NMLSbook

PAGE #0 - Getting Started
PAGE #1 - Course Name
PAGE #2 - Disclosure Notice
PAGE #3 - Course Purpose

Course Information Course Purpose
This course is designed to enable the student to better understand the steps, procedures and laws involved in originating mortgage loans. This course is broken down into 20 modules. At the beginning of each module, an explanation and description of the objectives will be given. This course is relevant as it deals with the various laws a working Loan Officer and/or Mortgage Broker uses in his or her day-to-day activity. Knowledge of this information is invaluable to the licensee and benefits the public the licensee serves.
Learning Experiences
To ensure the adult learning experience in each module, the student will be provided detailed background and information on the topic. In addition, the student will be required to participate in group discussions on the topics to demonstrate their mastery of the objectives.
PAGE #4 - Instructor Background and Contact Information

Instructor background and contact information and introduction Scott Hilton is licensed as a Texas Real Estate Broker, originally licensed in 1987, and a licensed Mortgage Broker 2002-2009. Scott has authored numerous education manuals including Law of Contracts, Competitive Marketing, Real Estate Ethics, CORE Mortgage Lending, Mortgage Lending Practice, Mortgage Lending Law, Law of Agency, and numerous others. Scott operates a real estate company with over 50 real estate professionals and is an instructor at 123CEinc.com a training school that has trained over 45,000 students providing classroom and distance learning instruction. He has been a member of the Houston Association of REALTORS, Texas Association of REALTORS, National Association of REALTORS, Texas Real Estate Teachers Association, Womans Counsel of REALTORS, National Association of Professional Mortgage Women, National Association of Mortgage Brokers and the National Association of Mortgage Bankers. Scott also created the Certified in Mortgage Ethics Designation (CME) for NAPMW. Contact information: Phone: 1-877-550-5808 Email: scott@scotthilton.com
PAGE #5 - Course Description and Objectives

Course description This course includes 12 hours on topics of Mortgage Origination, 3 hours on Federal Law and Regulation, 3 hours on Mortgage Ethics, and 2 hours on Nontraditional Mortgage Product Market. Course objectives Specific course objectives will be given at the beginning of each module.
PAGE #6 - Requirements for text or other Course Materials

Requirement for text or other course materials This course is all inclusive. Although no other materials are needed, additional .pdf downloads may be provided during the course depending on recent developments in regard to the topic being presented.
PAGE #7 - Policy and Course Completion Expectations, Attendance and Grading

Policy and course completion expectations To complete this course, the student is required to complete all sessions of the course and participate in group discussions via online blogs. Any student not fulfilling these requirements will be disqualified from receiving a completion certificate. Policy regarding attendance and behavior Students will not attempt to disrupt any security options of the Learning Management System, and will not use any profanity when submitting blog entries or work assignments. Grading or pass/fail criteria Students must pass the final exam with at least a 70% rating. Due to NMLS requirements, you will not be able to take the final exam until the last day of the course.
PAGE #8 - End of course completion requirements

End-of-course completion requirements All students will complete an end-of-course evaluation of the course. Module of instruction Each module is 1 hour in length. Technology requirements Students may need a basic calculator to work on mathematical problems.
PAGE #9 - Instructions on moving through the course

Instructions on moving through the course This course is designed to allow the student some flexibility in moving through the information. To advance to the next page of the course, click the NEXT PAGE link. Should you need to stop, and pick up at a later time, you can close the browser, click on logout, or click the PAUSE link. The CONTROL PANEL link lists all the pages within the course. While reviewing this list, it you wish to review any of the previously completed pages, simply click the VIEW link next to the page.
PAGE #10 - Instructions on moving through the course

Blogs To allow for Student to Student interaction, you will be required at specific times to post blog entries, or respond to other student blog entries throughout the course. At anytime, you can always click the COURSE BLOGS link, to review, or respond at any time. Course Work At specific times, you will be required to submit course work assignments to your instructor. Once complete, you will be able to continue throughout the course.
PAGE #11 - Lesson 1
PAGE #12 - Learning Objectives for Lesson 1
LEARNING OBJECTIVES After participating in this module, you will be able to:
better understand the definition of a mortgage, be able to explain various types of mortgages and loans, and be able to discuss various aspects of mortgage lending.
PAGE #13 - Basic understanding of Lending

Basic Understanding of Lending
A mortgage loan is a loan secured by real property through the use of a document which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan. A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably.
It is normal for home purchases to be funded by a mortgage loan as few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed.

Basic concepts and legal regulation According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest (right to the property) as security or collateral for a loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property. As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of real property can, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk.

Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property. Although the terminology and precise forms will differ from country to country, the basic components tend to be similar: Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible. Mortgage: the security interest of lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance or pay off outstanding debt before selling the property. Borrower: the person borrowing who either has or is creating an ownership interest in the property. Lender: any lender, but usually a bank or other financial institution. Lenders may also be investors who own an interest in the mortgage through a mortgage-backed security. In such a situation, the initial lender is known as the mortgage originator, which then packages and sells the loan to investors. The payments from the borrower are thereafter collected by a loan servicer. Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size. Interest: a financial charge for use of the lender's money. Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.

Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system. Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formula. The most basic arrangement would require a fixed monthly payment over a period of fifteen to thirty years, depending
on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common.

Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization). In the United States, the largest firms securitizing loans are Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), which are government sponsored enterprises. Mortgage lending will also take into account the perceived riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances.

Mortgage loan types There are many types of mortgages used, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements. Interest: interest may be fixed for the life of the loan or variable, and change at certain predefined periods; the interest rate can also, of course, be higher or lower. Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization. Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid. Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment. The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In many countries, floating rate mortgages are the norm and will simply be referred to as mortgages; in the United States, fixed rate mortgages are typically considered "standard." Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period. In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. In the U.S., the term is usually up to 30 years (15 and 30 being the most common), although longer terms may be offered in certain circumstances. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan, although ancillary costs (such as property taxes and insurance) can and do change.

In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Common indices in the U.S. include the Prime rate, the London Interbank Offered Rate (LIBOR), and the Treasury
Index ("T-Bill"); other indices are in use but are less popular. You can select the mortgage loan you require when interest rates are quite low and get it adjusted throughout the loan term. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve. Additionally, lenders in many markets rely on credit reports and credit scores derived from them. The higher the score, the more creditworthy the borrower is assumed to be. Favorable interest rates are offered to buyers with high scores. Lower scores indicate higher risk for the lender, and higher rates will generally be charged to reflect the (expected) higher default rates.

A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term. This payment is sometimes referred to as a "balloon payment" or bullet payment. The interest rate for a balloon loan can be either fixed or floating. The most common way of describing a balloon loan uses the terminology X due in Y, where X is the number of years over which the loan is amortized, and Y is the year in which the principal balance is due. Other loan types: Assumed mortgage In real estate an assumed mortgage occurs when the buyer of a real property has transferred all the obligations of the seller's mortgage. The buyer assumes all the obligations under the mortgage, just as if the loan had been made to the buyer. The major driving force behind assumptions is the lower interest rate on the assumed mortgage relative to current market rates. This method is frequently used when the buyer cannot get a better interest rate than the seller currently has.
PAGE #21 - Baloon mortgage

Balloon mortgage A balloon payment mortgage is a mortgage which does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size. Balloon payment mortgages are more common in commercial real estate than in residential real estate. A balloon payment mortgage may have a fixed or a floating interest rate. In the United States, the amount of the balloon payment must be stated in the contract if Truth-in-Lending provisions apply to the loan. Because borrowers may not have the resources to make the balloon payment at the end of the loan term, a "two-step" mortgage plan may be used with balloon payment mortgages. Under the two-step plan, sometimes referred to as "reset option", the mortgage note "resets" using current market rates and using a fully-amortizing payment schedule. This option is not necessarily automatic, and may only be available if the borrower is still the owner/occupant, has no 30-day late payments in the preceding 12 months, and has no other liens against the property. For balloon payment mortgages without a reset option or where the reset option is not available, the expectation is that either the borrower will have sold the property or refinanced the loan by the end of the loan term. This may mean that there is a refinancing risk.
PAGE #22 - Blanket Loan

Blanket loan
A blanket loan, or blanket mortgage, is a type of loan used to fund the purchase of more than one piece of real property. Blanket loans are popular with builders and developers who buy large tracts of land, then subdivide them to create many individual parcels to be gradually sold one at a time. Rather than securing a new mortgage each time a portion of the development is sold, the borrower uses the blanket loan to buy them all. Once a parcel is sold, a portion of the mortgage is released, with the rest of the mortgage remaining intact. Traditional mortgages typically have a "due-on-sale clause", which stipulates that if property secured by the mortgage is sold, the entire outstanding mortgage debt must be paid in full immediately. With a blanket mortgage, a release clause allows the sale of portions of the secured property and corresponding partial repayment of the loan. This is done to facilitate purchases and sales of multiple units of property with the convenience of a single mortgage. A builder, for example, might use a blanket mortgage to pay for construction of several homes in one neighborhood. When a home is sold, the portion of the mortgage that was used to fund that home is paid back to the lender, and then retired. The remaining outstanding balance is adjusted accordingly, and the blanket mortgage continues phase by phase in that manner, until all houses are sold and the entire mortgage is repaid and retired.
PAGE #23 - Bridge Loan

Bridge loan A bridge loan is interim financing for an individual or business until permanent or the next stage of financing can be obtained. Money from the new financing is generally used to "take out" (i.e. to pay back) the bridge loan, as well as other capitalization needs. Bridge loans are typically more expensive than conventional financing to compensate for the additional risk of the loan. Bridge loans typically have a higher interest rate, points and other costs that are amortized over a shorter period, and various fees and other "sweeteners" (such as equity participation by the lender in some loans). The lender also may require cross-collateralization and a lower loan-to-value ratio. On the other hand they are typically arranged quickly with relatively little documentation.
PAGE #24 - Equity Loan

Equity loan An equity loan is a mortgage placed on real estate in exchange for cash to the borrower. For example, if a person owns a home worth $100,000, but does not currently have a lien on it, they may take an equity loan at 80% loan to value (LTV) or $80,000 in cash in exchange for a lien on title placed by the lender of the equity loan. Many lending institutions require the borrower to repay only an interest component of the loan each month (calculated daily, and compounded to the loan once each month). The borrower can apply any surplus funds to the outstanding loan principal at any time, reducing the amount of interest calculated from that day onwards. Some loan products also allow the possibility to redraw cash up to the original LTV, potentially perpetuating the life of the loan beyond the original loan term. The rate of interest applied to equity loans is much lower than that applied to unsecured loans, such as credit card debt. The reasoning behind this is that equity loans involve collateral, and credit card debt does not. Foreign National mortgage A mortgage to a non resident is called a Foreign National Mortgage loan. A foreign national who is not a resident of the United States will in many cases seek to own real estate. Financing real estate is generally done by US mortgage companies and banks to United States citizens. Lenders also offer loans to non citizens. They may be resident aliens, temporary residents or other classifications of either temporary or permanent status.
PAGE #25 - Graduated payment mortgage loan

Graduated payment mortgage loan A graduated payment mortgage loan, often referred to as GPM, is a mortgage with low initial monthly payments which gradually increase over a specified time frame. These plans are mostly geared towards borrowers who cannot afford large payments now, but can realistically expect to do better financially in the future. For instance a medical student who is just about to finish medical school might not have the financial capability to pay for a mortgage loan, but once the borrower graduates, it is more than probable that the borrower will be earning a high income. It is a form of negative amortization loan. GPMs are typically available in 30 year and 15 year amortization, and for both conforming and jumbo mortgage. Over a period of time, typically 5 to 15 years, the monthly payments increase every year according a predetermined percentage. For instance, a borrower may have a 30-year graduated payment mortgage with monthly payments that increase by 7 % every year for five years. At the end of five years, the increases stop. The borrower would then pay this new increased amount monthly for the rest of the 25-year loan term. The graduated payment mortgage seems to be an attractive option for first-time home buyers or those who currently do not have the resources to afford high monthly home mortgage payments. Even though the amounts of payments are drawn out and scheduled, it requires borrowers to predict their future earnings potential and how much they are able to pay in the future, which may be tricky. Borrowers could overestimate their future earning potential and not be able to keep up with the increased monthly payments. Eventually, even if the graduated payment mortgage lets borrowers save at the present time by paying low monthly amounts; the overall expense of a graduated payment mortgage loan is higher than that of conventional mortgages, especially when negative amortization is involved.
PAGE #26 - Hard money loan

Hard money loan A hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by the value of a parcel of real estate. Hard money loans are typically issued at much higher interest rates than conventional commercial or residential property loans and are almost never issued by a commercial bank or other deposit institution. Hard money is similar to a bridge loan, which usually has similar criteria for lending as well as cost to the borrowers. The primary difference is that a bridge loan often refers to a commercial property or investment property that may be in transition and does not yet qualify for traditional financing, whereas hard money often refers to not only an assetbased loan with a high interest rate, but possibly a distressed financial situation, such as arrears on the existing mortgage, or where bankruptcy and foreclosure proceedings are occurring. Many hard money mortgages are made by private investors, generally in their local areas. Usually the credit score of the borrower is not important, as the loan is secured by the value of the collateral property. Typically, the maximum loan to value ratio is 6570%. That is, if the property is worth $100,000, the lender would advance $65,000$70,000 against it. This low LTV provides added security for the lender, in case the borrower does not pay and they have to foreclose on the property. A hard money loan is a species of real estate loan collateralized against the quick-sale value of the property for which the loan is made. Most lenders fund in the first lien position, meaning that in the event of a default, they are the first creditor to receive remuneration. Occasionally, a lender will subordinate to another first lien position loan; this loan is known as a mezzanine loan or second lien. Hard money lenders structure loans based on a percentage of the quick-sale value of the subject property. This is called the loan-tovalue or LTV ratio and typically hovers between 60 and 70% of the market value of the property. For the purpose of determining an LTV, the word "value" is defined as "today's purchase price." This is the amount a lender could reasonably expect to realize from the sale of the property in the event that the loan defaults and the property must be sold in a one- to four-month timeframe. This value differs from a market value appraisal, which assumes an arms-length transaction in which neither buyer nor seller is acting under duress. Below is an example of how a commercial real estate purchase might be structured by a hard money lender:
65% Hard money (Conforming loan) 20% Borrower equity (cash or additional collateralized real estate) 15% Seller carryback loan or other subordinated (mezzanine) loan
PAGE #27 - Hard money loan

Hard Money is a term that is used almost exclusively in the United States and Canada where these types of loans are most common. In commercial real estate, hard money developed as an alternative "last resort" for property owners seeking capital against the value of their holdings. The industry began in the late 1950s when the credit industry in the US underwent drastic changes. The hard money industry suffered severe setbacks during the real estate crashes of the early 1980s and early 1990s due to lenders overestimating and funding properties at well over market value. Since that time, lower LTV rates have been the norm for hard money lenders seeking to protect themselves against the market's volatility. Today, high interest rates are the mark of hard money loans as a way to compensate lenders for the considerable risk that they undertake. In some cases, the low loan-to-values do not facilitate a loan sufficient to pay off the existing mortgage lender, in order for the hard money lender to be in first lien position. Because a security interest in the property is the basis of making a hard money loan, the lender usually always requires first lien position of the property. As an alternative to a potential shortage of equity beneath the minimum lender Loan To Value guidelines, many hard money lender programs will allow a "Cross Lien" on another of the borrowers properties. The cross collateralization of more than one property on a hard money loan transaction, is also referred to as a "blanket mortgage". Not all homeowners have additional property to cross collateralize. Cross collateralizing or blanket loans are more frequently used with investors on Commercial Hard Money Loan programs.
PAGE #28 - Jumbo mortgage

Jumbo mortgages A jumbo mortgage is a mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits. This standard is set by the two largest secondary market lenders, Fannie Mae and Freddie Mac. Loans above the conforming limits may be offered by seller servicers of these wholesale institutions, as well as Wall Street conduits who provide warehouse financing for mortgage lenders. The loan amounts reflect average loan sizes nationwide. Jumbo mortgages apply when agency (FNMA and FHLMC) limits don't cover the full loan amount. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of residential mortgages in the U.S. They set a limit on the maximum dollar value of any mortgage they will purchase from an individual lender. Other large investors, such as insurance companies and banks, step in to fill the need, with maximum mortgage amounts going to the $1 million or $2 million range. A loan in excess of $650,000 is referred to as a super jumbo mortgage. The average interest rates on jumbo mortgages are typically greater than is normal for conforming mortgages, and vary depending on property types and mortgage amount. On February 13, 2008 President George W. Bush signed an economic stimulus package that temporarily increased the conforming limit in the United States to $729,750 until December 31, 2008. The limit for any area would be the greater of: the 2008 conforming loan limit ($417,000); 125% of the area median house price, but no more than 175% of the 2008 conforming loan limit ($729,750, which is 175% of $417,000).

Jumbo mortgage loans are a higher risk for lenders. This is because if a jumbo mortgage loan defaults, it is harder to sell a luxury residence quickly for full price. Luxury prices are more vulnerable to market highs and lows. That is one reason lenders prefer to have a higher down payment from jumbo loan
seekers. Jumbo home prices can be more subjective and not as easily sold to a mainstream borrower, therefore many lenders may require two appraisals on a jumbo mortgage loan. The interest rate charged on jumbo mortgage loans is generally higher than a loan that is conforming, due to the slightly higher risk to the lender. The spread, or difference between the two rates, depends on the current market price of risk. While typically the spread fluctuates between 0.25 and 0.5%, at times of high investor anxiety it can exceed one and a half percentage points. Jumbo mortgage loan options are similar to traditional loan programs.

They simply require a slightly higher down payment, usually of an additional 5% for similar program types. No-money-down programs are generally not available, but instead require a minimum of 5% down payment for a jumbo mortgage. Because the loans are large, jumbo lenders frequently offer variable loan programs to the jumbo client. The risk of an interest rate increase can result in a large dollar amount increase. It can be more expensive to refinance a jumbo loan due to the closing costs. Some lenders will offer the service of an extension and consolidation agreement, so that a jumbo refinancer will not have to pay for mortgage tax again on the same principal balance. Some consumers seeking a jumbo mortgage choose to seek advice from a competent professional familiar with jumbo mortgage loans. Due to increased housing prices, there is a large increase in the number of jumbo loan applicants. Many consumers are becoming jumbo borrowers when buying a modest ranch or Cape Cod house; this option is no longer limited to high-end luxury residences. New loan programs are now offered to address the large increase in jumbo loan applications. Because of the steep price increases during the recent years (2000-2006), mortgage loans are required in excess of the conforming limits in most big-city areas or their surrounding suburbs. They allow the jumbo loan borrower to pay the loan back over a longer period of time, or to defer any repayment of principal for a few years - thus saving them on their monthly payment. In some cases, the banker makes a larger profit if the loan takes more than 30 years to repay. 80/20 & 80/15 jumbo loan programs are very popular with new home purchasers.

Because any borrower with less than a twenty percent down payment was previously subject to purchasing private mortgage insurance (PMI) to insure the lender for the higher risk, jumbo borrowers were previously paying a very large PMI fee on a loan with an LTV (loan-to-value ratio) higher than 80%. Now, the jumbo borrower can borrow the 80% without PMI, and take a second mortgage at a slightly higher interest rate, which does not require PMI, and hedges the risk of the first position lender at the lower interest rate. However with recent foreclosures on the rise lenders have turned away from 80/20 loans and very few zero down loans are available both for jumbo and conforming loans. Many lenders are offering LPMI (Lender Paid Mortgage Insurance) options that build the PMI into the interest rate. So by taking a slightly higher interest rate the borrower can avoid PMI altogether even if they are only putting 5-15% down payment. This will effectively reduce the monthly payment for the short term - but overall the higher rate may not be the best option because many times the standard PMI can be dropped after the homeowner has over 20% in equity.
PAGE #32 - Package loan

A package loan is a real estate loan used to finance the purchase of both real property and personal property, such as in the purchase of a new home that includes carpeting, window coverings and major appliances. Participation mortgage
A participation mortgage or participating mortgage is a mortgage, or sometimes a group of them, in which two or more persons have fractional equitable interests. In this arrangement the lender, or mortgagee, is entitled to share in the rental or resale proceeds from a property owned by the borrower, or mortgagor. The mortgage is evidenced by the bank or other fiduciary that has legal title to the mortgage and sells the fractional shares to investors or makes the investment for the certificate holders. A participation mortgage may or may not require principal and interest payments and may or may not contain a balloon payment. For instance, John has a loan for a strip mall including six separate units. All are rented or leased and in addition to the principal and interest he pays to the lender, he is required to pay a certain percentage of the incoming funds. The lender is then participating in the income stream provided by the particular property.
PAGE #33 - Reverse mortgage

Reverse mortgage A reverse mortgage (or lifetime mortgage) is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care). In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term (e.g., 30 years) the mortgage has been paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month. If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. But in certain countries (including the United States), a reverse mortgage must be the only mortgage on the property.

To qualify for a reverse mortgage in the United States, the borrower must be at least 62 years of age. There are no minimum income or credit requirements, but there are other requirements and homeowners should make sure that they qualify for the loan before they invest significant time or money into the process. For most reverse mortgages, the money can be used for any purpose; however, the borrower must pay off any existing mortgage(s) with the proceeds from the reverse mortgage and, if needed, additional personal funds. A pending bankruptcy which has not been finalized may, however, slow the process. Some types of dwellings do not qualify, while others (like mobile homes) have special requirements (such as being on an approved permanent foundation and built after 1976) in order to be approved. Before borrowing, applicants must seek third party financial counseling from a source which is approved by the Department of Housing and Urban Development (HUD). The counseling is a safeguard for the borrower and his/her family, to make sure the borrower completely understands what a reverse mortgage is and how one is obtained.

The amount of money available to the consumer is determined by five primary factors: The appraised value of the property, whether any health or safety repairs need to be made to the house, and whether there are any existing liens on the house. The interest rate, as determined by the U.S. Treasury 1 year T-Bill, the London Inter-Bank Offer
Rate (LIBOR) index or 1 Year Constant Maturity Treasury (CMT). The age of the senior (The older the senior is, the more money he/she will receive). Whether the payment is taken as line of credit, lump sum, or monthly payments. Line of credit will maximize the money available, while lump sum provides the cash immediately, but the interest fees are the highest. Monthly payments are set up as a "Tenure" payment. Borrowers receive them for the rest of their lives no matter how long they live. The value of the property, and whether that value is higher than the national loan limit set by HUD.

All these factors contribute to the Total Annual Lending Cost (TALC) as defined by the US Federal Government Regulation Z, the single rate which includes all the loan costs. There are reverse mortgages for homes valued over the maximum limit. These are called "Jumbo" reverse mortgages, and are generally offered as proprietary reverse mortgages. For homeowners of higher-valued homes, a Jumbo loan can provide a larger loan amount. However, these loans are currently uninsured by the FHA and their fees are often higher. The money received (loan advances) from a reverse mortgage is not taxable and does not directly affect Social Security or Medicare benefits. However, an American Bar Association guide to reverse mortgages explains that if borrowers receive Medicaid, SSI, or other public benefits, loan advances will be counted as "liquid assets" if the money is kept in an account (savings, checking, etc.) past the end of the calendar month in which it is received. The borrower could then lose eligibility for such public programs if his or her total liquid assets (cash, generally) is then greater than those programs allow. It is important to note that the homeowner must ensure that taxes and insurance are kept current at all times. If either taxes or insurance lapse, it could result in a default on the reverse mortgage.

Once the reverse mortgage is established, there are no restrictions on how the funds are used. In addition to the tenure monthly payments, the borrower has the option of moving the entire amount of money into investments, or they can simply take the money and spend it as they wish. Among the options of interest bearing instruments, the borrower can keep them with the lender (these accounts grow by the same percentage as the interest rate of the loan), move the funds to a directed account with a financial specialist (This option is risky unless you direct the investment options of the financial specialist), or withdraw the funds and manage their investment themselves. The Housing and Economic Recovery Act of 2008 provided FHA-insured Home Equity Conversion Mortgage (HECM) mortgagors with the opportunity to purchase a new principal residence with HECM loan proceeds - the so-called HECM for Purchase program, effective January 2009. The program was designed to allow seniors to purchase a new principal residence and obtain a reverse mortgage within a single transaction by eliminating the need for a second closing. The program was also designed to enable senior homeowners to relocate to other geographical areas to be closer to family members or downsize to homes that meet their physical needs, i.e., handrails, one level properties, ramps, wider doorways, etc.

The cost of getting a reverse mortgage from a private sector lender may exceed the costs of other types of mortgage or equity conversion loans. Exact costs depend on the particular reverse mortgage program the borrower acquires. For the most popular type of reverse mortgage in the U.S., the HECM, there is an insurance premium of 2% of the loan and an origination fee in addition to normal closing
costs, which are typically several thousand dollars, but vary depending on the third-party costs (appraisal fees, title searches, etc.) which must be undertaken. Other programs skip the insurance premium but still require the origination fees and closing costs. In addition, a monthly service charge (between $25 and $35) is usually added to the total amount of the loan. In all of these cases, the costs of a reverse mortgage can typically be financed with the proceeds of the loan itself, with the costs and fees being rolled directly into the principal balance of the loan, rather than paid by the borrower in cash. While this does permit borrowers with little or no available cash to get a reverse mortgage, it means that the initial loan principal will be increased, and consequently, that the fees will begin accruing interest. Since there are no payments made during the course of the loan, the compound interest accrued on the principal plus fees are added to the principal of the loan. Interest rates on reverse mortgages are determined on a program-by-program basis, because the loans are secured by the home itself, and backed by HUD, the interest rate should always be below any other available interest rate in the standard mortgage marketplace for an FHA reverse mortgage.

Several lenders now offer FHA HECM reverse mortgages that have fixed interest rates. Some of these mortgages have interest rates that are similar to the current FHA/VA rate plus the mandatory mortgage insurance premium. Some fixed rate reverse mortgages limit the cash proceeds to half of that offered by adjustable rate reverse mortgages. To apply for an FHA/HUD reverse mortgage, a borrower is required to complete a counseling session with a HUD-approved counselor. The counselor will explain the legal and financial obligations of a reverse mortgage. After the counseling session, the borrower receives a "certificate of counseling" that is required before the loan application can be processed. The American Bar Association guide advises that generally, the Internal Revenue Service does not consider loan advances to be income, annuity advances may be partially taxable, and interest charged is not deductible until it is actually paid, that is, at the end of the loan. The mortgage insurance premium is deductible on the 1040 long form. The loan ends when the homeowner dies, sells the house, or, depending on the loan conditions, moves out of the house for 12 consecutive months (for example, to go into an assisted living home or due to physical or mental illness the borrower is not able to live in the property on which the loan has been taken). At that point, the reverse mortgage can be paid off with the proceeds of the sale of the house, or if the borrower has died, the property can be refinanced by the heirs of the homeowner's estate with a regular mortgage. If the proceeds exceed the loan amount including compounded interest and fees, the owner of the house receives the difference. If the owner has died, the heirs receive the difference. For cases where the proceeds are not sufficient to pay off the loan, then the bank (or insurance which the bank has on the loan) absorbs the difference.

The technical term for this cap on debt is "non-recourse limit." It means that the lender does not have legal recourse to anything other than the value of the home when the loan is to be paid off. In most cases when the borrower moves out of the property or dies, as long as the borrower (or his estate) provides proof to the lender that he/she is attempting to sell the home or obtain financing to pay off the outstanding debt, the investor will allow him/her a specific period to do so. After that period is up, the lender cannot provide any further extension of time to the borrower (or estate). Home Equity Conversion Mortgages account for 90% of all reverse mortgages originated in the U.S. As
of February 2007 the federal cap of $275,000 HECM loan guarantees had been issued since the program's inception in 1989. Legislators subsequently suspended the cap until September 1, 2007 allowing additional HECM loan guarantees to take place. Program growth in recent years has been very rapid. The National Reverse Mortgage Lenders Association (NRMLA) reports that 55,659 HECM loans were endorsed through the first nine months of fiscal year 2006, an 83% increase over the 30,404 loans endorsed during the same period in the prior fiscal year.

Section 255 of the National Housing Act, which governs the HECM program, limits the aggregate number of outstanding HECMs to 250,000. The cap could possibly be reached in 2007 or 2008, and efforts are currently underway to remove or increase the limit. A drawback to reverse mortgages are the high upfront costs. This upfront cost is tempered by the lower interest rate over time, but some seniors choose other options to draw on their home equity, particularly if they don't plan to remain at the property more than five years. Other options which can free up home equity but avoid the high upfront costs of a reverse mortgage include: intra-family loan or sale-leaseback and selling and moving to a less expensive dwelling or location. However, when selling the homeowner incurs high closing costs including, typically, a 6% commission, moving costs, and purchase costs on the new dwelling. Currently, there is a coordinated government program called "Aging in Place" intended to assist homeowners wishing to remain in their home and/or neighborhood. Studies conducted by various agencies, including AARP, show that over 80% of elderly homeowners do not want to move.
PAGE #42 - Wraparound mortgage

Wraparound mortgage A wrap-around mortgage is a form of secondary financing in which a seller extends to a purchaser a junior mortgage which wraps around and exists in addition to one or more superior mortgages. Under a wrap, a seller accepts a promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance. The new purchaser makes monthly payments to the seller, who is then responsible for making the payments to the underlying mortgagee. Should the new purchaser default on those payments, the seller then has the right of foreclosure to recapture the subject property. Because wraps are a form of seller-financing, they have the effect of lowering the barriers to ownership of real property; they also can expedite the process of purchasing a home.
PAGE #43 - Wraparound mortgage

An example: The seller, who has the original mortgage sells his home with the existing first mortgage in place and a second mortgage which he "carries back" from the buyer. The mortgage he takes from the buyer is for the amount of the first mortgage, plus a negotiated amount less than or up to the sales price minus the down payment and closing costs. The buyer pays the seller, who then continues to pay the first
mortgage with the proceeds of the second. Once the second mortgage is satisfied, the seller is out, but this is rarely the case. Typically, the seller also charges a "middle" on the first mortgage. For example, one has a first mortgage at 6% and sell the whole property with a rate of 8% on a wraparound mortgage. He/she makes 2% middle on the first mortgage amount, using other people's money to make money. So, it is in the best interests of a seller to keep the wrap, rather than allow the buyer to assume the first mortgage. As title is actually transferred from seller to buyer, most wraparound mortgage transactions will violate the due-on-sale clause of the underlying mortgage, if such a clause is present.
PAGE #44 - Negative amortization loan

Negative amortization loan In finance, negative amortization, also known as NegAm, occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loan increases. As an amortization method the shorted amount (difference between interest and repayment) is then added to the total amount owed to the lender. Such a practice would have to be agreed upon before shorting the payment so as to avoid default on payment. The term is most often used for mortgage loans; corporate loans which have negative amortization are called Payment in Kind (PIK) loans. Also known as deferred interest or Graduated Payment Mortgage (GPM). This method is generally used in an introductory period before loan payments exceed interest and the loan becomes self-amortizing. Negative amortization only occurs in loans in which the periodic payment does not cover the amount of interest due for that loan period. The unpaid accrued interest is then capitalized monthly into the outstanding principal balance. The result of this is that the loan balance (or principal) increases by the amount of the unpaid interest on a monthly basis. The purpose of such a feature is most often for advanced cash management and/or more simply payment flexibility, but not to increase overall affordability.

Neg-Ams also have what is called a recast period, and the recast principal balance cap is based on Federal and State legislation. The recast period is usually 60 months (5 years). The recast principal balance cap (also known as the "neg am limit") is usually up to a 25% increase of the amortized loan balance over the original loan amount. States and lenders can offer products with lesser recast periods and principal balance caps; but usually cannot issue loans that exceed their state and federal legislated requirements under penalty of law. Although rare, a newer loan option has been introduced which allows for a 40-year loan term. This makes the minimum payment even lower than a comparable 30-year term. All NegAM home loans eventually require full repayment of principal and interest according to the original term of the mortgage and note signed by the borrower. Most loans only allow NegAM to happen for no more than 5 years, and have terms to "Recast" the payment to a fully amortizing schedule if the borrower allows the principal balance to rise to a pre-specified amount. This loan is written often in high cost areas, because the monthly mortgage payments will be lower than any other type of financing instrument. Negative amortization loans can be high risk loans for inexperienced investors. These loans tend to be
safer in a falling rate market and riskier in a rising rate market.

Start rates on negative amortization or minimum payment option loans can be as low as 1%. This is the payment rate, not the actual interest rate. The payment rate is used to calculate the minimum payment. Other minimum payment options include 1.95% or more. NegAM loans today are mostly straight Adjustable Rate Mortgages (ARMs), meaning that they are fixed for a certain period and adjust every time that period has elapsed; e.g., one month fixed, adjusting every month. The NegAm loan, like all Adjustable Rate Mortgages, is tied to a specific financial index which is used to determine the interest rate based on the current index and the margin (the markup the lender charges). Most NegAm loans today are tied to the Monthly Treasury Average, in keeping with the monthly adjustments of this loan. There are also Hybrid ARM loans in which there is a period of fixed payments for months or years, followed by an increased change cycle, such as six months fixed, then monthly adjustable. The Graduated Payment Mortgage is a "fixed rate" NegAm loan, but since the payment increases over time, it has aspects of the ARM loan until amortizing payments are required. The most notable differences between the Traditional Payment Option Arm and the Hybrid Payment Option Arm are in the start rate also known as the "minimum payment" rate. On a Traditional Payment Option Arm, the minimum payment is based on a principal and interest calculation of 1% - 2.5% on average.
PAGE #47 - Hybrid

The start rate on a Hybrid Payment Option Arm is higher, yet still extremely competitive payment wise. On a Hybrid Payment Option Arm, the minimum payment is derived using the "interest only" calculation of the start rate. The start rate on the Hybrid Payment Option arm typically is calculated by taking the Fully Indexed Rate (Actual Note Rate), then subtracting 3%, which will give you the start rate. Example: 7.5% fully indexed rate - 3% = 4.5% (4.5% would be the start rate on a Hybrid Pay Option Arm) This guideline can vary among lenders. Aliases the Payment Option Arm loans are known by: Negative Amortizing Loan (Neg Am) Pick-A-Pay Deferred Interest Option Loan (This is the way this loan was introduced to the mortgage industry when first created)

Criticisms of Negative Amortization loans Negative Amortization loans, being relatively popular only in the last decade, have attracted a variety of criticisms: Unlike most other adjustable-rate loans, many negative amortization loans have been advertised with either teaser or artificially introductory interest rates or with the minimum loan payment
expressed as a percentage of the loan amount. For example, a negative amortization loan is often advertised as featuring "1% interest", or by prominently displaying a 1% number without explaining the fixed interest rate. This practice has been done by large corporate lenders. This practice has been considered deceptive for two different reasons: most mortgages do not feature teaser rates, so consumers do not look out for them; and, many consumers aren't aware of the negative amortization side effect of only paying 1% of the loan amount per year. In addition, most negative amortization loans contain a clause saying that the payment may not increase more than 7.5% each year, except if the 5-year period is over or if the balance has grown by 15%. Critics say this clause is only there to deceive borrowers into thinking the payment could only jump a small amount, whereas in fact the other two conditions are more likely to occur.

Negative amortization loans as a class have the highest potential for what is known as payment shock. Payment shock is when the required monthly payment jumps from one month to the next, potentially becoming unaffordable. To compare various mortgages' payment shock potential (note that the items here do not include escrow payments for insurance and taxes, which can cause changes in the payment amount): 30-year (or 15-year) fixed-rate fully amortized mortgages: no possible payment jump. 5-year adjustable-rate fully amortized mortgage: No payment jump for 5 years, then a possible payment decrease or increase based on the new interest rate. A 10-year interest only mortgage product, recasting to a 20 year amortization schedule (after ten years of interest only payments) could see a payment increase of up to $600 on a balance of 330K. Negative amortization mortgage: no payment jump either until 5 years OR the balance grows 15% (depending on the product) higher than the original amount. The payment increases, by requiring a full interest plus principal payment. The payment could further increase due to interest rate changes. However, all things being equal, the fully amortized payment is almost triple the negative amortized payment.

In a very hot real estate market a buyer may use a negative amortizing mortgage to purchase a property with the plan to sell the property at a higher price before the end of the "negam" period. Therefore, an informed investor could purchase several properties with minimal monthly obligations and make a great profit over a five year plan in a strong real estate market. However, if the property values decrease, it is likely that the borrower will owe more on the property than it is worth, known colloquially in the mortgage industry as "being underwater." In this situation, if the property owner cannot make the new monthly payment, he/she may be faced with foreclosure or having to refinance with a very high Loan to Value Ratio, requiring additional monthly obligations such as Mortgage Insurance and higher rates/payments due to the adversity of a high Loan to Value Ratio. It is very easy for borrower's to ignore or misunderstand the complications of this product when being presented with minimal monthly obligations that could be from one half to one third what other, more predictable, mortgage products require.
PAGE #51 - Non-conforming mortgage

Difference Between Negative Amortization and a Reverse Mortgage A Negative Amortization Mortgage should not be confused with a Reverse Mortgage. A Negative Amortization Mortgage is a mortgage where the principal increases throughout the early stage of the mortgage. This early stage is known as the negative amortization or negam period. During this time period the borrower is, in effect, making partial payments toward his mortgage. The remainder of his
payment, which he is not paying, is added on to the amount owed on the mortgage. Naturally, when this period ends, he must start to pay this additional amount off, along with his original principal. A Reverse Mortgage happens when a homeowner, usually a retired person, sells some or all of his equity in his home and retains the right to live there. No payments are due until the homeowner moves out of the house. However the interest charged on the loan is applied back to the principal since no interest payments are made during the life of the loan. Non-conforming mortgage A non-conforming mortgage is a term for a residential mortgage that does not conform to the loan purchasing guidelines set by the Federal National Mortgage Association/Federal Home Loan Mortgage Corporation (Fannie Mae and Freddie Mac). Mortgages which are non-conforming because they have a dollar amount over the purchasing limit set by FNMA/FHLMC are often called "jumbo" mortgages. Mortgages which are non-conforming because they do not meet FNMA/FHLMC underwriting guidelines (such as credit quality or loan-to-value ratio) are often called "subprime" mortgages. Non-conforming loans must remain in a lender's portfolio, or be sold to other companies who purchase non-conforming loans, or be securitized, with the securities being sold to investors seeking non-conforming mortgagebacked securities. Consequently, a premium is paid by those obtaining non-conforming mortgages, generally .25% or .5 points more than the same loan would cost if it were conforming. The loan amount is adjusted every few years depending upon the average sales price of homes in the U.S.
PAGE #52 - Loan to value and downpayments

Loan to value and downpayments Upon making a mortgage loan for purchase of a property, lenders usually require that the borrower make a downpayment, that is, contribute a portion of the cost of the property. This downpayment may be expressed as a portion of the value of the property. The loan to value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan where the purchaser has made a downpayment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property. The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan.
PAGE #53 - Value

Value: appraised, estimated, and actual Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various ways, but the most common are: Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available. Appraised value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official appraisal. Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances. Equity or homeowner's equity The concept of equity in a property refers to the value of the property minus the outstanding debt, subject to the definition of the value of the property. Therefore, a borrower who owns a property whose
estimated value is $400,000 but with outstanding mortgage loans of $300,000 is said to have homeowner's equity of $100,000.
PAGE #54 - Payment and debt ratios

Payment and debt ratios A number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. Credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc; the specifics will vary from loan to loan. Some lenders may also require a potential borrower have one or more months of "reserve assets" available. In other words, the borrower may be required to show the availability of enough assets to pay for the housing costs (including mortgage, taxes, etc.) for a period of time in the event of the job loss or other loss of income. Standard or conforming mortgages Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws, government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80% LTV and no more than one-third of gross income going to mortgage debt.
PAGE #55 - Standard or conforming mortgages

A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which it may be sold. A conforming mortgage is one which meets the established rules and procedures of the two major government-sponsored entities in the housing finance market (including some legal requirements). In contrast, lenders who decide to make non-conforming loans are exercising a higher risk tolerance and do so knowing that they face more challenge in reselling the loan. Regulated lenders (such as banks) may be subject to limits or higher risk weightings for non-standard mortgages. Repaying the capital There are various ways to repay a mortgage loan; repayment depends on locality, tax laws and prevailing culture.
PAGE #56 - Capital and interest

Capital and interest The most common way to repay a loan is to make regular payments of the capital (also called principal) and interest over a set term. This is commonly referred to as amortization. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or semi-annually; prepayment penalties may apply; and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices. Depending on the size of the loan and the prevailing practice the term may be short (15 years) or long
(30 years plus). 30 years is the usual maximum term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change.
PAGE #57 - Interest only

Interest only The main alternative to capital and interest mortgage is an interest only mortgage, where the capital is not repaid throughout the term. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over repayment mortgages. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to clear the debt. Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for the loan to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest rate).
PAGE #58 - No capital or interest

No capital or interest For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year. These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages. The loans are typically not repaid until the borrowers die, hence the age restriction. Interest and partial capital A partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short of that term.
PAGE #59 - Foreclosure and non-recourse lending

Foreclosure and non-recourse lending In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions - principally, non-payment of the mortgage loan - obtain. Subject to local legal requirements, the property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure.
In other jurisdictions, the borrower remains responsible for any remaining debt. In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by the relevant government; in some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.
PAGE #60 - US mortgage process

United States mortgage process In the U.S., the process by which a mortgage is secured by a borrower is called origination. This involves the borrower submitting a Loan application and documentation related to his/her financial history and/or credit history to the underwriter. Many banks previously offered "no-doc" or "low-doc" loans in which the borrower is required to submit only minimal financial information. These loans carry a higher interest rate and are available only to borrowers with excellent credit. Sometimes, a third party is involved, such as a mortgage broker. This entity takes the borrower's information and reviews a number of lenders, selecting the ones that will best meet the needs of the consumer. Loans are often sold on the open market to larger investors by the originating mortgage company. Many of the guidelines that they follow are suited to satisfy investors. Some companies, called correspondent lenders, sell all or most of their closed loans to these investors, accepting some risks for issuing them. They often offer niche loans at higher prices that the investor does not wish to originate.
PAGE #61 - US mortgage process

If the underwriter is not satisfied with the documentation provided by the borrower, additional documentation and conditions may be imposed, called stipulations. The meeting of such conditions can be a daunting experience for the consumer, but it is crucial for the lending institution to ensure the information being submitted is accurate and meets specific guidelines. This is done to give the lender a reasonable guarantee that the borrower can and will repay the loan. If a third party is involved in the loan, it will help the borrower to clear such conditions. The following documents are typically required for traditional underwriter review. Over the past several years, use of "automated underwriting" statistical models has reduced the amount of documentation required from many borrowers. Such automated underwriting engines include Freddie Mac's "Loan Prospector" and Fannie Mae's "Desktop Underwriter". Credit Report 1003 Uniform Residential Loan Application 1004 Uniform Residential Appraisal Report 1005 Verification Of Employment (VOE) 1006 Verification Of Deposit (VOD) 1007 Single Family Comparable Rent Schedule 1008 Transmittal Summary Copy of deed of current home Federal income tax records for last two years Verification of Mortgage (VOM) or Verification of Payment (VOP) Borrower's Authorization Purchase Sales Agreement 1084A and 1084B (Self-Employed Income Analysis) and 1088 (Comparative Income Analysis) used if borrower is self-employed
PAGE #62 - Predatory mortgage lending
Predatory mortgage lending There is concern in the U.S. that consumers are often victims of predatory mortgage lending. The main concern is that mortgage brokers and lenders, operating legally, are finding loopholes in the law to obtain additional profit. The typical scenario is that terms of the loan are beyond the means of the borrower. The borrower makes a number of interest and principal payments, and then defaults. The lender then takes the property and recovers the amount of the loan, and also keeps the interest and principal payments, as well as loan origination fees. Option ARM An option ARM provides the option to pay as little as the equivalent of an amortized payment based on a 1% interest rate, (please note this is not the actual interest rate). As a result, the difference between the monthly payment and the interest on the loan is added to the loan principal; the loan at this point has negative amortization. In this respect, an option ARM provides a form of equity withdrawal (as in a cash-out refinancing) but over a period of time.
PAGE #63 - Option ARM

The option ARM gives a number of payment choices each month (for example, the equivalent of an amortized payment where the interest rate 1%, interest only based on actual interest rate, actual 30 year amortized payment, actual 15 year amortized payment). The interest rate may adjust every month in accordance with the index to which the loan is tied and the terms of the specific loan. These loans may be useful for people who have a lot of equity in their home and want to lower monthly costs; for investors, allowing them the flexibility to choose which payment to make every month; or for those with irregular incomes (such as those working on commission or for whom bonuses comprise a large portion of income).
PAGE #64 - Option ARM

One of the important features of this type of loan is that the minimum payments are often fixed for each year for an initial term of up to 5 years. The minimum payment may rise each year a little (payment size increases of 7.5% are common) but remain the same for another year. For example, a minimum payment for year 1 may be $1,000 per month each month all year long. In year 2 the minimum payment for each month is $1,075 each month. This is a gradual increase in the minimum payment. The interest rate may fluctuate each month, which means that the extent of any negative amortization cannot be predicted beyond worst-case scenario as dictated by the terms of the loan. Option ARM mortgages have been criticized on the basis that some borrowers are not aware of the implications of negative amortization; that eventually option ARMs reset to higher payment levels (an event called "recast" to amortize the loan), and borrowers may not be capable of making the higher monthly payments; and that option ARMs have been used to qualify mortgages for individuals whose incomes cannot support payments higher than the minimum level.
PAGE #65 - US mortgage finance industry

Costs Lenders may charge various fees when giving a mortgage to a mortgagor. These include entry fees, exit fees, administration fees and lenders mortgage insurance. There are also settlement fees (closing costs) the settlement company will charge. In addition, if a third party handles the loan (Mortgage Broker), it may charge other fees as well. The United States mortgage finance industry
Mortgage lending is a major category of the business of finance in the United States. Mortgages are commercial paper and can be conveyed and assigned freely to other holders. In the U.S., the Federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association (known as Ginnie Mae), the Federal National Mortgage Association (known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (known as Freddie Mac). These programs work by buying a large number of mortgages from banks and issuing (at a slightly lower interest rate) "mortgage-backed bonds" to investors, which are known as mortgage-backed securities (MBS).
PAGE #66 - US mortgage finance industry

This allows the banks to quickly relend the money to other borrowers (including in the form of mortgages) and thereby to create more mortgages than the banks could with the amount they have on deposit. This in turn allows the public to use these mortgages to purchase homes, something the government wishes to encourage. The investors meanwhile, gain low-risk income at a higher interest rate (essentially the mortgage rate, minus the cuts of the bank and GSE) than they could gain from most other bonds. Securitization is a momentous change in the way that mortgage bond markets function, and has grown rapidly in the last 10 years as a result of the wider dissemination of technology in the mortgage lending world. For borrowers with superior credit, government loans and ideal profiles, this securitization keeps rates almost artificially low, since the pools of funds used to create new loans can be refreshed more quickly than in years past, allowing for more rapid outflow of capital from investors to borrowers without as many personal business ties as the past. The increased amount of lending led (among other factors) to the United States housing bubble of 2000-2006. The growth of lightly regulated derivative instruments based on mortgage-backed securities, such as collateralized debt obligations and credit default swaps, is widely reported as a major causative factor behind the 2007 subprime mortgage financial crisis.
PAGE #67 - Federal Home Loan Mortgage Corporation

Second-layer lenders in the US A group called second-layer lenders became an important force in the residential mortgage market in the latter half of the 1960s. These federal credit agencies, which include the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association, conduct secondary market activities in the buying and selling of loans and provide credit to primary lenders in the form of borrowed money. Federal Home Loan Mortgage Corporation The Federal Home Loan Mortgage Corporation, sometimes known as Freddie Mac, was established in 1970. This corporation is designed to promote the flow of capital into the housing market by establishing an active secondary market in mortgages. It may by law deal only with governmentsupervised lenders such as savings and loan associations, savings banks, and commercial banks; its programs cover conventional whole mortgage loans, participations in conventional loans, and FHA and VA loans.
PAGE #68 - Federal National Mortgage Association

Federal National Mortgage Association The Federal National Mortgage Association, known in financial circles as Fannie Mae, was chartered as a
government corporation in 1938, rechartered as a federal agency in 1954, and became a governmentsponsored, stockholder-owned corporation in 1968. Fannie Mae, which has been described as "a private corporation with a public purpose", basically provides a secondary market for residential loans. It fulfills this function by buying, servicing, and selling loans that, since 1970 have included FHA-insured, VAguaranteed, and conventional loans. However, purchases outrun sales by such a wide margin that some observers view this association as a lender with a permanent loan portfolio rather than a powerful secondary market corporation.
PAGE #69 - Government National Mortgage Association

Government National Mortgage Association The Government National Mortgage Association, which is often referred to as Ginnie Mae, operates within the Department of Housing and Urban Development. In addition to performing the special assistance, management, and liquidation functions that once belonged to Fannie Mae, Ginnie Mae has an important additional function: that of issuing guarantees of securities backed by government-insured or guaranteed mortgages. Such mortgage-backed securities are fully guaranteed by the U.S. government as to timely payment of both principal and interest. Delinquency At the start of 2008, 5.6% of all mortgages in the United States were delinquent. By the end of the first quarter that rate had risen, encompassing 6.4% of residential properties. This number did not include the 2.5% of homes in foreclosure.
PAGE #70 - Competition

Competition among US lenders for loanable funds To be able to provide homebuyers and builders with the funds needed, financial institutions must compete for deposits. Consumer lending institutions compete for loanable funds not only among themselves but also with the federal government and private corporations. Called disintermediation, this process involves the movement of dollars from savings accounts into direct market instruments: U.S. Treasury obligations, agency securities, and corporate debt. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.
PAGE #71 - Competition

To compete for deposits, US savings institutions offer many different types of plans: Passbook or ordinary accounts - permit any amount to be added to or withdrawn from the account at any time. NOW and Super NOW accounts - function like checking accounts but earn interest. A minimum balance may be required on Super NOW accounts. Money market accounts - carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance. Certificate accounts - subject to loss of some or all interest on withdrawals before maturity. Notice accounts - the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal. Individual retirement accounts (IRAs) and Keogh accountsa form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal. Checking accounts - offered by some institutions under definite restrictions.
Club accounts and other savings accountsdesigned to help people save regularly to meet certain goals.
PAGE #72 - Mortgage Insurance

Mortgage insurance Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in loans with a loan-to-value ratio over 80%, and employed in the event of foreclosure and repossession. This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized component of monthly mortgage payment. Mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down, or any combination of both to relegate the loan-to-value under 80%. In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to dispose of hard assets (such as real estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing authority recover less than full and fair market value for any hard asset.
PAGE #73 - Student work - Blog Entry
BLOG
PAGE #74 - Lesson 2
explain the meaning of a variety of mortgage and real estate terms.
PAGE #76 - Mortgage Terms and Definitions 0-9

Mortgage Terms and Definitions 0-9 401(k)/403(b) loan. Some administrators of 401(k)/403(b) plans allow for loans against the monies you have accumulated in these plans. Loans against 401K plans are an acceptable source of down payment for most types of loans. 401(k)/403(b). An employer-sponsored investment plan that allows individuals to set aside taxdeferred income for retirement or emergency purposes. 401(k) plans are provided by employers that
are private corporations. 403(b) plans are provided by employers that are not for profit organizations.
PAGE #77 - Mortgage Terms and Definitions A

Acceleration Clause. A clause in your mortgage which allows the lender to demand payment of the outstanding loan balance for various reasons. The most common reasons for accelerating a loan are if the borrower defaults on the loan or transfers title to another individual without informing the lender. Amortization Schedule. A table which shows how much of each payment will be applied toward principal and how much toward interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero. Amortization. Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. Annual Percentage Rate (A.P.R.). APR is a measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a basis for comparing the cost of loans. Application. The form used to apply for a mortgage loan, containing information about a borrowers income, savings, assets, debts, and more. Appraisal. An estimate of the value of property, made by a qualified professional called an "appraiser".

Amortization Schedule. A table which shows how much of each payment will be applied toward principal and how much toward interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero. Amortization. Means loan payment by equal periodic payments calculated to pay off the debt at the end of a fixed period, including accrued interest on the outstanding balance. Annual Percentage Rate (A.P.R.). APR is a measurement of the full cost of a loan including interest and loan fees expressed as a yearly percentage rate. Because all lenders apply the same rules in calculating the annual percentage rate, it provides consumers with a basis for comparing the cost of loans. Application. The form used to apply for a mortgage loan, containing information about a borrowers income, savings, assets, debts, and more. Appraisal. An estimate of the value of property, made by a qualified professional called an "appraiser".

Assessment. A local tax levied against a property for a specific purpose, such as for a sewer or street lights. Appraised Value. An opinion of a property's fair market value, based on an appraiser's knowledge, experience, and analysis of the property. Since an appraisal is based primarily on comparable sales, and the most recent sale is the one on the property in question, the appraisal usually comes out at the purchase price.
Appraiser. An individual qualified by education, training, and experience to estimate the value of real property and personal property. Although some appraisers work directly for mortgage lenders, most are independent. Appreciation. The increase in the value of a property due to changes in market conditions, inflation, or other causes. Assessed Value. The valuation placed on property by a public tax assessor for purposes of taxation. Assessor. A public official who establishes the value of a property for taxation purposes. Asset. Items of value owned by an individual. Assets that can be quickly converted into cash are considered "liquid assets." These include bank accounts, stocks, bonds, mutual funds, and so on. Other assets include real estate, personal property, and debts owed to an individual by others.
PAGE #80 - Mortgage Terms and Definitions A-B

Assignment. When ownership of your mortgage is transferred from one company or individual to another, it is called an assignment. Assumable Mortgage. A mortgage that can be assumed by the buyer when a home is sold. Usually, the borrower must "qualify" in order to assume the loan. Assumption. The agreement between buyer and seller where the buyer takes over the payments on an existing mortgage from the seller. Assuming a loan may save the buyer money since assuming an existing mortgage debt forgoes new mortgage closing costs and new market-rate interest charges. B Balloon Mortgage. A loan, which is amortized for a longer period than the term of the loan. Usually this refers to a thirty-year amortization and a five year term. At the end of the term of the loan, the remaining outstanding principal on the loan is due. This final payment is known as a balloon payment.
PAGE #81 - Mortgage Terms and Definitions B

Balloon Payment. The final lump sum payment that is due at the termination of a balloon mortgage. Bankruptcy. By filing in federal bankruptcy court, an individual or individuals can restructure or relieve themselves of debts and liabilities. Bankruptcies are of various types, but the most common for an individual seem to be a "Chapter 7 No Asset" bankruptcy which relieves the borrower of most types of debts. A borrower cannot usually qualify for an "A" paper loan for a period of two years after the bankruptcy has been discharged and requires the re-establishment of an ability to repay debt. Bill of Sale. A written document that transfers title to personal property. For example, when selling an automobile to acquire funds which will be used as a source of down payment or for closing costs, the lender will usually require the bill of sale (in addition to other items) to help document this source of funds.

Biweekly Mortgage. A mortgage in which you make payments every two weeks instead of once a month. The basic result is that instead of making twelve monthly payments during the year, you make thirteen. The extra payment reduces the principal, substantially reducing the time it takes to pay off a thirty year mortgage.
Note: there are independent companies that encourage you to set up bi-weekly payment schedules with them on your thirty year mortgage. They charge a set-up fee and a transfer fee for every payment. Your funds are deposited into a trust account from which your monthly payment is then made, and the excess funds then remain in the trust account until enough has accrued to make the additional payment which will then be paid to reduce your principle. You could save money by doing the same thing yourself, plus you have to have faith that once you transfer money to them that they will actually transfer your funds to your lender. Blanket Mortgage. A mortgage covering at least two pieces of real estate as security for the same mortgage. Borrower (Mortgagor). One who applies for and receives a loan in the form of a mortgage with the intention of repaying the loan in full.

Bond Market. Usually refers to the daily buying and selling of thirty year treasury bonds. Lenders follow this market intensely because as the yields of bonds go up and down, fixed rate mortgages do approximately the same thing. The same factors that affect the Treasury Bond market also affect mortgage rates at the same time. That is why rates change daily, and in a volatile market can and do change during the day as well. Bridge Loan. Not used much anymore, bridge loans are obtained by those who have not yet sold their previous property, but must close on a purchase property. The bridge loan becomes the source of their funds for the down payment. One reason for their fall from favor is that there are more and more second mortgage lenders now that will lend at a high loan to value. In addition, sellers often prefer to accept offers from buyers who have already sold their property. Broker. Brokers assist in arranging funding and negotiating contracts for a client. Brokers charge a fee or receive a commission for their services. Buy-down. When the lender and/or the home builder subsidize the mortgage by lowering the interest rate during the first few years of the loan. While the payments are initially low, they will increase when the subsidy expires.
PAGE #84 - Mortgage Terms and Definitions C

C Caps (Interest). Consumer safeguards which limit the amount the interest rate on an adjustable rate mortgage can change per year and/or the life of the loan. Caps (Payment). Consumer safeguards which limit the amount monthly payments on an adjustable rate mortgage may change. Cash Flow. The amount of cash derived over a certain period of time from an income-producing property. The cash flow should be large enough to pay the expenses of the income producing property (mortgage payment, maintenance, utilities, etc.) Cash-out Refinance. When a borrower refinances his mortgage at a higher amount than the current loan balance with the intention of pulling out money for personal use, it is referred to as a cash out refinance. Certificate of Deposit. A time deposit held in a bank which pays a certain amount of interest to the depositor.

Certificate of Deposit Index. One of the indexes used for determining interest rate changes on some adjustable rate mortgages. It is an average of what banks are paying on certificates of deposit. Certificate of Eligibility. The document given to qualified veterans which entitles them to VA guaranteed loans for homes, businesses and/or mobile homes. Certificates of eligibility may be obtained by sending form DD-214 (Separation Paper) to the local VA office with VA form 1880 (request for Certificate of Eligibility). Certificate of Reasonable Value (CRV). An appraisal issued by the Veterans Administration showing the property's current market value. Certificate of veteran status. The document given to veterans or reservists who have served 90 days of continuous active duty (including training time). It may be obtained by sending DD 214 to the local VA office with form 26-8261a (request for certificate of veteran status. This document enables veterans to obtain lower down payments on certain FHA insured loans).

Chain of Title. An analysis of the transfers of title to a piece of property over the years. Clear Title. A title that is free of liens or legal questions as to ownership of the property. Closing. The meeting between the buyer, seller and lender or their agents where the property and funds legally change hands. Also called settlement. closing costs usually include an origination fee, discount points, appraisal fee, title search and insurance, survey, taxes, deed recording fee, credit report charge and other costs assessed at settlement. The cost of closing usually are about 3 percent to 6 percent of the mortgage amount. Closing Costs. Closing costs are separated into what are called "non-recurring closing costs" and "prepaid items." Non-recurring closing costs are any items which are paid just once as a result of buying the property or obtaining a loan. "Pre-paids" are items which recur over time, such as property taxes and homeowners insurance. A lender makes an attempt to estimate the amount of non-recurring closing costs and prepaid items on the Good Faith Estimate which they must issue to the borrower within three days of receiving a home loan application.

Closing Statement. See Settlement Statement. Cloud on Title. Any conditions revealed by a title search that adversely affect the title to real estate. Usually clouds on title cannot be removed except by deed, release, or court action. Co-borrower. An additional individual who is both obligated on the loan and is on title to the property. COFI. Adjustable-rate mortgage with rate that adjusts based on a cost-of-funds index, often the 11th District Cost of Funds. Collateral. In a home loan, the property is the collateral. The borrower risks losing the property if the loan is not repaid according to the terms of the mortgage or deed of trust. Collection. When a borrower falls behind, the lender contacts them in an effort to bring the loan current. The loan goes to "collection." As part of the collection effort, the lender must mail and record
certain documents in case they are eventually required to foreclose on the property.

Commission. Most salespeople earn commissions for the work that they do and there are many sales professionals involved in each transaction, including REALTORS, loan officers, title representatives, attorneys, escrow representative, and representatives for pest companies, home warranty companies, home inspection companies, insurance agents, and more. The commissions are paid out of the charges paid by the seller or buyer in the purchase transaction. REALTORS generally earn the largest commissions, followed by lenders, then the others. Common Area Assessments. In some areas they are called Homeowners Association Fees. They are charges paid to the Homeowners Association by the owners of the individual units in a condominium or planned unit development (PUD) and are generally used to maintain the property and common areas. Common Law. An unwritten body of law based on general custom in England and used to an extent in some states. Community Property. In some states, especially the southwest, property acquired by a married couple during their marriage is considered to be owned jointly, except under special circumstances. This is an outgrowth of the Spanish and Mexican heritage of the area. Comparable Sales. Recent sales of similar properties in nearby areas and used to help determine the market value of a property. Also referred to as "comps."

Condominium. A type of ownership in real property where all of the owners own the property, common areas and buildings together, with the exception of the interior of the unit to which they have title. Often mistakenly referred to as a type of construction or development, it actually refers to the type of ownership. Condominium Conversion. Changing the ownership of an existing building (usually a rental project) to the condominium form of ownership. Construction Loan. A short term interim loan to pay for the construction of buildings or homes. These are usually designed to provide periodic disbursements to the builder as he or she progresses.

Contingency. A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector. Contract. An oral or written agreement to do or not to do a certain thing. Contract Sale or Deed. A contract between purchaser and a seller of real estate to convey title after certain conditions have been met. It is a form of an installment sale. Conventional Loan. A mortgage not insured by FHA or guaranteed by the VA.
Convertible ARM. An adjustable-rate mortgage that allows the borrower to change the ARM to a fixedrate mortgage within a specific time. Cooperative (co-op). A type of multiple ownership in which the residents of a multiunit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit. Credit History. A record of an individual's repayment of debt. Credit histories are reviewed by mortgage lenders as one of the underwriting criteria in determining credit risk. Credit Report. A report documenting the credit history and current status of a borrower's credit standing. Credit Repository. An organization that gathers, records, updates, and stores financial and public records information about the payment records of individuals who are being considered for credit. Credit. An agreement in which a borrower receives something of value in exchange for a promise to repay the lender at a later date. Creditor. A person to whom money is owed.
PAGE #92 - Mortgage Terms and Definitions D

D Debt. An amount owed to another. Debt-to-Income Ratio. The ratio, expressed as a percentage, which results when a borrower's monthly payment obligation on long-term debts is divided by his or her gross monthly income. See housing expenses-to-income ratio. Deed. The legal document conveying title to a property. Deed of trust. In many states, this document is used in place of a mortgage to secure the payment of a note. Deed-in-lieu. Short for "deed in lieu of foreclosure," this conveys title to the lender when the borrower is in default and wants to avoid foreclosure. The lender may or may not cease foreclosure activities if a borrower asks to provide a deed-in-lieu. Regardless of whether the lender accepts the deed-in-lieu, the avoidance and non-repayment of debt will most likely show on a credit history. What a deed-in-lieu may prevent is having the documents preparatory to a foreclosure being recorded and become a matter of public record. Default. Failure to meet legal obligations in a contract, specifically, failure to make the monthly payments on a mortgage.
PAGE #93 - Mortgage Terms and Definitions D

Deferred interest. When a mortgage is written with a monthly payment that is less than required to satisfy the note rate, the unpaid interest is deferred by adding it to the loan balance. See negative amortization. Delinquency. Failure to make payments on time. This can lead to foreclosure. Department of Veterans Affairs (VA). An independent agency of the federal government which guarantees long-term, low-or no-down payment mortgages to eligible veterans.
Deposit. A sum of money given in advance of a larger amount being expected in the future. Often called in real estate as an "earnest money deposit." Depreciation. A decline in the value of property; the opposite of appreciation. Depreciation is also an accounting term which shows the declining monetary value of an asset and is used as an expense to reduce taxable income. Since this is not a true expense where money is actually paid, lenders will add back depreciation expense for self-employed borrowers and count it as income. Discount Point. See points. Down Payment. Money paid to make up the difference between the purchase price and the mortgage amount. Due-on-Sale-Clause. A provision in a mortgage or deed of trust that allows the lender to demand immediate payment of the balance of the mortgage if the mortgage holder sells the home.
PAGE #94 - Mortgage Terms and Definitions E

E Earnest Money. Money given by a buyer to a seller as part of the purchase price to bind a transaction or assure payment. Easement. A right of way giving persons other than the owner access to or over a property. Effective Age. An appraisers estimate of the physical condition of a building. The actual age of a building may be shorter or longer than its effective age. Eminent Domain. The right of a government to take private property for public use upon payment of its fair market value. Eminent domain is the basis for condemnation proceedings.

Encroachment. An improvement that intrudes illegally on anothers property. Encumbrance. Anything that affects or limits the fee simple title to a property, such as mortgages, leases, easements, or restrictions. Entitlement. The VA home loan benefit is called entitlement. This is also known as eligibility. Equal Credit Opportunity Act (ECOA). Is a federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, sex, religion, national origin, age, marital status or receipt of income from public assistance programs.

Equity. The difference between the fair market value and current indebtedness, also referred to as the owner's interest. The value an owner has in real estate over and above the obligation against the property. Escrow. An account held by the lender into which the home buyer pays money for tax or insurance payments. Also earnest deposits held pending loan closing. Escrow Account. Once you close your purchase transaction, you may have an escrow account or
impound account with your lender. This means the amount you pay each month includes an amount above what would be required if you were only paying your principal and interest. The extra money is held in your impound account (escrow account) for the payment of items like property taxes and homeowners insurance when they come due. The lender pays them with your money instead of you paying them yourself.

Escrow Analysis. Once each year your lender will perform an "escrow analysis" to make sure they are collecting the correct amount of money for the anticipated expenditures. Escrow Disbursements. The use of escrow funds to pay real estate taxes, hazard insurance, mortgage insurance, and other property expenses as they become due. Estate. The ownership interest of an individual in real property. The sum total of all the real property and personal property owned by an individual at time of death. Eviction. The lawful expulsion of an occupant from real property. Examination of title. The report on the title of a property from the public records or an abstract of the title. Exclusive listing. A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time. Executor. A person named in a will to administer an estate. The court will appoint an administrator if no executor is named. "Executrix" is the feminine form.
PAGE #98 - Mortgage Terms and Definitions F

F Fair Credit Reporting Act. A consumer protection law that regulates the disclosure of consumer credit reports by consumer/credit reporting agencies and establishes procedures for correcting mistakes on one's credit record. Fair Market Value. The highest price that a buyer, willing but not compelled to buy, would pay, and the lowest a seller, willing but not compelled to sell, would accept. Fannie Mae. See Federal National Mortgage Association. Farmers Home Administration (FmHA). Provides financing to farmers and other qualified borrowers who are unable to obtain loans elsewhere.

Federal Home Loan Bank Board (FHLBB). The former name for the regulatory and supervisory agency for federally chartered savings institutions. Agency is now called the Office of Thrift Supervision. Federal Home Loan Mortgage Corporation (FHLMC). Also called "Freddie Mac", is a quasigovernmental agency that purchases conventional mortgage from insured depository institutions and HUD-approved mortgage bankers. Federal Housing Administration (FHA). A division of the Department of Housing and Urban
Development. Its main activity is the insuring of residential mortgage loans made by private lenders. FHA also sets standards for underwriting mortgages. Federal National Mortgage Association (FNMA). Also known as "Fannie Mae" A tax-paying corporation created by Congress that purchases and sells conventional residential mortgages as well as those insured by FHA or guaranteed by VA. This institution, which provides funds for one in seven mortgages, makes mortgage money more available and more affordable.

Fee simple estate. An unconditional, unlimited estate of inheritance that represents the greatest estate and most extensive interest in land that can be enjoyed. It is of perpetual duration. When the real estate is in a condominium project, the unit owner is the exclusive owner only of the air space within his or her portion of the building (the unit) and is an owner in common with respect to the land and other common portions of the property. FHA Loan. A loan insured by the Federal Housing Administration open to all qualified home purchasers. While there are limits to the size of FHA loans, they can handle moderately-priced homes almost anywhere in the country. FHA Mortgage Insurance. A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price. Insurance purchased by the buyer to protect the lender in the event of default. Typically purchased for loans with less than 20 percent down payment. The cost of mortgage insurance is usually added to the monthly payment. Mortgage insurance is available through a government agency, such as the Federal Housing Administration (FHA) or through companies (Private Mortgage Insurance or PMI).

FHLMC. The Federal Home Loan Mortgage Corporation provides a secondary market for savings and loans by purchasing their conventional loans. Also known as "Freddie Mac." Firm Commitment. A promise by FHA to insure a mortgage loam for a specified property and borrower. A promise from a lender to make a mortgage loan. First Mortgage. The mortgage that is in first place among any loans recorded against a property. Usually refers to the date in which loans are recorded, but there are exceptions. Fixed Rate Mortgage. The mortgage interest rate will remain the same on these mortgages throughout the term of the mortgage for the original borrower. Fixture. Personal property that becomes real property when attached in a permanent manner to real estate. Flood Insurance. Insurance that compensates for physical property damage resulting from flooding. It is required for properties located in federally designated flood areas. FNMA. The Federal National Mortgage Association is a secondary mortgage institution which is the largest single holder of home mortgages in the United States. FNMA buys VA, FHA, and conventional mortgages from primary lenders. Also known as "Fannie Mae." Foreclosure. A legal process by which the lender or the seller forces a sale of a mortgaged property because the borrower has not met the terms of the mortgage. Also known as a repossession of property.
Freddie Mac. See Federal Home Loan Mortgage Corporation.
PAGE #102 - Mortgage Terms and Definitions G

G Ginnie Mae. See Government National Mortgage Association. Government Loan (mortgage). A mortgage that is insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA) or the Rural Housing Service (RHS). Mortgages that are not government loans are classified as conventional loans. Government National Mortgage Association (GNMA). Also known as "Ginnie Mae", provides sources of funds for residential mortgages, insured or guaranteed by FHA or VA. Graduated Payment Mortgage (GPM). A type of flexible-payment mortgage where the payments increase for a specified period of time and then level off. This type of mortgage has negative amortization built into it. Grantee. The person to whom an interest in real property is conveyed. Grantor. The person conveying an interest in real property. Guaranty. A promise by one party to pay a debt or perform an obligation contracted by another if the original party fails to pay or perform according to a contract.
PAGE #103 - Mortgage Terms and Definitions H

H Hazard Insurance. A form of insurance in which the insurance company protects the insured from specified losses, such as fire, windstorm and the like. Home Equity Conversion Mortgage (HECM). Usually referred to as a reverse annuity mortgage, what makes this type of mortgage unique is that instead of making payments to a lender, the lender makes payments to you. It enables older home owners to convert the equity they have in their homes into cash, usually in the form of monthly payments. Unlike traditional home equity loans, a borrower does not qualify on the basis of income but on the value of his or her home. In addition, the loan does not have to be repaid until the borrower no longer occupies the property. Home Equity Line of Credit. A mortgage loan, usually in second position, that allows the borrower to obtain cash drawn against the equity of his home, up to a predetermined amount.

