SCOPE OF THE BUSINESS - swlearning.com

Thomson Learning

TM

PA R T 1 SCOPE OF THE BUSINESS

1. SCOPE OF MORTGAGE LOAN BROKERAGE 2. SOURCES OF BUSINESS

Thomson Learning TM

Thomson Learning

TM

3

CHAPTER 1 SCOPE OF MORTGAGE LOAN BROKERAGE

PREVIEW A career in real estate mortgage lending can be exciting and profitable for a person who has energy and is self-motivated. Mortgage loan professionals help potential real estate buyers obtain financing to purchase a property and help property owners place a refinance loan on an existing parcel. Along the way, mortgage loan professionals provide a great service by informing borrowers about the costs and terms in the variety of loan packages in the marketplace. The demand for the services of a well-trained mortgage loan professional is high, but to achieve success takes not only dedication and hard work but also a commitment to continuous training and education. As soon as a mortgage loan representative learns everything about 20 types of loan packages, then 30 totally new kinds of loan programs hit the marketplace. The ability to adapt to change and the personality to thrive on the opportunity to learn something new every day often make the difference between success and failure. In short, the mortgage brokerage business is fiercely competitive but offers an individual with a strong work ethic an opportunity to make a high income. This textbook describes in detail the workings of the mortgage loan business and gives you the preview you need to help you decide if this business is for you. If you are already in

4

Part 1 Scope of the Business

the mortgage business, this book will give you ideas to make you more successful.

Thomson Learning

TM

At the end of this chapter you will be able to: 1. Understand the structure of the book. 2. Describe the history of real estate lending in the United States. 3. Explain some current and future trends in real estate lending. 4. Learn about career opportunities in the mortgage loan brokerage field. 5. Differentiate between a mortgage broker and a mortgage banker.

1.1 Overview of the Book

T

he book is divided into five parts: scope of the business, loans, processing, the secondary money market, and regulations and operations. Figure 1.1 gives an overview of the book.

The first part of the book is Chapter 1, which covers the historic background that has led to the present-day operations of the mortgage loan business, and Chapter 2, with information on career opportunities. Originating loans and developing business contacts are also discussed. Developing sources for your loan business means learning techniques and methods that separate you from your competition and creating a marketing strategy that complies with all regulations. Part 2 is three chapters that review real estate loan information. Chapter 3 explains the types and characteristics of the various conventional loans, as well as loan features and mortgage insurance. Chapter 4 discusses government and other nonconventional loans. The basic details of the Federal Housing Administration (FHA), the Department of Veterans Affairs (DVA), and the California Veterans (Cal Vet) loan programs are covered from the point of view of the mortgage loan broker. Because not all loans in the mortgage loan business involve institutional or government loans, this chapter also discusses junior liens, refinance and equity loans, Title I loans, and subprime loans. The last chapter in this section, Chapter 5 discusses loan disclosures and compliance.

Chapter 1 Scope of Mortgage Loan Brokerage

5

Escrow title Ch 8

TM

Borrower

Thomson Learning

Recording Loan Origination Ch 2

Pre-Qual Ch 6

Credit Ch 7

Types of loans Chs 3, 4, 5

Processing Chs 6, 7, 8

Underwriting Ch 9

Appraisal Ch 8

Funding Ch 10

Shipping Ch 11 Servicing Retained Ch 12

Servicing Agent Ch 12

Investor

Chapters 13, 14, 15—Licensing, Finance Mathematics, and Trust Funds

Figure 1.1 Overview of the book.

