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Financing Real Property Conveyances

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  1. Financing Real Property Conveyances Mortgages

  2. Congressional Oversight Panel Releases Oversight Report on Foreclosure Mitigation • Foreclosure (Encyclopedia of Everyday Law) • Who Regulates Whom? An Overview of U.S. Financial Supervision, February 24, 2009 • US Housing Crash Continues ( • National Association of Home Builders • National Association of the Remodeling Industry

  3. Mortgage • A loan secured by a legal interest in real property, commonly the fee title • Most often made to enable individuals or corporations to acquire that interest • The most common means of financing the purchase of real property • The borrower conveys the interest acquired in that real property to the mortgagor as security for the loan, in effect creating an encumbrance, a mortgage lien • Most made by financial institutions; mortgage companies, banks, or savings and loan associations • Virtually anyone, including individuals, may make a mortgage loan – contract for deed

  4. Mortgage • Transaction involves two legal entities - a lender (creditor, mortgagee) a borrower (debtor, mortgagor) - and a real property interest • In most states title passes to the purchaser while the lender has a lien • The purchaser has rights to exercise all of the real property rights appropriate to the jurisdiction in which the real property  is located • In a few states title to the property remains with the lender until the loan is paid

  5. Mortgage • Comprises two necessary contractual elements • A debt - a financial institution lends money to individuals who possess an interest in real property • A consideration for the debt • The debtor, conveys part of the interest in the real property to the creditor, as security  • This "security" interest simply backs up, or collateralizes, the financial obligation incurred by the landowner • The legal document describing the mortgage is a mortgage deed – usually recorded in the county courthouse • Along with this document is a promissory note in which the details of how the mortgage will be repaid are spelled out – the monthly payment of the principal and interest – called an amortization schedule – not normally filed for public record

  6. Mortgage • Foreclosure • If the borrower is unable to repay the loan, the creditor is entitled to force the sale of the property through appropriate judicial proceeding defined by state law • The proceeds from such a sale, termed foreclosure, go towards satisfying the debt • If the sale proceeds are less than the amount owed, the creditor is usually entitled to bring a personal action against the borrower to make up for any deficiency • The borrower receives the excess if the sale proceeds are greater than the amount owed

  7. Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential property • Basic components • Property - the real estate being financed – land and structure(s) – possesses value • Mortgage - the security created on the property by the lender, which will usually include certain restrictions on the use or disposal of the property (such as paying any outstanding debt before selling the property) • Borrower - the person borrowing who either has or is creating an ownership interest in the property – ability to pay • Lender – the entity loaning the money, usually a bank or other financial institution • Principal - the original size of the loan, which may or may not include certain other costs (As principal is repaid it will go down) • Interest - a financial charge for use of the lender's money • Amortization schedule – schedule of payments for the length of the loan, includes principal and interest

  8. Introductory • Real Estate (Ilyce Glink) • All about mortgages (Freddie Mac) • Mortgage Glossary (HUD) • • Real Estate Finance and Investment

  9. Words in the News - Subprime • The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers) • The rate is almost always the same amongst major banks • Adjustments to the prime lending rate are made by banks at the same time • The prime rate does not adjust on any regular basis • When used in a mortgage sense means most creditworthy individuals • Subprime, then, refers to mortgages given to less creditworthy individuals • Also used to refer to those mortgages issued without adequate documentation • And also those mortgages with “unusual” provisions

  10. Sub-Prime mortgages • A sub-prime lender is one who lends to borrowers who do not qualify for loans from mainstream lenders • Some are independent, but increasingly they are affiliates of mainstream lenders operating under different names – Well Fargo • Sub-prime lenders seldom if ever identify themselves as such • Their prices are uniformly higher than those quoted by mainstream lenders • A sub-prime borrower is one who cannot qualify for prime financing terms because of low credit ratings, insufficient income, purpose of loan, or property type • Sub-prime lenders base their rates and fees on the same factors as prime lenders • Rates are higher the lower the credit score and the smaller the down-payment • But the entire structure of rates and fees is higher at sub-prime lenders to cover the greater risk and higher costs of sub-prime lending

