California Real Estate Finance

1
California Real Estate Finance

• Sixth Edition

2
Nature and Cycle of California Real Estate
Finance

• Chapter 1

3
Historical Perspective

• Might and power
• English feudal system
• Allodial system

4
Nature of Real Estate Finance

• Ownership of property
• Property
• Real property
• Personal property
• Commercial fixtures

5
Estates in Realty

• Freehold estate
• Fee simple absolute
• Time-shares
• Legal title equitable title
• Concurrent ownership
• Tenants in common and partnerships
• Community property
• Leasehold estate

6
Real Estate Characteristics

• Physical
• Economic
• Social
• Police powers
• Eminent domain
• Condemnation

7
Mortgage Lending Activities

• Savings associations
• Credit system economy
• Financing relationships
• Local markets
• National markets

8
Real Estate Cycles

• Supply and Demand
• Real estate
• Money
• Population Characteristics
• Political attitudes

9
Money and the Monetary System

• Chapter 2

10
What is Money?

• Medium of exchange or means of payment
• Storehouse of purchasing power
• Standard of value

11
The Use of Paper Money

• As long as the public can exchange symbolic paper
  money for commodities of like value, the system
  works.

12
The Supply and Cost of Money

• M1 includes cash and checking accounts
• M2 adds savings and time deposits of less than
  100,000
• M3 adds large time deposits at all depository
  institutions
• Creating money

13
The Federal Reserve System (FED)

• A central banking system that provides a rising
  standard of living through controlled growth of
  money and credit.

14
Organization of the FED

• Twelve Federal Reserve districts
• Each district includes Federal Reserve Bank
• Directed by board of governors
• Membership

15
Functions of the FED

• Reserve requirements to protect depositors
• Discount rates to regulate the cost of funds
• Federal Funds Rate at which the Fed lends money
  to member
• Open market operations
• Truth-in-Lending Act (Regulations Z)

16
The United States Treasury

• Balances governments income against its
  long-term and short-term debt instruments has a
  direct effect on the monetary and credit climate
  of the country.
• The Office of the Comptroller of the Currency
  (OCC)
• Nations Fiscal Manager
• The Treasurys Role
• The Financial Institutions Reform, Recovery and
  Enforcement Act of 1989 (FIRREA)
• The Federal Deposit Insurance Corporation (FDIC)
• The Deposit Insurance Fund

17
The Federal Home Loan Bank System (FHLB)

• Organization
• Office of Thrift Supervision
• Activities
• Provides its members a national market for their
  securities

18
California Financial Agencies

• Department of Savings and Loans
• California Housing Finance Agency (CHFA)
• Department of Banking
• Department of Insurance
• Department of Corporations (DOC)
• Department of Real Estate (DRE)
• Office of Real Estate Appraiser (OREA)

19
Institutional Lenders for Real Estate Finance

• Chapter 3

20
Commercial Banks

• Origins
• Goldsmiths and money lending
• Advent and evolution of checking system
• Underwriting
• Organization and operation
• Mortgage loan activities
• Interim financing (construction loans)
• Home improvement loans
• Manufactured home loans
• Equity loans
• Mortgage banking
• Trust department activities

21
Savings and Loan Associations/Savings Banks

• Origins and development
• Organization
• Mortgage lending activities
• California chartered savings and loan
  associations

22
Life Insurance Companies

• Seek safety and long-term stability of an
  investment.
• Participation financing
• Purchase of blocks of single-family mortgages or
  securities from the
• secondary mortgage market

23
Pension and Retirement Programs

• Pension monies collect routinely, usually from
  payroll deductions, and are held in trust until
  needed at retirement.
• Pension fund managers invest assets from
  accounts.

24
Credit Unions

• Members deposit savings, usually through payroll
  deductions.
• Members borrow at interest rates below
  competition.
• Expanding in real estate finance.

25
Noninstitutional Lenders

• Chapter 4

26
Mortgage Brokers and Bankers

• Mortgage brokers match up borrowers and lenders
• Mortgage bankers are intermediaries (known as
  correspondents) originate new loans, collect
  payments, periodically inspect the collateral,
  and supervise foreclosure, if necessary.
• Development Interest only loans with balloon
  payments
• High level of defaults during Great Depression
• Formation of Federal Housing Administration (FHA)
  in 1934
• New plans for mortgage payback systemamortization
  
• Operation
• Servicing a Loan
• Assignment of Loan
• Activities

27
Real Estate Trusts

• Designed to provide vehicles by which real estate
  investors can enjoy the special income tax
  benefits granted to mutual funds and other
  regulated investment companies.

