ch 3: loans: conventional
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©2011 Cengage Learning
Ch 3: Loans: Conventional
By Dr. D. Grogan
M.C. “Buzz” Chambers
©2011 Cengage Learning
The purpose of this unit is to acquaint the learner with the various types of non-government loans available in the conventional lending arena. These loans usually follow FNMA, GNMA or FHLMC guidelines. New loans become available on a regular basis to meet new consumer demands. Some traditional loan programs do not always have funding available by investors for particular types of loans.
The market is ever changing and the mortgage loan broker must be flexible. Other loans are SBA, reverse mortgages, refinance loans, junior liens, equity loans and less than “A” paper loans. Defaults are also discussed.
PREVIEW
©2011 Cengage Learning
Contents
PART 2 Loans
Ch 3: Loans Conventional 3.1 How a mortgage broker
selects a loan
3.2 Conventional loan features Loan amounts Eligibility requirements for high-balance
loans Loan to value ratio Loan to value payment Fixed rate loan Bi-Weekly fixed rate loans The 10- or 15-year mortgage Adjustable rate mortgages Index Treasury bill rate LIBOR The two step mortgage Price level-adjusted mortgage Reverse annuity mortgage
©2011 Cengage Learning
Contents
3.2 Conventional loan features (cont.) FNMA & FHLMC loan programs Condominium loans
3.3 Mortgage insurance
3.4 California loan programs California housing finance agency Southern California Home
Financing Authority Hope for Ownership of Single
Family Homes Home Investment and Affordable
Housing
3.4 California loan programs (cont.)
Public Employees Retirement System State Teacher Retirement System Home Ownership Program My Community mortgage loan Energy Efficient Mortgage Other loan programs
3.5 Refinance, Equity and Junior or Sub-Prime loans Refinance loan Junior liens Home equity line of credit Loans: Sub-Prime borrowers Defaults
©2011 Cengage Learning
Student Learning Outcomes:
1. Compare and contrast the primary considerations used to select one conventional lender over another.
2. Differentiate among the various conventional loans for FNMA, GNMA, and FHLMC.
3. Describe conventional loans features used to determine which loan best suits a particular borrower.
4. List and explain the components of various types of indexes for which a loan rate would be tied.
5. Describe conventional loan insurance programs, when such is required and the coverage.
6. Identify the loan criteria that serve as a match with buyer qualification.
7. Explain the nature of the various conventional programs.
8. Describe the elements of junior lien types.
9. Discuss subprime or B-paper loans.
©2011 Cengage Learning
3.1 How a Loan Broker selects a loan What is the lender’s ability to lock in an interest rate? What date or event will the loan rate tie to: application date, funding
date, advertised rate? What loan points, fees, and costs go with which kind of loan? Will the lender give you references of other loan brokers who use this
lender? What is the average time to close the loan once a processed loan is
submitted? What loan terms and programs are available to the loan broker? What are underwriting guidelines that the lender prefers for the loan
package?
©2011 Cengage Learning
3.2 Conventional loan features
NOT a government loan & NOT insured by state or federal agency
Conforming loan guidelines for secondary market: Maximum loan amount Minimum qualification for borrower & property
Secondary money market loans must meet the guideline standards set by FNMA or FHLMC
©2011 Cengage Learning
CONVENTIONAL LOAN FEATURES
Prefer single-family, owner-occupied homes or condos.
Prefer working with only certain loan programs. No one conventional lender dominates the market. Different conventional lenders have different
stacking orders. Processing time varies from conventional lender to
lender. Typical down payment required on many of these
loans ranges from five to ten percent.
©2011 Cengage Learning
CONVENTIONAL LOAN FEATURES (cont)
Loan-to-Value (LTV) ratios Up to 95% of the appraised property value Interest rates and loan fees will vary Each lender sets own guidelines for LTV
Amortized loan payment Some principal and interest payment. Impound account may be required for taxes
and insurance.
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Conventional Loans Loans made by institutional lenders:
Life insurance companies prefer larger loans.
Commercial banks prefer loans on construction, refinance & home equity line.
Savings prefer owner occupied home loans.
