization; conversion option (if any).

– Rates that change more frequently than payments may create negative amortization (payments insufficient to cover interest due).

– Caps keep loans from growing out of control. – Lenders periodically readjust or recast the loan by recalculating

payments based on the loan balance at specific interval. – Conversion options allow buyers to convert to fixed rate. – Lenders/MLOs must provide CHARM booklet to borrower in

addition to other mandated disclosures, including the annual percentage rate (APR). For ARMs, it is a composite rate that reflects the lower rate for certain number of years and the higher rate for later years. Lenders cannot disclose only initial low rates.



(02/21/2012)


Products

68

Summary

4. Reverse mortgages provide monthly income, a lump sum of cash, or a line of credit to borrowers aged 62 or older, based on the equity in their homes

– Loan generally repaid when the borrower dies, moves out of the house for 12 months, or sells the house (assuming no breach).

5. Structured mortgages help borrowers reach other financial goals.

– Growth equity: Fixed rate, but payments increase to pay off faster.

– Reduction option: Buyer can reduce rate one time, with fewer refinancing costs.

– Shared appreciation: Lender shares equity in commercial project.

6. Subprime loans (B-C loans, low-doc, stated income) have more risk than what is allowed by the conventional market. Borrower risk factors determine interest rate and terms. A-minus loans are riskier than prime loans, less risky than subprime loans.



(02/21/2012)


Products

69

Summary

7. Seller financing is when seller extends credit to buyer to financethe purchase of property. Seller can extend all or partial credit.

– Can help buyer who doesn’t have enough cash to buy a property, can’t qualify for a conventional loan, or wants or needs a lower-than-market interest rate. Seller gets the benefit of a home that’s easier to sell, and often a better price by offering terms.

– A purchase money mortgage or seller-held mortgage is given by buyer to the seller to secure part or all of the money borrowed to purchase property. Unencumbered property with no liens is best for this transaction; encumbered property with liens needs assumption or wraparound.

– Assumption has the buyer take responsibility for the mortgage, but the seller must get a release from the lender.

– A seller-wraparound mortgage has the seller retain existing mortgage (the buyer makes one larger payment; the seller pays the lender and keeps difference).



(02/21/2012)


Products

2/1/2013

24

70

Summary

8. A land contract is a real estate installmentagreement.

– Buyer (vendee) makes payments to seller (vendor) forright to occupy land, but no title is transferred until all,or part of, payments are made.

– Buyer has equitable title under a land contract. Statesdiffer in how they treat land contracts.

– Problems for the buyer include difficulty in borrowingagainst equity with a land contract and protecting equityif land contract is not recorded.

– Lender may consent to deal using an estoppel letter.



(02/21/2012)


Products

71

Summary

9. Other alternative financing:– A lease/option has the seller (optionee) lease to a tenant (optionor)

who has the right (but not the obligation) to buy the property at a set price within a certain time. An option can be used for profit, speculation, investment, comparison, or to give the optionor time to acquire cash, to qualify, or credit rent toward purchase price.

– A lease/purchase combines a lease with a purchase contract.

– An equity exchange (tax-deferred exchange, Section 1031) is property traded for value in other property. Properties must be exchanged (or delayed exchange), like kind, and held for trade, business, or investment. Capital gains tax is deferred, but boot (unlike property added to balance value) is taxed. Tax-free exchanges are not available for residential property.

– Participation plans have investors share equity of the property instead of or in addition to receiving interest.



(02/21/2012)


Products

72

Summary

10. Homebuyer assistance programs:– Down payment assistance programs (DAP)

– Subsidized mortgage interest rates

– Help with closing costs (or combination)

– Programs can be offered by government or non-

profit groups, or by lenders



(02/21/2012)


Products

2/1/2013

25

73

Chapter 8 Quiz

1. A borrower is purchasing a home for $100,000.

The LTV on the loan is 80%. If the borrower pays a

total of 6 points on the loan, how much will the

points cost him?