The third part covers the bulk of the loan business, called processing. Once the loan has been originated or obtained, detailed steps are required to consummate the transaction. Chapter 6 explains the first step in processing the loan application, often referred to as prequalification, or prequal. From the application, the mortgage loan broker can run ratios to begin matching the borrower to the various types of loans that were discussed in the previous chapters. A prospective borrower usually qualifies for more than one type of loan, so the mortgage loan broker discusses the options available with the applicant. The next chapter about processing, Chapter 7, covers the credit report and compliance with both credit laws and fair lending practices. Chapter 8 reviews preparing and handling verifications. Processing includes the stacking order as required by the lender. Chapter 9 is on processing the property. It covers the appraisal, title reports, and escrow, or settlement. Chapter 10 discusses underwriting and quality control. The last chapter of this part, Chapter 11, completes the outline of the loan-processing portion of the mortgage loan brokerage business with the loan documents, called loan docs, and then goes on to funding and closing the loan.


Thomson Learning

TM

6

Part 4 is about investment money markets and covers topics about the secondary money market and securities. Chapter 12 explains shipping and servicing the loan. The loan may be kept in the originating lender’s own portfolio or packaged and sold to other investors. In either case, calculating yields, discounting notes, and properly transferring documents used to secure loans on real property are reviewed. The last section of the text, Part 5, is about the various regulations and operations of the business. Chapter 13 discusses broker supervision, agency law, and licensing by the California Department of Real Estate (DRE) for Brokers and Salespersons; and loan brokers licensed under the Corporation Commissioner for brokers handling Consumer Finance Lender (CFL) loans. Chapter 14 covers the topic that gives licensees the most trouble with the state licensing agencies—handling client trust funds, including threshold reporting, compensation, and similar record-keeping elements. Chapter 15 is devoted to real estate finance mathematics.

1.2 Historic Perspective In the Beginning Many of the current lending practices are based on the foundations carried forward from the Roman times to the European governments, as shown in Figure 1.2. These standards of practice were brought to the English colonies by the early settlers and then included in the laws of the newly formed government of the United States. There were virtually no institutional or government loans available for residential properties during these early years. Home loans primarily came from friends or family members.

Early Progress Figure 1.3 shows the progression of major legislation affecting real estate lending. The Federal Reserve Act became law in 1913. It made real estate loans available through federally chartered commercial banks. California enacted legislation in 1919 to become the first state to license people who practice real estate professions. Other states followed, and today nearly all states require most real estate transactions to be performed by a licensed real estate agent, including the work of the mortgage loan broker. Most states exempt owners from transactions directly


7

Development of Financial Institutions

TM

Pre-1600s

Thomson Learning

Hide money in home

1863

Deposit into king’s treasury

Figure 1.2 History of finance.

Deposit with blacksmith, bullion dealers

Moneyholders invested funds

Checks in volume

America imports English system

U.S. Bank Act passed

on their own property, such as renting or selling their own homes. Also often exempt are those working directly for a federal banking operation. The early 1920s were times when real estate values increased by as much as 50% until the collapse of the optimistic real estate market in 1927. The stock market crash soon followed the real estate market crash. Congress enacted many new laws during the 1930s that were designed to prevent a similar future market crash. The Federal Home Loan Bank (FHLB) Act established a board and 12 regional banks to provide a central credit clearinghouse for home finance institutions. The National Housing Act created the Federal Housing Administration (FHA) in 1934. The Federal National Mortgage Association (FNMA) was authorized to provide a secondary money market for FHA loans, which provided liquidity for real estate loan investments.

1940 to 1979 Toward the end of World War II, in the mid-1940s, the Serviceman’s Readjustment Act created the Department of Veterans Administration (DVA, formerly referred to as VA), a home loan program. The period from 1945 to 1965 had only a few major real estate or lending laws pertaining to private-sector economic growth. The FDIC Act of 1950 revised and consolidated earlier legislation; the Bank Holding Company Act of 1956 required FDIC approval for establishment of a bank

8


Figure 1.3 Chronology of lending regulations.