28
Trust Qualifications (1 or 2)

• Trust must not hold property primarily for sale
  to customers in the ordinary course of business.
• Trust must be owned beneficially by at least 100
  investors.
• Trust must not have fewer than five persons who
  own more than 50 percent of the beneficial
  interest.
• Trusts beneficial interests must be evidenced by
  transferable shares or certificates of interest
• Ninety-five percent of the trusts gross income
  must be derived from its investments.

29
Trust Qualifications (2 or 2)

• Seventy-five percent of the trusts gross income
  must be derived from real estate investments.
• No more than 30 percent of the trusts gross
  income may result from sales of stocks and
  securities held for less than 12 months or from
  the sale of real estate held for less than four
  years.
• Ninety-five percent of the trusts gross income
  must be distributed in the year it is earned.
• All trust income must be considered passive by
  the IRS.

30
Real Estate Investment Trusts (REITS)

• Invest in improved income properties
• Income derived from rents and capital gains
• Individual investors pay income tax only at
  participant level

31
Real Estate Mortgage Trusts (REMTs)

• Expand their financial bass with strong credit at
  their commercial banks.
• Make mortgage loans on commercial income
  properties.
• Income from mortgage interest, origination fees,
  and profits made from buying and selling
  mortgages.

32
Balanced Trusts

• Combine REIT with REMT, earning profits from
  rental income and increased property values as
  well as mortgage interest and placement fees.

33
Syndicates

• Organizations of investors pooling capital for
  real estate investments
• Can be corporations, general partnerships, or
  limited partnerships
• Investment conduits that pass profits and losses
  through to investors in proportion to their
  ownership shares

34
California Syndication

• Controlled by the California Department of
  Corporations
• Limited partners may become liable for the total
  debts of the partnership if they take an active
  role in the management of the partnership
• Limited liability company (LLC) combines
  single-level tax benefit of partnership with
  organizational structure and limited liability of
  limited partnerships and corporations.

35
Real Estate Bonds

• Can be used to secure funds for financial real
  estate projects through 1) issuance and sale of
  mortgage bonds and 2) issuance and sale of
  municipal, county, or state bonds for purposes of
  financing community improvements.

36
Nature of Bonds

• Secured and unsecured (debentures)
• Coupon registered coupon
• Classification by nature of issuer, nature of
  security, or by maturity date
• Issuance of banks
• Market prices of bonds
• Ratings

37
Uses for Bond Issues

• Use has faded since depression of 1930s
• Many companies today use debenture bonds as a
  source of raising long-term funds

38
Bonds

• General obligation bonds
• Tax privilege of exempting interest income earned
  on state and local securities
• Revenue bonds
• Industrial revenue bonds
• Mortgage revenue bonds
• Zero coupon bonds
• Mortgage loan bonds

39
California Bonds

• Issued by Community Redevelopment Agencies
• Money used to make below-market interest rate
  loans to qualified developers of low-income and
  medium-income residential projects
• Mortgage-backed bonds issued by savings
  associations

40
Endowment Funds

• Provides a permanent source of income
• Managers responsible to develop income while
  preserving capital
• Perfect vehicle for real estate financeREMIC

41
Private Loan Companies

• Usually deal in junior finance
• Often charge higher than market interest rates
• Must adhere to Truth-In-Lending laws

42
California Real Property Loan Law

• Limits on amount of commission and fees that can
  be charged for making or arranging a hard money
  loan.

43
Individuals

• Sellers as lenders
• Families as lenders
• Other lenders

44
Conventional, Insured, and Guaranteed Loans

• Chapter 5

45
Conventional Loans (1 or 2)

• Fixed-Rate Loans
• Interest-0nly Loans
• Private Mortgage Insurance (PMI)
• Permanent/Temporary (Escrow) Buydown Plan
• Borrowers Qualifications
• Other Conventional Loan Programs
• Zero Money Down Payment

46
Conventional Loans (2 or 2)

• Reduced Paperwork
• Jumbo Loans
• Home Equity and Home Equity Line of Credit
  (HELOC)
• Automatic Rate Reduction
• Subprime Loans

47
Predatory Lending

• Flipping
• Packing
• Charging excessive fees

48
Home Ownership and Equity Protection Act of 1994

• Addresses deceptive and unfair practices in home
  equity lending.