Home Inspection. A thorough inspection by a professional that evaluates the structural and mechanical condition of a property. A satisfactory home inspection is often included as a contingency by the purchaser. Homeowners' Association. A nonprofit association that manages the common areas of a planned unit development (PUD) or condominium project. In a condominium project, it has no ownership interest in the common elements. In a PUD project, it holds title to the common elements. Homeowner's Insurance. An insurance policy that combines personal liability insurance and hazard
insurance coverage for a dwelling and its contents. Homeowner's Warranty. A type of insurance often purchased by homebuyers that will cover repairs to certain items, such as heating or air conditioning, should they break down within the coverage period. The buyer often requests the seller to pay for this coverage as a condition of the sale, but either party can pay.

Housing Expenses-to-Income Ratio. The ratio, expressed as a percentage, which results when a borrower's housing expenses are divided by his/her gross monthly income. See debt-to-income ratio. HUD median income. Median family income for a particular county or metropolitan statistical area (MSA), as estimated by the Department of Housing and Urban Development (HUD). HUD-1 settlement statement. A document that provides an itemized listing of the funds that were paid at closing. Items that appear on the statement include real estate commissions, loan fees, points, and initial escrow (impound) amounts. Each type of expense goes on a specific numbered line on the sheet. The totals at the bottom of the HUD-1 statement define the seller's net proceeds and the buyer's net payment at closing. It is called a HUD1 because the form is printed by the Department of Housing and Urban Development (HUD). The HUD1 statement is also known as the "closing statement" or "settlement sheet."
PAGE #106 - Mortgage Terms and Definitions I

I Impound. That portion of a borrower's monthly payments held by the lender or servicer to pay for taxes, hazard insurance, mortgage insurance, lease payments, and other items as they become due. Also known as reserves. Index. A published interest rate against which lenders measure the difference between the current interest rate on an adjustable rate mortgage and that earned by other investments (such as one, three, and five year U.S. Treasury security yields, the monthly average interest rate on loans closed by savings and loan institutions, and the monthly average costs-of-funds incurred by savings and loans), which is then used to adjust the interest rate on an adjustable mortgage up or down. Indexed rate. The sum of the published index plus the margin. For example if the index were 9% and the margin 2.75%, the indexed rate would be 11.75%. Often, lenders charge less than the indexed rate the first year of an adjustable-rate mortgage. Interim Financing. A construction loan made during completion of a building or a project. A permanent loan usually replaces this loan after completion. Investor. A money source for a lender.
PAGE #107 - Mortgage Terms and Definitions J

J Joint Tenancy. A form of ownership or taking title to property which means each party owns the whole property and that ownership is not separate. In the event of the death of one party, the survivor owns the property in its entirety.
Judgment. A decision made by a court of law. In judgments that require the repayment of a debt, the court may place a lien against the debtor's real property as collateral for the judgment's creditor. Judicial Foreclosure. A type of foreclosure proceeding used in some states that is handled as a civil lawsuit and conducted entirely under the auspices of a court. Other states use non-judicial foreclosure. Jumbo Loan. A loan which is larger than the limits set by the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Because jumbo loans cannot be funded by these two agencies, they usually carry a higher interest rate.
PAGE #108 - Mortgage Terms and Definitions L

L Late Charge. The penalty a borrower must pay when a payment is made a stated number of days. On a first trust deed or mortgage, this is usually fifteen days. Lease Option. An alternative financing option that allows home buyers to lease a home with an option to buy. Each month's rent payment may consist of not only the rent, but an additional amount which can be applied toward the down payment on an already specified price. Lease. A written agreement between the property owner and a tenant that stipulates the payment and conditions under which the tenant may possess the real estate for a specified period of time.

Leasehold Estate. A way of holding title to a property wherein the mortgagor does not actually own the property but rather has a recorded long-term lease on it. Legal Description. A property description, recognized by law, that is sufficient to locate and identify the property without oral testimony. Lender. A term which can refer to the institution making the loan or to the individual representing the firm. For example, loan officers are often referred to as "lenders." Liabilities. A person's financial obligations. Liabilities include long-term and short-term debt, as well as any other amounts that are owed to others. Liability Insurance. Insurance coverage that offers protection against claims alleging that a property owner's negligence or inappropriate action resulted in bodily injury or property damage to another party. It is usually part of a homeowners insurance policy.

Lien. A claim upon a piece of property for the payment or satisfaction of a debt or obligation. Line of Credit. An agreement by a commercial bank or other financial institution to extend credit up to a certain amount for a certain time to a specified borrower. Liquid Asset. A cash asset or an asset that is easily converted into cash. Loan. A sum of borrowed money (principal) that is generally repaid with interest. Loan Officer. Also referred to by a variety of other terms, such as lender, loan representative, loan
"rep" and others. The loan officer serves several functions and has various responsibilities: they solicit loans, they are the representative of the lending institution, and they represent the borrower to the lending institution.

Loan Origination. How a lender refers to the process of obtaining new loans. Loan Servicing. After you obtain a loan, the company you make the payments to is "servicing" your loan. They process payments, send statements, manage the escrow/impound account, provide collection efforts on delinquent loans, ensure that insurance and property taxes are made on the property, handle pay-offs and assumptions, and provide a variety of other services. Loan-to-Value Ratio. The relationship between the amount of the mortgage loan and the appraised value of the property expressed as a percentage. Lock. Lender's guarantee that the mortgage rate quoted will be good for a specific number of days from day of application. Once a rate is locked, it cannot be decreased, even if market rates decrease.
PAGE #112 - Mortgage Terms and Definitions M

M Margin. The amount a lender adds to the index on an adjustable rate mortgage to establish the adjusted interest rate. Market Value. The highest price that a buyer would pay for a property. Market value may be different from the price a property could actually be sold for at a given time. Maturity. The date on which the principal balance of a loan, bond, or other financial instrument becomes due and payable. Merged Credit Report. A credit report which reports the raw data pulled from two or more of the major credit repositories. Contrast with a Residential Mortgage Credit Report (RMCR) or a standard factual credit report. MIP (Mortgage Insurance Premium). The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company.

Modification. Occasionally, a lender will agree to modify the terms of your mortgage without requiring you t refinance. If any changes are made, it is called a modification. Mortgage. A legal document that pledges a property to the lender as security for payment of a debt. Instead of mortgages, some states use First Trust Deeds. Mortgage Banker. A mortgage banker is generally assumed to originate and fund their own loans, which are then sold on the secondary market, usually to Fannie Mae, Freddie Mac, or Ginnie Mae. However, firms rather loosely apply this term to themselves, whether they are true mortgage bankers or simply mortgage brokers or correspondents.

Mortgage Insurance (MI). Insurance that covers the lender against some of the losses incurred as a result of a default on a home loan. Often mistakenly referred to as PMI, which is actually the name of one of the larger mortgage insurers. Mortgage insurance is usually required in one form or another on all loans that have a loan-to-value higher than eighty percent. Mortgages above 80% LTV that call themselves "No MI" are usually a made at a higher interest rate. Instead of the borrower paying the mortgage insurance premiums directly, they pay a higher interest rate to the lender, which then pays the mortgage insurance themselves. Mortgage Insurance Premium (MIP). The amount paid by a mortgagor for mortgage insurance, either to a government agency such as the Federal Housing Administration (FHA) or to a private mortgage insurance (MI) company. Mortgage Insurance. Money paid to insure the mortgage when the down payment is less than 20 percent. See private mortgage insurance, FHA mortgage insurance.

Mortgage Life and Disability Insurance. A type of term life insurance often bought by borrowers. The amount of coverage decreases as the principal balance declines. Some policies also cover the borrower in the event of disability. In the event that the borrower dies while the policy is in force, the debt is automatically satisfied by insurance proceeds. In the case of disability insurance, the insurance will make the mortgage payment for a specified amount of time during the disability. Be careful to read the terms of coverage, however, because often the coverage does not start immediately upon the disability, but after a specified period, sometime forty-five days. Mortgagee. The Mortgagee is the lender. Mortgagor. The Mortgagor is the borrower or homeowner. Multi-dwelling Units. Properties that provide separate housing units for more than one family, although they secure only a single mortgage.
PAGE #116 - Mortgage Terms and Definitions N

N Negative Amortization. Occurs when your monthly payments are not large enough to pay all the interest due on the loan. This unpaid interest is added to the unpaid balance of the loan. The danger of negative amortization is that the home buyer ends up owing more than the original amount of the loan. Net Effective Income. The borrower's gross income minus federal income tax. No Cash-out Refinance. A refinance transaction which is not intended to put cash in the hand of the borrower. Instead, the new balance is calculated to cover the balance due on the current loan and any costs associated with obtaining the new mortgage. Often referred to as a "rate and term refinance." No-cost Loan. Many lenders offer loans that you can obtain at "no cost." You should inquire whether this means there are no "lender" costs associated with the loan, or if it also covers the other costs you would normally have in a purchase or refinance transactions, such as title insurance, escrow fees, settlement fees, appraisal, recording fees, notary fees, and others. These are fees and costs which may be associated with buying a home or obtaining a loan, but not charged directly by the lender. Keep in mind that, like a "no-point" loan, the interest rate will be higher than if you obtain a loan that has costs associated with it.
PAGE #117 - Mortgage Terms and Definitions N

Non Assumption Clause. A statement in a mortgage contract forbidding the assumption of the mortgage without the prior approval of the lender. Note: The signed obligation to pay a debt, as a mortgage note. Nonconforming Mortgage Loan. Mortgage loan not guaranteed to the lender by FNMA or FHLMC. Therefore, the loan program is not required to abide by the strict guidelines of FNMA/FHLMC. Nonconforming loans are much easier for borrowers to qualify for. Note. A legal document that obligates a borrower to repay a mortgage loan at a stated interest rate during a specified period of time. Note Rate. The interest rate stated on a mortgage note. Notice of Default. A formal written notice to a borrower that a default has occurred and that legal action may be taken.
PAGE #118 - Mortgage Terms and Definitions O

O One-year adjustable. Mortgage whose annual rate changes yearly. The rate is usually based on movements of a published index plus a specified margin, chosen by the lender. Original Principal Balance. The total amount of principal owed on a mortgage before any payments are made. Origination Fee. A fee charged by a lender/MLO in association of originating and processing the loan. Owner Financing. A property purchase transaction in which the property seller provides all or part of the financing.
PAGE #119 - Mortgage Terms and Definitions P

P Partial Payment. A payment that is not sufficient to cover the scheduled monthly payment on a mortgage loan. Normally, a lender will not accept a partial payment, but in times of hardship you can make this request of the loan servicing collection department. Payment Change Date. The date when a new monthly payment amount takes effect on an adjustable-rate mortgage (ARM) or a graduated-payment mortgage (GPM). Generally, the payment change date occurs in the month immediately after the interest rate adjustment date. Periodic Payment Cap. For an adjustable-rate mortgage where the interest rate and the minimum payment amount fluctuate independently of one another, this is a limit on the amount that payments can increase or decrease during any one adjustment period. Periodic Rate Cap. For an adjustable-rate mortgage, a limit on the amount that the interest rate can increase or decrease during any one adjustment period, regardless of how high or low the index might be. Permanent Loan. A long term mortgage, usually ten years or more. Also called an "end loan."
Personal Property. Any property that is not real property.

PITI. This stands for principal, interest, taxes and insurance. If you have an "impounded" loan, then your monthly payment to the lender includes all of these and probably includes mortgage insurance as well. If you do not have an impounded account, then the lender still calculates this amount and uses it as part of determining your debt-to-income ratio. PITI reserves. A cash amount that a borrower must have on hand after making a down payment and paying all closing costs for the purchase of a home. The principal, interest, taxes, and insurance (PITI) reserves must equal the amount that the borrower would have to pay for PITI for a predefined number of months. Planned Unit Development (PUD). A project or subdivision that includes common property that is owned and maintained by a homeowners' association for the benefit and use of the individual PUD unit owners. Pledged Account Mortgage (PAM). Money is placed in a pledged savings account and this fund, plus earned interest, is gradually used to reduce mortgage payments.

Points (Loan Discount Points). Prepaid interest assessed at closing by the lender. Each point is equal to 1 percent of the loan amount (i.e. two points on a $100,000 mortgage would cost $2,000). Power of Attorney. A legal document authorizing one person to act on behalf of another. Pre-approval. A loosely used term which is generally taken to mean that a borrower has completed a loan application and provided debt, income, and savings documentation which an underwriter has reviewed and approved. A pre-approval is usually done at a certain loan amount and making assumptions about what the interest rate will actually be at the time the loan is actually made, as well as estimates for the amount that will be paid for property taxes, insurance and others. A pre-approval applies only to the borrower. Once a property is chosen, it must also meet the underwriting guidelines of the lender. Contrast with pre-qualification. Prepaid Expenses. Necessary to create an escrow account or to adjust the seller's existing escrow account. Can include taxes, hazard insurance, private mortgage insurance and special assessments. Prepayment. A privilege in a mortgage agreement permitting the borrower to make payments in advance of their due date.

Prepayment Penalty. Money charged for an early repayment of debt. Prepayment penalties are allowed in some form (but not necessarily imposed) in many states. Pre-qualification. This usually refers to the loan officers written opinion of the ability of a borrower to qualify for a home loan, after the loan officer has made inquiries about debt, income, and savings. The information provided to the loan officer may have been presented verbally or in the form of documentation, and the loan officer may or may not have reviewed a credit report on the borrower. Primary Mortgage Market. Lenders making mortgage loans directly to borrower's such as savings and loan associations, commercial banks, and mortgage companies. These lenders sometimes sell their
mortgages into the secondary mortgage markets such as to FNMA or GNMA, etc. Prime Rate. The interest rate that banks charge to their preferred customers. Changes in the prime rate are widely publicized in the news media and are used as the indexes in some adjustable rate mortgages, especially home equity lines of credit. Changes in the prime rate do not directly affect other types of mortgages, but the same factors that influence the prime rate also affect the interest rates of mortgage loans.

Principal Balance. The outstanding balance of principal on a mortgage. The principal balance does not include interest or any other charges. Private Mortgage Insurance (PMI). Lenders will sometimes allow a small down payment if borrowers carry private mortgage insurance. Private mortgage insurance will usually require an initial premium payment and may require an additional monthly fee depending on your loan's structure. Promissory Note. A written promise to repay a specified amount over a specified period of time. Public Auction. A meeting in an announced public location to sell property to repay a mortgage that is in default. Purchase Agreement. A written contract signed by the buyer and seller stating the terms and conditions under which a property will be sold. Purchase Money Transaction. The acquisition of property through the payment of money or its equivalent.
PAGE #124 - Mortgage Terms and Definitions Q

Q Qualifying Ratios. Calculations that are used in determining whether a borrower can qualify for a mortgage. There are two ratios. The "top" or "front" ratio is a calculation of the borrowers monthly housing costs (principle, taxes, insurance, mortgage insurance, homeowners association fees) as a percentage of monthly income. The "back" or "bottom" ratio includes housing costs as well as all other monthly debt. Quitclaim Deed. A deed that transfers without warranty whatever interest or title a grantor may have at the time the conveyance is made.
PAGE #125 - Mortgage Terms and Definitions R

R Rate Lock. A commitment issued by a lender to a borrower or other mortgage originator guaranteeing a specified interest rate for a specified period of time at a specific cost. Real Estate Agent. A person licensed to negotiate and transact the sale of real estate. REALTOR. A real estate broker or an associate holding active membership in a local real estate board affiliated with the National Association of REALTORS. Keep in mind that REALTORS are Real Estate specialists and not Mortgage specialists.
Rescission. The cancellation of a contract. With respect to mortgage refinancing, the law gives a homeowner three days to cancel a contract if the transaction uses equity in the home as security. Recorder. The public official who keeps records of transactions that affect real property in the area. Sometimes known as a "Registrar of Deeds" or "County Clerk."

Recording. The noting in the registrars office of the details of a properly executed legal document, such as a deed, a mortgage note, a satisfaction of mortgage, or an extension of mortgage, thereby making it a part of the public record. Recording Fees. Money paid to the lender for recording a home sale with the local authorities, thereby making it part of the public records. Refinance. Obtaining a new mortgage loan on a property already owned. Often to replace existing loans on the property. Refinance Transaction. The process of paying off one loan with the proceeds from a new loan using the same property as security. Remaining Balance. The amount of principal that has not yet been repaid. See principal balance. Remaining term. The original amortization term minus the number of payments that have been applied. Renegotiable Rate Mortgage. A loan in which the interest rate is adjusted periodically. See adjustable rate mortgage.

Rent Loss Insurance. Insurance that protects a landlord against loss of rent or rental value due to fire or other casualty that renders the leased premises unavailable for use and as a result of which the tenant is excused from paying rent. Repayment Plan. An arrangement made to repay delinquent installments or advances. Replacement Reserve Fund. A fund set aside for replacement of common property in a condominium, PUD, or cooperative project - particularly that which has a short life expectancy, such as carpeting, furniture, etc. RESPA. Short for the Real Estate Settlement Procedures Act. RESPA is a federal law that allows consumers to review information on known or estimated settlement cost once after application and once prior to or at a settlement. The law requires lenders to furnish the information after application only. Reverse Annuity Mortgage (RAM). A type of mortgage in which the lender makes periodic payments to the borrower using the borrower's equity in the home as Satisfaction of Mortgage: The document issued by the mortgagee when the mortgage loan is paid in full. Also called a "release of mortgage."

Revolving Debt. A credit arrangement, such as a credit card, that allows a customer to borrow against a preapproved line of credit when purchasing goods and services. The borrower is billed for the amount
that is actually borrowed plus any interest due. Right of First Refusal. A provision in an agreement that requires the owner of a property to give another party the first opportunity to purchase or lease the property before he or she offers it for sale or lease to others. Right of Ingress or Egress. The right to enter or leave designated premises. Right of Survivorship. In joint tenancy, the right of survivors to acquire the interest of a deceased joint tenant.
PAGE #129 - Mortgage Terms and Definitions S

S Second Mortgage. A mortgage made subsequent to another mortgage and subordinate to the first one. Secondary Mortgage Market. The place where primary mortgage lenders sell mortgages to obtain more funds to originate more new loans. It provides liquidity for the lenders' security. Secured Loan. A loan that is backed by collateral. Security. The property that will be pledged as collateral for a loan. Servicing. All the steps and operations a lender performs to keep a loan in good standing, such as collection of payments, payment of taxes, insurance, property inspections and the like.

Shared Appreciation Mortgage (SAM). A mortgage in which a borrower receives a below-market interest rate in return for which the lender (or another investor such as a family member or other partner) receives a portion of the future appreciation in the value of the property. May also apply to mortgage where the borrowers shares the monthly principal and interest payments with another party in exchange for part of the appreciation. Simple Interest. Interest which is computed only on the principle balance. Subdivision. A housing development that is created by dividing a tract of land into individual lots for sale or lease.

Subordinate Financing. Any mortgage or other lien that has a priority that is lower than that of the first mortgage. Survey. A measurement of land, prepared by a registered land surveyor, showing the location of the land with reference to known points, its dimensions, and the location and dimensions of any buildings. Sweat Equity. Equity created by a purchaser performing work on a property being purchased.
PAGE #132 - Mortgage Terms and Definitions T
T Tenancy In Common. As opposed to joint tenancy, when there are two or more individuals on title to a piece of property, this type of ownership does not pass ownership to the others in the event of death. Third-party Origination. A process by which a lender uses another party to completely or partially originate, process, underwrite, close, fund, or package the mortgages it plans to deliver to the secondary mortgage market. Title. A document that gives evidence of an individual's ownership of property. Title Insurance. A policy, usually issued by a title insurance company, which insures a home buyer against errors in the title search. The cost of the policy is usually a function of the value of the property, and is often borne by the purchaser and/or seller. Policies are also available to protect the lender's interests. Title Search. An examination of municipal records to determine the legal ownership of property. This usually is performed by a title company. Transfer of Ownership. Any means by which the ownership of a property changes hands. Lenders consider all of the following situations to be a transfer of ownership: the purchase of a property "subject to" the mortgage, the assumption of the mortgage debt by the property purchaser, and any exchange of possession of the property under a land sales contract or any other land trust device.
PAGE #133 - Mortgage Terms and Definitions T

Transfer Tax. State or local tax payable when title passes from one owner to another. Treasury index. An index that is used to determine interest rate changes for certain adjustable-rate mortgage (ARM) plans. It is based on the results of auctions that the U.S. Treasury holds for its Treasury bills and securities or is derived from the U.S. Treasury's daily yield curve, which is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. Trustee. A fiduciary who holds or controls property for the benefit of another. Truth-In-Lending. A federal law requiring disclosure of the Annual Percentage Rate to home buyers shortly after they apply for the loan. Also known as Regulation Z. Two-Step Mortgage. A mortgage in which the borrower receives a below-market interest rate for a specified number of years (most often seven or 10), and then receives a new interest rate adjusted (within certain limits) to market conditions at that time. The lender sometimes has the option to call the loan due with 30 days notice at the end of seven or 10 years. Also called "SuperSeven" or "Premier" mortgage. Two-to Four-family Property. A property that consists of a structure that provides living space (dwelling units) for two to four families, although ownership of the structure is evidenced by a single deed.
PAGE #134 - Mortgage Terms and Definitions U-V

U Underwriting. The decision whether to make a loan to a potential home buyer based on credit, employment, assets, and other factors. The matching of this risk to an appropriate interest rate, term and loan amount.
Usury. Interest charged in excess of the legal rate established by law. V VA Loan. A long-term, low, or no down payment loan guaranteed by the Department of Veterans Affairs. Restricted to individuals qualified by military service or other entitlements. VA Mortgage Funding Fee. A first-time buyer will pay a little over two percent for a 'no money down' loan, and a second time buyer's fee is just above three percent. The reason for the fee includes the idea that the veteran is reducing taxpayer burden by contributing to the cost of his VA mortgage. Variable Rate Mortgage (VRM). See adjustable rate mortgage.
PAGE #135 - Mortgage Terms and Definitions V-W

Verification of Deposit (VOD). A document signed by the borrower's financial institution verifying the status and balance of his/her financial accounts. Verification of Employment (VOE). A document signed by the borrower's employer verifying his/her position and salary. Vested. Having the right to use a portion of a fund such as an individual retirement fund. For example, individuals who are 100 percent vested can withdraw all of the funds that are set aside for them in a retirement fund. However, taxes may be due on any funds that are actually withdrawn. W Warehouse Fee. Many mortgage firms must borrow funds on a short term basis in order to originate loans which are to be sold later in the secondary mortgage market (or to investors). When the prime rate of interest is higher on short term loans than on mortgage loans, the mortgage firm has an economic loss which is offset by charging a warehouse fee. Wraparound Mortgage. Results when an existing assumable loan is combined with a new loan, resulting in an interest rate somewhere between the old rate and the current market rate. The payments are made to a second lender or previous homeowner, who then forwards the payments to the first lender after taking the additional amount off the top.
PAGE #136 - Lesson 3
explain the process of prequalifying the borrower and assessing the borrowers needs; identify the traditional elements of Private Mortgage Insurance; recognize the key components in completing a loan application; explain the differences of qualification and approval letters; and be able to complete a good faith estimate.
PAGE #138 - Assessing the borrowers needs

Mortgage Loan Originator Activities/Process Application and pre-qualification process and role of mortgage broker/loan officer ASSESSING THE BORROWERS NEEDS Pre-Qualifying the Borrower Pre-qualifying is used to determine what price home your borrower can afford. It involves calculating their ratios (debt-to-income and payment-to-income), looking at the amount of cash they have available, looking at their expenses and analyzing their credit. The 28/36 Guidelines One common guideline is that your mortgage payments should amount to no more than 28 percent of your monthly gross income (income before taxes, social security and other deductions). The mortgage payment has four components: principal, interest, property taxes and insurance. In the lending business, these are commonly referred to as PITI.
PAGE #139 - 28/36 guidelines

For example: Gross income per month = $3,000 x 28% (or 0.28) = $840 available for PITI Another method says that your new mortgage payment plus your total long-term debt-load (such as car payments, college loans, installment payments) should not exceed 36 percent of your gross income. For example: Gross income per month = $3,000 x 36% (or 0.36) = $1,080 for total debt load, including the new mortgage payment. The 28/36 formulas are just guidelines. Lenders may use 25/33 in some cases, for an adjustable-rate mortgage with a down payment of less than 10 percent. Also, some special low and moderate income home buying programs use 33 percent and 38 percent for the qualifying numbers.
PAGE #140 - Assessing the borrowers needs

Here are just a few steps you can take to perform the proper pre-qualification. Find out what price home your client can afford. This includes checking credit, calculating ratios, assessing how much cash the buyer has available. Here is where you determine if they are a qualified lead. Do not waste the pre-qual follow-up system on someone who isn't qualified! This step is where you decide if loan will be doable. At the time you sit down to take a borrowers application, you should already know that the loan will close. Determine how you will package the loan. For example, you may have a borrower that has very little money but excellent ratios; you then know that they will need to have the seller paying the closing costs or that they may need down payment assistance. You need to know how you are going to overcome any barriers that present themselves.
Counseling the Borrower Not only is pre-qualifying your borrower essential to assessing their needs but also counseling them on requirements in meeting standard guidelines to obtain a loan. Compensating factors are used when a borrower may not meet all the standard guidelines for a conventional loan. Most lenders now have niche products that will allow a borrower to obtain financing.
PAGE #141 - Counseling the borrower

The following are some factors lenders could take into consideration when approving a borrower. Evidence of the donor's ability to give the gift (e.g. bank statement, stock statement) A large down payment toward the purchase of the property A low loan to value ratio Demonstration of the ability to devote a greater portion of income to basic needs like housing expense The potential for increased earnings and advancement because of the borrowers education or job training, even though they have just entered the job market Short-term income (such as social security income, alimony or child support, notes receivable, trust income, VA benefits) that could not be counted as stable income because it would not continue to be received for at least three years beyond the date of the mortgage application Property purchase as a result of corporate relocation of primary wage-earner and the secondary wage-earner, who has a history of employment in the previous location, is expected to return to work (even if he/she has not yet obtained employment in the new location) Net worth substantial enough to evidence ability to repay mortgage Substantial assets remaining after closing

Upfront Cost Buying a house means more than monthly payments. Up-front costs are sometimes paid in cash and are not a part of your mortgage amount. Some up-front costs include the following: Down Payment: Traditionally, lenders required a 20 percent down payment for a 30-year fixed-rate mortgage. For a $90,000 house, that meant an $18,000 down payment (0.2 x 90,000). Today, homebuyers can get mortgages with as little as 3 percent down and even less in certain programs. A 3 percent down payment on a $90,000 house would be $2,700. In the first case, that leaves $72,000 for the amount of the mortgage, compared to $87,300 in the latter case. If you pay less than 20 percent down, your lender might require that the client gets private mortgage insurance (PMI). Closing Costs: Chief among these are points - various one-time fees that the lender charges. Each point is equal to 1 percent of the borrowed amount. On a $72,000 mortgage, for instance, that's $720 (0.01 x 72,000). All told, closing costs may run from 3 percent to 6 percent of the mortgage amount. Let's use a 5 percent figure for this example. For a $72,000 mortgage, that would be $3,600 (0.05 x 72,000).
Besides down payment and closing costs, there are other up-front costs in buying a home that add up. Everything from mover's fees to telephone hookup charges. One way you can pare down your up-front costs is to pay less in points. Lenders will usually charge lower or even no points in exchange for a slightly higher interest rate on the mortgage. The biggest obstacle for homebuyers is coming up with enough cash to cover the down payment and other up-front costs. A 20 percent down payment was long considered the traditional standard. But that's changed in today's highly competitive lending environment. Five and 10 percent down payments are now more common. Still, if your savings fall short, don't give up.

What Does Your Borrower Have? Lets take a look at all the possible sources of down-payment funds available to the borrower. Maybe there are some you haven't thought of immediately. For example, if you're a two-car family, could you get along with one car and sell the other? Could you get money from your parents or other family members? If so, youll need a letter stating that the money is a gift, not a loan. Of course, your borrower shouldn't place that entire amount into a down payment. He or she will also need cash for closing costs, upcoming major home repairs and other unexpected expenses. If your client doesn't qualify now, don't blow them off, tell them what to do to get prepared to purchase a home in 6 months to a year. This may take a few extra minutes but they will remember you. After that, schedule to call them in 6 months. Placing a Borrower with a Lenders Program After you have determined that your borrower can indeed afford to purchase a home, you now must choose the appropriate program. The appropriate program will depend on the needs and wants of the borrower. During the pre-qualification process you should have determined if your borrower is a first time buyer, if your borrower has money to put down, if you borrower has qualifying ratios for conventional loans and other necessary information to determine the right program.

The following is a list of programs you will need to consider when trying to obtain a loan approval for your borrower: Fixed Rate: A fixed rate mortgage means that the interest rate remains unchanged for the life of your mortgage loan and locked into a set interest rate. Fixed rate mortgages keep your monthly expenses consistent and some prefer it as it makes budgeting easier. If you have reason to think interest rates are going to increase, a fixed rate mortgage is probably the best option for you. ARMs: Adjustable Rate Mortgage or ARMs are appealing because they usually offer a low initial interest rate and payment. Adjustable loans are also worth considering if you plan to be in your home a short time. For the borrower, this means you can qualify for a larger mortgage loan. Furthermore, at times when rates are falling the borrower can take advantage of the lower interest rates without the refinancing their mortgage. With an Adjustable Rate Mortgage - ARM, your monthly mortgage payment may change frequently and significantly over the term of your loan. You must decide if you can afford to take this route and if you can stomach it. Some borrows find the concept of varying interest rates a bit scary, others are willing to take the risk.
PAGE #146 - Conventional loans

Conventional Loans: Conventional loans are mortgages which are not FHA or VA loans. There are three main types of conventional loan: conforming loans, jumbo loans, and non-conforming loans. Conforming loans must meet the guidelines of Fannie Mae (FNMA) and Freddie Mac (FHLMC), these are the two largest home loan purchasers. Conventional loans have loan limits which are set by Fannie Mae and Freddie Mac, these limits do change periodically. To view current conforming loan limits, check with Fannie Mae. For loans that may exceed conventional loan limits, Non-Conforming or Jumbo loans exist. All conventional loans with less than a 20% down payment is required to have PMI (Private Mortgage Insurance). Jumbo loans are mortgages with loan amounts exceeding the guidelines of Fannie Mae and Freddie Mac.
PAGE #147 - FHA loans

FHA Loans: The Federal Housing Administration or FHA is a federal agency in the U.S. Department of Housing and Urban Development or HUD. FHA allows borrowers with less than perfect credit to receive comparable interest rates to those with good credit. FHA is not a lender itself, instead it insures mortgage loans made by private lenders. This insurance minimizes the financial risk of the borrower to the lender and allows the lender to offer a lower mortgage interest rate. First Time Homebuyer Loans: First time home buyers, we know selecting the right loan is a very important decision, a bad decision could cost you a lot of money now or down the road. As a first time home buyer you have options, maybe your hurdle is limited funds for a down payment or poor or no credit. There are loans available for first time home buyers. Home Equity Line of Credit: With a Home Equity Loan you can use your home as collateral to consolidate bills, make home improvements, plan a vacation or buy a new car. There is also a The Title I loan for individuals requiring funds for home improvement, but who have little or no equity in their property or who live in a state where equity loans are very limited. If you have some equity in your home you may want to consider refinancing for your home improvements. Title I loans bear a higher interest rate than other loan types available. You can cash out your equity in your house to for any need you may have, with a home equity loan, all of your options are open.
PAGE #148 - Other loans

Interest Only Mortgage Investor Loans: An Interest Only Mortgage requires that only the interest portion of the payment be submitted, this means that the principle balance remains the same. An interest only mortgage loan offers you greater purchasing, reduced qualifying income, maximizes your cash flow, and also offers a significant monthly payment reduction compared to a conventional mortgage. Jumbo Mortgages:
Any loan amount above the conforming loan limit is considered a Jumbo loan. Jumbo loans typically have slightly higher interest rates than loans of a lesser value, this is because lenders generally have a higher risk on these Jumbo loans than conforming loans as well as some additional underwriting restrictions and higher a Origination fee. VA Loans: Almost every veteran is eligible for Veterans Affair benefits like VA home loans. These loans are generally the best choice for veterans who are planning to make a purchase or refinance an existing home mortgage.
PAGE #149 - Private mortgage insurance

Private Mortgage Insurance What Is PMI? PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home's value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI. Benefits of PMI PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment. New PMI Requirements A new federal law, The Homeowner's Protection Act (HPA) of 1998, requires lenders or servicers to provide certain disclosures concerning PMI for loans secured by the consumer's primary residence obtained on or after July 29, 1999. The HPA also contains disclosure provisions for mortgage loans that closed before July 29, 1999. In addition, the HPA includes provisions for borrower-requested cancellation and automatic termination of PMI.

Why a Change in PMI Requirements? In the past, most lenders honored consumers' requests to drop PMI coverage if their loan balance was paid down to 80 percent of the property value and they had a good payment history. However, consumers were responsible for requesting cancellation and many consumers were not aware of this possibility. Consumers had to keep track of their loan balance to know if they had enough equity and they had to request that the lender discontinue requiring PMI coverage. In many cases, people failed to make this request even after they became eligible, and they paid unnecessary premiums ranging from $250 to $1,200 per year for several years. With the new law, both consumers and lenders share responsibility for how long PMI coverage is required.
PAGE #151 - Reading and understanding a credit report
READING AND UNDERSTANDING A CREDIT REPORT Credit bureaus gather information about us and sell it to banks, credit card venders, credit unions, finance companies, insurance companies, landlords, employers and others. These companies use the information to verify and supplement the data provided by consumers in an application for a credit card, loan, insurance, housing, and employment. Whether or not the applicant is approved, to a large degree, depends on what is contained in the credit report. To understand your clients credit worthiness, you will need to learn how to review and understand a credit report. A permissible purpose in which a consumer-reporting agency may furnish a credit report is defined in the Fair Credit Reporting Act. The Fair Credit Reporting Act defines the rules and procedures regulating consumer reporting agencies and the civil liability for willful and/or negligent noncompliance. What is typically referred to as a "credit report" is more accurately termed "consumer report" by the Federal government. This is because credit is only one aspect of the report. A typical consumer report contains personal data, employment history, detailed account information, information reported by landlords, utility and insurance companies, doctors, hospitals, lawyers and other agencies. Public records are also included, such as bankruptcy filings, lawsuits, court judgments, foreclosures, judgment liens, tax liens, mechanics liens, and criminal arrest and convictions. Inquiries by creditors and others are also listed on one's consumer credit report. Consumers should always be aware of what is contained in their credit report, especially if they intend to apply for credit or an insurance policy, are seeking employment or looking for a place to live. Upon review, if it is discovered that there is derogatory, incorrect, outdated or misleading information contained within the credit report then it is important to take the appropriate steps to correct the issues. Derogatory information on a credit report can damage the chances of your client qualifying for a loan. Additionally, it can even affect their chances of getting a good job or renting a place to live. Most banks, creditors, and a growing number of employers, rely on credit reports for obtaining information and making decisions.
PAGE #152 - Taking a complete loan application

TAKING A COMPLETE LOAN APPLICATION Good loan applications are not difficult to generate. If you have pre-qualified your client correctly, you know at this point you can get the loan approved. The loan application process is simply filling in the blanks and collecting the documentation. Gather all the information. While gathering and analyzing the documentation try to predict what problems may arise. Example: look at the bank statements when you receive them. If the statements contain large deposits then get an explanation from your client as to where the money originated. The same with credit explanations, etc. The more information you gather up front the less work you need to do and the happier your customer will be (no one likes to get explanations of large deposits one week before closing - get it up front!) Get the loan submitted immediately. It is best to put the application into the origination software while everything is fresh in your mind.

Materials Required For Mortgage Loan Application Document requirements vary depending on whether it is a refinance or purchase money. Each lender may have different requirements; this list should be used as a guideline only. Some lenders may have automated underwriting, which requires less documentation. This list does not account for fees that may be required such as appraisal fees and application fees. Original signed loan application and all mortgage loan disclosures Copy of year-to-date pay stubs for past 30 days Copies of last two year w-2's or 1099's If self-employed, federal tax returns for the past two years and YTD profit/loss statement Personal tax returns for the last two years - all schedules, signed. Homeowner's insurance information (include policy # insurance agent's tel. #) Homeowner's association information (include contact name & tel. #) Copies of bank statements for the past 2 months on all accounts Copy of ratified sales contract or HUD-1 on current home (if purchase) Copy of the front and back of the cancelled earnest deposit check (if purchase) Evidence of cashing in assets (stocks, 401k) documenting the value, liquidation, and transfer of funds to your checking account for all funds that are to be used for the down payment Copies of leases on all rental properties owned for one year. Termite inspection report (if purchase) Copy of survey and title policy on current home (if refinance) For VA loans: copy of DD214 and certificate of eligibility Other documents that may be required in certain circumstances: Original gift letter signed by both the donor and recipient of gift Evidence of the donor's ability to give the gift (e.g. bank statement, stock statement) List of savings bonds held with serial numbers Letter of explanation and supporting documentation regarding the source of funds HUD-1 settlement statement after the following property goes to settlement Copy of realtors listing and net proceeds sheet Separation agreement and divorce decree Evidence of receipt of child support or paternity agreement Bankruptcy petition and discharge documentation Auto title demonstrating free and clear ownership of all automobiles Green card or work visa Letter of credit explanation Letter of explanation for the gap in employment

I. Type of Mortgage & Terms of Loan (Page 1 of the 1003) Click here to download a copy of the 1003 in .pdf. Mortgage Applied For - You would chose FHA, Conventional, VA, Other, Etc. Agency Case Number - The FHA Case Number Lender Case Number - If applicable Amount Loan Amount Interest Rate Rate that Borrower is receiving No. of Months The number of months that the loan will be in effect Amortization Type Is it a fixed rate or ARM

II. PROPERTY INFORMATION & PURPOSE OF LOAN (Page 1 of the 1003) Subject Property This would be the address of the property being purchased or refinanced. No. of Units Single Family or possible a duplex. Legal Description Put the legal description of the property furnished by the county in which the property is located. Year Built (If built 1978 or prior, lead based paint disclosure would be required.) Purpose of Loan You will need to indicate whether it is a purchase, refinance, construction loan or other. Property will be Is this for a primary residence or will it will a second home for the borrower or an investment property. This next section is to be completed if you are doing a construction loan: You will need to know the year the lot was acquired, original cost, and the amount of any existing liens. You will then need the present value of the lot along with the cost of the improvements and put that total in the blank.

The next section is to be completed if you are doing a refinance. You will need to know the year the property was acquired, the original cost, amount of any existing liens, purpose of refinance and any improvements that were made or are to be made and the cost of those improvements. Title will be Held in what Name(s) This is ownership of the property and may be different from the names of those legally obligated by the mortgage. For example, a married couple may choose to have both spouses on the title but only one on the loan. This is common when only one spouse has good credit. Manner in which Title will be held - This section will be completed by the lender. However, applicants should make sure that when it has been completed this section matches the loan they are applying for. The loan amount, interest rate, number of months (usually 360 or 180), and the amortization type should agree with the program you are applying for. Estate will be held in - Fee Simple: This is how most property in the U.S. is held. It mans simply that you own the property outright and have certain rights that go with that ownership. Leasehold - This is quite rare, although it is still fairly common in the state of Hawaii. Vacation homes on U.S. Forest Service land are another example of leasehold property. Typically, you get title to the dwelling but the land is not yours outright. Your lease is long-term (55 years or more) and you can finance these properties as long as the term of the loan doesn't exceed the term of the lease.

III. Borrower Information (Page 1 of the 1003) This section will include personal information about the borrower and the co-borrower. You will need their social security number, Home Phone Number, Date of Birth and the Number of Years that they attended school. Next, the marital status and the number of dependents that the borrower and coborrower have. You will then need their present address including city, state and zip code and whether they own or rent the property and the number of years that they have lived in that particular location. Also include their mailing address if it is different from their present address. If they have lived at the current address for less than 2 years, you will need to know the previous address. IV. Employment Information (Page 1 and continued on Page 2 of the 1003) The following information will be needed:
Name & Address of the Employer and whether they are self-employed. Years on the Job Years employed in this line of work/profession Position Title/Type of Business Business Phone If employed in current position less than 2 years or they have more than one position, this information will be required and information about that job will be the same as listed above.

V. Monthly Income & Combined Housing Expense Information (Page 2 of the 1003) For both the borrower & co-borrower, the following will be required: Base Employee Income Overtime Bonuses Commissions Dividends/Interests Net Rental Income Other Will be explained below** The loan originator will also need the following information from the borrower/co-borrower: Rent Present amount that they pay First Mortgage (P&I) for their current property & the proposed property Other Financing (P&I) This could be a second mortgage; again, current & proposed Hazard Insurance Amount they pay for current & the proposed Real Estate Taxes - Amount they pay for current & the proposed Mortgage Insurance - Amount they pay for current & the proposed Homeowner Association Dues - Amount they pay for current & the proposed Other - Amount they pay for current & the proposed this could include other assessments and possibly other insurance i.e., flood. Note: Self Employed Borrowers/Co-Borrowers may be required to provide additional documentation such as tax returns (which most lenders are now requiring for all borrowers) and financial statements. **Other Income - Indicate whether it is for the borrower or co-borrower and describe the additional income. It could be alimony, child support and or separate maintenance. This additional other income need NOT be revealed if the borrower/co-borrower does not choose to have it considered for repaying this loan.

VI. Assets & Liabilities (Page 2 and continued on Page 3 of the 1003) Description - Assets can be many things, from jewelry and furniture to stocks and real estate. If someone owes you money, the balance owed is an asset. For borrowing purposes, the most important assets are bank balances and marketable securities like stocks, bonds, and mutual funds--things that can be easily turned into cash if needed. Get copies of all of your account statements covering two or three months. Be sure to provide all pages, even the last one which is often blank. Cash Deposit toward Purchase held by - This is the earnest money or deposit that you put up when buying a home.

Checking & Savings Accounts - This is your cash, including CDs. If you have a joint account with someone who is NOT going to be on the mortgage with you, you will need a letter from that person indicating that you have access to all of the funds in the account. Be careful with your bank accounts statements which show bounced checks are red flags to underwriters. The loan originator will also need the name of the banking institution, address, city & state & zip, account number and the amount of monies in that account. Liabilities & Pledged Assets - Liabilities are amounts you owe, such as balances on auto loans, mortgages, and credit cards. Your credit report is a good place to start when listing your debts. In addition, list any amounts not shown on your credit report. Good news! If your balance will be paid in less than ten months - for example, a $2,000 balance on a car loan with a $400 payment - the underwriter usually disregards that debt. Most of this information will be derived from the credit report. This is where your monthly payment goes. To determine how many months remain, take your balance and divide it by your monthly payment. If it's an account requiring that you pay the entire balance, such as some American Express accounts, enter "1" in the "Months" field. Make sure the credit report balances and payments are accurate. Keep in mind that obligations with less than 10 months remaining may be disregarded by the lender. Assets & Liabilities are continued on page 3 of the new 1003 which is effective January 1, 2010.

Stocks & Bonds - This includes most kinds of investments, like mutual funds, municipal bonds, retirement accounts (not through your place of work), and 529 (college savings) plans. Life Insurance Net Cash Value/Face Amount - If you have term life insurance (the kind that only pays off when someone dies), the "net cash value" is zero. The death benefit is the "face amount." Whole life policies, on the other hand, function as a kind of savings account and your policy will show a "cash surrender value" if you have this type of insurance. Enter the "cash surrender value" of your policy in the "net cash value" part of the application. The 2 above categories will then give you a subtotal of your Liquid assets.

Real Estate owned - (Enter the market value from the schedule of real estate owned which is listed below - If you go down to the Schedule of Real Estate Owned, just above Section VII, you can enter the details for every property you own. Add up the market value of all of those properties and enter that total here. Vested Interest in Retirement Fund - This is money you accumulate toward retirement through your employer(s). The "vested interest" is the amount you are entitled to. Your own contributions are vested immediately, and your employer's contributions generally are vested after a period of some years. Net Worth of Business(es) owned (Attached financial statement) - Your business' net worth is the difference between its assets and liabilities. With smaller proprietorships it can be easy to mix up personal and business assets and debt. Make sure you don't count anything twice, such as a company / personal car. Sometimes a debt that is included in the business income calculations also shows up on a personal credit report. Make sure your loan officer knows about this so underwriters don't count the debt against your income twice.
Automobiles owned (Make & Year) - Include the make, year, and approximate value. While underwriters don't really care what kind of car you drive, it is a major asset. If you have an auto loan on your credit report, be sure and list the car that goes with it in the assets section. Other Assets (Itemize) - It's not necessary to put down everything you have (you aren't going to get a loan based on the worth of your furniture). If you own investment-grade items, or something that will be sold to provide your down payment (for example, a buyer who sold a baseball card collection to get his down payment listed the collection as an "other asset" and provided an appraisal), then list it here. Total Assets - Put the total of all of the above assets. Schedule of Real Estate Owned - Include the property address and status (Sold, Pending Sale, or Rental). Indicate the type of property - principle residence (PR), second home (SH), or investment property (IP). List the current value of each property, what you owe on it, the gross rent (before expenses), mortgage payments, and other property-related expenses (divide annual payments by 12 to get a monthly figure). If you file a schedule C, E, or F to report your rental income you will need to provide it.

List any Additional Names under which credit has previously been received and indicate creditor name & account number VII. Details of Transaction (Page 3 and continued on Page 4 of the 1003) The lender will complete this area, but you will be signing the final version. Make sure it agrees with your understanding of the transaction, whether it's a home purchase, construction loan, or refinance. Look especially closely at the estimated closing costs and estimated prepaid items. Estimated closing costs cover what it costs to get the loan - fees like origination, underwriting, appraisals, title and escrow. Estimated prepaid items aren't loan charges but are costs of home ownership, like property taxes and homeowners' insurance. Discount is an extra charge some borrowers choose to pay to get a lower rate.

Other details include subordinate financing, which is a second mortgage added to the first mortgage. An example of this is an 80-10-10, a loan package in which the borrower brings in 10% down, takes an 80% first mortgage, and a 10% second mortgage. Sometimes this is cheaper than bringing in 10% down and paying mortgage insurance. If you are purchasing a property and the seller is paying some of these costs, make sure that is shown in this section. Be very sure that the loan amount is correct - if you get approved for less than you end up needing, your application may have to be re-underwritten. And if you are cashing out home equity, the amount you are getting should be reflected on the cash to borrower line.

VIII. Declarations (Page 3 and continued on Page 4 of the 1003) The following questions are to be answered Yes or No. If you answer Yes, you will need to use continuation sheet for explanation: Any Outstanding Judgments - Bankruptcy filings won't necessarily derail your loan application, especially if some time has passed and you have cleaned up your credit. If your discharge date is
within the last seven years, answer "Yes." If you it's been seven years or more, or you filed for bankruptcy but your case was denied or dismissed, you can answer "No." Have you been declared Bankrupt within the past 7 years? - Bankruptcy filings won't necessarily derail your loan application, especially if some time has passed and you have cleaned up your credit. If your discharge date is within the last seven years, answer "Yes." If you it's been seven years or more, or you filed for bankruptcy but your case was denied or dismissed, you can answer "No." Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years This includes pretty much any deal in which you were voluntarily or involuntarily forced out of your home. If you were able to negotiate a short sale and get out without defaulting on your mortgage, you can answer "No" here. Are you a party to a lawsuit? Being involved in a lawsuit doesn't mean you can't get a mortgage. Lenders just want to know if there are any potential financial or other problems. Provide whatever information and documentation the lender needs. If you are a plaintiff (suing someone else) you probably won't need much. If you are a defendant (being sued) the lender will want to know the amount you are being sued for and the nature of the case. Have you directly or indirectly been obligated on any loan which resulted in foreclosure - This includes any financial obligation incurred by you or someone you co-signed for which was not paid as agreed - and resulted in a legal judgment, foreclosure, or repossession.

Are you presently delinquent or in default on any Federal debt or any other loan, mortgage, financial obligation bond, or loan guarantee - Federal debt generally means tax obligations. If you are in default or behind on your payments on any loan or obligation (such as a child support), or if you owe back taxes you need to explain the situation on a continuation sheet. Are you obligated to pay alimony, child support, or separate maintenance - Be prepared to document the amount required (provide a copy of your decree) and prove that you are making the payments (canceled checks or bank statements). Any obligation of less than 10 month's duration will probably not be counted. Is any part of the down payment borrowed? - The amount of your own funds invested in the property is important to mortgage lenders. Underwriters need to know how much of your own funds are invested in the property, and if you have a loan for the down payment you will also need to disclose the terms for repaying it. Are you a co-maker or endorser on a note? - Have you co-signed or guaranteed a loan for anyone? Even if you aren't obligated by someone else's financial transaction, there is a chance that you could be in the future. Lenders will want an explanation of the nature of the obligation. If you can show that the person you cosigned for has been making the payments as agreed, the lender will probably disregard the loan.

Are you a U.S. citizen? You don't have to be a U.S. citizen to get a mortgage but you do have to have a Social Security number. Are you a permanent resident alien? - You don't have to be a U.S. citizen to get a mortgage but you do have to have a Social Security number. Do you intend to occupy the property as your primary residence? - Mortgages for primary residences are less risky than loans for vacation homes or rental property. Occupancy influences how much you can borrow, what the loan will cost, and how tight the underwriting standards will be. Lenders often audit completed mortgages and verify that you are living in the home if you say that you will be. A misstatement here could be considered fraudulent. If the answer is YES, the questions below need to be completed. Have you had an ownership interest in a property in the last three years? In many cases first-time buyer benefits are available to those who have not owned property within three years, even if they aren't technically "first-timers." What type of property did you own--principle residence (PR), second home (SH), or investment property (IP)? Include all that apply. How did you hold title to the home--solely by yourself (S), jointly with your spouse (SP), or
jointly with another person (O)? This question is asked largely to determine your eligibility for first-time homebuyer programs.

IX. ACKNOWLEDGMENT AND AGREEMENT (Page 4 of the 1003) This is where you sign agreeing that the information on this application is accurate and true. X. INFORMATION FOR GOVERNMENT MONITORING PURPOSES (Page 4 of the 1003) The following information is requested by the Federal Government for certain types of loans related to a dwelling in order to monitor the lender's compliance with equal credit opportunity, fair housing and home mortgage disclosure laws. You are not required to furnish this information, but are encouraged to do so. The law provides that a lender may not discriminate either on the basis of this information, or on whether you choose to furnish it. If you furnish the information, please provide both ethnicity and race. For race, you may check more than one designation. If you do not furnish ethnicity, race, or sex, under Federal regulations, this lender is required to note the information on the basis of visual observation and surname if you have made this application in person. If you do not wish to furnish the information, please check the box below. (Lender must review the above material to assure that the disclosures satisfy all requirements to which the lender is subject under applicable state law for the particular type of loan applied for.)

CONTINUATION SHEET/RESIDENTIAL LOAN APPLICATION - Use this continuation sheet if you need more space to complete the Residential Loan Application. Mark B for Borrower or C for CoBorrower. Acknowledgement. Each of the undersigned hereby acknowledges that any owner of the Loan, its servicers, successors and assigns, may verify or re-verify any information contained in this application or obtain any information or data relating to the Loan, for any legitimate business purpose through any source, including a source named in this application or a consumer reporting agency.
PAGE #171 - Online pre-approvals

ONLINE PRE-APPROVALS Automated vs. Traditional Approval The mortgage approval or underwriting process has evolved into two methods: Automated Underwriting - This method employs a computer to analyze the borrower's income, assets, liabilities, and credit scores. This process is usually done on one of two systems, DO/Desk Top Originator (FNMA) or LP/Loan Prospector (FHLMC).

Advantages of Automated Underwriting: Speed - Once the income, assets, liabilities, and credit scores have been entered, the loan approval is available within seconds
Flexibility - The affects of minor changes to down payment, income, cash reserves, or liabilities can be seen instantly. What would happen if your down payment increased by $500 or you paid off a small debt? Your answer is back in seconds.

Qualifying Income/Debt Ratios - The mortgage payment and total debt to income ratios mentioned earlier are frequently exceeded by the automated underwriting process based upon credit scores, assets, etc. Deviations are far greater than permitted under the traditional underwriting process. Traditional Underwriting - Traditional underwriting means a loan is underwritten by a human who brings to the process all their personal bias and focus on the textbook treatment of debt ratios and credit scores. The mortgage lender should only be using this as a quality control method for checking and certifying data entered under the automated system and when errors occur in the Automated Analysis. Since FHA and VA do not require credit scores, alternate credit referrals may be used such as Rental History, Car Insurance and Utility Payment Histories, etc. (Keep in mind that lenders may have credit score requirements.) Traditional Underwriting would be used when you have a FHA or VA mortgage with no credit scores.
PAGE #174 - Desktop underwriter

Desktop Underwriter Desktop Underwriter is an automated mortgage loan underwriting system that reduces the time, cost, and subjectivity associated with traditional mortgage underwriting. By providing an automated tool to assist with mortgage underwriting, DU creates efficiencies in the origination process that expand the number of loans lenders can make and result in greater liquidity for mortgages and mortgage backed securities. At the same time, DU improves the fairness and flexibility of mortgage underwriting by using objective, colorblind criteria in evaluating credit risk. Specifically, DU's quantitative risk analysis capabilities, which assess the level of credit risk associated with a loan, allow lenders to quickly tailor loan terms based on an individual borrower's risk profile. DU helps to overcome barriers and expand homeownership opportunities, particularly among minority populations that historically have experienced discrimination in the mortgage market.
PAGE #175 - Desktop underwriter

DU has never considered factors such as race or gender in assessing default risk. In order to assess the borrower's credit risk, DU uses empirical data - such as loan-to-value ratios, debt-to-income ratios, and reserves - to provide an objective assessment. It was built to fully comply with fair lending laws. DU does not approve or deny mortgage applications. Rather, it is a tool that our lender partners can use to assess credit risk as they evaluate loan applications. Our lending partners ultimately decide whether to approve the mortgage loan. DU also automates the wholesale lending process. It connects lenders to their mortgage brokers who use Desktop Originator (DOTM) by providing them with access to automated underwriting and DU's other benefits.
PAGE #176 - Understanding the lenders finding reports

Understanding the Lenders Finding Reports
Types of underwriting reports Underwriting Findings report. This report provides the underwriting recommendation for the case file, a detailed list of findings, and the steps necessary to complete the processing of the loan file. Underwriting Analysis report. This report contains key information used in determining the recommendation, including property, loan, and borrower information as well as the calculations. Credit Summary report. This report summarizes key statistics from the credit report, including information on the borrower's open accounts, derogatory accounts, and undisclosed accounts.
PAGE #177 - Understanding and gathering supporting docs

UNDERSTANDING AND GATHERING SUPPORTING DOCS PURCHASE: Fully executed purchase agreement and earnest money deposit check. REFINANCE: Warranty deed, owner's title policy, prior survey, and homeowners insurance information (agent's name or copy of last bill). CONDO: Name and phone number of Condo Assoc. or management firm. INCOME: SALARIED PERSONS: W-2s for the past 2 years and pay stubs for the most recent 30 days (paid weekly - 4 stubs, bi-weekly 2 stubs, monthly - I stub). SELF EMPLOYED: Most recent 2 years 1040s including all schedules. If corporation or partnership, we must also have 2 years of complete company returns and current Profit & Loss and Balance Sheet. INTEREST OR DIVIDEND INCOME: Most recent 2 years 1040s including all schedules and current bank or brokerage statements verifying assets, which derive this income.
PAGE #178 - Understanding and gathering supporting docs

RENTAL INCOME: Most recent 2 years 1040s including all schedules and/or copies of all leases. NOTES RECEIVABLE: Most recent 2 years 1040s including all schedules and a copy of note (income must continue for 3 more years). ALIMONY/CHILD SUPPORT: Final divorce decree & property settlement (income must continue for 3 more years). Verification of receipt (deposit receipt, check copies). RETIRED: Social Security or Pension Award Letter (income must continue for 3 more years). SOURCE OF FUNDS/CASH: Most recent 3 months checking and/or savings statements. Most recent 3 months brokerage statements for stocks, bonds, mutual funds, etc. if needed. Contract from sale of home if funds needed from it to close. Gift letter (loan officer will provide forms). ADDITIONAL: Accounts numbers and complete addresses for all private mortgages. INFORMATION: Complete information on all properties you own including address, rental income, and mortgage payments, taxes and insurance.
PAGE #179 - Conditional qualification letters
CONDITIONAL QUALIFICATION LETTERS Conditional qualification letters are given to prospective applicants typically after the pre-qualification process has occurred. This letter should contain information such as date, applicants name, mortgage broker or loan officer information (i.e., license number, address and phone number), and loan description. It should also gives details of what steps the mortgage broker has taken to qualify the prospective applicant. The conditional qualification letter should contain a statement that explains how the mortgage broker determined eligibility and qualification to meet the financial requirements of the loan. In addition, the conditional qualification letter should state clearly that it does not serve as an approval. It should, however, list the requirements to obtain a loan approval. Click here to download a sample in .pdf.
PAGE #180 - Conditional approval letters

CONDITIONAL APPROVAL LETTERS Conditional approval letters are given to prospective applicants after the mortgage broker or loan officer has used either automated or traditional underwriting tools to determine eligibility. Just like the conditional qualification letter, the conditional approval letter contains information such as date, applicants name, Mortgage Broker or Loan Officer information (i.e., license number, address and phone number). Click here to download a sample in .pdf.
PAGE #181 - Conditional approval letters

However, the loan description in this letter contains more details relating to the loan. The interest rate, interest rate lock expiration date, maximum loan-to-value, loan type and program, and secondary financing terms (if applicable) should appear in the text of this letter. The conditional approval letter should contain subject property information. The Mortgage Broker or Loan Officer at this point should have received a signed application from the borrower, reviewed the applicants credit report and credit score, evaluated income, assessed available funds for down payment, and estimated closing cost. These steps should be noted in the letter. In addition, the conditional approval letter should state clearly that the applicant is approved for the loan provided the applicants credit worthiness and financial position does not change prior to closing. Additional conditions related to subject property appraisal, title commitment, and survey should be listed. The conditional approval letter should contain an expiration date and signature of the Broker or Loan Officer.
PAGE #182 - The good faith estimate

THE GOOD FAITH ESTIMATE (GFE) The good faith estimate (GFE) is one of the government required disclosures that is provided to buyers
at the time of or within three business days after application. It is a legal requirement that all residential mortgage lenders/brokers must follow. The GFE provides the borrower with an estimation of the closing costs, down payment balances, prepaid expenses and all other charges that the borrower must address at the closing. Some of the items listed on the good faith estimate are considered to be prepaid finance charges that are used in calculating the Annual Percentage Rate.

The lender/broker must inform the borrower immediately of any changes in the loan program, rate, pricing, closing costs and prepaid item charges. The lender/broker can only estimate at the time of application what expenses title charges, investor fees, inspection costs and other such expenses will be. These expenses are generated by other 3rd parties or are chosen by the seller or buyer and not the lender or mortgage broker. However, the lender/broker should be accurate with its own fees.

The good faith estimate is normally divided into four sections, not including all related disclaimers, application information and borrower acknowledgment. The four sections are: Closing costs. These are one-time fees paid by the borrower at the time the loan closes. The closing cost a borrower may incur are loan origination, loan discount, appraisal fee, credit report, lender's inspection fee, mortgage insurance application fee, broker fee, tax service fee, processing fee, underwriting fee, commitment fee, escrow waiver fee, courier fee, settlement, closing or escrow fee, document preparation, attorney's fee, title insurance, filing fees, city transfer fee, county transfer stamp, state transfer stamp, survey and pest inspection Prepaid expenses. These are the borrower's projected housing payments (i.e., interest, taxes, insurance) that must be prepaid to establish the escrow and loan schedule. The prepaid expenses include prepaid interest, mortgage insurance premiums, flood and hazard insurance premiums, hazard and mortgage insurance reserves, real estate tax reserves, yearly assessment reserves, and flood insurance reserves.

Balance of cash for closing. This section provides the borrower with an estimate of the amount of funds needed to pay or to be received at the closing. This section includes 3 sections. Total Loan Investment. This stage compiles the borrower's total debit amount with regard to this transaction. This will include the estimated closing costs and prepaid items from the preceding section, plus other expenses. Total Borrower Credit. This stage will tabulate all of the credits that borrower will receive in this transaction. The largest credit is usually the loan amount, but deposits and prepayments must also be factored. Additional Cash From/To Borrower. The final stage subtracts the debits from the credits to arrive at a net amount. Projected monthly payment. This section lists and adds together the borrower's projected monthly housing payment based on the current loan amount, interest rate, term and other housing related debts. The monthly payment can include principle and interest, hazard insurance, real estate taxes, mortgage insurance and home owner association dues.

For the first time in more than 30 years, the U.S. Department of Housing and Urban Development today issued long-anticipated mortgage reforms that will help consumers to shop for the lowest cost mortgage
and avoid costly and potentially harmful loan offers. HUD will require, for the first time ever, that lenders and mortgage brokers provide consumers with a standard Good Faith Estimate (GFE) that clearly discloses key loan terms and closing costs. HUD estimates its new regulation will save consumers nearly $700 at the closing table. In announcing HUD's final changes to the regulatory requirements of the Real Estate Settlement Procedures Act (RESPA), HUD Secretary Steve Preston said that changes in the housing market and increases in home foreclosures demands action. "It has been a long road but today we can finally announce a better way to buy homes in America," said Preston. "Consumers need and deserve to know what they're getting themselves into before they sign on the dotted line. After carefully considering the concerns of consumers and the different businesses in the housing sector, we have developed an approach that empowers the average family to shop for the most appropriate loan to meet their needs."

March 2008, HUD proposed reforms to the longstanding regulatory requirements of the Real Estate Settlement Procedures Act (RESPA) by improving disclosure of the loan terms and closing costs consumers pay when they buy or refinance their home. Last May, HUD extended the rule's comment period to June 12th to allow for more opportunity for comment on the Department's proposed GFE form. Brian Montgomery, HUD's Assistant Secretary of Housing, Federal Housing Commissioner, said, "We have carefully considered the concerns expressed from every corner of the mortgage market in developing this rule. I am convinced that we successfully balanced the needs of consumers with those in the business of homeownership. None of us can lose sight of the fact that millions of Americans simply don't understand all the fine print of their mortgages and this, in many respects, is at the heart of today's mortgage crisis." Since 1974, little has changed about the process Americans endure when they buy and refinance their homes. Now, HUD's final reform will improve disclosure of the key loan terms and closing costs consumers pay when they buy or refinance their home.

HUD received approximately 12,000 comment letters following the proposal of its new RESPA rule. In considering those comments, the Department made considerable modifications to its proposal. For example, HUD originally proposed that settlement agents read a closing script at the closing table and that a copy be provided to borrowers. HUD ultimately discarded the script in favor of a new page on the HUD-1 Settlement Statement that allows consumers to easily compare their final loan terms and closing costs with those listed on their Good Faith Estimate. Most industry commenters said HUD's proposed four-page GFE was too long. HUD shortened the GFE form to three pages including an instructional page to help borrowers understand their loan offer. HUD continues to believe that consumers need to be aware of the key aspects of their loan as well as associated settlement costs. HUD agreed with many commenters who suggested the new GFE allow consumers to compare their estimated closing costs with the actual costs included on their HUD-1 Settlement Statement. To facilitate comparison between the HUD-1 and the GFE, each designated line on the final HUD-1 will now include a reference to the relevant line from the GFE. Borrowers will now be able to easily compare their estimated and actual costs in very much the same manner as many of the commenters suggested.
Fact Sheet on HUD's final RESPA Rule For the first time ever, HUD will require mortgage lenders and brokers to provide borrowers with an easy-to-read standard Good Faith Estimate (GFE) that will clearly answer the key questions they have when applying for a mortgage including: What's the term of the loan? Is the interest rate fixed or can it change? Is there a pre-payment penalty should the borrower choose to refinance at a later date? Is there a balloon payment? What are total closing costs? HUD estimates that by improving upfront disclosures on the GFE, and limiting the amount estimated charges can change, consumers will save nearly $700 in total closing costs. Based on substantial public comment, HUD withdrew a proposed requirement that closing agents read and provide a 'closing script' to borrowers in favor of a new page on the HUD-1 Settlement Statement that allows consumers to easily compare their final closing costs and loan terms with those listed on the GFE. HUD's new Good Faith Estimate has been reduced from four to three pages, including an instructional page to help borrowers better understand their loan offer. In addition, the GFE will consolidate closing costs into major categories to prevent junk fees and display total estimated settlement charges prominently on the first page so the consumer can easily compare loan offers. HUD will specify the closing costs that can and cannot change at settlement. If a fee changes, HUD will limit the amount it can change.

To help borrowers compare their Good Faith Estimate with their HUD-1 Settlement Statement, each designated line on the final HUD-1 will now include a reference to the relevant line from the GFE. Borrowers will now be able to easily compare their estimated and actual costs in the same manner many commenters suggested. HUD will require lender payments to mortgage brokers (often called Yield Spread Premiums) to be disclosed in a more meaningful way. These payments are directly dependent on the interest rates that consumers agree to. To ensure that HUD's new requirement will not create a consumer bias against brokers, the Department did rigorous consumer testing and found the new Good Faith Estimate helped consumers to select the lowest cost loan nine-out-of-10 times, regardless of whether the loan was originated by a lender or a broker. Loan originators will be required to provide borrowers their Good Faith Estimate three days after the loan originator's receipt of all necessary information. To facilitate shopping, loan originators could not require verification of GFE information (tax returns etc.) until after the applicant makes the decision to proceed. HUD will allow lenders and settlement service providers to correct potential violations of RESPA's new disclosure and tolerance requirements. Lenders and settlement service providers will now have 30 days from the date of closing to correct errors or violations and repay consumers any overcharges. The new, standardized GFE and revised HUD-1 is required starting January 1, 2010.

Purpose The good faith estimate (GFE) is one of the government required disclosures that is provided to buyers at the time of or within three business days after loan application. It is a legal requirement that all residential mortgage lenders/brokers must follow. The Good Faith Estimate (GFE) gives the borrower an estimate of their settlement charges and loan terms. This new GFE now better enables the borrower to be able to shop for the best loan. There is much more detailed information required for the loan originator to fill in than on the previous GFE.
Click here to download a copy of the GFE in .pdf. Shopping for Your Loan This new GFE lets the borrower know that there is now a shopping chart on page 3 of the new GFE. Important Dates Originators will now need to include the following: Date that the interest rate for current GFE available through. Date that estimate for all other settlement charges is available through. Number of days a borrower has to go to closing to receive the locked interest rate. Number of days interest rate must be locked prior to settlement.

Summary of your Loan Initial Loan Amount Loan Term Initial Interest Rate Initial Monthly amount for Principal, Interest & Mortgage Insurance Can Interest Rate Rise? If you make payments on time, can Loan Balance Rise? If you make payments on time, can monthly amount owed for P&I and Mortgage Insurance Rise? Does loan have a Prepayment Penalty? Does loan have a Balloon Payment? Escrow Account Information Originators will now need to disclose the amount of funds that will be collected from the borrower for the taxes and insurance. (Do not include P&I & Mortgage Insurance in this figure). You will also need to disclosure whether the borrower has or does not have an escrow account. Summary of your Settlement Charges A) Your Adjusted Origination Charges (from Page 2) B) Your Charges for all Other Settlement Services (from page 2) A plus B = Total Estimated Settlement Charges

Understanding your Estimated Settlement Charges Origination (#1 on the GFE) This section will be the originators adjusted origination charges. You will disclose the origination charge (this charge is for getting the loan for the borrower). This amount is a dollar amount instead of a percentage. Credit or Charge (Points) for the Specific Interest Rate Chosen (#2 on the GFE)
There are three (3) choices the originator may choose from in this section: Credit or Charge for the Interest Rate is included in the Origination Charge Borrower receives a credit of (dollar amount) for the interest rate. This credit reduces their settlement charges. A charge of (dollar amount) for the interest rate. This charge increases their settlement charges. There is a tradeoff table on page 3 where the total settlement charges can change by the borrower choosing a different interest rate for the loan. This will be discussed a little later in the course.

Your Adjusted Origination Charges (A) on the GFE The total of your Origination Charges and Points will now be added and put in Row A (Adjusted Origination Charges) on page 1. Your Charges for all Other Settlement Services Required Services that we Select (#3 on the GFE) These charges are for services that are required to complete the settlement and are chosen by the loan originator, escrow company or lender. Originators will need to list the service (i.e., appraisal) and list the charge for the service. Title Services and Lenders Title Insurance (#4 on the GFE) Total charge on this line would be for the services of a title or settlement agent and the title insurance to protect the lender if required. Owners Title Insurance (#5 on the GFE) This is the Owners Title Insurance Policy which protects the borrowers interest in the property. Required Services that you can Shop for (#6 on the GFE) These charges relate to other charges that are required to complete a settlement. Originators will identify the providers and the cost of those services. However, the borrower may choose to shop for themselves. An example, Title Company and certainly Homeowners Insurance.

Government Recording Charges (#7 on the GFE) Recording fees are for state and local fees to record the borrowers loan and title documents. Transfer Taxes (#8 on the GFE) State and local fees on mortgages and home sales. Initial Deposit for your Escrow Account (#9 on the GFE) This charge is for monies held in Escrow to pay for future recurring charges on the borrowers property. This would most likely include 1) property taxes 2) all insurance (hazard, flood, etc) and 3) any other recurring charge that may be on the property. The taxes and insurance are now in one figure on the
GFE instead of broken down as in the old GFE. Daily Interest Charges (#10 on the GFE) This charge (previously termed interim interest) is the daily interest on the loan from the day of settlement until the first day of the next month or the first day of the borrowers normal mortgage payment cycle. The daily amount and the number of days will need to be disclosed. Also the settlement date will be shown. Homeowners Insurance (#11 on the GFE) This charge is for the 1 year insurance policy the borrower must purchase for the property to protect it from a loss, such as fire. Charges for All Other Settlement Charges (B) on the GFE The total of your All other Settlement Charges will now be added and put in Row B on page 1. TOTALS - The totals of A & B will now be at the bottom of pages 1 & 2 of the new GFE.