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Conventional Loans Loans made by non-institutional lenders:
Mortgage Companies prefer saleable loans Loan correspondent represents one company,
usually for income property loans Funded by a mortgage banker
Private investors include sellers who carry back junior loans on property they sell Soft money loan is when a seller is the lender Hard money loan is funded by an outside source
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Conventional Loan Amounts OTS sets upper limits on loan-to-value (LTV) (for S&Ls
only, not for all mortgage lenders) High-cost areas maximum loan amounts changed Jan 2, 2009 Land up to 65% Land development up to 75% Multifamily & commercial property up to 80% 1-4 family properties up to 95%-100%
©2011 Cengage Learning
Loan Amounts Non-Conforming loans:
Jumbo loans Exceed the maximum loans amounts of FNMA Underwriting guidelines different
See www.fanniemae.comMaximum loan amount General High-cost area
One unit (SFR, Condo) $________ $_________
Two units (duplex,2 on a lot) $________ $_________
Three units $________$_________
(triplex, house+2units)
Four units $________$_________
©2011 Cengage Learning
Jan 1, 2009 FNMA Changes Housing and Economic Recovery Act (ERA)
changed maximum loan amounts. American Recovery and Reinvestment Act
(ARRA) modified high balance eligibility requirements.
Super-conforming loan costs less than jumbo loans that FNMA cannot buy.
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Super-conforming loan Borrower must have
good credit 3 months house payment as a reserve
Interest rate 1%-1.5% higher than conforming loan Slightly higher than conforming loan Less costly than jumbo loan
A basis point = one hundredth of a percent Loan costs 25-30 basis points over conforming loan
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Eligibility Requirements for High-Balance Loans Loans must be conventional first loans ONLY. One-to-four unit properties are eligible. Loans may be fixed-rate or adjustable rate, but NO balloon payment is
permitted. Loans may be underwritten manually or with Desktop Underwriter (DU). Loans must meet the loan-to-value (LTV), combined loan-to-value (CLTV),
and home equity combined loan-to-value (MCLTV) ratio requirements. Borrowers must meet the minimum credit score requirements. All borrowers must have a credit score. Financed borrower-purchaser loan insurance is permitted; however, the
maximum grow LTV cannot exceed 90%. All high-balance loan must meet all standard Fannie Mae eligibility and
delivery requirements.
©2011 Cengage Learning
1990-2008 loans
©2011 Cengage Learning
Loan-to-Value Ratio (LTV) 95% of appraisal or sales price (lower)
owner-occupied Conventional
80% LTV Most common conventional loan
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Loan Payment
“Pity Me” A ssociation dues (HOA) P rincipal I nterest T axes (property) I nsurance (mortgage, fire, flood, etc)
MI Mortgage Insurance
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AMORTIZATION
Example: $200,000 loan @ 8%, 30 year term
12345678910
Pmt No. Principal Total Interest Principle Ending Balance Pmt. Portion Portion Balance
$200,000.00 $1467.54 $1333.33 $134.21 $199,865.79$199,865.79 $1467.54 $1332.44 $135.10 $199,730.69
©2011 Cengage Learning
Fixed Rate Loans (FRL) Fixed monthly loan payment Amortized from 15 to 40 years No prepayment penalty No “balloon” payment Available on 1-4 unit properties Either owner or Non-owner occupied property Low down payment with high LTV Usually contains a Due-On-Sale clause Permits buydown
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Bi-Weekly Fixed Rate Loan
Shortens the life of the loan The borrower makes 26 payments a year –
one every two weeks Reduces the total interest paid
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10- or 15- year loan Lower interest rate Shorter duration Pays off a 30 year about 9 years early To convert a 30 year loan to 15 year payoff,
pay 4.5% more each year.
©2011 Cengage Learning
15 YEAR LOANS
$230,514
$135,400
$329,306
$193,429
$411,628
$241,785
$0 $100,000 $200,000 $300,000 $400,000 $500,000
30 Year
15 Year
30 Year
15 Year
30 Year
15 Year
$125,000 Mortgage
$100,000 Mortgage
$70,000 Mortgage
Substantial Savings over life of Loan
Pmt $1,343 @ 10%
Pmt $1,143 @ 10.5%
Pmt $1,075 @ 10%
Pmt $915 @ 10.5%
Pmt $752 @ 10%
Pmt $640 @ 10.5%
Lower Interest Rate
May Require Larger Down Payment
©2011 Cengage Learning
WHAT TO KNOW ABOUT ARM’s
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ADJUSTABLE RATE MORTGAGESInterest Rate Cap over the life of the loanLifetime Cap: Maximum interest ratePer-Adjustment Cap: The max allowable up or down adjustmentConversion Option: Terms to convert to fixed ratePayment Cap:Payment Adjustment Period: Over the life of the loanRate Adjustment Period: At any one adjustment periodTeaser Rate: Low initial rate with adjustments where
borrower qualifies for later, higher rateNegative Amortization: Difference between fully
indexed rate, minus actual amount paid which is added to unpaid loan balance.