  11. Sub-prime lending costs are also higher because more applications are rejected and marketing costs are higher • A higher percentage of sub-prime than of prime loans go into default • The development of the sub-prime market has made mortgages, and therefore home ownership, available to a segment of the population that otherwise would have been shut out of the market • Some borrowers who are eligible for loans from mainstream lenders end up in the sub-prime market • Some borrowers cannot bear the financial burden of a mortgage • Sub-prime lending (HUD) • The risk in sub-prime (CNN Money)

  12. Mortgage Foreclosures • How to avoid foreclosure (HUD) • Mortgage foreclosure ( • Sub-prime in Hennepin and Dakota counties (CURA Reporter, Spring 2005) • Residential Foreclosures in Minneapolis (Minneapolis)

  13. Government Involvement • Governments regulate many aspects of mortgage lending • Directly • licensing individuals • imposing legal requirements on participants in the transactions • lending by the government, by state-owned banks, or sponsorship of various entities – Minnesota Housing Finance Agency • underwriting – guaranteeing loans made by commercial banks • Indirectly – regulating the participants in the financial transactions or the financial markets, such as the banking industry

  14. Federal Government Involvement • Equal  Credit Opportunity Act - prohibits discrimination in lending practices • Fair Housing - prohibits discrimination in housing • enforced by court or by administrative hearings in the Department of Housing and Urban Development (HUD) • Fair lending statutes • Truth in Lending - requires credit institutions to inform borrowers of the true cost of borrowing money (Wikipedia) • including the interest rate and cost of all finance charges (origination fees, finder's fees, service charges, and "points") • three-day right of rescission • Community Reinvestment Act

  15. Federal Government Involvement • Real Estate Settlement Procedures Act - buyers and sellers have full knowledge of all "settlement" costs - settlement, when the necessary deeds and the financial transactions are completed • Insuring mortgages • Itemized Deductions (IRS) • Monetary Policy - the value of money and the Federal Reserve Board

  16. Mortgage Monies • A mortgage is both a debt to the owner – the mortgagee – and an investment to the loaner – the mortgagor • A. Primary mortgage market – loan origination by credit institutions • Banks – Wells Fargo • Savings & Loans (Thrifts) - S & L Crisis (Wikipedia) Chronology (FDIC) • Credit Unions • Mortgage Companies, often through a mortgage broker • B. Secondary mortgage market – mortgage assigned to a third party who thus invests in the underlying value of the property and the financial ability of the borrower • Insurance Companies • Pension funds – retirement funds • Real Estate Investment Trusts (Securities and Exchange Commission) • Mutual Funds –retirement funds

  17. Institutions that originate loans made to eligible borrowers • Commercial Bank • Mutual Savings Bank • Savings & Loans Association • Credit Union • State Housing Agency • Mortgage Company • Licensed Mortgage Broker - acts as intermediary between lender and borrower

  18. Terms of Mortgages • Vary greatly in terms of • the amount of money loaned - the principal • the rate of interest • the period of time for the repayment - amortization schedule

  19. Terms of Mortgage • Fixed rate mortgages - the interest rate on the mortgage loan is fixed for the life of the loan • Adjustable rate mortgages (ARM) - the interest rate is fixed for a specified period of time and then varies, usually within a minimum and a maximum figure • Home equity loans - second (junior) mortgageWells Fargo Home MortgageMortgage Bankers Association of America • Reverse mortgages - the owner sells a real property interest to a financial institution and receives a monthly sum of moneyNational Center for Home Equity Conversion Mortgage • Minnesota Association of Mortgage Brokers • Minnesota Mortgage Chart