49
Refinancing Existing Conventional Loans

• Costs of refinancing are unregulated and vary
  dramatically among lenders.

50
Electronic Real Estate Loan Services

• Borrower can arrange for a residential loan on
  the computer
• Still requires filing of a loan application and
  the probably submission of ancillary documents
  such as bank statements and annual income tax
  reports.

51
FHA Organization and Requirements

• Lenders must grant long-term, self-amortizing
  loans at market interest rates
• All properties must meet minimum standards of
  acceptability
• Careful loan application review
• Comprehensive written appraisal report on
  property
• Borrower required to receive and sign a form
  entitled For Your Protection Get a Home
  Inspection

52
FHA Program Summary

• Not a direct lender
• Reduced the down payment obstacle for cash-short
  borrowers
• Helps stabilize the mortgage market

53
Existing FHA Programs

• Title Ilight or moderate rehabilitation of
  properties manufactured homes, developed lot, or
  combination of lot and home.
• Title II
• Section 203(b)Mortgage Insurance for One-Family
  to Four-Family
• Section 203(k)Rehabilitation Mortgage Insurance
• Section 234(c)Mortgage Insurance for Condominium
  Units
• Section 251Insurance for Adjustable Rate
  Mortgages
• Other Title II programs

54
Special HUD/FHA Programs

• Energy Efficient Mortgage (EEM)
• Home Equity Conversion Mortgage (HECM)
• Officer Next Door
• Teacher Next Door
• Homeownership Vouchers
• Native American Housing

55
Underwriting Guidelines

• Maximum Loan Limitations
• Down Payment Requirements
• Borrowers Income Qualifications
• Mortgage Insurance Premium (MIP)
• Allowable Closing Costs
• Second Mortgage/Buydowns

56
Frequently Used FHA Loans

• Section 203(b) One-Family to Four-Family
  Mortgage Insurance
• Section 234(c) Mortgage Insurance for
  Condominium Units
• Section 251 Insurance for Adjustable-Rate
  Mortgages
• Section 203(k) Rehabilitation Mortgage Insurance
• Streamline Refinance

57
Additional FHA Issues

• Direct Endorsement and Coinsurance
• Advantages of FHA Mortgage
• FHA Contributions to Real Estate Finance

58
The U.S. Department of Veterans Affairs Real
Estate Loan Guarantee Program

• Program Application
• Eligibility/Entitlement
• Certificate of Eligibility
• Partial Entitlement
• Certificate of Reasonable Value
• Interest
• Income Qualifying Requirements
• Closing costsmay not be included in DVA loans
• Funding Fee
• Second Mortgages
• Buydowns
• Assumptions
• Release of Liability/Novation

59
Additional DVA Loan Guarantee Programs

• DVA Adjustable-Rate Mortgage (ARM)
• DVA Streamline Refinance
• Cash Out Refinance
• Conventional to DVA Mortgage

60
California Veterans Home and Farm Purchase
Program (CAL-VET)

• Funding and title
• Eligibility requirements
• All veterans are eligible
• 90 days active service or meet other
  qualifications
• Honorable discharge
• Active service within designated periods
• Veteran receiving approved medals during
  peacetime may also qualify
• Unremarried spouses of veterans killed in active
  duty also eligible

61
California Veterans Home and Farm Purchase
Program (CAL-VET)

• Qualifying procedures
• Maximum property values on single family homes,
  condos and mobile homes on owned lots
• Maximum for manufactured homes
• Maximum for self-supporting farms and ranches
• Downpayment differs depending on type of loan
• Most loans amortized over 30 years
• Fixed an variable rate loans available
• Insurance against floods and earthquakes required
  
• Special Conditions
• New construction
• Funds for Refinancing
• Junior financing
• Occupancy
• Others

62
Financial Agencies and Lending Programs

• Chapter 6

63
Agricultural Lending

• Need for flexibility
• Open-end mortgages
• Moratorium on payments

64
The Farm Credit System (FCS)

• Farm Credit Administration (FCA)
• Federal Agriculture Mortgage Corporation (Farmer
  Mac)
• Farm Credit Leasing Services
• Farm Credit Council
• The U.S. Department of Agricultural Rural
  Development Program (USDA Rural Development)