1910s

Thomson Learning

TM

1930s

1940s

1950s 1960s

1970s

1980s

1990s

Federal Reserve Act California Real Estate License (DRE) (1919) Federal Home Loan Bank Act (FHLB) National Housing Act Federal Housing Administration (FHA) Federal National Mortgage Association (FNMA) Serviceman’s Readjustment Act Veterans Administration (VA) (Note: 1990s, VA changed to DVA, Department of Veterans Affairs) Federal Deposit Insurance Act of 1950 (FDIC) of 1950 Bank Holding Company Act of 1956 Housing and Urban Development Act (HUD) Fair Housing Act Interstate Land Sales Full Disclosure Act Consumer Credit Protection Act (Truth in Lending, Reg. Z) Fair Credit Reporting Act National Environmental Policy Act Government National Mortgage Association (GNMA) 1968 International Banking Act of 1978 Emergency Home Finance Act Flood Disaster Protection Act Real Estate Settlement Procedures Act (RESPA) Equal Credit Opportunity Act (ECOA) Home Mortgage Disclosure Act Fair Lending Practices Act Community Reinvestment Act (CRA) Housing and Community Development Amendments Financial Institution Regulatory and Interest Rate Control Act of 1978 (FIRIRCA) Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) Omnibus Reconciliation Act Garn–St. Germain Depository Institutions Act Depository Institution Act of 1982 Deficit Reduction Act Competitive Equality Banking Act Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) Housing and Community Development Act of 1992 (HCDA) RTC Completion Act Community Development and Regulatory Improvement Act of 1994 Interstate Banking and Branching Efficiency Act of 1994 Economic Growth and Regulatory Paperwork Reduction Act of 1996 Gramm-Leach-Bliley Act of 1999

Source: Federal Deposit Insurance Corporation.

holding company. Bank holding companies headquartered in one state were prohibited from acquiring a bank in another state. An equilibrium point was reached in 1957, and the demand for housing most nearly matched the supply of housing available. From

Thomson Learning

TM


9

the mid-1960s forward, however, many changes occurred. The Housing and Urban Development Act in 1965 created the Housing and Urban Development (HUD) to consolidate many federal programs. Before 1970, the Fair Housing Act, the Interstate Land Sales Full Disclosure Act, the Consumer Credit Protection Act (Truth in Lending [TIL], Reg. Z), the Fair Credit Reporting Act, and the National Environmental Policy Act were all put into place while national interests were directed toward protecting consumers. During this time, the HUD Act of 1968 moved FNMA from government to private authority and created the Government National Mortgage Association (GNMA). In 1978, two important federal acts became law. The International Banking Act brought foreign banks within the federal regulatory framework and required deposit insurance for branches of foreign banks engaged in U.S. retail banking. The Financial Institution Regulatory and Interest Rate Control Act created major statutory provisions regarding electronic fund transfers and established limits and reporting requirements for banks.

1980 to 2000 Increasing home prices sustained the real estate market for the next 25 years. Even though prices dipped in the early 1970s, 1980s, and early 1990s, the overall growth rate equated to about 4% per year until 1990. These increasing values created a demand for real estate loans. The Emergency Home Finance Act provided secondary loan support for funding by thrift institutions and enabled FNMA to purchase conventional loans, rather than only VA or FHA loans. The Flood Disaster Protection Act required flood insurance for loans in flood hazard areas. The Real Estate Settlement Procedures Act (RESPA), the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act, the Fair Lending Practices Act, the Community Reinvestment Act, and the Housing and Community Development Amendments also received Congressional approval. In 1980, Congress passed the Depository Institutions Deregulation and Monetary Control Act (DIDMCA), which changed many real estate practices. It extended federal overrides of state usury ceilings, simplified truth in lending, eased geographical lending restrictions, and created jumbo loans. This act granted new powers to thrift institutions and raised the deposit insurance ceiling to $100,000. The Omnibus Reconciliation Act limited housing revenue bond tax exemptions. The Garn–St. Germain Depository Institutions Act