  20. Types of Mortgage • A. Conventional Mortgage • B. Guaranteed Mortgage – one in which an entity, such as a federal agency, guarantees, or insures, repayment of the mortgage loan in the event the homeowner is unable to pay • Since 1934, the Federal Housing Administration (FHA) has helped build and maintain healthy, prosperous neighborhoods, and expand opportunities for affordable home ownership and rental housing through insuring loans  • Consolidated into the Department of Housing and Urban Development's (HUD) Office of Housing in 1965, the FHA continued its core mission • HRA is the largest mortgage insurer in the world

  21. HUD's Mortgage Insurance Programs • HUD doesn't make loans directly but rather insures the loans made through an approved commercial lender - a bank, mortgage company, or savings and loan association • When someone with a HUD insured mortgage can't meet the payments, the lender forecloses on the home • HUD pays the lender what is owed, takes ownership of the home, and sells it at market value as quickly as possible • Section 203b Mortgage • Section 255 Home Equity Conversion Mortgage - Reverse Mortgages • Section 203k Rehabilitation Mortgage • Energy-Efficient Mortgage Program • Section 248 Indian Reservations and Other Restricted Lands • Title I Home Improvements

  22. HUD's Special Homebuying Programs • Officer Next Door • Teacher Next Door • Public Housing Home Ownership programs • Homeownership Vouchers • Financing Manufactured (Mobile) Homes • Faith-Based and Community Initiatives

  23. Other Federal Mortgage Insurance Programs • Veterans Affairs Home Loan program • USDA Rural Development Housing programs helps rural communities and individuals by providing loans and grants for housing and community facilities. We provide funding for single family homes, apartments for low-income persons or the elderly, housing for farm laborers, childcare centers, fire and police stations, hospitals, libraries, nursing homes, schools, and much more.

  24. “Closing” • A borrower usually conveys the interests in the real property, through a deed, before the loan is actually paid • In reality, the loan has to repaid – the mortgage satisfied – before the real property interest is actually conveyed • Most often a borrower-seller pays of the mortgage loan from the proceeds of the sale of the real property interests at the same time as the buyer borrows money to acquire those interests at a traumatic event called "closing“ • Real Estate Settlement Procedures Act (RESPA) • Buying Your Home. Guide to Settlement Costs • The bulk of the proceeds from the sale of a house goes to satisfy an existing mortgage • The bulk of the proceeds involved in the purchase of a house comes from a new mortgage • The mortgage companies are swapping money!!

  25. Private Mortgage Insurance • Mortgage insurance – PMI – is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower) • It is used commonly in loans with a loan-to-value ratio over 80%, in cases where the borrower puts down less than 20% of the total value of the residence • $300,000 Value • Couple put $30,000 down (equity) borrow $270,000 - have a 90% loan-to-value • Would pay mortgage insurance • Cancelled when the couple’s equity equals 20% of the value or $60,000 • Equity = principal (does not concern interest)

  26. Vertical Integration in Real Estate Industry • Salesperson – Mortgage institution – Title Company “bundled” together • Edina Realty

  27. Once a mortgage is originated, lenders have a choice • to hold the mortgage in their own portfolios • to sell the mortgages to secondary market investors • When lenders sell their mortgages, they replenish their funds so they can turn around and lend more money to home buyers • September 2001, the total real-estate equity market in the United States was $372.7 billion • Pension funds held $144 billion

  28. Secondary mortgage market • Mortgage lending is a major category of the business of finance • Mortgages are commercial paper and can be conveyed and assigned freely to other holders • In the U.S., the federal government has created several programs, actually government sponsored entities, to foster mortgage lending and housing construction and thus encourage home ownership • the Government National Mortgage Association (known as Ginnie Mae) • the Federal National Mortgage Association (known as Fannie Mae) • the Federal Home Loan Mortgage Corporation (known as Freddie Mac) • These programs work by buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are known as Mortgage Backed Securities – ious secured by a pool of mortgages

  29. Secondary mortgage market • This allows the banks to quickly recoup their mortgage money and originate other mortgages • The investors gain low-risk income at a higher interest rate (essentially the mortgage rate, minus the origination fees and other service fees) than they could gain from other sources • Mortgaged backed securities have grown rapidly in the last 10 years as a result of the wider dissemination of technology in the mortgage lending world • For borrowers this securitization process keeps mortgage rates almost artificially low, since the pools of funds used to create new loans can be refreshed quickly allowing rapid flow of capital from investors to borrowers