65
U.S. Department of Housing and Urban Development
(HUD)

• U.S. Department of Housing and Urban Development
  (HUD)
• Supervises the Federal Housing Administration
  (FHA)
• Directs Ginnie Mae
• Oversees Fannie Mae and Freddie Mac operations
• Enforces fair housing and RESPA regulations
• Manages the Housing Choice Voucher Program
• Manages the Indian Housing Act
• Regulates interstate land sales registration,
  urban renewal, and rehabilitation programs
• Supervises public housing projects

66
HUD Strategic Plan

• Increase home ownership opportunities
• Promote decent affordable housing
• Strengthen communities

67
HUD Additional Responsibilities

• Regulation of Fannie Mae and Freddie Mac
• Urban renewal
• Subsidized housing
• Community Development Block Grants (CDBG)
• Public Housing

68
The Real Estate Settlement Procedures Act (RESPA)

• Disclosures under RESPA
• Disclosures before Settlement Closing
• Disclosures at Settlement
• Disclosures after Settlement

69
The Federal Equal Credit Opportunity Act (ECOA)

• Prohibits lenders from discriminating against
  credit applicants on the basis of race, color,
  religion, national origin, sex, marital status,
  age, or dependency on public assistance.

70
Interstate Land Sales

• Established criteria for the dissemination of
  vital information to potential buyers of
  residential land.

71
Federal Legislation

• Fair Housing Act
• Uhruh Civil Rights Act (Civil Code Section 51)
• Community Reinvestment Act
• The Home Mortgage Disclosure Act
• Truth-in-Lending (Regulation Z)
• Advertising
• Right of rescission
• Usury Laws
• Usury Laws
• Federal
• California

72
State Financing Agencies

• Industrial Development Agency
• Community Redevelopment Agency (CRA)
• Tax-increment financing
• Mortgage revenue bonds
• Special assessments

73
The California Housing Finance Agency (CHFA)

• Programs provide below-market, fixed-rate
  financing for first-time homebuyers.
• The Home Purchase Assistance Program
• The Matching Down Payment Program
• Other CHFA Programs

74
City Of Los Angeles Home Mortgage Program

• Provides mortgage loans to low-income and
  moderate-income first-time homebuyers who wish to
  purchase from selected new homes and condominiums.

75
The Housing Financial Discrimination Act of 1977
(Holden Act)

• Offsets illegal practice of redlining
• Prohibits discrimination

76
Junior Loans in Real Estate Finance

• Chapter 7

77
Junior and Senior Liens

• Distinguishing first and junior lien by date and
  time of recording
• Increase of junior financing by thrifts and
  commercial banks
• Secondary market for junior finance
• Junior financing provides funds for land
  developers to pay for offsite improvements

78
Anatomy of a Second Mortgage/Deed of Trust

• Second deed of trust is in junior position to an
  existing senior loan
• Junior loan holder in higher-risk position
• In event of default, senior lender will usually
  give junior lender a chance to make delinquent
  payments
• Causes protect junior lien holders position
  against that of senior lender
• Junior loan risks
• Junior Loan interest rates and usury

79
Home Equity Loans

• Offered by many lenders
• Interest is tax deductible, unlike interest on
  consumer debt, which is not
• Attractive interest rates, sometimes for only
  short period of term
• Face high default rates when economy slows
• Freddie Mac has program for purchase of secured
  home improvement loans

80
Loan Terms and Note Payments

• Chapter 8

81
Interest

• Simple Interestpaid only on the amount of
  principal still owed.
• Term Loanrequires payments of interest only with
  the entire principal being repaid at a specified
  time.
• Amortizationpayments include portions for both
  principal and interest.
• Distribution of Principal and Interest

82
Variations in Payments and Interest Rates

• Graduated-Payment Mortgage (GPM)
• Adjustable-Rate Mortgage (ARM)
• Adjustment periods
• Initial rate
• Note rate
• Qualifying rate
• Index
• Margin
• Interest rate caps
• Payment caps

83
Innovative Payment Plans

• The 15-Year Mortgage
• Reverse Annuity Mortgage (RAM)
• Fannie Mae Senior Housing Program
• Fannie Maes Two-Step Mortgage Plan

84
Variations in Formats

• Open-End Mortgage
• Construction Mortgage
• Blanket Mortgage
• Release Clauses
• Leasehold Mortgage
• Package Mortgage
• Manufactured Home Mortgages
• Purchase-Money Mortgage
• Hard-Money Mortgage (Equity Mortgage)
• Bridge Loan
• Wraparound Encumbrance (Wrap)
• Mortgage Participation

85
Tax-Deferred Mortgage Lending

• Installment Sales
• Option to Buy
• Lease with Option of Buy
• ExchangesInternal Revenue Code Section 1031

86
Instruments of Real Estate Finance

• Chapter 9

87
Terminology

• Encumbranceright or interest in a property held
  by one who is not the legal owner of the
  property.
• Lien is a financial encumbrance.
• Liendefined as a charge against a specific
  property wherein the property is made the
  security for the performance of a certain act,
  usually the repayment of a debt.
• Voluntary liens and involuntary liens general
  and specific liens.