Thomson Learning

TM

10

phased out interest rate differentials and preempted state due-on-sale restrictions by lenders. The Deficit Reduction Act changed loan interest reporting procedures and extended the tax exemption for certain loan bonds. The Competitive Equality Banking Act kept savings bank life insurance and gave flexibility to thrifts. The 1980s ended with a crash in the real estate market that exceeded the late-1920s disaster. Consequently, most loans above 80% of value require some form of mortgage insurance in the event of loan default, such as private mortgage insurance (PMI). The most important new law at that time was the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which created the Office of Thrift Supervision (OTS) under the Treasury Department and the Federal Housing Finance Board (FHFB), while abolishing the Federal Home Loan Bank Board (FHLBB). The act also formed the Resolution Trust Corporation (RTC), a temporary agency to liquidate defaulting assets of member banks. The Savings Association Insurance Fund (SAIF) was created to replace FSLIC; the Bank Insurance Fund (BIF) was created to cover banks. In 1991, the Federal Deposit Insurance Corporation Improvement Act (FDICIA) recapitalized BIF and strengthened the FDIC fund by borrowing from the Treasury. The act established new capital requirements for banks and created new truth-in-savings provisions. In the following year, the Housing and Community Development Act was passed to regulate the structure for government-sponsored enterprises (GSEs) to combat money laundering. In 1994, the Community Development and Regulatory Improvement (CDRI) Act, containing more than 50 provisions to reduce paperwork requirements, was passed. This act established the wholly owned government corporation that provides financial and technical assistance to community development financial institutions. The Interstate Banking and Branching Efficiency Act permitted bank holding companies to acquire banks in other states, thus allowing mergers. This era ended with the Gramm-Leach-Bliley Act of 1999 that repealed the last provisions of the Glass Steagall Act of 1933 and allows affiliation between banks and insurance underwriters. The law creates new financial holding company legislation authorizing engagement in commercial and merchant banking, investment in and development of real estate, and other complementary activities. All financial institutions had to provide customers the opportunity to not


11

share nonpublic information with unaffiliated third parties as of July 1, 2001.

Thomson Learning

TM

Unstable Market The real estate market often appears to be a bouncing ball. No one seems to be able to control the height that the ball will bounce, or when it will come to a stop. The real estate financial markets are often compared with the stock market—uncontrollable, unpredictable, and volatile. Changes create opportunities and new programs for the mortgage loan broker. The transition period from the late 1980s through the 1990s reflected the reaction to the vast regulatory changes. As the various acts were implemented, the industry kept adjusting its strategies on how to comply yet stay competitive. Along the way, many loan representatives and firms ceased operations. Also, new firms emerged with technology aids to handle understaffed peak demands and formerly overstaffed slower periods. The economic changes can be seen in Figure 1.4, where, in a one-year period from January 1990 to January 1991, the difference between the peak of 1.63 million and the valley of 850,000 is an astounding difference of 780,000 housing starts. This difference represents huge changes in the number of loans generated and the number of staff positions in the industry.

Figure 1.4 Housing starts.

Annual rate, in millions of dwelling units 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 1989 Source: U.S. Commerce Department

1990

1991

1992

12


Thomson Learning

TM

Today As the real estate industry progresses into the twenty-first century, lenders have become more competitive and specialized as a result of several factors: the real estate recession of the early 1990s, technology, and the market dominance of minority purchasers. Some lenders specialize in commercial shopping centers, and others seek only less creditworthy borrowers, referred to as subprime lenders. As the government has tried to increase home ownership, new programs have emerged for the first-time homebuyer. These changes have led to loan professionals merging into firms with individuals who specialize in a particular type of loan. Firms often employ multilingual loan agents to aid multicultural homebuyers. Technology has also changed the way business is handled. The loan agent can now sit at a “for sale” open house with a real estate sales agent and take the loan application on a portable laptop computer, calculate the loan qualification ratios, and run a credit report— all without being at “the office.” The mortgage loan brokerage field now combines many aspects of the people-oriented real estate professional with the technical banking aspects to offer many career opportunities. As long as people need to borrow funds, loan arrangers will be in demand.

