chapters 10 and part 15 re306 f13

7/27/2019 Chapters 10 and Part 15 RE306 F13

1/34

1

Residential Mortgage Types and

Borrower Decisions

Mortgage Mechanics and Calculations

Chapter 10 (some from Chap 15)

Oct 16Real Estate Process #306


2/34

2

Course Business Homework #2 posted

Due Friday November 1

No discussion sections NEXT WEEK (week of Oct 21) Sharon gone October 23-25

No office hours during that time.

Week of Oct 28 (in 1.5 weeks): Discussion sections inComputer Labs (2294). Sessions voluntary


3/34

3

Real Estate Club (REC) Real Estate Club http://realestateclub.org/

Meetings with RE industry speakers, RE job fair, networking, etc. Meetings at the Pyle Center (on Langdon Street). Pizza/beverages arefrom 6:30 - 7:00, and speakers normally begin at 7:15 7:30 PM

Next meeting Thursday October 17!!

Thursday October 17: Hudson Advisors Wednesday-Friday October 23-25: REC trip to Miami, Florida

Thursday November 14: TBA

Thursday December 5: Colony Capital

Thursday December 12: Graduation Celebration Dinner

Study Trips - Wed-Fri Oct 23-25 Miami, Florida Dues: $60 half semester, $100 two semesters


4/34

Real Estate BBA Employment On Campus Events Information sessions

Transwestern 10/14, 4:30 PM - CANCELLED DTZ 10/28, 7:00 PM and 10/30, 7:00 PM

Rouse Properties 11/7, 6:00 PM

Deutsche Bank Securities 11/12, 7:00 PM

Resume Submission Deadlines DTZ (Corp RE Advisory): 10/15 or 10/17?

Rouse Properties (Intern): 10/25

4


5/34

UW Real Estate DepartmentUndergraduate Information sessions - Fall 2013

Tuesday, Sept. 24, 4 5pm: General Orientation - 1100 Grainger

Overview of the Department, professors, classes

Discussion of the Wisconsin Real Estate Alumni Association (WREAA) and the Real Estate Club

Student introductions

Tuesday, Oct 8, 4 5pm: Resumes, Networkin g and Resources - 3070 Grainger

Fast facts on networking via e-mail, phone and in-person

Resume tips

Employment resources and strategies


Tuesday, Oct 22, 4 5pm: The Real Estate Industry - 2510 Grainger Industry overviews, the major food groups, positions and functions


FRIDAY, Nov 8, 10am - 1:15pm: Guest speakers - Rm: 3070

10:00 AM 12:00 PM:

Kyle Adams, Ruedebusch Commercial Investment

Topic: Royster Clark Redevelopment

12:15 1:15 PM:

Paul Boneham, EVP, Bentall Kennedy

Topic: Overview of the Real Estate Industry and Employment Opportunities.

5


6/34

6

Coming Up Wednesday Oct 16 Chapter 10, 15 Res. Mortgage Types (Ch 15:

part Mortgage Mechanics)

Monday Oct 21 Chapter 11 Sources of Funds for Res Mortgages

Wednesday Oct 23 - Guest speakers: UW Credit Union Sharon and TAs gone Oct 23-25: No office hours

NO discussion sections this week!

Monday Oct 28 Chapters 16 & 17 Commercial Mortgages Wednesday Oct 30 - Chapters 16 & 17 Commercial Mortgages

Monday Nov 4 Chapters 12 & 13 RE Brokerage, Contracts for Sale

Wednesday Nov 6 - TBA

Monday Nov 11Second Exam During class time. In two rooms

Wednesday Nov 13 Chapter 22 Leases and Property Types

Monday Nov 18 Chapter 22 Leases and Property Types

Wednesday Nov 20 Chapter 7 Valuation (Sales and Cost)


7/34

7

Mortgage Costs (Chap 15)

Interest rate = Lenders yield ANDborrowers cost

When there are NO up front costs/points

Other costs/income will impact thelenders yield and borrowers cost

Effective Interest Rate (EIR) - lender

Effective Borrower Cost (EBC) - borrower


8/34

8

Lenders Yield (EIR) - (Chap 15)

Consider the following cash flows: Term 360 months Required yield: 7% Monthly payment: $1,000

Initial loan balance is $150,307.57

P/Y = 12PV Pmtin FV

360 7 1,000 0

-150,307.57

What if we charge discount points of 3.53%?

Points = .0353 x 150,307.57 = 5,307.57

Net loan amount = $145,000 ($150,307.57 5,307.57)


9/34

9

Lenders Yield - EIR: (continued) - (Chap 15) What interest rate will result in a loan payment

of $1,000 and net loan of 145,000?