INSTRUCTIONS (this is Page 3 of the GFE) Page 3 of the new GFE will give instructions to the borrower and explain in detail about the GFE and the HUD-1. It also explains which charges cannot increase, those that can increase up to 10%) and the charges that can change at settlement. The following charges cannot increase at settlement: Origination Fee / Yield Spread (YSP) note: ZERO TOLERANCE Points for a specific interest rate Adjusted origination charges after an interest rate has been locked Transfer Taxes The total of these charges can increase up to 10%: Required services that the originator, lender or title company selects Title services and lenders title insurance Owners Title Insurance Required services that the borrower shops for (if borrower uses companies we identify) Recording Fees These charges can change at settlement: Required services that the borrower shops for (if borrower does not use companies we identify) Title services and lenders title insurance (if borrower does not use companies we identify) Owners Title Insurance (if borrower does not use companies we identify) Initial Deposit for your Escrow Account Daily Interest Charges Homeowners Insurance

Using the Tradeoff Table
On the GFE, the originator has offered the borrower a loan with a particular interest rate and estimated settlement charges. The Tradeoff Table is used when the borrower may want to choose the same loan but with lower settlement charges. They would then have a higher interest rate. The borrower may choose to have a lower interest rate in which event they would have higher settlement charges. If the borrower chooses one of these options, a new GFE would need to be prepared. Using the Shopping Chart This is a chart prepared for the borrower that will enable them to compare GFEs from different loan originators. That enables the borrower to shop for the best loan. In order for the borrower to shop, the originator will need to answer the following questions: Initial Loan Amount Loan Term Initial Interest Rate Initial Monthly Amount Owed Rate Lock Period Can Interest Rate Rise? Can Loan Balance Rise? Can Monthly Amount Owed Rise? Prepayment Penalty? Balloon Payment? The statement at the end of Page 3 of the GFE If your loan is sold in the future lets the borrower know that if their loan is sold no changes will be made.
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better understand annual percentage rate; be able to complete a truth in lending disclosure statement; have an understanding of documents required on a loan file; be able to explain the anatomy of a loan; understand how home value is estimated; and be able to read a HUD1.
PAGE #201 - Truth in lending disclosure

Truth in Lending Disclosure Statement A Truth in Lending disclosure statement is one of the more important documents in the mortgage process. It is designed to help borrowers understand their borrowing costs in their entirety. Federal law
requires that lenders provide a Truth in Lending (TIL) document to all loan applicants within three business days of receiving a loan application, disclosing all costs associated with making and closing the loan. Here is a breakdown of the some of the charges you may find on a Truth in Lending statement and what they mean: Annual percentage rate: The annual percentage rate (APR) is the cost of credit or the amount you will pay for the credit provided to you through the loan. APR is calculated at a yearly rate. It includes not only your contractual interest rate, but also any prepaid finance charges paid during or before the loans closing such as origination points, service fees or credit fees, commitment or discount fees, buyers points, finders feels, etc. as well as any private mortgage insurance (PMI). PMI is generally required if you put less than 20 percent down on a home. Note that the APR shown on the TIL disclosure statement always exceeds the quoted interest rate because of the additional items noted above. In essence the APR reflects the true cost of your loan. Click here to download a copy of the TIL in .pdf. Click here to download a copy of the APR Calculation Table in .pdf.

Finance charge The finance charge also calculates the cost of credit, however this figure is expressed in dollars rather than a percentage. Like the APR, the finance charge includes the total amount of interest incurred over the loans lifetime, plus any prepaid finance charges and mortgage insurance premiums. Amount financed The amount financed represents the loan amount minus any prepaid finance charges. The amount financed is important because it provides you with a clear, accurate assessment of the total amount of credit provided through the loan.

Total of payments The total of payments indicates the total amount you will pay over the course of the loan if you make all required payments. This includes the principal, interest and private mortgage insurance (if required), but not your real estate tax premiums or monthly property insurance payments. Payment schedule The payment schedule includes the following information: number of payments, amount of payments, and when payments are due. Keep in mind that the amount of payments does not include payments for real estate taxes or property insurance premiums. If you have an Adjustable Rate Mortgage, the payment schedule will reflect the payments due based on any adjustments. If you have mortgage insurance, the payments may that reflected as well.

Other disclosures
Your Truth in Lending statement will contain a number of additional disclosures below the payment schedule information. Some of these may include whether or not your loan has a demand feature and / or a variable rate feature. A demand feature allows the lender to demand payment of the loan for any reason. A variable rate feature means that your interest rate is not fixed and may change. This essentially indicates that you have an adjustable rate mortgage. There is also a section on the Truth in Lending statement that details the late charge terms. This line will tell you when you will be charged a late fee and how much that fee will be.

Another important disclosure to look for is called prepayment. There are two lines under prepayment. The first tells you whether or not you have to pay a penalty if you pay your loan off early. (Remember this fee could apply if you chose to refinance your mortgage or sell your home before the end of your loan term.) The second line states that if you pay the loan off early, you are, unfortunately, not entitled to a refund of part of your finance charge. Basically, this means that you will pay interest for the period of time in which you use the loan and any previously paid finance charges are non-refundable.
PAGE #206 - Stacking a complete file

STACKING A COMPLETE FILE WHAT IS A COMPLETE FILE? WHAT CONSTITUTES A COMPLETE FILE? Sections of a Complete File Stack documents from the bottom upward ending with your application on top. 1. Disclosures - servicing, ECOA, signature authorization & GFE 2. Purchase - executed sales agreement Refinance - warranty deed, title, survey, and homeowners insurance. 3. Tax returns for 2 years - oldest year first, latest year on top of that. 4. Bank Statements - most current on top. 5. Pay Stubs Most current month 6. Application
PAGE #207 - Stacking a complete file

A complete file is generally dependent upon the lenders requirements for complete approval of the loan. Yes, there are basics documents that typically go with every file like the ones listed above, but there may be additional documents needed to completely approve the loan. For example, an appraisal and survey maybe requested for review before a final loan approval is granted.
PAGE #208 - Anatomy of a loan

ORGANIZATION AND CONDITIONS Anatomy of a Loan Once you submit a loan, it goes through many different stages before you can collect your money at the closing. The following information details the steps a loan processors could perform when receiving a file. When your loan is submitted for processing, it is organized and entered into the pipeline. The processor stamps and dates the file and enters the loan information into the system.

When the processor reviews the file to make sure that the ratios are okay and that all the documents needed to make the loan complete are in the file, the processor works up and mails out the verifications of deposits and employment on the borrowers. Once that is done the processor verifies the information on the 1003 and 1008 for the file, reviews and stacks bank statements for underwriting, highlights the bank balances, pay stubs, etc. The processor at this point uses a quality control checklist to detail what is in the file and what is missing from the file. If the money is in file for the appraisal then an appraisal request form is generated to orders the appraisal. At this point the processor will complete the documents necessary (Doc Order Form, Loan Submission Form, etc) to submit the file to the lender. A cover sheet is then written given the details of the file. The file is copied and then sent to the Lender.

Once the file is approved the processor is informed. The processor then informs you so that a conditional approval letter can be sent to your borrower and Real Estate Agents involved. If the file is suspended or denied, the processor will review the reasons given for the suspension or denial. At this point the decision can be overturn or the package can be sent back so that the loan officer can resubmit it to another Lender. When the loan is approved the file is then passed to the auditor/closer who prepares the loan for closing. The processor receives and reviews the conditions needed to close the file and orders the title and survey. The processor then lets you know what conditions you need to get in order to clear the loan. The underwriter has many conditions that need to clear that you never see i.e., condo info, title info, appraisal info, fee sheets, etc. When completing a refinance make sure that you deliver a copy of the prior mortgage and survey to the processor immediately (you should have received it up front). The Lender needs that time to release the package from underwriting to closing. The underwriter will coordinate with the closing agent as to the closing. If there are last minute changes (i.e. you changed the loan amount) the originator must update the 1003 and 1008 to reflect these changes. You will also need to supply the processor/lender with the insurance agent's name & phone number and if it is a Condo or PUD the lender will need the management company information. The loan officer must prepare the fee sheet. The lender will order the funds and get the closing information to the closing agent so a HUD can be prepared prior to closing.

Conversation Log It is important to keep a conversation log when communicating with REALTORS, Borrowers, Title Companies, Lenders, Appraisers as well as people within the processing department of your mortgage
company. It is very challenging to write down every detail. It can save you a lot of time and also makes it easy for you to track the process of the loan. Understanding Conditions After you have submitted a complete file to a lender with initial required docs and the file has been submitted to underwriting, there are a number of things the underwriter could audit and review. Usually during this phase the underwriter will generally send you a list of conditions that must be submitted prior to preparing documents for closing as well as conditions that will have to be met prior to funding. In some cases an underwriter may suspend a file if the documents you submitted with the initial file are not clear are accurate. The key step in meeting conditions comes with knowing how to completely understand what the underwriter is requesting. If you have any doubt as to what the underwriter is asking for, you may want to contact an underwriter assistant or processor to obtain clarification. Dont just assume the underwriter is clear about what they need to complete the loan process.

Meeting Conditions Once you understand exactly what the underwriter is requesting, then you should contact the appropriate people to help you meet the conditions. This may involve contacting the borrower, Title Company, insurance agent, Homeowners Association, surveyor, appraisal and many others who may supply documentation for the file. It is a good idea to send all the requested conditions at the same time in the order in which they were requested. Clearly mark and identify each condition. This makes the underwriters job a lot easier, which will expedite the loan process.

Scheduling Closing Once you have submitted all the conditions and the underwriter has cleared them, you should communicate with the closer to find out the turn-around time to prepare and send out docs. Each lender is different. Some have 24 to 48 hour turn times to release docs. Others may have 48 to 72 hours turn times. In addition, you have to coordinate closing times with the Title Company, the buyers and the sellers. Communicate with everyone before setting an exact closing date and time. Make sure all parties involved will be able to close. Re-Conditions! An underwriter may review a condition and clear it at one phase of the underwriting process and later recondition you for the same document. For example, a survey may have been reviewed and accepted by the underwriter, but most lenders have to have documents reviewed by lawyers. If the lawyers notice something incorrect about the survey, the underwriter may be asked to recondition you for a correction or update. Re-conditions could delay closing for 2 or 3 days depending on how difficult it is to obtain a correction or update to the file.

WORKING WITH THE TITLE COMPANY Establishing an effective line of communication with Title Company is essential when trying to schedule closings. You want to get to know the escrow officers and their assistants. You want to understand how a Title Company operates. You need to have a clear understanding as to how their fees are structured, how closings are scheduled and what is required to ensure a successful closing. ORDERING AND REVIEWING THE SURVEY Once an approval is given on a loan and you have reviewed the conditions to make sure you can meet them, you should order the survey. This is generally done through the Title Company. Of course, the previous owner or builder may have a survey on hand. In most cases the Title Company will have to review and accept the survey. If the survey is over 10 years old, most Title Companies and lenders will request that a new survey is ordered.

ORDERING INSURANCE Insurance should be ordered within 2 or 3 days of closing. By this phase in the loan process you have received an approval with conditions. Of course, one of the conditions will be homeowners insurance or hazard insurance. You should review lender requirements for insurance policies. A particular mortgagee clause will need to appear on the policy and in most cases the loan number. In addition, make sure policy coverage amount, premium and dwelling coverage is clearly stated on the policy or binder. ORDERING AN APPRAISAL The appraisal should be ordered right after you have received a conditional approval from the lender. Due to new regulations (HVCC), appraisals will usually be ordered by the lender. When you receive the appraisal, make sure you confirm market value and any other necessary information required by the lender.

Estimating Home Value How can I find out what my house is worth? As a homeowner, you may have reason to question the value of your home on various occasions. These may include planning to buy or sell a home, appealing your property tax assessment, seeking to eliminate payment of private mortgage insurance or undertaking a major home renovation project. Valuation consultants will tell you that your home may have different values for different purposes.

MARKET VALUE:
For buying and selling, market value can indicate the most probable price at which a home should sell in a fair sale in a competitive market. INSURABLE VALUE: The insurable value - the cost of replacing your property if it were destroyed or damagedcan used to underwrite fire and hazard insurance. ASSESSMENT VALUE: Real estate taxes are generally based on the assessed value of your home, as estimated by your local assessor; this value is usually based on market value.

When an Appraisal Is Needed Buying or Selling a Home If you're planning to sell your home, setting an appropriate listing price can help to speed the sale. An appraiser, using market data, arrives at an opinion of market value that can help you decide on a fair listing price. Similarly, when you're shopping for a new home, a professional appraisal can indicate if the listing prices of homes you're considering are in line with the actual sale prices of similar properties. Transfer of ownership typically involves a mortgage, and an appraisal usually is required before a home loan is approved. Lending institutions may require an appraisal of property that will be used as security for a mortgage, and this opinion of value plays a key role in mortgage application approval and the amount of down payment required.

Canceling Private Mortgage Insurance New homeowners are frequently required to obtain private mortgage insurance, but as a result of legislation passed by Congress in 1998, homeowners can cancel this coverage when their loan to value ratio reaches 80 percent. To take advantage of this option a homeowner generally must have a good payment history and satisfy the holder of the mortgage that the value of the property has not declined below its original value. An appraiser can develop an opinion of the current value of the home, which will assist the homeowner in deciding whether or not to ask the lender to drop mortgage insurance. Relocating for a Job Real estate appraisals are often needed by relocation firms that assist employers in the transfer of their employees. Sometimes, the relocation firm offers to purchase an employee's home if the employee is unable to sell the home during a specified time period. An appraiser is called in to estimate the market value of the home; this estimate of value helps the relocation firm decide how much to pay for the property. The appraiser may be selected by the relocation firm, the employer or by the homeowneremployee, depending on the relocation firm's policy.

Appealing Your Tax Assessment In most communities real estate taxes are based on an ad valorem ("according to value") assessment
of your property's value. If you believe the assessed value is unfair, you may have the right to appeal the assessor's valuation. Many assessment appeals can be resolved with a telephone call or letter to your local assessor. If a dispute is carried beyond this point, however, you may want a professional appraiser to give you an independent opinion of value to bolster your appeal to the assessor. Insuring Your Home Although most reputable insurance brokers can tell you if your fire and hazard coverage is sufficient, there are properties that may require a closer examination - for example, older buildings, custom-built homes or properties with unusual features such as solar energy collectors. An appraiser can give an opinion of the insurable value of your home by using the cost approach.
PAGE #221 - Remodeling and rehabbing

Remodeling and Rehabbing Many homeowners today are choosing to fix up rather than trade up: to remodel and enlarge a present home rather than move to another home. But don't count on receiving a dollar-for-dollar return at resale time - improvements may not return their costs. Some highly personalized improvements can even handicap the sale of your home. If you're considering improving your home with the intention of increasing its resale value, an appraiser can help you decide which improvements make the most economic sense. If you're undertaking a major rehabilitation project, a feasibility study can be very useful. The appraiser conducting the study analyzes the condition of the property and the cost of rehabilitation and prepares an estimate of the property's value after improvement (the improved value will affect the ad valorem real estate tax). In addition, the appraiser will examine the surrounding neighborhood in terms of growth, structure and change. The appraiser can also investigate whether your property qualifies for historic preservation benefits from the federal and local governments. All of the data gathered and analyzed by the professional appraiser, can aid you in your decision to rehabilitate.
PAGE #222 - Appraisals

Other Decisions Requiring Appraisals An experienced, professional appraiser can assist in many other real estate decisions. Appraisers often are asked to estimate "just compensation" in situations where the government takes private property for public use, such as for a road or public park. The law requires that owners of the property taken in this manner must be paid a fair price. Appraisers also can give an opinion of value of property for gift or inheritance taxes, lease rental schedules and other investment purposes. The Appraisal Process An appraiser needs to know the purpose of an appraisal to begin the process of valuation. The appraiser will propose an appropriate fee based on the estimated work involved in the assignment. Fees vary according to the complexity of an assignment and appraiser's experience, special expertise and reputation. Professional appraisers do not structure their fees contingent on the final conclusion of value.
PAGE #223 - Approaches to value

Approaches to Value Appraisers generally use three basic methods to arrive at a conclusion of property value: the sales
comparison approach, the cost approach and the income capitalization approach. Wherever appropriate, all three methods are used in an appraisal. SALES COMPARISON APPROACH: The sales comparison approach is used to compare sales of similar properties, taking into account differences among properties that may affect value. The sales comparison approach is typically the most applicable method of valuing single-family houses, townhouses and condominiums. COST APPROACH: The cost approach is based on the current cost of replacing or reproducing a property. After estimating the cost of building the structures on a property, and deducting an amount for depreciation, the appraiser adds the estimated value of the land and arrives at an indication of value. This method is particularly useful for estimating insurable value.
PAGE #224 - Income capitalization approach

INCOME CAPITALIZATION APPROACH: The income capitalization approach is based on a property's potential rent. This method is obviously most useful for valuing income-producing properties, but it can be applied whenever rental figures from similar properties indicate what the potential rental income would be if your property was leased. Generally, the appraiser inspects your property, collects specific data about it as well as comparable properties in the same market, and analyzes general information about the property market. Using one or more of the three methods of estimating value, the appraiser arrives at a final conclusion. The appraiser's final opinion of value and supporting data are typically presented in a written appraisal report. Many single-family residential appraisals are reported on a standard form used by most lending institutions; some appraisals require detailed narrative reports supplemented with statistical data and photographs. Regardless of the report's format, the appraiser must be able to support the conclusions and explain the process clearly. Throughout the process, the appraiser uses professional judgment.
PAGE #225 - The value of a good appraiser

The Value of a Good Appraiser Whatever the reason that calls for a value estimate of your home, you should engage the services of a designated member of the Appraisal Institute. These professionals have met stringent education, experience and ethics requirements that surpass many of those required for state licensure. Reflecting their unbiased and objective approach to real property appraisal and analysis, members of the Appraisal Institute are required to adhere to a strictly enforced Code of Professional Ethics and Standards of Professional Appraisal Practice. Appraisal Institute members may hold the prestigious MAI, SRPA and SRA designations. What is an appraisal? An appraisal is a professional appraiser's opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience and professional judgment of the appraiser.
PAGE #226 - Role of the appraiser
What is the role of the appraiser? The role of the appraiser is to provide objective, impartial and unbiased opinions about the value of real property - providing assistance to those who own, manage, sell, invest in and/or lend money on the security of real estate. What qualifications must appraisers have? At minimum, all states require appraisers to be state licensed or certified in order to provide appraisals to federally regulated lenders. However, appraisers who become designated members of the Appraisal Institute have gone beyond these minimum requirements. They have fulfilled rigorous educational and experience requirements and must adhere to strict standards and a code of professional ethics. The Appraisal Institute currently confers the MAI membership designation on those who are experienced in the valuation of commercial, industrial, residential and other types of properties. The SRA membership designation is held by those who are experienced in the analysis and valuation of residential real property.

How do well-credentialed appraisers add value to real estate transactions? They bring knowledge, experience, impartiality and trust to the transaction. In so doing, they help their clients make sound decisions with regard to real property. What are the components of an appraisal report? Most appraisals are reported in writing, although in certain circumstances, an appraiser may provide an oral appraisal. A written appraisal report generally consists of: a description of the property and its locale; an analysis of the "highest and best use" of the property; an analysis of sales of comparable properties "as near the subject property as possible"; and information regarding current real estate activity and/or market area trends. What are the most important considerations in the valuation of real property? The value indicated by recent sales of comparable properties, the current cost of reproducing or replacing a building and the value that the property's net earning power will support are the most important considerations in the valuation of real property.

What is the range of services appraisers provide? In addition to residential or commercial appraisalsand depending upon an appraiser's designation and qualifications he or she may be able to assist with the following: Estate planning and estate settlements Tax assessment review and advice Advice in eminent domain and condemnation property transactions Dispute resolutionincluding divorce, estate settlements, property partition suits, foreclosures, and zoning issues Feasibility studies Expert witness testimony Market rent and trend studies Cost/benefit or investment analysis, for example, what will be the financial return on remodeling Land utilization studies Supply and demand studies

No Two Alike Because no two properties are exactly alike, you are provided a fresh challenge with every assignment you accept. This is what makes real estate appraisal interesting and distinct from the many other career choices available. If you want variety in your job, real estate appraisal may be a perfect option.
PAGE #230 - Completing a fee sheet

COMPLETING A FEE SHEET (DOC ORDER FORM) A fee sheet, or as some lenders call it, a doc order form should be completed accurately and thoroughly. Not only does this document contain your commission and fees, but it also contains important details about the type of loan, borrower information, title fees, lender fees and information on how to deliver documentation to the closing officer.
PAGE #231 - Reading a HUD 1

READING A HUD 1 The HUD-1 Settlement Statement is distributed at closing and shows the actual charges incurred by the borrower and the seller. The Settlement Statement shows the estimated taxes, insurance and other charges that will be paid from the escrow account during the first year of the loan. All amounts paid to and by the settlement agent are shown on the statement. Items marked POC are items that were paid outside of closing (i.e., appraisal fee), but are shown on the settlement statement for informational purposes and are NOT included in the totals. Click here to download a copy of the HUD 1 in .pdf.

Sections A through I Here's where you'll find information regarding what type of loan the buyer is obtaining, the lender's name and address, information about the settlement agent, the settlement date and the property location.

Section J Summary of Borrower's Transaction Section 100 Gross Amounts Due from Borrower
Line 101 The gross sales price of the property. Line 102 Charges for personal property (such items as draperies, washer, dryer, outdoor furniture, and decorative items being purchased from the seller) Line 103 The total settlement charges to the borrower brought forward from Line 1400 (this includes all charges to the borrower (loan officer, lender & title company fees) Lines 104 and 105 Amounts owed by the borrower or previously paid by the seller. Entries charged to the borrower include a balance in the seller's escrow account if the borrower is assuming the loan.

Adjustments for Items paid by Seller in Advance The borrower may owe the seller a portion of uncollected rents. Lines 106 through 112 are for items, which the Seller has paid in advance. For instance the buyer must reimburse the seller for a prorated portion of county taxes, since the seller paid an annual bill but will not own the property during that entire year. Line 120 Gross amount Due from Borrower. It is the total of Lines 101 through 112. Section 200 Amounts Paid By or On Behalf of Borrower. These are all entries for funds the borrower will receive and/or pay at closing. Line 201 Gives the buyer credit for the amount of earnest money paid when the contract was executed.

Line 202 The amount of the new loan, which is being paid for the borrower by the lender. Line 203 Is used when the borrower is assuming a loan or taking title subject to an existing loan or lien on the property. Lines 204 209 Used to list miscellaneous items paid by or on behalf of the buyer. They may include such items as an
allowance the seller is making for repairs or replacement of items. This area is also used when the seller accepts a note from the borrower for part of the purchase price.

ADJUSTMENTS FOR ITEMS UNPAID BY SELLER Lines 210 219 Bills which the seller has not yet paid, but owes all or a portion of. Taxes and assessments are listed, but the area might also include rent collected in advance by the seller for a period extending beyond the settlement date. Line 220 Total paid by/for Borrower.

Section 300 Cash at Settlement From/To Borrower Line 301 Summary of the total amount due from the borrower (line 120). Line 302 Summary of all items already paid by/for the borrower (line 220) Line 303 Cash From or To Borrower - Difference between lines 301 and 302. It shows cash from or to the borrower.

Section K Summary of Seller's Transaction Section 400 - Gross Amount Due to Seller The amounts in this section are added to the seller's funds. Line 401 States the gross sales price of the property.

Line 402
Entries for personal property (such items as draperies, washer, dryer, outdoor furniture and decorative items that the seller may be selling to the buyer). Lines 403 - 405 Other amounts owed by the borrower or previously paid by the seller, such as: If the borrower is assuming the seller's loan, he/she must reimburse the seller for the balance in the seller's escrow account. The buyer may owe the seller a portion of uncollected rents.

ADJUSTMENTS FOR ITEMS PAID BY SELLER IN ADVANCE Lines 406 through 412 Items, which the Seller has paid in advance. For instance, the buyer may need to reimburse the seller for a prorated portion of county taxes if the seller paid an annual bill but will not own the property during that entire year. Line 420 Gross amount due to Seller. It is the total of Lines 401 through 412. Section 500 - Reductions in Amount Due to Seller The amounts in this section are subtracted from the seller's funds. Line 501 Used when the seller's real estate broker or another party holds the borrower's earnest money deposit, and will pay it directly to the seller.

Line 502 Contains the figure from Line 1400, the seller's total charges as computed in Section L. Line 503 Used if the borrower is assuming or taking title subject to existing liens, which are deducted from the sales price. Lines 504 and 505 For any first and/or second loans which will be paid-off as part of settlement (including accrued interest).

Lines 506 through 509
Shown as blank lines for miscellaneous entries. Used to record deposits paid by the borrower to the seller or another party who is not the settlement agent. This is slightly different than the entry in 501. In this case the party holding the funds transfers it to the settlement agent to be disbursed at closing. These lines may also be used to list additional liens, which must be paid at settlement to clear title to the property.

ADJUSTMENTS FOR ITEMS UNPAID BY SELLER Lines 510 through 519 For bills which the seller has not yet paid, but owes all, or a portion of. Taxes and assessments are listed, but the area might also include rent collected in advance by the seller for a period extending beyond the settlement date. Line 520 Total Reduction Amount Due Seller - is the total for all items in Section 500. The total is deducted from the seller's proceeds. Section 600 Cash at Settlement To/From Seller Line 601 Gross amount due to the seller from line 420. Line 602 Contains the total of reductions in seller's proceeds from line 520.

Line 603 Cash to or from Seller - Difference between lines 601 and 602. It usually indicates a cash amount paid to seller. It is possible for the seller to owe money at closing. For instance, the seller might owe more on first and second mortgages than is recovered in the contract. The HUD 1 also gives details of the settlement charges that the borrower may be required to obtain and pay for. These charges are itemized in Section L of the HUD-1 Settlement Statement. You also will find a sample of the HUD-1 form to help you to understand the settlement transaction.

L. SETTLEMENT CHARGES Line 700 Total Real Estate Broker Fees - Total sales/brokers commission based on sales price @ %= normally paid from sellers funds at settlement. However, in some instances, the commission may be paid by the borrower.
Division of Commission (line 700) as follows: Line 701 Monies to Listing Brokerage Company Line 702 Monies to Selling Brokerage Company Line 703 Total Commission paid at Settlement Line 704 Could be used to list any bonus paid to Listing or Selling Brokerage.

Line 800 ITEMS PAYABLE IN CONNECTION WITH LOAN - Fees that lenders charge to process, approve and make the mortgage loan: Line 801 Loan Origination: This fee is usually known as a loan origination fee but sometimes is called a "point" or "points." It covers the lender's administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders. Generally, the buyer pays the fee, unless otherwise negotiated.

Line 802 Credit or Charge (points) for the specific interest rate chosen. Each "point" is equal to one percent of the mortgage amount. For example, if a lender charges two points on an $80,000 loan this amounts to a charge of $1,600. Line 803 Adjusted Origination Charges Line 804 Appraisal Fee: This charge pays for an appraisal report made by an appraiser. This is one item that will normally show POC most lenders charge this fee upfront before having an appraisal perform their job.

Line 805
Credit Report Fee: This fee covers the cost of a credit report, which shows your credit history. The lender uses the information in a credit report to help decide whether or not to approve your loan and how much money to lend you. Line 806 Tax Service Fee Line 807 Flood Certification Line 808 Left Blank for any additional charges

Line 900 Items Required by Lender to Be Paid in Advance You may be required to prepay certain items at the time of settlement, such as accrued interest, mortgage insurance premiums and hazard insurance premiums. Line 901 Daily Interest Charges: Lenders usually require borrowers to pay the interest that accrues from the date of settlement to the first monthly payment.

Line 902 Mortgage Insurance Premium: The lender may require you to pay your first years mortgage insurance premium or a lump sum premium that covers the life of the loan, in advance, at the settlement. On some loans, this can be added into the loan amount, but will still show on this line. Line 903 Homeowners Insurance - Hazard insurance protects you and the lender against loss due to fire, windstorm, and natural hazards. Lenders often require the borrower to bring to the settlement a paidup first years policy or to pay for the first year's premium at settlement. Line 904 Left blank for any other fees that the lender would required to be paid in advance.

Line 1000 RESERVES DEPOSITED WITH LENDER
Lines 1000 - 1007 Escrow Account Deposits: These lines identify the payment of taxes and/or insurance and other items that must be made at settlement to set up an escrow account. The lender is not allowed to collect more than a certain amount. The individual item deposits may overstate the amount that can be collected. The aggregate adjustment makes the correction in the amount on line 1008. It will be zero or a negative amount. Line 1001 Initial Deposit for your Escrow Account Line 1002 Homeowners Insurance months @ $ per month (The lender will determine how many month are to be collected It depends on the month in which you close; therefore you will need to check w/each lender to determine this amount.

Line 1003 Mortgage insurance months @ $ per month. The lender will determine how many months are to be collected It depends on the month in which you close; therefore you will need to check w/each lender to determine this amount. Line 1004 Property taxes months @ $ per month. The lender will determine how many months are to be collected It depends on the month in which you close; therefore you will need to check w/each lender to determine this amount. Lines 1005 1006 Left blank in event there are more assessments/fees to be collected for escrow. Line 1007 Aggregate Adjustment This figure will be calculated by the Escrow Agent.

1100 TITLE CHARGES Title charges may cover a variety of services performed by title companies and others. Your particular settlement may not include all of the items below or may include others not listed. Line 1101 Title Services and Lenders Title Insurance Line 1102 Settlement or Closing Fee: This fee is paid to the settlement agent or escrow holder. Responsibility for payment of this fee should be negotiated between the seller and the buyer. Normally you will see that
this fee is split between the buyer and the seller. Line 1103 Owners Title Insurance - The cost of the owner's policy is shown here.

Line 1104 Lenders Title Insurance - The cost of the lenders policy is shown here. Line 1105 Lenders Title Policy Limit Line 1106 Owners Title Policy Limit Line 1107 Agents Portion of the total Title Insurance Premium Line 1108 Underwriters Portion of the total Title Insurance Premium

1200 GOVERNMENT RECORDING AND TRANSFER CHARGES: These fees may be paid by you or by the seller, depending upon your agreement of sale with the seller. The buyer usually pays the fees for legally recording the new deed and mortgage (line 1201). Transfer taxes, which in some localities are collected whenever property changes hands or a mortgage loan is made can be quite large and are set by state and/or local governments. City, county and/or state tax stamps may have to be purchased as well (lines 1202 and 1203). Line 1201 Government Recording Charges Line 1202 Deed $; Mortgage $ Releases $ Line 1203 Transfer Taxes Line 1204 City/County Tax/Stamps Deed$; Mortgage $
Line 1205 State Tax Stamps Deed $; Mortgage $ Line 1206 Intentionally Left Blank

1300 ADDITIONAL SETTLEMENT CHARGES Line 1301 Required Services that you can Shop for (from GFE#6) Lines 1302 1305 Intentionally left blank for any other items (i.e., Survey: The lender may require that a surveyor conduct a property survey. This is a protection to the buyer as well. Usually the buyer pays the surveyor's fee, but this is negotiable as to who pays.) 1400. TOTAL SETTLEMENT CHARGES (enter on lines 103, Section J and 502, Section K) The sum of all fees in the borrower's column entitled "Paid from Borrower's Funds at Settlement" is placed here. This figure is then transferred to line 103 of Section J, "Settlement charges to borrower" in the Summary of Borrower's Transaction on page 1 of the HUD-1 Settlement Statement and added to the purchase price. The sum of all of the settlement fees paid by the seller are transferred to line 502 of Section K, Summary of Seller's Transaction on page 1 of the HUD-1 Settlement Statement.

Paid Outside Of Closing ("POC"): Some fees may be listed on the HUD-1 to the left of the borrowers column and marked "P.O.C." Fees such as those for credit reports and appraisals are usually paid by the borrower before closing/settlement. They are additional costs to you. Other fees such as those paid by the lender to a mortgage broker or other settlement service providers may be paid after closing/settlement. These fees are usually included in the interest rate or other settlement charge. They are not an additional cost to you. These types of fees will not be added into the total on Line 1400.

Comparison of Good Faith Estimate (GFE) and HUD-1 Charges On Page 3 This is the comparison of the Good Faith Estimate (GFE) and HUD-1 Charges: Charges that Cannot Increase Origination Charge (Line 801) Your Credit or Charge (Points) for the specific interest rate chosen (Line 802) Your Adjusted Origination Charges (Line 803)
Transfer Taxes (Line 1203)

Charges That in Total Cannot Increase More Than 10% Government Recording Charges Total of the charges that cannot increase and charges that cannot increase more than 10%. Increase between GFE and HUD-1 Charges Dollar Amount or Percentage Charges that Can Change Once again, charges from your GFE and the charges on the HUD-1 will be listed. Initial Deposit for your escrow account (Line 1001) Daily Interest Charges (Line 901) Homeowners Insurance (Line 903)

Loan Terms Your Initial Loan Amount is Your Loan Term (number of years) Your Interest Rate is (interest rate the borrower is receiving) Your Initial Monthly Amount owed for Principal, Interest & and Mortgage Insurance (the amount will NOT include escrows only P&I and the Mortgage Insurance. Can your Interest Rate Rise? Even if your make Payments on Time, Can your Loan Balance Rise? If payments are made on time, can monthly amount for P&I and Mortgage Insurance rise? Does the loan have a Prepayment Penalty? Does the loan have a Balloon Payment? Total Monthly Amount owned Including Escrow Accounts Of course with the NEW HUD-1 Statement, loan originators will need to get some of the answers from either the lender and/or the escrow officer. AT THE CLOSING... The closing of a loan is the transfer of real property from the seller to the buyer, according to the terms of the sales contract. The closing will vary from state to state. The closing agent also referred to as an escrow agent is the person responsible for explaining all of the documents required. This can be an attorney, an independent escrow company or a title company. Closing Agent The closing agent follows instructions from the lender as well as from the buyer and seller per the sales contract. The closing agent goes over the promissory note, mortgage, deed and any other documents and makes sure that they are properly signed by the buyer or seller as is required. The closing agent also goes over all the fees that are charged to each party. They also calculate the various prorations
(taxes), etc. between the seller and buyer. They compile the HUD-1 Settlement Statement in compliance with RESPA. The HUD-1 Settlement Statement is then compared to the GFE to verify the correct tolerance with all the disclosed fees. Explanation of Fees There are several fees associated with getting a loan. Some of the fees are paid upfront and some fees may have to be paid even if the loan does not close. Some of the typical fees that lenders charge include: Application Fee Credit Report Fee Appraisal Fee Explanation of Documents Promissory Note The promissory note (also called a mortgage note or real estate note) is a note the buyer gives to the lender promising to repay the amount of the loan plus interest. The note also states the amount of time the buyer has to repay the loan and what action the lender may take if the buyer fails to make the required payments. The note should state the interest rate and specify whether it is fixed or variable. The note also may contain provisions such as a balloon payment. It is important to note that the borrowers typical monthly payment to the lender is not solely for principal and interest owed on the note. Monthly payments might also include escrow payments for property taxes and insurance. Mortgage A mortgage involves only two parties: the borrower and the lender. It creates a lien on the property, which is recorded in the public land records. With a mortgage, the borrower has full title to the property but may not transfer ownership until the debt is paid off and the lien is released. If the debt is not paid, the lender has the right to sell the property, usually through judicial foreclosure. Truth In Lending This discloses the finance charge expressed as an APR (Annual Percentage Rate), the amount financed and total number of payments. HUD-1 Settlement Statement Standard form that shows all charges for the buyer and the seller in connection with the closing. Deed - A written document for the transfer of land or other real property from one person to another. Funding When the loan is approved (all conditions have been met and the closing papers are at the closing agents place of business to be signed), the loan funds are then disbursed to the proper parties. The parties would include the lender, mortgage loan originator, escrow company, buyer, seller and the real estate agent.
PAGE #261 - Student work - Work Assignment
HOMEWORK
understand what credit is; be able to explain how a credit score is determined; be able to understand what components affect a credit score; and be able to explain how to correct errors on a credit report.
PAGE #264 - Understanding credit reports

Understanding Credit Reports What is a Credit Score? Your credit score is important. How important? Well, lets put it this way: If youre interested in buying a house one day or applying for a loan to go to college or even doing as simple as trying to sign up for a new cell phone plan, you need to know about your credit score. You need to know what it is, how high it is and what it entitles you to. If your credit score is low, you need to work to improve it. If it is high, you need to know how to keep it high over time. Essentially, your credit score is everything a potential creditor wants and needs to know about it. It lets them know whether youre the sort of person who pays bills on time or whether youve ever defaulted on a loan. Think of it as a reference on your resume when you apply for a new job. And then think about the fact that some employers will actually request your credit report to get a better idea about the type of person you are. Now that you know just how important your credit score is, continue reading to learn about how exactly it works for you.

What Your Credit Score Actually Means Credit scores range between 300 to 900 with the higher numbers representing those people who have a higher and better credit score than those with lower scores. However, you need to understand exactly how the major credit bureaus Equifax, Experian, and TransUnion come up with these numbers in order to see why the number you have is so important. Your individual credit score is calculated by using mathematical formulas that take your current payment history into account as well as your debts and past debts, credit history and inquiries by creditors, employers and others into your credit report. These formulas produce your credit score, which is then used by creditors to determine whether or not they are willing to lend you money.

Good credit scores are typically above 680 and those people who have good credit scores usually get approved for loans and get lower interest rates on those loans. Those with lower rates are often turned down for loans or subjected to high interest rates that make it more difficult for them to successfully pay those loans off. Because of this, its important for you to both understand your credit score and work towards improving it.
You also should know that you are entitled to check your credit score with all three of the major credit bureaus once a year.

Your Credit Score May Fluctuate If youre like most Americans, your credit score will change over the course of your life for a variety of reasons. For starters, most young people in this country do not have high credit scores simply because they have never had to apply for credit before. Therefore, its important for young people to find small ways to establish credit. While they certainly need to understand the risks involved with taking on a credit card, these are great ways to establish credit when used properly. Once a person has credit though, there are a variety of ways to keep a credit score high.

Here are several of the ways to raise your credit score: Make sure you pay your bills on time: The most important way to keep your credit high is to make sure you stay current with all your outstanding debt and pay bills on time. While most creditors will not report you to the credit bureaus on your first offense, they are certainly entitled to report you anytime you do not take on the responsibility of pay your bills. Keep three to six open credit accounts at all times: The only way to prove that you can be responsible with debt is to actually have some debt or at least keep lines of credit open. By keeping credit accounts open and paying your bills on time, you can raise your credit score. Have more than one loan: The only way youre going to prove that you can responsibly handle debt is to keep some around. Paying off all your debt may seem appealing but learn to balance your debt and keep some without burying yourself underneath of it.

Keep your credit card balances low: While you do want to maintain a certain level of debt, there is such thing as too much of a bad thing when it comes to your credit report. Pay off your credit card debt as often as possible in order to keep it low. Keep a record of your credit use: As you continue to grow older and open new lines of credit, dont lose sight of your goal of improving your credit. Continue to keep records of all the credit you use so that you can see how to maximize your credit by using specific types of credit throughout your life. Keep your credit accounts open: Most people are, understandably, concerned with debt. So once they pay off a credit card, they close the account. However, this isnt actually good for your credit score. Rather, learn how to use the card responsibly and keep the balance low. Avoid too many new credit applications: Applying for credit often is one surefire way to lower your credit score. Just like asking too many people out on a date can tarnish your reputation, asking too many creditors for money makes you look like you need money more than you actually might need it. Keep your applications to a minimum.

The best way to make sense of a credit report is to first accept that there is no sense in the credit reporting system and how creditors assess you. While you may have never been late on a payment in your life, a large credit line that hasnt even been charged on could lower your credit score. Its just another example of how unfair and bogus a credit report can be.
This is why you must understand what really counts against you, what doesnt and whats worse. While different lenders use different criteria and credit reporting systems use various scoring methods, there are a few basic rules.

First, one of the main factors lenders like to verify on a credit report is your debt ratio to your reported income. Basically the amount you owe compared to the amount you make, lenders like to see it below 30 percent. The lower the better and 45 percent is usually the cutoff for whether or not a borrower will get a loan or financing. The credit score is usually on a scale of 300-800 or 400-900, the lower scores being worse. A score of 680 or better is considered fairly good. A score down in the 300 or 400 range is not good.

These scores are based on complicated equations that arent really worth trying to understand. Unfortunately, youre stuck with the score youve got until you do things to improve your credit rating pay down debt, catch up payments, etc. While you may pay your utility and other regular bills on time, a credit report does not take that into account. Rent or mortgage is most important, but after that, it is the items that may be lower on your priority list that are considered: credit cards, department store credit, other loans and debts. This is one reason its so important to stay current with creditors. While your history with credit card companies is most important, the credit limit is also a factor. Accounts with big credit lines are considered potential debt, so even if you havent used that $5,000 limit account at all, it could count against you.

If youve never had credit, this can count against you as well. The supposed reason is that you havent proven that you will make regular payments to a lender or creditor. The fact may be that youre smart enough to have stayed out of credit debt. However, you need to establish a credit history. This is best achieved by getting a department store or credit card. Use it and pay a little on it. Youll find once you have a credit card, offers will come pouring in. Dont go crazy. You dont want to turn no credit into bad credit. Just keep current and youll eventually establish that history thats so important with lenders. Applications for credit also drive your credit score down. It doesnt make much sense that simply looking at your credit will harm it, but thats the sad fact. It does not have a major impact on your credit rating, just understand that the more companies or creditors look at your credit, the more it counts against you.

While credit reporting and scoring may seem unfair, a lot of people dont know that they can have a say when trying to secure a loan. Many lenders will accept a letter explaining some of your debt, late payments or a particular situation. If you can say, for instance, that you have not missed payments in the last two years, it may balance a history of delinquent payments or closed accounts several years ago. Just be sure not to shrug off the responsibility for the debts or delinquency in the letter. Simply tell them why youre not as much of a credit risk as might be reflected on your credit report. One last thing to remember is that medical debts, for whatever reason, do not usually count against
you when it comes to credit reporting. Again, creditors are most concerned about your history paying back other loans and credit accounts. While theres no way to instantly improve your credit, you can do things to improve your credit situation.

Review and understand your credit report. Your credit report is a collection of information about you and your credit history, and can have a major impact on your life. The three credit reporting agencies are Equifax, Trans Union, and Experian. Click here to download a sample credit report in .pdf. Know whether you have a credit report. If you have ever applied for any of the following, you have a credit report: Credit card Student loan Auto loan Mortgage

Understand who looks at your credit report. Your credit report may be looked at by all of the following: Potential creditors Landlords Potential and current employers Government licensing agencies Insurance underwriters Know what these entities are asking: How promptly do you pay your bills? How many credit cards do you hold? What is the total amount of credit extended to you? How much do you owe on all of your accounts?

Be aware of the consequences of credit mistakes. Any negative information found on your credit report (late payments, bankruptcies, too much debt) can have a serious impact on your ability to do the following: Get credit Get a new job Advance in your current job Rent or buy a home Know what is on your credit report. Personal identifying information - Name, Social Security number, date of birth, current and previous addresses, and employers Credit account information - date opened, credit limit, balance, monthly payment, and payment history Public record information - bankruptcy, tax and other liens, judgments, and, in some states, overdue child support Inquiries - names of companies that requested your credit report Your credit score, depending on the type of report

Know what is not on your credit report. Checking or savings account information Medical history Race Gender Religion National origin Political preference Criminal record Be aware of how long information stays on your credit report. Positive information - indefinitely Inquiries - 6 months to 2 years Most negative information - 7 years Some bankruptcies - 10 years

This history - complied by credit reporting agencies that receive your financial information from banks, lenders, and other various creditors - is used to generate your credit score. Lenders and creditors then use this report, and the credit score associated with it, to determine if they will make a new loan to you, give you a credit card, or increase your limit on existing credit cards. Your credit history also affects the interest rate you receive. To help you become more familiar with the critical elements of your credit report, check out the four major sections of a typical credit report. Learn whats included, why it's important to check your report, what to do in cases of inaccurate information, how to decipher your credit score, and much more.

Different scores: Excellent Your credit score is above 800. Lenders and insurers view you as an excellent credit risk. You probably have a long history of using credit responsibly. Your credit report likely contains multiple credit and loan accounts that have all been paid on time for years. You have no public records, such as bankruptcy filings or collection accounts, on your report. Your excellent score means you can qualify for the best deals available.

Very Good Your credit score is between 750 and 800 and you are considered a very low credit risk. You use your credit accounts responsibly and pay your accounts on time each month. Your credit score qualifies you for some of the lowest rates available. Good Your credit score is between 700 and 750. Lenders and insurance companies view you as a low credit risk. You may have had late payments in the past, but all of your accounts are currently paid on time.
You also do not have an excessive amount of credit card debt. Your credit score qualifies you for very competitive interest rates and terms, but maybe not the best that a lender has to offer.

Fair Your credit score is between 650 and 700. You are considered to be a moderate credit risk. You may have older derogatory items on your credit report that are not hurting your score as much as they used to. Your fair credit score could also be the result of higher than normal credit card debt or too many applications for new credit in the past few months.

Bad Your credit score is between 600 and 650. Lenders and insurance companies will view you as being a high risk. Scores below 650 are considered "subprime" by many lenders. Your credit score could be lower than average because of high amounts of credit card debt or derogatory items on your credit report, such as late payments, collections, or even bankruptcy. Your credit score makes it difficult to be approved for standard credit products at competitive rates and terms. Its also possible that you could be denied for credit or insurance. Very Bad Your credit score is below 600. This means that you are a very high credit risk. Mainstream lenders and insurance companies are not likely to approve your applications. If you are approved, you will be charged much higher interest rates or premiums. Credit scores below 600 are usually caused by late payments, collection accounts, or public records appearing on your credit reports. Excessive applications for new credit or high amounts of credit card debt can also lower your score. It will be difficult for you to obtain new credit without the help of a co-signer or a large down payment.

No Credit You have no credit score. Lenders and insurers cannot accurately predict your credit risk and by default they consider you to be a high risk. Having no credit is better than having very bad credit, however, and you can be approved for new accounts. You probably have not been using credit cards and loans regularly enough for there to be recent information on your credit reports. You may be trying to open your first account, or you simply have not used any type of credit recently. You can establish your credit by opening a new credit card and using it responsibly. After a few months of use, your credit report should be able to be scored.
PAGE #285 - Consumer information

Consumer information This section consists of personal information that can include your name, Social Security number, date of birth, and current and former addresses and employer(s). Check to ensure that your Social Security number and the rest of your personal data are correct. If not,
contact each credit agency immediately. Doing this helps protect you against identity theft. Consumer statements The consumer statement section contains any comments submitted to the credit bureau to be included in your credit report. Usually this statement is an explanation of why a negative credit item is appearing on your report and will be taken into consideration by creditors and lenders. Check each credit agency's website for information on how to add or remove a consumer statement.
PAGE #286 - Public record information

Public record information Public record information from local, state, and federal courts shows any legal item that may affect your credit such as bankruptcy, judgments, suits, liens, foreclosures, collection items, and items past due. This section includes information about the type of record, whether the case is open or has been closed, the date the case was filed, a record identification number, a closing date, and which court has jurisdiction over the record. In cases of bankruptcy, your public record will include information about liability (the amount you are legally responsible for as decided by the court), exempt amount (the amount claimed against you that you are not legally responsible for), and asset amount (the value of total personal assets that can be used to pay down your debt).
PAGE #287 - Credit score

Section B: Credit score A credit score is a grade of your credit behavior. Credit scores are frequently referred to as FICO scores - a name derived from Fair Isaac Corporation, the company that invented credit scores. Credit scores range from 300 to 850 the higher the better. FICO scoring is based on five related categories. The percentages show the "weight" each one carries. History of payment (35%): Your payment history shows whether you pay your bills on time, the number of past-due accounts (and how long they are overdue), any accounts referred for collections, any bankruptcies, and other payment-related behavior. The better you are about making your monthly payments on time, the better your credit score will be. Late payments demonstrate higher credit risk behavior.

Balance and available credit (30%): Not only do lenders want to know how much money you owe, they are also interested in the ratio between outstanding debt and available credit. In other words, the closer you are to "maxing out" an account, the more negative the impact on your credit score. Length of credit history (15%): The longer your accounts have been open and active, the more credit points you'll score. The less time your accounts have been open, the less time you've had to prove yourself. You need at least six months (preferably nine to 12 months) of credit activity to build a credit score.
Number of accounts and types of credit held (10%): If you have many open credit accounts, you have greater potential to accrue more debt and your score may be reduced. As for types of credit held, more variety shows you have more experience with different accounts, reducing your possibility of being a credit risk. Highest scores usually involve a mix of revolving and installment accounts, showing that you know how to handle various types of credit.

New credit (10%): How frequently and how recently have you applied for new credit? Many outside inquiries into your credit, especially within a 12-month period, can lower your credit score. Beware: If you are lagging behind in other areas of your credit score, such as having a history of late payments, opening new accounts could imply you may be about to go into default and are looking for a way to stay afloat. Something else to keep in mind: Too many inquiries made by lenders and creditors will be more harmful to a younger credit history than an older one.

Information regarding all credit accounts in your name Company name: Person/agency who gave you the credit account (i.e., bank, credit card company, etc.) Account number: Number that identifies your account (i.e., credit card number) Condition: Account status as of the last reported date (i.e., open, closed) Type: Type of account (common types include real estate, revolving, and installment) Responsibility: Who is responsible for the account (i.e., individual, joint) Opened: Date the account was opened Limit: Maximum amount of charges allowed on a credit card Last reported: Date the information was last reported to the credit bureau Reported balance: Amount owed (at time last reported) Recent payment: Most recent payment made on your account (at time last reported) Past due: Amount left unpaid after the due date of payment and number of days past due (at time last reported)

Accounts that are included on a credit report Some common account types include real estate, revolving, and installment. Real estate accounts include home mortgage loans. Revolving accounts have varied payments such as credit cards. Installment accounts have a regular payment, such as student loans. Accounts can be joint or individual. A joint account means that access and responsibility of the account are shared by two or more people. The account history will show up on the credit reports of each party. An individual account is the sole responsibility of the borrower. What if my Account Information Summary is incorrect? If you find a mistake, get reports from all three credit agencies and look for mistakes in other versions as well. Once you have done that, you must contact the agency(s) that have the mistake.
You can generally request an investigation (which must be completed within 30 days) and rectify a dispute with each credit bureau online, by phone, or by mail. Visit the credit agencies' websites for more detailed information.

Inquiries The inquiry section lists details about each query made into your credit history, such as the name of the inquirer and the dates of inquiry. There are two kinds of inquiries: 1. Hard inquiries are made by lenders and creditors when you have filled out a new loan or credit application. They can count against your credit score if too many are made within a short time. Remember, 10% of your credit score is affected by new inquiries. 2. Soft inquiries are made when you request a copy of your credit report or when your credit is checked for marketing purposes, such as when a credit card company sends you a pre-approved application.
PAGE #293 - What is credit?

Understanding Your Credit Report What is credit? Credit is the use of someone elses money in exchange for a promise to pay it back on a given date. There are two major types of credit: Revolving and Installment. The best example of revolving credit is a credit card. If you are approved for a credit card your creditor makes a certain amount of money available to you when you want to use it. The maximum amount is called a limit. You are able to borrow from the credit card company up to that limit. If you have a balance with the credit company, each month you must make at least a minimum payment until what you borrowed is paid down. The more you pay down, the more you can borrow again. Here is a specific example: From a $1500 limit, I borrow $500. This means I could still use my credit card up to $1000, but it also means that I will owe at least a minimum monthly payment each month until that $500 is paid down to $0. Once it is paid down to $0, I will have $1500 available to me again.

The best example of installment credit is a loan. If you are approved for a loan your creditor gives you a check for the amount of money for which you were approved. In return you will be required to make monthly payments of a set amount for a certain number of months or years, depending on what terms the creditor has specified as part of your loan package. Here is a specific example: I obtain a personal loan from my bank for $1500. They give me a check for $1500. Now, I must pay them X amount each month until I have paid back the full $1500. What is interest? In both of the above cases, the creditor will charge you interest. Interest is the cost to you of using
someone elses money. The amount of interest charged is set as a percentage of what you owe. It is usually expressed as an annual percentage rate. When you make your monthly payment to a creditor part of the payment is what you borrowed and part of the payment is the interest you owe.

In the case of revolving credit, you only pay interest when you have a balance. For example, if I used my credit card for $500 worth of purchases, I now have a balance, which means I will have to make payments. Part of my monthly payment (a percent of the balance) will go to the interest charge for the use of someone elses money and part will go to paying down the principal, which is the amount that I owe. In the case of installment credit, the situation is very similar. Part of my set monthly payment will go to interest and part will go to principal. At the time that I am approved for the loan I will be told what my annual interest rate will be. By the time I have finished paying my $1500 loan I will have paid back more than $1500. I will have paid back the $1500 + the interest charged as a percent of my balance each month.
PAGE #296 - How do you build credit?

How do you build credit? Many people are denied credit because they have little or no credit in their name. To build a credit file, you must borrow money and repay it according to the terms of the loan. You could obtain a credit card, then use it a little each month and pay it off regularly to generate a credit history. You do not build a credit history, however, if you apply for a credit card but never use it. You must use the card and make payments for a credit record to accumulate. Paying down your student loans is another way to build credit.
PAGE #297 - Why is having good credit important?

Why is having good credit important? By using or making payments on your credit card or making repayments on your loan you are building a record of on-time payments that will prove that you are credit worthy. Potential creditors will look at your credit history to determine if they believe that you will repay them. A history of on-time payments will prove to the creditors that you would pay them on time as well. Conversely, late payments will reflect on you poorly and make creditors think you are a credit risk. As such, they will be less likely to lend to you or will lend to you at a higher rate of interest, making it more expensive for you to get credit. This can affect you when you buy a home or obtain a student loan or when you obtain a business or personal loan. Additionally, many different types of companies that arent lenders have started looking at your credit history to determine your level of responsibility. Often potential landlords or employers will look at your credit history as part of their decision to rent you an apartment or offer you a job. Even cell phone companies often check credit these days. If you have no credit or damaged credit you may be denied a cell phone contract or be forced to put down a security deposit in order to obtain the phone.
PAGE #298 - What is a credit report?
What is a credit report? Your credit report provides a summary of your credit history and allows creditors to analyze whether or not you would be a risky borrower. A credit report is much like a report card that you would get in school - it is a report card for you level of credit responsibility. Your credit report includes your name, address, birth date, social security number, and the name of your employer. Various accounts with creditors (loans, credit cards, and certain other debts) are listed, showing how much credit has been extended and whether you have paid on time. If an account has ever been overdue or referred to a collections agency, this will also be noted. Public information such as bankruptcies, foreclosures, or tax liens will be included in your credit report. There will be a record of any request for your credit record within the past year and a record of any request related to employment for the past two years. It may also have information about your employment history, home ownership, income and previous addresses.
PAGE #299 - What is a credit score?

What is a credit score? If the credit report is a report card, then the credit score is your grade. The credit bureaus synthesize your payment history, amount of debt, amount of credit cards and loans, and length of credit history to come up with a number between 350 and 800 that indicates your credit worthiness at a glance. Anything below 650 and you may have trouble obtaining a loan. Anything about 700 and you are deemed as having excellent credit.
PAGE #300 - How do you get a copy of your credit report?

How do you get a copy of your credit report? It is important to know what is in your credit report, and to correct any inaccurate information from time to time. You have the right to obtain a copy of your credit report, and to have credit bureaus correct any inaccurate information in it. Negative information can make the difference between getting a loan and being denied, so it is crucial that you examine your credit report carefully and make sure it is accurate. Everyone is entitled to request a free credit report from each of the three major credit bureaus each year. To do so, visit www.annualcreditreport.com or call 1 877-322-8228. If you are denied credit (turned down for a loan or a credit card), you are entitled to a free copy of your credit report, as long as you request it within 60 days of the credit denial. You can also get your report free if you are unemployed, if you are receiving public assistance or if you believe your credit file contains inaccuracies resulting from fraud.
PAGE #301 - How do you get a copy of your credit report?

The three largest credit bureaus are: Equifax P.O. Box 740241 Atlanta, GA 30347 (800) 658-1111 http://www.equifax.com
Experian P.O. Box 949 Allen, TX 75013 (888) 397-3742 http://www.creditexpert.com Trans Union P.O. Box 2000 Chester, PA 19022 (800) 888-4213 http://www.tuc.com
PAGE #302 - How do you correct errors on your credit report?

How do you correct errors in your credit report? By law, credit bureaus are responsible for investigating and correcting inaccurate or incomplete information on your credit report. To have them do so, you must contact the credit bureaus in writing to inform them of the information you believe is inaccurate. In addition to your name, address, and Social Security Number, your letter should state each item in the report that you dispute, what you believe to be the correct information and why. Request a correction and include copies of any documents that support your position. You may want to enclose a copy of your report with the specific items circled. Send the letter by certified mail and request a return receipt so you can document that the credit bureau received your letter. Keep copies of all of your correspondence.
PAGE #303 - How do you correct errors on your credit report?

Credit bureaus are required to investigate disputes within 30 days (unless they consider your dispute frivolous). They must also notify the creditor involved, as well as all other credit bureaus, of the correct information. Finally, they must give you a free copy of your credit report if the dispute results in a change. We have included a sample dispute letter for your reference: Sample Dispute Letter Your Name, Address, Date Complaint Department Name of Credit Reporting Agency Address City, State, Zip code Dear Sir or Madam: I am writing to dispute the following information contained in my credit report. The items I am disputing are circled on the attached copy of my report. This item [identify item by name, source, date, and type of item] is [inaccurate or incomplete] because [describe what is wrong and why]. I am requesting that the item be [deleted or changed] to reflect the correct information. Enclosed are copies of [describe your documentation, such as payment records, receipts, canceled checks, court documents] supporting my position. Please investigate this matter and [delete or correct] the disputed item as soon as possible. Thank you for your assistance with this matter.
Sincerely, (Your Name) Enclosures: [list what you are enclosing, with one item listed on each line]
PAGE #304 - What about negative information on your credit report?

What about negative information in your credit report? Negative information may appear in your credit report if you have ever made late payments, declared bankruptcy, or gone to a collections agency, etc. Most information positive and negative remains on your credit report for seven years. Exceptions to this rule are: Bankruptcy information may remain on your report for 10 years Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer Information about criminal convictions has no time limit Credit information reported in response to an application for a job with a salary of more than $75,000 has no time limit Credit information requested for an application for more than $150,000 worth of credit or life insurance has no time limit
PAGE #305 - How do you repair your credit?

How do you repair your credit? A low credit score can be caused by bills that have been paid late or not at all, inaccurate information, or too much overall debt for your income. If you have a low credit score, repairing your credit will take time and discipline. You may want to get counseling to assist you in consolidating your debt or creating a budget that allows you to pay your bills on time.

Most creditors will negotiate payment plans or settlements with someone who has fallen behind. A payment plan involves closing your account, freezing the balance at a certain amount, and paying back a set amount each month (based on what you can afford until you have paid your debt off). A settlement is usually preferred by creditors. If you are unable to pay your full balance, you can make a deal to pay an agreed upon reduced sum. You have to make this payment in one or two parts, however, so you will need to have the money available. If your account has been passed on to a collection agency, then the original creditor has decided to stop trying to collect your debt. Instead, they have opted to sell the right to collect to the collections agency. This agency now owns your account and can legally collect payment from you.

If your account is in collections, this will appear on your credit report. Making a payment plan or settlement agreement with the collections agency this will also appear on your credit report. Making payment arrangements is better than having late payments on your credit report but does not have the same impact on your credit as if you had paid on time.
The most important thing to remember when negotiating with either a collections agency or a creditor is not agree to payment arrangements that you cannot afford to pay.
PAGE #308 - How does being married affect your credit report?
How does being married affect your credit report? You are responsible for your own debts and any debts that you incur jointly with your partner (or anyone else). You are not responsible for your partners individual debt. For example, if you and your partner have a credit card in both names, you are jointly responsible for the bills if you both signed the application.
PAGE #309 - What about divorce and my credit records?

What about divorce and my credit records? You are responsible for all joint accounts in which you both applied to be listed on the account. You are not responsible for your partners individual accounts. Many people find their credit history impacted negatively by a divorce. Bills may be paid late when there is disagreement as to who is responsible for paying which bills; one partner may refuse to pay on joint accounts, or may try to hold the other responsible for all of the debts. In this scenario, it is important to apply for credit in your own name and build your own file. It is also important to discuss this issue with your attorney at the time of your divorce. If you divorce, you may want to close joint accounts or accounts on which your partner can sign.

What is a Credit Score? A credit score is an estimate of your credit risk based on a snapshot of your credit report at a specific point in time. It attempts to condense a borrower's credit history into a single number that ranges from about 350 to more than 800. Credit scoring was developed in the 1960s. Credit scores analyze a borrower's credit history considering numerous factors such as: Late payments The amount of time credit has been established The amount of credit used versus the amount of credit available Length of time at present residence Employment history Negative credit information such as bankruptcies, charge-offs, collections, etc.

In general, when people talk about "your score," they may be talking about your current score with any of the three main US credit reporting agencies: Experian, TransUnion and Equifax. The credit score from each credit reporting agency considers the data in your credit report at that agency. This gives lenders a fast, objective estimate of your credit risk. Some lenders use one of these three scores, while other lenders may use the middle score. In other words, your credit score is a powerful piece of information. And because it is a snapshot of your borrowing and bill paying behavior over the previous 24 months, you have the power to change it
for the better. As you do that, you'll be able to swap some of your higher-rate credit card debts, mortgages and auto loans for lower rate ones, and that will enable you to pay back the money you owe both faster and cheaper.
PAGE #312 - Breakdown of your score

Breakdown of your Score There are a number of ways you can improve your score. For example, you should be consistent about using your name. Use the same one all the time: first, middle (if you're including one) and last, as well as any Jrs. or IIIs. If you hyphenate, hyphenate with regularity. If you've decided to take your maiden name as your middle name, make it legal. That way, the credit bureaus are less likely to confuse your information with that of someone else. Beyond that, you can improve your score by taking a look at how it is computed-and knowing what you need to do to improve in each area. Thirty-five percent of your score is based on how well you pay your bills. Start paying on time. If you make late payments, the amount your score will suffer depends on how late and how frequent you are with delinquent payments. Late payments are not an automatic "scorekiller." An overall good credit picture can outweigh one or two instances of late credit card payments.

Thirty percent of your score is a measure of how much credit you have available to you and how much of that credit you're using. Having credit accounts and owing money on them does not mean you are a high-risk borrower with a low score. You're in the best shape if you're using 20 to 30 percent of the credit available to you. Fifteen percent is a measure of the length of your credit relationships: How long have you had the cards in your wallet? In general, a longer credit history will increase your score. If and when you decide to cancel your credit cards, try not to cancel the ones you've had the longest. It's good to have at least one card in your wallet that's more than two years old. Once you've had a card for 15 to 20 years, it won't send your score any higher. Ten percent is based on your search for new credit-how recently you have opened (or inquired about opening) new accounts.

Today, the smart shopper shops around for the best rates. Along the way, it wouldn't be unusual for 10 or 15 different institutions to check their credit score. Credit scores generally do a good job of distinguishing between a search for many new credit accounts and rate shopping for one new account, i.e., auto or mortgage related inquiries. Ten percent is the financial composition of your file - what percentage is bank-card debt and what percentage is installment debt? In the world of credit scoring, it's better to have a ratio of 60 to 70 percent bank-card debt to 30 to 40 percent installment debt than to have much more of one or the other. It is not necessary to have one of each, and it is not a good idea to open credit accounts you don't intend to use. The credit mix usually won't be a key factor in determining your score - but it will be more important if your credit report does
not have a lot of other information on which to base a score.
PAGE #315 - What is NOT in your score

What is Not in Your Score. Credit scores consider a broad range of information on your credit report. However, they do not take into account the following: Your race, color, religion, national origin, sex and marital status - US law prohibits credit scoring from considering these facts, as well as any receipt of public assistance, or the exercise of any consumer right under the Consumer Credit Protection Act. Your age Your salary, occupation, title, employer, date employed or employment history - Lenders may consider this information, however, as may other types of scores. Where you live Any interest rate being charged on a particular credit card or other account Any items reported as child/family support obligations or rental agreements
PAGE #316 - What is NOT in your score

Certain types of inquiries (requests for your credit report) - The score disregards: a) "consumer-initiated" inquiries - requests you have made for your credit report, in order to check it; b) "promotional inquiries" - requests made by lenders in order to make you a "preapproved" credit offer; c) "administrative inquiries" - requests made by lenders to review your account with them; or d) requests that are marked as coming from employers are not counted either. How do I find out my score? It's OK to request and check your own credit report. This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers. To order your report and dispute any errors, contact the credit reporting agencies below: Equifax: (800) 685-1111, www.equifax.com Experian: (888) 397-3742, www.experian.com TransUnion: (800) 888-4213, www.transunion.com There is a little known credit reporting agency to add to the list: Innovis Data Solutions. Unlike the Big Three credit bureaus, Innovis doesn't sell consumers' credit histories to lenders, insurers and potential employers. Innovis specializes in helping creditors compile mailing lists. Adverse information on your Innovis credit report, accurate or not, could prevent you from getting favorable credit offers in the mail. Whether you think that's a good thing or a bad thing is up to you. To request a copy of your credit report, go to their website at http://www.innovis.com/customer_assistance.htm.
PAGE #317 - Monitor for identity theft
Monitor for Identity Theft. Another important reason to check your credit report regularly is for an early detection of identity theft. Identity theft is when someone uses your personal information - such as your name, Social Security number, credit card number or other identifying information - without your permission to make purchases, open accounts, take-out loans, buy cars and even get new jobs. By regularly checking your credit report from each of the credit reporting agencies, you can make sure it's accurate and includes only those activities you've authorized. If you suspect that your personal information has been hijacked and misappropriated to commit fraud or theft, take action immediately, and keep a record of your conversations and correspondence. These four basic actions are appropriate in almost every case: Contact the credit reporting agencies to place a "fraud alert" on your credit reports and to review your credit reports. Close any accounts that have been tampered with or opened fraudulently. File a report with your local police or the police in the community where the identity theft took place. File a complaint with the Federal Trade Commission.
PAGE #318 - How do I improve my score?

How do I improve my score? There is no swift and immediate fix to improving your credit score. It takes time. The best advice is to manage credit responsibly over time and by following these tips: Pay your bills on time. If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score. Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years. Pay off debt rather than moving it around. The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score. Have credit cards - but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly. Keep balances low on credit cards and other "revolving credit". High outstanding debt can affect a score. Don't close unused credit cards as a short-term strategy to raise your score. A closed account will still show up on your credit report, and may be considered by the score. Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower score. If you have been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user. Do your rate shopping for a given loan within a focused period of time. Credit scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your score in the long term. If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time. Negative items affect your credit score much more quickly than positive items. Late payments can negatively affect your score in just a few months, whereas paying bills on time may take 6 to 12 months to generate a significant improvement in your score.
PAGE #319 - Why should I improve my score?
Why should I improve my score? Everywhere you turn, you hear and read about credit scores. Are they really that important if you're not in the market for a loan or credit card? The answer is yes. Your credit score is important because it may affect every major purchase you will ever make. It may determine what interest rate you will be charged on a mortgage, car loan or credit card. Even your car insurance premiums can be higher due to a poor credit score. In some cases, your credit score can even determine whether you get that job offer you've been hoping for. Just remember: a poor score costs you more. Understanding Credit Report Score The analysis of personal or business statistics in a fiscal year results in a credit score. The credit report score is a document that enlists individual entries that affect the credit score. It is a compilation of the sensitive data that is accessible free of cost... The credit report score is a figure that is calculated on the basis of an algorithm that extrapolates the fiscal factors involved in analyzing personal or business credit worthiness. There are three credit bureaus that are authorized to issue credit report scores and reports. They are Equifax, Experian, and TransUnion. These three credit bureaus use standardized scoring models to generate a score from the entries compiled on the credit report.
PAGE #320 - Difference between credit report score and credit report
Difference between Credit Report Score and Credit Report: A credit report is a comprehensive report of sensitive financial data of a business or individual within a fiscal year. The data mapping appears as entries that are obtained from various dedicated resources, each handling a particular area of research. For example there are firms that assimilate loan and registration information, while others collect and analyze information on legal implications. The report is a document that leads to the calculation of a credit rating or score. On the other hand, a credit report score is a figure. Commonly, the score would be a three figure number like '708' or a three figure number and grade, like C 708. The score or rating is mainly used in competitor comparisons and excellent scores create a niche for an individual or business in the volatile fiscal arena.
PAGE #321 - Understanding the credit report score

Understanding the Credit Report Score: The credit report score is calculated based on the information of the credit report. There is no single credit score for a person or business. The three issuing authorities differ in assimilation and analysis of financial information for each person and business. The credit scoring models also differ. One such popular third-party credit scoring system is the Fair Isaac's scoring model or FICO. The final score evaluated determines the creditworthiness of a person or business. Banks and lending institutions use credit scores to understand the potential risk that they might be exposed to, while dealing with a particular consumer or business entity. They access these scores to mitigate losses and determine loan qualification and acceptable credit limits. A credit report score is designed to be fair and objective. How is a Credit Report Score Obtained? The credit reporting agency calculates the credit score by using a standard computing formula. The
score is monitored and periodically updated to highlight the latest developments on the consumer loan repayment rates. The score is obtained by comparing a consumer with personal or business competition. The common rostrum is accessed by considering other players within a similar population. The consumer is graded according to mathematical variables obtained on using the special formula. The score is the result of figures fed into a scoring model. The credit bureaus use different proprietary credit-scoring models and hence there is a visible difference in the scores obtained from all three. There is a median score and while the lowest scores are further from it, the highest scores surpass it. The governing law emphasizes that the credit-scoring models must be empirical in nature. They have to be statistically sound and result in accurate scores.
PAGE #322 - Importance of a credit report score

Importance of a Credit Report Score: The figure is responsible for a loan application being denied or granted credit. The accurate assessment enables the measurement of default risk on the basis of the credit history of a person or business. The scores gives the lender a sneak preview of a borrower's punctuality of repayment, amount of debt, credit history, types of credit accessed and recent search for credit. Credit scores also enable lenders and employers to access information on current income, employment history, tenancy status and sources of passive income. Of course, most of the details are logged as entries on the report; nevertheless, the score depends on the entries and is accessible on the same sheet.
PAGE #323 - Factors that negate credit report scores

Factors that Negate Credit Report Scores: There are a number of factors that weigh on the credit report score, calling for immediate corrective response, like: Money payable towards a court judgment, tax debt or lien Presence of credit accounts exceeding the prescribed number Number of credit checks run recently Regular pre-screening of credit or insurance by lenders, employers or the person or entrepreneur Credit report scores depend on the information in a credit report. The score is determined by the ratio of credit to a predetermined credit limit. A simple way to improve a credit score is to increase the credit limit.
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PAGE #325 -
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explain the meaning of Private Mortgage Insurance; be able to understand the cost of Private Mortgage Insurance; and better understand how to cancel Private Mortgage Insurance.