88
Interests Secured by a Real Estate Loan

• Fee simple ownership Less than fee simple
  ownership Personal property, trade fixtures
• Title and Lien Theories
• Equitable rights
• Title theory
• Redemption right
• Statutory redemption period
• Lien theory recognizes the rights of lenders in
  collateral property being equitable rights, while
  borrowers retain their legal rights in the
  property.
• California has taken modified position between
  the title and lien theories.
• General Requirement for a finance instrument

89
Note and Deed of Trust (Trust Deed)

• Deed of Trustevolved to become the dominant
  security instrument for financiers of California
  real estate.
• Advantage of trust deed over mortgage is shorter
  foreclosure period.
• Judicial foreclosure nonjudicial foreclosure
  power-of-sale clause naked title beneficiaries.

90
Note Secured by Deed of Trust

• Date signed
• Participants identities
• Promise to pay
• Payment due dates
• Amount and terms
• Reference to security
• Signatures and endorsements
• Cosigners

91
Deed of Trust

• Executed by the trustor to transfer a form of
  legal fee ownership to the trustee to be held for
  the beneficiary, while the trustors maintain
  their equitable ownership.

92
Covenants of California Deed of Trust

• Preservation and maintenance
• Fire insurance
• Legal action
• Taxes and assessments
• Beneficiary and trustee expenditures
• Condemnation
• Late payments
• Reconveyance

93
Note and Mortgage

• Note Secured by a Mortgage
• Mortgage
• Recording information
• Participants
• Pledge
• Property description
• Covenant of seisin
• Note attachment
• Mello-Roos disclosure
• Property taxes
• Insurance
• Defeasance clause and acceleration
• Maintenance of the collateral
• Signatures and acknowledgement
• Release of mortgage

94
Real Property Sales Contract (Land Contract)

• Single, complete financing and sales agreement
  executed between buyer and seller.

95
Special Provision in Real Estate Finance
Instruments

• Late payment Penalty
• Prepayment Privilege
• Prepayment Penalties
• Lock-In Clause
• Due-On-Sale Clause
• Assumption Versus Subject To
• Subordination Clause
• Release Clause
• Extensions and Modifications

96
Contracts Used in the Real Estate Business (cont.)

• Listing agreements
• Sales contracts
• Offer and acceptance
• Equitable title
• Destruction of premises
• Earnest money deposits
• Cooperative apartment contracts
• Condominium sales
• Option agreements
• Land contracts
• Local forms
• Recission

97
Real Estate Loan Underwriting

• Chapter 10

98
Underwriting

• Estimating the value of the property being
  pledged as collateral to guarantee repayment and
  determining the ability of a borrower to repay
  the loan.

99
Definition of Value

• Value in use
• Value in exchange
• Subjective value
• Objective value
• Market value

100
Appraisal

• Estimate of propertys value at a specific point
  in time.

101
The Appraisal Process

• Drive-by appraising
• Defining the appraisal problem
• Determining the purpose for the appraisal
• Examining the neighborhood and property being
  appraised
• Collecting the pertinent data
• Applying approaches to estimate value
• Reconciling values estimated
• Preparing the report

102
Appraisal Approaches

• Direct Sales Comparison Approach
• Cost Approach
• Income Capitalization Approach
• Gross Rent Multiplier (GRM)
• Reconciliation of Data and Opinion of Value

103
Qualifying the Borrower

• The loan application
• Financial statement
• Assets
• Liabilities
• Net worth
• Data verification
• Deposits
• Employment
• Credit report
• Credit evaluation
• Credit scoring
• Loan qualifying income ratios

104
Processing Real Estate Loans

• Chapter 11

105
Qualifying the Title

• Noticesconstructive notice and actual notice
• Abstracts and Opinion of Title
• Title Insurance
• Title Faults
• Surveys