PV Pmtin FV

360 -145,000 1,000 0

7.36%

Implicit yield is 7.36%; that is, the lendersyield, charging 3.53 points, is 7.36%

Lenders yield: Implicit interest rate receivedon a loan (also called in text: equivalent interest rate)

Actual NET cash loaned out

Actual cash payments received


10/34

10

Borrowers SideEffective Borrowing Cost (EBC) (Chap 15)

Considers third-party expenses-some areclosing costs: Borrower expenses not paidto lender:

Mortgage insurance premium Taxes on the loan

Lenders title insurance

Appraisal Survey

Effect: Borrower receives less than

lenders actual disbursement


11/34

11

Effective Borrowing Cost (continued) (Chap 15)

Example: Same loan, but with additional borrower expenses

Points: $5,307.57 Borrowers loan expenses: $2,692.43 (Not paid to lender) Total deducted from loan disbursement: $8,000 (5,307.57 +

$2,692.43) Total net loan: $142,307.57

What is the implicit interest rate? (term 360 mos., payment$1,000)

Net loan amount: $142,307.57

PV Pmtin FV360 -142,307.57 1,000 0

7.55%

With a total of $8,000 in borrower expenses, the EBC

of the loan is 7.55%


12/34

12

Special Case ofEBC: APR (Chap 15)

Federal Truth in Lending Act (TILA) requiresdisclosure of annual percentage rate (APR) onvirtually all home mortgage loans

APR: Yield to maturity (APR somewhat similar to EIR,

EBC), after adjusting for: All loan finance charges (points, fees, mort ins)

All compensation to originating brokers

All other charges controlled by lender

Premiums for any required insurance

Does not consider ALL costs (appraisal, survey,etc) and does not consider impact of prepayment.


13/34

13

Other Mortgage Topics in Text(Chap 15)

Impact on prepayment on EBC/EIR andlenders yield

Generally, whenever lender charges points and

loan paid off early increases lenders yield andEBC/EIR

Know implications for borrowing (p 414)


14/34

14

Alternative Amortization Schedules (Chap 15)

Interest-only (straight-term) Seldom with home loans (popular recently, never again)

Often with income property loans

OLB is constant, never pay any principal

Partially amortized loans (commercial)

One term for maturity (shorter)

Another term for amortization (longer)

Balloon payment Early Payment (EPM)

Example: Growing equity mortgage (GEM)

Pay off principal faster(payments increase, extra -> principal)


15/34

15

Adjustable Rate Mortgages:Recent Variations (Chap 15)

3 year - 1 year ARM (3/1 yr)

Interest rate fixed for 3 years

Adjusts annually thereafter

Other terms: 5/1 yr; 7/1 yr, 10/1 yr

ARMs shift in interest rate risk to borrower

Originally created to fix the maturitymismatch between funding long term debtwith short term deposits and savings


16/34

Adjustable Rate Mortgages (Ch 10) LPMs work well when mortgage interest rates

are low and stable

1970s and 1980s interest rates on LPMincreased greatly. Also more volatile

Housing became less affordable and lendersbecause nervous

16

0

5

10

15

20

25

Prime rate 1970 - 1989Short term deposits fundinglong term mortgages (LPMs)

maturity imbalance.

ARMs became viable alternative


17/34

17

Mortgages The Industry (Chap 10) About 65% of households own a house (2010 census)

Most have mortgages

Most finance part of the purchase price

Lack of funds

Positive financial leverage (more in Chap 16) Better diversification

Homeownership increased dramatically after WWII

Primary and secondary mortgage market


18/34

18

Primary Mortgage Market

Where loans are created (originated)

Retail or street market

Players

Mortgage bankers

Mortgage brokers

Commercial Banks

Thrifts (savings and loan associations)

Credit Unions

Either keep loans in house or sell them


19/34

19

Secondary Mortgage Market

Where existing home loans are resold Wholesale market among lenders

Dominant role of loan securitization

Government-sponsored enterprises (GSEs) * largest purchasers of residential mortgages Fannie Mae

Freddie Mac *Fannie and Freddie placed under US govt conservatorship in Sept 08 and

will likely transition to a new form in the future. More on this in Chap 11..