Private Mortgage Insurance Private mortgage insurance (PMI) is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property. Typical rates are $55/mo. per $100,000 financed, or as high as $1,500/yr. for a typical $200,000 loan. The annual cost of PMI varies and is expressed in terms of the total loan value in most cases, depending on the loan term, loan type, proportion of the total home value that is financed, the coverage amount, and the frequency of premium payments (monthly, annual, or single). The PMI may be payable up front, or it may be capitalized onto the loan in the case of single premium product. This type of insurance is usually only required if the downpayment is less than 20% of the sales price or appraised value (in other words, if the loan-to-value ratio (LTV) is 80% or more). Once the principal is reduced to 80% of value, the PMI is often no longer required. This can occur via the principal being paid down, via home value appreciation, or both. In the case of lender-paid MI, the term of the policy can vary based upon the type of coverage provide (either primary insurance, or some sort of pool insurance policy). Borrowers typically have no knowledge of any lender-paid MI, in fact most "No MI Required" loans actually have lender-paid MI, which is funded through a higher interest rate that the borrower pays.

Sometimes lenders will require that PMI be paid for a fixed period (for example, 2 or 3 years), even if the principal reaches 80% sooner than that. The cancellation request must come from the Servicer of the mortgage to the PMI company who issued the insurance. Often the Servicer will require a new appraisal to determine the LTV. The cost of mortgage insurance varies considerably based on several factors which include: loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most of all, credit score.

If a borrower has less than the 20% downpayment needed to avoid a mortgage insurance requirement, they might be able to make use of a second mortgage (sometimes referred to as a "piggy-back loan") to make up the difference. Two popular versions of this lending technique are the so-called 80/10/10
and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a 10% downpayment, and an 80/15/5 program uses a 15% LTV second mortgage with a 5% downpayment. Other combinations of second mortgage and downpayment amounts might also be available. One advantage of using these arrangements is that under United States tax law, mortgage interest payments may be deductible on the borrower's income taxes, whereas mortgage insurance premiums were not until 2007. In some situations, the all-in cost of borrowing may be cheaper using a piggy-back than by going with a single loan that includes borrower-paid or lender-paid MI.
PAGE #331 - PMI tax deduction

PMI Tax Deduction Mortgage insurance became tax-deductible in 2007 in the USA. For some homeowners, the new law made it sometimes cheaper to get mortgage insurance than to get a 'piggyback' loan. The MI tax deductibility provision passed in 2006 provides for an itemized deduction for the cost of private mortgage insurance for homeowners earning up to $109,000 annually. The original law was extended in 2007 to provide for a three-year deduction, effective for mortgage contracts issued after December 31, 2006 and before January 1, 2010. It does not apply to mortgage insurance contracts that were in existence prior to passage of the legislation. Mortgage insurance (also known as mortgage guarantee) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer.
PAGE #332 - PMI tax deduction

For example, Mr. Smith decides to purchase a house which costs $150,000. He pays 10% in $15,000 downpayment and takes out a $135,000 mortgage. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale price. Because of his limited equity, the lender requires that Mr. Smith pay for mortgage insurance that protects the lender against his default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the 135,000, or $33,750, leaving the lender with an exposure of $101,250. The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower is in default and the property sells at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher. To obtain public mortgage insurance from the Federal Housing Administration, Mr. Smith must pay a mortgage insurance premium (MIP) equal to 2.25 percent of the loan amount at closing. This premium is normally financed by the lender and paid to FHA on the borrower's behalf. On FHA loans, monthly MIP must be paid until the loan balance equals 78% of the lower of the initial sales price or appraised value. The United States Veterans Administration also offers insurance on mortgages.

Private Mortgage Insurance Private mortgage insurance is typically required when down payments are below 20%. Rates can range from 1.5% to 6% of the principal of the loan based upon loan factors such as the percent of the loan insured, loan-to-value (LTV), fixed or variable, and credit score. The rates may be paid annually, monthly, or in some combination of the two (split premiums). In the U.S., payments by the borrower are tax-deductible until 2010.
Borrower-Paid Private Mortgage Insurance (BPMI or "Traditional Mortgage Insurance") is a default insurance on mortgage loans provided by private insurance companies and paid for by borrowers. BPMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The US Homeowners Protection Act of 1998 requires PMI to be canceled when the amount owed reaches a certain level, particularly when the loan balance is 78 percent of the home's purchase price. Often, BPMI can be cancelled earlier by submitting a new appraisal showing that the loan balance is less than 80% of the home's value due to appreciation (this generally requires two years of on-time payments first).
PAGE #334 - Lender-paid private mortgage insurance

Lender-Paid Private Mortgage Insurance (LPMI) Similar to BPMI, except that it is paid for by the lender, and the borrower is often unaware of its existence. LPMI is usually a feature of loans that claim not to require Mortgage Insurance for high LTV loans. The cost of the premium is built into the interest rate charged on the loan. One more time: What Is PMI? PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home's value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.
PAGE #335 - Benefits of PMI

Benefits of PMI PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment. New PMI Requirements A new federal law, The Homeowner's Protection Act (HPA) of 1998, requires lenders or servicers to provide certain disclosures concerning PMI for loans secured by the consumer's primary residence obtained on or after July 29, 1999. The HPA also contains disclosure provisions for mortgage loans that closed before July 29, 1999. In addition, the HPA includes provisions for borrower-requested cancellation and automatic termination of PMI.
PAGE #336 - Why a change to PMI requirements?

Why a Change in PMI Requirements? In the past, most lenders honored consumers' requests to drop PMI coverage if their loan balance was paid down to 80 percent of the property value and they had a good payment history. However, consumers were responsible for requesting cancellation and many consumers were not aware of this possibility. Consumers had to keep track of their loan balance to know if they had enough equity and they had to request that the lender discontinue requiring PMI coverage. In many cases, people failed to make this request even after they became eligible, and they paid unnecessary premiums ranging from $250 to $1,200 per year for several years. With the new law, both consumers and lenders share responsibility
for how long PMI coverage is required.
PAGE #337 - The homeowner's Protection Act (HPA) of 1998

The Homeowner's Protection Act (HPA) of 1998 What Loans Are Covered? Generally, the HPA applies to residential mortgage transactions obtained on or after July 29, 1999, but it also has requirements for loans obtained before that date. This new law does not cover VA and FHA government loans. In addition, the new law has different requirements for loans classified as "highrisk." Although the HPA does not provide the standards for what constitutes a "high risk" loan, it permits Fannie Mae and Freddie Mac to issue guidance for mortgages that conform to secondary market loan limits. Fannie Mae and Freddie Mac are corporations chartered by Congress to create a continuous flow of funds to mortgage lenders in support of homeownership. For non-conforming mortgages, the lender may designate mortgage loans as "high risk."

What is a Residential Mortgage Transaction? There are four requirements for a transaction to be considered a residential mortgage transaction: a mortgage or deed of trust must be created or retained; the property securing the loan must be a single-family dwelling; the single-family dwelling must be the primary residence of the borrower; and the purpose of the transaction must be to finance the acquisition, initial construction, or refinancing of that dwelling.

How do you Cancel or Terminate PMI? Cancellation Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

Automatic Termination Under HPA, mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan. If the loan is
delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date. For high risk loans, mortgage lenders or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77 percent of the original value of the property, provided you are current on your loan.

Final Termination Under HPA, if PMI has not been canceled or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year loan with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage. Final termination must occur within 30 days of this date.

What Disclosures does the HPA require? For Loans Obtained on or after July 29, 1999 The HPA establishes three different times when a lender or servicer must notify a consumer of his or her rights. Those times are at loan closing, annually, and upon cancellation or termination of PMI. The content of these disclosures varies depending on whether: PMI is "borrower-paid PMI" or "lender-paid PMI," the loan is classified as a "fixed rate mortgage" or "adjustable rate mortgage," or the loan is designated as "high risk" or not. At loan closing, lenders are required to disclose all of the following to borrowers: The right to request cancellation of PMI and the date on which this request may be made. The requirement that PMI be automatically terminated and the date on which this will occur. Any exemptions to the right to cancellation or automatic termination. A written initial amortization schedule (fixed-rate loans only).

Annually, your mortgage loan servicer must send borrowers a written statement that discloses: The right to cancel or terminate PMI. An address and telephone number to contact the loan servicer to determine when PMI may be canceled. When the PMI coverage is canceled or terminated, a notification must be sent to the consumer stating that:
PMI has been terminated, and the borrower no longer has PMI coverage. No further PMI premiums are due.

The obligation for providing notice of cancellation or termination is with the servicer of the mortgage. Before extending a mortgage, lenders typically require borrowers to make a sizable down payment to reduce both the risk of default on the loan and the amount they stand to lose if a foreclosure is necessary. Moreover, borrowers often pay significant closing costs. Together, the down payment and closing costs can be substantial relative to the borrower's savings, particularly for first-time homebuyers and households with lower incomes. Mortgage lenders may require a down payment of at least 20 percent of the appraised value of a home. But they will accept smaller down payments if repayment of the mortgage is backed by a type of insurance, paid for by the borrower, known as mortgage guarantee insurance. Mortgage insurance for low-down-payment loans is available from the federal government, primarily through programs administered by the Federal Housing Administration and the Department of Veterans Affairs, and from the private sector.

Insurance on a mortgage comes into play when the homeowner defaults on the loan and the proceeds from the subsequent sale of the mortgaged property fail to cover the remaining debt plus the costs associated with the sale. In such a case, the mortgage insurer reimburses the lender for the shortfall, generally in full if the insurance is governmental but only up to certain limits if the insurance is private. Because insurers bear at least part of the risk of loss on home loans, they must carefully review the qualifications of prospective borrowers and the value of the collateral provided by the property being purchased. Early forms of mortgage insurance arose in the private sector around the turn of the century and developed until the onset of the Depression. The private mortgage insurance industry then collapsed, and its function was assumed by the federal government, which was the only source of mortgage insurance from the mid-1930s through the late 1950s. Today, mortgages backed by government insurance continue to play a significant role in the home finance market, but mortgage insurance offered by the private mortgage insurance industry is also widely used by homebuyers and those refinancing their existing mortgages. Private mortgage insurance backed nearly 1.2 million single-family home loans extended in 1993, representing about 45 percent of all the insured mortgages granted that year.

Listed here is some of the history of the mortgage insurance industry and outlines the way the mortgage insurance business is conducted, examines the financial implications for a borrower choosing between governmental and private mortgage insurance, and discusses the disposition of recent applications submitted to private mortgage insurers. Little information has been available heretofore about the disposition of applications. The private mortgage insurance industry released data on the disposition of the cases that private insurers acted on during the fourth quarter of 1993 and on the characteristics of the households in those cases. The article summarizes the new information and draws some comparisons with data on applications for government insurance and with mortgage applications generally.
PAGE #347 - PMI A historical perspective

PRIVATE MORTGAGE INSURANCE: A HISTORICAL PERSPECTIVE The private mortgage insurance (PMI) industry can trace its origin to the early years of this century and the activities of title insurance companies in New York State. The state legislature authorized the issuance of mortgage guarantee insurance in 1904, but the law permitted insurers to guarantee the payments only on mortgages owned by the institution that originated the loan. In 1911, New York amended the law to permit mortgage insurers to purchase and resell mortgages. To enhance their ability to sell mortgages to investors, insurers guaranteed the property title as well as the loan. Until the Depression, rising real estate values made it possible for most mortgaged properties that were in default to be sold without a loss. This experience reinforced a widely held perception that insuring mortgages was a low-risk business. But the sharp decline in real estate values in the early years of the Depression - together with the low capitalization, questionable business practices, and weak regulation of the PMI industry - resulted in the collapse of the industry.

Government efforts to revive the housing industry during the Depression led to the establishment by the Federal Housing Administration (FHA) of the Mutual Mortgage Insurance Fund to provide mortgage insurance on FHA loans. After World War II, the federal government's role in providing insurance on mortgages expanded with the creation in the Veterans Administration (VA) of a mortgage insurance program for veterans. FHA and VA home loan insurance programs apply to a wide range of prospective homebuyers, but both programs have significant limitations. The FHA, for example, limits the size of the mortgages it will insure. The VA programs guarantee only a portion of the loan amount up to a congressionally established ceiling and are available only to veterans. In addition, the property and credit underwriting standards of both the FHA and VA exclude some prospective borrowers.

The PMI industry re-emerged in 1957 with the establishment of the Mortgage Guarantee Insurance Corporation (MGIC). Throughout the 1960s and 1970s, the industry generally flourished because rising home values limited the incidence of, and losses from, mortgage defaults. In this environment, companies tended to focus more on growth and less on credit quality. In the 1980s, as house price inflation slowed - and prices fell in some areas--homeowners who could not make their mortgage payments often were unable to resolve their problems by selling their homes; instead, they defaulted on their mortgages. In addition, some PMI companies suffered substantial losses from fraud and inadequate risk diversification. Weak companies could not survive as independent entities, and industry consolidation followed. By the end of the 1980s, only half of the firms from the early 1980s remained. In the past few years, tighter underwriting standards and an end to an excessive reliance on continuing increases in house prices to mitigate credit risk has brought the industry back to financial health. Today, many PMI companies are active. The two largest, MGIC and GE Capital Mortgage Corporation, accounted for roughly 52 percent of the private mortgage insurance written and 62 percent of the outstanding dollar amount of private mortgage insurance in force in 1993.

Comparing the revenues and profitability of the PMI companies is complicated by differences in the products they offer and in the strategies they pursue. However, the ratio of premiums earned to total insurance in force is a measure of the average payment made by a borrower with PMI across different products and through time. Generally, companies that specialize in insuring mortgages with lower credit
risks tend to have lower premiums than companies that insure products with a wider range of credit characteristics. Regardless of the premiums charged, the rates of return in 1993, as measured by the ratio of net income to insurance in force, seem similar among the well-established firms. Overall, the re-emergence of the PMI industry has greatly expanded the opportunities for homebuyers to take out conventional mortgage loans with low down payments. PMI is now available on a wide variety of loan programs and may be used for the purchase of homes with values far exceeding the FHA loan limits.
PAGE #351 - The business of mortgage insurance

THE BUSINESS OF MORTGAGE INSURANCE Lenders that originate and hold mortgage loans or financial instruments derived from such loans face two distinct types of risk, interest rate risk and credit risk. Interest rate risk exists because market interest rates change over time. When market interest rates rise relative to the rate on an outstanding mortgage, the value of the mortgage falls. Lenders may protect themselves from interest rate risk in various ways, but such measures increase costs. Credit risk is the possibility that borrowers may fail to repay their loan obligations as scheduled. In the case of default, the lender is able to take action against the borrower, for example by foreclosing on the property securing the loan. But foreclosure entails a variety of costs - unpaid interest from the time of delinquency through foreclosure, legal expenses, costs to maintain the property, and expenses associated with the sale of the property - and therefore even if the asset has not lost value, the lender may incur a loss.

Among the steps lenders can take to mitigate credit risk is the requirement that borrowers whose mortgages have high loan-to-value ratios obtain private mortgage insurance. PMI reduces credit risk by insuring against losses associated with default up to a contractually established percentage of the claim amount. Defaults on these loans may result in a loss to the insurer; therefore PMI companies address credit risk in many ways in pursuing their business strategies: First, a PMI company may simply not insure a particular type of mortgage contract or a mortgage secured by a specific type of property, ceding that business to competitors. Second, in determining whether to insure a particular loan in a chosen line of business, PMI companies act as a review underwriter, evaluating both the creditworthiness of the prospective borrower and the adequacy of the collateral offered as security on the loan. They will deny insurance to prospective borrowers judged to impose undue credit risk on the insurer and lender; lenders, of course, are free to extend credit to such borrowers, but they must do so without the protection of PMI.

Third, insurers may underwrite some mortgages more strictly than others and thus limit their exposure to losses. Fourth, they may charge a higher premium to insure riskier mortgages, although state regulation can limit or set the premiums charged for different types of mortgage insurance. Fifth, the PMI companies can limit the extent of their coverage of losses, either directly (by limiting the proportion of the mortgage insured) or by using reinsurance or pooling arrangements. Sixth, PMI companies can mitigate credit risk through credit counseling and early intervention once a borrower falls behind on payments.

In assessing the risk of the borrower, PMI companies evaluate both the ability and the willingness of the borrower to repay the mortgage loan. In determining the borrower's ability to repay, insurers examine sources of income, debt-to-income ratios, asset holdings, employment history, and prospects for income growth. Insurers gauge willingness to repay primarily by reviewing the borrower's credit history, including rent and utility payment records in some cases. PMI companies also evaluate the characteristics of the property securing the mortgage. For example, because insurers generally perceive condominiums, manufactured homes, and properties with two, three, or four units as riskier sources of collateral than single-family detached dwellings, they usually treat them more stringently. In addition, insurers consider the use of the property securing the mortgage. Dwellings to be used as vacation homes, second homes, or investment properties are generally underwritten to standards that are more strict than those for owner-occupied, primary residences. For example, the maximum loan-tovalue ratio allowed for second homes is often lower than that for primary residences. In the extreme, some PMI companies have chosen not to offer insurance for particular uses of property, such as investment.

Furthermore, insurers examine the characteristics of the mortgage itself and adjust the price of insurance coverage accordingly. The loan-to-value ratio on the mortgage is a primary indicator of default risk; hence, the higher the ratio, the higher the premium. Insurers also generally assess higher premiums on adjustable rate mortgages because these mortgages can potentially impose larger payment burdens on borrowers and because they have historically exhibited an inferior payment record. Finally, insurers assess lower premiums on shorter-term mortgages because such mortgages result in a more rapid accumulation of equity by the borrower and therefore impose less risk of loss. The PMI companies often use the credit underwriting guidelines of the two large government-sponsored mortgage agencies, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), when deciding whether to approve an application. Many lenders desire to sell their mortgages to these agencies, and both Fannie Mae and Freddie Mac require PMI before they will consider purchasing a low-down-payment mortgage. Thus, PMI companies have a strong motivation to assure lenders that mortgages insured by PMI companies conform to the standards set by these organizations.

When examining the risks described above, many PMI companies rely heavily on automated underwriting systems to identify and quickly approve applications that are acceptable for insurance. PMI employees further evaluate applications that fail the automated review. Computer automation of underwriting thus allows PMI companies to focus their efforts on applicants with marginal or unusual credit histories and other special circumstances and is generally perceived to have widened the availability of PMI. A fundamental strategy of insurance underwriting is to diversify risk. In the case of PMI companies, risk diversification means limiting geographic concentrations of insurance, dealing with numerous lenders, and restricting the insurance written for any one particular project. The importance of these tactics is illustrated by the large losses in the 1980s of PMI companies that had significant concentrations of insurance in "oil patch" states.
An integral part of the PMI business is the management of problem mortgages. Foreclosing on properties is both time-consuming and costly, and insurers attempt to avoid it. Insurers try to work with delinquent borrowers, mostly through lenders, but sometimes directly with borrowers. Insurers often stress counseling as a way of helping borrowers overcome payment difficulties. Insurers will try to determine the prospects for bringing the mortgage back to scheduled payments and may work out a plan with the borrower to do so. In some cases, however, encouraging borrowers to sell their properties may be the least costly method, for both insurer and borrower, of resolving problems.
PAGE #358 - Sources of mortgage insurance

SOURCES OF MORTGAGE INSURANCE From the lender's perspective, the mortgage insurance provided both by private mortgage insurers and by government agencies such as the FHA and the VA reduces credit risk, but the level of protection varies. PMI companies typically limit coverage within a range of 20 percent to 25 percent of the claim when a mortgage defaults, whereas the FHA, for instance, covers 100 percent of the unpaid balance of the mortgage to the lender as well as some, but not necessarily all, of the costs associated with foreclosure and the sale of the property. For marginally qualified borrowers, some lenders might prefer the added protection afforded by FHA insurance and they may encourage borrowers to apply for these mortgages. Lenders may have other incentives to encourage applicants to apply for one loan program over another. For example, FHA-insured mortgages provide lenders with greater income from loan servicing than do the mortgages covered by PMI. On the other hand, the origination of mortgages insured by PMI often requires less paperwork. From the perspective of homebuyers, the costs and availability of the insurance offered by FHA, VA, and private companies can differ markedly. The homebuyers' knowledge of these alternatives varies with their experience, their willingness to shop among lenders, and the extent of information provided by real estate agents and others. Real estate agents, as well as others, sometimes encourage homeowners to select one type of insured mortgage product over another.

Incentives for Using Government Insurance Most households are able to purchase homes or refinance an existing mortgage without mortgage insurance and thus avoid the added cost of the insurance. Many households, however, lacking the assets necessary for a sizable down payment and closing costs, can qualify only for a mortgage with a high loan-to-value ratio and thus must purchase mortgage insurance. In addition, some households prefer making a small down payment toward a mortgage even if they have the funds for a larger down payment; they, too, are normally required by the lender to purchase mortgage insurance. Households often choose mortgages backed by the FHA or the VA instead of mortgages backed by private insurers because the agencies will insure mortgages that require a considerably smaller amount of cash at closing and will use more liberal underwriting guidelines when evaluating the creditworthiness of the applicant. For example, the FHA insures mortgages that require smaller down payments and, unlike PMI companies, the FHA allows the borrower to finance the mortgage insurance premium. In addition, the FHA allows households to use gifts from other for the entire down payment. Generally, insurers backing conventional low-down-payment mortgages limit the proportion of the down payment that may be paid from gifts. Moreover, the FHA allows households to carry relatively more debt and still qualify for a mortgage, an underwriting practice that is often important to lower-income and first-time homebuyers.
Comparison of Costs Comparing the costs to a homebuyer of purchasing a home with an FHA-insured mortgage relative to the costs of a mortgage backed by PMI is difficult. The initial fee for government insurance is higher than for PMI, but government agencies allow the borrower to finance this fee as part of the mortgage. Furthermore, the FHA refunds part of the initial premium when the borrower prepays the mortgage within a specified period. On the other hand, PMI in some circumstances can be dropped once the household has accumulated at least a 20 percent equity position in the property, whereas the household must prepay the mortgage to drop FHA insurance. The price of FHA insurance also does not vary by the size of the borrower's down payment, whereas the premium rate for PMI is lower for households making larger down payments. Overall, households that have low debt payments relative to income and that are taking out mortgages with loan-to-value ratios between 80 percent and 95 percent are more likely to choose a mortgage backed by PMI.

Common Mortgage Insurance Premium Questions Answered Mortgage insurance premiums, commonly referred to as MIP, pose many questions for borrowers. Mortgage insurance is an insurance policy where your mortgage lender is protected against the value of the outstanding mortgage liability in the event that you die or are disabled, and are unable to make mortgage payments. The typical beneficiary of the policy in this case is the bank. Since there may be cases where you require mortgage insurance either due to the requirement of your lender, or as a personal preference, you may want to go over some common queries related to mortgage insurance premiums listed below: Calculation of Mortgage Insurance Premiums & Factors Affecting It MIP is typically calculated as a percentage of the loan amount being borrowed. MIP varies on the basis of factors such as the borrowers credit rating, the down payment being made, whether the mortgage is fixed or variable, debt to income ratios, etc. Generally, the range of the rates is between 0.50% and 0.90% of the loan value, with the calculation being based upon monthly premium payments.

FHA MIP & Portion of the Premium Due At Closing Federal Housing Authority (FHA) mortgages requires MIP for its home purchase programs and tend to be slightly more expensive than MIP on conventional loans. Typically, there is a portion of the MIP that must be paid at the time of closing. The amount is directly dependent on the amount being borrowed. FHA MIP typically has a 2.25% premium required at the time of closing that can be financed into the total loan amount. A monthly amount of 0.55% is then charged as the MIP as part of the mortgage payment. MIP for conventional mortgages generally have lower upfront premiums and renewal rates ranging from 0.3 0.5%.
PAGE #363 - Mortgage insurance

Frequency of Premium Payments MIP payments can be arranged to be paid as a lump sum, on an annual basis, or monthly basis. A large number of lenders often arrange to lump the payment into your monthly mortgage payment for ease of
tracking and payment. Lender Paid Mortgage Insurance In certain cases, instead of the borrower making premium payments on the loan amount, the lender makes the premium payments without the borrower being explicitly made aware of the premiums. In this case, the amount of the premium is typically built into the mortgage payment. Tax Treatment of Mortgage Insurance Premiums MIP payments may be tax deductible until 2010, however, there may be additional benefits that are available based on specific circumstances. MLOs should not provide tax advice to a borrower and should suggest the borrower speak to an accountant on this issue.

Removing Mortgage Insurance In conventional mortgages, mortgage insurance is typically stipulated by lending parties when the borrower is making a down payment of less than 20% of the total value of the property. Once the mortgage reached the point where the equity portion exceeds 20%, mortgage insurance may be cancelled. Refund of Mortgage Insurance Premiums MIP payments are typically non-refundable. However, in certain cases, such as when MIP is paid as a lump sum at the time of sale closing, a small portion of the premium payments may be refunded to the borrower at the time that the policy is cancelled. The difference in the minimum down payments made under the two programs is relatively small, but financing the closing costs and the mortgage insurance premium means that the FHA borrower has less equity relative to the value of the home. In addition, the borrower's monthly housing expenses are higher for the FHA mortgage. The higher loan-to-value ratio and monthly housing expenses suggest that FHA borrowers may be more prone to default if they encounter financial difficulties.

Under the FHA insurance program, the borrower's initial cash outlays are lower, but the monthly payments are higher. If the borrower is constrained by the amount of available cash at closing, the FHA may be the only alternative. On the other hand, if the borrower has sufficient cash on hand and is concerned about the amount of debt to be carried and the higher monthly payment, then PMI may be preferable. A comparison of two borrowers with equal incomes who both have sufficient cash to choose either an FHA-insured or PMI-backed mortgage suggests that the household with PMI could accumulate greater wealth over the life of the mortgage. With the requirements for a smaller initial outlay of cash, the FHA program allows the borrower to place $3,635 of his or her savings in a savings account. However, with the smaller loan size associated with PMI and the consequently lower monthly payments, the PMI borrower is able to invest the monthly payment difference each month, also in a savings account. Summing up the net worth of each borrower at any particular time, the FHA borrower generally will carry greater mortgage debt but will also have the compounded earnings from the $3,635 savings account. The PMI borrower has a savings account that is accumulating faster, however, because of the lower monthly payments. Even counting the potential refunds from FHA as a source of wealth for the FHA borrower who chooses to sell the home, the PMI borrower still begins to accumulate greater wealth after only one year.

Another major determinant of who uses PMI is the congressionally imposed limit on the size of a mortgage that can receive FHA insurance. The limit varies by area, depending on whether the region is considered high-cost or low-cost. For high-cost areas, the limit in 1993 was 95 percent of the local median sales price up to a maximum of $151,725, whereas for low-cost areas the maximum was $67,500. Unlike the FHA, PMI companies may insure mortgages of any size. A person whose desired mortgage is within the size limits established for FHA loan programs may still have to choose PMI because of other restrictions associated with FHA loans. For example, the FHA limits the availability of insurance in projects with high proportions of rental units and does not provide insurance for most of the adjustable rate mortgage products offered in the conventional mortgage market. In addition, some housing developments are not approved for FHA insurance, and some loan programs for first-time homebuyers rely exclusively on conventional mortgages with PMI.
PAGE #367 - Review of PMI activity

REVIEW OF 1993 PMI ACTIVITY The eight private mortgage insurance companies recently made data publicly available that, for the first time, describes the disposition of applications for insurance by the characteristics of the mortgage borrower. These data are comparable to those supplied by mortgage lenders under the Home Mortgage Disclosure Act (HMDA). The PMI data cover applications for mortgage insurance acted on only during the fourth quarter of 1993. The companies limited their 1993 data to this quarter to allow themselves adequate time to develop procedures for receiving, tracking, and reporting activity in a manner consistent with the requirements of HMDA. Information about the PMI industry indicates that fourthquarter activity accounted for nearly 30 percent of all 1993 PMI commitments written on home mortgage loans. The nature of the fourth-quarter mortgages and their disposition may or may not be representative of the rest of the year.

For applications pertaining to properties in metropolitan statistical areas (MSAs), the PMI companies identified properties by census tract number. Lenders covered by HMDA, in contrast, currently identify property location by census tract only for loans in metropolitan areas where they have, or are deemed to have, a home or branch office. For the eight PMI companies, the Federal Financial Institutions Examination Council prepared disclosure statements detailing a company's activities for each MSA in which it had business. In total, the FFIEC prepared disclosure statements relating to 1,894 MSAs, an average of 237 MSAs for each PMI company. In contrast, the typical lender covered by HMDA in 1993 received a disclosure statement that included information on an average of only 3.7 MSAs.

Volume of Applications for PMI In the fourth quarter of 1993, PMI companies acted on roughly 456,400 applications for insurance: 265,400 for insurance to back home-purchase mortgages on single-family properties and 191,000 to insure refinancings of existing mortgages. Most applications dealt with mortgages of less than $150,000. The average size of the home-purchase mortgages was $116,200. The mortgage size distribution and the average mortgage size for home-purchase mortgages are only
slightly different from those for refinancings. This relationship is somewhat surprising because of the large proportion of first-time homebuyers in the home-purchase category; such homebuyers typically have lower incomes than other homeowners and consequently take out smaller loans than homeowners who are refinancing.

Characteristics of Applicants for PMI In 1993, more than two-thirds of the PMI applicants seeking home purchase mortgages had incomes that exceeded the median for the MSA in which the property securing the loan was located. The distributions of PMI applicants by income differ between those seeking loans to purchase homes and those applying for insurance to refinance an existing loan. In particular, the proportion of insurance applicants in the highest income group (income greater than 120 percent of the median family income in their MSA) was significantly larger for refinancings than for home-purchase mortgages. Once again, this difference probably reflects the high proportion of first-time, and perhaps younger, homebuyers in the home-purchase category.

A Comparison of Applicants for PMI and for Government Insured Mortgages The vast majority of mortgages insured by the FHA and VA have high loan-to-value ratios at the time of origination. For example, among all FHA single-family mortgages originated in 1993, 94 percent had a loan-to-value ratio exceeding 80 percent, and 78 percent had a ratio exceeding 90 percent. The vast majority of mortgages backed by PMI also have high loan-to-value ratios, but the pool of FHA-insured mortgages includes many with loan-to-value ratios that exceed PMI limits. Because PMI companies, the FHA, and the VA all serve households applying for mortgages with low down payments, comparisons of the characteristics of the applicants applying for insurance under each program are appropriate.

We conducted such a comparison, using data on FHA and VA lending activity drawn from information filed for 1993 by lenders covered by HMDA. The comparisons are limited to applications for mortgages secured by properties in MSAs. In addition, the samples of applications used for the comparison was restricted to mortgages that fell within the size limits established by the FHA for single-family mortgages.

Our comparison indicates that the majority of applicants for both government-backed and privately insured home-purchase loans had incomes that were below the median family income for their MSA. Applicants for the government-backed programs, however, were relatively more likely to have modest incomes: for example, for home-purchase loans, 68 percent of FHA applicants and 65 percent of VA applicants had incomes that were below the median family income for their MSA, compared with 54 percent of the applicants for PMI. A comparison between applicants of the different insurance programs based on neighborhood income finds a smaller difference. For example, 16 percent of the PMI applicants sought insurance for homepurchase mortgages for properties in low- or moderate-income census tracts, compared with 18 percent of the FHA applicants and 16 percent of the VA applicants. Thus, the insurance programs seem to have a similar distribution of applicants across neighborhoods grouped by income.

Disposition of Applications for Mortgage Insurance PMI companies approved most of the applications for insurance that they acted on during the fourth quarter of 1993 - roughly 85 percent of applications for insurance to back home-purchase loans and 87 percent to back refinancings. The insurers denied about 12 percent of home-purchase applications and about 10 percent of refinancing applications; in a relatively small percentage of cases, applications were withdrawn by the lender or files were closed after additional information needed by the insurer to make a decision was not provided. Most applications for PMI were approved in 1993, but the approval rate varied substantially across metropolitan areas. In particular, applications for insurance for home-purchase mortgages secured by properties located in all California MSAs and in most Florida MSAs had relatively high rates of denial. Denial rates in California were as high as 33 percent in some areas, including Los Angeles. In California, the aggressive pursuit of customers by mortgage originators and a weak housing market may have led to higher proportions of marginally qualified applicants for mortgage insurance. The explanations for high denial rates in Florida are less certain, but suggestions range from a high proportion of condominiums and second homes to a local economy that is prone to greater volatility in housing prices. In contrast, many MSAs in the Midwest--including Chicago, Detroit, and St. Louis - had denial rates well below the national average.

Multiple Applications In general, the relatively high approval rates for PMI are to be expected; lenders submitting applications for insurance know the prospective borrower's credit circumstances and the credit underwriting guidelines used by the PMI companies. However, unlike mortgage lenders, who charge a fee to applicants, PMI companies do not charge for the submission of applications; consequently multiple PMI applications are potentially more common than multiple mortgage applications and may skew the statistics. For example, if lenders submit the applications of only the marginally qualified applicants to more than one PMI firm, then denial rates may be inflated. If, on the other hand, lenders need quick approvals and low premiums to attract well-qualified applicants, then denial rates may be deflated because multiple applications for insurance would be more common for these borrowers. Overall, only 4.1 percent of the applications in the 1993 data appear to have involved multiple applications, and they appear to be, for the most part, from applicants who are only marginally qualified. For example, among the multiple applications, the denial rate for insurance for homepurchase mortgages was about 49 percent, compared with 10 percent for all home-purchase applications excluding the multiple applications.

Disposition by Applicant Income and Race In general, income and its stability can be expected to affect an applicant's ability to qualify for mortgage insurance, although they are usually considered in relationship to the existing and proposed debt burden rather than as an absolute measure of creditworthiness. Other factors consider when evaluating creditworthiness include the size of the loan, assets available for down payment and closing costs, employment experience, and credit history. Nevertheless, on average, low-income households have fewer assets and lower net worth and experience more frequent employment disruptions than high-income households; this combination of factors often results in a denial of an application.
The 1993 fourth-quarter data indicate that the rates of approval and denial for PMI vary somewhat among applicants grouped by their income. For example, about 87 percent of the applicants for insurance for home-purchase loans whose incomes placed them in the highest income group were approved for insurance, compared with 79 percent in the lowest income group (income less than 80 percent of the median of their MSA). Approval and denial rates for applicants from middle-income groups were similar to those for the highest income group. The same patterns were found for applications for insurance on refinancings.

AFFORDABLE HOUSING INITIATIVES As noted earlier, the essential feature of mortgage insurance is that it allows homebuyers to acquire a house with a small down payment. Usually, home-buyers who can afford only a small down payment also have low or moderate incomes; in this sense, mortgage insurance promotes home ownership for such households. Over the past several years, PMI companies have introduced new programs targeted at low-and moderate-income households. Often these programs involve other parties, including Fannie Mae and Freddie Mac and state housing finance authorities.

Working with secondary market agencies through programs such as Fannie Mae's Community Home Buyers and Freddie Mac's Affordable Gold, the PMI companies expand their regular 95 percent loan-tovalue ratio programs by allowing the borrower to use gifts and other nonborrower sources of funds as part of the down payment. These programs also use more flexible underwriting criteria. To offset the additional potential risk anticipated from such loans, borrowers are required to complete a homebuyer education course. Often the prepurchase counseling for homebuyers is undertaken with community groups and other nonprofit organizations. State housing authorities generally issue taxexempt bonds to fund mortgages with high loan-to-value ratios granted to first-time homebuyers. PMI companies issue a special form of mortgage insurance ("pool insurance") to enhance the credit quality of these bonds. Another recent PMI industry initiative provides insurance for mortgages with 97 percent loan-to-value ratios. As with the programs described above, financial counseling is typically a mandatory component of these products. In addition, PMI companies use early intervention techniques in these programs for households that fall behind in their mortgage payments. Mortgages generated through these programs may be held in portfolio by the lender, whereas others may be sold into the secondary market.

Finally, the industry is examining and modifying its traditional products to make them more attractive to all households, including low- and moderate-income households. For example, PMI companies have recently introduced monthly payment programs that allow the borrower to pay the initial premium over time rather than as a lump-sum advance payment. This type of initiative lowers the amount of funds the borrower needs at closing to acquire a house and thereby allows households with fewer assets to become homeowners. Generally, affordable housing programs initiated or supported by PMI companies have not been available long enough to determine their risks and profitability or their impact on first-time homebuyers. In addition, many lenders are not yet familiar with the full range of products that PMI companies offer to promote homeownership. However, insurance products associated with affordable housing initiatives are expected to contribute to the financial performance of the PMI companies by
opening new markets as well as by supporting their traditional core businesses. An example of the latter effect is that some special programs encourage applications from borrowers who were unaware that they could qualify for mainstream insurance programs. But like the traditional PMI programs, the affordable housing initiatives also face competition from the FHA and from lenders who extend mortgages to low and moderate income homebuyers without requiring mortgage insurance.

Data Disclosed by the Private Mortgage Insurance Industry During 1994 the Federal Financial Institutions Examination Council (FFIEC) received and processed data from eight PMI companies regarding applications for insurance that they acted on in the fourth quarter of 1993. The FFIEC prepared disclosure reports for the PMI companies in formats similar to those created for financial institutions covered by the Home Mortgage Disclosure Act (HMDA). The compilation was carried out under the auspices of the Mortgage Insurance Companies of America (MICA). In asking the FFIEC to undertake the report preparation, MICA was responding to growing public and congressional interest in learning more about the activities of PMI companies as they relate to issues of fair lending, affordable housing, and community development.

To supply the data, each PMI company records data in a loan application register for each application for private mortgage insurance acted on in a given period. The information covers the action taken on the application (approved, denied, withdrawn, or file closed); the purpose of the mortgage for which insurance was sought; the race or national origin, the sex, and the annual income of the mortgage applicants; the amount of the mortgage; and the geographic location of the property securing the mortgage. The FFICE compiled the data into disclosure statements summarizing the information for the public. Disclosure statements for each PMI company are publicly available at its corporate headquarters and at a central depository in each MSA. In addition to a disclosure statement for each PMI company, the central depository has aggregate data for all of the companies active in that MSA.

Claims under Private Mortgage Insurance The claim amount on a defaulted loan generally includes the outstanding balance on the loan, delinquent interest payments, expenses incurred during foreclosure, costs to maintain the property, and advances the lender made to pay taxes and hazard insurance on the property. After foreclosing and taking title to a property, a lender may submit a claim to the mortgage insurer. At this point, the PMI company has two options: (1) pay the full claim amount and take title to the property or (2) pay the lender the designated percentage of the coverage of the total claim amount as indicated in the policy and let the lender retain title to the property. The option selected by the PMI company will depend on its estimate of the potential value of the property net of sales expenses.
Multiple Applications Among the 456,404 applications for PMI acted on in the fourth quarter of 1993, 18,844, or 4.1 percent, appear to be multiple or "duplicate" applications. Multiple applications were identified by searching the mortgage insurance application data for records with identical census tracts, purpose of loan, race or ethnic status, applicant income, and loan size. For matches on applicant income and loan size, differences of $1,000 were allowed when identifying matches. In the overwhelming number of cases, a multiple match consisted of only two records, indicating that lenders typically did not submit a given application to more than two PMI companies.

Pros and Cons of Private Mortgage Insurance Studies show that Americans are saving much less and spending a lot more than what their parents did. This spending habit coupled with the fact that home prices are going up at a rate which is much higher than the earning power of Americans makes it very difficult to save a large down payment for buying a home. However experience tells us that the more stake a person has on his home, less is the chance for default. Lenders typically require a 20% down payment to ensure that the borrower would not default on his loan. Private Mortgage Insurance (PMI) was introduced to get around this problem. PMI protects the lender against defaults on the loan. On the other hand it also enables the borrowers with less than 20% down payment to purchase a home. Although it is the lender who is protected against the default, it is the borrower who pays the insurance premium. PMI is only required for loans where the loan-to-value ratio is 80% or more. Once the principal is reduced to 80% of the value of the home, by virtue of a home value appreciation or the principal being paid down or both, PMI is no longer required.

Home Owner's Protection Act (HPA) of 1998 Before 1998 lenders often canceled PMI payments but only on a specific request from the borrower. Borrowers who were unaware of the fact that PMI can be canceled after the 20% equity is reached, often continued paying for mortgage insurance long after the equity requirements were met. Homeowner's Protection Act (HPA) of 1998 made it the responsibility of lenders to cancel the mortgage insurance payments after the principal is 78% of the loan value. Lenders are also required to provide certain disclosures concerning PMI at closing, like how many years and months it will take for them to reach the 80 percent level, for loans given on or after July 29, 1999. In order to cancel the insurance premium the borrower should have a good payment history and should not have defaulted on the loan. Lenders can also continue the mortgage insurance on loans which are categorized as high risk. Borrowers can request for cancellation of PMI even before the principal is paid down to 78% of the loan value if they feel that their home has appreciated in value. The borrower will have to pay for a second appraisal of the home and if it has appreciated beyond the 20% equity value, the mortgage insurance can be canceled.

How to avoid Private Mortgage Insurance?
The easiest way to avoid Private Mortgage Insurance is by putting down a 20% down payment but most borrowers cannot afford to do so. A piggy-back loan or a second mortgage on the property is another option. This was popular before 2007 because the interest payments on the second loan were tax deductible but the mortgage insurance payments were not. Now that both are tax deductible, borrowers often end up paying more on the second loan payments than what they would have paid for Private Mortgage Insurance. 80/10/10 and 80/15/5 are two popular variations of piggy-back loans where the borrower puts down 10% or 5% as down payment and the rest of the down payment is financed through a second mortgage. Borrowers should carefully examine the closing costs and interest payments on the second loan to see whether taking a second mortgage is better suited to them than paying for mortgage insurance.

While it is better to avoid Private Mortgage Insurance altogether and save hundreds of dollars on insurance premium, it also enables a lot of people to achieve their dream of owning a home much earlier than waiting for years to save on a 20% down payment.
have a better understandings of real estate contracts; be able to explain Offer and Acceptance; understand the difference in contract law between the US and other countries; understand the importance of specific performance and how the mortgage process can affect a buyers contractual obligations; and understand contractual theory.
PAGE #390 - Understanding sales contracts

Understanding Sales Contracts A real estate contract is a contract for the purchase/sale, exchange, or other conveyance of real estate between parties. Real estate called leasehold estate is actually a rental of real property such as an apartment, and leases (rental contracts) cover such rentals since they typically do not result in recordable deeds. Freehold ("More permanent") conveyances of real estate are covered by real estate contracts, including conveying fee simple title, life estates, remainder estates, and freehold easements. Real estate contracts are typically bilateral contracts (i. e., agreed to by two parties) and should have the legal requirements specified by contract law in general and should also be in writing to be enforceable. In writing In many countries, real estate contracts must be in writing to be enforceable. In the United States, the Statute of Frauds require real estate contracts to be in writing to be enforceable.

Additionally, a real estate contract must: Identify the parties: The full name of the parties must be on the contract. In a sales contract, the parties are the seller(s) and buyer(s) of the real estate, who are often called the principals to distinguish them from real estate agents, who are effectively their intermediaries and representatives in negotiation of the price. If there are any real estate agents brokering the sale, they are typically listed also as the real estate brokers/agents who would earn the commission from the sale. Identify the real estate (property): At least the address, and usually the legal description must be on the contract.

Identify the purchase price: The amount of the sales price or a reasonably ascertainable figure (an appraisal to be completed at a future date) must be on the contract. Include signatures: A real estate contract must be entered into voluntarily (not by force), and must be signed by the parties, to be enforceable. Have a legal purpose: The contract is void if it calls for illegal action. Involve competent parties: Mentally impaired, drugged persons, etc. cannot enter into a contract. Contracts in which at least one of the parties is a minor are voidable by the minor. Reflect a meeting of the minds: Each side must be clear and agree as to the essential details, rights, and obligations of the contract.

Include Consideration: Consideration is something of value bargained for in exchange of the real estate. Money is the most common form of consideration, but other consideration of value, such as other property in exchange, or a promise to perform (i.e. a promise to pay) is also satisfactory. Notarization by a notary public is normally not required for a real estate contract, but recording offices may require that a seller's or conveyor's signature on a deed be notarized to record the deed. The real estate contract is typically not recorded with the government, although statements or declarations of the price paid are commonly required to be submitted to the recorder's office.

Sometimes real estate contracts will provide for a lawyer review period of several days after the signing by the parties to check the provisions of the contract and counterpropose any that are unsuitable. If there are any real estate brokers/agents brokering the sale, the buyer's agent will often fill in the blanks on a standard contract form for the buyer(s) and seller(s) to sign. The broker commonly gets such contract forms from a real estate association he/she belongs to. When both buyer and seller have agreed to the contract by signing it, the broker provides copies of the signed contract to the buyer and seller.
PAGE #395 - Offer and acceptance

Offer and acceptance
As may be the case with other contracts, real estate contracts may be formed by one party making an offer and another party accepting the offer. To be enforceable, the offers and acceptances must be in writing (Statute of Frauds, Common Law) and signed by the parties agreeing to the contract. Often, the party making the offer prepares a written real estate contract, signs it, and transmits it to the other party who would accept the offer by signing the contract. As with all other types of legal offers, the other party may accept the offer, reject it - in which case the offer is terminated, make a counteroffer in which case the original offer is terminated, or not respond to the offer - in which case the offer terminates if an expiration date is placed in it. Before the offer (or counteroffer) is accepted, the offering (or countering) party can withdraw it. A counteroffer may be countered with yet another offer, and a counteroffering process may go on indefinitely between the parties.
PAGE #396 - Deed

To be enforceable, a real estate contract must possess signatures by the parties and any alterations to the contract must be initialed by all the parties involved. If the original offer is marked up and initialed by the party receiving it, then signed, this is not an offer and acceptance but a counter-offer. Deed specified A real estate contract typically does not convey or transfer ownership of real estate by itself. A different document called a deed is used to convey real estate. In a real estate contract, the type of deed to be used to convey the real estate may be specified, such as a warranty deed or a quitclaim deed. If a deed type is not specifically mentioned, "marketable title" may be specified, implying a warranty deed should be provided. Lenders will typically insist on a warranty deed. Any liens or other encumbrances on the title to the real estate should be mentioned up front in the real estate contract, so the presence of these deficiencies would not be a reason for voiding the contract at or before the closing.
PAGE #397 - Deed

If the liens are not cleared before by the time of the closing, then the deed should specifically have an exception(s) listed for the lien(s) not cleared. The buyer(s) signing the real estate contract are liable (legally responsible) for providing the promised consideration for the real estate, which is typically money in the amount of the purchase price. However, the details about the type of ownership may not be specified in the contract. Sometimes, signing buyer(s) may direct a lawyer preparing the deed separately what type of ownership to list on the deed and may decide to add a joint owner(s), such as a spouse, to the deed. For example, types of joint ownership (title) may include tenancy in common, joint tenancy with right of survivorship, or joint tenancy by the entireties. Another possibility is ownership in trust instead of direct ownership.
PAGE #398 - Contingencies

Contingencies Contingencies are conditions which must be met if a contract is to be performed. Contingencies that suspend the contract until certain events occur are known as "suspensive conditions". Contingencies that cancel the contract if certain events occur are known as "resolutive conditions". Most contracts of sale contain contingencies of some kind or another, because few people can afford to enter into a real estate purchase without them, but it is possible for a real estate contract not to have any contingencies.

Some types of contingencies which can appear in a real estate contract include: Mortgage contingency - Performance of the contract (purchase of the real estate) is contingent upon or subject to the buyer getting a mortgage loan for the purchase. Usually such a contingency calls for a buyer to apply for a loan within a certain period of time after the contract is signed. Since most people who buy a house get a mortgage loan to finance their purchase, mortgage contingencies are one of the most common type of contingencies in real property contracts. Inspection contingency - Purchase of the real estate is contingent upon a satisfactory inspection of the real property revealing no significant defects. Contingencies could also be made on the satisfactory repair of a certain item associated with the real estate.

another sale contingency - Purchase or sale of the real estate is contingent on a successful sale or purchase of another piece of real estate. The successful sale of another house may be needed to finance the purchase of a new one. appraisal contingency - Purchase of the real estate is contingent upon the contract price being at or below a fair market value determined by an appraisal. Lenders will often not lend more than a certain percentage (fraction) of the appraised value, so such a contingency may be useful for a buyer.

72-hour kick out contingency - Seller contingency, in which the seller accepts a contract from a buyer with a contingency (typically a home sale or rent contingency where the buyer conditions the sale on their ability to find a buyer or renter for their current property prior to settlement). The seller retains the right to sell the property to another party if he so chooses after giving the buyer 72 hours notice to remove their contingency. The buyer will then either remove their contingency and provide proof that they can consummate the sale or will release the seller from their contract and allow the seller to move forward with the new contract. These types of contingencies are important for the originator to be aware of when structuring the timeline of a loan application.
PAGE #402 - Date of closing and possession

Date of closing and possession A typical real estate contract specifies a date by which the closing must occur. The closing is the event in which the money (or other consideration) for the real estate is paid for and title (ownership) of the real estate is conveyed from the seller(s) to the buyer(s). The conveyance is done by the seller(s) signing a deed for buyer(s) or their attorneys or other agents to record the transfer of ownership. Often other paperwork is necessary at the closing. The date of the closing is normally also the date when possession of the real estate is transferred from the seller(s) to the buyer(s). However, the real estate contract can specify a different date when possession changes hands. Transfer of possession of a house, condominium, or building is usually accomplished by handing over the key(s) to it. The contract may have provisions in case the seller(s) hold over possession beyond the agreed date.
PAGE #403 - Date of closing and possession

The contract can also specify which party pays for what closing cost(s). If the contract does not specify, then there are certain customary defaults depending on law, common law (judicial precedents), location, and other orders or agreements, regarding who pays for which closing costs. Be aware that some loans do not allow borrowers to pay for certain fees.
PAGE #404 - Condition of property

Condition of property A real estate contract may specify in what condition of the property should be when conveying the title or transferring possession. For example, the contract may say that the property is sold as is, especially if demolition is intended. Alternatively there may be a representation or a warranty (guarantee) regarding the condition of the house, building, or some part of it such as affixed appliances, HVAC system, etc. Sometimes a separate disclosure form specified by a government entity is also used. The contract could also specify any personal property (non-real property) items which are to be included with the deal, such as washer and dryer which are normally detachable from the house. Utility meters, electrical wiring systems, fuse or circuit breaker boxes, plumbing, furnaces, water heaters, sinks, toilets, bathtubs, and most central air conditioning systems are normally considered to be attached to a house or building and would normally be included with the real property by default.
PAGE #405 - Riders

Riders Riders (or addenda) are special attachments (separate sheets) that become part of the contract in certain situations. An originator should read through all addenda to the contract. Earnest money deposit Although it is not absolutely required for a valid real estate offer or a contract, an earnest money deposit from the buyer(s) customarily accompanies an offer to buy real estate. The amount, a small fraction of the total price, is listed in the contract, with the remainder of the cost to be paid at the closing. This money is usually deposit with a disinterested third party such as a title company. If either party defaults on the contract, this Earnest Money could be given to the non-defaulting party as compensation for the default. A buyer not receiving their loan and closing on time could be a reason for the buyer to be in default, thereby cause the buyer to be in default, and potentially losing their earnest money.
PAGE #406 - Financial qualifications of buyers

Financial qualifications of buyer(s) The better the financial qualification of the buyer(s) is, the more likely the closing will be successfully completed, which is typically the goal of the seller. Any documentation demonstrating financial qualifications of the buyer(s), such as mortgage loan pre-approval or pre-qualification, may accompany a real estate offer to buy along with an earnest money check. When there are competing offers or when a lower offer is presented, the seller may be more likely to accept an offer from a buyer demonstrating evidence of being well qualified than from a buyer without such evidence.
Contract in Law In law, a contract is a binding legal agreement that is enforceable in a court of law. That is to say, a contract is an exchange of promises for the breach of which the law will provide a remedy.
PAGE #407 - Contract in law

Agreement is said to be reached when an offer capable of immediate acceptance is met with a "mirror image" acceptance (ie, an unqualified acceptance). The parties must have the necessary capacity to contract and the contract must not be either trifling, indeterminate, impossible or illegal. Contract law is based on the principle expressed in the Latin phrase pacta sunt servanda (usually translated "pacts must be kept", but more literally "agreements are to be kept"). Breach of contract is recognized by the law and remedies can be provided.

As long as the good or service provided is legal, any oral agreement between two parties can constitute a binding legal contract. The practical limitation to this, however, is that only parties to a written agreement have material evidence (the written contract itself) to prove the actual terms uttered at the time the agreement was struck. In daily life, most contracts can be and are made orally, such as purchasing a book or a sandwich. Sometimes written contracts are required by either the parties, or by statutory law within various jurisdiction for certain types of agreement, for example: when purchasing property. Contract law can be classified, as is habitual in civil law systems, as part of a general law of obligations (along with tort, unjust enrichment or restitution).

According to legal scholar Sir John William Salmond, a contract is "an agreement creating and defining the obligations between two or more parties". As a means of economic ordering, contract relies on the notion of consensual exchange and has been extensively discussed in broader economic, sociological and anthropological terms. In American English, the term extends beyond the legal meaning to encompass a broader category of agreements.
PAGE #410 - Contractual information

Contractual formation In common law systems, the five key requirements for the creation of a contract are: offer and acceptance (agreement) consideration an intention to create legal relations legal capacity formalities In civil law systems, the concept of consideration is not central. In addition, for some contracts formalities must be complied with under what is sometimes called a statute of frauds.

One of the most famous cases on forming a contract is Carlill v. Carbolic Smoke Ball Company, decided in nineteenth-century England. A medical firm advertised that its new wonder drug, a smoke ball, would prevent those who used it according to the instructions from catching the flu, and if it did not, buyers would receive 100 and said that they had deposited 1,000 in the bank to show their good faith. When sued, Carbolic argued the ad was not to be taken as a serious, legally binding offer. It was merely an invitation to treat, and a gimmick (a 'mere puff'). But the court of appeal held that it would appear to a reasonable man that Carbolic had made a serious offer, primarily because of the reference to the 1000 deposited into the bank. People had given good "consideration" for it by going to the "distinct inconvenience" of using a faulty product. "Read the advertisement how you will, and twist it about as you will," said Lindley LJ, "here is a distinct promise expressed in language which is perfectly unmistakable".

Where a product in large quantities is advertised in a newspaper or on a poster, it may be an offer, but generally speaking it will be regarded as an invitation to treat, since even when large stock is held it is still limited, whilst the response to an advertisement may be unlimited. This was the basis of the decision in Partridge v. Crittenden a criminal case in which the defendant was charged with "offering for sale" bramblefinch cocks and hens. The court held that the newspaper advertisement could only be an invitation to treat, since it could not have been intended as an offer to the world, so the defendant was not guilty of "offering" them for sale. Similarly, a display of goods in a shop window is an invitation to treat, as was held in Fisher v. Bell another criminal case which turned on the correct analysis of offers as against invitations to treat.

In this instance the defendant was charged with "offering for sale" prohibited kinds of knives, which he had displayed in his shop window with prices attached. The court held that this was an invitation to treat, the offer would be made by a purchaser going into the shop and asking to buy a knife, with acceptance being by the shopkeeper, which he could withhold. (The law was later amended to "exposing for sale".) A display of goods on the shelves of a self-service shop is also an invitation to treat, with the offer being made by the purchaser at the checkout and being accepted by the shop assistant operating the checkout: Pharmaceutical Society of Great Britain v. Boots Cash Chemists (Southern) Ltd. If the person who is to buy the advertised product is of importance, for instance because of his personality, etc., when buying land, it is regarded merely as an invitation to treat. In Carbolic Smoke Ball, the major difference was that a reward was included in the advertisement, which is a general exception to the rule and is then treated as an offer.

Offer and acceptance The most important feature of a contract is that one party makes an offer for an arrangement that another accepts. This can be called a 'concurrence of wills' or 'ad idem' (meeting of the minds) of two or more parties. The concept is somewhat contested. The obvious objection is that a court cannot read minds and the existence or otherwise of agreement is judged objectively, with only limited room for questioning subjective intention. Richard Austen-Baker has suggested that the perpetuation of the idea
of 'meeting of minds' may come from a misunderstanding of the Latin term 'consensus ad idem', which actually means 'agreement to the [same] thing'. There must be evidence that the parties had each from an objective perspective engaged in conduct manifesting their assent, and a contract will be formed when the parties have met such a requirement. An objective perspective means that it is only necessary that somebody gives the impression of offering or accepting contractual terms in the eyes of a reasonable person, not that they actually did want to form a contract.

The case of Carlill v. Carbolic Smoke Ball Co. is an example of a 'unilateral contract', obligations are only imposed upon one party upon acceptance by performance of a condition. In the U.S., the general rule is that in "case of doubt, an offer is interpreted as inviting the offeree to accept either by promising to perform what the offer requests or by rendering the performance, as the offeree chooses."

Offer and acceptance does not always need to be expressed orally or in writing. An implied contract is one in which some of the terms are not expressed in words. This can take two forms. A contract which is implied in fact is one in which the circumstances imply that parties have reached an agreement even though they have not done so expressly. For example, by going to a doctor for a checkup, a patient agrees that he will pay a fair price for the service. If one refuses to pay after being examined, the patient has breached a contract implied in fact. A contract which is implied in law is also called a quasi-contract, because it is not in fact a contract; rather, it is a means for the courts to remedy situations in which one party would be unjustly enriched were he or she not required to compensate the other.

For example, a plumber accidentally installs a sprinkler system in the lawn of the wrong house. The owner of the house had learned the previous day that his neighbor was getting new sprinklers. That morning, he sees the plumber installing them in his lawn. Pleased at the mistake, he says nothing, and then refuses to pay when the plumber delivers the bill. Will the man be held liable for payment? Possibly YES, if it could be proven that the man knew that the sprinklers were being installed mistakenly, the court would make him pay because of a quasi-contract. If that knowledge could not be proven, he would not be liable. Such a claim is also referred to as "quantum meruit".
PAGE #418 - Consideration

Consideration and estoppel Consideration is known as 'the price of a promise' and is a controversial requirement for contracts under common law. It is not necessary in some common law or civil law systems, and is considered by some to be unnecessary as the requirement of intention to create legal relations by both parties meets the same requirement under contract. The reason that both exist in common law jurisdictions is thought by leading scholars to be the result of
the combining by 19th century judges of two distinct threads: first the consideration requirement was at the heart of the action of assumpsit, which had grown up in the Middle Ages and remained the normal action for breach of a simple contract in England & Wales until 1884, when the old forms of action were abolished; secondly, the notion of agreement between two or more parties as being the essential legal and moral foundation of contract in all legal systems, promoted by the 18th century French writer Pothier in his Traite des Obligations, much read (especially after translation into English in 1805) by English judges and jurists. The latter chimed well with the fashionable will theories of the time, especially John Stuart Mill's influential ideas on free will, and got grafted on to the traditional common law requirement for consideration to ground an action in assumpsit.

The idea is that both parties to a contract must bring something to the bargain table. A party seeking to enforce a contract must show that he/she conferred some benefit or suffered some detriment, recognized by law (though it might be trivial) for example, money, however in some cases money will not suffice as consideration - e.g., when one party agrees to make part payment of a debt in exchange for being released from the full amount). This can be either conferring an advantage on the other party, or incurring some kind of detriment or inconvenience towards oneself. A number of rules govern consideration, of which the following are the principal ones. Consideration must be "sufficient" (i.e., recognizable by the law), but need not be "adequate" (i.e., the consideration need not be a fair and reasonable exchange for the benefit of the promise). For instance, agreeing to buy a car for a penny may constitute a binding contract.

Consideration must not be from the past. For instance, in Eastwood v. Kenyon, the guardian of a young girl obtained a loan to educate the girl and to improve her marriage prospects. After her marriage, her husband promised to pay off the loan. It was held that the guardian could not enforce the promise because taking out the loan to raise and educate the girl was past consideration - it was completed before the husband promised to repay it. Consideration must move from the promisee. For instance, it is good consideration for person A to pay person C in return for services rendered by person B. If there are joint promisees, then consideration need only to move from one of the promisees.

The promise to do something one is already contractually obliged to do is not, traditionally, regarded as good consideration. The classic instance is Stilk v. Myrick, in which a captain's promise to divide the wages of two deserters among the remaining crew if they would sail home from the Baltic shorthanded, was found unenforceable on the grounds that the crew were already contracted to sail the ship through all perils of the sea. (The case has been much criticized on grounds that the ship was in port at the time of the promise.) A very specific example is the "rule in Pinnel's Case", brought into the modern law of consideration by the House of Lords in Foakes v. Beer.

This rule is to the effect that a smaller sum of money cannot be good consideration for the release of a larger debt, though if the smaller sum is accompanied by something non-monetary in addition, for instance "a horse, a hawk or a robe", or payment is to be made early or in some special place or way,
then there will be good consideration for the promise to discharge the debt. This rule has suffered some inroads recently. In Williams v. Roffey Bros & Nicholls (Contractors) Ltd the English Court of Appeal held that a promise by a joiner to complete the contracted work on time, where this was falling behind, was good consideration for the contractor's promise to pay extra money. The reasoning adopted was that the strict rule of Stilk v. Myrick was no longer necessary, as English law now recognized a doctrine of economic duress to vitiate promises obtained when the promisor was "over a barrel" for financial reasons.

Therefore, where the promise to pay extra could be seen as conferring a practical benefit on the promisor, that could be good consideration for a variation of the terms. The rule in Pinnel's Case has also been effectively sidestepped in England by the Court of Appeal in the case of Collier v. P & MJ Wright (Holdings) Ltd which held that a promise to accept less in discharge of a pure debt (as opposed to, say, accepting reduced rent, which has long been recognized) could give rise to a promissory estoppel. The promise must not be to do something one is already obliged by the general law to do - e.g., to give refrain from crime or to give evidence in court: Collins v. Godefroy. However, a promise from A to do something for B if B will perform a contractual obligation B owes to C, will be enforceable - B is suffering a legal detriment by making his performance of his contract with C effectively enforceable by A as well as by C.

Civil law systems take the approach that an exchange of promises, or a concurrence of wills alone, rather than an exchange in valuable rights is the correct basis. So if you promised to give me a book, and I accepted your offer without giving anything in return, I would have a legal right to the book and you could not change your mind about giving me it as a gift. However, in common law systems the concept of culpa in contrahendo, a form of 'estoppel', is increasingly used to create obligations during pre-contractual negotiations. Estoppel is an equitable doctrine that provides for the creation of legal obligations if a party has given another an assurance and the other has relied on the assurance to his detriment. A number of commentators have suggested that consideration be abandoned, and estoppel be used to replace it as a basis for contracts. However, legislation, rather than judicial development, has been touted as the only way to remove this entrenched common law doctrine.
PAGE #425 - Intention to be legally bound

Intention to be legally bound There is a presumption for commercial agreements that parties intend to be legally bound (unless the parties expressly state that they do not want to be bound, like in heads of agreement). On the other hand, many kinds of domestic and social agreements are unenforceable on the basis of public policy, for instance between children and parents. One early example is found in Balfour v. Balfour. Using contract-like terms, Mr. Balfour had agreed to give his wife 30 a month as maintenance while he was living in Ceylon (Sri Lanka). Once he left, they separated and Mr. Balfour stopped payments. Mrs. Balfour brought an action to enforce the payments. At the Court of Appeal, the Court held that there was no enforceable agreement as there was not enough evidence to suggest that they were intending to be legally bound by the promise.
PAGE #426 - Intention to be legally bound

The case is often cited in conjunction with Merritt v. Merritt. Here the court distinguished the case from Balfour v. Balfour because Mr. and Mrs. Merritt, although married again, were estranged at the time the agreement was made. Therefore any agreement between them was made with the intention to create legal relations.
PAGE #427 - Third parties

Third parties The doctrine of privity of contract means that only those involved in striking a bargain would have standing to enforce it. In general this is still the case, only parties to a contract may sue for the breach of a contract, although in recent years the rule of privity has eroded somewhat and third party beneficiaries have been allowed to recover damages for breaches of contracts they were not party to. In cases where facts involve third party beneficiaries or debtors to the original contracting party have been allowed to be considered parties for purposes of enforcement of the contract. A recent advance has been seen in the case law as well as statutory recognition to the dilution of the doctrine of privity of contract. The recent tests applied by courts have been the test of benefit and the duty owed test. The duty owed test looks to see if the third party was agreeing to pay a debt for the original party and whereas the benefit test looks to see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. Any defense allowed to parties of the original contract extend to the third party beneficiaries.
PAGE #428 - Formalities and writing

Formalities and writing Contrary to common wisdom, an exchange of promises can still be binding and legally as valid as a written contract. A spoken contract should be called an oral contract, which might be considered a subset of verbal contracts. Any contract that uses words, spoken or written, is a verbal contract. Thus, all oral contracts and written contracts are verbal contracts. This is in contrast to a "non-verbal, nonoral contract," also known as "a contract implied by the acts of the parties", which can be either implied in fact or implied in law.

Most jurisdictions have rules of law or statutes which may render otherwise valid oral contracts unenforceable. This is especially true regarding oral contracts involving large amounts of money or real estate. For example, in the U.S., generally speaking, a contract is unenforceable if it violates the common law statute of frauds or equivalent state statutes which require certain contracts to be in writing. An example of the above is an oral contract for the sale of a motorcycle for US $5,000 in a jurisdiction which requires a contract for the sale of goods over US $500 to be in writing to be enforceable. The point of the Statute of Frauds is to prevent false allegations of the existence of contracts that were never made, by requiring formal (i.e. written) evidence of the contract. However, a common remark is that more frauds have been committed through the application of the Statute of Frauds than have ever been prevented. Contracts that do not meet the requirements of common law or statutory Statutes of Frauds are unenforceable, but are not necessarily thereby void. However, a party unjustly enriched by an unenforceable contract may be required to provide restitution for unjust enrichment. Statutes of Frauds are typically codified in state statutes covering specific types of contracts, such as contracts for the sale of real estate.

In Australia and many, if not all, jurisdictions which have adopted the common law of England, for contracts subject to legislation equivalent to the Statute of Frauds, there is no requirement for the entire contract to be in writing. Although for property transactions there must be a note or memorandum evidencing the contract, which may come into existence after the contract has been formed. The note or memorandum must be signed in some way, and a series of documents may be used in place of a single note or memorandum. It must contain all material terms of the contract, the subject matter and the parties to the contract. In England and Wales, the common law Statute of Frauds is only now in force for guarantees, which must be evidenced in writing, although the agreement may be made orally. Certain other kinds of contract must be in writing or they are void, for instance, for sale of land under s. 52, Law of Property Act 1925.

If a contract is in a written form, and somebody signs the contract, then the person could be bound by its terms regardless of whether they have read it or not, provided the document is contractual in nature. Furthermore, if a party wishes to use a document as the basis of a contract, reasonable notice of its terms must be given to the other party prior to their entry into the contract. This includes such things as tickets issued at parking stations. Contracts may be bilateral or unilateral. A bilateral contract, is an agreement in which each of the parties to the contract makes a promise or promises to the other party. For example, in a contract for the sale of a home, the buyer promises to pay the seller $200,000 in exchange for the seller's promise to deliver title to the property.

In a unilateral contract, only one party to the contract makes a promise. A typical example is the reward contract: A promises to pay a reward to B if B finds A's dog. B is not obliged to find A's dog, but A is obliged to pay the reward to B if B finds the dog. The consideration for the contract here is B's reliance on A's promise, or B giving up his legal right to do whatever he wanted at the time he was engaged in the finding of the dog. In this example, the finding of the dog is a condition precedent to A's obligation to pay, although it is not a legal condition precedent, because technically no contract here has arisen until the dog is found (because B has not accepted A's offer until he finds the dog, and a contract requires offer, acceptance, and consideration), and the term "condition precedent" is used in contract law to designate a condition of a promise in a contract. For example, if B promised to find A's dog, and A promised to pay B when the dog was found, A's promise would have a condition attached to it, and offer and acceptance would already have occurred. This is a situation in which a condition precedent is attached to a bilateral contract.

Condition precedents can also be attached to unilateral contracts, however. This would require A to require a further condition to be met before he pays B for finding his dog. So, for example, A could say "If anyone finds my dog, and the sky falls down, I will give that person $100. In this situation, even if the dog is found by B, he would not be entitled to the $100 until the sky falls down. Therefore the sky falling down is a condition precedent to A's duty being actualized, even though they are already in a contract, since A has made an offer and B has accepted.
An offer of a unilateral contract may often be made to many people (or 'to the world') by means of an advertisement. In that situation, acceptance will only occur on satisfaction of the condition (such as the finding of the offeror's dog). If the condition is something that only one party can perform, both the offeror and offeree are protected the offeror is protected because he will only ever be contractually obliged to one of the many offerees; and the offeree is protected, because if she does perform the condition, the offeror will be contractually obliged to pay her.

