Some sellers help sell their homes by extending credit to the buyer in the form of seller carryback financing. This is usually in the form of a promissory note secured by a deed of trust. To prevent abuses involving some of these seller assisted financing plans the state requires the arranger of credit to give the borrower a written disclosure. An arranger of credit is a person who is not a party to the transaction, but will be compensated for arranging the credit, negotiating the credit terms, completing the credit documents, and facilitating the transaction.
The arranger of credit must deliver a disclosure statement as soon as possible before the execution of any note or security document. The statement must be signed by the arranger of credit, the buyer and the seller, who are each to receive a copy. The disclosure statement must include comprehensive information about the financing cautions applicable to certain types of financing, and suggestions of procedures that will protect the parties during the terms of the financing. The arranger of credit does not have to deliver a disclosure statement to a buyer or seller who is entitled to receive a disclosure under the regulations
of the Federal Truth in Lending Act, Real Estate Settlement Procedures Act (RESPA) or a mortgage loan disclosure statement.
Summary
Most customers do not have the financial resources to purchase a home, and must borrow to finance the transaction. Today many loan packages are available to meet the customer’s financial needs. However, finding the right financial package to fit these needs can be confusing and intimidating. The mortgage market consists of primary markets (loan-originator sellers) and the secondary market (loan buyers). There are two divisions in the primary mortgage market—the institutional lenders and the non-institutional lenders. The institutional lender is a depository, such as a commercial bank. They receive most of their deposits from household savings or individual investors. The major type of lending activity funded by commercial banks is for short- term (six to thirty-six months) construction loans, even though they do make other types of loans as well. Non-institutional lenders are non-depositories and include private individuals, mortgage companies, investment companies, pension funds, and title companies. The primary market lenders make real estate loans and package them into mortgage pools to be sold to the customers in the secondary mortgage market. The secondary mortgage market is comparable to a resale marketplace for loans (in which existing loans are bought and sold).
Mortgage lenders are concerned about a customer’s ability to repay a loan. Lenders use qualifying ratios with a review of the customer’s credit report and net worth to screen potential borrowers. Security for the loan is the property. An appraisal of the property is made to obtain an accurate valuation.
Real Estate Laws require anyone negotiating a loan to provide a mortgage loan broker’s statement to a prospective borrower, with information disclosing all important features of a loan to be negotiated for the borrower. Among these laws are the Consumer Credit Protection Act, Truth in Lending Act,
Regulation Z, Adjustable-Rate Loan Disclosure, Equal Credit Opportunity Act, Lender Compensation Disclosure, and Seller Financing Disclosure
Statement.
Any borrower who is denied credit must be told the reason why credit was denied, be given access to the credit report, and told how to challenge any disputed entries.
A. APR B. commercial banks C. compensating balance D. credit scoring E. credit union F. deregulation G. disintermediation H. Equal Credit Opportunity Act I. FDIC J. finance charge K. good faith estimate
L. loan-to-value M. monetary policy N. mortgage broker O. mortgage companies P. mortgage loan disclosure statement Q. mortgage yield R. mortgage-backed securities S. pass-through securities T. pledge
U. primary mortgage market
V. real estate investment trust W. reconveyance deed X. redlining Y. secondary mortgage market Z. security agreement AA. tight money
BB. Truth in Lending Act CC. underwriting DD. warehousing
UNIT 10 REvIEw
Matching Exercise
Instructions: Write the letter of the matching term on the blank line before its definition. Answers are in Appendix B.
Terms
Definitions
1. ������� An objective, statistical method that lenders use to assess the borrower’s credit risk.
2. �������� Originators of a majority of all residential loans, and are not depository institutions.
3. �������� Consumer-protection law passed to promote the informed use of consumer credit by requiring disclosures about its terms and costs.
4. �������� Private individuals, each with a small amount of capital, who pool their resources to buy real estate.
5. �������� The relative cost of credit expressed as a yearly percentage rate.
6. �������� The process of assembling a number of mortgage loans into one package, prior to selling them to an investor.
7. �������� Lending institutions that make mortgage loans directly to borrowers. 8. �������� Real estate licensee who originates a loan by taking the application from a
borrower and then selling that unclosed loan to a mortgage lender.
9. �������� An economic situation in which the supply of money is limited, and the demand for money is high, as evidenced by high interest rates.
10. ������� A resale marketplace for loans.
11. ������� The percentage of appraised value to the loan.
12. ������� The process of evaluating a borrower’s risk factors before the lender will make a loan.
13. ������� Corporation that insures deposits in all federally chartered banks and savings institutions up to $100,000 per account for commercial and savings banks.
14. ������� A borrower deposits funds with the bank in order to induce the lender into making a loan.
15. ������� Mortgage backed securities that pass through the principal and interest of the underlying loans to investors.
16. ������� Actions taken by the Fed to influence the availability and cost of money and credit as a means of promoting national economic goals.
17. ������� An illegal lending policy of denying real estate loans on properties in older, changing urban areas.
18. ������� Federal act to ensure that all consumers are given an equal chance to obtain credit.
19. ������� A process whereby regulatory restraints are gradually relaxed.
20. ������� An association whose members usually have the same type of occupation. 21. ������� The amount received or returned from an investment expressed as a
percentage.
22. ������� The dollar amount the credit will cost and is composed of any direct or indirect charge as a condition of obtaining credit.
23. ������� Pools of mortgages used as collateral for the issuance of securities in the secondary market.
24. ������� Document that provides detailed information on escrow costs so that the borrower can shop around for escrow services.
25. ������� A statement, which must be in a form approved by the Real Estate Commissioner that informs the buyer of all charges and expenses related to a particular loan.