1.3 Basic Information Hard Money versus Seller Carry Money Hard money loans are any institutional or noninstitutional loans for which the lenders placed their cash funds on the table in a transaction. The lenders’ funds may be from their depositors, from the sale of their assets, or from funds borrowed against their assets. Private individuals, corporations, and investors may have a mortgage broker place their funds on a hard money, real estate–backed loan. The funds actually changed hands, and upon default, the lenders could lose some or all of their cash, even if the property held as collateral was sold to try to retire the debt. Because of the higher risk involved for certain types of loans, some hard money lenders rely more heavily on the equity in the property than on the borrower, but typical residential loan investors rely on the borrower. To offset the higher risk and illiquidity of real estate loans, hard money investors may demand a higher than normal yield over the

Thomson Learning

TM


13

rate they could receive in a “safe” and secured bank savings account. However, all loans tend to revert back to the normal yield for the specific type of loan, called market yield. This is the amount typical investors would pay in the market for the particular type of loan. The courts view these hard money lenders as investors who gave up cash on the good faith expectation that the borrower would repay all funds.

Seller carryback loans (soft money loans) are typically an extension of credit from a seller to a buyer. No funds are taken out of a bank account, and no assets are sold to raise any capital to make the loan to the buyer. The loan amount may have been originated on the note for reasons other than banking or investor criteria. Often these loans are made without the basic requirements that an institutional lender would expect, such as a credit application, credit report, or property appraisal. Some seller carryback loans may be generated to cover costs that the seller is initially paying for the buyer, such as an amount to buy down an interest rate, points, or loan fees. These loans often have features such as more favorable terms. Seller carryback loans may, but typically do not have loan fees, loan origination points, prepayment penalties, and similar provisions. Mortgage insurance on the loan and similar items, if handled by a hard money lender, would often result in the buyers being unable to qualify for or obtain a loan. After the close of escrow, seller carryback loans may be sold at a discount to a third party, who becomes the new lender beneficiary. The purchaser of the loan is usually a private individual termed the holder in due course. In a foreclosure procedure, should the sale proceeds fall short of covering all the loan amounts owed, the judicial system usually views hard money and seller carryback lenders differently.

Careers in Mortgage Loan Brokerage The various persons or entities who are involved in the real estate lending business at different stages of the loan process can be confusing to the novice. Some individuals are licensed, and others are not required to have any state regulatory license. Most direct employees are not licensed and have very specific job duties and assignments, according to a company policies and procedures manual. A marketing department may have telemarketers, computergenerated form solicitation, advertising personnel, and key networking personnel. A loan processor may verify loan application information according to prescribed steps. This person or a loan assistant may


Thomson Learning

TM

14

prepare computer-generated disclosure forms and credit reports and work with title company records. The mortgage loan broker file must contain certified copies of escrow instructions obtained from the escrow officer. The appraisal report must be ordered. Buyers’ insurance information must be received. An individual working in this field may be licensed by one or more government-regulated agencies, such as a licensed real estate salesperson working under the supervision of a licensed real estate broker. The individual may, instead, be an employee of a financial institution, such as a loan officer working for a savings and loan. The institution is regulated by another form of government agency, such as the bank examiners.

Loan Originators The loan originators solicit others to obtain applications for loans. The percentage of market share shown in Figure 1.5 shows the annual dollar volume of residential loan applications by the type of lender. From 1980 to 1995, mortgage bankers and brokers dominated the single-family conventional market with 35% to nearly 60% of market share. Although thrift institutions reached almost 40% in the mid1980s, their market share declined to only about 15% by the mid1990s. Commercial banks hold a relative steady market share at about 20%, while savings institutions have decreased from about 40% to about 20% in the 1990s. Independent mortgage companies have grown from about 10% to almost 30%, and subsidiary mortgage companies have grown from less than 20% to about one-third of the market. Loan originators in California usually hold a Department of Real Estate (DRE) real estate salesperson license. They create a loan in the normal course of their real estate activity and perform loan duties under a DRE licensed broker. Some employees work in an office under an individual licensed under the corporation commissioner, as described in Chapter 14, and the employee may not need to be licensed. Loan originations predominantly fall into several groups: (1) the mortgage broker, (2) the mortgage banker, and (3) commercial banks or savings and loan institutions (see Figure 1.6). A mortgage banker acts much like a bank and receives revenue from the loan origination. Mortgage bankers may lend their own funds. They may also act as local, regional, or national representatives for an institutional lender. Thus, mortgage bankers may retain a loan in their own portfolio, or they may transfer ownership of the loan to


Figure 1.5 Mortgage origination activity by lender type.