©2011 Cengage Learning
ADJUSTABLE LOAN(Note: Index changed every 6 months; Payment adjusted twice, year 3 (up) & year 6 (down)
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%Y
ear 1
Year 2
Year 3
Year 4
Year 5
Year 6
1st Payment Adjustment (UP)
2nd Payment Adjustment (DOWN)
Payment
Index
©2011 Cengage Learning
ADJUSTABLE RATE MORTGAGESLower initial rate with shared risk of rising interest rate.
Index is a published indicator: COFI, LIBOR, 11th district, prime rate, moving averages.
Margin is a fixed rate added to an index.
Note rate is interest actually charged on the amount borrowed (index + margin).
Historical rate information must be given to borrower.
©2011 Cengage Learning
Jan 1991 – July 2009
SOURCE: Federal Home Loan Mortgage Corporation
Mortgage Rates and Fed Funds Rate
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FRM
ARM
Federal Funds
©2011 Cengage Learning
Other conventional loans Two-Step
Interest rate adjusted only once Rate usually adjusted at year five or seven
Price Level-Adjusted Mortgage (PLAM) The rate is the same as the Consumer Price
Index Adjustment in monthly payment and outstanding
principal annually.
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Reverse Annuity Mortgage (RAM) Borrower must be age 62 or older
Borrower equity rich, but cash poor Loan may be a lump sum or a line of credit Must occupy the property as their principal residence
Single-purpose reverse mortgage that may be used for only one specified purpose (to pay property taxes or make a home repair).
Federally insured reverse mortgage that may be used for any purpose and is available throughout the United States, providing the largest advances that are convention, insured loans.
Proprietary reverse mortgages may be used for any purpose and are designed for advances where the property value is substantially more than the median home value in the country, called high-cost areas.
http://www.aarp.org/revmort
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RAM loan options
ARM payment option-Borrower: Receives monthly payment for
fixed period they select. Receive monthly payment until
they no longer occupy the property as their principal residence.
May draw the principal in equal monthly payments.
May draw cash at times & amounts of their choosing.
May change from one option to another for a fee with HUD authorization.
Fixed-rate Single payment option Borrower may draw entire line of
credit at closing. Future draws or access are allowed
only for repairs or servicing fees. FNMA will only fund closed-end,
fully drawn, fixed-rate HECMs that comply w/HUD regulations.
©2011 Cengage Learning
Step to obtain a RAM
Awareness: Go online to learn about reverse mortgage for general information. Action: Contact a reverse mortgage lender or NRMLA. Counseling: Obtain counseling from a HUD approved counseling agency or
AARP-trained counselor. Counseling is mandatory, regardless of which program chosen.
Application: The homeowner completes an application and selects the payment option: fixed monthly payments, lump sum amount, line of credit or combination.
Processing: Loan broker orders title and lien payoffs. Financial institution orders appraisal to determine the property value and physical condition of the property.
Underwriting: Loan broker finalizes loan parameters with the homeowner and submits the loan package to an underwriter for final loan approval.
©2011 Cengage Learning
Step to obtain a RAM (cont.)
Closing: After the loan is approved and the closing date is scheduled for the signing of the final loan documents, the loan closes escrow. The initial and expected interest rates are then calculated and the final figures are prepared. Once completed, the homeowner signs the new loan papers.
Funding: The homeowner has three business days to cancel the loan. After the three days, the loan funds are disbursed.
Payments: The homeowner does not make any monthly loan payment to the lender during the life of the loan. The loan is due upon death or sale.
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FNMA & FHLMC Loans
FNMA- Fannie Mae -Federal National Mortgage Association
http://www.fanniemae.com
FHLMC - Freddie Mac - Federal Home Loan Mortgage Corp.
http://www.freddiemac.com
GNMA - Ginnie Mae – Government National Mortgage Corp.
http://www.ginniemae
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Mortgage Credit Certificate (MCC)
15% of the interest paid on the loan is a direct credit on federal taxes
Allows some borrowers to qualify for a loan that they might otherwise not be able to obtain.
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LOANS on a CONDOMINIUM
Same for owner-occupied single-family residences and for owner-occupied condominium units.
80% LTV loan: The project must be 51% or more owner occupied.
90% LTV loan w/PMI: The project must be 70% owner-occupied.
If 15% of total homeowner association dues are delinquent, no loan.