20/34

20

Conventional Mortgage Loans Oldest form of mortgage

Any standard home mortgage loan NOTinsured by FHA or guaranteed byVeterans Affairs (VA)

Prime, sub-prime and Alt-A loans Predominantly fixed-rate level payment

(LPM) LPM really started with FHA (1934)

LPM accelerated after WW II by start ofprivate mortgage insurance (PMI)

Higher LTVs and longer terms LPM market has changed over last few years and is changing again


21/34

21

The Language ofConventional Mortgage Loans

Conforming conventional home loan: Meets therequirements for purchase by Freddie Mac orFannie Mae: Standard application, note and mortgage

Certain underwriting standards (pmt % of inc, LTV)

Standard appraisal

Size limit: Currently $417,000 on SF homes

Interest rate advantage due to liquidity (at least .25%) Nonconforming conventional loan: Does not meetGSE requirements in some respect Jumbo: Nonconforming in terms of size

Have higher interest rates


22/34

22

Government Sponsored Mortgage Programs

To help middle and low income households

obtain mortgages and buy homes Federal Housing Administration (FHA)

Insures loans are from private lenders, allows

lower down payment Veterans Affairs

Guarantees loans from private lenders for vets

Some direct loans Dept of Ag-Rural Housing Service (RHS)

State & local programs


23/34

23

How FHA Insurance Works

Targets borrowers who are weakerfinancially Easier underwriting LTV, credit scores, debt-income ratios

Limited mortgage amounts

Program in transition

Insures 100% of loan After foreclosure, title is transferred to Housing and

Urban Development (HUD)

Premiums: Up-front and annual premium

Many FHA insurance programs

203b: Standard LPM insurance


24/34

24

FHA Mortgages

Importance of FHA Created the LPM

Prior to 1934, most home loans were for 5-15 years;loans non-amortizing

Influenced housing and subdivision standards

Through power to approve/deny loans

Continues to innovate: HECM program (homeequity conversion program)

FHA market share fell from around 15% in early 1990s to about3% in 2006. With collapse of subprime lending in 2007, gained

market share again (about 18-19% in 2009). 2011 trending down (14%)


25/34

25

Veterans Affairs Guarantees

VA-guaranteed loans

Limited to qualified veterans of military service.

Guarantees percentage of loan for a fee


26/34

26

Private Mortgage Insurance (PMI) For conventional loans.

Protects lenderagainst losses due to default Generally required for loans over 80% of value

Protects lender for losses up to 25% of loan Up-front costs and annual premium Termination may be allowed if loan falls below

80% of current value and borrower is in goodstanding (Homeowners Insurance Act of 1999) Obligation to terminate when loan falls to 78% of

original value

Curt Culver MGIC (p 248-250)


27/34

27

Other Mortgage Types

Purchase money mortgage: Mortgage

given by a property buyer simultaneouswith receipt of title

Normally a second mortgage loan to reduce

the down payment Usually a loan from the seller

Piggy-back Mortgages

2nd mortgage to avoid PMI Home equity loans, reverse mortgages,

option ARM


28/34

28

Home Equity Loans

Some home equity loans are closed-end, fixed-term loans

Mostly open-end or credit-line loans

Tax deductible interest (usually) Strength of the house as security

provides favorable rate and longerterm

Usually limited to total mortgage debt(sum of all mortgage loans) of 75% to80% of value

Some time in future

Property Value($125,000)

75% LTV (Requi redEquity = $31,250)

AvailableEquity ($33,750) fromamortization & valueincrease)

Mortgage Balance(Debt = $60,000)

Equity

Property Value($100,000)

75% LTV (Requi redEquity = $25,000)

Mortgage Balance (Debt= $75,000)


29/34

29

Reverse Annuity Mortgage (RAM)

Many older households are incomeconstrained (house poor)

Over 80% own their home Most have little or no mortgage debt

Most do not want to sell


30/34

Time

Building equity through amortization

Traditional Mortgage

Principal payments reduce loan balance


31/34

Time

Liquidating equity through regular

disbursements

Reverse Mortgage

Periodic loan draws plus accruing interestincrease the loan, and reduce the owners equity.


32/34

32

How the Reverse Mortgage Works

Reverse mortgage loan converts home equity toincome without requiring borrower to move:Requires no payment (p. 257-258) Regular annuity disbursement (monthly payment)

Lump sum disbursement Credit line

Mortality risk: Risk that loan will grow beyondvalue of mortgaged property, forced sale

FHAs HECM program and private insurance protectlender

No foreclosure

Fannie Mae provides secondary market


33/34

Other Mortgage Types

Interest Only (I-O) mortgages

With balloon, or amortizing after period of time

Hybrid ARM

Fixed rate for time period, then adjusts

Option ARM

Can change between fully amortizing, interestonly, or minimum payment

If minimum payment could have negativeamortization!

33


34/34

Subprime and Alt-A

In 2006, 20% of all loans were subprimeand 13% were Alt-A

Subprime-

Usually ARM, negative amortization,substantial payment increases

Designed to be refinanced

Alt-A

standard conventional loans with oneunderwriting criteria relaxed (high LTV, nodocumentation of earnings)

34

chapters 10 and part 15 re306 f13

Documents