Ch 3: Loans: Conventional

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Ch 3 Loans Conventional

• By Dr. D. Grogan
• M.C. Buzz Chambers

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PREVIEW

• 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.

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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

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Contents

• 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

• 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

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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.

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3.1 How a Loan Broker selects a loan

• What is the lenders 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?

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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

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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.

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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
  SLs 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

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Loan Amounts

• Non-Conforming loans
• Jumbo loans
• Exceed the maximum loans amounts of FNMA
• Underwriting guidelines different
• See www.fanniemae.com
• Maximum loan amount General High-cost area
• One unit (SFR, Condo) ________ _________
• Two units (duplex,2 on a lot) ________ _________
  
• Three units ________ _________
• (triplex, house2units)
• Four units ________ _________

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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.

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1990-2008 loans
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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 _at_ 8, 30 year term

Pmt No. Principal Total
Interest Principle Ending
Balance Pmt. Portion Portion
Balance
1 2 3 4 5 6 7 8 9 10
200,000.00 1467.54 1333.33 134.21
199,865.79
199,865.79 1467.54 1332.44 135.10
199,730.69
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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.

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15 YEAR LOANS
Substantial Savings over life of Loan
Pmt 1,343 _at_ 10
125,000 Mortgage
Pmt 1,143 _at_ 10.5
Pmt 1,075 _at_ 10
100,000 Mortgage
Pmt 915 _at_ 10.5
Pmt 752 _at_ 10
Lower Interest Rate
70,000 Mortgage
Pmt 640 _at_ 10.5
May Require Larger Down Payment
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WHAT TO KNOW ABOUT ARMs
Probability of Negative Amortization?
How often will the Rate Change?
Is there a Payment Cap?
Is there a Rate Cap?
Initial Interest Rate?
Option to Convert Fixed Rate?
How Often will Payment Change?
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ADJUSTABLE RATE MORTGAGES

• Interest Rate Cap over the life of the loan
• Lifetime Cap Maximum interest rate
• Per-Adjustment Cap The max allowable up or down
  adjustment
• Conversion Option Terms to convert to fixed rate
• Payment Cap
• Payment Adjustment Period Over the life of the
  loan
• Rate Adjustment Period At any one adjustment
  period
• Teaser Rate Low initial rate with adjustments
  where
• borrower qualifies for later, higher rate
• Negative Amortization Difference between fully
  
• indexed rate, minus actual amount paid which is
  added
• to unpaid loan balance.

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ADJUSTABLE LOAN(Note Index changed every 6
months Payment adjusted twice, year 3 (up)
year 6 (down)
1st Payment Adjustment (UP)
Payment
2nd Payment Adjustment (DOWN)
Index
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ADJUSTABLE RATE MORTGAGES

• Lower 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.

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Jan 1991 July 2009

•   

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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.

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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.

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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
• 80.190.0 0.0067
• 90.195.0 0.0078
• 95.1100 0.0122

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PRIVATE MORTGAGE INSURANCE
Annual Premium
Private Mortgage Insurer
Borrower
Coverage in Case of Default
Mortgage Loan
Lender
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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 trustors equity reaches 22 (LTV ratio
  78)
• Borrower must contact lender to have PMI
  discontinued
• mgic.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 Agency

• Program 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

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Rate lock

• A rate commitment where the lenders 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.

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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

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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.

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