Lender Share of Single-Family Conventional Originations Savings Commercial Institution Bank

TM

Thomson Learning

15

1999 1998 1997 1996 1995 1994 1993 1992 1991 1990

Mortgage Co. Independent Subsidiary Mortgage Co.

Credit Union

Total Volume

Market Share

Market Share

Market Share

Market Share

Market Share

($ Billions)

21% 23% 25% 25% 25% 26% 22% 40% 33% 41%

21% 17% 19% 21% 22% 22% 20% 24% 26% 27%

29% 30% 26% 25% 25% 19% 19% 19% 17% 18%

26% 27% 27% 26% 26% 31% 37% 25% 22% 11%

3% 2% 3% 3% 2% 2% 2% 2% 2% 3%

962 1,165 632 558 447 536 834 610 341 268

Market share figures are based on annual dollar volume of residential loan origination reported under the Home Mortgage Disclosure Act (HMDA). Savings institutions and commercial banks refer to federally regulated, deposit-taking institutions, or their service corporations, with assets exceeding an inflation-indexed, minimum threshold, which changes annually. The asset-level cutoff is set by the Federal Reserve Board based on changes in the consumer price index (CPI). The threshold was $28 million in 1997, $29 million in 1998 and 1999, $30 million in 2000, and $31 million for 2001. Credit union refers to a federally regulated, deposit-taking institution that meets the asset and lending threshold tests for covered savings institutions and banks. Mortgage company subsidiary refers to the mortgage-origination arm of the holding company for an HMDA-covered savings institution or bank when the parent company owns a minimum 50% interest in the subsidiary. Independent mortgage company refers to a nondepository lender that (a) had assets, including those of parent corporation, exceeding $10 million (unadjusted for inflation) on the preceding Dec. 31 or (b) originated at least 100 home-purchase or refinancing loans in the preceding calendar year. (Before 1993, a small independent mortgage company with assets of $10 million or less was exempt from reporting to HMDA, even if it had originated 100 or more loans in the preceding year.) Source: MBA.

another entity. They may also sell the loan on the secondary money market to investors or to another lender. If they sell the loan, in such case they generate funds to make more loans. The mortgage banker may retain the servicing on the loan, in which case the borrower often does not notice any difference and the mortgage banker continues to receive ongoing revenue from loan-servicing fees.

16


DRE Broker

Thomson Learning

TM

MORTGAGE BROKER: Third-Party Arranger

DRE Broker

Sources of Funds • Bank • Their Own Funds • Investor (FNMA, Corp)

Depositors (Interest income)

Bank Income

LOAN ORIGINATION

Loan Processing

Package sent for Lender Approval and Funding

MORTGAGE BANKER: Third Party or Primary

LOAN ORIGINATION

Loan Processing

SERVICING Insuring

Warehouse Line

LOAN APPROVAl (Their Own Lender, MI Investor)

Closing Funding

BANK OR SAVINGS & LOAN: Primary Lender LOAN ORIGINATION

SERVICING Dept.

Loan Approval

Closing Funding Dept.

Figure 1.6 Originators.

Mortgage loan brokers generally do not lend any of their own funds. The mortgage broker connects a lender and a borrower for which a fee is received. Many borrowers do not know that mortgage brokers often get wholesale rates that the borrower could not get directly from the same lender. A discussion of wholesale versus retail loans is found in Chapter 13. Many lenders cannot find adequate numbers of borrowers at a particular time and welcome the mortgage broker for placing idle funds. A mortgage broker does not retain the loan-servicing work.