106
Disclosures in California Real Estate Transactions

• Real estate transfer disclosures
• Delivery of a pest control inspection report
• Disclosure of geological hazards
• Disclosure of hazardous waste deposits
• Thermal insulation disclosure
• Special flood area disclosure
• Special city and country ordinances
• Foreign investment real estate tax
• Condominium documents disclosure
• Disclosure for real property loans

107
Costs of Securing a Loan

• RESPA requires good-faith estimate
• Points
• Placement or origination fee
• Impound funds (escrow accounts)
• Property taxes
• Hazard insurance
• Title insurance
• Mortgage insurance
• Assessment liens
• Interest adjustments
• Prepayment penalties

108
Additional Costs

• Prorations
• Interest
• Property taxes
• Insurance premiums
• Additional prorations

109
Additional Processing Concerns

• Closing Statements
• Servicing the Loan
• Assignment of the Loan

110
The Secondary Mortgage and Trust Deed Markets

• Chapter 12

111
Introduction to Secondary Market

• Originators of new loans are called primary
  lenders
• Most loans created by primary lenders are sold in
  the secondary market
• Lenders acquire money for new loans avoid the
  risk of holding long-term fixed interest loans
• Some keep loan servicing responsibilities high
  tech approach has removed personal interaction
  between lenders and borrowers
• Emergence of securitization of pools of mortgage
  loans

112
Fannie Mae (formerly the Federal National
Mortgage Association)

• Originally a government agency
• Created to buy FHA-insured loans issued in the
  Depression
• Bought loans at par to stimulate economic
  recovery

113
Fannie Mae Charter of 1954

• Allowed Fannie Mae to sell as well as to buy
  loans
• Financed by private capital
• National secondary mortgage market operations to
  provide liquidity for mortgage investments

114
Housing and Urban Development Act of 1968

• Fannie Mae reorganized as a private corporation
• Creation of Ginnie Mae, established for special
  assistance programs
• Administered price system allows Ginnie Mae to
  adjust its required yields daily in accordance
  with market factors and its financial needs
• Fannie Mae Mortgage-Backed sold on international
  markets

115
Underwriting Standards for Conventional Loans
Sold to Fannie Mae

• Conforming and nonconforming loans
• Automated underwriting system
• Credit scoring

116
Other Fannie Mae Programs

• Fannie Mae Mortgage Solutions
• Community Lending Mortgage Products
• Office of Federal Housing Enterprise Oversight

117
Freddie Mac

• Created in 1970 to offset credit crunch for the
  savings associations

118
Organization of Freddie Mac

• Established with an initial subscription from the
  12 Federal Home Loan district banks
• Under direction of three members of Federal Home
  Loan Bank Board
• Authorized to raise additional funds by floating
  its own securities
• Since 1989, became independent stock company in
  direct competition with Fannie Mae

119
Freddie Mac Mission

• To make it possible for Americans to obtain
  affordable mortgage loans dedicated to expanding
  minority home ownership in the United States.

120
Freddie Mac Operations

• Purchases conventional loans FHA-insured and
  VA-guaranteed loans
• Obtains funds by selling securities, referred to
  as participation certificates (PCs), and debt
  instruments to investors worldwide.

121
Freddie Mac Systems and Programs

• Underwriting Standards
• Electronic Underwriting System
• Risk-Based Loan Pricing
• Fixed-Rate Mortgages
• Adjustable-Rate Mortgages (ARMs)
• Affordable Housing Products and Programs

122
Ginnie Mae

• Government National Mortgage Corporation, created
  in 1968 to provide financing for special
  assistance programs and operate the securities
  pool.

123
Ginnie Mae Operations and Programs

• Works with issuers of mortgage-backed securities
  and investors/sponsors of mortgage-backed
  securities
• Does not buy or sell loans or issues
  mortgage-backed securities
• Guarantees that investors will receive timely
  payments of principal and interest primarily on
  MBSs based on FHA or VA loans.
• Ginnie Mae Mortgage-Backed Securities

124
Farmer Mac

• Federal Agricultural Mortgage Corporation (FAMC)
• Mission is to improve the availability of
  long-term credit at stable interest rates to
  Americas farmers, ranchers, rural homeowners,
  businesses, and communities.
• Purchases qualified loans from agricultural
  mortgage lenders

125
The Real Estate Mortgage Investment Conduit
(REMIC)

• Conduit, holding fixed pools of mortgages that
  back securities collateralized by the mortgage
  cash flows.
• Tranches or ownership interests to meet investor
  needs and respond to market conditions.
• Interest-only (IO) Principal only commercial
  mortgage-backed (CMBS).