In unilateral contracts, the requirement that acceptance be communicated to the offeror is waived. The offeree accepts by performing the condition, and the offeree's performance is also treated as the price, or consideration, for the offeror's promise. The offeror is master of the offer; it is he who decides whether the contract will be unilateral or bilateral. A bilateral contract is one in which there are duties on both sides, rights on both sides, and consideration on both sides. If an offeror makes an offer such as "If you promise to paint my house, I will give you $100," this is a bilateral contract once the offeree accepts. Each side has promised to do something, and each side will get something in return for what they have done.
PAGE #435 - Uncertainty, incompleteness and severance

Uncertainty, incompleteness and severance If the terms of the contract are uncertain or incomplete, the parties cannot have reached an agreement in the eyes of the law. An agreement to agree does not constitute a contract, and an inability to agree on key issues, which may include such things as price or safety, may cause the entire contract to fail. However, a court will attempt to give effect to commercial contracts where possible, by construing a reasonable construction of the contract.
PAGE #436 - Uncertainty, incompleteness and severance

Courts may also look to external standards, which are either mentioned explicitly in the contract or implied by common practice in a certain field. In addition, the court may also imply a term; if price is excluded, the court may imply a reasonable price, with the exception of land, and second-hand goods, which are unique. If there are uncertain or incomplete clauses in the contract, and all options in resolving its true meaning have failed, it may be possible to sever and void just those affected clauses if the contract includes a severability clause. The test of whether a clause is severable is an objective test - whether a reasonable person would see the contract standing even without the clauses.
PAGE #437 - Damages

Damages There are five different types of damages. Compensatory damages, which are given to the party which was detrimented by the breach of contract. With compensatory damages, there are two heads of loss, consequential damage and direct damage. Exemplary damages, which are used to make an example of the party at fault to discourage similar
crimes. Fines can be multiplied by multiple factors for such damages. Some jurisdictions do not allow exemplary damages for breach of contract.
PAGE #438 - Damages

Liquidated damages are really a pre-estimate of loss agreed upon in the contract, so that the court is saved the process of calculating compensatory damages and the parties have greater certainty. Liquidated damages clauses are often called "penalty clauses" in ordinary language, but the law distinguishes between liquidated damages (legitimate) and penalties (invalid). A penalty clause is one which is intended to operate "in terrorem" to deter breach and are typically excessive in amount compared with the greatest loss which the parties could have anticipated as resulting from breach at the time the contract was made (though it will still be an invalid penalty if circumstances change and the sum is reasonable by the time of the actual breach). The parties' terminology is not determinative and the court will decide whether the clause is a penalty or one for liquidated damages.
PAGE #439 - Damages

Nominal damages consist of a small cash amount where the court concludes that the defendant is in breach but the plaintiff has suffered no quantifiable pecuniary loss (often sought to obtain a legal record of who was at fault). Punitive damages are used to punish the party at fault. These are not usually given regarding contracts but possible in a fraudulent situation. Again, these are not permitted in all jurisdictions. Compensatory damages aim at compensating the plaintiff for actual losses suffered as accurately as possible. They may be "expectation damages", "reliance damages" or "restitutionary damages". Expectation damages are awarded to put the party in as good of a position as the party would have been in had the contract been performed as promised.
PAGE #440 - Damages

The court assesses what the likely benefit to the plaintiff of the proper performance of the contract would have been, on a balance of probabilities. Reliance damages are usually awarded where no reasonably reliable estimate of expectation loss can be arrived at, or at the option of the plaintiff (the complaint will include a claim by the plaintiff for damages, so the plaintiff sets the agenda to an extent). Reliance losses cover expense suffered in reliance on the promise made by the defendant which the defendant has breached, rather than lost profits. Examples where reliance damages have been awarded because profits are too speculative include the Australian case of McRae v. Commonwealth Disposals Commission which concerned a contract for the rights to salvage a ship which was not in fact there. It was not possible to evaluate with any reliability the profits that might have been made, given the risks and uncertainties of the venture, but the plaintiff's expenditure in conducting a fruitless search for the vessel could be awarded.
PAGE #441 - Damages

In Anglia Television Ltd v. Reed the English Court of Appeal went so far as to award the plaintiff expenditure incurred before the contract was executed, in preparation for performance of the contract, when a contract was subsequently executed and then breached by the defendant. Furthermore, once a breach has occurred, the non-breaching party is said to have a duty to mitigate damages. Damages are not recoverable for harm that the plaintiff should have foreseen and could have avoided by reasonable
effort without undue risk, expense, or humiliation. Hadley v. Baxendale establishes general and consequential damages. General damages are those damages which naturally flow from a breach of contract. Consequential damages are those damages which, although not naturally flowing from a breach, are naturally supposed by both parties at the time of contract formation. An example would be when someone rents a car to get to a business meeting, but when that person arrives to pick up the car, it is not there. General damages would be the cost of renting a different car. Consequential damages would be the lost business if that person was unable to get to the meeting, if both parties knew the reason the party was renting the car. However, there is still a duty to cover; the fact that the car was not there does not give the party a right to not attempt to rent another car.
PAGE #442 - Damages

Whenever you have a contract that requires completing something, and a person informs you before they begin your project that it will not be completed, this is referred to as anticipatory breach. When it is neither possible nor desirable to award damages measured in that way, a court may award money damages designed to restore the injured party to the economic position that he or she had occupied at the time the contract was entered (known as the "reliance measure"), or designed to prevent the breaching party from being unjustly enriched ("restitution").
PAGE #443 - Specific performance

Specific performance There may be circumstances in which it would be unjust to permit the defaulting party simply to buy out the injured party with damages. For example where an art collector purchases a rare painting and the vendor refuses to deliver, the collector's damages would be equal to the sum paid. The court may make an order of what is called "specific performance", requiring that the contract be performed. In some circumstances a court will order a party to perform his or her promise (an order of "specific performance") or issue an order, known as an "injunction," that a party refrain from doing something that would breach the contract. A specific performance is obtainable for the breach of a contract to sell land or real estate on such grounds that the property has a unique value. In the United States by way of the 13th Amendment to the United States Constitution, is only legal "as punishment for a crime whereof the criminal shall be dully convicted."
PAGE #444 - Specific performance

Both an order for specific performance and an injunction are discretionary remedies, originating for the most part in equity. Neither is available as of right and in most jurisdictions and most circumstances a court will not normally order specific performance. A contract for the sale of real property is a notable exception. In most jurisdictions, the sale of real property is enforceable by specific performance. Related to orders for specific performance, an injunction may be requested when the contract prohibits a certain action. Action for injunction would prohibit the person from performing the act specified in the contract.
PAGE #445 - Contractual theory

Contractual theory
Contract theory is the body of legal theory that addresses normative and conceptual questions in contract law. One of the most important questions asked in contract theory is why contracts are enforced. One prominent answer to this question focuses on the economic benefits of enforcing bargains. Another approach, associated with Charles Fried, maintains that the purpose of contract law is to enforce promises. This theory is developed in Fried's book, Contract as Promise. Other approaches to contract theory are found in the writings of legal realists and critical legal studies theorists.

Attempts at overarching understandings of the purpose and nature of contract as a phenomenon have been made, notably 'relational contract theory' originally developed by U.S. contracts scholars Ian Roderick Macneil and Stewart Macaulay, building at least in part on the contract theory work of U.S. scholar Lon L. Fuller, while U.S. scholars have been at the forefront of developing economic theories of contract focusing on questions of transaction cost and so-called 'efficient breach' theory.

Another dimension of the theoretical debate in contract is its place within, and relationship to a the wider law of obligations. Obligations have traditionally been divided into contracts, which are voluntarily undertaken and owed to a specific person or persons, and obligations in tort which are based on the wrongful infliction of harm to certain protected interests, primarily imposed by the law, and typically owed to a wider class of persons.

Recently it has been accepted that there is a third category, restitutionary obligations, based on the unjust enrichment of the defendant at the plaintiffs expense. Contractual liability, reflecting the constitutive function of contract, is generally for failing to make things better (by not rendering the expected performance), liability in tort is generally for action (as opposed to omission) making things worse, and liability in restitution is for unjustly taking or retaining the benefit of the plaintiffs money or work. The common law describes the circumstances under which the law will recognize the existence of rights, privilege or power arising out of a promise.
PAGE #449 - Originator concerns

Originator Concerns Loan originators should be concerned as your buyer may be contractually obligated to perform (i.e. close on a certain date). Ensure you have properly pre-qualified, and verified information. Ensure you have completed your origination duties in a timely manner. A borrower that is in default of a sales contract due to an originators errors or delays, could cause unintended consequences and a legal nightmare.
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explain the history of title insurance; be able to explain the different types of title policies; better understand the charges for title insurance; and explain why a buyer needs title insurance.
PAGE #453 - Title insurance

Title Insurance Title insurance in the United States is indemnity insurance against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally a product developed and sold in the United States as a result of the comparative deficiency of the US land records laws. It is meant to protect an owner's or a lender's financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. The first title insurance company, the Law Property Assurance and Trust Society, was formed in Pennsylvania in 1853. The vast majority of title insurance policies are written on land within the U.S. Typically the real property interests insured are fee simple ownership or a mortgage. However, title insurance can be purchased to insure any interest in real property, including an easement, lease or life estate. Just as lenders require fire insurance and other types of insurance coverage to protect their investment, nearly all institutional lenders also require title insurance to protect their interest in the collateral of loans secured by real estate. Although rare, some mortgage lenders, especially noninstitutional lenders, may not require title insurance.
PAGE #454 - Title insurance

Title insurance is available in many other countries, such as Canada, Australia, United Kingdom, Northern Ireland, Mexico, New Zealand, China, Korea and throughout Europe. However, while a substantial number of properties located in these countries are insured by US title insurers, they do not constitute a significant share of the real estate transactions in those countries. They also do not constitute a large share of US title insurers' revenues. In many cases these are properties to be used for commercial purposes by US companies doing business abroad, or properties financed by US lenders. The US companies involved buy title insurance to obtain the security of a US insurer backing up the evidence of title that they receive from the other country's land registration system, and payment of legal defense costs if the title is challenged.
PAGE #455 - History
History Prior to the invention of title insurance buyers in real estate transactions bore sole responsibility for ensuring the validity of the land title held by the seller. If the title were later deemed invalid or found to be fraudulent, the buyer lost his investment. In 1868, the case of Watson v. Muirhead was heard by the Pennsylvania Supreme Court. Plaintiff Muirhead had lost his investment in a real estate transaction as the result of a prior lien on the property. Defendant Watson, the conveyancer, had discovered the lien prior to the sale but told Muirhead the title was clear after his lawyer had (erroneously) determined that the lien was not valid. The courts ruled that Watson (and others in similar situations) was not liable for mistakes based on professional opinions. As a result, in 1874, the Pennsylvania legislature passed an act allowing for the incorporation of title insurance companies.
PAGE #456 - History

Joshua Morris, a conveyancer in Philadelphia, and several colleagues met on March 28, 1876 to incorporate the first title insurance company. The new firm, Real Estate Title Insurance Company of Philadelphia, would "insure the purchasers of real estate and mortgages against losses from defective titles, liens and encumbrances," and that "through these facilities, transfer of real estate and real estate securities can be made more speedily and with greater security than heretofore." Morris' aunt purchased the first policy, valued at $1,500, to cover a home on North 43rd Street in Philadelphia.
PAGE #457 - History

Why Title Insurance Exists in the United States Title insurance exists in the U.S. in great part because of a comparative deficiency in the U.S. land records laws. Most of the industrialized world uses land registration systems for the transfer of land titles or interests in them. Under these systems, the government makes the determination of title ownership and encumbrances on the title based on the registration of the instruments transferring or otherwise affecting the title in the applicable government office. With only a few exceptions, the government's determination is conclusive. Governmental errors lead to monetary compensation to the person damaged by the error but that aggrieved party usually cannot recover the property. A few jurisdictions in the United States have adopted a form of this system, e.g., Minneapolis, Minnesota and Boston, Massachusetts. However, for the most part, the states have opted for a system of document recording in which no governmental official makes any determination of who owns the title or whether the instruments transferring it are valid. The reason for this is probably that it is much less expensive to operate than a land registration system; it doesn't require the number of legally skilled employees that the registration systems do.
PAGE #458 - History

Greatly simplified, in the recording system, each time a land title transaction takes place, the transfer instrument is recorded with a local government recorder located in the jurisdiction (usually the county) where the land lies. The instrument is then indexed by the names of the grantor (transferor) and the grantee (transferee) and photographed so it can be found and examined by anyone who wants to see it. Usually, the failure by the grantee to record the transfer instrument voids it as to subsequent purchasers of the property who don't actually know of its existence. Under this system, determining who owns the title requires the examination of the indexes in the
recorders' offices pursuant to various rules established by state legislatures and courts, scrutinizing the instruments to which they refer and making the determination of how they affect the title under applicable law. (The final arbiters of title matters are the courts, which make decisions in suits brought by parties having disagreements.) Initially, this was done by hiring an abstractor to search for the documents affecting the title to the land in question and an attorney to opine on their meaning under the law, and this is still done in some places. However, this procedure has been found to be cumbersome and inefficient in most of the US. Substantial errors made by the abstractor or the attorney will be compensated only to the limit of the financial responsibility of these parties (including their liability insurance). Some errors may not be compensated at all, depending on whether the error was the result of negligence. The opinions given by attorneys as to each title are not uniform and often require time consuming analysis to determine their meanings.
PAGE #459 - History

Title insurers use this recording system to produce an insurance policy for any purchaser of land, or interest in it, or mortgage lender if the premium is paid. Title insurers use their employees or agents to perform the necessary searches of the recorders' offices records and to make the determinations of who owns the title and to what interests it is subject. The policies are fairly uniform (a fact that greatly pleases lenders and others in the real estate business) and the insurers carry, at a minimum, the financial reserves required by insurance regulation to compensate their clients for valid claims they make under the policies. This is especially important in large commercial real estate transactions where many millions of dollars are invested or loaned in reliance on the validity of real estate titles. As stated above, the policies also require the insurers to pay for the costs of defense of their clients in legal contests over what they have insured. Abstractors and attorneys have no such obligation.
PAGE #460 - Types of policies

Types of policies Standardized forms of title insurance exist for owners and lenders. The lender's policies include a form specifically for construction loans. Owner's policy The owner's policy assures a purchaser that the title to the property is vested in that purchaser and that it is free from all defects, liens and encumbrances except those which are listed as exceptions in the policy or are excluded from the scope of the policy's coverage. It also covers losses and damages suffered if the title is unmarketable. The policy also provides coverage for loss if there is no right of access to the land. Although these are the basic coverages, expanded forms of residential owner's policy exist that cover additional items of loss.

The liability limit of the owner's policy is typically the purchase price paid for the property. As with other types of insurance, coverages can also be added or deleted with an endorsement. There are many forms of standard endorsements to cover a variety of common issues. The premium for the policy may be paid by the seller or buyer as the parties agree; usually there is a custom in a particular state or county on this matter which is reflected in most local real estate contracts. Consumers should inquire about the cost of title insurance before signing a real estate contract which provide that they pay for title charges. A real estate attorney, broker, escrow officer (in the western states), or loan officer can provide
detailed information to the consumer as to the price of title search and insurance before the real estate contract is signed. Title insurance coverage lasts as long as the insured retains an interest in the land insured and typically no additional premium is paid after the policy is issued.

Lender's policy This is sometimes called a loan policy and it is issued only to mortgage lenders. Generally speaking, it follows the assignment of the mortgage loan, meaning that the policy benefits the purchaser of the loan if the loan is sold. For this reason, these policies greatly facilitate the sale of mortgages into the secondary market. That market is made up of high volume purchasers such as Fannie Mae and the Federal Home Loan Mortgage Corporation as well as private institutions. The American Land Title Association ("ALTA") forms are almost universally used in the country though they have been modified in some states.

In general, the basic elements of insurance they provide to the lender cover losses from the following matters: The title to the property on which the mortgage is being made is either Subject to defects, liens or encumbrances, or Unmarketable. There is no right of access to the land. The lien created by the mortgage: is invalid or unenforceable, is not prior to any other lien existing on the property on the date the policy is written, or is subject to mechanic's liens under certain circumstances. As with all of the ALTA forms, the policy also covers the cost of defending insured matters against attack. Elements 1 and 2 are important to the lender because they cover its expectations of the title it will receive if it must foreclose its mortgage. Element 3 covers matters that will interfere with its foreclosure. Of course, all of the policies except or exclude certain matters and are subject to various conditions.

There are also ALTA mortgage policies covering single or one-to-four family housing mortgages. These cover the elements of loss listed above plus others. Examples of the other coverages are loss from forged releases of the mortgage and loss resulting from encroachments of improvements on adjoining land onto the mortgaged property when the improvements are constructed after the loan is made. Land title associations & standardized policies In the United States, the American Land Title Association (ALTA) is a national trade association of title insurers. ALTA has created standard forms of title insurance policy "jackets" (standard terms and conditions) for Owners, Lenders and Construction Loan policies. ALTA forms are used in most, but not all, U.S. states. ALTA also offers special endorsement forms for the various policies; endorsements amend and typically broaden the coverage given under a basic title insurance policy. ALTA does not
issue title insurance; it provides standardized policy and endorsement forms that most title insurers issue.

Some states, including Texas and New York, may mandate the use of forms of title insurance policy jackets and endorsements approved by the state insurance commissioner for properties located in those jurisdictions, but these forms are usually similar or identical to ALTA forms. While title insurance generally insures owners and lenders against things that have occurred in the past, in some limited circumstances, in some states, coverage is available for certain events that can occur after a title insurance policy is issued. Most notably, coverage is now available that includes the risk that a third party may place a forged mortgage or deed of trust against a property after the owner's policy has been issued. This coverage is included in the "Homeowners Policy of Title Insurance" (a specific policy form), published by ALTA and the California Land Title Association (CLTA). Note that this is not the same as a so-called CLTA Standard Policy, which provides much less coverage than the Homeowners Policy of Title Insurance.
PAGE #466 - Comparison with other forms of insurance

Comparison with other forms of insurance Title insurance differs in several respects from other types of insurance. Where most insurance is a contract where the insurer indemnifies or guarantees another party against a possible specific type of loss (such as an accident or death) at a future date, title insurance generally insures against losses caused by title problems that have their source in past events. This often results in the curing of title defects or the elimination of adverse interests from the title before a transaction takes place. Title insurance companies attempt to achieve this by searching public records to develop and document the chain of title and to detect known claims against or defects in the title to the subject property. If liens or encumbrances are found, the insurer may require that steps be taken to eliminate them (for example, obtaining a release of an old mortgage or deed of trust that has been paid off, or requiring the payoff) before issuing the title policy. In the alternative, it may except from the policy's coverage those items not eliminated. Title plants are sometimes maintained to index the public records geographically, with the goal of increasing searching efficiency and reducing claims.
PAGE #467 - Comparison with other forms of insurance

The explanation above discloses another difference between title insurance and other types: title insurance premiums are not principally calculated on the basis of actuarial science, as is true in most other types of insurance. Instead of correlating the probability of losses with their projected costs, title insurance seeks to eliminate the source of the losses through the use of the recording system and other underwriting practices. As a result, a relatively small fraction of title insurance premiums are used to pay insured losses. The great majority of the premiums is used to finance the title research on each piece of property and to maintain the title plants used to efficiently do that research. There is significant social utility in this approach as the result conforms with the expectations of most property purchasers and mortgage lenders. Generally, they want the real estate they purchased or loaned money on to have the title condition they expected when they entered the transaction, rather than money compensation and litigation over unexpected defects. This is not to say that title insurers take no actuarial risks. There are several matters that can affect the title to land that are not disclosed by the recording system but that are covered by the policies. Some examples are deeds executed by minors or mentally incompetent persons, forged instruments (in some cases), corporate instruments executed without the proper corporate authority and errors in the public records. However, historically, these problems have not
amounted to a high percentage of the losses paid by the insurers. A more significant percentage of losses paid by the insurers are the result of errors and omissions in the title examining process itself.
PAGE #468 - Homeowners right to choose title company

Homeowner's right to choose a Title Insurance Company A federal law called the Real Estate Settlement Procedures Act (RESPA) entitles the individual homeowner to choose a title insurance company when purchasing or refinancing residential property. Typically, homeowners don't make this decision for themselves, instead relying on their bank's or attorney's choice; however, the homeowner retains the right. RESPA makes it unlawful for any bank, broker or attorney to mandate that a particular title insurance company be used. Doing so is a gross violation of federal law and any person or business doing so can be heavily fined or lose its license.
PAGE #469 - Section 9 of RESPA

Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance. The only exception to this rule applies to commercial real estate transactions, which is not within the parameters of RESPA. Note: It also must be stated that various attorneys have different interpretations on this RESPA law, including that the buyer only has this option if the buyer is paying for the title policy.
PAGE #470 - Cost of title insurance

Cost of Title Insurance The cost of title insurance has two components: premium charges and service fees. Premium charges Some states do not regulate the premiums for title insurance, however, the vast majority of state governments do individually regulate the insurance premiums charged for properties located in the state. The regulation runs from requiring the filing of rates by the insurers (and requiring their use while they are in effect) to promulgating the rates that will be used by all title insurers within the states. An example of the latter is Texas, where rates are set after comprehensive hearings each year. In most states, there is an approval requirement. This varies from rates being deemed approved if no complaints are filed within a specified period of time after filing, to the requirement of approval by the state's insurance regulator before use of the rates is allowed. The rates may include discounts if title insurance is ordered within a specified time after the last policy issued or if the mortgage being insured is a refinance of an earlier mortgage. In the states employing any of these regulations, it is illegal for title insurance companies to charge a higher or lower rate than the regulated rate.
PAGE #471 - Service fees

For example: In Pennsylvania there are two rates, basic rate and reissue rate. The basic rate would
apply if it has been more than ten years since the last policy was issued. Less than ten years, the reissue rate applies. The reissue rate offers a discount of approximately ten percent off of the basic rate. If the transaction is a refinance, the savings can be as much as thirty percent off of the reissue rate. These rates and applicable discounts are filed with and approved by the Pennsylvania Insurance commission. Applicable discounts are mandatory not optional. Service fees In some states, the regulated premium charge does not include part of the underwriting costs necessary for the process. In those states, title insurers may also charge search or abstracting fees for searching the public records, or examination fees to compensate them for the title examination. These fees are usually not regulated and in those cases may sometimes be negotiated. In some states, regulation requires that the title insurer base its policy on the opinion of an attorney. The attorney's fees are not regulated. They are also not part of the title insurance premium, though the title insurer may include those fees within its invoice as a convenience to the attorney rendering the opinion. Similarly, fees for closing a sale or mortgage transaction are not regulated in most states though the charge for closing may appear in the invoice disclosing the total charges for the transaction.
PAGE #472 - FAQs about title insurance

Frequently Asked Questions about Title Insurance Why Do You Need It? Buying a new home is one of life's most gratifying experiences. As you approach the big day of closing, all the details can be a little overwhelming. You might easily overlook the single most important step in the entire process - the purchase of Title Insurance on the wonderful new home of yours. What is a Title? A title is the evidence, of right, that a person has to the ownership and possession of land. It is possible that someone other than the owner has a legal right to the property. If that right can be established, this person can claim the property outright or make demands on the owner as to its use.

Do I need Title Insurance? Most definitely! Title insurance is a means of protecting yourself from financial loss in the event that problems develop regarding the rights to ownership of your property. There may be hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim. What can make a Title Defective? Any number of problems that remain undisclosed after even the most meticulous search of public records can make a title defective. These hidden "defects" are dangerous indeed because you may not learn of them for many months or years. Yet they could force you to spend substantial sums on a legal defense, and still result in the loss of your property.

But the lender already requires Title Insurance, won't that protect me?
Not necessarily. There are two types of Title Insurance. Your lender likely will require that you purchase a Lender's Policy. This policy only insures that the financial institution has a valid, enforceable lien on the property. Most lenders require this type of insurance, and typically require the borrower to pay for it. An Owner's Policy on the other hand is designed to protect you from title defects that existed prior to the issue date of your policy. Title troubles, such as improper estate proceedings or pending legal action, could put your equity at serious risk. If a valid claim is filed, in addition to financial loss up to the face amount of the policy, your owner's title policy covers the full cost of any legal defense of your title. How much does Title Insurance cost? The one-time premium is directly related to the value of your home. Typically, it is less expensive than your annual auto insurance. It is a one-time only expense, paid when you purchase your home. Yet it continues to provide complete coverage for as long as you or your heirs own the property.

When should I look into purchasing Title Insurance? Call the Title Company as soon as you and the seller sign the purchase contract. With a brief summary of the details, title experts will begin a search of the public records and issue a title commitment. Because there are a number of steps that must take to make certain that that all is known about the title, it is wise to get the ball rolling as soon as possible. Should I shop around for the best Title Insurance deal? Some states closely regulate rates. Others permit open competition, often resulting in significant differences between title insurers on rates and coverage. Depending where you live, it pays to investigate your options carefully in order to obtain the most complete coverage. Can my title company handle the closing? Yes, in most areas of the country. Title Companies usually act as a central clearinghouse for the parties involved - collecting necessary documents, insuring adherence to the lender's title instructions, making arrangements for proper payment and distribution of funds.

What items are needed at closing? You will want to have these items complete or in hand when you come to the closing (please confirm with your escrow officer, as practices vary by state): Buyer Buyer's copy of purchase agreement Cashier's check(s) to make all payments Proof of purchase of insurance for fire, casualty, etc. Invoices for any unpaid taxes, utilities or assessments Photo identification (passport, driver's license, or state-issued identification card) Seller Seller's copy of purchase agreement
Invoices for any unpaid taxes, utilities, assessments, and latest utilities meter readings Receipts for last payment of interest on mortgages Bill of Sale of personal property covered by the purchase agreement Any unrecorded instruments that affect the title Proof of satisfaction of any mechanics' liens, chattel mortgages, judgments, or mortgages that were paid prior to the closing Photo identification (passport, driver's license, or state-issued identification card)
PAGE #477 - Historical developments

HISTORICAL DEVELOPMENTS The need for title insurance arose historically from the fact that traditional methods of conveying real property did not provide adequate safety to the parties involved. Until a century ago, transferring title to real property was handled primarily by conveyancers, who were responsible for all aspects of the transaction. The conveyancer conducted a title search to determine the ownership rights of the seller and any other rights, interests, liens or encumbrances that might exist with respect to the property, and, based on its search, provide a signed abstract (or description) of the status of the title. Although the conveyancer was generally not a lawyer, that individual was recognized as an authority on real estate law. The origin of title insurance is directly traceable to the limited protection that the work of such a conveyancer provided to the purchaser of real property.

To review again In 1868, the celebrated case of Watson v. Muirhead was filed in Pennsylvania. In that case, Muirhead, a conveyancer, had searched and abstracted a title for Watson, the purchaser of a parcel of real property. In good faith and after consulting an attorney, Muirhead chose to ignore certain recorded judgments and to report the title as good and unencumbered. On the basis of Muirheads abstract, Watson went ahead with the purchase, but was subsequently presented with, and required to satisfy, the liens that Muirhead had concluded were not impairments to title. Watson sued Muirhead to recover his losses, but the Pennsylvania Supreme Court ruled that there was no negligence on the conveyances part and dismissed the case. Watson, an innocent purchaser who had suffered financial damages because of the encumbrances on his title, had no recourse.

The decision of Watson v. Muirhead demonstrated clearly that the existing conveyancing system could not provide total assurance to purchasers of real property that they would be safe and secure in their ownership. As a result of that decision, the Pennsylvania legislature shortly thereafter passed an act "to provide for the incorporation and regulation of title insurance companies." The first title company was founded in Philadelphia in 1876.

This new type of insurance (called "title insurance"), addressed the concerns raised in Watson v. Muirhead by providing: responsibility without proof of negligence;
financial protection through a reduction of the risk of insolvency; and the assumption of risks beyond those disclosed in the public records (for which the abstractor was not liable). Since the late 1800s, the title insurance industry has grown to where it now is; an essential component in an overwhelming majority of real estate transactions in this country. The services provided by the title insurers may vary somewhat from one area of the country to the other, reflecting the different laws, customs and procedures of the various states and counties throughout the nation. But the essential purpose of these services is the same to assist all of the parties in real estate transactions by ensuring that the acquisition or transfer of an interest in real estate can be effected with a maximum degree of efficiency, security and safety.
PAGE #481 - Title issues

TITLE ISSUES The job of searching the public records to identify existing rights and interests is not an easy task. The title searcher or abstracter reviews the public records to find all aspects of title, which can be seen and recognized. From the title search, the title examiner produces an opinion of title, from which the Company will issue its insurance. In many areas, the title to a property can be traced back to a royal grant, charter, or the United States government. In many areas, titles are not traced back that far; instead, local custom or title insurance company requirements dictate a shorter search. There are few titles, if any, that have a perfect history from their source, or root, to the present day. Each transfer of ownership is a "link" in what is referred to as the "chain of title." As each transaction or link takes place, there is a potential for a problem. Even if the entire chain of title appears to be in order, the chain is still subject to interpretation. When searching a title, what we are trying to determine are the various rights and interests that make up each link in the chain as it has passed from one owner to another.

A "title" is composed of three basic elements. Rights and interests that are disclosed in the public records or by physical inspection of the property, i.e., deeds, mortgages, leases, etc., parties in possession, utility easements, etc. Rights and interests that are not recorded but exist, i.e., limitations imposed by laws and statutes, etc. Rights and interests that are hidden, i.e., forgeries, secret marriages and unknown heirs. Every title is made up of many different "rights" and "interests" that may be owned by different people. The "owners" of the property own the most valuable of the property's rights and interests, but other people may also have rights to the property, such as easements for utilities or mortgages, etc. Each title can be compared to sticks in a bundle. The rights and interests are represented by the sticks. The "owners" own what we call a "fee simple" title, that is, they have purchased the most vital and valuable sticks including rights of possession, use, occupancy, enjoyment, inheritance, etc. Also, within the bundle are sticks that may be owned by other parties. These are called encumbrances and may consist of easements, mortgages, liens, etc.

When a buyer purchases a parcel of real estate, it is not only the physical property itself that he or she
acquires, but the sellers rights and interests, "the seller's title," in the property. It is essential for the prospective purchaser to know before the transaction takes place, precisely what rights or interests the seller can convey. The purchaser also needs to know who else may have rights or interest in the property, and about any encumbrances against the property that may affect the use or enjoyment of the land. The title search must cover all these rights and interests. Benefits of Title Insurance Title insurance typically provides a broad range of benefits to the parties involved in a real estate transaction.

To the Purchaser of Real Estate... The purchaser of real estate needs protection against serious financial loss due to a defect in the title to the property purchased. For a single, one-time premium, which is a modest amount in relationship to the value of the property, a buyer can receive the protection of a title insurance policy - a policy that is backed by the reserves and solvency of the Company. A title insurance policy will cover both claims arising out of title problems that could have been discovered in the public records, and those so-called "non-record" defects that could not be discovered in the record, even with the most complete search. A title insurance policy will not only protect the insured owner, but also that persons heirs for as long as they hold title to the property, and even after they sell by warranty deed. The Company will not only satisfy any valid claim made against the insured's title, but it will pay for the costs and legal expenses of defending against a title claim.

To the Lender... The overwhelming majority of mortgage loans made in the United States are made by persons who are acting in a fiduciary capacity - by savings and loan associations, savings banks, and commercial banks on behalf of their depositors, and by life insurance companies on behalf of their policyholders. Because they are lending other people's money (other people's savings or policyholder's funds) these lenders must be concerned with the safety of their mortgage investments. A policy of title insurance provides a mortgage lender with a high degree of safety against the loss of security as a result of a title problem. This protection remains in effect for as long as the mortgage remains unsatisfied.

To the Seller... An owner of real property whose interest is insured by an owner's title insurance policy has the assurance that the title will be marketable when selling the property. The title insurance policy protects the seller from financial damage if the seller's title is rejected by a prospective purchaser. Also, when the seller conveys with "warranties," the seller is still protected if the buyer sues because of a breach of those warranties. To the Real Estate Attorney... Title insurance enables the real estate attorney to provide the client with substantially greater
protection than would be afforded by the attorney's opinion alone. The attorney's opinion is generally limited to recorded matters and the client can only recover from the attorney if the attorney is found to be negligent.

To the Real Estate Broker... The title insurance company and the real estate agent both seek to ensure that as many purchases as possible are closed to the satisfaction of all the principals in the transaction. From the broker's standpoint, the efficient and safe transfer of title will result in client satisfaction, increased prestige, and continued business. Apart from the security that title insurance offers, most brokers have experienced numerous instances in which title insurance personnel have enabled them to close transactions that otherwise would have been delayed. By helping to avoid delays, Title Companies are able to facilitate the job of the real estate broker and to minimize the inconveniences and costs to the homebuyer.

To the Home Builder... By providing various title insurance services and information to the home builder, the title insurance industry can and does assist the builder in identifying and evaluating building and use restrictions, easements, etc., in removing title problems that may arise, and in facilitating prompt and needed disbursement of construction funds from the construction lender. All of these services ultimately rebound to the benefit of the buyers of newly constructed homes. To the Community in General... Apart from the unique benefits title insurance offers to particular parties interested in a real estate transaction, title insurance companies can and do offer considerable assistance to public officials through the use of their "title plants" - the data banks of reorganized and indexed public records that are maintained by the Company in many areas of the country. Much of the information contained in title plants is not readily available from other sources. This fund of information about the date of recent sales, representative sale prices, ownerships, area maps, use restrictions, surrounding properties, and a host of other matters pertinent to proposed projects, has helped representatives from all levels of government save countless hours and taxpayer dollars. In addition, title plant people frequently help recording officers correct errors they discover in public indices and records.
PAGE #489 - Methods of title searches

METHODS OF TITLE SEARCHES There are various methods by which title to a parcel of real property can be examined. Direct Search In some areas of the country, title companies or lawyers retained by the customer go directly to the county records when conducting a title search. In others, title companies maintain copies of those records in "title plants," which are located right in the company's offices.
In some parts of the country, predominantly in the northeast, the counties' records are maintained in Grantor/Grantee books that index properties by seller's and buyer's names and are laborious to search. In some states, the county real estate records are indexed in a Tract Index similar to a title company's title plant. A tract index indexes properties by the property location, i.e., lot number, and if reliable, title companies may use them instead of going to the expense of building their own title plants.
PAGE #490 - Title plant examination

Title Plant Examination The other method of title searching is called the Title Plant Examination. The title examiner makes the search from the company's title plant records. The plant contains a duplicate of the "public records", which has been reorganized and indexed in a more useful fashion. This means that once the searcher locates the property, the searcher has instant access to all instruments affecting that property. This method of title search has been used in most metropolitan areas since the advent of title insurance. It requires that the title insurer or its agent own a title or abstract plant.
PAGE #491 - Title examination

Title Examination When the search is completed, copies of all pertinent documents, tax searches, name searches, etc., are sent to a title officer. It is the officer's responsibility to examine those items and arrive at a conclusion as to who owns the property and what encumbrances or defects exist. The officer may also set out certain requirements to clear up any problems disclosed by the search and examination. Title Underwriting The title officer may also have to make certain underwriting decisions. Suppose, for instance, that there are building restrictions limiting buildings from being built closer than 30 feet from the front lot line, but our building is actually located 25 feet from the front line. Can we guarantee the lender that it will not suffer loss because of this violation? Title Companies try to resolve such problems - many of them are very complex and require skill and experience to underwrite to our customer's satisfaction. If a particularly difficult problem arises or it involves a large title policy, your local title officer will often call the Regional Counsel or our Chief Title Counsel in for advice and suggestions.
PAGE #492 - The public records

THE PUBLIC RECORDS In the United States we maintain a public records system that varies from state to state. This system is controlled by "recording statutes." Simply, this means that in each and every county there is a public office where people may have their deeds or other written instruments relating to title recorded in permanent record books. The public records provide constructive notice to everyone as to the rights and interests of parties in a particular piece of property. There may be other rights and interests that are not disclosed by the public records (i.e., secret marriages, incompetency, unknown heirs, forgery, etc.). The public recording offices and their records constitute the most important source of information about title to real estate.
PAGE #493 - The public records

The offices in which these public records are maintained have different names in different states. In fact, there usually are several different offices in each and every county. One office may be for the recording of deeds, mortgages, and documents pertaining exclusively to land. Other offices in the same counties may contain the records of other matters affecting the title to the land. Lawsuits, marriages, divorces, insanity proceedings, and probate may all affect the title to the land. Still other offices may contain the records relating to taxes against the properties or, in some instances, recorded surveys. In a very limited number of states the Registered Land System (also known as a "Torrens System") is used. Under this system, a court proceeding has been brought naming parties who have an adverse interest in the property. If everything in the proceeding is completed and handled properly, the plaintiff is said to have a good title as of that date. This title, however, is not guaranteed by the state. The Torrens System has been abandoned by most states primarily because the associated court proceedings complicated title transferring and delayed real estate sales proceedings caused extra and unnecessary expenses.
PAGE #494 - The parties in a transaction

THE PARTIES IN A TRANSACTION There are few business transactions with more importance than those related to the sale and purchase of real estate. The purchase of a home is usually the largest, single expenditure most families will ever make. In most cases, a property owner will approach a real estate agent and offer a property for sale. The agent will then advertise the property and conduct a search for potential buyers. Generally, a number of potential buyers will respond to the agent's listing, depending upon real estate market conditions and general economic conditions at the time. The agent, working with the client, then determines which of the potential buyers is financially qualified to enter into sale price negotiations with the property owner. Once a qualified buyer is found and a sale of property is arranged for and completed, the agent is compensated in the form of a commission. This commission is normally paid by the property seller and is based on a percentage of the final sale price of the property. The actual dollar amount of the commission, as well as the general terms of the agent's services, are specified in a listing contract or listing agreement.

Once the buyer and seller have agreed on a purchase price, they enter into a Purchase Agreement or Contract. The contract sets out the terms of the agreement such as price, closing date, contingencies, etc. It is recommended that the parties have the advice of their lawyers before signing the Contract, since once it is executed it defines the terms of the sale. The parties' attorneys may continue to provide legal advice to their respective clients until the real estate transaction is completed. Most people do not have enough cash to purchase property on an all-cash basis and must therefore look toward one of the many sources of financing available today. The basic arrangement is that someone will lend the buyer enough money to purchase the property under certain conditions. The conditions require the purchaser to repay the monies according to a known repayment schedule, and pledge the property as security for the debt.

When you borrow money, the lender is in fact making an investment in which the lender will earn interest. Your payments will usually be made on a monthly basis and are calculated so that the entire amount of principal and interest due is repaid in a fixed number of years. If the entire debt will not be paid in this time (i.e., fully "amortized") the total amount left to be paid is called a "balloon" payment. The lender first processes and underwrites the buyers application. This involves ordering credit reports, appraisals, verifications of salary, verification of debts, and possible investor and private mortgage insurance company approval. When loan approval appears likely, title insurance is ordered, often by the real estate agent.
PAGE #497 - Why an owner's policy?

Why an Owner's Policy? Mr. Seller and (presumably) Mrs. Seller arrived at settlement to execute the deed to Mr. & Mrs. Buyer. A while later, the real Mrs. Seller's attorney mails a letter to Mr. & Mrs. Buyer claiming the property still belongs to Mrs. Seller, who had been separated at the time of the purported sale and unaware of the perfidy of Mr. Seller. Joe Frazier, after his annuity income stops, decides your property is still his, 14 years after he signed a deed. Sounds crazy, but he still sues you and you need a good title attorney, NOW. Your legal description recites a boundary along a roadway. Your seller says he uses the dirt roadway to get out to the main roadway. The searcher just assumes there is legal access to a public road because of the way the legal description reads. When the property owner over which you must travel to reach the main highway sells, the new owner decides to block off the dirt road. Now you are landlocked. You may or may not be able to require this neighbor to open the roadway again without purchasing an easement from him, but you have to go to court and pay a lawyer and the court expenses.

A new regime takes over the local municipal government determined to save the taxpayer's money and get re-elected again and again. The "newly elected" tackle their new job with vigor that would surpass the "white tornado" in that old commercial for a newer, stronger, more disinfectant cleaner. They are determined to "clean house." To their delight they discover that their campaign rhetoric was absolutely true. The last members of the municipal board had never gone after the scofflaws of the township to get them to pay their water/sewer line tap-in fees, or their street improvement assessments, or any of the other myriad township assessments and fees imposed on the upstanding property owners as a privilege to live in "Camelot" township. Now is the time to collect on the old municipal liens. But now you are the owner of the property. It was your seller who was the "scofflaw."

When you purchased your property, the settlement clerk paid off the seller's mortgages. You thought your troubles were over. Later when you went to refinance your mortgage for a lower interest rate, the searcher finds old open mortgages still against your property. The settlement clerk had obtained a letter of indemnification from the seller's title insurance underwriter (because the seller had an Owner's Title Policy) in order to insure over these old mortgages. Later the clerk failed, for whatever reason, to obtain releases from the mortgage companies to clear the courthouse records. If you did not purchase an Owner's Title Policy insuring you against such liens, you cannot obtain a letter of indemnification, as did the seller when you purchased, because you did not purchase the Owner's Title Policy to protect
yourself. However, you were advised by a trusted and competent advisor that you do not need an owner's title policy. "Once they search the title to protect the lender, you know your chain is good. So why pay the extra money for an owner's policy." Good advice? Not when that claim comes in.

A Lender's Title Policy insures only the lender. And the Lender's policy insures that the mortgage is a first lien. The lender, of course, would be concerned if you lost your title to the property but only when you lost your title to the property. The lender would be concerned if they found out there is a judgment or municipal lien ahead of their mortgage in lien priority; but only when the mortgage is in foreclosure. The lender gets concerned once the tragedy has already happened. An owner is concerned before it gets that far. And, without an Owner's Policy, you are not covered and you must pay someone else's debt. Because the title policy is an indemnity contract for losses, the mortgage company must suffer a loss before they actually have a claim under the Lender's Title Policy. Therefore, they must proceed to foreclosure, sell the property and obtain less than the debt due on the loan. By that time the owner has been ejected from the property. For just a little more money over the lender's-only policy you can get an Owner's and Lender's policy combination that protects your ownership interest. In addition, should you die, the ownership interests of you heirs or devisees are also protected under this same policy. You pay a premium only once and the policy continues in force until you sell to a third party. Don't let anyone convince you that the lenders coverage accrues to your benefit.
PAGE #501 - Title industry quick facts

Title Industry Quick Facts Nationally, title insurance paid approximately $582.7 million in claims in 2002, compared to $465.1 million in the previous year, an indication of how important it is for homeowners and purchasers of real property to purchase title insurance. Source: American Land Title Association A survey of 420 abstractors and agent operations showed that problems or defects in the title are discovered through examinations performed by title industry professionals in one out of every four real estate transactions. Because of the research and corrective work that title companies perform, it is rare for homeowners to suffer a loss under their title insurance policy. Source: American Land Title Association A recent study by the American Land Title Association finds that in 36% of all real estate transactions the title company needs to fix a significant problem before the title is insurable. Source: Dr. Nelson R. Lipshutz, President, Regulatory Research Corp

In performing title searches and curing title problems discovered by title searches to void losses by policyholders the title industry spends more than 10 times the amount it pays in claims. Source: American Land Title Association "In addition to indemnifying insureds when a title problem occurs, the title insurance process guarantees that almost all title problems will be fixed before a consumer buys a property or borrows money against it. Title insurance is primarily about loss prevention, not loss reimbursement. Source: Dr. Nelson R. Lipshutz, President, Regulatory Research Corp At a time when homeowners insurance and automobile insurance are increasing in price, the cost of title insurance is at its lowest level in more than a decade. In 1993, an owner's policy of title insurance for $100,000 of coverage cost the consumer $1,023. Today, the same amount of
insurance would cost only $871. Also, today $1,020 will purchase $127,000 of title insurance coverage. Source: Texas Land Title Association

The cost of title insurance paid by policyholders in Texas has decreased more than 15 percent in the last decade, as opposed to costs paid by policyholders for most other lines of insurance that have increased. Source: Texas Department of Insurance When you buy a homeowner's insurance policy to insure your home in the event of a fire, you pay for the premium for insurance coverage that lasts usually for no more than a year. If you want insurance on your home next year, you have to pay more premium for another policy covering your home next year. But you only pay for a title insurance policy once, and the policy is in effect for as long as you own your home. Source: Texas Land Title Association Regulation of title insurance markets in Texas is designed to protect consumers. This requires a balancing of two objectives: (1) making affordable coverage available to the consuming public; and (2) attracting sufficient investment in the industry to ensure that the guarantees provided by title insurers are capable of being maintained over time. Source: Dr. Jared Hazleton

Out of more than one million policies issued in Texas in 2002, only 296 complaints were filed with the Texas Department of Insurance, most of which were due to the complainants misunderstanding about the product. Source: Texas Department of Insurance In Summary: The provisions of the typical real estate purchase contract that deal with title and title insurance issues are probably the least understood sections of the contract. In point of fact, the percentage of lawyers (including real estate lawyers) who understand the nuances of the laws dealing with title to real property and title insurance is very, very small. Because of the complexity of these subjects, this section of the booklet is divided into two parts. The first part deals with what the homebuyer really needs to know about these issues. The second part will explore title and title insurance issues in a little more detail and provide some additional information which you might find interesting and helpful.
PAGE #505 - What the homebuyer needs to know

What the Homebuyer Needs to Know. When you buy a home, you want to know that, once you go to settlement on the home, you will really own it and that you will have peaceful and quiet possession of the home. You want to know that your title to the property is good and that no one else is going to come along and assert any claim against the property. Basically, that is what is meant by the phrase "good title". Title insurance is a particular kind of insurance which homebuyers purchase with the expectation that, if the title to their property turns out not to be "good" for some reason, the title insurance policy will protect them against any loss. Title insurance is almost always a good thing for a homeowner to obtain, provided that it covers what it should. Unfortunately, since most homebuyers do not know what to look for in a title insurance policy and because most homeowners do not get adequate representation at settlement, most homebuyers who purchase title insurance actually get a lot less than they think they are getting. It is not until later, when a title problem crops up, that they find out that that particular problem is not covered by their title insurance policy. This is one of the most important areas in which homebuyers need the help of an experienced real estate attorney.

When you buy a home, the lender will require you to provide the lender with a lender's title insurance policy. Consequently, whether or not you buy owner's title insurance to protect your interests in the property (and you should), the settlement agent will arrange for a title search to be prepared in advance of settlement. Basically, a title search means an examination of the public records to determine whether they contain any matters which may affect the title to the property you are purchasing. The results of that search are reduced to a written summary called an "abstract of title" (or "title report"). The title insurance company or its agent then reviews that abstract and uses it to prepare the title insurance "commitment" (or "binder") which is, basically, the company's promise to issue the title insurance policy at a later date subject to the various conditions described in the title insurance commitment.

Obviously, when the title insurance company issues the commitment, it has already had the benefit of reviewing the abstract of title and it already knows whether or not the title search has revealed any potential title problems. If it has, it is possible for the title insurance company simply to exclude from insurance coverage any of those potential problem items and you will be none the wiser unless and until the problem surfaces, maybe years later. It is suggested for the homebuyer to have his own, independent, knowledgeable real estate attorney to review the abstract of title, the title insurance binder and the final title insurance policy to make certain that, if any problems have been uncovered in the title search, they have either been dealt with and resolved before settlement or they are covered in your final title insurance policy. One more thing you should know about title insurance: Early on in the negotiations for purchasing the home, try to find out whether the seller purchased or refinanced the home within the last ten years. If so, try to find out whether or not the owner bought owner's title insurance when he purchased or last refinanced. If the answers to both of those questions are "yes", you can occasionally go back to the same title insurance company and get a substantial premium reduction (called a "reissue rate") on the title insurance policy you buy when you settle on the home.
PAGE #508 - Additional information

Additional Information You Might Want to Know About Real Estate Titles and Title Insurance. There is a lot of terminology to master in order to understand a discussion of title and title insurance issues. In the first place, a properly drafted real estate purchase contract should require the seller to transfer to the purchaser a title to the property which is "good, marketable and insurable at regular rates (that is, with no additional risk premium) by a licensed title insurance company." These three terms have three related but distinctly different meanings. "Good" title means that the title of the seller is, in law and fact, superior to the claims of anyone else. "Marketable" title means that, whether or not the seller's title is "good," it would be acceptable, without objection, to a reasonably well informed person who understood the historical facts affecting the chain of title as well as the legal principles applying to those facts. "Insurable at regular rates" basically means that a reputable title company would issue a final title insurance policy insuring good and marketable title without charging any additional premium for covering any potential defects in the title. Even where a contract includes the desired phrase, however, the purchaser is not always fully protected
because many contract forms then add another phrase which may totally or substantially remove the protection afforded by the desired phrase. The key problematical language to look for is "subject to" any matters of record. Where a contract, on the one hand, requires a seller to transfer "good and marketable title," etc. but then, on the other hand, says that the title conveyed may be "subject to" matters of record, the right hand may taketh away what the left hand giveth.

In any event, however the conflicts between these two parts of the sentence might be resolved, a purchaser would be foolish to agree to accept a title which was subject to matters of record when the purchaser has no idea what those matters might be. Where such phraseology appears in a contract, a prudent purchaser must further modify the contract to state that the purchaser is not obligated to accept "matters of record" which adversely affect the value or use of the property. When a title examiner performs a title search, she looks at all of the public records which may have a bearing on the title to the property being examined. These records include the records which reflect the succession of owners of the property as well as any liens which may have been placed against the property for loans secured by the property, judgments, claims of mechanics or materialmen or for any other reason. The title examiner then prepares an abstract of title which reflects all of the facts potentially affecting the property. These include any liens as described above as well as any other potential claims against, or limitations on, the unrestricted ownership and use of the property.

In some parts of the country, it is customary for lawyers or their staffs to do the title searches and prepare the abstracts of title so that the attorney may issue a title opinion or a certificate of title. In some areas, the attorney's opinion or certificate takes the place of title insurance. Sometimes it is issued in addition to title insurance. Lenders who finance the purchase of a home will almost always require the purchaser to obtain a title insurance policy which names the lender as a beneficiary up to the amount of the loan. When a lender requires a borrower to provide the lender with a title insurance policy, the policy is called a "lender," "mortgagee" or "loan" policy. It is customary for the coverage provided in a lender policy to be more comprehensive than the coverage provided in an owner's policy issued simultaneously with the lender's policy. This is because lenders are familiar with title insurance, they know what additional coverages to ask for and they have the clout to get them. A homebuyer unrepresented by counsel doesn't even know what to ask for, much less how to get it. It is worth remembering that title insurance companies spend an enormous amount of their time and money searching and evaluating titles in order to eliminate risks from coverage under their policies. They are very effective at this as is demonstrated by the extremely low level of loss payouts that title insurance companies experience (as compared with casualty insurers, for example). A title insurance company is under no obligation, legal or otherwise, to explain to you the meaning and effect of the coverages offered by its policy. In fact, title insurance companies, their agents and employees are prohibited by law from explaining (to a non-lawyer) the legal meaning or effect of anything revealed by their title examination or abstract.

Furthermore, even if title companies were legally authorized to tell you about title problems which they had uncovered, it would obviously be against their financial interest to do so. If they did, you might cancel the purchase of the home (and the title company would receive no premium) or you might demand that the title insurance company expand its coverage to include the excluded problem (which
would expose the company to additional and unwanted risk). In any event, it should be obvious that the interests of the title insurance company and its agents are diametrically opposed to the best interests of the homebuyer when it comes to deciding what your final policy will and will not cover. You need someone to represent you in the transaction who is knowledgeable, free of conflicting interests and committed to protecting your interests above all others. Owner's title insurance can provide you with important protections that are not afforded by an attorney's title opinion or, even, an attorney's review of a title abstract. For example, title insurance can protect you against claims that even the most careful title examination would not reveal, like a forged deed in the chain of title, defective conveyances from people thought to be single who were really married (the missing spouse may turn up later to claim her "rights"), people erroneously believed to be dead, defective deeds executed by minors or mental incompetents and claims by missing and previously unknown heirs.

In all of these cases, title insurance may protect you in ways that even your attorney never could. For example, if you suffer a loss as a result of a risk that is covered by the policy, the title insurance company is obligated to pay that claim up to the full value of the policy in order to protect your title and to allow you to remain in possession of your property. In addition, even where a claim, ultimately, does not have to be paid, the title insurance company will be responsible for providing you with a defense of your title, even in court, if necessary. And they do it at their expense, which may be substantial. When title problems are discovered prior to settlement, they can usually be resolved satisfactorily, although the seller or his title insurance company may sometimes be put to some expense and, sometimes, settlements have to be delayed a little bit to resolve the problems. It is rare for a title problem to totally kill a sale. In any event, the purchaser is a lot better off finding out about the problem before settlement than after. If an insoluble problem arises before settlement, the purchaser can always just walk away from the deal. After settlement, however, the exposure to the purchaser is considerably greater and that is when a purchaser is most likely to appreciate fully the advice of counsel which assured the purchaser of proper and adequate protection by his title insurance policy. Whether it happens before or after settlement, a title problem is somewhat like lightning. The chance of it striking you are fairly small but, if it happens, it will quickly get your full attention. Your attorney can make sure that the lightning rod you buy will, in fact, protect you should you ever need it.
HOMEWORK
explain possible solutions for distressed or delinquent borrowers; understand government bailout pros and cons; and list various government or government supported programs.
PAGE #516 - Distressed/Delinquent borrowers

Distressed/Delinquent Borrowers The Subprime mortgage crisis solutions debate discusses various actions and proposals by economists, government officials, journalists, and business leaders to address the subprime mortgage crisis and broader economic crisis of 2007-2009. Overview Solutions may be organized in these categories: Liquidity: Central banks have expanded their lending and money supplies, to offset the decline in lending by private institutions and investors. Solvency: Some financial institutions are facing risks regarding their solvency, or ability to pay their obligations. Alternatives involve restructuring through bankruptcy, bondholder haircuts, or government bailouts (i.e., nationalization, receivership or asset purchases). Economic stimulus: Governments have increased spending or cut taxes to offset declines in consumer spending and business investment.

Homeowner assistance: Banks are adjusting the terms of mortgage loans to avoid foreclosure, with the goal of maximizing cash payments. Governments are offering financial incentives for lenders to assist borrowers. Other alternatives include systematic refinancing of large numbers of mortgages and allowing mortgage debt to be "crammed down" (reduced) in homeowner bankruptcies. Regulatory: New or reinstated rules designed help stabilize the financial system over the long-run to mitigate or prevent future crises. Various actions have been taken since the crisis became apparent in August 2007. Critics have argued that governments treated this crisis as one of financial liquidity rather than solvency, delaying the appropriate remedies. Others have argued that this crisis represents a reset of economic activity, rather than a recession or cyclical downturn.

In September 2008, major instability in world financial markets increased awareness and attention to the crisis. Various agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis. To date, various government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. President Barack Obama and key advisors introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others.
PAGE #519 - Liquidity

Liquidity
All major corporations, even highly profitable ones, borrow money to finance their operations. In theory, the lower interest rate paid to the lender is offset by the higher return obtained from the investments made using the borrowed funds. Corporations regularly borrow for a period of time and periodically "rollover" or pay back the borrowed amounts and obtain new loans in the credit markets, a generic term for places where investors can provide funds through financial institutions to these corporations. The term liquidity refers to this ability to borrow funds in the credit markets or pay immediate obligations with available cash. Prior to the crisis, many companies borrowed short-term in liquid markets to purchase long-term, illiquid assets like mortgage-backed securities (MBS), profiting on the difference between lower short-term rates and higher long-term rates. Some have been unable to "rollover" this short-term debt due to disruptions in the credit markets, forcing them to sell long-term, illiquid assets at fire-sale prices and suffering huge losses.
PAGE #520 - Liquidity

The central bank of the USA, the Federal Reserve or Fed, in partnership with central banks around the world, have taken several steps to increase liquidity, essentially stepping in to provide short-term funding to various institutional borrowers through various programs such as the TALF. Fed Chairman Ben Bernanke stated in early 2008: "Broadly, the Federal Reserve's response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy." The Fed, a quasi-public institution, has a mandate to support liquidity as the "lender of last resort" but not solvency, which resides with government regulators and bankruptcy courts.
PAGE #521 - Arguements for lower interest rates

Lower Interest Rates Arguments for lower interest rates Lower interest rates stimulate the economy by making borrowing less expensive. The Fed lowered the target for the Federal funds rate from 5.25% to a target range of 0-0.25% since 18 September 2007. Central banks around the world have also lowered interest rates. Lower interest rates may also help banks "earn their way out" of financial difficulties, because banks can borrow at very low interest rates from depositors and lend at higher rates for mortgages or credit cards. In other words, the "spread" between bank borrowing costs and revenues from lending increases. For example, a large U.S. bank reported in February 2009 that its average cost to borrow from depositors was 0.91%, with a net interest margin (spread) of 4.83%. Profits help banks build back equity or capital lost during the crisis.
PAGE #522 - Arguement against lower interest rates

Arguments against lower interest rates Other things being equal, economic theory suggests that lowering interest rates relative to other countries weakens the domestic currency. This is because capital flows to nations with higher interest rates (after subtracting inflation and the political risk premium), causing the domestic currency to be sold in favor of foreign currencies, a variation of which is called the carry trade. Further, there is risk that the stimulus provided by lower interest rates can lead to demand-driven inflation once the economy is growing again. Maintaining interest rates at a low level also discourages saving, while encouraging spending.
PAGE #523 - Credit easing

Monetary policy and "credit easing" Expanding the money supply is a means of encouraging banks to lend, thereby stimulating the economy. The Fed can expand the money supply by purchasing Treasury securities through a process called open market operations which provides cash to member banks for lending. The Fed can also provide loans against various types of collateral to enhance liquidity in markets, a process called credit easing. This is also called "expanding the Fed's balance sheet" as additional assets and liabilities represented by these loans appear there.
PAGE #524 - Credit easing

The Fed has been active in its role as "lender of last resort" to offset declines in lending by both depository banks and the shadow banking system. The Fed has implemented a variety of programs to expand the types of collateral against which it is willing to lend. The programs have various names such as the Term Auction Facility and Term Asset-Backed Securities Loan Facility. A total of $1.6 trillion in loans to banks were made for various types of collateral by November 2008. In March 2009, the FOMC decided to increase the size of the Federal Reserves balance sheet further by purchasing up to an additional $750 billion of agency (GSE) mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longerterm Treasury securities during 2009. The Fed also announced that it was expanding the scope of the TALF program to allow loans against additional types of collateral.
PAGE #525 - Arguements for credit easing

Arguments for credit easing According to Ben Bernanke, expansion of the Fed balance sheet means the Fed is electronically creating money, necessary "...because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."
PAGE #526 - Arguements against credit easing

Arguments against credit easing Credit easing involves increasing the money supply, which presents inflationary risks that could weaken the dollar and make it less desirable as a reserve currency, affecting the ability of the U.S. government to finance budget deficits. The Fed is lending against increasingly risky collateral and in great amounts. The challenge to reduce the money supply at the right cadence and amount will be unprecedented once the economy is on firmer footing. Further, reducing the money supply as the economy begins to recover may place downward pressure against economic growth. In other words, raising the money supply to cushion a downturn will have a dampening effect on the subsequent upturn. There is also risk of inflation and devaluation of the currency. Critics have argued that worthy borrowers can still get credit and that credit easing (and government intervention more generally) is really an attempt to maintain a debt-driven standard of living that was unsustainable.
PAGE #527 - Solvency

Solvency Critics have argued that due to the combination of high leverage and losses, the U.S. banking system is effectively insolvent (i.e., equity is negative or will be as the crisis progresses), while the banks counter that they have the cash required to continue operating or are "well-capitalized." As the crisis progressed into mid-2008, it became apparent that growing losses on mortgage-backed securities at large, systemically-important institutions were reducing the total value of assets held by particular firms to a critical point roughly equal to the value of their liabilities.

A bit of accounting theory is helpful to understanding this debate. It is an accounting identity (i.e., a rule that must hold true by definition) that assets equals the sum of liabilities and equity. Equity is comprised primarily of the common or preferred stock and the retained earnings of the company and is also referred to as capital. The financial statement that reflects these amounts is called the balance sheet. If a firm is forced into a negative equity scenario, it is technically insolvent from a balance sheet perspective. However, the firm may have sufficient cash to pay its short-term obligations and continue operating. Bankruptcy occurs when a firm is unable to pay its immediate obligations and seeks legal protection to enable it to either re-negotiate its arrangements with creditors or liquidate its assets. Pertinent forms of the accounting equation for this discussion are shown below: Assets = Liabilities + Equity Equity = Assets - Liabilities = Net worth or capital Financial leverage ratio = Assets / Equity

If assets equal liabilities, then equity must be zero. While asset values on the balance sheet are marked down to reflect expected losses, these institutions still owe the creditors the full amount of liabilities. To use a simplistic example, Company X used a $10 equity or capital base to borrow another $290 and invest the $300 amount in various assets, which then fall 10% in value to $270. This firm was "leveraged" 30:1 ($300 assets / $10 equity = 30) and now has assets worth $270, liabilities of $290 and equity of negative $20. Such leverage ratios were typical of the larger investment banks during 2007. A t 30:1 leverage, it only takes a 3.33% loss to reduce equity to zero.

Banks use various regulatory measures to describe their financial strength, such as tier 1 capital. Such measures typically start with equity and then add or subtract other measures. Banks and regulators have been criticized for including relatively "weaker" or less tangible amounts in regulatory capital measures. For example, deferred tax assets (which represent future tax savings if a company makes a profit) and intangible assets (e.g., non-cash amounts like goodwill or trademarks) have been included in tier 1 capital calculations by some financial institutions. In other cases, banks were legally able to move liabilities off their balance sheets via structured investment vehicles, which improved their ratios. Critics suggest using the "tangible common equity" measure, which removes non-cash assets from these measures. Generally, the ratio of tangible common equity to assets is lower (i.e., more conservative)
than the tier 1 ratio.
PAGE #531 - Nationalization

Nationalization Nationalization typically involves the assumption of either full or partial control over a financial institution as part of a bailout. The board and senior management is replaced. Full nationalization means current equity shareholders are entirely wiped out and bondholders may or may not receive a "haircut," meaning a write-down on the value of the debt owed to them. Suppliers are generally paid fully by the government. Once the bank is again healthy, it is sold to the public and taxpayers get some or all of their initial investment back. Arguments for nationalization or recapitalization Banks that are insolvent from a balance sheet perspective (i.e., liabilities exceed assets, meaning equity is negative) may restrict their lending. Further, they are at increased risk of making risky financial bets due to moral hazard (i.e., either they make money if the bets work out or will be bailed out by the government, a dangerous position from society's point of view). An unstable banking system also undermines economic confidence.
PAGE #532 - Arguements for nationalization

These factors (among others) are why insolvent financial institutions have historically been taken over by regulators. Further, loans to a struggling bank increase assets and liabilities, not equity. Capital is therefore "tied up" on the insolvent bank's balance sheet and cannot be used as productively as it could be at a healthier financial institution. Banks have taken significant steps to obtain additional capital from private sources. Further, the U.S. and other countries have injected capital (willingly or unwillingly) into larger financial institutions. Economist Paul Krugman has argued for bank nationalization: "A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks debts to make them solvent; and sold the fixed-up banks to new owners." He advocates an "explicit, though temporary government takeover" of insolvent banks.

Economist Nouriel Roubini stated: "I'm worried that many banks are zombies, they should be shut down, the sooner the better...otherwise they will take deposits and make other risky loans." He also wrote: "Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume." He recommended four steps: Determine which banks are insolvent. Immediately nationalize insolvent institutions or place them into receivership. The equity holders will be wiped out, and long-term debt holders will have claims only after the depositors and other short-term creditors are paid off. Separate nationalized bank assets into good and bad pools. Banks carrying only the good assets would then be privatized. Bad assets would be merged into one enterprise. The assets could be held to maturity or eventually sold off with the gains and risks accruing to the taxpayers.

Harvard professor Niall Ferguson argued: "Worst of all indebted are the banks. The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt banks that are de facto insolvent need to be restructured a word that is preferable to the oldfashioned nationalization. Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalization after losses have meaningfully been written down."
PAGE #535 - Arguements against nationalization

Alan Greenspan estimated in March 2009 that U.S. banks will require another $850 billion of capital, representing a 3-4 percentage point increase in equity capital to asset ratios. The U.S. government authorized the injection of up to $350 billion in equity in the form of preferred stock or asset purchases as part of the $700 billion Emergency Economic Stabilization Act of 2008, also called the Troubled Asset Relief Program (TARP).
PAGE #536 - Arguements against nationalization

Arguments against nationalization or recapitalization Nationalization wipes out current shareholders and may impact bondholders, raising constitutional issues - seizure of private property without due process and without just compensation. It is initially very costly to taxpayers, who may or may not recoup their investment when the nationalized bank is later sold to the public. The government probably will not be able to manage the institution better than the current management. The threat of nationalization also makes it challenging for banks to obtain funding from private sources.
PAGE #537 - Toxic or Legacy asset purchases

Government intervention may not always be fair or transparent. Who gets a bailout and how much? A Congressional Oversight Panel (COP) chaired by Harvard Professor Elizabeth Warren was created to monitor the implementation of the TARP program. COP issued its first report on 10 December 2008. In related interviews, Professor Warren indicated it was difficult to obtain clear answers to her panel's questions.
PAGE #538 - Arguements for toxic asset purchase

"Toxic" or "Legacy" asset purchases Another method of recapitalizing institutions is for the government or private investors to purchase assets that are significantly reduced in value due to payment delinquency, whether related to mortgages, credit cards, auto loans, etc.

Arguments for toxic asset purchases Removing complex and difficult to value assets from banks' balance sheets across the system in exchange for cash is a major win for the banks, provided they can command an appropriate price for the assets. Further, transparency of financial institution health is improved across the system, improving confidence, as investors can be more assured of the valuation of these firms. Financially healthy firms are more likely to lend.

U.S. Treasury Secretary Timothy Geithner announced a plan during March 2009 to purchase "legacy" or "toxic" assets from banks. The Public-Private Partnership Investment Program involves government loans and guarantees to encourage private investors to provide funds to purchase toxic assets from banks. The press release stated: "This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly. Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets."
PAGE #541 - Arguements against toxic asset purchase

Arguments against toxic asset purchases A key question is what to pay for the assets. For example, a bank may believe an asset, such as a mortgage-backed security with a claim on cash from the underlying mortgages, is worth 50 cents on the dollar, while it may only be able to find a buyer on the open market for 30 cents. The bank has no incentive to sell the assets at the 30 cent price. But if taxpayers pay 50 cents, they are paying more than market value, an unpopular choice for taxpayers and politicians in a bailout. To truly be helping the banks, the taxpayers would have to pay more than the value at which the bank is carrying the asset on its books, or more than the 50 cent price. Further, who will determine the price and how will ownership of the assets be administered? Does the government entity setup to make these purchases have the expertise?

Economist Joseph Stiglitz criticized the plan proposed to purchase toxic assets: "Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the plan works only if and when the taxpayer loses big time." He stated that toxic asset purchases represents "ersatz capitalism," meaning gains are privatized while losses are socialized. The government's initial Troubled Asset Relief Program (TARP) proposal was derailed because of these questions and because of the timeline involved in successfully valuing, purchasing, and administering such a program was too long with an imminent crisis faced in September-October 2008.

Martin Wolf has argued that the purchase of toxic assets may distract the U.S. Congress from the
urgent need to recapitalize banks and may make it more politically difficult to take necessary action. Research by JP Morgan and Wachovia indicates that the value of toxic assets issued during late 2005 to mid-2007 are worth between 5 cents and 32 cents on the dollar. Approximately $305 billion of the $450 billion of such assets created during the period are in default. By another indicator, toxic assets are worth about 40 cents on the dollar, depending on the precise vintage (period of origin).
PAGE #544 - Bondholder and counterparty haircuts

Bondholder and counterparty haircuts As of March 2009, bondholders at financial institutions that received government bailout funds have not been forced to take a "haircut" or reduction in the principal amount and interest payments on their bonds. A partial conversion of debt to equity is fairly common in Chapter 11 bankruptcy proceedings, as the common stock shareholders are wiped out and the bondholders effectively become the new owners. This is another way to increase equity capital in the bank, as the liability amount on the balance sheet is reduced. For example, assume a bank has assets and liabilities of $100 and therefore equity is zero. In a bankruptcy proceeding or nationalization, bondholders may have the value of their bonds reduced to $80. This creates equity of $20 immediately ($10080=$20).
PAGE #545 - Bondholder and counterparty haircuts

A key aspect of the AIG scandal is that over $100 billion taxpayer dollars have been channeled through AIG to major global financial institutions (its counterparties) that have already received separate, significant bailout dollars in many cases. The amounts paid to counterparties were at 100 cents on the dollar. In other words, funds are provided to AIG by the U.S. government so that it can pay other companies, in effect making it a "bailout clearinghouse." Members of the U.S. Congress demanded that AIG indicate to whom it is distributing taxpayer bailout funds and to what extent these trading partners are sharing in losses. Key institutions receiving additional bailout funds channeled through AIG included a "who's who" of major global institutions. This included $12.9 billion paid to Goldman Sachs, which reported a profit of $2.3 billion for 2008.
PAGE #546 - Arguements for bondholder and counterparty haircuts

Arguments for bondholder and counterparty haircuts If the key issue is bank solvency, converting debt to equity via bondholder haircuts presents an elegant solution to the problem. Not only is debt reduced along with interest payments, but equity is simultaneously increased. Investors can then have more confidence that the bank (and financial system more broadly) is solvent, helping unfreeze credit markets. Taxpayers do not have to contribute dollars and the government may be able to just provide guarantees in the short-term to further support confidence in the recapitalized institution.

Economist Joseph Stiglitz testified that bank bailouts " are really bailouts not of the enterprises but of the shareholders and especially bondholders. There is no reason that American taxpayers should be doing this." He wrote that reducing bank debt levels by converting debt into equity will increase confidence in the financial system. He believes that addressing bank solvency in this way would help address credit market liquidity issues.

Fed Chairman Ben Bernanke argued in March 2009: "If a federal agency had had such tools on September 16, 2008, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now." Harvard professor Niall Ferguson has argued for bondholder haircuts at insolvent banks: "Bondholders may have to accept either a debt-for-equity swap or a 20 per cent haircut (a reduction in the value of their bonds) a disappointment, no doubt, but nothing compared with the losses when Lehman went under."

Economist Jeffrey Sachs has also argued for bondholder haircuts: "The cheaper and more equitable way would be to make shareholders and bank bondholders take the hit rather than the taxpayer. The Fed and other bank regulators would insist that bad loans be written down on the books. Bondholders would take haircuts, but these losses are already priced into deeply discounted bond prices." Dr. John Hussman has argued for significant bondholder haircuts: "Stabilize insolvent financial institutions through receivership if the bondholders of the institution are unwilling to swap debt for equity. In virtually all cases, the liabilities of these companies to their own bondholders are capable of fully absorbing all losses without the need for public funds to defend those bondholders The sum total of the policy responses to this crisis has been to defend the bondholders of distressed financial institutions at public expense."

