Chapter 16 Residential and Commercial Property Financing

1
Chapter 16 Residential and Commercial Property
Financing

• This chapter examines the legal framework that
  facilitates the real estate lending process. Real
  estate credit sources and laws protecting
  consumers are then distinguished.

2
Legal Framework of Financing Real Estate

• Understanding the mortgage concept
• Secured vs. Unsecured
• History of the mortgage concept
• Mortgage
• Hypothecation
• Modern mortgage concepts
• Title Theory
• Lien Theory

3

• US mortgage practice
• Promissory note (Fig. 13.1)
• Typical Provisions of a promissory note (Fig.
  13.2)
• Prepayment Clause
• Acceleration Clause
• Due on Sale Clause
• Typical provisions of a security instrument

4

• Understanding the foreclosure process.
• Foreclosure
• Types of Foreclosure
• Judicial
• Nonjudicial
• Strict
• Deficiency judgement

5

• Alternative security instruments
• Deed of Trust
• Trustee
• Trustor
• Land contract
• Final Thoughts on Foreclosure
• Due-on-sale clause
• Subject to
• Assumption
• Deed in lieu of foreclosure

6
Structure of the U.S. Housing Finance System

• Lending Process
• Loan Origination
• Primary Mortgage Market
• Secondary Mortgage Market

7

• Housing Finance System
• Federal Housing Administration (FHA)
• FHA-insured loans
• Insurance fees
• Private Mortgage Insurance
• PMI vs. FHA-insured
• VA Loan Guarantee Program
• Funding Fee
• Secondary Mortgage Markets
• Federal National Mortgage Association (FNMA)
• Government National Mortgage Association (GNMA)
• Mortgage-backed securities
• Federal Home Loan Mortgage Corporation (FHLMC)

8
Mortgage Market Participants (Table 13.1)

• Mortgage originators and investors
• Mortgage bankers
• Mortgage brokers
• Commercial banks
• Savings and loan institutions
• Credit Unions

9
Understanding the mortgage loan origination
process

• FNMA/FHLMC Uniform Residential Application (Fig.
  13.3)
• Information required from the borrower
• Duties of the originator
• EQUAL Credit Opportunity Act
• Consumer Credit Protection Act
• Real Estate Settlement and Procedures Act (RESPA)

10

• Mortgage Underwriting
• Qualifying applicant
• Qualifying the property

11

• Risk Assessment
• Loan to value ratio guidelines
• Down payment source guidelines
• Income ratio guidelines
• Mortgage debt ratio
• Total debt ratio
• The underwriting decision

12
Sources of Capital in commercial Property Markets

• Individual Investors
• Life Insurance Companies
• Pension Funds
• Real Estate Investment Trusts
• Commercial Banks
• Commercial Mortgage Backed Securities (CMBS)

13
Commercial Underwriting Criteria

• Commercial loan underwriters are more concerned
  with the propertys ability to generate income to
  repay the debt than they are concerned with
  borrowers income
• Lenders typically require that a propertys net
  operating income exceed the debt service
  requirement by 15 to 20 percent

14
Commercial Underwriting Criteria(Cont.)

• Lenders also set maximum loan-to-value ratios for
  commercial loans. 70 -80 LTV is common as a
  maximum LTV