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3.3 Mortgage Insurance
Premium paid in cash, up-front, as a lump-sum payment at the close of escrow.
Premium may be financed as part of the loan. Annual premium divided by 12 gives the
monthly, on-going, impounded payment. LTV Annual Premiums
80.1%—90.0% 0.0067
90.1%—95.0% 0.0078
95.1%—100% 0.0122
©2011 Cengage Learning
PRIVATE MORTGAGE INSURANCE
Annual Premium
Private Mortgage Insurer
Covera
ge in
Cas
e of D
efault
Lender
Mortgage Loan
Borrower
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Private Mortgage Insurance Written to protect the lender from loss Covers a percentage of the loan being insured Meets conforming guidelines Premiums paid by borrower in impound account PMI Terminates:
when loan reaches 80% LTV, or when trustor’s equity reaches 22% (LTV ratio = 78%)
Borrower must contact lender to have PMI discontinuedmgic.com
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3.4 California Loan Programs
(CHFA)-California Housing Finance Agency Helps low- to moderate-income persons and families obtain
affordable housing, especially first-time home buyers Sales tax-exempt notes and mortgage revenue bonds (MRBs) Offers a 35-year, interest-only loan with variable-rate interest Single family or condominium only – no 2-4 units Strongly committed to minority, women and disabled veterans
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(CHFA)-California Housing Finance AgencyProgram #1: (EDA) –
Economically Distressed Area
Program #2: (MSP) - maximum sales price
Program #3: FTHB – First time home buyer
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Other CA loan programs
SCHFA – Southern California Home Financing Authority created by DAD – Community Development Commission
PERS – Public Employees’ Retirement System for city or state workers or public school workers. JRS – Judges Retirement System members qualify.
STRS/CalSTRS – CA state teacher retirement system
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Other CA loan programs
HOPE – Home Ownership for first time home buyers
HOP – Home Ownership Program My Community Mortgage Loan- loan-level
price adjustment (LLPA_ EEM – Energy Efficient Mortgage
©2011 Cengage Learning
Rate lock
A rate commitment where the lender’s holds a certain interest rate and a points for a specific period of time.
The lock is to hold until the close of escrow. Rate float is a delay of the decision to fix the
interest rate. Float-down option is the ability to lock a rate
today and take advantage of any future drop in interest rate until the loan closes.
©2011 Cengage Learning
Refinance Loan (Refi)
Borrower objectives Do it if new interest rate is 2% lower than existing. To cut out-of-pocket loan costs and benefit the
shortest pay back time to cover these costs. Pay off an existing loan that has poor terms, such as
rate increase or short-term due date.
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Junior liens
Any loan on a property above the existing loans (1st, 2nd, 3rd, etc.)
Seller carry-back loans Home equity loans Used when borrower cannot obtain desired
amount finance with one loan due to Poor credit Lack of equity – low appraisal
©2011 Cengage Learning
Home Equity Line of Credit (HELOC) A form of revolving credit. Property serves as collateral. Borrower may obtain multiple advances up
the maximum approved loan amount. After a certain time the loan locks at
whatever is the then unpaid balance with no future advances allowed.
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Loans for Subprime Borrowers A paper is for prime borrowers B, C or D paper is for less credit worth
borrowers Delinquencies Foreclosure Bankruptcy Low FICO score
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Defaults
Bank failures 2008 - California had 5 of 25 banks = 20% 2009 – California had 12 of 36 banks = 33%
Individual failures NOD -Notice of Default – Required by loan
insurer/guarantor NOS - Notice of Trustee Sale – A final sale REO – Real Estate Owned – Property owned by the
investor as a result of foreclosure or deed in lieu of foreclosure.
©2011 Cengage Learning
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Delinquency Rate - CA Foreclosure Rate - CA
CA Mortgage Foreclosure & Delinquency RatesCalifornia: Q2-2009, NSA
SOURCE: Mortgage Bankers Association
Delinquencies: Long Run Average: 4.1%
Foreclosure Rate: Long Run Average: 1.0%
©2011 Cengage Learning
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Notice of Defaults - CountsNotice of Trustee SaleREO
California Foreclosure Activity 2008 - present
September 2008:CA SB 1137 Takes Effect
September 18, 2008:Paulson asks For TARP Funds
Government Intervention
SOURCE: ForeclosureRadar.comFebruary 11 2009:Frank’s Moratorium Request
February 20, 2009:CA Foreclosure Prevention Act
March 4, 2009:Making Home Affordable/HAMP
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