Professor and author Nassim Nicholas Taleb argued during July 2009 that deleveraging through forcible conversion of debt to equity swaps for both banks and homeowners is "the only solution." He advocates much more aggressive and system-wide action. He emphasized the complexity and fragility of the current system due to excessive debt levels and stated that the system is in the process of crashing. He believes any "green shoots" (i.e., signs of recovery) should not distract from this response.
PAGE #551 - Arguements against bondholder and counterparty haircuts

Arguments against bondholder and counterparty haircuts Investors may balk at providing funding to U.S. institutions if bonds become subject to arbitrary haircuts due to nationalization. Insurance companies and other investors that own many of the bonds issued by major financial institutions may suffer large losses if they must accept debt for equity swaps or other forms of haircuts. The fear of losing one's investments which is contributing to the recession would increase with each expropriation.
PAGE #552 - Economic stimulous and fiscal policy

Economic stimulus and fiscal policy Between June 2007 and November 2008, Americans lost a total of $8.3 trillion in wealth between housing and stock market losses, contributing to a decline in consumer spending and business
investment. The crisis has caused unemployment to rise and GDP to decline at a significant annual rate during Quarter 4 of 2008. On February 13, 2008, former President George W. Bush signed into law a $168 billion economic stimulus package, mainly taking the form of income tax rebate checks mailed directly to taxpayers. Checks were mailed starting the week of April 28, 2008. On February 17, 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA), an $800 billion stimulus package with a broad spectrum of spending and tax cuts.
PAGE #553 - Arguements for bailouts

Government bailouts Arguments for bailouts Governments may intervene because of the belief that that an institution is "too big to fail" or "too interconnected to fail," meaning that allowing them to enter bankruptcy would create or increase systemic risk, meaning large stock market declines or disruption in the availability of credit to worthy borrowers. In a dramatic meeting on September 18, 2008 Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout of the banking system. Bernanke reportedly told them: "If we don't do this, we may not have an economy on Monday." The Emergency Economic Stabilization Act also called the Troubled Asset Relief Program (TARP) was signed into law on October 3, 2008.
PAGE #554 - Arguements for bailouts

Ben Bernanke also described his rationale for the AIG bailout as a "difficult but necessary step to protect our economy and stabilize our financial system." AIG had $952 billion in liabilities according to its 2007 annual report; its bankruptcy would have made the payment of these liabilities uncertain. Banks, municipalities, and insurers could have suffered significant financial losses, with unpredictable and potentially significant consequences. In the context of the dramatic business failures and takeovers of September 2008, he was unwilling to allow another large bankruptcy such as Lehman Brothers, which had caused a run on money-market funds and caused a crisis of confidence that brought interbank lending to a standstill.
PAGE #555 - Arguements against bailouts

Arguments against bailouts Signals lower business standards for giant companies by incentivizing risk Creates moral hazard through the assurance of safety nets Promotes centralized bureaucracy by allowing government powers to choose the terms of the bailout Instills a socialistic style of government in which government creates and maintains control over businesses. Instills a corporatist style of government in which businesses use the state's power to forcibly extract money from taxpayers.

On November 24, 2008, Congressman Ron Paul (TX) wrote, "In bailing out failing companies, they are confiscating money from productive members of the economy and giving it to failing ones. By sustaining companies with obsolete or unsustainable business models, the government prevents their resources from being liquidated and made available to other companies that can put them to better, more productive use. An essential element of a healthy free market, is that both success and failure must be permitted to happen when they are earned. But instead with a bailout, the rewards are reversed the proceeds from successful entities are given to failing ones. How this is supposed to be good for our economy is beyond me It wont work. It cant work It is obvious to most Americans that we need to reject corporate cronyism, and allow the natural regulations and incentives of the free market to pick the winners and losers in our economy, not the whims of bureaucrats and politicians."

Journalist Nicole Gelinas wrote in March 2009: "In place of a wrenching but consistent and well-tested process (bankruptcy) of winding down a failed company, what have we chosen? A world of investors who can never be sure, in the future, that if they put their money into a company that fails, they can depend on a reliable process to recoup some of their funds. Instead, they may find themselves at the mercy of a government veering from whim to whim as it reads the mood of a volatile public In saving the remnants of failed companies from free-market failures, Washington may be sacrificing the publics confidence that the government can ensure that free markets are reasonably fair and impartial. One year into an era of exhausting and arbitrary bailouts, its not clear that our policy of destroying the system in order to save it is going to work." Bailouts are extremely costly for taxpayers. In 2002, World Bank reported that country bailouts cost an average of 14% of Gross Domestic Product (GDP). Based on U.S. GDP of $14 trillion in 2008, this would be approximately $2 trillion.
PAGE #558 - Homeowner assistance

Homeowner assistance A variety of voluntary private and government-administered or supported programs were implemented during 2007-2009 to assist homeowners with case-by-case mortgage assistance, to mitigate the foreclosure crisis engulfing the U.S. Examples include the Housing and Economic Recovery Act of 2008, Hope Now Alliance, and Homeowners Affordability and Stability Plan. These all operate under the paradigm of "one-at-a-time" or "case-by-case" loan modification, as opposed to automated or systemic loan modification. They typically offer incentives to various parties involved to help homeowners stay in their homes.

There are four primary variables that can be adjusted to lower monthly payments and help homeowners: Reduce the interest rate; Reduce the loan principal amount; Extend the mortgage term, such as from 30 to 40 years; and Convert variable-rate ARM mortgages to fixed-rate.
PAGE #560 - Arguements for systematic refinancing

Arguments for systematic refinancing Some Economist described the issue this way: "No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programs have been ineffectual, and private efforts not much better." Up to 9 million homes may enter foreclosure over the 2009-2011 period, versus one million in a typical year. Critics have argued that the case-by-case loan modification method is ineffective, with too few homeowners assisted relative to the number of foreclosures and with nearly 40% of those assisted homeowners again becoming delinquent within 8 months.

On February 18, 2009, economists Nouriel Roubini and Mark Zandi recommended an "across the board" (systemic) reduction of mortgage principal balances by as much as 20-30%. Lowering the mortgage balance would help lower monthly payments and also address an estimated 20 million homeowners that may have a financial incentive to enter voluntary foreclosure because they are "underwater" (i.e., the mortgage balance is larger than the home value). Roubini has further argued that mortgage balances could be reduced in exchange for the lender receiving a warrant that entitles them to some of the future home appreciation, in effect swapping mortgage debt for equity. This is analogous to the bondholder haircut concept discussed above. Harvard professor Niall Ferguson wrote: " we need a generalized conversion of American mortgages to lower interest rates and longer maturities. The idea of modifying mortgages appalls legal purists as a violation of the sanctity of contract. But there are times when the public interest requires us to honor the rule of law in the breach. Repeatedly during the course of the 19th century governments changed the terms of bonds that they issued through a process known as conversion. A bond with a 5 per cent coupon would simply be exchanged for one with a 3 per cent coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatized as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment."

The State Foreclosure Prevention Working Group, a coalition of state attorney generals and bank regulators from 11 states, reported in April 2008 that loan servicers could not keep up with the rising number of foreclosures. 70% of subprime mortgage holders are not getting the help they need. Nearly two-thirds of loan workouts require more than six weeks to complete under the current "case-by-case" method of review. In order to slow the growth of foreclosures, the Group has recommended a more automated method of loan modification that can be applied to large blocks of struggling borrowers. In December 2008, the U.S. FDIC reported that more than half of mortgages modified during the first half of 2008 were delinquent again, in many cases because payments were not reduced or mortgage debt was not forgiven. This is further evidence that case-by-case loan modification is not effective as a policy tool. A report released in April 2009 by the Office of the Comptroller of the Currency and Office of Thrift Supervision indicated that fewer than half of loan modifications during 2008 reduced homeowner payments by more than 10%. Nearly one in four loan modifications during the fourth quarter of 2008 actually increased monthly payments. Nine months after modification, 26% of loans where monthly payments were reduced by 10% or more were again delinquent, versus 50% where payment amounts were unchanged. The U.S. Comptroller stated: "...modification strategies that result in unchanged or increased monthly payments run the risk of unacceptably high re-default rates."

It is the inability of homeowners to pay their mortgages that causes mortgage-backed securities to become "toxic" on the banks balance sheets. To use an analogy, it is the "upstream" problem of homeowners defaulting that creates toxic assets and banking insolvency "downstream." By assisting homeowners "upstream" at the core of the problem, banks would be assisted "downstream," helping both parties with the same set of funds. However, the government's primary assistance through April 2009 has been to the banks, helping only the "downstream" party rather than both. Economist Dean Baker has argued for systematically converting mortgages to rental arrangements for homeowners at risk of foreclosure, at considerably reduced monthly payment amounts. Homeowners would be allowed to remain in the home for a substantial period time (e.g., 510 years). Rents would be at 50-70% of the current mortgage amount. Homeowners would be given this option, indirectly forcing banks to be more aggressive in their refinancing decisions.
PAGE #564 - Arguements against systematic refinancing

Arguments against systematic refinancing Historically, loans were originated by banks and held by them. However, mortgages originated over the past few years have increasingly been packaged and sold to investors via complex instruments called mortgage-backed securities (MBS) or collateralized debt obligations (CDO's). The contracts involved between the banks and investors may not allow systematic refinancing, as each loan must be individually approved by the investor or their delegates. Banks are concerned that they may face lawsuits if they unilaterally and systematically convert a large number of mortgages to more affordable terms. Such assistance may also further damage the financial condition of banks, although many have already written down MBS asset values and much of the impact would be absorbed by investors outside the banking system. Breaking contracts would potentially lead to higher interest rates, as investors demand higher compensation for taking the risk that their contracts may be subject to homeowner bailouts or relief mandated by the government. As with other government interventions, homeowner relief would create moral hazard - why should a potential homeowner make a down payment or limit himself to a house he can afford, if government is going to bail him out when he gets in trouble?
PAGE #565 - History

History United States 1930's During the Great Depression in the United States a number of mortgage modification programs were enacted by the states to limit the economic disruption of foreclosure sales and subsequent homelessness. Because of the shrinkage of the economy many borrowers lost their jobs and income and were unable to maintain their mortgage payments. In 1933, the Minnesota Mortgage Moratorium Act was challenged by a bank which argued before the United States Supreme Court that it was a violation of the contract clause of the Constitution. In Home Building & Loan Association v. Blaisdell the court upheld the law imposing a mandatory mortgage modification.
PAGE #566 - History
United States 2000's According to the FDIC chairman, Sheila C. Bair, looking back as far as the 1980s, "the FDIC applied workout procedures for troubled loans out of bank failures, modifying loans to make them affordable and to turn non-performing into performing loans." The U.S. housing boom of the first half of this decade ended abruptly in 2006. Housing starts, which peaked at more than 2 million units in 2005, have plummeted to just over half that level. Home prices, which were increasing at double-digit rates nationally in 2004 and 2005, are now (in 2006) falling in many areas across the country.
PAGE #567 - History

As home prices decline, the number of problem mortgages, particularly in sub-prime and Alt-A portfolios, is rising. As of third quarter 2007, the percentage of sub-prime adjustable-rate mortgages (ARMs) that were seriously delinquent or in foreclosure reached 15.6 percent, more than double the level of a year ago. The deterioration in credit performance began in the industrial Midwest, where economic conditions have been the weakest, but has now (2006-2007) spread to the former boom markets of Florida, California, and other coastal states.
PAGE #568 - History
During 2007, investors and ratings agencies have repeatedly downgraded assumptions about sub-prime credit performance. A Merrill Lynch study published in July estimated that if U.S. home prices fell only 5 percent, subprime credit losses to investors would total just under $150 billion, and Alt-A credit losses would total $25 billion. On the heels of this report came news that the S&P/Case-Shiller Composite Home Price Index for 10 large U.S. cities had fallen in August to a level that was already 5 percent lower than a year ago, with the likelihood of a similar decline over the coming year. The complexity of many mortgage-backed securitization structures has heightened the overall risk aversion of investors, resulting in what has become a broader illiquidity in global credit markets. These disruptions have led to a precipitous decline in sub-prime lending, a significant reduction in the availability of Alt-A loans, and higher interest rates on jumbo loans. The tightening in mortgage credit has placed further downward pressure on home sales and home prices, a situation that now could derail the U.S. economic expansion.
PAGE #569 - History

Residential mortgage credit quality continues to weaken, with both delinquencies and charge-offs on the rise at FDIC-insured institutions. This trend, in tandem with upward pricing of hybrid adjustable-rate mortgage (ARM) loans, falling home prices, and fewer refinancing options, underscores the urgency of finding a workable solution to current problems in the sub-prime mortgage market. Legislators, regulators, bankers, mortgage servicers, and consumer groups have been debating the merits of strategies that may help preserve home ownership, minimize foreclosures, and restore some stability to local housing markets. On December 6, 2007, an industry-led plan was announced to help avert foreclosure for certain subprime homeowners who face unaffordable payments when their interest rates reset. This plan provides for a streamlined process to extend the start rates on sub-prime ARMs for at least five years in cases where borrowers remain current on their loans but cannot refinance or afford the higher payments after reset. An important component of the industry-led plan is detailed reporting of loan modification activity. Working with the Treasury Department and other bank regulators, the FDIC will monitor loan modification levels and seek adjustments to the protocols if warranted.
PAGE #570 - History

Purpose Sheila Bair has long advocated a systematic and streamlined approach to loan modification that puts borrowers into long-term, sustainable mortgages. I support the industry plan as a means to allow borrowers to remain in their homes, provide investors with higher returns than can be obtained under foreclosure, and strengthen local neighborhoods where foreclosures are already driving down property values. It is my hope that this plan will be implemented in a way that delivers real progress on these important policy goals.
Under the financial rescue package, the Treasury plans to directly inject $250 billion of capital into U.S. banks in exchange for preferred shares. Nine of the largest U.S. banks were essentially arm-twisted into signing on for the first $125 billion in capital infusions. "Those of us who have looked to the selfinterest of lending institutions to protect shareholder's equity ... are in a state of shocked disbelief," said the former Fed chief. "Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards," Bair said. "By doing so, unaffordable loans could be converted into loans that are sustainable over the long term." Bair made clear that she considers existing voluntary loan modification programs inadequate. "We are falling badly behind and more needs to be done," she said on a day when RealtyTrac announced U.S. home foreclosure filings in the third quarter 2008 were 71% above the comparable period a year earlier.
PAGE #571 - Streamlined modification process

Streamlined modification process The adoption of this streamlined modification framework is an additional tool that servicers will now have to help avoid preventable foreclosures. This framework will not only help homeowners who receive a streamlined modification, but will also further address servicer capacity concerns by freeing up resources, helping ensure that borrowers do not fall through the cracks because servicers aren't able to get to them. This is the first time the industry has agreed on an industry standard. The benchmark ratio for calculating the affordable payment is 38 percent of monthly gross household income. Once the affordable payment is determined, there are several steps the servicer can take to create that payment extending the term, reducing the interest rate, and forbearing interest. In the event that the affordable payment is still beyond the borrowers means, the borrowers situation will be reviewed on a case-by-case basis using a cash flow budget. This program resulted from a unified effort among the Enterprises, Hope Now and its 27 servicer partners, Treasury, the Federal Housing Administration (FHA) and FHFA. In addition, weve drawn on the FDICs experience and assistance from developing the IndyMac streamlined approach and have greatly benefited from the FDICs input and example. To accommodate the need for more flexibility among a larger number of servicers, the Streamlined Modification Program does differ from the IndyMac model in a few areas. However, it uses the same fundamental tools to achieve the same affordability target. The Streamlined Modification Program (SMP) was developed in collaboration with the Federal Housing Finance Agency (FHFA), the Department of Treasury, Freddie Mac, and members of the HOPE NOW Alliance.
PAGE #572 - Fannie Maw/Freddie Mac plan

Fannie Mae / Freddie Mac Plan In the task at hand to make headway against foreclosures and the depressed housing market. Fannie Mae and Freddie Mac entered a new phase on December 9, 2008 for a fast-track program meant to make "hundreds of thousands of mortgages affordable to people who can't currently meet their monthly payments." Through the SMP, servicers may change the terms of a loan to reduce a borrower's first lien monthly mortgage payment, including taxes, insurance and homeowners association payments, to an amount equal to 38 percent of gross monthly income. The changes in terms may include one or more of the following: Adding the accrued interest, escrow advances and costs to the principal balance of the loan, if allowed by state law; Extending the length of the mortgage loan as appropriate; Reducing the mortgage loan interest rate in increments of 0.125 percent to an interest rate that is not less than 3 percent. If the new rate is set below the market interest rate, after five years it
will step up in annual increments to either the original loan interest rate or the market interest rate at the time of the modification, whichever is lower; Forbearing on a portion of the principal, which will require the borrower to make a balloon payment when the loan matures, is paid off, or is refinanced.
PAGE #573 - Eligibility requirements

Eligibility Requirements Conforming conventional and jumbo conforming mortgage loans originated on or before January 1, 2009; Borrowers who are at least three or more payments past due and are not currently in bankruptcy; Only one-unit, owner-occupied, primary residences; and Current mark-to-market loan-to-value ratio of 90 percent or more. New Servicer Guidance Fannie Mae's foreclosure prevention efforts have generally been made available to a borrower only after a delinquency occurs. Under Fannie Mae's new guidance, loan servicers can use foreclosure prevention tools to assist distressed borrowers when a borrower demonstrates the need. As noted above, these guidelines apply to borrowers who are still current in their payments, but whose default is reasonably foreseeable.
PAGE #574 - Hope for Homeowners Plan HUD/FHA

Hope for Homeowners Plan (HUD) / FHA) The H4H Program is effective for endorsements on or after October 1, 2008, through September 30, 2011. Affordability versus value: lenders will take a loss on the difference between the existing obligations and the new loan, which is set at 96.5 percent of current appraised value. The lender may choose to provide homeowners with an affordable monthly mortgage payment through a loan modification rather than accepting the losses associated with declining property values. Borrower eligibility: Lenders that determine the H4H program is a feasible and effective option for mitigating losses will assess the homeowners eligibility for the program: The existing mortgage was originated on or before January 1, 2008; Existing mortgage payment(s) as of March 1, 2008 exceeds 31 percent of the borrowers gross monthly income for fixed-rate mortgages; For ARMs, the existing mortgage payment (s) exceeds 31 percent of the borrowers gross monthly income as of March 1, 2008 OR the date of the new loan application. The homeowner did not intentionally default, does not have an ownership interest in other residential real estate and has not been convicted of fraud in the last 10 years under Federal and state law; and The homeowner did not provide materially false information (e.g., lied about income) to obtain the mortgage that is being refinanced into the H4H mortgage.
PAGE #575 - United HOPE for Homeowners Improvements

Updated Hope for Homeowners Improvements Eliminates 3% upfront premium Reduces 1.5% annual premium to a range between .55% and .75%, based on risk-based pricing (also makes technical fix to permit discontinuation of fees when loan balance drops below certain levels, consistent with normal FHA policy)
Raises maximum loan to value (LTV) from 90% to 93% for borrowers above a 31% mortgage debt to income (DTI) ratio or above a 43% ratio Eliminates government profit sharing of appreciation over market value of home at time of refi. Retains government declining share (from 100% to 50% after five years) of equity created by the refi, to be paid at time of sale or refi as an exit fee Authorizes payments to servicers participating in successful refis Administrative simplification: eliminates borrower certifications regarding not intentionally defaulting on any debt, eliminates special requirement to collect 2 years of tax returns, eliminates originator liability for first payment default, eliminates March 1, 2008 31% DTI test, eliminates prohibition against taking out future second loans, requires Board to make documents, forms, and procedures conform to those under normal FHA loans to the maximum extent possible consistent with statutory requirements.
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explain the background of the sub-prime market; better understand how credit affected the sub-prime market; and be able to list various impacts on the market that occurred from the financial sector employing sub-prime loans.
PAGE #579 - Sub-prime market

Sub-Prime Market The subprime mortgage crisis is an ongoing financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe. The crisis, which has its roots in the closing years of the 20th century, became apparent in 2007 and has exposed pervasive weaknesses in financial industry regulation and the global financial system. Approximately 80% of U.S. mortgages issued in recent years to subprime borrowers were adjustablerate mortgages. When U.S. house prices began to decline in 2006-2007, refinancing became more difficult and as adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit around the world.
PAGE #580 - Background
Background and timeline of events The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 20052006. High default rates on "subprime" and adjustable rate mortgages (ARM) began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 20062007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive to enter foreclosure. The ongoing foreclosure epidemic that began in late 2006 in the U.S. continues to be a key factor in the global economic crisis, because it drains wealth from consumers and erodes the financial strength of banking institutions.

In the years leading up to the crisis, significant amounts of foreign money flowed into the U.S. from fast-growing economies in other countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 contributed to easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load. As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of U.S. dollars globally.

While the housing and credit bubbles built, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations. These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses. These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions, assuming significant additional financial commitments.

The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. Effects on global stock markets due to the crisis have been dramatic. Between January 1 and October 11, 2008, owners of stocks in U.S.
corporations had suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40%. Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine. Leaders of the larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis. As of April 2009, many of the root causes of the crisis had yet to be addressed. A variety of solutions have been proposed by government officials, central bankers, economists, and business executives.
PAGE #584 - Mortgage market

Mortgage market Subprime borrowers typically have weakened credit histories and reduced repayment capacity. Subprime loans have a higher risk of default than loans to prime borrowers. If a borrower is delinquent in making timely mortgage payments to the loan servicer (a bank or other financial firm), the lender may take possession of the property, in a process called foreclosure. The value of USA subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding. Between 2004-2006 the share of subprime mortgages relative to total originations ranged from 18%-21%, versus less than 10% in 2001-2003 and during 2007. In the third quarter of 2007, subprime ARMs making up only 6.8% of USA mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter. By October 2007, approximately 16% of subprime adjustable rate mortgages (ARM) were either 90-days delinquent or the lender had begun foreclosure proceedings, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%.
PAGE #585 - Causes

The value of all outstanding residential mortgages, owed by USA households to purchase residences housing at most four families, was US $9.9 trillion as of year-end 2006, and US $10.6 trillion as of midyear 2008. During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. As of August 2008, 9.2% of all mortgages outstanding were either delinquent or in foreclosure. Between August 2007 and October 2008, 936,439 USA residences completed foreclosure. Foreclosures are concentrated in particular states both in terms of the number and rate of foreclosure filings. Ten states accounted for 74% of the foreclosure filings during 2008; the top two (California and Florida) represented 41%. Nine states were above the national foreclosure rate average of 1.84% of households. Causes The crisis can be attributed to a number of factors pervasive in both housing and credit markets, factors which emerged over a number of years. Causes proposed include the inability of homeowners to make their mortgage payments, due primarily to adjustable rate mortgages resetting, borrowers overextending, predatory lending, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, monetary policy, international trade imbalances, and government regulation (or the lack thereof). Two important catalysts of the subprime crisis were the influx of moneys from the private sector and banks entering into the mortgage bond market and the predatory lending practices of mortgage brokers, specifically the adjustable rate mortgage, 2-28 loan. Ultimately, though, specific to the bailout of Wall Street and the financial industry moral hazard lay at the core of many of the causes.
PAGE #586 - Causes
In its "Declaration of the Summit on Financial Markets and the World Economy," dated November 15, 2008, leaders of the Group of 20 cited the following causes: During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
PAGE #587 - Boom and bust in the housing market

Boom and bust in the housing market Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption. The USA home ownership rate increased from 64% in 1994 (about where it had been since 1980) to an all-time high of 69.2% in 2004. Subprime lending was a major contributor to this increase in home ownership rates and in the overall demand for housing, which drove prices higher. Between 1997 and 2006, the price of the typical American house increased by 124%. During the two decades ending in 2001, the national median home price ranged from 2.9 to 3.1 times median household income. This ratio rose to 4.0 in 2004, and 4.6 in 2006. This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by the price appreciation. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990.

While housing prices were increasing, consumers were saving less and both borrowing and spending more. A culture of consumerism is a factor "in an economy based on immediate gratification." Household debt grew from $705 billion at year-end 1974, 60% of disposable personal income, to $7.4 trillion at year-end 2000, and finally to $14.5 trillion in mid-year 2008, 134% of disposable personal income. During 2008, the typical USA household owned 13 credit cards, with 40% of households carrying a balance, up from 6% in 1970. Free cash used by consumers from home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion dollars over the period. U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990's to 73% during 2008, reaching $10.5 trillion. This credit and house price explosion led to a building boom and eventually to a surplus of unsold homes, which caused U.S. housing prices to peak and begin declining in mid-2006. Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages. These mortgages enticed borrowers with a below market interest rate for some predetermined period, followed by market interest rates for the remainder of the mortgage's term. Borrowers who could not make the higher payments once the initial grace period ended would try to refinance their mortgages. Refinancing became more difficult, once house prices began to decline in many parts of the USA. Borrowers who found themselves unable to escape higher monthly payments by refinancing began to default.

As more borrowers stop paying their mortgage payments (this is an on-going crisis), foreclosures and the supply of homes for sale increases. This places downward pressure on housing prices, which further
lowers homeowners' equity. The decline in mortgage payments also reduces the value of mortgagebacked securities, which erodes the net worth and financial health of banks. This vicious cycle is at the heart of the crisis. By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. This major and unexpected decline in house prices means that many borrowers have zero or negative equity in their homes, meaning their homes were worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers - 10.8% of all homeowners had negative equity in their homes, a number that is believed to have risen to 12 million by November 2008. Borrowers in this situation have an incentive to default on their mortgages as a mortgage is typically nonrecourse debt secured against the property. Economist Stan Leibowitz argued in the Wall Street Journal that although only 12% of homes had negative equity, they comprised 47% of foreclosures during the second half of 2008. He concluded that the extent of equity in the home was the key factor in foreclosure, rather than the type of loan, credit worthiness of the borrower, or ability to pay. Increasing foreclosure rates increases the inventory of houses offered for sale. The number of new homes sold in 2007 was 26.4% less than in the preceding year. By January 2008, the inventory of unsold new homes was 9.8 times the December 2007 sales volume, the highest value of this ratio since 1981. Furthermore, nearly four million existing homes were for sale, of which almost 2.9 million were vacant. This overhang of unsold homes lowered house prices. As prices declined, more homeowners were at risk of default or foreclosure. House prices are expected to continue declining until this inventory of unsold homes (an instance of excess supply) declines to normal levels.
PAGE #590 - Speculation

Speculation Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes purchases were not intended as primary residences. David Lereah, NAR's chief economist at the time, stated that the 2006 decline in investment buying was expected: "Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market." Housing prices nearly doubled between 2000 and 2006, a vastly different trend from the historical appreciation at roughly the rate of inflation. While homes had not traditionally been treated as investments subject to speculation, this behavior changed during the housing boom. Media widely reported condominiums being purchased while under construction, then being "flipped" (sold) for a profit without the seller ever having lived in them. Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties. Nicole Gelinas of the Manhattan Institute described the negative consequences of not adjusting tax and mortgage policies to the shifting treatment of a home from conservative inflation hedge to speculative investment. Economist Robert Shiller argued that speculative bubbles are fueled by "contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address the psychology that fuels them, they're going to keep forming." Keynesian economist Hyman Minsky described how speculative borrowing contributed to rising debt and an eventual collapse of asset values.
PAGE #591 - High-risk mortgage loans and lending/borrowing practices

High-risk mortgage loans and lending/borrowing practices In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers. Subprime mortgages amounted to $35 billion (5% of total
originations) in 1994, 9% in 1996, $160 billion (13%) in 1999, and $600 billion (20%) in 2006. A study by the Federal Reserve found that the average difference between subprime and prime mortgage interest rates (the "subprime markup") declined significantly between 2001 and 2007. The combination of declining risk premia and credit standards is common to boom and bust credit cycles. In addition to considering higher-risk borrowers, lenders have offered increasingly risky loan options and borrowing incentives. In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever. By comparison, China has down payment requirements that exceed 20%, with higher amounts for non-primary residences.

One high-risk option was the "No Income, No Job and no Assets" loans, sometimes referred to as Ninja loans. Another example is the interest-only adjustable-rate mortgage (ARM), which allows the homeowner to pay just the interest (not principal) during an initial period. Still another is a "payment option" loan, in which the homeowner can pay a variable amount, but any interest not paid is added to the principal. An estimated one-third of ARMs originated between 2004 and 2006 had "teaser" rates below 4%, which then increased significantly after some initial period, as much as doubling the monthly payment. The proportion of subprime ARM loans made to people with credit scores high enough to qualify for conventional mortgages with better terms increased from 41% in 2000 to 61% by 2006. However, there are many factors other than credit score that affect lending. In addition, mortgage brokers in some cases received incentives from lenders to offer subprime ARM's even to those with credit ratings that merited a conforming (i.e., non-subprime) loan. Mortgage underwriting standards declined precipitously during the boom period. The use of automated loan approvals allowed loans to be made without appropriate review and documentation. In 2007, 40% of all subprime loans resulted from automated underwriting. The chairman of the Mortgage Bankers Association claimed that mortgage brokers, while profiting from the home loan boom, did not do enough to examine whether borrowers could repay. Mortgage fraud by lenders and borrowers increased enormously. In 2004, the Federal Bureau of Investigation warned of an "epidemic" in mortgage fraud, an important credit risk of nonprime mortgage lending, which, they said, could lead to "a problem that could have as much impact as the S&L crisis".

So why did lending standards decline? In a Peabody Award winning program, National Public Radio (NPR) correspondents argued that a "Giant Pool of Money" (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) and collateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in the U.S., with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted. However, continued strong demand for MBS and CDO began to drive down lending standards, as long as mortgages could still be sold along the supply chain. Eventually, this speculative bubble proved unsustainable.
NPR described it this way: The problem was that even though housing prices were going through the roof, people weren't making any more money. From 2000 to 2007, the median household income stayed flat. And so the more prices rose, the more tenuous the whole thing became. No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn't possibly afford, no matter what the mortgage machine tried, the people just couldn't swing it. By late 2006, the average home cost nearly four times what the average family made. Historically it was between two and three times. And mortgage lenders noticed something that they'd almost never seen before. People would close on a house, sign all the mortgage papers, and then default on their very first payment. No loss of a job, no medical emergency, they were underwater before they even started. And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history popped.
PAGE #595 - Securitization practices

Securitization practices The traditional mortgage model involved a bank originating a loan to the borrower/homeowner and retaining the credit (default) risk. With the advent of securitization, the traditional model has given way to the "originate to distribute" model, in which banks essentially sell the mortgages and distribute credit risk to investors through mortgage-backed securities. Securitization meant that those issuing mortgages were no longer required to hold them to maturity. By selling the mortgages to investors, the originating banks replenished their funds, enabling them to issue more loans and generating transaction fees. This may have created moral hazard and increased focus on processing mortgage transactions rather than ensuring their credit quality. Securitization accelerated in the mid-1990s. The total amount of mortgage-backed securities issued almost tripled between 1996 and 2007, to $7.3 trillion. The securitized share of subprime mortgages (i.e., those passed to third-party investors via MBS) increased from 54% in 2001, to 75% in 2006. American homeowners, consumers, and corporations owed roughly $25 trillion during 2008. American banks retained about $8 trillion of that total directly as traditional mortgage loans. Bondholders and other traditional lenders provided another $7 trillion. The remaining $10 trillion came from the securitization markets. The securitization markets started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds. In February 2009, Ben Bernanke stated that securitization markets remained effectively shut, with the exception of conforming mortgages, which could be sold to Fannie Mae and Freddie Mac.
PAGE #596 - Securitization practices

A more direct connection between securitization and the subprime crisis relates to a fundamental fault in the way that underwriters, rating agencies and investors modeled the correlation of risks among loans in securitization pools. Correlation modeling - determining how the default risk of one loan in a pool is statistically related to the default risk for other loans - was based on a "Gaussian copula" technique developed by statistician David X. Li. This technique, widely adopted as a means of evaluating the risk associated with securitization transactions, used what turned out to be an overly simplistic approach to correlation. Unfortunately, the flaws in this technique did not become apparent to market participants until after many hundreds of billions of dollars of ABS and CDOs backed by subprime loans had been rated and sold. By the time investors stopped buying subprime-backed securities - which halted the ability of mortgage originators to extend subprime loans--the effects of the crisis were already beginning to emerge. Nobel laureate Dr. A. Michael Spence wrote: "Financial innovation, intended to redistribute and reduce risk, appears mainly to have hidden it from view. An important challenge going forward is to better understand these dynamics as the analytical underpinning of an early warning system with respect to financial instability."
PAGE #597 - Inacurate credit ratings

Inaccurate credit ratings Credit rating agencies are now under scrutiny for having given investment-grade ratings to MBSs based on risky subprime mortgage loans. These high ratings enabled these MBS to be sold to investors, thereby financing the housing boom. These ratings were believed justified because of risk reducing practices, such as credit default insurance and equity investors willing to bear the first losses. However, there are also indications that some involved in rating subprime-related securities knew at the time that the rating process was faulty. Critics allege that the rating agencies suffered from conflicts of interest, as they were paid by investment banks and other firms that organize and sell structured securities to investors. On June 11, 2008, the SEC proposed rules designed to mitigate perceived conflicts of interest between rating agencies and issuers of structured securities. On December 3, 2008, the SEC approved measures to strengthen oversight of credit rating agencies, following a ten-month investigation that found "significant weaknesses in ratings practices," including conflicts of interest. Between Quarter 3 2007 and Quarter 2 2008, rating agencies lowered the credit ratings on $1.9 trillion in mortgage backed securities. Financial institutions felt they had to lower the value of their MBS and acquire additional capital so as to maintain capital ratios. If this involved the sale of new shares of stock, the value of the existing shares was reduced. Thus ratings downgrades lowered the stock prices of many financial firms.
PAGE #598 - Government policies

Government policies Both government failed regulation and deregulation contributed to the crisis. In testimony before Congress both the Securities and Exchange Commission (SEC) and Alan Greenspan conceded failure in allowing the self-regulation of investment banks. Increasing home ownership has been the goal of several presidents including Roosevelt, Reagan, Clinton and G.W. Bush. In 1982, Congress passed the Alternative Mortgage Transactions Parity Act (AMTPA), which allowed non-federally chartered housing creditors to write adjustable-rate mortgages. Among the new mortgage loan types created and gaining in popularity in the early 1980s were adjustable-rate, option adjustable-rate, balloon-payment and interest-only mortgages. These new loan types are credited with replacing the long standing practice of banks making conventional fixed-rate, amortizing mortgages. Among the criticisms of banking industry deregulation that contributed to the savings and loan crisis was that Congress failed to enact regulations that would have prevented exploitations by these loan types. Subsequent widespread abuses of predatory lending occurred with the use of adjustable-rate mortgages. Approximately 80% of subprime mortgages are adjustable-rate mortgages.

In 1995, the GSEs like Fannie Mae began receiving government tax incentives for purchasing mortgage backed securities which included loans to low income borrowers. Thus began the involvement of the Fannie Mae and Freddie Mac with the subprime market. In 1996, HUD set a goal for Fannie Mae and Freddie Mac that at least 42% of the mortgages they purchased be issued to borrowers whose household income was below the median in their area. This target was increased to 50% in 2000 and 52% in 2005. From 2002 to 2006, as the U.S. subprime market grew 292% over previous years, Fannie Mae and Freddie Mac combined purchases of subprime securities rose from $38 billion to around $175 billion per
year before dropping to $90 billion per year, which included $350 billion of Alt-A securities. Fannie Mae had stopped buying Alt-A products in the early 1990s because of the high risk of default. By 2008, the Fannie Mae and Freddie Mac owned, either directly or through mortgage pools they sponsored, $5.1 trillion in residential mortgages, about half the total U.S. mortgage market. The GSE have always been highly leveraged, their net worth as of 30 June 2008 being a mere US$114 billion. When concerns arose in September 2008 regarding the ability of the GSE to make good on their guarantees, the Federal government was forced to place the companies into a conservatorship, effectively nationalizing them at the taxpayers' expense.

The Glass-Steagall Act was enacted after the Great Depression. It separated commercial banks and investment banks, in part to avoid potential conflicts of interest between the lending activities of the former and rating activities of the latter. Economist Joseph Stiglitz criticized the repeal of the Act. He called its repeal the "culmination of a $300 million lobbying effort by the banking and financial services industries spearheaded in Congress by Senator Phil Gramm." He believes it contributed to this crisis because the risk-taking culture of investment banking dominated the more conservative commercial banking culture, leading to increased levels of risk-taking and leverage during the boom period. The Federal government bailout of thrifts during the savings and loan crisis of the late 1980s may have encouraged other lenders to make risky loans, and thus given rise to moral hazard.

Others have also debated the possible effects of the Community Reinvestment Act (CRA), with detractors claiming that the Act encouraged lending to uncreditworthy borrowers, and defenders claiming a thirty year history of lending without increased risk. Detractors also claim that amendments to the CRA in the mid-1990s, raised the amount of mortgages issued to otherwise unqualified lowincome borrowers, and allowed the securitization of CRA-regulated mortgages, even though a fair number of them were subprime. Both Federal Reserve Governor Randall Kroszner and FDIC Chairman Sheila Bair have stated their belief that the CRA was not to blame for the crisis.
PAGE #602 - Policies of central banks

Policies of central banks Central banks manage monetary policy and may target the rate of inflation. They have some authority over commercial banks and possibly other financial institutions. They are less concerned with avoiding asset price bubbles, such as the housing bubble and dot-com bubble. Central banks have generally chosen to react after such bubbles burst so as to minimize collateral damage to the economy, rather than trying to prevent or stop the bubble itself. This is because identifying an asset bubble and determining the proper monetary policy to deflate it are matters of debate among economists. Some market observers have been concerned that Federal Reserve actions could give rise to moral hazard. A Government Accountability Office critic said that the Federal Reserve Bank of New York's rescue of Long-Term Capital Management in 1998 would encourage large financial institutions to believe that the Federal Reserve would intervene on their behalf if risky loans went sour because they were too big to fail.
PAGE #603 - Policies of central banks
A contributing factor to the rise in house prices was the Federal Reserve's lowering of interest rates early in the decade. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the dot-com bubble and of the September 2001 terrorist attacks, and to combat the perceived risk of deflation. The Fed believed that interest rates could be lowered safely primarily because the rate of inflation was low; it disregarded other important factors. Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas, said that the Fed's interest rate policy during the early 2000s was misguided, because measured inflation in those years was below true inflation, which led to a monetary policy that contributed to the housing bubble. According to Ben Bernanke, now chairman of the Federal Reserve, it was capital or savings pushing into the United States, due to a world-wide "saving glut", which kept long term interest rates low independently of Central Bank action. The Fed then raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year ARM rates, making ARM interest rate resets more expensive for homeowners. This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates and it became riskier to speculate in housing.
PAGE #604 - Financial institution debt levels and incentives

Financial institution debt levels and incentives Many financial institutions, investment banks in particular, issued large amounts of debt during 2004 2007, and invested the proceeds in mortgage-backed securities (MBS), essentially betting that house prices would continue to rise, and that households would continue to make their mortgage payments. Borrowing at a lower interest rate and investing the proceeds at a higher interest rate is a form of financial leverage. This is analogous to an individual taking out a second mortgage on his residence to invest in the stock market. This strategy proved profitable during the housing boom, but resulted in large losses when house prices began to decline and mortgages began to default. Beginning in 2007, financial institutions and individual investors holding MBS also suffered significant losses from mortgage payment defaults and the resulting decline in the value of MBS.

A 2004 U.S. Securities and Exchange Commission (SEC) decision related to the net capital rule allowed USA investment banks to issue substantially more debt, which was then used to purchase MBS. Over 2004-07, the top five US investment banks each significantly increased their financial leverage, which increased their vulnerability to the declining value of MBSs. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of USA nominal GDP for 2007. Further, the percentage of subprime mortgages originated to total originations increased from below 10% in 2001-2003 to between 18-20% from 2004-2006, due in-part to financing from investment banks. During 2008, three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch). These failures augmented the instability in the global financial system. The remaining two investment banks, Morgan Stanley and Goldman Sachs, opted to become commercial banks, thereby subjecting themselves to more stringent regulation.

In the years leading up to the crisis, the top four U.S. depository banks moved an estimated $5.2 trillion in assets and liabilities off-balance sheet into special purpose vehicles or other entities in the shadow banking system. This enabled them to essentially bypass existing regulations regarding minimum capital ratios, thereby increasing leverage and profits during the boom but increasing losses during the crisis. New accounting guidance will require them to put some of these assets back onto
their books during 2009, which will significantly reduce their capital ratios. One news agency estimated this amount to be between $500 billion and $1 trillion. This effect was considered as part of the stress tests performed by the government during 2009. Martin Wolf wrote in June 2009: " an enormous part of what banks did in the early part of this decade the off-balance-sheet vehicles, the derivatives and the 'shadow banking system' itself was to find a way round regulation."

The New York State Comptroller's Office has said that in 2006, Wall Street executives took home bonuses totaling $23.9 billion. "Wall Street traders were thinking of the bonus at the end of the year, not the long-term health of their firm. The whole system - from mortgage brokers to Wall Street risk managers - seemed tilted toward taking short-term risks while ignoring long-term obligations. The most damning evidence is that most of the people at the top of the banks didn't really understand how those [investments] worked." Investment banker incentive compensation was focused on fees generated from assembling financial products, rather than the performance of those products and profits generated over time. Their bonuses were heavily skewed towards cash rather than stock and not subject to "claw-back" (recovery of the bonus from the employee by the firm) in the event the MBS or CDO created did not perform. In addition, the increased risk (in the form of financial leverage) taken by the major investment banks, was not adequately factored into the compensation of senior executives.
PAGE #608 - Credit default swaps

Credit default swaps Credit defaults swaps (CDS) are financial instruments used as a hedge and protection for debt-holders, in particular MBS investors, from the risk of default. As the net worth of banks and other financial institutions deteriorated because of losses related to subprime mortgages, the likelihood increased that those providing the insurance would have to pay their counterparties. This created uncertainty across the system, as investors wondered which companies would be required to pay to cover mortgage defaults. Like all swaps and other financial derivatives, CDS may either be used to hedge risks (specifically, to insure creditors against default) or to profit from speculation. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion. CDS are lightly regulated. As of 2008, there was no central clearing house to honor CDS in the event a party to a CDS proved unable to perform his obligations under the CDS contract. Required disclosure of CDS-related obligations has been criticized as inadequate. Insurance companies such as American International Group (AIG), MBIA, and Ambac faced ratings downgrades because widespread mortgage defaults increased their potential exposure to CDS losses. These firms had to obtain additional funds (capital) to offset this exposure. AIG's having CDSs insuring $440 billion of MBS resulted in its seeking and obtaining a Federal government bailout.
PAGE #609 - Credit default swaps

Like all swaps and other pure wagers, what one party loses under a CDS, the other party gains; CDSs merely reallocate existing wealth [that is, provided that the paying party can perform]. Hence the question is which side of the CDS will have to pay and will it be able to do so. When investment bank Lehman Brothers went bankrupt in September 2008, there was much uncertainty as to which financial firms would be required to honor the CDS contracts on its $600 billion of bonds outstanding. Merrill Lynch's large losses in 2008 were attributed in part to the drop in value of its unhedged portfolio of collateralized debt obligations (CDOs) after AIG ceased offering CDS on Merrill's CDOs. The loss of
confidence of trading partners in Merrill Lynch's solvency and its ability to refinance its short-term debt led to its acquisition by the Bank of America. Economist Joseph Stiglitz summarized how credit default swaps contributed to the systemic meltdown: "With this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else-or even of one's own position. Not surprisingly, the credit markets froze."
PAGE #610 - Investment in US by foreigners

Investment in U.S. by foreigners of their proceeds from America's net imports In 2005, Ben Bernanke addressed the implications of the USA's high and rising current account (trade) deficit, resulting from USA imports exceeding its exports. Between 1996 and 2004, the USA current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the USA to borrow large sums from abroad, much of it from countries running trade surpluses, mainly the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the USA) running a current account deficit also have a capital account (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the USA to finance its imports. Foreign investors had these funds to lend, either because they had very high personal savings rates (as high as 40% in China), or because of high oil prices. Bernanke referred to this as a "saving glut" that may have pushed capital into the USA, a view differing from that of other economists, who view such capital as having been pulled into the USA by its high consumption levels. In other words, a nation cannot consume more than its income unless it sells assets to foreigners, or foreigners are willing to lend to it.
PAGE #611 - Investment in US by foreigners

Regardless of the push or pull view, a "flood" of funds (capital or liquidity) reached the USA financial markets. Foreign governments supplied funds by purchasing USA Treasury bonds and thus avoided much of the direct impact of the crisis. USA households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities. USA housing and financial assets dramatically declined in value after the housing bubble burst.
PAGE #612 - Boom and colapse of the shadow banking system

Boom and collapse of the shadow banking system In a June 2008 speech, U.S. Treasury Secretary Timothy Geithner, then President of the NY Federal Reserve Bank, placed significant blame for the freezing of credit markets on a "run" on the entities in the "parallel" banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls. Further, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities: "In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion." He
stated that the "combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles."
PAGE #613 - Boom and colapse of the shadow banking system

Nobel laureate Paul Krugman described the run on the shadow banking system as the "core of what happened" to cause the crisis. "As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible - and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank." He referred to this lack of controls as "malign neglect." The securitization markets supported by the shadow banking system started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds. According to the Brookings Institution, the traditional banking system does not have the capital to close this gap as of June 2009: "It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume." The authors also indicate that some forms of securitization are "likely to vanish forever, having been an artifact of excessively loose credit conditions."
PAGE #614 - Impact in the US

Impact in the U.S. Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30-35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans' second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total a staggering $8.3 trillion. Members of USA minority groups received a disproportionate number of subprime mortgages, and so have experienced a disproportionate level of the resulting foreclosures.
PAGE #615 - Financial market impacts, 2007

Financial market impacts, 2007 The crisis began to affect the financial sector in February 2007, when HSBC, the world's largest (2008) bank, wrote down its holdings of subprime-related MBS by $10.5 billion, the first major subprime related loss to be reported. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. Top management has not escaped unscathed, as the CEOs of Merrill Lynch and Citigroup resigned within a week of each other in late 2007. As the crisis deepened, more and more financial firms either merged, or announced that they were negotiating seeking merger partners. During 2007, the crisis caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as "stores of value".
Financial speculation in commodity futures following the collapse of the financial derivatives markets has contributed to the world food price crisis and oil price increases due to a "commodities super-cycle." Financial speculators seeking quick returns have removed trillions of dollars from equities and mortgage bonds, some of which has been invested into food and raw materials.

Mortgage defaults and provisions for future defaults caused profits at the 8533 USA depository institutions insured by the FDIC to decline from $35.2 billion in 2006 Quarter 4 (Q4) billion to $646 million in the same quarter a year later, a decline of 98%. 2007 Q4 saw the worst bank and thrift quarterly performance since 1990. In all of 2007, insured depository institutions earned approximately $100 billion, down 31% from a record profit of $145 billion in 2006. Profits declined from $35.6 billion in 2007 Q1 to $19.3 billion in 2008 Q1, a decline of 46%.

Financial market impacts, 2008 As of August 2008, financial firms around the globe have written down their holdings of subprime related securities by US$501 billion. The IMF estimates that financial institutions around the globe will eventually have to write off $1.5 trillion of their holdings of subprime MBSs. About $750 billion in such losses had been recognized as of November 2008. These losses have wiped out much of the capital of the world banking system. Banks headquartered in nations that have signed the Basel Accords must have so many cents of capital for every dollar of credit extended to consumers and businesses. Thus the massive reduction in bank capital just described has reduced the credit available to businesses and households.

When Lehman Brothers and other important financial institutions failed in September 2008, the crisis hit a key point. During a two day period in September 2008, $150 billion were withdrawn from USA money funds. The average two day outflow had been $5 billion. In effect, the money market was subject to a bank run. The money market had been a key source of credit for banks (CDs) and nonfinancial firms (commercial paper). The TED spread, a measure of the risk of interbank lending, quadrupled shortly after the Lehman failure. This credit freeze brought the global financial system to the brink of collapse. The response of the USA Federal Reserve, the European Central Bank, and other central banks was immediate and dramatic. During the last quarter of 2008, these central banks purchased US $2.5 trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks. However, some economists state that Third-World economies, such as the Brazilian and Chinese ones, will not suffer as much as those from more developed countries.
PAGE #619 - Responses

Responses Various actions have been taken since the crisis became apparent in August 2007. In September 2008, major instability in world financial markets increased awareness and attention to the crisis. Various
agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis.
PAGE #620 - Federal reserve and central banks

Federal Reserve and central banks The central bank of the USA, the Federal Reserve, in partnership with central banks around the world, has taken several steps to address the crisis. Federal Reserve Chairman Ben Bernanke stated in early 2008: "Broadly, the Federal Reserve's response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy." The Fed has: Lowered the target for the Federal funds rate from 5.25% to 2%, and the discount rate from 5.75% to 2.25%. This took place in six steps occurring between September 18, 2007 and April 30, 2008; In December 2008, the Fed further lowered the federal funds rate target to a range of 0-0.25% (25 basis points). Undertaken, along with other central banks, open market operations to ensure member banks remain liquid. These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rates (called the discount rate in the USA) they charge member banks for short-term loans; Created a variety of lending facilities to enable the Fed to lend directly to banks and non-bank institutions, against specific types of collateral of varying credit quality. These include the Term Auction Facility (TAF) and Term Asset-Backed Securities Loan Facility (TALF).
PAGE #621 - Federal reserve and central banks

In November 2008, the Fed announced a $600 billion program to purchase the MBS of the GSE, to help lower mortgage rates. In March 2009, the FOMC decided to increase the size of the Federal Reserves balance sheet further by purchasing up to an additional $750 billion of agency (GSE) mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longerterm Treasury securities during 2009. According to Ben Bernanke, expansion of the Fed balance sheet means the Fed is electronically creating money, necessary "...because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation."
PAGE #622 - Economic stimulous

Economic stimulus On February 13, 2008, President Bush signed into law a $168 billion economic stimulus package, mainly taking the form of income tax rebate checks mailed directly to taxpayers. Checks were mailed starting the week of April 28, 2008. However, this rebate coincided with an unexpected jump in gasoline and food prices. This coincidence led some to wonder whether the stimulus package would have the intended effect, or whether consumers would simply spend their rebates to cover higher food and fuel prices. On February 17, 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009, a $787 billion stimulus package with a broad spectrum of spending and tax cuts.
PAGE #623 - Bank solvency and capital replenishment

Bank solvency and capital replenishment Losses on mortgage-backed securities and other assets purchased with borrowed money have dramatically reduced the capital base of financial institutions, rendering many either insolvent or less capable of lending. Governments have provided funds to banks. Some banks have taken significant steps to acquire additional capital from private sources. The U.S. government passed the Emergency Economic Stabilization Act of 2008 (EESA or TARP) during October 2008. This law included $700 billion in funding for the "Troubled Assets Relief Program" (TARP), which was used to lend funds to banks in exchange for dividend-paying preferred stock. Another method of recapitalizing banks is for government and private investors to provide cash in exchange for mortgage-related assets (i.e., "toxic" or "legacy" assets), improving the quality of bank capital while reducing uncertainty regarding the financial position of banks. U.S. Treasury Secretary Timothy Geithner announced a plan during March 2009 to purchase "legacy" or "toxic" assets from banks. The Public-Private Partnership Investment Program involves government loans and guarantees to encourage private investors to provide funds to purchase toxic assets from banks.
PAGE #624 - Bailouts and failures of financial firms

Bailouts and failures of financial firms Several major financial institutions either failed, were bailed-out by governments, or merged (voluntarily or otherwise) during the crisis. While the specific circumstances varied, in general the decline in the value of mortgage-backed securities held by these companies resulted in either their insolvency, the equivalent of bank runs as investors pulled funds from them, or inability to secure new funding in the credit markets. These firms had typically borrowed and invested large sums of money relative to their cash or equity capital, meaning they were highly leveraged and vulnerable to unanticipated credit market disruptions. The five largest U.S. investment banks, with combined liabilities or debts of $4 trillion, either went bankrupt (Lehman Brothers), were taken over by other companies (Bear Stearns and Merrill Lynch), or were bailed-out by the U.S. government (Goldman Sachs and Morgan Stanley) during 2008. Government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac either directly owed or guaranteed nearly $5 trillion in mortgage obligations, with a similarly weak capital base, when they were placed into receivership in September 2008. For scale, this $9 trillion in obligations concentrated in seven highly leveraged institutions can be compared to the $14 trillion size of the U.S. economy (GDP) or to the total national debt of $10 trillion in September 2008.
PAGE #625 - Bailouts and failures of financial firms

Major depository banks around the world had also used financial innovations such as structured investment vehicles to circumvent capital ratio regulations. Notable global failures included Northern Rock, which was nationalized at an estimated cost of 87 billion ($150 billion). In the U.S., Washington Mutual (WaMu) was seized in September 2008 by the USA Office of Thrift Supervision (OTS). Dozens of U.S. banks received funds as part of the TARP or $700 billion bailout. As a result of the financial crisis in 2008, twenty five U.S. banks became insolvent and were taken over by the FDIC. As of August 14, 2009, an additional 77 banks became insolvent. This seven month tally surpasses the 50 banks that were seized in all of 1993, but is still much smaller than the number of failed banking institutions in 1992, 1991, and 1990. The United States has lost over 6 million jobs since the recession began in December of 2007.
The FDIC deposit insurance fund, supported by fees on insured banks, fell to $13 billion in the first quarter of 2009. That is the lowest total since September 1993.

Homeowner assistance Both lenders and borrowers may benefit from avoiding foreclosure, which is a costly and lengthy process. Some lenders have offered troubled borrowers more favorable mortgage terms (i.e., refinancing, loan modification or loss mitigation). Borrowers have also been encouraged to contact their lenders to discuss alternatives. The Economist described the issue this way: "No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programs have been ineffectual, and private efforts not much better." Up to 9 million homes may enter foreclosure over the 2009-2011 period, versus one million in a typical year. At roughly U.S. $50,000 per foreclosure according to a 2006 study by the Chicago Federal Reserve Bank, 9 million foreclosures represents $450 billion in losses. A variety of voluntary private and government-administered or supported programs were implemented during 2007-2009 to assist homeowners with case-by-case mortgage assistance, to mitigate the foreclosure crisis engulfing the U.S. One example is the Hope Now Alliance, an ongoing collaborative effort between the US Government and private industry to help certain subprime borrowers. In February 2008, the Alliance reported that during the second half of 2007, it had helped 545,000 subprime borrowers with shaky credit, or 7.7% of 7.1 million subprime loans outstanding as of September 2007. A spokesperson for the Alliance acknowledged that much more must be done.

During late 2008, major banks and both Fannie Mae and Freddie Mac established moratoriums (delays) on foreclosures, to give homeowners time to work towards refinancing. Critics have argued that the case-by-case loan modification method is ineffective, with too few homeowners assisted relative to the number of foreclosures and with nearly 40% of those assisted homeowners again becoming delinquent within 8 months. In December 2008, the U.S. FDIC reported that more than half of mortgages modified during the first half of 2008 were delinquent again, in many cases because payments were not reduced or mortgage debt was not forgiven. This is further evidence that case-by-case loan modification is not effective as a policy tool. In February 2009, economists Nouriel Roubini and Mark Zandi recommended an "across the board" (systemic) reduction of mortgage principal balances by as much as 20-30%. Lowering the mortgage balance would help lower monthly payments and also address an estimated 20 million homeowners that may have a financial incentive to enter voluntary foreclosure because they are "underwater" (i.e., the mortgage balance is larger than the home value).

A study by the Federal Reserve Bank of Boston indicated that banks were reluctant to modify loans. Only 3% of seriously delinquent homeowners had their mortgage payments reduced during 2008. In addition, investors who hold MBS and have a say in mortgage modifications have not been a significant impediment; the study found no difference in the rate of assistance whether the loans were controlled by the bank or by investors. Commenting on the study, economists Dean Baker and Paul Willen both advocated providing funds directly to homeowners instead of banks.
PAGE #629 - Homeowner Affordability and Stabilty Plan

Homeowners Affordability and Stability Plan On 18 February 2009, U.S. President Barack Obama announced a $73 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for Fannie Mae and Freddie Mac to purchase and more easily refinance mortgages. The plan is funded mostly from the EESA's $700 billion financial bailout fund. It uses cost sharing and incentives to encourage lenders to reduce homeowner's monthly payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrowers income, with government sharing the cost to further cut the rate to 31 percent. The plan also involves forgiving a portion of the borrowers mortgage balance. Companies that service mortgages will get incentives to modify loans and to help the homeowner stay current.
PAGE #630 - Regulatory proposals and long-term solutions

Regulatory proposals and long-term solutions President Barack Obama and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others. A variety of regulatory changes have been proposed by economists, politicians, journalists, and business leaders to minimize the impact of the current crisis and prevent recurrence. However, as of June 2009, many of the proposed solutions have not yet been implemented.

These include: Ben Bernanke: Establish resolution procedures for closing troubled financial institutions in the shadow banking system, such as investment banks and hedge funds. Joseph Stiglitz: Restrict the leverage that financial institutions can assume. Require executive compensation to be more related to long-term performance. Re-instate the separation of commercial (depository) and investment banking established by the Glass-Steagall Act in 1933 and repealed in 1999 by the Gramm-Leach-Bliley Act. Simon Johnson: Break-up institutions that are "too big to fail" to limit systemic risk. Paul Krugman: Regulate institutions that "act like banks " similarly to banks. Alan Greenspan: Banks should have a stronger capital cushion, with graduated regulatory capital requirements (i.e., capital ratios that increase with bank size), to "discourage them from becoming too big and to offset their competitive advantage." Warren Buffett: Require minimum down payments for home mortgages of at least 10% and income verification.
Eric Dinallo: Ensure any financial institution has the necessary capital to support its financial commitments. Regulate credit derivatives and ensure they are traded on well-capitalized exchanges to limit counterparty risk. Raghuram Rajan: Require financial institutions to maintain sufficient "contingent capital" (i.e., pay insurance premiums to the government during boom periods, in exchange for payments during a downturn.) Michael Spence and Gordon Brown: Establish an early-warning system to help detect systemic risk. Niall Ferguson and Jeffrey Sachs: Impose haircuts on bondholders and counterparties prior to using taxpayer money in bailouts. Nouriel Roubini: Nationalize insolvent banks. Reduce debt levels across the financial system through debt for equity swaps. Reduce mortgage balances to assist homeowners, giving the lender a share in any future home appreciation. Paul McCulley advocated "counter-cyclical regulatory policy to help modulate human nature." He cited the work of economist Hyman Minsky, who believed that human behavior is pro-cyclical, meaning it amplifies the extent of booms and busts. In other words, humans are momentum investors rather than value investors. Counter-cyclical policies would include increasing capital requirements during boom periods and reducing them during busts.
PAGE #633 - Other responses

Other responses Significant law enforcement action and litigation is resulting from the crisis. The U.S. Federal Bureau of Investigation was looking into the possibility of fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers, and insurer American International Group, among others. New York Attorney General Andrew Cuomo is suing Long Island based Amerimod, one of the nation's largest loan modification corporations for fraud, and has issued 14 subpoenas to other similar companies. The FBI also assigned more agents to mortgage-related crimes and its caseload has dramatically increased. The FBI began a probe of Countrywide in March 2008 for possible fraudulent lending practices and securities fraud. Over 250 civil lawsuits were filed in federal courts during 2007 related to the subprime crisis. The number of filings in state courts was not quantified but is also believed to be significant.
PAGE #634 - Implications

Implications Estimates of impact have continued to climb. During April 2008, International Monetary Fund (IMF) estimated that global losses for financial institutions would approach $1 trillion. One year later, the IMF estimated cumulative losses of banks and other financial institutions globally would exceed $4 trillion. This is equal to U.S. $20,000 for each of 200,000,000 people.

Francis Fukuyama has argued that the crisis represents the end of Reaganism in the financial sector, which was characterized by lighter regulation, pared-back government, and lower taxes. Significant financial sector regulatory changes are expected as a result of the crisis.
Fareed Zakaria believes that the crisis may force Americans and their government to live within their means. Further, some of the best minds may be redeployed from financial engineering to more valuable business activities, or to science and technology. Roger Altman wrote that "the crash of 2008 has inflicted profound damage on [the U.S.] financial system, its economy, and its standing in the world; the crisis is an important geopolitical setback the crisis has coincided with historical forces that were already shifting the world's focus away from the United States. Over the medium term, the United States will have to operate from a smaller global platform - while others, especially China, will have a chance to rise faster."

GE CEO Jeffrey Immelt has argued that U.S. trade deficits and budget deficits are unsustainable. America must regain its competitiveness through innovative products, training of production workers, and business leadership. He advocates specific national goals related to energy security or independence, specific technologies, expansion of the manufacturing job base, and net exporter status. "The world has been reset. Now we must lead an aggressive American renewal to win in the future." Of critical importance, he said, is the need to focus on technology and manufacturing. Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy - and somehow still expect to prosper, Jeff said. That idea was flat wrong. Economist Paul Krugman wrote in 2009: "The prosperity of a few years ago, such as it was - profits were terrific, wages not so much - depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isnt coming back, the spending that sustained the economy in the pre-crisis years isnt coming back either." Niall Ferguson stated that excluding the effect of home equity extraction, the U.S. economy grew at a 1% rate during the Bush years. Microsoft CEO Steve Ballmer has argued that this is an economic reset at a lower level, rather than a recession, meaning that no quick recovery to pre-recession levels can be expected.

The U.S. Federal government's efforts to support the global financial system have resulted in significant new financial commitments, totaling $7 trillion by November, 2008. These commitments can be characterized as investments, loans, and loan guarantees, rather than direct expenditures. In many cases, the government purchased financial assets such as commercial paper, mortgage-backed securities, or other types of asset-backed paper, to enhance liquidity in frozen markets. As the crisis has progressed, the Fed has expanded the collateral against which it is willing to lend to include higherrisk assets. The Economist wrote: "Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors. Given the political implications of such austerity, the temptation will be to default by stealth, by letting their currencies depreciate. Investors are increasingly alive to this danger..."

The crisis has cast doubt on the legacy of Alan Greenspan, the Chairman of the Federal Reserve System from 1986 to January 2006. Senator Chris Dodd claimed that Greenspan created the "perfect storm". When asked to comment on the crisis, Greenspan spoke as follows: The current credit crisis will come to an end when the overhang of inventories of newly built
homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.
PAGE #639 -
PROOF2
to discuss the history of Fannie Mae; be able to discuss the history of Freddie Mac; and be able to explain various changes to reform Fannie Mae and Freddie Mac.
PAGE #642 - Fannie Mae

Fannie Mae and Freddie Mac Fannie Mae The Federal National Mortgage Association (FNMA) (NYSE: FNM), commonly known as Fannie Mae, is a stockholder-owned corporation chartered by Congress in 1968 as a government-sponsored enterprise (GSE), but founded in 1938 during the Great Depression. The corporation's purpose is to purchase and securitize mortgages in order to ensure that funds are consistently available to the institutions that lend money to home buyers.
PAGE #643 - Fannie Mae

On September 7, 2008, James Lockhart, director of the Federal Housing Finance Agency (FHFA), announced that Fannie Mae and Freddie Mac were being placed into conservatorship of the FHFA. The action is "one of the most sweeping government interventions in private financial markets in decades". In 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) owned or guaranteed about half of the U.S.'s $12 trillion mortgage market.
PAGE #644 - History

History
Fannie Mae was established in 1938 as a mechanism to make mortgages more available to low-income families. It was added to the Federal Home Mortgage association, a government agency in the wake of the Great Depression in 1938, as part of Franklin Delano Roosevelt's New Deal in order to facilitate liquidity within the mortgage market. In 1968, the government converted Fannie Mae into a private shareholder-owned corporation in order to remove its activity from the annual balance sheet of the federal budget. Consequently, Fannie Mae ceased to be the guarantor of government-issued mortgages, and that responsibility was transferred to the new Government National Mortgage Association (Ginnie Mae).
PAGE #645 - History

In 1970, the government created the Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, to compete with Fannie Mae and, thus, facilitate a more robust and efficient secondary mortgage market. Since the creation of the GSEs, there has been debate surrounding their role in the mortgage market, their relationship with the government, and whether or not they are indeed necessary. This debate gained relevance due to the collapse of the U.S. housing market and subprime mortgage crisis that began in 2007. Despite this debate, Fannie Mae, as well as Ginnie Mae and later Freddie Mac, has played an integral role in increasing home ownership rates in the U.S. to among the highest in the world.
PAGE #646 - Contributing factors and early warnings

Contributing factors and early warnings In 1977, the Carter Administration and the United States Congress passed and signed the Community Reinvestment Act of 1977, or CRA , designed to boost lending in inner cities with areas of extreme blight by forcing area banks to open new branches in these areas and to have a certain percentage of their lending portfolio of small business loans and home mortgages located in these areas. Failure to maintain this ratio would result in the banks being prevented from opening branches in other areas that were not distressed.

In 1999, Fannie Mae came under pressure from politicians to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the CRA of 1977. Due to the increased ratio requirements, institutions in the primary mortgage market pressed Fannie Mae to ease credit requirements on the mortgages it was willing to purchase, enabling them to make loans to subprime borrowers at interest rates higher than conventional loans. Shareholders also pressured Fannie Mae to maintain its record profits. In 2000, due to a re-assessment of the housing market by HUD, anti-predatory lending rules were put into place that disallowed risky, high-cost loans from being credited toward affordable housing goals. In 2004, these rules were dropped and high-risk loans were again counted toward affordable housing goals.

The intent was that Fannie Mae's enforcement of the underwriting standards they maintained for standard conforming mortgages would also provide safe and stable means of lending to buyers who did not have prime credit.
As Daniel Mudd, then President and CEO of Fannie Mae, testified in 2007, instead the agency's responsible underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: "We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families.

"Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates, interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors."

In 1999, The New York Times reported that with the corporation's move towards the subprime market "Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s." Alex Berenson of The New York Times reported in 2003 that Fannie Mae's risk is much larger than is commonly held. Nassim Taleb wrote in The Black Swan: "The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deem these events 'unlikely'".

In 2002, President George W. Bush signed the Single-Family Affordable Housing Tax Credit Act. Dubbed "Renewing the Dream," the program would give nearly $2.4 billion in tax credits over the next five years to investors and builders who develop affordable single-family housing in distressed areas. On September 11, 2003, the Bush Administration recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis. Under the plan, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae. The new agency would have the authority, which now rests with Congress, to set capital-reserve requirements for the company and to determine whether the company is adequately managing the risks of its ballooning portfolios. The New York Times reported that the plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac is broken. The Times also reported Democratic opposition to Bush's plan: "These two entities - Fannie Mae and Freddie Mac - are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
On December 16, 2003, President George W. Bush signed the American Dream Downpayment Act, a new program that provided grants to help home buyers with downpayment and closing costs. The act authorized $200 million dollars per year for the program for fiscal years 2004-2007. President Bush also tripled the funding for organizations like Habitat for Humanity that help families help themselves become homeowners through 'sweat equity' and volunteerism in their communities. Substantially increasing, by at least $440 billion, the financial commitment made by the governmentsponsored enterprises involved in the secondary mortgage market specifically targeted toward the minority market.

On January 26, 2005, the Federal Housing Enterprise Regulatory Reform Act of 2005 (S.190) was first introduced in the Senate by Sen. Chuck Hagel. The Senate legislation was an effort to reform the existing GSE regulatory structure in light of the recent accounting problems and questionable management actions leading to considerable income restatements by the GSE's. After being reported favorably by the Senate's Committee on Banking, Housing, and Urban Affairs in July 2005, the bill was never considered by the full Senate for a vote. Sen. John McCain's decision to become a cosponsor of S.190 almost a year later in 2006 was the last action taken regarding Sen. Hagel's bill in spite of developments since clearing the Senate Committee. Sen. McCain pointed out that Fannie Mae's regulator reported that profits were "illusions deliberately and systematically created by the company's senior management" in his floor statement giving support to S.190.

At the same time, the House also introduced similar legislation, the Federal Housing Finance Reform Act of 2005 (H.R. 1461), in the Spring of 2005. The House Financial Services Committee had crafted changes and produced a Committee Report by July 2005 to the legislation. It was passed by the House in October in spite of President Bush's statement of policy opposed to the House version. The legislation met with opposition from both Democrats and Republicans and that point and the Senate never took up the House passed version for consideration after that.
PAGE #655 - Business mechanism

Business mechanism Fannie Mae buys loans from approved mortgage sellers, either for cash or in exchange for a mortgagebacked security that comprises those loans and that, for a fee, carries Fannie Mae's guarantee of timely payment of interest and principal. The mortgage seller may hold that security or sell it. Fannie Mae may also securitize mortgages from its own loan portfolio and sell the resultant mortgage-backed security to investors in the secondary mortgage market, again with a guarantee that the stated principal and interest payments will be timely passed through to the investor. By purchasing the mortgages, Fannie Mae and Freddie Mac provide banks and other financial institutions with fresh money to make new loans. This gives the United States housing and credit markets flexibility and liquidity. In order for Fannie Mae to provide its guarantee to mortgage-backed securities it issues, it sets the guidelines for the loans that it will accept for purchase, called "conforming" loans. Mortgages that don't follow the guidelines are called "non-conforming"; typically the secondary market for non-conforming loans deals in mortgages larger (termed "jumbo") than the maximum mortgage that Fannie Mae and Freddie Mac will purchase. In early 2008, the decision was made to allow TBA-eligible MBS to include up to 10% "jumbo" mortgages.
PAGE #656 - The mortgage crisis from late 2007

The mortgage crisis from late 2007 Following their mission to meet federal Housing and Urban Development (HUD) housing goals (HUD government goals), GSE's such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks (FHLBanks) have strived to improve home ownership of low and middle income families, underserved areas, and generally through special affordable methods such as "the ability to obtain a 30-year fixedrate mortgage with a low down payment and the continuous availability of mortgage credit under a wide range of economic conditions." (HUD 2002 Annual Housing Activities Report) Then in 2007, the subprime mortgage crisis began. An increasing number of borrowers, often with poor credit that were unable to pay their mortgages - particularly with adjustable rate mortgages (ARM), caused a precipitous increase in home foreclosures. As a result, home prices declined as increasing foreclosures added to the already large inventory of homes and stricter lending standards made it more and more difficult for borrowers to get mortgages. This depreciation in home prices led to growing losses for the GSEs, which back the majority of US mortgages. In July 2008, the government attempted to ease market fears by reiterating their view that "Fannie Mae and Freddie Mac play a central role in the US housing finance system". The Treasury Department and the Federal Reserve took steps to bolster confidence in the corporations, including granting both corporations access to Federal Reserve low-interest loans (at similar rates as commercial banks) and removing the prohibition on the Treasury Department to purchase the GSEs' stock. Despite these efforts, by August 2008, shares of both Fannie Mae and Freddie Mac had tumbled more than 90% from their one-year prior levels.
PAGE #657 - Business

Business One part of Fannie Mae's income is generated through the positive interest rate spread between the rate paid to fund the purchase of mortgage investments and the return it earns on those retained mortgage investments. Fannie Mae's mortgage portfolio was in excess of $700 billion as of August 2008. Fannie Mae also earns a significant portion of its income from guaranty fees it receives as compensation for assuming the credit risk on the mortgage loans underlying its single-family Fannie Mae MBS and on the single-family mortgage loans held in its retained portfolio. Investors, or purchasers of Fannie Mae MBSs, are willing to let Fannie Mae keep this fee in exchange for assuming the credit risk; that is, Fannie Mae's guarantee that the scheduled principal and interest on the underlying loan will be paid even if the borrower defaults.
PAGE #658 - Conforming loans

Conforming loans Fannie Mae and Freddie Mac have a limit on the maximum sized loan they will guarantee. This is known as the "conforming loan limit". The conforming loan limit for Fannie Mae (along with Freddie Mac) is set by Office of Federal Housing Enterprise Oversight (OFHEO), the regulator of both GSEs. OFHEO annually sets the limit of the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage is considered a non-conforming jumbo loan. The GSEs only buy loans that are conforming, to repackage into the secondary market, lowering the demand for non-conforming loans. By virtue of the law of supply and demand, then, it is harder for lenders to sell the loans, thus it would cost more to the consumers (typically 1/4 to 1/2 of a percent.) The conforming loan limit is 50 percent higher in Alaska and Hawaii. However, in 2008, since the demand for bonds not guaranteed by the corporations is almost non-existent, non-conforming loans are almost 1% to 1.5% higher than the conforming loans.
PAGE #659 - Guarantees and subsidies

Guarantees and subsidies Speculation that the U.S. government would bail out an insolvent Fannie Mae is a hypothesis that had never been tested until recently, when the subprime mortgage crisis hit the U.S. On July 11, 2008, the New York Times reported that U.S. government officials were considering a plan for the U.S. government to take over Fannie Mae and/or Freddie Mac should their financial situations worsen due to the U.S. housing crisis. The government officials also stated that the government had also considered calling for explicit government guarantee through legislation of $5 trillion on debt owned or guaranteed by the two companies.