A. $2,400

B. $3,400

C. $4,800

D. $6,000



(02/21/2012)


Products

74

Chapter 8 Quiz

2. A buydown plan can reduce the borrower’s payments

A. early in the loan only, but requires a large balloon payment.

B. early in the loan or for the entire life of the loan.

C. for the entire life of a loan, but with an automatic prepayment penalty.

D. with gradual payment decreases throughout the life of the loan.



(02/21/2012)


Products

75

Chapter 8 Quiz

3. Which statement is true about interest rate buydowns on FHA loans?

A. Borrowers may qualify at the buydownrate.

B. Borrowers must qualify at the note rate.

C. FHA does not allow builder-paid buydowns.

D. FHA does not allow seller-paid buydowns.



(02/21/2012)


Products

2/1/2013

26

76

Chapter 8 Quiz

4. Which of the following is NOT an element

of an ARM?

A. index

B. margin

C. positive amortization cap

D. rate



(02/21/2012)


Products

77

Chapter 8 Quiz

5. What is the adjustable number used to

compute the interest rate on an ARM

called?

A. cap

B. index

C. margin

D. prepayment



(02/21/2012)


Products

78

Chapter 8 Quiz

6. With an ARM, the index is added to the

______ to determine the _________ .

A. APR / cost of funds

B. home value / amount borrowed

C. margin / interest rate charged

D. qualifying ratio / maximum monthly

mortgage payment



(02/21/2012)


Products

2/1/2013

27

79

Chapter 8 Quiz

7. Negative amortization occurs when

A. a borrower suffers payment shock.

B. each mortgage payment is adjusted more

frequently than is the interest rate.

C. the payment made does not cover the

interest due for that period.

D. all of the above



(02/21/2012)


Products

80

Chapter 8 Quiz

8. How are subprime loans different from

conforming loans?

A. They allow for lower interest rates.

B. They allow for more risk.

C. They are only offered by banks.

D. They are sold in the secondary market.



(02/21/2012)


Products

81

Chapter 8 Quiz

9. Which scenario best describes a land contract?A. A buyer makes payments to the seller in exchange for

the right to occupy, use, and enjoy the property, but no deed or title transfers until a specified portion of payments have been made.

B. A buyer takes over primary liability for the loan of a seller, usually implying no change in loan terms.

C. A seller keeps the existing loan and continues to pay on it while giving the buyer another loan.

D. A seller leases the property with the provision that part of the rent payments be applied to the sale price if the tenant decides to purchase before the lease expires.



(02/21/2012)


Products

2/1/2013

28

82

Chapter 8 Quiz

10. An equity exchange may be treated as a tax-

free exchange when property is

A. for profit and of like kind.

B. held for sale by a dealer only.

C. owner-occupied.

D. rental only.



(02/21/2012)


Products

83

Chapter 8 Quiz

11. In which federal law would you find the

definition of a nontraditional loan?

A. Homeowners Equity Protection Act

B. Real Estate Settlement Procedures Act

C. Secure and Fair Enforcement for

Mortgage Licensing Act

D. Truth in Lending Act



(02/21/2012)


Products

84

Chapter 8 Quiz

12. During the life of a typical reverse

mortgage, which of the following factors is

decreased?

A. debt

B. equity

C. interest

D. monthly payments



(02/21/2012)


Products

2/1/2013

29

85

Chapter 8 Quiz

13. According to the Interagency Guidance on

Nontraditional Mortgage Products,

nontraditional mortgage loans may be

LEAST risky for borrowers with

A. high debt-to-income ratios.

B. high loan-to-value.

C. low credit scores.

D. low debt-to-income ratios.



(02/21/2012)


Products

86

Chapter 8 Quiz

14. Each of these are characteristics that could

make a loan nontraditional EXCEPT

A. 15-year term.

B. adjustable rate.

C. fixed rate.

D. temporary buydown.



(02/21/2012)


Products

87

Chapter 8 Quiz

15. A borrower has a ARM with a 5/2/6 interest rate cap. The start rate is 4%, the current index is 3%, and the margin is 3%. What is the borrower’s interest rate if the index rises to 5% at the time of the first adjustment?

A. 5%

B. 6%

C. 8%

D. 9%



(02/21/2012)


Products

Nontraditional Mortgage Productsfhatraining.com/wp-content/uploads/2013/04/MLPP4e... ·...

Documents

Transcript of Nontraditional Mortgage Productsfhatraining.com/wp-content/uploads/2013/04/MLPP4e... ·...