ch 3: loans: conventional

©2011 Cengage Learning

Ch 3: Loans: Conventional

By Dr. D. Grogan

M.C. “Buzz” Chambers


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


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


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


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.


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?


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


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.


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.


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.


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


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%


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 $________$_________


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.


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


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.


1990-2008 loans


Loan-to-Value Ratio (LTV) 95% of appraisal or sales price (lower)

owner-occupied Conventional

80% LTV Most common conventional loan


Loan Payment

“Pity Me” A ssociation dues (HOA) P rincipal I nterest T axes (property) I nsurance (mortgage, fire, flood, etc)

MI Mortgage Insurance


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


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


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


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.


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


WHAT TO KNOW ABOUT ARM’s


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.


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


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.


Jan 1991 – July 2009

SOURCE: Federal Home Loan Mortgage Corporation

Mortgage Rates and Fed Funds Rate

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FRM

ARM

Federal Funds


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.


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


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.


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.


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.


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


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.


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.


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


PRIVATE MORTGAGE INSURANCE

Annual Premium

Private Mortgage Insurer

Covera

ge in

Cas

e of D

efault

Lender

Mortgage Loan

Borrower


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


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


(CHFA)-California Housing Finance AgencyProgram #1: (EDA) –

Economically Distressed Area

Program #2: (MSP) - maximum sales price

Program #3: FTHB – First time home buyer


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


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


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.


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.


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


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.


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


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.


9.4%

5.8%

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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%


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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

ch 3: loans: conventional

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