Shares in U.S. mortgage finance firms Fannie Mae and Freddie Mac plunged on Friday, July 11, 2008, and market speculation mounted that the government was set to take them over to resolve their funding problems. Shares continued to plummet as investors became unsure about the adequacy of the capital held by FNMA. U.S. Treasury Secretary Henry M. Paulson as well as the White House went on the air to defend the financial soundness of Fannie Mae. Fannie Mae and smaller Freddie Mac own or guarantee almost half of all home loans in the United States. They face billions of dollars in potential losses, and may need to raise additional, potentially substantial, amounts of new capital as the current downturn in the U.S. housing market continues.

Markets assume that the taxpayer will if necessary take on the burden of all their mortgages because they underpin the whole U.S. mortgage market. If they were to collapse, mortgages would be harder to obtain and much more expensive. U.S. Treasury Secretary Henry Paulson has said the government's primary focus is in supporting Fannie Mae and Freddie Mac in their current form. No actual guarantees Fannie Mae receives no direct government funding or backing; Fannie Mae securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in many public communications issued by Fannie Mae. Neither the certificates nor payments of principal and interest on the certificates are guaranteed by the United States government. The certificates do not constitute a debt or obligation of the United States or any of its agencies or instrumentalities other than Fannie Mae. The perception of government guarantees has allowed Fannie Mae and Freddie Mac to save billions in borrowing costs. Estimates by the Congressional Budget Office and the Treasury Department put the figure at about $2 billion per year.

Assumed guarantees
There is a wide belief that FNMA securities are backed by some sort of implied federal guarantee, and a majority of investors believe that the government would prevent a disastrous default. Vernon L. Smith, 2002 Nobel Laureate in economics, has called FHLMC and FNMA "implicitly taxpayer-backed agencies". The Economist has referred to "the implicit government guarantee" of FHLMC and FNMA. In testimony before the House and Senate Banking Committee in 2004, Alan Greenspan expressed the belief that Fannie Mae's (weak) financial position was the result of markets believing that the U.S. Government would never allow Fannie Mae (or Freddie Mac) to fail.
PAGE #663 - Federal subsidies

Federal subsidies The FNMA receives no direct federal government aid. However, the corporation and the securities it issues are widely believed to be implicitly backed by the U.S. government. In 1996, the Congressional Budget Office wrote "there have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds the government provides considerable unpriced benefits to the enterprises Government-sponsored enterprises are costly to the government and taxpayers the benefit is currently worth $6.5 billion annually." Fannie Mae and Freddie Mac are allowed to hold less capital than normal financial institutions: e.g., it is allowed to sell mortgage-backed securities with only half as much capital backing them up as would be required of other financial institutions. Specifically, regulations exist through the FDIC Bank Holding Company Act that govern the solvency of financial institutions. The regulations require normal financial institutions to maintain a capital/asset ratio greater than or equal to 3%. The GSEs, Fannie Mae and Freddie Mac, are exempt from this capital/asset ratio requirement and can, and often do, maintain a capital/asset ratio less than 3%. The additional leverage allows for greater returns in good times, but put the companies at greater risk in bad times, such as during the current subprime mortgage crisis. FNMA is also exempt from state and local taxes. In addition, FNMA and FHLMC are exempt from SEC filing requirements; however, both GSEs voluntarily file their SEC 10-K and 10-Q.
PAGE #664 - Freddie Mac

Freddie Mac The Federal Home Loan Mortgage Corporation (FHLMC) (NYSE: FRE), known as Freddie Mac, is a government sponsored enterprise (GSE) of the United States federal government. Freddie Mac has its headquarters in the Tyson's Corner CDP in unincorporated Fairfax County, Virginia. The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with other GSEs, Freddie Mac buys mortgages on the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases. The name, "Freddie Mac", was a acronym of the company's full name that had been adopted officially for ease of identification.
PAGE #665 - Freddie Mac

On September 7, 2008, Federal Housing Finance Agency (FHFA) director James B. Lockhart III announced he had put Fannie Mae and Freddie Mac under the conservatorship of the FHFA. The action has been described as "one of the most sweeping government interventions in private financial markets in decades". Moody's gave Freddie Mac's preferred stock an investment grade rating of A1 until August 22, 2008 when Warren Buffett said publicly that both Freddie Mac and Fannie Mae had tried to attract him and
others. Moody's changed the credit rating on that day to Baa3, the lowest investment grade credit rating. Freddie's senior debt credit rating remains Aaa/AAA from each of the major ratings agencies Moody's, S&P, and Fitch. As of the start of the conservatorship, the United States Department of the Treasury had contracted to acquire US$1 billion in Freddie Mac senior preferred stock, paying at a rate of 10 percent a year, and the total investment may subsequently rise to as much as US$ 100 billion. Home loan interest rates may go down as a result, and owners of Freddie Mac debt and the Asian central banks who had increased their holdings in these bonds may be protected. Shares of Freddie Mac stock, however, plummeted to about one U.S. dollar on September 8, 2008. The yield on U.S Treasury securities rose in anticipation of increased U.S. federal debt.
PAGE #666 - History

History From 1938 to 1968, the Federal National Mortgage Association (Fannie Mae) was the sole institution that bought mortgages from depository institutions, principally savings and loan associations, which encouraged more mortgage lending and effectively insured the value of mortgages by the US government. In 1968, Fannie Mae split into a private corporation and a publicly financed institution. The private corporation was still called Fannie Mae, and its charter continued to support the purchase of mortgages from savings and loan associations and other depository institutions, but without an explicit insurance policy that guaranteed the value of the mortgages. The publicly financed institution was named the Government National Mortgage Association (Ginnie Mae) and it explicitly guaranteed the repayments of securities backed by mortgages made to government employees or veterans (the mortgages themselves were also guaranteed by other government organizations). To provide competition for the newly private Fannie Mae and to further increase the availability of funds to finance mortgages and home ownership, Congress then established the Federal Home Loan Mortgage Corporation (Freddie Mac) as a private corporation through the Emergency Home Finance Act of 1970. The charter of Freddie Mac was essentially the same as Fannie Mae's newly private charter: to expand the secondary market for mortgages and mortgage backed securities by buying mortgages made by savings and loan associations and other depository institutions.
PAGE #667 - History

The Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") of 1991 revised and standardized the regulation of both Fannie Mae and Freddie Mac. Prior to this act, Freddie Mac was owned by the Federal Home Loan Bank System and governed by the Federal Home Loan Bank Board, which was reorganized into the Office of Thrift Supervision by the Act. The Act severed Freddie Mac's ties to the Federal Home Loan Bank System, created an 18-member board of directors, and subjected it to HUD oversight. In 1995, Freddie Mac began receiving affordable housing credit for buying subprime securities, and by 2004, HUD suggested the company was lagging behind and should "do more." Freddie Mac was put under a conservatorship of the U.S. Federal government on Sunday, September 7, 2008: Federal takeover of Fannie Mae and Freddie Mac.
PAGE #668 - Conforming loans

Conforming loans The GSEs are allowed to buy only conforming loans, which limits secondary market competition for nonconforming loans. The law of supply and demand accordingly renders the non-conforming loan harder
to sell (fewer competing buyers); thus it would cost the consumer more (typically to of a percentage point, and sometimes more, depending on credit market conditions). OFHEO annually sets the limit of the size of a conforming loan in response to the October to October change in mean home price. The conforming loan limit for 2009 used by lenders is $417,000 (much lower than OFHEO limits). Above that conforming loan limit, a mortgage is considered a non-conforming jumbo loan. The conforming loan limit is 50 percent higher in such high-cost areas as Alaska, Hawaii, Guam and the US Virgin Islands, and is also higher for 2-4 unit properties on a graduating scale.

Guarantees and subsidies In mid July 2008 there was widespread speculation that the US government would move to provide Freddie Mac with additional guarantees of capital, because of widespread instability in the financial markets and public perceptions of looming insolvency. On Sunday July 13, 2008 the Secretary of the Treasury announced that the US government would seek legal permission to invest in Freddie Mac, which it later obtained as part of a Congressional housing bill. In addition, the Federal Reserve offered Freddie access to its emergency borrowing facility, the Discount Window, a resource traditionally reserved for banks. While, many are calling this move tantamount to a bailout, the Treasury has not yet invested in Freddie Mac and has in fact announced that it has no plans to do so; rather, the Congressional permission constituted a last resort.

No actual guarantees The FHLMC states, "securities, including any interest..., are not guaranteed by, and are not debts or obligations of, the United States or any agency or instrumentality of the United States other than Freddie Mac." The FHLMC and FHLMC securities are not funded or protected by the US Government. FHLMC securities carry no government guarantee of being repaid. This is explicitly stated in the law that authorizes GSEs, on the securities themselves, and in public communications issued by the FHLMC. Federal subsidies The FHLMC receives no direct federal government aid. However, the corporation and the securities it issues are thought to benefit from government subsidies. The Congressional Budget Office writes, "There have been no federal appropriations for cash payments or guarantee subsidies. But in the place of federal funds the government provides considerable unpriced benefits to the enterprises Government-sponsored enterprises are costly to the government and taxpayers the benefit is currently worth $6.5 billion annually."
PAGE #671 - Time to reform

Time to Reform Fannie Mae and Freddie Mac In late 2004, the leadership of the Federal National Mortgage Association (FNMA or Fannie Mae) was accused of having engaged in a series of questionable accounting practices that led to an overstatement of its earnings and an understatement of its risk. Although Fannie Maes top officers denied the accusations, a careful review by the U.S. Securities and Exchange Commission confirmed the allegations. Within a few weeks, Fannie Mae conceded the charges and its top officers were forced to resign. Any doubts about the seriousness of the companys shaky finances were laid to rest on January 19, 2005, when Fannie Mae cut its dividend in half to bolster its cash reserves.

Since then, Congress has held a series of hearings on Fannie Maes predicament and how to reform it. In the last week of May 2005, the House Committee on Financial Services proposed a series of regulatory changes that it claims would rectify the problem. However, critics of the FNMA, many of its private-sector competitors, and White House officials contend that these proposals are too timid and that the new regulatory environment would sustain the powerful co-monopolistic position that it shares with the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac), which suffered its own accounting and ethical lapses in 2003.

A better and more effective alternative is to phase out their generous federal credit privileges, allowing these financial giants time to adjust to a more competitive environment. To implement this orderly withdrawal of federal support, Congress should: Phase out Fannie Maes and Freddie Macs lines of credit with the U.S. Treasury over five years in annual increments of $500 million for each government-sponsored enterprise (GSE), Eliminate immediately the Federal Reserves authority to buy their debt, and Eliminate the GSEs exemption from state and local income taxes. As the phase out proceeds, Fannie Mae and Freddie Mac should: Conduct an orderly reduction in their holdings of residential mortgages (the profits from these investments depend largely on their ability to borrow at subsidized rates) and Concentrate their skilled workforces on securitizing residential mortgages in fair and open competition with the private sector. These legislative changes would greatly reduce the risk to financial markets and taxpayer exposure. They would also restore competition in residential mortgage markets while leaving the housing industry and homeownership opportunities unaffected.
PAGE #674 - Making the most of the opportunity

Making the Most of the Opportunity While Members of the 109th Congress are to be commended for taking on these two political powerhouses, the legislative package reported out by the House Committee on Financial Services in late May 2005 (H.R. 1461) falls short of what is needed. It will do little to address the fundamental problems associated with these federally supported financial monopolies that provide limited benefit to the housing finance market or homeownership opportunities. Notwithstanding press reports that the new legislation would create a new more powerful regulator for financial services giants Fannie Mae and Freddie Mac, some GSE reform advocates and Bush Administration officials view it as too weak and contend that the new regulatory system is less restrictive than the current one. In addition, the new proposal would require Fannie Mae and Freddie Mac to use 5 percent of their profits to fund affordable housing programs. This is a clumsy and costly effort to contrive a public purpose for these enterprises, which have long outlived any justification for the valuable privileges that they receive from the federal government.
The failure of Congress to address these broader issues stems from a flawed reform process that focused on Fannie Maes Enron-like behavior instead of the statutory privileges that have allowed it to amass enormous market power. Together, these two GSEs control half of the residential mortgage market, deterring competition and forcing the housing and housing finance markets to rely on two financially unstable co-monopolists. With such market power concentrated in the hands of only two companies, the stability of U.S. financial markets could be undermined by financial problems in just one of them. Of course, if a bailout ever becomes necessary, the taxpayers could end up paying the bill. In recent years, there have been a number of proposals to reform these GSEs. Some involve more regulation, others urge the creation of more GSEs to foster competition among government-subsidized entities, and still others would eliminate the statutory privileges that tie the GSEs to the taxpayer.

New regulations have attracted the most support, but this could turn out to be a useless and counterproductive approach. If the GSEs provide little or no benefit to society - beyond enriching their leaders and the various contractors who serve them - there is little point in trying to limit their risk with regulations and expose the taxpayers to a costly bailout. The co-monopolists would likely survive and thrive under a regulatory solution that would preserve the unhealthy concentration of risk, privilege, and power in the two companies. Both Fannie Mae and Freddie Mac have proven exceptionally adept at lobbying Congress to preserve and enhance their privileges. Any effort that relies on new regulations will likely perpetuate the risk to the financial market and preserve their dominant influence. Indeed, if Armando Falcon, director of the Office of Federal Housing Enterprise Oversight (OFHEO), had not courageously persisted in exposing Fannie Maes suspect operations, often in the face of congressional hostility, former Fannie Mae President Franklin Raines would still have his job and Fannie Maes shaky finances and fabricated earnings would still be hidden.

Instead of adopting compromise regulations, the government should begin an orderly process of severing all ties with the GSEs. Their most valuable federal privileges are their $2.25 billion lines of credit (for a total of $4.5 billion) with the U.S. Treasury and the Federal Reserves authority to buy their debt as part of its open market operations. These privileges allow Fannie Mae and Freddie Mac to claim an implicit federal guarantee of their outstanding obligations, which in turn makes them a popular investment for many major institutions, pension funds, and even foreign central banks. By lowering their borrowing costs and giving them access to subsidized credit, this implicit guarantee has allowed them to out-compete their private sector rivals and establish a monopoly presence in the financial markets.
PAGE #678 - Losing their sense of purpose

Losing Their Sense of Purpose Fannie Mae was created in 1936 during the Great Depression to provide a secondary market to encourage greater use of the innovative long-term, fixed-rate, level-payment, fully amortized mortgages that the newly created Federal Housing Administration (FHA) was insuring against loss of principal and interest. The exercise was a success, and this type of innovative mortgage became the standard means of financing the postwar housing boom that raised the homeownership rate from 44 percent in 1940 to 69 percent by 2004. By the 1970s, the basic purpose of the GSEs had shifted to the role of adding more funds to the housing market by connecting prospective homebuyers with major capital markets. To accomplish this
goal, the GSEs use their preferred credit rating to borrow in major financial markets and use the funds raised to acquire residential mortgages from brokers and other mortgage originators, earning profits and covering expenses on the difference in the interest rates earned and paid. The GSEs also package mortgages acquired from originators into pass through securities that are collateralized with qualified residential mortgages. Payments of principal and interest made by the homeowners are then passed through to the investors holding the securities.

Over much of this period, Fannie Mae and the federal government were minor players in the process. By 1965, the homeownership rate had risen to 63 percent, but Fannie Mae and the other sources of federal mortgage credit support accounted for only 6 percent of outstanding residential mortgages. Savings and loan associations, savings and commercial banks, and life insurance companies accounted for most of the rest. Fannie Mae was restructured as a federally chartered corporation in 1968, and its shares were sold to the public a year later. Initially, Fannie Mae was limited to investing in residential mortgages insured by the FHA or guaranteed by the Veterans Administration so as to maintain its public purpose of assisting entry-level homebuyers. A few years after Fannie Maes privatization, Congress authorized the creation of another government-sponsored mortgage credit facility, Freddie Mac, as a federally chartered corporation to provide a secondary market for the conventional mortgages written by savings and loans and other lenders and brokers. Over time, the mandates guiding the FNMA and FHLMC were liberalized, and the scope of their activity was expanded substantially to the point that they and the other federal housing finance programs now account for more than half the residential mortgage market in the United States.

Although structured as private companies, both the FNMA and the FHLMC operate with valuable federal privileges that give them a significant competitive advantage over other participants in the housing finance market. In particular, they are exempt from state and local income taxes; more important, they have exclusive access to lines of credit from the U.S. Treasury and the U.S. Federal Reserve System. Under current law, each is permitted to borrow up to $2.25 billion from the Treasury, and the Federal Reserve is authorized to purchase their debt as part of any open market operation. Although neither of these privileges has ever been requested, the fact that the federal government is authorized to assist these GSEs is interpreted by investors as an implied federal guarantee of their debt, and this interpretation allows them to borrow at interest rates well below those paid by private companies with the best credit ratings and only slightly higher than what the Treasury pays on its own full faith and credit debt.

As quasi-private companies obligated to enrich their shareholders with ever-increasing earnings and dividends, and operating with an implicit federal interest rate subsidy as well as a federal mandate to promote homeownership, Fannie Mae and Freddie Mac had every reason and opportunity to grow rapidly. By the 1980s and early 1990s, they dominated the housing finance market. By parlaying their subsidized borrowing advantage into lower-rate mortgage lending, they gradually pushed life insurance companies and commercial banks out of the less profitable residential mortgage market and squeezed the earnings of the already wobbly savings and loans, which by law could invest only in residential mortgages. While homebuyers benefited from slightly lower borrowing costs, financial markets were put at greater risk as more and more of the housing finance system was concentrated in the hands of two
highly leveraged, unsupervised, federally chartered financial institutions.
PAGE #682 - Concerns met with public relations

Concerns Met with Public Relations Many policymakers soon recognized the risk to financial markets posed by such a concentration of market share. In the late 1970s and early 1980s, Fannie Mae made a bad bet on interest rate trends that left the institution technically insolvent as its net worth briefly turned negative, raising fears of a financial collapse. Fannie Mae later recovered when the Federal Reserves monetary policy of the early 1980s led to dramatic declines in market interest rates, restoring the value of Fannie Maes loan portfolio. After implementing new financial controls and investment practices, Fannie Mae came out of its neardeath experience as a better-managed operation. Nonetheless, the possibility that it might fail could disrupt financial markets in general and mortgage markets in particular. This, in turn, led to calls to limit its size, scope, and privileges. In response to growing concern and criticism, Fannie Mae adopted an aggressive public relations program that was quickly copied by the Federal Home Loan Banks (FHLBs) and Freddie Mac, the other housing-related GSEs. With executive pay, bonuses, expense accounts, and other top management perks, and by promoting its stock to Wall Street analysts, Fannie Mae presents itself to investors as a hard-charging, profit-minded growth company.

Wall Street brokerage firms and investment banks earn more than $100 million in fees annually from the issuance of Fannie Mae and Freddie Mac debt instruments and mortgage-backed securities. Wall Street returns the favor with enthusiastic endorsements of their role in the economy and financial markets. However, when protecting itself against the few congressional reformers and marketplace competitors and selling its debt to foreign central banks at favorable interest rates, Fannie Mae poses as a public-purpose government entity that helps Americas disadvantaged to become homeowners. As part of this effort to garner influence, Fannie Mae has hired lobbyists by the score and created the Fannie Mae Foundation, which over the past five years has pumped $500 million into highly visible and heavily promoted local projects and grants. In the process of spreading its message, every interest group is cultivated.

Even Americas college professors became objects of Fannie Maes affection when it created and financed two academic journals - Housing Policy Debate and Journal of Housing Research - that focus (with a notable exception) on a wide range of housing issues. The exception is that both journals generally avoid discussing the GSEs role in the mortgage market and whether they make much of a difference. With many professors still confronting a publish-or-perish environment in pursuit of tenure and promotion, common sense argues against irritating a wealthy and influential publisher. As a result, academia has not been a reliable source of dispassionate inquiry into the GSEs role in Americas housing market.
PAGE #685 - Is Fannie Mae really needed?
Is Fannie Mae Really Needed? However, independent analysts have looked into the matter and have found little evidence that the FNMA, FMLMC, and FHLB make much of a difference in how many new homes are built or how many Americans become homeowners. In fact, a broad review of the evidence accumulated in the postwar era suggests that their impact on homeownership is inconsequential. Specifically, in 1965, when the GSE presence in the mortgage market was slightly above 6 percent, Americas homeownership rate was 63.3 percent. In 1990, after outstanding residential mortgage credit had expanded more than tenfold from $220.8 billion in 1965 to $2.6 trillion in 1990 and after the federal and GSE presence in the residential mortgage market had grown from 6 percent in 1965 to 48 percent in 1990, Americas homeownership rate was at 63.9 percent - virtually identical to the rate 25 years earlier. Expressed another way, the $1.24 trillion increase in federal and GSE involvement in the mortgage market was associated with an increase of less than 0.6 percentage points in the homeownership rate. In this regard, it is worth noting that Americas greatest surge in homeownership took place between 1946 and 1960, when homeownership jumped from the mid-40 percent range at the end of World War II to 62 percent in 1960, when the FNMAs activity was still limited and the FHLMC did not yet exist.

From 1990 to 2003, GSE involvement in outstanding mortgage credit expanded substantially, from $1.0 trillion in mortgages in 1990 to $3.4 trillion in 2003. During the same 13 years, total outstanding residential mortgage loans increased almost threefold, from $2.6 trillion to $7.3 trillion, and the homeownership rate increased from almost 64 percent in 1990 to 68 percent in 2003. However, this does not mean the GSEs finally made a difference. Credit instead goes to the Federal Reserves anti-inflation, pro-growth monetary policies, which drove down the AAA corporate bond rate from 9.32 percent in 1990 to 5.67 percent in 2003 and the home mortgage rate from 10.05 percent in 1990 to 5.80 percent in 2003. With the mortgage rate falling to half of its peak level, housing demand soared as monthly mortgage payments fell accordingly. Housing markets in the 1990s also benefited from the significant rise in employment and incomes over the decade, which allowed more families to accumulate the money for a down payment and qualify for a mortgage. As a consequence of these favorable macroeconomic developments, homeownership rose to record levels, independent of anything Fannie Mae and Freddie Mac did over the same period.

While these anecdotes are less than perfect proof of FNMA ineffectiveness, more comprehensive studies by the Federal Reserve Board and the Congressional Budget Office have come to similar conclusions. In 2003, Wayne Passmore, a Federal Reserve economist, wrote that the GSEs implicit subsidy does not appear to have substantially increased home-ownership or homebuilding and argued that the GSEs activity slightly lowered mortgage rates for some homeowners. More recently, an article in the prestigious Journal of Economic Perspectives contends that it does not appear that the companies activities have appreciably affected the rate of homeownership in the United States and cites several other studies that support that view.

One reason for the tenuous connection between a general increase in mortgage credit and increased homeownership is that beyond some point, an increase in mortgage credit availability mostly makes itself felt in higher loan-to-value ratios (lower down payments), higher home prices, and/or a diversion of mortgage credit to non-housing investments. As the early postwar record indicates, existing private
credit markets were perfectly capable of driving the homeownership rate into the mid-60 percent range. However, as more credit is forced into the system through the creation and expansion of subsidized GSEs, mortgage interest rates may fall somewhat, but this encourages private financial institutions that provide housing credit to look elsewhere for investments with better yields. While the slightly lower interest rates encourage and/or allow some moderate-income borrowers on the margin of eligibility to become homeowners, this stimulative effect may be partly or wholly offset by a credit-induced rise in home prices in excess of the growth in personal incomes.

While finding ways to assist the marginal buyer to become a homeowner has been one of the federal governments important public policy goals for much of the postwar era, relying on the GSEs to help achieve that goal is not an effective way to boost homeownership. As currently configured, the GSEs do not target the loans of marginal buyers but rather provide secondary market support to qualifying or conforming mortgages, most of which are secured by property owned by middle-income and higherincome households that are capable of buying and borrowing without federally sponsored support. Despite its claims to the contrary, Fannie Maes basic operating procedures do not target any particular type of buyer/borrower. Indeed, evidence from the federal government indicates that Fannie Mae and Freddie Mac are in fact neglecting first-time homebuyers in comparison to the entire private conventional mortgage market. Between 1999 and 2003, 9.0 percent of the conventional conforming loans (the type the GSEs are authorized to buy) made by the private mortgage market were to firsttime minority homebuyers. By contrast, only 4.7 percent of Fannie Mae loans and 3.5 percent of Freddie Mac loans over the same period were to first-time minority homebuyers.

Although one could give Fannie Mae the benefit of the doubt and view this failing as simply one of neglect, other actions by Fannie Mae in late 2004 and early 2005 suggest both that the neglect may be willful and that it reflects the companys bias against prospective lower-income, entry-level homebuyers. In January 2005, coalitions of low-income housing advocacy groups published reports that challenged the value of policies promoting and encouraging homeownership among poor and moderateincome neighborhoods, arguing that homeowner benefits may have been overstated and that rentals, public housing and other options may make better economic sense. Although these organizations had previously published a number of papers and reports expressing skepticism about the value of homeownership, the two most recent reports, published in January 2005, were funded by the Fannie Mae Foundation. Suspiciously, the release of these anti-homeownership reports by the Fannie Mae-assisted advocacy groups was followed one month later by the release of a new rule from the Department of Housing and Urban Development (HUD) requiring Fannie Mae and Freddie Mac to improve mortgage availability to minority and moderate-income-buyers. In effect, while Fannie Mae was conducting a massive and costly public relations campaign to present itself as the benefactor of moderate-income and minority homebuyers, it was funding studies that undermined that very goal. In a town awash with insincerity, the ambidexterity of Fannie Maes principles is in a class by itself.

As for the GSEs ultimate value, competitive improvements in the residential mortgage market have further undermined the connection between mortgage credit and homeownership as the availability of second mortgages on attractive terms and the refinancing of existing first mortgages, combined with the provisions of federal tax law, have encouraged the redirection of mortgage credit to nonreal estate purchases.
With mortgage interest payments still deductible from income for state and federal tax purposes, more and more households use mortgage credit obtained through a mortgage refinancing to buy a car, conduct home improvements, consolidate personal debt, or pay for a college education because the interest payment that would otherwise be incurred on debt accumulated directly for these reasons such as a car loan from a dealer or a student loan from a bank - is not tax-deductible. In part, this privileged use of debt, combined with substantial home price inflation, explains why outstanding residential mortgage credit has nearly tripled since 1990 while housing production and homeownership have expanded at a much slower pace.
PAGE #692 - Understanding the real problem

Understanding the Real Problem With little compelling evidence to indicate that four and a half decades of intrusive GSE activity has made much of a difference in homeownership rates, housing production, or helping the marginal buyer to become a homeowner, one has to wonder whether the costs and risks associated with these enterprises are justified. Regrettably, from the extensive discussions, hearings, proposals, and counterproposals, it appears that Congress and the White House gave little thought to asking whether these entities should exist in the first place or why these for-profit entities should continue to enjoy the extraordinary federal privileges that allow them to maintain their monopoly status at the potential expense of the taxpayers.

The evidence reveals that Fannie Maes management team appears to be the chief beneficiary of the federal privileges and the accounting irregularities that were recently uncovered. For example, in 2003, 749 members of Fannie Maes management team received a staggering $65.1 million in bonuses, a portion of which was attributable to the overstated earnings that followed from the accounting irregularities. Over the past five years, the top 20 Fannie Mae executives reportedly received combined bonuses of $245 million. This disconnect between reward and mission suggests that any reconciliation with the Securities and Exchange Commission should also require that the FNMAs management return their bonuses to a fund administered by a bona fide not-for-profit entity, such as Habitat for Humanity, for the purpose of assisting prospective homebuyers of modest means.

Although managements bonuses have generated most of the headlines, the real cost to the nation is not the tawdry looting of the company by its top management team. The real problem is the concentration of risk in the hands of two massive and privileged companies that now dominate Americas housing finance markets.

Ironically, Fannie Maes management has attempted to use the prospect of such risk to protect itself from better government oversight. In response to the U.S. Treasurys effort to improve oversight, former FNMA President Frank Raines admitted in a letter to U.S. Treasury Secretary John Snow that financial market instability could occur if even the slightest concern about the FNMAs operations were openly discussed:
From the beginning of our discussions, you and I have agreed to avoid disrupting the capital markets by indicating a wish to change Fannie Maes charter, status, or mission.
PAGE #696 - What should be done

Lest one think that such an occurrence would be a distant possibility, the record reveals that federally sponsored financial institutions, including those that the federal government closely regulates and insures, have a knack of frequently exploding in hugely horrific and costly ways. Since the mid-1980s, massive losses have occurred in the federal Farm Credit System, the Federal Deposit Insurance Corporation, and the Federal Savings and Loan Insurance Corporation. Worse, the heavily regulated and supposedly closely supervised savings and loan industry collapsed more than a decade ago, and repairing the residual damage cost the U.S. taxpayers $130 billion.

What Should Be Done Ideas have consequences, as the saying goes, but the process is seldom instantaneous. In June 1990, echoing earlier HUD recommendations, a Heritage Foundation research fellow recommended that Fannie Mae cease payment of dividends to shareholders, so that all earnings can be applied to reserve accumulation. In January 2005, nearly a decade and a half later, amidst the worst financial scandal in the companys history, Fannie Mae announced that it would cut its dividend in half.

The Bush Administration, through the leadership at the U.S. Treasury and OFHEO, did an excellent job of exposing the corruption in the GSEs and setting in motion an effective process of improvement. In both the FHLMC and the FNMA, problematic leadership has been forced to resign and the companies boards of directors have been required to make overdue changes in corporate governance. The January 2005 FNMA agreement to cut its dividend to build reserves will add stability to the system.

But much more needs to be done, and most of the responsibility will fall on Congress because the laws governing the GSEs are flawed and need to be changed. The proposals endorsed by the House Committee on Financial Services do not go nearly far enough, and the White House has expressed concern with the timid reform package under consideration.

Enhanced regulations have attracted the most support, and the House Committee on Financial Services has proposed changes in how the GSEs are regulated, but a regulatory approach to GSE problems could easily become useless and counterproductive. With substantial evidence suggesting that the GSEs provide little or no benefit to society, trying to prop them up with new regulations makes little sense. The latest congressional strategy essentially compels taxpayers to bear the risk of a new regulatory regime that would perpetuate the commanding market position of these ineffective co-monopolists.
However, the greater risk is not that additional regulation of the GSEs will render them merely useless, but that it will render them both useless and dangerous. As past practices reveal, it is likely that Fannie Mae and Freddie Mac will soon co-opt the regulators as they have done so adeptly in the past. The Fannie Mae Foundations $500 million of goodwill spending will buy the company helpful and influential supporters by the trainload. One merely needs to read the transcript of a recent congressional hearing for a sense of the loyal following that Fannie Mae has assembled in Congress.

To correct the situation, Congress should: End all of Fannie Maes and Freddie Macs federal privileges. It would be better for all if the government began an orderly process of severing all of its ties with the GSEs invested in the residential mortgage market. Immediately eliminate the Federal Reserves authority to buy their debt as part of its open market operations. Phase out their U.S. Treasury credit lines over five years. Phasing out Fannie Maes and Freddie Macs $2.25 billion credit lines with the U.S. Treasury in annual increments of $500 million would give them the opportunity to reduce their holdings of residential mortgages in an orderly manner. The profits from these investments depend largely on their ability to borrow at subsidized rates. This plan would also leave them with skilled workforces that could then concentrate on securing residential mortgages in fair and open competition with new entrants from the private sector, which would be attracted to the market by the level playing field. Limit diversification until privatization is complete. In the event that the GSEs choose to use the opportunity to reform themselves by diversifying their investment portfolios beyond the residential mortgage market, such diversification should be contingent upon the immediate termination of these privileges to avoid the cross-subsidization of new lines of business by federally supported profits, as occurred during the recent de-federalization of Sallie Mae (the Student Loan Marketing Corporation).
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define loan to value, interest, and other mortgage math terms; be able to calculate interest; and be able to complete other mortgage math calculations.
PAGE #705 - Loan to value

Mortgage Math and Calculations
Loan to value The loan-to-value (LTV) ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. For instance, if a borrower wants $130,000 to purchase a house worth $150,000, the LTV ratio is $130,000/$150,000 or 87%. Loan to value is one of the key risk factors that lenders assess when qualifying borrowers for a mortgage. The risk of default is always at the forefront of lending decisions, and the likelihood of a lender absorbing a loss in the foreclosure process increases as the amount of equity decreases. Therefore, as the LTV ratio of a loan increases, the qualification guidelines for certain mortgage programs become much more strict. Lenders can require borrowers of high LTV loans to buy mortgage insurance to protect the lender from the buyer default, which increases the costs of the mortgage.

The valuation of a property is typically determined by an appraiser, but there is no greater measure of the actual real value of one property than an arms-length transaction between a willing buyer and a willing seller. Typically, banks will utilize the lesser of the appraised value and purchase price if the purchase is "recent." What constitutes recent varies by institution but is generally between 12 years.

Low LTV ratios (below 80%) carry with them lower rates for lower-risk borrowers and allow lenders to consider higher-risk borrowers, such as those with low credit scores, previous late payments in their mortgage history, high debt-to-income ratios, high loan amounts or cash-out requirements, insufficient reserves and/or no income documentation. Higher LTV ratios are primarily reserved for borrowers with higher credit scores and a satisfactory mortgage history. The full financing, or 100% LTV, is reserved for only the most credit-worthy borrowers.

In the United States, conforming loans that meet Fannie Mae and Freddie Mac underwriting guidelines are limited to an LTV ratio that is less than or equal to 80%. Conforming loans above 80% are subject to private mortgage insurance. For properties with more than one mortgage lien, such as stand-alone seconds and home equity lines of credit (HELOC), the individual mortgages are also subject to combined loan to value (CLTV) criteria. The LTV for the stand-alone seconds and HELOCs would simply be their respective loan balance as a percentage of the total appraised value of real property. However, in order to measure the riskiness of the borrower, one should look at all outstanding mortgage debt as a percentage of the total appraised value of real property (CLTV).
PAGE #709 - Combined loan to value

Combined Loan To Value: (CLTV) ratio Combined Loan To Value (ratio) (CLTV) is the proportion of loans (secured by a property) in relation to its value.
The term "Combined Loan To Value" adds additional specificity to the basic Loan to Value which simply indicates the ratio between one primary loan and the property value. When "Combined" is added, it indicates that additional loans on the property have been considered in the calculation of the percentage ratio. The aggregate principal balance(s) of all mortgages on a property divided by its appraised value or Purchase Price, whichever is less. Distinguishing CLTV from LTV serves to identify loan scenarios that involve more than one mortgage. For example, a property valued at $100,000 with a single mortgage of $50,000 has an LTV of 50%. A similar property with a value of $100,000 with a first mortgage of $50,000 and a second mortgage of $25,000 has an aggregate mortgage balance of $75,000. The CLTV is 75%. Combined Loan to Value is an amount in addition to the Loan to Value, which simply represents the first position mortgage or loan as a percentage of the property's value.
PAGE #710 - Interest

Interest Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed money, or, money earned by deposited funds. Assets that are sometimes lent with interest include money, shares, consumer goods through hire purchase, major assets such as aircraft, and even entire factories in finance lease arrangements. The interest is calculated upon the value of the assets in the same manner as upon money. Interest can be thought of as "rent of money". For example, if you want to borrow money from the bank, there is a certain rate you have to pay according to how much you want loaned to you.

Interest is compensation to the lender for forgoing other useful investments that could have been made with the loaned asset. These forgone investments are known as the opportunity cost. Instead of the lender using the assets directly, they are advanced to the borrower. The borrower then enjoys the benefit of using the assets ahead of the effort required to obtain them, while the lender enjoys the benefit of the fee paid by the borrower for the privilege. The amount lent, or the value of the assets lent, is called the principal. This principal value is held by the borrower on credit. Interest is therefore the price of credit, not the price of money as it is commonly believed to be. The percentage of the principal that is paid as a fee (the interest), over a certain period of time, is called the interest rate.

History of interest Interest is the price paid for the use of savings over a given period of time. In ancient biblical Israel, it was against the Law of Moses to charge interest on private loans. During the Middle Ages, time was considered to be property of God. Therefore, to charge interest was considered to be commerce with God's property. Also, St. Thomas Aquinas, the leading theologian of the Catholic Church, argued that the charging of interest is wrong because it amounts to "double charging", charging for both the thing and the use of the thing. The church regarded this as a sin of usury; nevertheless, this rule was never strictly obeyed and eroded gradually until it disappeared during the industrial revolution.

Usury has always been viewed negatively by the Roman Catholic Church. The Second Lateran Council condemned any repayment of a debt with more money than was originally loaned, the Council of Vienna explicitly prohibited usury and declared any legislation tolerant of usury to be heretical, and the first scholastics reproved the charging of interest. In the medieval economy, loans were entirely a consequence of necessity (bad harvests, fire in a workplace) and, under those conditions, it was considered morally reproachable to charge interest. Interest has often been looked down upon in Islamic civilization as well for the same reason for which usury was forbidden by the Catholic Church, with most scholars agreeing that the Qur'an explicitly forbids charging interest. Medieval jurists therefore developed several financial instruments to encourage responsible lending.

In the Renaissance era, greater mobility of people facilitated an increase in commerce and the appearance of appropriate conditions for entrepreneurs to start new, lucrative businesses. Given that borrowed money was no longer strictly for consumption but for production as well, interest was no longer viewed in the same manner. The School of Salamanca elaborated on various reasons that justified the charging of interest: the person who received a loan benefited, and one could consider interest as a premium paid for the risk taken by the loaning party. There was also the question of opportunity cost, in that the loaning party lost other possibilities of using the loaned money. Finally and perhaps most originally was the consideration of money itself as merchandise, and the use of one's money as something for which one should receive a benefit in the form of interest. Martn de Azpilcueta also considered the effect of time. Other things being equal, one would prefer to receive a given good now rather than in the future. This preference indicates greater value. Interest, under this theory, is the payment for the time the loaning individual is deprived of the money.

Economically, the interest rate is the cost of capital and is subject to the laws of supply and demand of the money supply. The first attempt to control interest rates through manipulation of the money supply was made by the French Central Bank in 1847. The first formal studies of interest rates and their impact on society were conducted by Adam Smith, Jeremy Bentham and Mirabeau during the birth of classic economic thought. In the early 20th century, Irving Fisher made a major breakthrough in the economic analysis of interest rates by distinguishing nominal interest from real interest. Several perspectives on the nature and impact of interest rates have arisen since then. Among academics, the more modern views of John Maynard Keynes and Milton Friedman are widely accepted.

The latter half of the 20th century saw the rise of interest-free Islamic banking and finance, a movement which attempts to apply religious law developed in the medieval period to the modern economy. Some entire countries, including Iran, Sudan, and Pakistan, have taken steps to eradicate interest from their financial systems entirely. Rather than charging interest, the interest-free lender charges a "fee" for the service of lending. As any such fee can be shown to be mathematically identical to an interest charge, the distinction between "interest-free" banking and "for-interest" banking is merely one of semantics.
PAGE #717 - Simple interestSimple interest

Simple interest is calculated only on the principal amount, or on that portion of the principal amount which remains unpaid. The amount of simple interest is calculated according to the following formula:
where r is the period interest rate (I/m), B0 the initial balance and m the number of time periods elapsed.
PAGE #718 - Simple interest

To calculate the period interest rate r, one divides the interest rate I by the number of periods m. For example, imagine that a credit card holder has an outstanding balance of $2500 and that the simple interest rate is 12.99% per annum. The interest added at the end of 3 months would be,
and he would have to pay $2581.19 to pay off the balance at this point.

If instead he makes interest-only payments for each of those 3 months at the period rate r, the amount of interest paid would be,
His balance at the end of 3 months would still be $2500.

In this case, the time value of money is not factored in. The steady payments have an additional cost that needs to be considered when comparing loans. For example, given a $100 principal: Credit card debt where $1/day is charged: 1/100 = 1%/day = 7%/week = 365%/year. Corporate bond where the first $3 are due after six months, and the second $3 are due at the year's end: (3+3)/100 = 6%/year. Certificate of deposit (GIC) where $6 is paid at the year's end: 6/100 = 6%/year.

There are two complications involved when comparing different simple interest bearing offers.
1. When rates are the same but the periods are different a direct comparison is inaccurate because of the time value of money. Paying $3 every six months costs more than $6 paid at year end so, the 6% bond cannot be 'equated' to the 6% GIC. 2. When interest is due, but not paid, does it remain 'interest payable', like the bond's $3 payment after six months or, will it be added to the balance due? In the latter case it is no longer simple interest, but compound interest. A bank account offering only simple interest and from which money can freely be withdrawn is unlikely, since withdrawing money and immediately depositing it again would be advantageous.
PAGE #722 - Compound interest

Compound interest Compound interest is very similar to simple interest; however, with time, the difference becomes considerably larger. This difference is because unpaid interest is added to the balance due. Put another way, the borrower is charged interest on previous interest. Assuming that no part of the principal or subsequent interest has been paid, the debt is calculated by the following formulas: Icomp = B0 . [(1+r)n-1] Bn = B0 + Icomp where Icomp is the compound interest, B0 the initial balance, Bn the balance after n periods (where n is not necessarily an integer) and r the period rate.

For example, if the credit card holder above chose not to make any payments, the interest would accumulate

So, at the end of 3 months the credit card holder's balance would be $2582.07 and he would now have to pay $82.07 to get it down to the initial balance. Simple interest is approximately the same as compound interest over short periods of time, so frequent payments are the best (least expensive) payment strategy. A problem with compound interest is that the resulting obligation can be difficult to interpret. To simplify this problem, a common convention in economics is to disclose the interest rate as though the term were one year, with annual compounding, yielding the effective interest rate. However, interest rates in lending are often quoted as nominal interest rates (i.e., compounding interest uncorrected for the frequency of compounding).

Loans often include various non-interest charges and fees. One example are points on a mortgage loan in the United States. When such fees are present, lenders are regularly required to provide information on the 'true' cost of finance, often expressed as an annual percentage rate (APR). The APR attempts to express the total cost of a loan as an interest rate after including the additional fees and expenses, although details may vary by jurisdiction. In economics, continuous compounding is often used due to its particular mathematical properties.
PAGE #726 - Fixed and floating rates

Fixed and floating rates Commercial loans generally use simple interest, but they may not always have a single interest rate over the life of the loan. Loans for which the interest rate does not change are referred to as fixed rate loans. Loans may also have a changeable rate over the life of the loan based on some reference rate (such as LIBOR and EURIBOR), usually plus (or minus) a fixed margin. These are known as floating rate, variable rate or adjustable rate loans.
PAGE #727 - Market interest rates

Market interest rates There are markets for investments (which include the money market, bond market, as well as retail financial institutions like banks) set interest rates. Each specific debt takes into account the following factors in determining its interest rate.
PAGE #728 - Opportunity cost

Opportunity cost This encompasses any other use to which the money could be put, including lending to others, investing elsewhere, holding cash (for safety, for example), and simply spending the funds.
PAGE #729 - Inflation

Inflation Since the lender is deferring his consumption, he will at a bare minimum, want to recover enough to pay the increased cost of goods due to inflation. Because future inflation is unknown, there are three tactics. Charge X% interest 'plus inflation'. Many governments issue 'real-return' or 'inflation indexed' bonds. The principal amount or the interest payments are continually increased by the rate of inflation.
PAGE #730 - Inflation
Decide on the 'expected' inflation rate. This still leaves both parties exposed to the risk of 'unexpected' inflation. Allow the interest rate to be periodically changed. While a 'fixed interest rate' remains the same throughout the life of the debt, 'variable' or 'floating' rates can be reset. There are derivative products that allow for hedging and swaps between the two.
PAGE #731 - Default

Default There is always the risk the borrower will become bankrupt, abscond or otherwise default on the loan. The risk premium attempts to measure the integrity of the borrower, the risk of his enterprise succeeding and the security of any collateral pledged. For example, loans to developing countries have higher risk premiums than those to the US government due to the difference in creditworthiness. An operating line of credit to a business will have a higher rate than a mortgage. The creditworthiness of businesses is measured by bond rating services and individual's credit scores by credit bureaus. The risks of an individual debt may have a large standard deviation of possibilities. The lender may want to cover his maximum risk, but lenders with portfolios of debt can lower the risk premium to cover just the most probable outcome.
PAGE #732 - Deferred consumption

Deferred consumption Charging interest equal only to inflation will leave the lender with the same purchasing power, but he would prefer his own consumption sooner rather than later. There will be an interest premium of the delay. He may not want to consume, but instead would invest in another product. The possible return he could realize in competing investments will determine what interest he charges.
PAGE #733 - Length of time

Length of time Shorter terms have less risk of default and inflation because the near future is easier to predict. Broadly speaking, if interest rates increase, then investment decreases due to the higher cost of borrowing (all else being equal). Interest rates are generally determined by the market, but government intervention - usually by a central bank- may strongly influence short-term interest rates, and is used as the main tool of monetary policy. The central bank offers to buy or sell money at the desired rate and, due to their control of certain tools (such as, in many countries, the ability to print money) they are able to influence overall market interest rates. Investment can change rapidly in response to changes in interest rates, affecting national income, and, through Okun's Law, changes in output affect unemployment.
PAGE #734 - Open market operations in the US

Open market operations in the United States
The Federal Reserve (Fed) implements monetary policy largely by targeting the federal funds rate. This is the rate that banks charge each other for overnight loans of federal funds. Federal funds are the reserves held by banks at the Fed. Open market operations are one tool within monetary policy implemented by the Federal Reserve to steer short-term interest rates. Using the power to buy and sell treasury securities, the Open Market Desk at the Federal Reserve Bank of New York can supply the market with dollars by purchasing Tnotes, hence increasing the nation's money supply. By increasing the money supply or Aggregate Supply of Funding (ASF), interest rates will fall due to the excess of dollars banks will end up with in their reserves. Excess reserves may be lent in the Fed funds market to other banks, thus driving down rates.
PAGE #735 - Interest rates and credit risk

Interest rates and credit risk It is increasingly recognized that the business cycle, interest rates and credit risk are tightly interrelated. The Jarrow-Turnbull model was the first model of credit risk which explicitly had random interest rates at its core. Lando (2004), Darrell Duffie and Singleton (2003), and van Deventer and Imai (2003) discuss interest rates when the issuer of the interest-bearing instrument can default.
PAGE #736 - Money and inflation

Money and inflation Loans, bonds, and shares have some of the characteristics of money and are included in the broad money supply. The government institution can affect the markets to alter the total of loans, bonds and shares issued. Generally speaking, a higher real interest rate reduces the broad money supply. Through the quantity theory of money, increases in the money supply lead to inflation. This means that interest rates can affect inflation in the future.
PAGE #737 - Monthly payment calculation

MONTHLY PAYMENT CALCULATION CALCULATING A MONTHLY PAYMENT ON A FIXED RATE LOAN, INCLUDING PRINCIPAL AND INTEREST USING AN AMORTIZATION FACTOR SCHEDULE. THE AMOUNT OF THE LOAN, INTEREST RATE AND TERM OF THE LOAN ARE REQUIRED TO USE THIS TABLE. Click here to download a copy of payment factors in .pdf. The schedule gives factors to be used per $1,000.00 of the loan amount; therefore the loan amount must be divided by 1000 to make the factors relevant. The grid lists interest rates in percent and the terms (or lengths) of the loan in years. Follow the interest rate column down to the correct rate and then follow that row to the right to find the factor under the correct term.
For example, to determine the monthly payment for a 30-year loan at an interest rate of 9.25 %, find 9.250 in the interest column and the first factor in that row is the 30 Year column. The factor is 8.23 per $1000 of the loan. Using a loan amount of $45,250.00, you would divide this amount by 1000. 45,250 1000 = 45.25. Next, you would multiply 45.25 (the number of thousands) by $8.23 (the factor) to calculate the monthly payment. 45.25 X $8.23 = $372.4075.

Round up the result to the nearest penny. That would make the monthly payment $372.41. (Note: Adjusting the final loan payment covers inaccuracies caused by rounding.) The next step in determining the total amount the borrower would pay over the course of the 30 years would be to multiply the monthly payment by the number of months in the loan. In this case, $372.41 (monthly payment) multiplied by 360, the number of months (30 years X 12). $372.41 X 360 = $134,067.60.
PAGE #740 - Amortization calculation

AMORTIZATION CALCULATION Lets continue by using the same sample loan: $45,250.00 loan amount with a 30 year fixed rate at 9.25% interest. To calculate the interest, the mortgage amount is multiplied by the interest rate. This figure represents the interest that would be paid in a year. (Loan X IR = Interest) $45,250.00 (loan amount) X .0925 (IR) = $4185.63 (yearly interest). By dividing yearly interest by 12, you can determine the monthly interest. $4185.63 12 = $348.80 (monthly interest). This is the interest paid for the first month. The remainder of the payment applies to the principal. $372.41 (monthly payment) - $348.80 (interest) = $23.61 (principal paid). The new principal balance is $45,250 - $23.61 or $45,226.39.

Next we will calculate and see how much interest and principal are paid on the second payment. To determine this calculation, we will use the principal balance after the first payment, which is $45,226.39 as we calculated above. Using the same method; (Remember, we have a new principal balance). $45,226.39 X .0925 (yearly interest rate) = $4183.44 (yearly interest).
$4183.44 (yearly interest) 12 = $348.62 (monthly interest). $372.41 (monthly payment) - $348.62 (interest) = $23.79 (principal paid). The principal balance after the second payment is $45,226.39 - $23.79 or $45,202.60.

The third payment calculations use a new principal balance of $45,202.60 and follow the same formula. In chart form: Loan amount: $45,250.00 Term: 30 year fixed rate Interest rate: 9.25% Monthly payment: $372.41
Payment 1 2
Principal $23.61 $23.79
Interest $348.80 $348.62
New Balance $45,226.39 $45,202.60
We have just created the beginning of an amortization table. Click here to download a copy of payment factors in .pdf.
PAGE #743 - Annual percentage rate

Annual percentage rate The terms annual percentage of rate (APR), nominal APR, and effective APR (EAR) describe the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. It is a finance charge expressed as an annual rate. Those terms have formal, legal definitions in some countries or legal jurisdictions, but in general: The nominal APR is the simple-interest rate (for a year). The effective APR is the fee + compound interest rate (calculated across a year).

The nominal APR is calculated as: the rate, for a payment period, multiplied by the number of payment periods in a year. However, the exact legal definition of "effective APR", or EAR in short, can vary greatly in each jurisdiction, depending on the type of fees included, such as participation fees, loan origination fees, monthly service charges, or late fees. The effective APR has been called the "mathematically-true" interest rate for each year. The computation for the effective APR, as the fee + compound interest rate, can also vary depending on whether the up-front fees, such as origination or participation fees, are added to the entire amount, or
treated as a short-term loan due in the first payment. When start-up fees are paid as first payment(s), the balance due might accrue more interest, as being delayed by the extra payment period(s).

In some areas, the annual percentage rate (APR) is the simplified counterpart to the effective interest rate that the borrower will pay on a loan. When not using the term "effective APR", the use of "APR" is an early term for nominal APR. In many countries and jurisdictions, lenders (such as banks) are required to disclose the "cost" of borrowing in some standardized way as a form of consumer protection. APR is intended to make it easier to compare lenders and loan options. The APR is likely to differ from the "note rate" or "headline rate" advertised by the lender, due to the addition of other fees that may need to be included in the APR. APRs can be found by asking the lender or by reading the appropriate section in the contract.

In the U.S. lenders are required to disclose the APR before the loan (or credit application) is finalized. Credit card companies can advertise monthly interest rates, but they are required to clearly state the annual percentage rate before an agreement is signed. APR is a term used with regard to deposit accounts as well. However, when dealing with deposit accounts, the annual percentage yield (APY) or annual equivalent rate (AER) is quoted to consumers for comparison purposes.

Multiple definitions of effective APR There are at least three ways of computing effective APR: by compounding the interest rate for each year, without considering fees; origination fees are added to the balance due, and the total amount is treated as the basis for computing compound interest; the origination fees are amortized as a short-term loan. This loan is due in the first payment(s), and the unpaid balance is amortized as a second long-term loan. The extra first payment(s) is dedicated to primarily paying origination fees and interest charges on that portion.

For example, consider a $100 loan which must be repaid after one month, at 5% interest, plus a $10 fee. If the fee is neglected, this loan has a (year-long) effective APR of approximately 79% (1.05^12 =~1.7958). If the $10 fee were considered, the interest increases by 10% ($10/$100) for the month, with the effective APR being approximately 435% (1.15^12 =~5.3502, as 535%-100%=435%). Hence there are at least two possible "effective APRs": 79% and 435%.

Additional considerations Confusion is possible in that if the word "effective" is used separately as meaning "influential" or having a "long-range effect", then the term effective APR will vary as being an expression, rather than a strict legal definition. More confusion is possible in that when APR is treated as an abbreviation for the word "April" (4th month), then the term "effective APR" means "going into effect in April" (as a very common legal definition for the separate word "effective").

Still more confusion is possible in that the compound period affects the calculation of effective APR: for example, monthly compounding is different from daily compounding. Some credit cards compound interest daily even though payments are due monthly.

Certain fees are not considered Some classes of fees are deliberately not included in the calculation of APR. Because these fees are not included, some consumer advocates claim that the APR does not represent the total cost of borrowing. Excluded fees may include: routine one-time fees which are paid to someone other than the lender (such as a real estate attorney's fee) penalties such as late fees or service reinstatement fees without regard for the size of the penalty or the likelihood that it will be imposed.

Lenders argue that the real estate attorney's fee, for example, is a pass-through cost, not a cost of the lending. In effect, they are arguing that the attorney's fee is a separate transaction and not a part of the loan. Consumer advocates argue that this would be true if the customer is free to select which attorney is used. If the lender insists on using a specific attorney however, then the cost should be looked at as a component of the total cost of doing business with that lender. This area is made more complicated by the practice of contingency fees - for example, when the lender receives money from the attorney and other agents to be the one used by the lender. Because of this, U.S. regulators require all lenders to produce an affiliated business disclosure form which shows the amounts paid between the lender and the appraisal firms, attorneys, etc.

Lenders argue that including late fees and other conditional charges would require them to make assumptions about the consumer's behavior - assumptions which would bias the resulting calculation and create more confusion than clarity.

Not a comparable standard Even beyond the non-included cost components listed above, regulators have been unable to completely define which one-time fees must be included and which excluded from the calculation. This leaves the lender with some discretion to determine which fees will be included (or not) in the calculation. Consumers can, of course, use the nominal interest rate and any costs on the loan (or savings account) and compute the APR themselves, for instance using one of the calculators on the internet.
PAGE #755 - Fees

In the example of a mortgage loan, the following kinds of fees are: Generally included: Points Prepaid interest Origination fees including loan processing, underwriting and document preparation Attorney and notary fees Closing agent's document preparation fees Private mortgage insurance (PMI)
PAGE #756 - Fees

Sometimes included: Application fees Life insurance Generally not included: Appraisal Home-inspection Credit report costs Title fee

The discretion that is illustrated in the "sometimes included" column even in the highly regulated U.S. home mortgage environment makes it difficult to simply compare the APRs of two lenders. Note: U.S. regulators generally require a lender to use the same assumptions and definitions in their calculation of APR for each of their products even though they cannot force consistency across lenders. With respect to items that may be sold with vendor financing, for example, automobile leasing, the notional cost of the good may effectively be hidden and the APR subsequently rendered meaningless. An example is a case where an automobile is leased to a customer based on a "manufacturer's suggested retail price" with a low APR: the vendor may be accepting a lower lease rate as a trade-off against a higher sale price.

Had the customer self-financed, a discounted sales price may have been accepted by the vendor; in other words, the customer has received cheap financing in exchange for paying a higher purchase price, and the quoted APR understates the true cost of the financing. In this case, the only meaningful way to establish the "true" APR would involve arranging financing through other sources, determining the lowest-acceptable cash price and comparing the financing terms (which may not be feasible in all circumstances). For leases where the lessee has a purchase option at the end of the lease term, the cost of the APR is further complicated by this option. In effect, the lease includes a put option back to the manufacturer (or, alternatively, a call option for the consumer), and the value (or cost) of this option to the consumer is not transparent.
PAGE #759 - Dependence on loan period

Dependence on loan period APR is dependent on the time period for which the loan is calculated. That is, the APR for one loan with a 30 year loan duration cannot be compared to the APR for another loan with a 20 year loan duration. APR can be used to show the relative impact of different payment schedules (such as balloon payments or bi-weekly payments instead of straight monthly payments), but most standard APR calculators have difficulty with those calculations.
PAGE #760 - Dependence on loan period

Furthermore, most APR calculators assume that an individual will keep a particular loan until it is completely paid off resulting in the up-front fixed closing costs being amortized over the full term of the loan. If the consumer pays the loan off early, the effective interest rate achieved will be significantly higher than the APR initially calculated. This is especially problematic for mortgage loans where typical loan durations are 15 or 30 years but where many borrowers move or refinance before the loan period runs out. In theory, this factor should not affect any individual consumer's ability to compare the APR of the same product (same duration loan) across vendors. APR may not, however, be particularly helpful when attempting to compare different products.
PAGE #761 - Interest-only loans

Interest-only loans Since the principal loan balance is not paid down during the interest-only term, the total interest paid over the lifetime of the loan is increased and the APR is higher than a loan without an interest-only payment period. Three lenders with identical information may still calculate different APRs. The calculations can be quite complex and are poorly understood even by most financial professionals. Most users depend on software packages to calculate APR and are therefore dependent on the assumptions in that particular software package. While differences between software packages will not result in large variations, there are several acceptable methods of calculating APR, each of which returns a slightly different result.
PAGE #762 - Interest-only loans

In the U.S., the calculation and disclosure of APR is governed by the Truth in Lending Act (also known as Regulation Z). In general, APR in the United States is expressed as the periodic interest rate times the number of compounding periods in a year (also known as the nominal interest rate); since the APR must include certain non-interest charges and fees, however, it requires more detailed calculation.
PAGE #763 - Amortization schedule

Amortization schedule An amortization schedule is a table detailing each periodic payment on an amortizing loan (typically a mortgage), as generated by an amortization calculator. While a portion of every payment is applied towards both the interest and the principal balance of the loan, the exact amount applied to principal each time varies (with the remainder going to interest). An amortization schedule reveals the specific monetary amount put towards interest, as well as the specific amount put towards the principal balance, with each payment. Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal. Many kinds of amortization exist, including: Straight line (linear) Declining balance Annuity Bullet (all at once) Increasing balance (negative amortization)
PAGE #764 - Amortization schedule

Amortization schedules run in chronological order. The first payment is assumed to take place one full payment period after the loan was taken out, not on the first day (the amortization date) of the loan. The last payment completely pays off the remainder of the loan. Often, the last payment will be a slightly different amount than all earlier payments. In addition to breaking down each payment into interest and principal portions, an amortization schedule also reveals interest-paid-to-date, principal-paid-to-date, and the remaining principal balance on each payment date.
HOMEWORK
discuss the Truth in Lending Act; explain the Equal Credit Opportunity Act; explain the Real Estate Settlement Procedures Act; explain the Home Ownership and Equity Protection Act; discuss the Home Mortgage Disclosure Act; discuss the Depository Institutions Deregulation and Monetary Control Act; and be able to discuss the Alternative Mortgage Transaction Parity Act.
PAGE #768 - Truth in Lending Act (TILA)

Truth in Lending Act (TILA) The Truth in Lending Act (TILA) of 1968 is a United States federal law designed to protect consumers in credit transactions, by requiring clear disclosure of key terms of the lending arrangement and all costs. The statute is contained in Title I of the Consumer Credit Protection Act, as amended (15 U.S.C. 1601 et seq.). The regulations implementing the statute, which are known as "Regulation Z", are codified at 12 CFR Part 226. Most of the specific requirements imposed by TILA are found in Regulation Z, so a reference to the requirements of TILA usually refers to the requirements contained in Regulation Z, as well as the statute itself.

The purpose of TILA is to promote the informed use of consumer credit, by requiring disclosures about its terms, cost to standardize the manner in which costs associated with borrowing are calculated and disclosed. TILA also gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. With the exception of certain high-cost mortgage loans, TILA does not regulate the charges that may be imposed for consumer credit. Rather, it requires uniform or standardized disclosure of costs and charges so that consumers can shop. It also imposes limitations on home equity plans that are subject to the requirements of Sec. 226.5b and certain higher-cost mortgages that are subject to the requirements of Sec. 226.32. The regulation prohibits certain acts or practices in connection with credit secured by a consumer's principal dwelling. The regulation is divided into subparts and appendices as follows: Subpart C relates to closed-end credit. It contains rules on disclosures, treatment of credit balances, annual percentage rate calculations, right of rescission requirements, and advertising.

Subpart D contains rules on oral disclosures, Spanish language disclosure in Puerto Rico, record retention, effect on state laws, state exemptions (which only apply to states that had Truth in Lendingtype laws prior to the Federal Act), and rate limitations. Subpart E contains special rules for mortgage transactions. Section 226.32 requires certain disclosures and provides limitations for loans that have rates and fees above specified amounts. Section 226.33 requires disclosures, including the total annual loan cost rate, for reverse mortgage transactions. Section 226.34 prohibits specific acts and practices in connection with mortgage transactions.
Several appendices contain information such as the procedures for determinations about state laws, state exemptions and issuance of staff interpretations, special rules for certain kinds of credit plans, a list of enforcement agencies, model disclosures which if used properly will ensure compliance with the Act, and the rules for computing annual percentage rates in closed-end credit transactions and total annual loan cost rates for reverse mortgage transactions.

The lender must disclose to the borrower the annual percentage rate (APR). The APR reflects the cost of the credit to the consumer. It contains things other than interest such as origination fees and discount points. The Truth-in-Lending Act defines "finance charge" as all fees paid either directly or indirectly by the person to whom the credit is extended, incident to the extension of the credit. There are exceptions, to this rule, found at 12 CFR 226.4. Generally, the fees paid to the lender are considered finance charges regardless of any costs they are designed to cover. Effective for written applications received on and after July 30, 2009, Section 226.19(a) requires a creditor to make good faith estimates of the mortgage disclosures required by Section 226.18, by delivering or placing them in the mail not later than the third business day after receiving the consumers written application, and prohibits the collection of fees before the consumer receives the disclosures, other than a fee for obtaining the consumers credit report. However, unlike current subsection 226.19(a)(1), which is limited to residential mortgage transactions subject to RESPA and the July 2008 final rule, which expanded the early disclosure requirement of subsection 226.19(a)(1) to any closed-end loan subject to RESPA secured by the consumers principal dwelling, the May 2009 final rule expands the early disclosure requirements of Section 226.19(a) to a loan secured by any dwelling even when it is not the consumers principal dwelling.

Moreover, the May 2009 final rule imposes additional requirements not contained in the July 2008 final rules revision of subsection 226.19(a)(1): Creditors must deliver or mail the early disclosures at least seven business days before consummation of the transaction. If the annual percentage rate (APR) disclosed in these early disclosures changes beyond a specified tolerance for accuracy, the creditor must provide corrected disclosures, which the consumer must receive on or before the third business day before consummation. The early disclosures also must inform the consumer that the consumer is not obligated to complete the transaction simply because disclosures were provided or because the consumer has applied for a loan. Consumers may expedite consummation to meet a bona fide personal financial emergency by modifying or waiving the seven-business-day or three-business-day waiting period. In addition, the May 2009 final rule specifies different requirements for providing early disclosures for closed-end mortgage transactions that are secured by a consumers interest in a timeshare plan.

Initial Disclosures Paragraph 226.19(a)(1)(i). Under current subsection 226.19(a)(1), a creditor must deliver or mail good faith estimates of transaction specific mortgage loan disclosures (i.e., the APR and other material disclosures required by Section 226.18) only for a residential mortgage transaction (i.e., a loan for acquisition or initial construction of the consumers principal dwelling) the earlier of prior to consummation or three business days after the creditors receipt of a written loan application.

New paragraph 226.19(a)(1)(i) extends this early disclosure requirement to all closed-end, dwellingsecured loan transactions secured by any dwelling of the consumer, excludes home equity lines of credit (Section 226.5b) and timeshare plan loans (new subsection 226.19(a)(5)) from this early disclosure requirement, and deletes the prior to consummation timing requirement. Under new paragraph 226.19(a)(1)(i), the initial early disclosures must be delivered or mailed not later than the third business day after the creditors receipt of the consumers written loan application.

Seven-business-day Waiting Period - Paragraph 226.19(a)(2)(i). In addition to paragraph 226.19(a)(1) (i)s three-business-day requirement for providing the initial early disclosures, new paragraph 226.19 (a)(2)(i) requires that these initial early disclosures must be delivered or mailed not later than the seventh business day prior to consummation. Note: (1) Section 226.2(a)(6), as revised by the May 2009 final rule, applies the more precise definition of business day (i.e., all calendar days except Sundays and specified legal public holidays) to the seven-business-day waiting period. (2) Comment 19(a)(2)(i)-1 of the Official Staff Interpretations provides that the sevenbusiness-day waiting period begins when the creditor delivers the early disclosures or places them in the mail, not when the consumer receives or is deemed to have received the early disclosures. It also provides the following example clarifying that consummation may occur any time on the seventh business day after delivery or mailing - for example, if the creditor delivers the early disclosures to the consumer in person or places them in the mail on Monday, June 1, consummation may occur on or after Tuesday, June 9, the seventh business day following delivery or mailing of the early disclosures.

Three-business-day Periods Paragraph 226.19(a)(2)(ii). Under current subsection 226.19(a)(2), if the APR at consummation varies from the APR disclosed in the initial early disclosures required by current subsection 226.19(a)(1) (now paragraph 226.19(a)(1)(i)) by more than the specified tolerance in Section 226.22 (i.e., of 1% in a regular transaction or of 1% in an irregular transaction), the creditor must provide corrected disclosures no later than consummation or settlement. New paragraph 226.19(a)(2)(ii) changes this requirement to require that if the APR becomes inaccurate under Section 226.22, the creditor must provide corrected disclosures of the APR and all changed terms, so that the consumer receives them not later than the third business day before consummation; and, if the corrected disclosures are mailed or delivered other than by personal delivery, the consumer is considered to have received them three business days after mailing or delivery.
PAGE #777 - Equal Credit Opportunity Act (ECOA) (Reg B)

Equal Credit Opportunity Act (ECOA) (Reg. B) Equal Credit Opportunity: Understanding Your Rights Under the Law People use credit to pay for education or a house, a remodeling job or a car, or to finance a loan to
keep their business operating. The Federal Trade Commission (FTC), the nations consumer protection agency, enforces the Equal Credit Opportunity Act (ECOA), which prohibits credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or because you get public assistance. Creditors may ask you for most of this information in certain situations, but they may not use it when deciding whether to give you credit or when setting the terms of your credit. Not everyone who applies for credit gets it or gets the same terms: Factors like income, expenses, debts, and credit history are among the considerations lenders use to determine your creditworthiness. The law provides protections when you deal with any organizations or people who regularly extend credit, including banks, small loan and finance companies, retail and department stores, credit card companies, and credit unions. Everyone who participates in the decision to grant credit or in setting the terms of that credit, including real estate brokers who arrange financing, must comply with the ECOA.

Heres a brief summary of the basic provisions of the ECOA. I. When You Apply For Credit, Creditors May Not... Discourage you from applying or reject your application because of your race, color, religion, national origin, sex, marital status, age, or because you receive public assistance. Consider your race, sex, or national origin, although you may be asked to disclose this information if you want to. It helps federal agencies enforce anti-discrimination laws. A creditor may consider your immigration status and whether you have the right to stay in the country long enough to repay the debt.

Impose different terms or conditions, like a higher interest rate or higher fees, on a loan based on your race, color, religion, national origin, sex, marital status, age, or because you receive public assistance. Ask if youre widowed or divorced. A creditor may use only the terms: married, unmarried, or separated. Ask about your marital status if youre applying for a separate, unsecured account. A creditor may ask you to provide this information if you live in community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A creditor in any state may ask for this information if you apply for a joint account or one secured by property.

Ask for information about your spouse, except: if your spouse is applying with you; if your spouse will be allowed to use the account; if you are relying on your spouses income or on alimony or child support income from a former spouse; if you live in a community property state. Ask about your plans for having or raising children, but they can ask questions about expenses related to your dependents.
Ask if you get alimony, child support, or separate maintenance payments, unless they tell you first that you dont have to provide this information if you arent relying on these payments to get credit. A creditor may ask if you have to pay alimony, child support, or separate maintenance payments.