  30. Secondary Mortgage Market • The market in which existing mortgages and mortgage-backed securities are traded • Institutions that purchase mortgages from originators and sell them to investors • Ensure mortgage funds are available to primary lenders • A mortgage backed security is a security based on a pool of underlying mortgages • Usually based on mortgages that are guaranteed by a government agency for payment of principal and a guarantee of timely payment • History of Secondary Mortgage Market

  31. Mortgage-backed securities • Represent an ownership interest in a group or pool of one or more mortgage • Mortgage-backed securities are pools of mortgages used as collateral for securities sold to investors • Referred to as "pass-through" certificates because the principal and interest of the underlying loans is "passed through" to investors • The interest rate of the security is lower than the interest rate of the underlying loan to allow for payment of servicing and guaranty fees

  32. Mortgage-backed Securities • Fannie Mae and Freddie Mac pool loans and convert them into single-class mortgage-backed securities known as Fannie Mae MBS, which are then guaranteed – in terms of payment of principal and interest • Wide range of investors – money managers, insurance companies, thrift institutions, commercial banks, trust departments, pension funds, securities dealers and private investors

  33. Federal National Mortgage Association (Fannie Mae) • A congressionally chartered corporation • The corporation buys mortgages, pools them and sells them as mortgage-backed securities to investors on the open market • Monthly principal and interest payments are guaranteed by FNMA (not by the federal government) • (Fannie Mae receives no government funding or backing and is one of the nation's largest taxpayers) – written 2008 • It is/was one of the most consistently profitable corporations in the United States

  34. Federal Home Loan Mortgage Corporation (Freddie Mac) • A stockholder-owned corporation chartered by Congress in 1970 to keep money flowing to mortgage lenders in support of homeownership and rental housing • Freddie Mac purchases single-family and multifamily residential mortgages and mortgage-related securities, which it finances primarily by issuing mortgage pass-through securities and debt instruments in the capital markets • Role in secondary mortgage market

  35. Government National Mortgage Association (Ginnie Mae) • A corporation within the Department of Housing and Urban Development (HUD.) • Serves low-to moderate-income homebuyers • Ginnie Mae helps to make mortgage funds available throughout the United States, in areas where it has been harder to borrow money to buy a home  • The corporation guarantees securities backed by pools of mortgages - "mortgage-backed securities" • It is a guarantor for mortgage-backed securities, it does not purchase mortgage loans or issue, sell, or buy mortgage-backed securities

  36. Government National Mortgage Association (Ginnie Mae) • Mortgage-backed securities, most of which are insured by the Federal Housing Administration (FHA), or by the Rural Housing Service (RHS), or they are guaranteed by the Department of Veterans Affairs (VA), are issued by private institutions which are approved by Ginnie Mae • Ginnie Mae securities provide lenders with a vehicle for originating, funding and servicing mortgages in a highly structured and liquid market • At the same time, the securities provide investors with an investment that offers safety of principal, liquidity and attractive yield • Ginnie Mae securities are one of the most widely held and traded mortgage-backed securities in the world • Ginnie Mae has guaranteed more than $1.7 trillion in mortgage-backed securities. • 95% of all FHA and VA mortgages have been securitized through Ginnie Mae

  37. Real Estate Investment Trust • A company that owns income- producing real estate • Created by Congress in 1960 to give anyone and everyone the opportunity  to invest in large-scale commercial properties • It may  focus on a particular type of property, for example offices, apartments, shopping malls, strip centers or industrial properties • Its revenue is the total rent coming in from the tenants • Its profit is what remains after the property managers, janitors, lighting companies, mortgage companies, and local units of government have been paid • To be a REIT, a company must distribute at least 90% of its taxable income to shareholders annually in the form of dividends • Real Estate Investment Trust (SEC) • Real Estate Journal