126
Secondary Market for Junior Financing Loans

• Small private lending companies originate new
  junior loans and buy and sell existing second
  liens.
• States require that private mortgage finance
  companies dealing in financial securities be
  licensed and post bonds to protect the public
  from illegal activities.
• Growing secondary market for the sale of land
  contracts.
• Fannie Maes Simultaneous Second Mortgage program
• Freddie Macs Supplemental Mortgage

127
Loan Defaults and Foreclosures

• Chapter 13

128
Defaults

• Breach of one or more of the conditions or terms
  of a loan agreement.
• Acceleration clause
• Lenders seek to avoid foreclosure
• Acceleration and foreclosure as last resort
• Delinquencies
• Principal and interest
• Grace period
• Late period charge
• Property taxes
• Other liens
• Hazard insurance
• Poor property management

129
Adjustments

• Workouts
• The Soldiers and Sailors Civil Relief Act of 1940
  
• The Housing Act of 1964
• Avoiding a foreclosure
• Moratoriums (forbearance) and recasting
• Voluntary conveyance of deed

130
Foreclosures

• Process to recover lenders collateralborrowers
  rights of redemption are eliminated and all
  interests in the subject are removed.

131
Foreclosures

• Equitable redemption period
• Strict forfeiture
• Statutory redemption period
• Power-of-Sale Foreclosure
• Deeds of trust
• Judicial Foreclosure and Sale

132
Investment Financing Strategies

• Chapter 14

133
Sale-Leaseback

• Owner of property sells it to an investor and, at
  the same time, leases it back.
• Seller-lessees retain possession while obtaining
  full sales price free capital frozen in equity
• Investor-landlord receives fair return on and of
  the investment in the form of rent during the
  lease term and ownership of a depreciable asset
  already occupied by a good tenant buying
  guaranteed income stream that can be sheltered
  through proper use of allowable deductions.

134
Seller Refinances Prior to the Sale

• Seller can refinance the property in order to
  secure a loan that can be assumed by the buyer.

135
Trading on Sellers Equity

• Buyer refinances property instead of assuming the
  existing loan

136
Equity Participation

• Sale-Buyback
• Splitting ownership
• Joint ventures

137
Tax-Deferred Financing

• Realized capital gainsthe difference between the
  total consideration received and the adjusted
  book basis of the property transferred.
• Recognized capital gainsprofits that are
  actually taxable.
• Owners can refinance their properties during
  their lifetimes, generating tax-deferred dollars
  for reinvestment. At time of death, properties
  receive step-up basis to fair market value and
  could be distributed to heirs free of potential
  income tax on any appreciation to time death.
• Pyramiding through refinancing.
• Option to buyOption compared to installment sale
• Lease with option to buy
• Lease option
• Right of first refusal
• Distribution to Heirs
• Federal estate tax
• California inheritance tax
• Gift tax

138
Mathematics of Real Estate Finance

• Chapter 15

139
Interest

• Rentpaid for the use of money

140
Simple Interest

• Paid only on the amount of principal still owed
• Interest ceases on principal repaid
• Derived from IPRT

141
Add-On Interest

• Rent paid on the entire amount of principal for
  the entire period
• Disregards any principal repaid
• Acts to almost double contract rate
• Derived from AIR2IC/P (n1)

142
Nominal and Effective Rates of interest

• Nominal rate of interest is contracted rate
• Effective rate of interest includes additional
  costs, charges and discounts

143
Compound Interest

• Interest paid on interest earned

144
Compound Worth of an Annuity

• Calculating the future worth of a series of
  regular deposits, each made at the beginning of a
  period

145
Time Value of Money

• Money not received until some time in the future
  is worth less today
• Present worth of money
• Present worth of an annuity

146
Payment Schedules

• AmortizationThe systematic repayment of a debt
• Annual payments
• Monthly payments
• Loan constants
• Distribution of principal and interest
• Total interest costs

147
Measuring Profitability

• Breakeven Analysis
• Return on Investment (ROI)
• Lenders Profitability Calculations
• Investors Profitability Calculations
• Net Present Worth Method

148
Discounting Trust Deeds and Mortgages

• Point one percent of loan amount
• Rule-of-thumb method
• Discount cash flow method