17

Thomson Learning

TM

1.4 Licenses and Professional Organizations Legal and Licensing Requirements Because the loan business is involved with large amounts of money, many regulations intended to protect the general public govern its activities. The California mortgage loan broker is regulated by the California Department of Real Estate (DRE), which covers both the broker and the salesperson licenses. The mortgage company and mortgage banker may be licensed under the Corporation Commissioner as a consumer finance lender (CFL) or may be an agent for a California institutional lender and fall under the banking regulations of the parent company. Both federal and state institutional lenders are heavily regulated, and their direct employees may handle loans although the individual is not required to hold a government agency license. License requirements are covered in greater detail in Chapter 14.

Professional Organizations Real estate mortgage loan specialists have formed various local, state, and national trade associations. These associations go far beyond the mere social needs of its members to provide service in the areas of community outreach, educational courses, and promotion of legislative interests affecting the business and political needs of the industry. These organizations also establish codes of ethics to guide their members and protect the public. For more information on activities in the mortgage loan business, you may wish to contact: •

California Association of Mortgage Brokers 1730 “I” Street, Suite 240 Sacramento, CA 95814-3017 (916) 448-8236, (916) 443-8065 http://www.cambweb.org

•

National Association of Mortgage Brokers 8201 Greensboro Drive, Suite 300 McLean, VA 22102 Phone: (703) 610-9009; Fax: (703) 610-9005 http://www.namb.org


Thomson Learning

TM

18

•

National Association of Professional Mortgage Women P.O. Box 2016 Edmonds, WA 98020-9516 (800) 827-3034, fax (425) 771-9588 http://www.napmw.org

•

Mortgage Bankers Association of America 1919 Pennsylvania Avenue, NW Washington, DC, 20006 (202) 557-2700 http://www.mbaa.org

SUMMARY Lending practices go back as far as Roman times. Early U.S. loan activity was founded on traditions brought from Europe. The pioneer days had little activity in home mortgages prior to the 1920s. Today, the loan business is heavily regulated by many different state and federal laws. The lending industry views hard money as the primary market. Private lender credit extension activity is viewed as the seller carryback market. A loan arranger may be an individual agent, a principal, or a financial lending company. The originator is a third party to a real estate transaction who is usually a broker. A common originator is the mortgage loan broker, who brings together a borrower and a lender for a fee. The mortgage loan banker may also be an originator, with its own loan funds or those of another. An originator may be able to locate funds from many sources, thus giving the buyer a better choice of various loan options. A mortgage loan banker may be able to make a loan on a property that is kept in the bank’s own portfolio and not sold on the secondary money market, whereas the mortgage broker could not make the loan because it would not conform to the requirements of the secondary money market.

IMPORTANT TERMS Broker Department of Real Estate (DRE) Department of Veterans Affairs (DVA)

Federal Home Loan Bank (FHLB) Federal Housing Administration (FHA)

Thomson Learning

TM


19

Federal National Mortgage Association (FNMA)

Office of Thrift Supervision (OTS)

Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)

Originator

Government National Mortgage Association (GNMA)

Real Estate Settlement Procedures Act (RESPA)

Hard money loans Holder in due course

Resolution Trust Corporation (RTC)

Home Mortgage Disclosure Act (HMDA)

Savings Association Insurance Fund (SAIF)

Housing and Urban Development (HUD)

Seller carryback loans (soft money)

Mortgage insurance (MI)

Subprime lenders

Private Mortgage Insurance (PMI)

Omnibus Reconciliation Act

REVIEWING YOUR UNDERSTANDING 1. Which act made real estate loans available through federally chartered commercial banks? a. Federal Home Loan Bank Act b. National Housing Act c. Federal Reserve Act d. Fair Housing Act 2. Which act limited Housing Revenue Bond Tax Exemptions? a. The Omnibus Reconciliation Act b. Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) c. Home Mortgage Disclosure Act d. Community Reinvestment Act 3. Which act created jumbo loans? a. Fair Housing Act b. Interstate Land Sales Full Disclosure Act c. Housing and Urban Development Act d. Depository Institutions Deregulation and Monetary Control Act 4. Which act was passed prior to 1930? a. Federal Reserve Act b. Veterans Administration Act

20


Thomson Learning

TM

c. Fair Credit Reporting Act d. Deficit Reduction Act 5. FIRREA created a. OTS and RTC. b. SAIF. c. both A and B. d. neither A nor B. 6. The mortgage loan brokerage field is regulated by a. a number of government agencies. b. only VA. c. only DRE. d. both FNMA and GNMA. 7. Little legislation affected real estate prior to the a. 1920s. b. 1940s. c. 1960s. d. 1980s. 8. The Serviceman’s Readjustment Act in the 1940s created a. an insurance program. b. an association for retired vets. c. the VA home loan program. d. a loan insurance act. 9. The largest group of single-family conventional originations are made by a. commercial banks. b. mortgage bankers. c. savings and loan institutions. d. noninstitutional lenders. 10. Loan originators predominantly fall into which two groups? a. mortgage banker or mortgage broker b. mortgage banker or savings and loan c. mortgage broker or bank d. bank or savings and loan 11. A position in mortgage loan brokerage could be a. escrow officer or loan officer. b. appraiser or review appraiser. c. processor or mortgage loan banker. d. title officer or instrument recorder.

Thomson Learning

TM


21

12. The difference between what the mortgage broker does and what the banker does is a. origination. b. servicing. c. appraisal. d. credit. 13. The mortgage loan industry keeps adjusting strategies to a. stay competitive. b. handle understaffed peak demand periods. c. smooth out overstaffed non-peak periods. d. all of the above are true. 14. What brought liquidity to the real estate industry? a. PMI as a disaster protection b. ECOA as a consumer disclosure c. CRA as a deregulation act d. FNMA as a secondary market source 15. The difference between peak and valley housing starts in the early 1990s, which would generate new loans, would most nearly be which of the following? a. 250,000 b. 500,000 c. 750,000 d. 1,000,000 16. The single-family conventional market has been dominated by a. banks. b. mortgage brokers. c. seller carryback loans. d. equity loans. 17. FIRREA a. created OTS under the Treasury Department. b. created RTC and SAIF. c. both A and B. d. neither A nor B. 18. An individual may be licensed by a. a financial institution. b. a government agency. c. a beneficiary or mortgagee. d. the holder in due course.


Thomson Learning

TM

22

19. Lenders’ funds could come from a. their own savings. b. the sale of their assets. c. funds borrowed against their assets. d. all of the above are true. 20. The mortgage loan broker a. does not lend any of its own funds. b. lends only FHA or DVA funds. c. lends only savings and loan funds. d. lends only FNMA or GNMA funds. 21. The mortgage broker connects a lender and a borrower and a. is paid by the seller of the property b. is paid by the secondary money market c. a fee is received d. receives a kickback from the appraiser 22. The primary reason for affiliation with a professional organization is to aid members in a. fulfilling social needs b. keep common-interest groups together c. meet educational, legislative, and political goals d. make the public aware of the individual’s level of education 23. What does the lending industry view as the primary market? a. hard money b. seller carryback c. insured loans d. guaranteed loans 24. Real estate loans given as all or part of the purchase price are called a. purchase money loans b. hard money loans c. servicing agreements d. secondary money market transactions 25. The extension of credit loan typically does not have which? a. loan fees b. loan origination points c. prepayment penalties d. all of the above.


23

Thomson Learning

TM

Answers to Reviewing Your Understanding 1.

C

10.

A

19.

D

2.

A

11.

C

20.

A

3.

D

12.

B

21.

C

4.

A

13.

D

22.

C

5.

C

14.

D

23.

A

6.

A

15.

C

24.

B

7.

A

16.

B

25.

D

8.

C

17.

D

9.

B

18.

B

Thomson Learning TM

SCOPE OF THE BUSINESS - swlearning.com

Recommend Documents