II. When Deciding To Grant You Credit Or When Setting The Terms Of Credit, Creditors May Not... Consider your race, color, religion, national origin, sex, marital status or whether you get public assistance. Consider your age, unless: youre too young to sign contracts, generally under 18; youre at least 62, and the creditor will favor you because of your age; its used to determine the meaning of other factors important to creditworthiness. For example, a creditor could use your age to determine if your income might drop because youre about to retire; its used in a valid credit scoring system that favors applicants 62 and older. A credit scoring system assigns points to answers you give on credit applications. For example, your length of employment might be scored differently depending on your age. Consider whether you have a telephone account in your name. A creditor may consider whether you have a phone. Consider the racial composition of the neighborhood where you want to buy, refinance or improve a house with money you are borrowing.

III. When Evaluating Your Income, Creditors May Not... Refuse to consider reliable public assistance income the same way as other income. Discount income because of your sex or marital status. For example, a creditor cannot count a mans salary at 100 percent and a womans at 75 percent. A creditor may not assume a woman of childbearing age will stop working to raise children. Discount or refuse to consider income because it comes from part-time employment, Social Security, pensions, or annuities. Refuse to consider reliable alimony, child support, or separate maintenance payments. A creditor may ask you for proof that you receive this income consistently.

IV. You Also Have The Right To... Have credit in your birth name (Mary Smith), your first and your spouses last name (Mary Jones), or your first name and a combined last name (Mary Smith Jones). Get credit without a cosigner, if you meet the creditors standards.
Have a cosigner other than your spouse, if one is necessary. Keep your own accounts after you change your name, marital status, reach a certain age, or retire, unless the creditor has evidence that youre not willing or able to pay. Know whether your application was accepted or rejected within 30 days of filing a complete application.

Know why your application was rejected. The creditor must tell you the specific reason for the rejection or that you are entitled to learn the reason if you ask within 60 days. An acceptable reason might be: your income was too low or you havent been employed long enough. An unacceptable reason might be you didnt meet our minimum standards. That information isnt specific enough. Learn the specific reason you were offered less favorable terms than you applied for, but only if you reject these terms. For example, if the lender offers you a smaller loan or a higher interest rate, and you dont accept the offer, you have the right to know why those terms were offered. Find out why your account was closed or why the terms of the account were made less favorable, unless the account was inactive or you failed to make payments as agreed.

V. A Special Note To Women and Men A good credit history - a record of your bill payments - often is necessary to get credit. This can hurt many married, separated, divorced, and widowed men and women. Typically, there are two reasons women dont have credit histories in their own names: either they lost their credit histories when they married and changed their names, or creditors reported accounts shared by married couples in the husbands name only. If youre married, separated, divorced, or widowed, contact your local consumer reporting companies to make sure all relevant bill payment information is in a file under your own name. Your credit report includes information on where you live, how you pay your bills, and whether youve been sued, arrested or filed for bankruptcy. National consumer reporting companies sell the information in your report to creditors, insurers, employers, and other businesses that, in turn, use it to evaluate your applications for credit, insurance, employment, or renting a home.
PAGE #786 - Real Estate Settlement Procedures Act (RESPA)

Real Estate Settlement Procedures Act (RESPA) and associated Regulations The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in 1974. The purposes of RESPA are to help consumers become better shoppers for settlement services and to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. Details about RESPA Corresponding with the above purposes: 1. RESPA requires that borrowers receive disclosures at various times. Some disclosures
spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.

2. RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting anything of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company. RESPA in general RESPA covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. HUD's Office of RESPA and Interstate Land Sales is responsible for enforcing RESPA.

RESPA required disclosures: At the time of loan application When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers: a Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only) and a Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use a particular settlement provider, then the lender must disclose this requirement on the GFE. a Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution.

If the borrowers don't get these documents at the time of application, the lender must mail them within three business days of receiving the loan application. If the lender turns down the loan within three days, however, then RESPA does not require the lender to provide these documents. The RESPA statute does not provide an explicit penalty for the failure to provide the Special Information Booklet, Good Faith Estimate or Mortgage Servicing Statement. However, bank regulators may choose to impose penalties on lenders who fail to comply with federal law. Disclosures before settlement/closing occurs The terms "settlement" and "closing" can be and are used interchangeably. An Affiliated Business Arrangement (ABA) Disclosure is required whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring
party has an ownership or other beneficial interest.

The referring party must give the ABA disclosure to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider's charges. Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender's interest in the transaction, the referring party may not require the consumer to use the particular provider being referred. The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.

Disclosures at settlement The HUD-1 Settlement Statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. Where it is not the practice that the borrower and the seller both attend the settlement, the HUD-1 should be mailed or delivered as soon as practicable after settlement. The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges anticipated to be paid from the Escrow Account during the first twelve months of the loan. It lists the Escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it.

Disclosures after settlement Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. The annual Escrow account statement summarizes all escrow account deposits and payments during the servicer's twelve month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken. A Servicing Transfer Statement is required if the loan servicer sells or assigns the servicing rights to a borrower's loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments.

RESPA'S statutes explained: consumer protections and prohibited practices
Section 8: kickbacks, fee-splitting, unearned fees Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed. Violations of Section 8's anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service. Section 9: Seller required title insurance Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.

Section 10: Limits on escrow accounts Section 10 of RESPA sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. RESPA does not require lenders to impose an escrow account on borrowers; however, certain government loan programs or lenders may require escrow accounts as a condition of the loan. During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month the lender may require a borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year. The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of $50 or more must be returned to the borrower.
PAGE #795 - RESPA enforcement

RESPA enforcement Civil law suits Individuals have one (1) year to bring a private law suit to enforce violations of Section 8 or 9. A person may bring an action for violations of Section 6 within three years. Lawsuits for violations of Section 6, 8, or 9 may be brought in any federal district court in the district in which the property is located or where the violation is alleged to have occurred. HUD, a State Attorney General or State insurance commissioner may bring an injunctive action to enforce violations of Section 6, 8 or 9 of RESPA within three (3) years.
PAGE #796 - Loan servicing complaints

Loan servicing complaints
Section 6 provides borrowers with important consumer protections relating to the servicing of their loans. Under Section 6 of RESPA, borrowers who have a problem with the servicing of their loan (including escrow account questions), should contact their loan servicer in writing, outlining the nature of their complaint. The servicer must acknowledge the complaint in writing within 20 business days of receipt of the complaint. Within 60 business days the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. Until the complaint is resolved, borrowers should continue to make the servicer's required payment. A borrower may bring a private law suit, or a group of borrowers may bring a class action suit, within three years, against a servicer who fails to comply with Section 6's provisions. Borrowers may obtain actual damages, as well as additional damages if there is a pattern of noncompliance.
PAGE #797 - Other enforcement actions

Other enforcement actions Under Section 10, HUD has authority to impose a civil penalty on loan servicers who do not submit initial or annual escrow account statements to borrowers. Borrowers should contact HUD's Office of RESPA and Interstate Land Sales to report servicers who fail to provide the required escrow account statements. Scope of RESPA What kinds of transactions are covered under RESPA? Transactions involving a federally related mortgage loan, which includes most loans secured by a lien (first or subordinate position) on residential property. This includes: home purchase loans, refinances, lender approved assumptions, property improvement loans, equity lines of credit, and reverse mortgages.
PAGE #798 - RESPA Q&A

What types of transactions are generally not covered? The following are kinds of transactions that are not covered: an all cash sale, a sale where the individual home seller takes back the mortgage, a rental property transaction or other business purpose transaction. Is a "time share" a covered transaction under RESPA? Yes, if the lender's interest is secured by a lien on residential property.

Is a loan secured by a condominium unit or a cooperative share a covered transaction under RESPA? Yes, as long the units are not used for business purposes. Is a loan secured by a manufactured home (mobile home) covered transaction under RESPA? Yes, but only if the manufactured home is located on real property on which the lender's interest is secured by a lien. Does a federally related mortgage loan only involve FHA, VA or other government sponsored loans?
No, RESPA covers most conventional loans too. Are home equity loans covered under RESPA? Yes, home equity loans secured by residential property are covered. How does the coverage of home equity loans and subordinate lien loans differ from other RESPA covered loans? If the loan involves an open-end line of credit, providing the disclosures required by Regulation Z satisfies the RESPA good faith estimate and the HUD-1 or HUD-1A requirements. Both subordinate lien loans and open-end lines of credit (home equity loans) in first lien position are exempted from the loan servicing requirements.

Are construction loans covered under RESPA? No. Unless: 1) the loan is used as, or may be converted to permanent financing by the same lender; or 2) the lender issues a commitment for permanent financing; or 3) the loan is used to finance a transfer of title to the first user; or 4) the loan is for a term of two years or more, unless it is to a bona fide builder. If a construction loan is covered under RESPA, how do you account for construction loan closing on the HUD-1 if funds will be held back by the lender until performance? List the sales price of the land on Line 204, the construction cost on Line 105 (Line 101 is left blank) and the amount of the loan on line 102. The remainder of the form should be completed taking into account adjustments and charges related to the temporary and permanent financing which are known at the date of the settlement.

When the loan transaction includes an option for the borrower to obtain additional funds in the future merely by signing a note for the new amount, must RESPA's disclosure requirements be followed for the future advance of additional funds? Yes, because there is a new note. This is consistent with Truth in Lending Act provisions. If a loan is sold within 1-7 days of closing to another lender, does the sale of that loan fall within RESPA's coverage? The sale of a loan after the original funding of the loan at settlement is a secondary market transaction. Such a sale is exempt from RESPA coverage as a secondary market transaction. However, any transfer of ownership and/or servicing rights is subject to RESPA's requirements in Section 6. Does the exemption from RESPA for the sale of a land parcel of at least 25 acres apply even if there are 2 homes on the property? Yes, as long as the property is a single parcel.

Can a credit agency provide a lender with a dedicated printer to expedite communication
between the credit agency and the lender? Yes, provided the printer can only be used for communication with the lender and not for general use. If it's for general use it may be considered payment for the referral of business. Can a flood zone certification company examine a lender's existing loan portfolio for free or at a reduced rate, in exchange for the lender sending the company future business? No. Flood zone certification is a covered settlement service (24 CFR 3500.2), therefore RESPA would apply to agreements by companies or persons providing portfolio reviews. Providing free or reduced reviews is a thing of value. Providing this service in exchange for referrals of future flood insurance business would violate Section 8(a) of RESPA which provides that "no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person."

Can a lender set up a contest for real estate agents under which the agent who provides the lender with the most business will win a trip to Hawaii? No. Under RESPA, the trip itself, and even the opportunity to win the trip, would be a thing of value given in exchange for the referral of business. Can a lender give a borrower an incentive, such as a chance to win a trip or a rebate, for doing business with the lender? RESPA does not prohibit a lender or other settlement provider from giving the borrower an incentive for doing business with it as long as the incentive is not based on the borrower referring business to the lender.

Can a mortgage banker and a real estate broker advertise their services together, for example, on the same brochure or newspaper advertisement? Nothing in RESPA prevents joint advertising. However, if one party is paying less than a pro-rata share for the brochure or advertisement, there could be a RESPA violation. Can a lender give a real estate agent note pads with the lender's name on it? Yes. Such note pads with the lender's name on it would be allowable as normal promotional items. However, if the lender gives the real estate agent note pads with the real estate agent's name on it for the agent to use to market clients for its real estate business, then the note pads could be a thing of value given for referral of loan business, because it defrays a marketing expense that the real estate agent would otherwise incur.

Can a mortgage broker be compensated for referring business to a lender that is unrelated to a real estate transaction, such as automobile loans?
Yes, provided that the compensation is exclusively related to the automobile loan and does not represent, in whole or in part, compensation for the referral of real estate business, and no lien is placed on a residence to secure the auto loan. Affiliated businesses If a lender refers a consumer to more than one of its affiliated settlement service providers, does the lender have to provide a separate affiliated business arrangement disclosure statement for each referral? No, the lender can use one disclosure statement.

If a lender refers a consumer to a settlement service provider with which it does not have an affiliate relationship, as defined by RESPA, does the lender still have to provide the affiliated business arrangement disclosure statement? No, the affiliated business arrangement disclosure statement is only for affiliates. When a principal in a law firm is a member of the board of a lender and the lender refers RESPA covered settlement service business to the firm, but not personally to the principal, must the relationship be disclosed? Yes. When the lender refers the borrower to the law firm, the borrower must be given an Affiliated Business Arrangement Disclosure Statement.

Fee splitting Can a lender charge a borrower a fee for sending documents via courier and disclose it on the HUD-1 where in fact the borrower stops by the lender's office and picks up the documents instead? No, because the charge for the courier service does not represent a charge for work actually performed which can be imposed on the borrower. Can a lender collect from the borrower an appraisal fee of $200, listing the fee as such on the HUD-1, yet pay an independent appraiser $175 and collect the $25 difference? No, the lender may only collect $175 as the actual charge. It is a violation of Section 8 (b) for any person to accept a split of a fee where services are not performed.

Can a lender charge a borrower at closing a onetime charge for setting up an account with a tax service to arrange for tax payments? Yes, the lender may collect a reasonable charge for the service provided. Can a title company, which has the only convenient closing room in the area, provide it to any interested party at $100 per closing?
Yes, provided the charge is reasonably related to the value of the space. Specific forms and consumer information Where a mortgage broker is used, is it the mortgage broker's responsibility to provide the Good Faith Estimate (GFE) to consumers, or is that the lender's responsibility? If the mortgage broker is not an exclusive agent of the lender, the broker should provide a GFE within 3 days of receiving an application. The lender is not required to send an additional GFE; however, it is the lender's responsibility to ascertain that one was sent and includes an estimate of all costs that are likely to occur. Where the broker is the exclusive agent of the lender, either the broker or the lender shall provide the GFE.

When must the special information booklet be provided and by whom? In general, the lender or mortgage broker should provide the special information booklet at application. Alternatively, they may place it in the mail to the applicant not later than three business days after the application is received or prepared. Must a mortgage servicing transfer notice be given for a prospective table funded transaction? Yes, by the mortgage broker. When the potential borrower furnishes a substantial amount of financial information for prequalification, but no particular property has been identified, must the good faith estimate be furnished to the borrower? No. A submission by a borrower to a lender that does not identify a property is not an application and thus does not trigger the Good Faith Estimate requirement. However, HUD encourages providing information to the borrower on settlement costs as soon as it can be estimated, so that the borrower may be better able to shop.

If the servicer neglects to pay the homeowner's insurance bill out of escrow and, as a result, the consumer loses coverage, what are the servicer's responsibilities and what is the servicer's liability for harm to the consumer that results? The servicer is required to pay escrow items on time, so long as the borrower is timely in his/her mortgage payments. If the borrower is damaged by the servicer's failure to pay for the insurance on time, the borrower can sue under section 6. Additional FAQs If the borrower is getting a "no cost" loan, must the lender list charges the lender is going to pay? Yes. The charges to be shown on the GFE and the HUD-1 must include any payments by the lender to affiliated or independent settlement providers. These payments should be shown as P.O.C. (paid outside of closing).

The regulations at 3500.15 (b)(1)(i) state that where a lender makes a referral to a borrower the condition for providing an Affiliated Business Disclosure (ABA) may be satisfied as part of and at the time of the GFE. Does this mean the lender does not have to give a separate ABA disclosure if the information is part of the GFE? No. A separate ABA must be given. The regulation means the ABA may be given at the time the GFE is given if this is when the affiliate is referred or is required to be used (a lender may require the use of an appraisal, credit reporting company, or attorney). Must a mortgage broker disclose payments he receives that the borrower does not pay for directly? Yes. The mortgage broker must disclose all payments and fees he receives whether they are received directly from the borrower or indirectly from the lender.

If I have a question concerning the calculation of the "Annual Percentage Rate" or "APR", can HUD answer it? The calculation of the APR is part of the Truth-in-Lending Act (TILA) which is administered by the Federal Reserve Board. Questions concerning TILA as well as Section 32 (high cost loan disclosure) may be directed to the Federal Reserve Board at (202) 452-3693. May a settlement service provider charge a fee that reflects its own fee plus any recording fees as the servicer provider's fee? Example: An attorney charges $500 for its services and the county charges $30 for recording fees.

May the attorney simply charge the consumer $530 and pay the county as a cost of doing business? No. The "Line Item" instructions to the HUD-1 state that "for all items except for those paid to and retained by the lender, the name of the person or firm ultimately receiving the payment should be shown." The attorney must disclose all entities ultimately receiving the fee. May real estate agents that are independent contractors be considered employees under the "employer-employee" exemption, for purposes of being allowed to be paid referral fees from employers? No. The exemption applies only to bona-fide employees.

If the borrower's escrow account includes a surplus greater than $50 which HUD's rules require be refunded, may the servicer credit the surplus directly to the principal, rather than refund the surplus to the borrower? No. However, the servicer may inform the borrower in the information accompanying the return of the surplus that the borrower may elect to use the refund to reduce principal or have it credited against the
next year's escrow payments. If there is a surplus in the escrow account and the borrower is in default, may the servicer retain the surplus as payment towards the amount in default? HUD's escrow rules are inapplicable to loans that are in default, which is defined under the RESPA rules as current payments which are more than 30 days delinquent. The parties should consult the mortgage documents or state law to resolve whether escrow funds are available for this purpose.

May a consumer delay or avoid a mortgage transaction if it discovers that there exists a RESPA violation? No. RESPA specifically provides that it does not affect the validity or enforceability of any sale or contract for the sale of real property, or any agreement arising in connection with a federally-related mortgage loan.
PAGE #816 - Home Ownership and Equity Protection Atc (HOEPA)

Home Ownership and Equity Protection Act (HOEPA) High-Rate, High-Fee Loans (HOEPA/Section 32 Mortgages) If youre refinancing your mortgage or applying for a home equity installment loan, you should know about the Home Ownership and Equity Protection Act of 1994 (HOEPA). The law addresses certain deceptive and unfair practices in home equity lending. It amends the Truth in Lending Act (TILA) and establishes requirements for certain loans with high rates and/or high fees. The rules for these loans are contained in Section 32 of Regulation Z, which implements the TILA, so the loans also are called Section 32 Mortgages. Heres what loans are covered, the laws disclosure requirements, prohibited features, and actions you can take against a lender who is violating the law.

What Loans Are Covered? A loan is covered by the law if it meets the following tests: for a first-lien loan, that is, the original mortgage on the property, the annual percentage rate (APR) exceeds by more than eight percentage points the rates on Treasury securities of comparable maturity; for a second-lien loan, that is, a second mortgage, the APR exceeds by more than 10 percentage points the rates in Treasury securities of comparable maturity; or the total fees and points payable by the consumer at or before closing exceed the larger of $583 or eight percent of the total loan amount. (The $583 figure is for 2009. This amount is adjusted annually by the Federal Reserve Board, based on changes in the Consumer Price Index.) Credit insurance premiums for insurance written in connection with the credit transaction are counted as fees. The rules primarily affect refinancing and home equity installment loans that also meet the definition of a high-rate or high-fee loan. The rules do not cover loans to buy or build your home, reverse mortgages or home equity lines of credit (similar to revolving credit accounts).

What Disclosures Are Required? If your loan meets the above tests, you must receive several disclosures at least three business days before the loan is finalized: The lender must give you a written notice stating that the loan need not be completed, even though youve signed the loan application and received the required disclosures. You have three business days to decide whether to sign the loan agreement after you receive the special Section 32 disclosures. The notice must warn you that, because the lender will have a mortgage on your home, you could lose the residence and any money put into it, if you fail to make payments. The lender must disclose the APR, the regular payment amount (including any balloon payment where the law permits balloon payments, discussed below), and the loan amount (plus where the amount borrowed includes credit insurance premiums, that fact must be stated). For variable rate loans, the lender must disclose that the rate and monthly payment may increase and state the amount of the maximum monthly payment. These disclosures are in addition to the other TILA disclosures that you must receive no later than the closing of the loan.

What Practices Are Prohibited? The following features are banned from high-rate, high-fee loans: All balloon payments - where the regular payments do not fully pay off the principal balance and a lump sum payment of more than twice the amount of the regular payments is required - for loans with less than five-year terms. There is an exception for bridge loans of less than one year used by consumers to buy or build a home: In that situation, balloon payments are not prohibited. Negative amortization, which involves smaller monthly payments that do not fully pay off the loan and that cause an increase in your total principal debt. Default interest rates higher than pre-default rates. Rebates of interest upon default calculated by any method less favorable than the actuarial method. A repayment schedule that consolidates more than two periodic payments that are to be paid in advance from the proceeds of the loan.

Most prepayment penalties, including refunds of unearned interest calculated by any method less favorable than the actuarial method. The exception is if: the lender verifies that your total monthly debt (including the mortgage) is 50 percent or less of your monthly gross income; you get the money to prepay the loan from a source other than the lender or an affiliate lender; and the lender exercises the penalty clause during the first five years following execution of the mortgage. A due-on-demand clause. The exceptions are if: there is fraud or material misrepresentation by the consumer in connection with the loan; the consumer fails to meet the repayment terms of the agreement; or there is any action by the consumer that adversely affects the creditors security.

Creditors also may not: make loans based on the collateral value of your property without regard to your ability to repay the loan. In addition, proceeds for home improvement loans must be disbursed either directly to you, jointly to you and the home improvement contractor or, in some instances, to the escrow agent. refinance a HOEPA loan into another HOEPA loan within the first 12 months of origination, unless the new loan is in the borrowers best interest. The prohibition also applies to assignees holding or servicing the loan. wrongfully document a closed-end, high-cost loan as an open-end loan. For example, a high-cost mortgage may not be structured as a home equity line of credit if there is no reasonable expectation that repeat transactions will occur.

How Are Compliance Violations Handled? You may have the right to sue a lender for violations of these requirements. In a successful suit, you may be able to recover statutory and actual damages, court costs and attorneys fees. In addition, a violation of the high-rate, high-fee requirements of the TILA may enable you to rescind (or cancel) the loan for up to three years.

Where to Go for More Information The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad. The Federal Trade Commission (FTC) is the nations consumer protection agency. Here are some tips from the FTC to help you be a more savvy consumer. 1. Know who youre dealing with. Do business only with companies that clearly provide their name, street address, and phone number. 2. Protect your personal information. Share credit card or other personal information only when buying from a company you know and trust. 3. Take your time. Resist the urge to act now. Most any offer thats good today will be good tomorrow, too.

4. Rate the risks. Every potentially high-profit investment is a high-risk investment. That means you could lose your investment - all of it. 5. Read the small print. Get all promises in writing and read all paperwork before making any payments
or signing any contracts. Pay special attention to the small print. 6. Free means free. Throw out any offer that says you have to pay to get a gift or a free gift. If something is free or a gift, you dont have to pay for it. Period. 7. Report fraud. If you think youve been a victim of fraud, report it. Its one way to get even with a scam artist who cheated you. By reporting your complaint to 1-877-FTC-HELP or www.ftc.gov, you are providing important information to help law enforcement officials track down scam artists and stop them!
PAGE #825 - Home Mortgage Disclosure Act (HMDA)

Home Mortgage Disclosure Act (HMDA) The United States Home Mortgage Disclosure Act (or HMDA, pronounced HUM-duh) was passed in 1975. It requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings. It also requires branches and loan centers to display a HMDA poster. HMDA was designed by the Federal Reserve Board in order to: Help public officials to distribute public-sector investments Discover if financial institutions are serving housing needs of communities Identify where there are discriminatory lending practices
PAGE #826 - Depository Institutions Deregulation and Monetrary Control Act (DIDMCA)
Depository Institutions Deregulation and Monetary Control Act (DIDMCA) The Depository Institutions Deregulation and Monetary Control Act, a United States federal financial statute law passed in 1980, gave the Federal Reserve greater control over non-member banks. It forced all banks to abide by the Fed's rules. It allowed banks to merge. It removed the power of the Federal Reserve Board of Governors under the Glass-Steagall Act and Regulation Q to set the interest rates of savings accounts. It raised the deposit insurance of US banks and credit unions from $40,000 to $100,000. It allowed credit unions and savings and loans to offer checkable deposits. Allowed institutions to charge any interest rates they chose.
PAGE #827 - Alternative Mortgage Transaction Parity Act (AMTPA)

Alternative Mortgage Transaction Parity Act (AMTPA) The Alternative Mortgage Transaction Parity Act of 1982 preempts state laws that restrict banks from making any mortgage except conventional fixed rate amortizing mortgages. The law actually allows lenders to make loans with terms that may obscure the total cost of a loan. This led to various exotic new mortgages many borrowers failed to understand and could not afford. Such mortgages included: Adjustable-rate mortgages, in which the interest rate becomes floating after a number of years. Balloon payment mortgages have a large payment remaining when the loan comes due. Interest-only mortgages only require the borrower to pay the interest on the principal balance for
the first years of the loan. The United States House of Representatives passed H.R.3915 "The Mortgage Reform and Anti-Predatory Lending Act of 2007" in November, 2007. It remains before the United States Senate. The House bill would require lenders to write mortgages that take into account the borrowers' ability to pay at the fully-indexed rate. AMTPA Purpose: It is the purpose of this chapter to eliminate the discriminatory impact that those regulations have upon non-federally chartered housing creditors and provide them with parity with federally chartered institutions by authorizing all housing creditors to make, purchase, and enforce alternative mortgage transactions so long as the transactions are in conformity with the regulations issued by the Federal agencies.
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explain how Fair Lending involves Originating Loans; discuss the history of the S.A.F.E Act; discuss the Fair Credit Reporting Act; better understand the laws governing Privacy and Do-Not-Call; explain FTC Red Flag Rules; and discuss appraisal Law and the history of FHA.
PAGE #831 - Fair lending

Fair Lending Discrimination in mortgage lending is prohibited by the federal Fair Housing Act and HUD's Office of Fair Housing and Equal Opportunity actively enforces those provisions of the law. The Fair Housing Act makes it unlawful to engage in the following practices based on race, color, national origin, religion, sex, familial status or handicap (disability): Refuse to make a mortgage loan Refuse to provide information regarding loans Impose different terms or conditions on a loan, such as different interest rates, points, or fees Discriminate in appraising property Refuse to purchase a loan or set different terms or conditions for purchasing a loan
Filing a Complaint If you have experienced any one of the above actions, you may be the victim of discrimination. Recognizing the signs of lending discrimination is the first step in filing a complaint. HUD investigates your complaints at no cost to you.
PAGE #832 - Fair lending

HUD Fair Lending Studies Pre-application inquiries about mortgage lending financing options represent a critical phase in the home buying process. If potential homebuyers cannot obtain full and fair access to information about mortgage financing, they may give up on their pursuit of homeownership, their housing search may be restricted, or they may be unable to negotiate the most favorable loan terms. HUD has conducted a number of studies to determine whether minority homebuyers receive the same treatment and information as whites during the mortgage lending process. To determine whether minority homebuyers receive the same treatment and information as whites at the pre-application phase of the loan process, the Urban Institute, under contract with HUD, conducted a study using the paired testing technique. In the paired tests, two individuals of different races who were equally qualified in every way were matched together. Posing as homebuyers, the two then inquired about the availability and terms for home mortgage loans. The pilot test results show that in both Los Angeles and Chicago, African American and Hispanic homebuyers face a significant risk of receiving less favorable treatment than equally qualified whites when inquiring about mortgage financing.
PAGE #833 - Subprime lending

Subprime Lending Subprime loans previously played a significant role in the mortgage lending market, making homeownership possible for many families who have blemished credit histories or who otherwise fail to qualify for prime, conventional loans. A HUD analysis, based on HMDA and related data, showed that the number of home purchase subprime applications increased from 327,644 in 1997 to 783,921 in 2000.

While the subprime mortgage market serves a legitimate role, these loans tend to cost more and sometimes have less advantageous terms than prime market loans. Additionally, subprime lenders are largely unregulated by the federal government. Typically, subprime loans are for persons with blemished or limited credit histories. The loans carry a higher rate of interest than prime loans to compensate for increased credit risk. Many have questioned why minorities appear to be over-represented in the subprime lending market. Studies reveal that even in upper-income African-American neighborhoods one is one-and-a-half times as likely to have a subprime loan than persons in low-income white neighborhoods. In neighborhoods where Hispanics comprise at least 80 percent of the population, they were 1.5 times as likely than the nation as a whole to have a subprime mortgage loan.
Some allege this disparity to be attributed to subprime lenders purposefully marketing to AfricanAmerican communities - what some have called reverse redlining. They allege lenders will provide loans to these communities, but at a higher cost and with less favorable conditions. Some facts about subprime lenders Home refinance loans account for higher shares of subprime lenders' total origination than prime lenders' originations Subprime lenders originate a larger percentage of their total originations in predominately black census tracts than prime lenders Subprime lenders are more likely to have terms like "consumer," "finance," and "acceptance" in their lender names
PAGE #836 - Predatory lending

Predatory Lending Some lenders, often referred to as predatory lenders, saddle borrowers with loans that come with outrageous terms and conditions, often through deception. Elderly women and minorities frequently report that they have been targeted, or preyed upon, by these lenders. The typical predatory loan is: (1) in excess of those available to similarly situated borrowers from other lenders elsewhere in the lending market, (2) not justified by the creditworthiness of the borrower or the risk of loss, and (3) secured by the borrower's home. HUD is working hard to fight against predatory lending.
PAGE #837 - Predatory lending

Over the last several years, our nation has made enormous progress in expanding access to capital for previously underserved borrowers. Despite this progress, however, too many families are suffering today because of a growing incidence of abusive practices in a segment of the mortgage lending market. Predatory mortgage lending practices strip borrowers of home equity and threaten families with foreclosure, destabilizing the very communities that are beginning to enjoy the fruits of our nations economic success. If you believe you have been a victim of predatory lending practices there are Federal agencies that can help. Please refer to the list of agencies below and contact the organization or agency that you think can help address your specific problem.
PAGE #838 - Minority homeownership

Minority Homeownership HUD is committed to increasing homeownership opportunities for all Americans. HUD is engaged in a special effort to boost the minority homeownership rate since the rate for African American and Hispanic Americans lags behind that of others. HUD is an avid supporter of increased minority homeownership. The Office of Fair Housing and Equal Opportunity carefully monitors the programs of other HUD offices, as well as the work of GSEs (government sponsored enterprises) to ensure that policies are being followed to progress toward an increase in numbers of minority homeowners. Policies and procedures are examined to be sure they do not discriminate or bring about a negative impact against minorities in pursuit of homeownership.

Serving as the mission regulator for government-sponsored enterprises (GSEs) in the secondary mortgage market, HUD continues to promote efforts to increase the number of minority and low to moderate-income families working to achieve homeownership Fannie Mae and Freddie Mac, the two largest sources of housing finance in the United States, have been subject to a number of goals associated with mortgage lending to low income families.

Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs) in the secondary mortgage market, are the two largest sources of housing finance in the United States. They fund these mortgages by purchasing loans directly from primary market mortgage originators and holding these loans in portfolio, or by acting as a conduit and issuing mortgage-backed securities, which are then sold in the capital markets. HUD is the mission regulator for the GSEs, and a major aspect of this regulation involves setting minimum percentage-of-business goals for their mortgage purchases. These goals deal with the enterprises' support for low-income lending and lending in underserved geographic areas, and they have played an important role in encouraging mortgage originators to undertake more affordable lending for lower-income and minority families in recent years. This issue brief discusses the significant increases in these lending goals for the years 2001-03, which should encourage the GSEs to further step up their support for affordable lending.
PAGE #841 - SAFE Act

SAFE Act The Housing and Economic Recovery Act of 2008, signed into law on July 30, 2008 (Public Law 110289) (HERA), constitutes a major new housing law that is designed to assist with the recovery and the revitalization of America's residential housing market - from modernization of the Federal Housing Administration, to foreclosure prevention, to enhancing consumer protections. The SAFE Act is a key component of HERA. The SAFE Act is designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators and for the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) to establish and maintain a nationwide mortgage licensing system and registry for the residential mortgage industry for the purpose of achieving the following objectives: (1) Providing uniform license applications and reporting requirements for state licensed-loan originators; (2) Providing a comprehensive licensing and supervisory database;

(3) Aggregating and improving the flow of information to and between regulators; (4) Providing increased accountability and tracking of loan originators; (5) Streamlining the licensing process and reducing regulatory burden;
(6) Enhancing consumer protections and supporting anti-fraud measures; (7) Providing consumers with easily accessible information, offered at no charge, utilizing electronic media, including the Internet, regarding the employment history of, and publicly adjudicated disciplinary and enforcement actions against, loan originators; (8) Establishing a means by which residential mortgage loan originators would, to the greatest extent possible, be required to act in the best interests of the consumer; (9) Facilitating responsible behavior in the subprime mortgage market place and providing comprehensive training and examination requirements related to subprime mortgage lending; (10) Facilitating the collection and disbursement of consumer complaints on behalf of state mortgage regulators.

The new standards, as well as the uniformity and consistency of such standards, directed to be established nationwide by the SAFE Act present a significant step in the effort to increase integrity in the residential mortgage loan market, enhance consumer protections, and reduce fraud. The SAFE Act encourages states to participate in the Nationwide Mortgage Licensing System and Registry, and requires states to have in place, by law or regulation, a system for licensing and registering loan originators that meets the requirements of sections 1505, 1506, and 1508(d) of the SAFE Act. The SAFE Act requires the states to have the licensing and registration system in place by: (1) July 31, 2009, for states whose legislatures meet annually; and (2) July 31, 2010, for states whose legislatures meet biennially. For both this 1-year period and 2-year period, HUD may extend the deadline, by not more than 24 months, if HUD determines that a state is making a good faith effort to establish a state licensing law that meets the minimum requirements of the SAFE Act.

To aid and facilitate states' compliance with the requirements of the SAFE Act, the Act directs the establishment of a nationwide mortgage licensing system and registry (NMLSR), to be developed and maintained by CSBS and AARMR. If HUD determines that a state's mortgage loan originator licensing standards do not meet the minimum requirements of the Act, HUD must implement and administer a licensing system for that state. A loan originator in such a state would have to comply with the requirements of HUD's SAFE Actcompliant licensing system for that state as well as with any applicable state requirements. A HUD license for a state would be valid only for that state, even if HUD must implement licensing systems in multiple states. Additionally, if HUD determines that the NMLSR is failing to meet the requirements and purposes of the SAFE Act, HUD must establish a system that meets the requirements of the SAFE Act.

For the last several months, CSBS and AARMR have undertaken considerable outreach to states and the financial services industry regarding the development of the NMLSR and of legislation that would meet the requirements of the SAFE Act. CSBS and AARMR have developed a model state law (MSL) designed to assist and facilitate states to enact legislation on mortgage loan originator licensing that complies with the SAFE Act and by the deadlines imposed by the SAFE Act. While states are charged with enacting licensing standards that meet the requirements of the SAFE Act, overall responsibility for interpretation, implementation, and compliance with the SAFE Act rests with HUD. In this regard, CSBS and AARMR requested that HUD review the model legislation, and advise of
its sufficiency in meeting applicable minimum requirements of the SAFE Act.

CSBS/AARMR Model Legislation HUD reviewed the model legislation to determine whether it meets the minimum requirements of the SAFE Act and finds that it does. State legislation that follows the provisions of the model legislation, whether by statute or regulation, will be determined to have met the applicable minimum requirements of the SAFE Act. The complete text of the model legislation, reviewed by HUD, is provided here.) More information about the model legislation can be found at CSBS's website. The commentary that follows presents HUD's views and interpretations of certain statutory provisions that required consideration and analysis in determining that the model legislation meets the minimum requirements of the SAFE Act.

HUD Commentary Through this commentary, HUD advises of the analysis of the SAFE Act that was undertaken in reviewing the model legislation and of HUD's interpretation of certain provisions in the SAFE Act. These interpretations are designed to assist the states, as well as members of the public, in understanding how HUD determined that the model legislation meets the minimum requirements of the SAFE Act, and to assist states in adopting legislation or regulations that meet the minimum requirements of the SAFE Act. A. Standards in Legislation May Exceed Standards in SAFE Act The SAFE Act's licensing and registration standards for mortgage loan originators are minimum standards. Legislation enacted or regulations promulgated by a state may exceed the minimum standards of the SAFE Act. States may not, however, enact legislation, promulgate regulations, or otherwise impose requirements that would frustrate the objectives of the SAFE Act, keeping in mind that the SAFE Act's primary objectives include provision of a comprehensive licensing and supervisory system with uniform application and reporting requirements.

B. Definition of Loan Originator Section 1503(3)(A)(i) of the SAFE Act defines "loan originator" as "an individual who (I) takes a residential mortgage loan application; and (II) offers or negotiates terms of a residential mortgage loan for compensation or gain." Section 1503(3)(B), entitled "Other Definitions Relating to Loan Originator" provides "For purposes of this subsection, an individual `assists a consumer in obtaining or applying to obtain a residential mortgage loan' by, among other things, advising on loan terms (including rates, fees, other costs), preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan. HUD interprets "application" to include any request from a borrower, however communicated, for an offer (or in response to a solicitation of an offer) of residential mortgage loan terms, as well as the information from the borrower that is typically required in order to make such an offer. HUD interprets "taking" an application to mean receipt of an application for the purpose of deciding whether or not to extend the requested offer of a loan to the borrower, whether the application is received directly or indirectly from the borrower.

Since it generally would not be possible for an individual to offer to or negotiate residential mortgage loan terms with a borrower without first receiving the request from the borrower (including a positive response to a solicitation of an offer) as well as the information typically contained in a borrower's application, HUD considers the definition of loan originator to encompass any individual who, for compensation or gain, offers or negotiates pursuant to a request from and based on the information provided by the borrower. Such an individual would be included in the definition of loan originator, regardless of whether the individual takes the request from the borrower for an offer (or positive response to an offer) of residential mortgage loan terms directly or indirectly from the borrower. The SAFE Act also describes activities in the residential mortgage process that are excluded from the definition of "loan originator." Activities that are excluded are those that pertain to administrative or clerical tasks; real estate brokerage activities by individuals licensed or registered by a state to undertake real estate brokerage activities unless a person is compensated by a loan originator, loan processing or underwriting undertaken under the direction and supervision of a state-licensed loan originator or registered loan originator; and those individuals solely involved in extensions of credit relating to timeshare plans.

HUD interprets an individual who "takes a residential mortgage loan application" to exclude an individual who performs purely administrative or clerical tasks, such as physically handling a completed application form or transmitting a completed form to a lender on behalf of a prospective borrower. This interpretation is consistent with the exclusion defined in section 1503(3)(C) of the SAFE Act. On the other hand, HUD views activity that involves assisting or advising a prospective borrower in the completion of an application extending beyond purely administrative or clerical tasks falls within coverage of the SAFE Act provided by section 1503(3)(B). As a result, an individual who offers or negotiates residential mortgage loan terms for compensation or gain could not avoid applicability of the SAFE Act standards by having another person or entity take the application from the prospective borrower and then pass the application to the individual. A state licensing and registration system that permits such individuals to avoid compliance with SAFE Act standards would be determined by HUD to be not in compliance with the SAFE Act. A state may clarify that such individuals are not exempt from licensing requirements. The MSL provides one approach in making this clarification in section XX.XXX.030(6).

Notwithstanding the broad definition of "loan originator" in the SAFE Act, there are some limited contexts where offering or negotiating residential mortgage loan terms would not make an individual a loan originator. The provision in the definition that loan originators are individuals who take an "application" implies a formality and commercial context that is wholly absent where an individual offers or negotiates terms of a residential mortgage loan with or on behalf of a member of his or her immediate family. State legislation that excludes from licensing and registration requirements an individual who offers or negotiates terms of a residential mortgage loan only with or on behalf of an immediate family member will not be found to be out of compliance with the SAFE Act merely because of such exclusion. The MSL includes this exclusion in section XX.XXX.040(3)(b).

The commercial context implied by the taking of an "application" is also absent where an individual seller provides financing to a buyer pursuant to the sale of the seller's own residence. The frequency
with which a particular seller provides financing is so limited that HUD's view is that Congress did not intend to require such sellers to obtain loan originator licenses. Accordingly, state legislation that excludes from licensing and registration requirements an individual who offers or negotiates terms of a residential mortgage loan only to the buyer or prospective buyer of the seller's residence will not be found to be out of compliance with the SAFE Act. The MSL includes this exclusion in section XX.XXX.040 (3)(c). Additionally, the definition generally would not apply to, for example, a licensed attorney who negotiates terms of a residential mortgage loan with a prospective lender on behalf of a client as an ancillary matter to the attorney's representation of the client, unless the attorney is compensated by a lender, mortgage broker, or other mortgage loan originator or by an agent of such lender, mortgage broker, or other loan originator. In such cases, the duties of loyalty, competence, and diligence owed by the attorney to his or her client are significant. HUD views the SAFE Act's requirements for registration and licensing as not applying in this context, which is distinguished from the commercial context contemplated in the SAFE Act. The MSL includes this exclusion in section XX.XXX.040(3)(d).

C. Definition of "Dwelling" The SAFE Act's definition of "residential mortgage loan" includes a loan secured by a consensual security interest on a "dwelling" and cross-references the definition of dwelling in section 103(v) of the Truth in Lending Act (TILA) (15 U.S.C. 1601 note). Regulation Z, which implements TILA, defines dwelling to mean "a residential structure that contains 1 to 4 units, whether or not that structure is attached to real property. The term includes an individual condominium unit, cooperative unit, mobile home, and trailer, if it is used as a residence." (12 CFR 226.2(a)(19).) Since both the SAFE Act and TILA address consumer protections for borrowers in housing finance transactions, HUD finds that the same interpretation applies under the SAFE Act. In addition, HUD interprets "mobile home" to include a manufactured home, as defined in the National Manufactured Housing Construction and Safety Standards Act of 1974. (42 U.S.C. 5402(6).)

D. Delayed Effective Date of Requirement to Obtain and Maintain a License Under the SAFE Act, HUD may determine the acceptability of states' licensing and registration systems and of their participation in the NMLS as early as July 31, 2009, or July 31, 2010, as applicable. As a result, states are facing tight deadlines before they must enact legislation and implement systems to carry out licensing and registration requirements. To meet the SAFE Act's licensing requirements, NMLSR will have to develop tests and approve educational courses, mortgage loan originators will have to comply with testing, education, and bonding requirements, and states will have to evaluate the records of thousands of applicants.

Although a state should enact legislation or promulgate regulations by the applicable deadline, HUD's position is that Congress did not intend for states to require all mortgage loan originators to be licensed in accordance with the SAFE Act's standards immediately upon enactment of the state's legislation or issuance of regulations. Such a requirement could cause a massive disruption in the housing finance industry at a time when millions of Americans may be seeking to refinance their existing mortgages or to purchase a new home. The ability of loan originators to facilitate such transactions is critical to ameliorate the current conditions in the housing market, but in many states, individuals currently performing loan originations may not be able to meet the educational, testing, and background check requirements by the time required legislation or regulations become effective.
In addition, HUD is aware that some states already require licensure of loan originators, and that some individuals in those states will hold licenses that do not expire until as late as December 2010. Nonetheless, the provision for HUD to enforce the SAFE Act's standards in any state that fails to implement these standards reflects the underlying statutory concern that loan originators who do not meet these standards pose a significant risk to borrowers and the housing finance system. As a result, any period during which loan originators may operate without a SAFE Act-compliant license must be only as long as necessary for substantial numbers of qualified loan originators to obtain licenses.

Accordingly, HUD will not determine that a state's legislation is not in compliance with the SAFE Act merely because the legislation or regulations provide for a reasonable period following enactment for certain loan originators to be licensed under the new requirements. Considering the education, testing, and background check standards that license applicants must meet, HUD views a reasonable delay, with respect to individuals who do not already possess a valid loan originator license, is one which does not extend past July 31, 2010. Such a delay generally provides one year from state enactment of legislation for individuals to come into compliance with applicable requirements. (HUD has determined that all state legislatures that meet only biennially meet in 2009, which means that these states will have the opportunity to enact SAFE Act compliant legislation by July 31, 2009.) For individuals who possess licenses granted under a system that was in place prior to the SAFE Act-compliant system, HUD views a reasonable delay is one that does not extend past December 31, 2010.

This effective date will accommodate individuals with two-year licenses that were granted or renewed as late as December 2008, and also synchronizes with the NMLSR's uniform annual license expiration date of December 31. The MSL provides in section L26-(1)(2) for these delayed effective dates for the state licensing requirement, and provides that these effective dates could be further extended only with HUD's approval. HUD may approve a later date only upon a state's demonstration that substantial numbers of loan originators (or of a class of loan originators) who require a state license face unusual hardship, through no fault of their own or of the state government, in complying with the standards required by the SAFE Act to be in the state legislation and in obtaining state licenses within one year.

E. State of Licensure Section 1504(a) of the SAFE Act prohibits an individual from "engaging in the business of a loan originator" without first obtaining a registration or state license. HUD interprets this provision to mean that an individual must comply with licensing and registry requirements of a state in order to engage in the business of a loan originator with respect to any residential property in that state, regardless of whether the individual or the prospective borrower is located in the state. This interpretation ensures that each state is able to establish and enforce the provisions of its SAFE Act licensing system and prevents an individual from circumventing a state's requirements simply by physically locating outside of the state and conducting business by telephone or other means. This interpretation, however, does not affect the level of reciprocity a state may grant to another state's determination that its own SAFE Act-compliant licensing requirements have been met. This interpretation promotes clarity by unambiguously determining which state's license is required for a given transaction. The MSL incorporates this interpretation in section XX.XXX.040(1).

F. Felony Convictions Section 1505(b)(2) of the SAFE Act provides that, to be eligible for a license, an individual must not have been convicted of any felony within the preceding seven years or convicted of certain types of felonies at any time prior to application. Since the provision is triggered by a conviction, rather than by an extant record of a conviction, HUD interprets the provision to make an individual ineligible for a loan originator license even if the conviction is later expunged. Pardoned convictions, in contrast, are generally treated as legal nullities for all purposes under state law and would not render an individual ineligible. The law under which an individual is convicted, rather than the state where the individual applies for a license, determines whether a particular crime is classified as a felony.

G. Surety Bond Section 1508(d)(6) of the SAFE Act provides that states must set minimum net worth or surety bond requirements or establish a recovery fund paid into by loan originators. HUD has determined that a state may comply with the SAFE Act requirement by providing that, in the case of a company that employs more than one loan originator, the bonding requirement may be met at the company level. Individual loan originators would not have to be bonded separately.

Licensing Requirements: Mortgage Loan Originators must: Provide fingerprints for an FBI criminal history background check, Provide authorization for NMLS&R to obtain a credit report, Input and maintain their personal Mortgage Loan Originator record in NMLS&R as their license in each state in which they wish to conduct loan origination activity, Pass a national mortgage test Take 20 hours of pre-licensure education courses approved by NMLS&R. The education must include: 3 hours of federal law and regulations, 3 hours of ethics, which must include fraud, consumer protection, and fair lending, 2 hours of standards on non-traditional mortgage lending Licensing Standards: All state-licensed Mortgage Loan Originators must meet the following standards: Never had a loan originator license revoked; and has had no felonies in the past seven years; and never had a felony involving fraud, dishonesty, breach or trust or money laundering; and demonstrates financial responsibility and general fitness; and Scores 75% or better on a national test created by NMLS&R. The test will include: Ethics, Federal law and regulation, State law and regulation, Federal and state law and regulation pertaining to fraud, consumer protection, nontraditional mortgages, and fair lending; and takes eight hours of continuing education annually. The education must include: 3 hours of federal law and regulations, 3 hours of ethics, which must include fraud, consumer protection, and fair lending, 2 hours of standards on nontraditional mortgage lending; and Maintain licensure through NMLS&R. FURTHER INFORMATION CONTACT: HUD Office of Regulatory Affairs and Manufactured Housing Department of Housing and Urban Development 451 Seventh Street, SW Rm. 9162
Washington, DC 20410-8000 Telephone: (202) 708-6401 FAX: (202) 708-2678 Email: safeprogram@hud.gov
PAGE #862 - Fair Credit Reporting Act

Fair Credit Reporting Act The federal Fair Credit Reporting Act (FCRA) is designed to promote accuracy, fairness, and privacy of information in the files of every "consumer reporting agency" (CRA). Most CRAs are credit bureaus that gather and sell information about you - such as if you pay your bills on time or have filed bankruptcy to creditors, employers, landlords, and other businesses. You can find the complete text of the FCRA, 15 U.S.C. 1681-1681u, at the FTC's web site. The FCRA gives you specific rights, as outlined below. You may have additional rights under state law. You may contact a state or local consumer protection agency or a state attorney general to learn those rights.

You must be told if information in your file has been used against you. Anyone who uses information from a CRA to take action against you - such as denying an application for credit, insurance, or employment - must tell you, and give you the name, address, and phone number of the CRA that provided the consumer report. You can find out what is in your file. At your request, a CRA must give you the information in your file, and a list of everyone who has requested it recently. There is no charge for the report if a person has taken action against you because of information supplied by the CRA, if you request the report within 60 days of receiving notice of the action. You also are entitled to one free report every twelve months upon request if you certify that (1) you are unemployed and plan to seek employment within 60 days, (2) you are on welfare, or (3) your report is inaccurate due to fraud. Otherwise, a CRA may charge you up to eight dollars.

You can dispute inaccurate information with the CRA. If you tell a CRA that your file contains inaccurate information, the CRA must investigate the items (usually within 30 days) by presenting to its information source all relevant evidence you submit, unless your dispute is frivolous. The source must review your evidence and report its findings to the CRA. (The source also must advise national CRAs to which it has provided the data - of any error.) The CRA must give you a written report of the investigation, and a copy of your report if the investigation results in any change. If the CRA's investigation does not resolve the dispute, you may add a brief statement to your file. The CRA must normally include a summary of your statement in future reports. If an item is deleted or a dispute statement is filed, you may ask that anyone who has recently received your report be notified of the change. Privacy advocates advise consumers to protect themselves from identity theft and related crimes, by checking their credit reports twice a year, shredding personal documents before throwing them away and cleansing wallets of old receipts and printed social security numbers.

Inaccurate information must be corrected or deleted. A CRA must remove or correct inaccurate or
unverified information from its files, usually within 30 days after you dispute it. However, the CRA is not required to remove accurate data from your file unless it is outdated (as described below) or cannot be verified. If your dispute results in any change to your report, the CRA cannot reinsert into your file a disputed item unless the information source verifies its accuracy and completeness. In addition, the CRA must give you a written notice telling you it has reinserted the item. The notice must include the name, address and phone number of the information source. You can dispute inaccurate items with the source of the information. If you tell anyone - such as a creditor who reports to a CRA - that you dispute an item, they may not then report the information to a CRA without including a notice of your dispute. In addition, once you've notified the source of the error in writing, it may not continue to report the information if it is, in fact, an error. Outdated information may not be reported. In most cases, a CRA may not report derogatory information that is more than seven years old; ten years for bankruptcies.

Access to your file is limited. A CRA may provide information about you only to people with a need recognized by the FCRA - usually to consider an application with a creditor, insurer, employer, landlord, or other business. Your consent is required for reports that are provided to employers, or reports that contain medical information. A CRA may not give out information about you to your employer, or prospective employer, without your written consent. A CRA may not report medical information about you to creditors, insurers, or employers without your permission. You may choose to exclude your name from CRA lists for unsolicited credit and insurance offers. Creditors and insurers may use file information as the basis for sending you unsolicited offers of credit or insurance. Such offers must include a toll-free phone number for you to call if you want your name and address removed from future lists. If you call, you must be kept off the lists for two years. If you request, complete, and return the CRA form provided for this purpose, you must be taken off the lists indefinitely. You may seek damages from violators. If a CRA, a user or (in some cases) a provider of CRA data, violates the FCRA, you may sue them in state or federal court.
PAGE #867 - Fair Credit Reporting Act Q&A

Fair Credit Reporting Questions and Answers... If you've ever applied for a charge account, a personal loan, insurance, or a job, there's a file about you. This file contains information on where you work and live, how you pay your bills, and whether you've been sued or filed for bankruptcy. Companies that gather and sell this information are called Consumer Reporting Agencies (CRAs). The most common type of CRA is the credit bureau. The information CRAs sell about you to creditors, employers, insurers, and other businesses is called a consumer report. The Fair Credit Reporting Act (FCRA), enforced by the Federal Trade Commission, is designed to promote accuracy and ensure the privacy of the information used in consumer reports. Recent amendments to the Act expand your rights and place additional requirements on CRAs. Businesses that supply information about you to CRAs and those that use consumer reports also have new responsibilities under the law.
Here are some questions consumers commonly ask about consumer reports and CRAs -- and the answers. Note that you may have additional rights under state laws. Contact your state Attorney General or local consumer protection agency for more information. Q. Do I have a right to know what's in my report? A. Yes, if you ask for it. The CRA must tell you everything in your report, including, in most cases, the sources of the information. The CRA also must give you a list of everyone who has requested your report within the past year - two years for employment related requests. Q. Is there a charge for my report? A. Sometimes. There's no charge if a company takes adverse action against you, such as denying your application for credit, insurance or employment, and you request your report within 60 days of receiving the notice of the action. The notice will give you the name, address, and phone number of the CRA. In addition, you're entitled to one free report a year (1) you're unemployed and plan to look for a job within 60 days, (2) you're on welfare, or (3) your report is inaccurate because of fraud.

Q. What can I do about inaccurate or incomplete information? A. Under the new law, both the CRA and the information provider have responsibilities for correcting inaccurate or incomplete information in your report. To protect all your rights under this law, contact both the CRA and the information provider. First, tell the CRA in writing what information you believe is inaccurate. CRAs must reinvestigate the items in question - usually within 30 days - unless they consider your dispute frivolous. They also must forward all relevant data you provide about the dispute to the information provider. After the information provider receives notice of a dispute from the CRA, it must investigate, review all relevant information provided by the CRA, and report the results to the CRA. If the information provider finds the disputed information to be inaccurate, it must notify all nationwide CRAs so that they can correct this information in your file. When the reinvestigation is complete, the CRA must give you the written results and a free copy of your report if the dispute results in a change. If an item is changed or removed, the CRA cannot put the disputed information back in your file unless the information provider verifies its accuracy and completeness, and the CRA gives you a written notice that includes the name, address, and phone number of the provider. Second, tell the creditor or other information provider in writing that you dispute an item. Many providers specify an address for disputes. If the provider then reports the item to any CRA, it must include a notice of your dispute. In addition, if you are correct - that is, if the information is inaccurate - the information provider may not use it again.

Q. What can I do if the CRA or information provider won't correct the information I dispute? A. A reinvestigation may not resolve your dispute with the CRA. If that's the case, ask the CRA to include your statement of the dispute in your file and in future reports. If you request, the CRA also will provide your statement to anyone who received a copy of the old report in the recent past. There usually is a fee for this service. If you tell the information provider that you dispute an item, a notice of your dispute must be included anytime the information provider reports the item to a CRA.

Q. Can my employer get my report?
A. Only if you say it's okay. A CRA may not supply information about you to your employer, or to a prospective employer, without your consent. Q. Can creditors, employers, or insurers get a report that contains medical information about me? A. Not without your approval. Q. What should I know about "investigative consumer reports"? A. "Investigative consumer reports" are detailed reports that involve interviews with your neighbors or acquaintances about your lifestyle, character, and reputation. They may be used in connection with insurance and employment applications. You'll be notified in writing when a company orders such a report. The notice will explain your right to request certain information about the report from the company you applied to. If your application is rejected, you may get additional information from the CRA. However, the CRA does not have to reveal the sources of the information.

Q. How long can a CRA report derogatory information? A. Seven years. There are certain exceptions: Information about criminal convictions may be reported without any time limitation. Bankruptcy information may be reported for 10 years. Information reported in response to an application for a job with a salary of more than $75,000 has no time limit. Information reported because of an application for more than $150,000 worth of credit or life insurance has no time limit. Information about a lawsuit or an unpaid judgment against you can be reported for seven years or until the statute of limitations runs out, whichever is longer.

Q. Can anyone get a copy of my report? A. No. Only people with a legitimate business need, as recognized by the FCRA. For example, a company is allowed to get your report if you apply for credit, insurance, employment, or to rent an apartment. Q. Are there other laws I should know about? A. Yes. If your credit application was denied, the Equal Credit Opportunity Act requires creditors to specify why - if you ask. For example, the creditor must tell you whether you were denied because you have "no credit file" with a CRA or because the CRA says you have "delinquent obligations." The ECOA also requires creditors to consider additional information you might supply about your credit history. You may want to find out why the creditor denied your application before you contact the CRA.
PAGE #874 - Privacy Protection/Do not call

Privacy Protection / Do Not Call Has your evening or weekend been disrupted by a call from a telemarketer? If so, youre not alone. The Federal Communications Commission (FCC) has been receiving complaints in increasing numbers from
consumers throughout the nation about unwanted and uninvited calls to their homes from telemarketers. Pursuant to its authority under the Telephone Consumer Protection Act (TCPA) of 1991, the FCC established, together with the Federal Trade Commission (FTC), a national Do-Not-Call Registry. The registry is nationwide in scope, applies to all telemarketers (with the exception of certain non-profit organizations), and covers both interstate and intrastate telemarketing calls. Commercial telemarketers are not allowed to call you if your number is on the registry, subject to certain exceptions. As a result, consumers can, if they choose, reduce the number of unwanted phone calls to their homes. The fine for each violation of the Telephone Consumer Protection Act (TCPA) is up to $16,000. The fine for each violation of the Telemarketing Sales Rule (TSR) which is regulated by the FTC is up to $11,000.
PAGE #875 - Do-not-call Registry

Do-Not-Call Registry You can register your phone numbers for free, and they will remain on the list until you remove them or discontinue service there is no need to re-register numbers. The Do-Not-Call registry does not prevent all unwanted calls. It does not cover the following: calls calls calls calls from organizations with which you have established a business relationship; for which you have given prior written permission; which are not commercial or do not include unsolicited advertisements; by or on behalf of tax-exempt non-profit organizations.

How to Register For Consumers: Subscribers may register their residential telephone number, including wireless numbers, on the national Do-Not-Call registry by telephone or by Internet at no cost. Consumers can register on-line for the national do-not-call registry by going to www.donotcall.gov. To register by telephone, consumers may call 1-888-382-1222: for TTY call 1-866-290-4236. You must call from the phone number you wish to register. For Industry: Telemarketers and sellers are required to search the registry at least once every 31 days and drop from their call lists the phone numbers of consumers who have registered.

Related Rules In addition to the establishment of a national Do-Not-Call Registry, there are other amendments to the Commission's rules implementing the TCPA that may reduce the number of telemarketing calls to your home:
If you subscribe to CALLER ID, you should know when a telemarketer is calling you: telemarketers are required to transmit Caller ID information and may not block their numbers. Telemarketers must ensure that predictive dialers abandon no more than three percent of all calls placed and answered by a person. A call will be considered "abandoned" if it is not transferred to a live sales agent within two seconds of the recipient's greeting. As a result, you are less likely to run to answer the phone only to find silence or the "click" of the calling party disconnecting the line.

In addition to these changes the rules provide: Telephone solicitation calls to your home before 8 am or after 9 pm are prohibited. Anyone making a telephone solicitation call to your home must provide his/her name, the name of the entity on whose behalf the call is being made, and a telephone number or address at which you may contact that entity. Company-specific do-not-call lists are available to consumers who wish to avoid telemarketing calls only from specific companies.

How to Complain Filing a Do-Not-Call Complaint In addition to complaints alleging violations of the national do-not-call list, you may also file a complaint against a telemarketer who is calling for a commercial purpose (e.g., not charitable organizations) if: The telemarketer calls before 8 AM or after 9 PM; OR The telemarketer leaves a message, but fails to leave a phone number that you can call to sign up for their company specific do-not-call list; OR You receive a telemarketing call from a company that you have previously requested not call you; OR The telemarketing firm fails to identify itself; OR You receive a pre-recorded commercial message from someone with whom you do not have an established business relationship and to whom you have not given permission to call you.
PAGE #880 - FTC Red Flag Rules

FTC Red Flag Rules / Fair and Accurate Credit Transaction Act of 2003 New Red Flag Requirements for Financial Institutions and Creditors Will Help Fight Identity Theft Identity thieves use peoples personally identifying information to open new accounts and misuse existing accounts, creating havoc for consumers and businesses. Financial institutions and creditors soon will be required to implement a program to detect, prevent, and mitigate instances of identity theft. The Federal Trade Commission (FTC), the federal bank regulatory agencies, and the National Credit Union Administration (NCUA) have issued regulations (the Red Flags Rules) requiring financial institutions and creditors to develop and implement written identity theft prevention programs, as part of the Fair and Accurate Credit Transactions (FACT) Act of 2003. The programs must be in place by November 1, 2008, and must provide for the identification, detection, and response to patterns,
practices, or specific activities known as red flags that could indicate identity theft.

Who must comply with the Red Flags Rules? The Red Flags Rules apply to financial institutions and creditors with covered accounts. Under the Rules, a financial institution is defined as a state or national bank, a state or federal savings and loan association, a mutual savings bank, a state or federal credit union, or any other entity that holds a transaction account belonging to a consumer. Most of these institutions are regulated by the Federal bank regulatory agencies and the NCUA. Financial institutions under the FTCs jurisdiction include state-chartered credit unions and certain other entities that hold consumer transaction accounts. A transaction account is a deposit or other account from which the owner makes payments or transfers. Transaction accounts include checking accounts, negotiable order of withdrawal accounts, savings deposits subject to automatic transfers, and share draft accounts.

A creditor is any entity that regularly extends, renews, or continues credit; any entity that regularly arranges for the extension, renewal, or continuation of credit; or any assignee of an original creditor who is involved in the decision to extend, renew, or continue credit. Accepting credit cards as a form of payment does not in and of itself make an entity a creditor. Creditors include finance companies, automobile dealers, mortgage brokers, utility companies, and telecommunications companies. Where non-profit and government entities defer payment for goods or services, they, too, are to be considered creditors. Most creditors, except for those regulated by the Federal bank regulatory agencies and the NCUA, come under the jurisdiction of the FTC. A covered account is an account used mostly for personal, family, or household purposes, and that involves multiple payments or transactions. Covered accounts include credit card accounts, mortgage loans, automobile loans, margin accounts, cell phone accounts, utility accounts, checking accounts, and savings accounts. A covered account is also an account for which there is a foreseeable risk of identity theft for example, small business or sole proprietorship accounts.

Complying with the Red Flags Rules Under the Red Flags Rules, financial institutions and creditors must develop a written program that identifies and detects the relevant warning signs or red flags of identity theft. These may include, for example, unusual account activity, fraud alerts on a consumer report, or attempted use of suspicious account application documents. The program must also describe appropriate responses that would prevent and mitigate the crime and detail a plan to update the program. The program must be managed by the Board of Directors or senior employees of the financial institution or creditor, include appropriate staff training, and provide for oversight of any service providers.

How flexible are the Red Flags Rules?
The Red Flags Rules provide all financial institutions and creditors the opportunity to design and implement a program that is appropriate to their size and complexity, as well as the nature of their operations. Guidelines issued by the FTC, the federal banking agencies, and the NCUA (ftc.gov/opa/2007/10/redflag.shtm) should be helpful in assisting covered entities in designing their programs. A supplement to the Guidelines identifies 26 possible red flags. These red flags are not a checklist, but rather, are examples that financial institutions and creditors may want to use as a starting point. They fall into five categories: alerts, notifications, or warnings from a consumer reporting agency; suspicious documents; suspicious personally identifying information, such as a suspicious address; unusual use of or suspicious activity relating to a covered account; and notices from customers, victims of identity theft, law enforcement authorities, or other businesses about possible identity theft in connection with covered accounts.
PAGE #885 - FHA mortgage lending

FHA Mortgage Lending and relevant programs Congress created the Federal Housing Administration (FHA) in 1934. The FHA became a part of the Department of Housing and Urban Development's (HUD) Office of Housing in 1965. When the FHA was created, the housing industry was flat on its back: Two million construction workers had lost their jobs. Terms were difficult to meet for homebuyers seeking mortgages. Mortgage loan terms were limited to 50 percent of the property's market value, with a repayment schedule spread over three to five years and ending with a balloon payment. America was primarily a nation of renters. Only four in 10 households owned homes. During the 1940s, FHA programs helped finance military housing and homes for returning veterans and their families after the war. In the 1950s, 1960s and 1970s, the FHA helped to spark the production of millions of units of privatelyowned apartments for elderly, handicapped and lower income Americans. When soaring inflation and energy costs threatened the survival of thousands of private apartment buildings in the 1970s, FHA's emergency financing kept cash-strapped properties afloat.
PAGE #886 - FHA mortgage lending

The FHA moved in to steady falling home prices and made it possible for potential homebuyers to get the financing they needed when recession prompted private mortgage insurers to pull out of oil producing states in the 1980s. By 2001, the nation's homeownership rate had soared to an all time high of 68.1 percent as of the third quarter that year. The FHA and HUD have insured over 34 million home mortgages and 47,205 multifamily project mortgages since 1934. FHA currently has 4.8 million insured single family mortgages and 13,000 insured multifamily projects in its portfolio. In the more than 60 years since the FHA was created, much has changed and Americans are now arguably the best housed people in the world. HUD has helped greatly with that success.
PAGE #887 - Appraisal law

Appraisal Law In March 2008, Fannie Mae adopted the Home Valuation Code of Conduct (HVCC) which governs the appraisal process for loans that are to be delivered to Fannie Mae. The HVCC is a detailed document that governs many aspects of the home appraisal process. This article will provide insight into how the HVCC appraisal process affects homeowners. Although HUD/FHA did not adopt HVCC, HUD/FHA did adopt "similar language" to the HVCC. Additional information on this can be found by reading Mortgee Letter 2009-28 as it relates to Appraisal Indepdence. What is the HVCC? The HVCC is a code of conduct to be followed by lenders, mortgage brokers, and appraisers on any home loan (subject to many qualifiers, for example it only applies to 1 to 4 unit single-family loans; it does not apply to loans insured or guaranteed by a federal agency; etc.) which is to be sold to Fannie Mae or Freddie Mac. The HVCC specifically addressed the relationship between the appraiser of the property and the lender, mortgage broker and homeowner. The HVCC is very detailed and provides for many exceptions to its general rules. In summary, the heart of the purpose of the HVCC is to eliminate undue influence upon the appraiser by either the lender or the homeowner.

Some of the restrictions include: The appraiser may only be paid by the lender requesting the appraisal, not directly by the homeowner. The homeowner may ultimately reimburse the lender on the settlement statement for the loan. The appraiser may not be given a target value for a home. However, if the transaction is a purchase, a copy of the purchase contract may be provided to the appraiser. The lender may not coerce the appraiser to hit a certain value by threatening to withhold future business. The lender may not order additional appraisals to value shop the home value. The lender may, however, order more than one appraisal on a home if it is part of a standard procedure documented by the lender. Lenders cannot use in-house appraisers to determine value. Lenders can use in-house appraisers to review the independent appraisal and assist in the loan decision. Mortgage brokers cannot select the appraiser nor can they communicate with the appraiser selected by the lender. This is a sample of the type of restrictions placed upon lenders, mortgage brokers, and homeowners by the HVCC. Lenders and other real estate professionals must be completely aware of the HVCC requirements and comply when they are applicable. Homeowners are not affected as directly.

Why is the HVCC needed? The housing market and lending industry have been primary contributors in the current economic downturn. There are numerous articles detailing the greed of the banks in generating high-risk home loans that were then graded as quality paper by rating agencies. Many of the facts in these articles are true.
Fannie Mae, being a GSE, was influenced by the US Congress to become less stringent in its lending guidelines to allow more lending to individuals that would not typically qualify for a conforming loan. Other investors followed suit, and lending guidelines become less and less strict as competition for loans increased. As a small part of this large problem, the competition led to unhealthy activities, such as lenders and mortgage brokers pressuring appraisers to overvalue properties, allowing for larger loans and therefore less equity invested by the homeowner. The HVCC is a direct response to this undue pressure. Please note that the appraisal industry is managed by ethics and guidelines. This article does not intend to reflect poorly on this industry. It is the opinion that the majority of appraisers would not respond unethically to undue pressure.

How does it affect the Homeowner? In most cases, the homeowner ultimately pays for and receives a copy of the appraisal. The HVCC helps ensure that the appraisal value is a true independent value derived by a licensed and qualified appraiser who is under no undue influence to distort or bias the value. This is good news to homeowners who wish to know the value of their property. However, since appraisers can now fairly appraise properties without undue influence, homeowners may not be able to receive a loan amount as high as they could have in the past. The HVCC is one of many much needed reforms to the lending industry to protect the investors, lenders, and homeowners.
explain the history of the Gramm-Leach-Bliley Act; explain the Consumer Credit Protection Act; explain the Fair and Accurate Transaction Act; discuss truth in advertising; explain the USA Patriot Act; and be able to explain the Flood Disaster Protection Act of 1973.
PAGE #893 - Gramm-Leach-Bliley Act (GLB)

Gramm-Leach-Bliley Act (GLB) The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, (Pub.L. 106-102, 113 Stat. 1338, enacted November 12, 1999) is an act of the 106th United States Congress (1999-2001) which repealed part of the Glass-Steagall Act of 1933, opening up the market among banking companies, securities companies and insurance companies. The Glass-Steagall Act prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and/or an insurance company.
The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate. For example, Citicorp (a commercial bank holding company) merged with Travelers Group (an insurance company) in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica and Travelers. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act of 1956 by combining securities, insurance, and banking, if not for a temporary waiver process. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the "financial services industry".

Legislative history Final Congressional vote by chamber and party, November 4, 1999. The banking industry had been seeking the repeal of the 1933 Glass-Steagall Act since the 1980s, if not earlier. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act. Respective versions of the legislation were introduced in the U.S. Senate by Phil Gramm (Republican of Texas) and in the U.S. House of Representatives by Jim Leach (R-Iowa). The third lawmaker associated with the bill was Rep. Thomas J. Bliley, Jr. (R-Virginia), Chairman of the House Commerce Committee from 1995 to 2001.

The House passed its version of the Financial Services Act of 1999 on July 1st by a bipartisan vote of 343-86 (Republicans 20516; Democrats 13869; Independent 01), two months after the Senate had already passed its version of the bill on May 6th by a much-narrower 5444 vote along basicallypartisan lines (53 Republicans and one Democrat in favor; 44 Democrats opposed).

When the two chambers could not agree on a joint version of the bill, the House voted on July 30th by a vote of 241-132 (R 58-131; D 182-1; Ind. 10) to instruct its negotiators to work for a law which ensured that consumers enjoyed medical and financial privacy as well as "robust competition and equal and non-discriminatory access to financial services and economic opportunities in their communities" (i.e., protection against exclusionary redlining).

The bill then moved to a joint conference committee to work out the differences between the Senate and House versions. Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the anti-redlining Community Reinvestment Act and address certain privacy concerns; the conference committee then finished its work by the beginning of November. On November 4th, the final bill resolving the differences was passed by the Senate 90-8, and by the House 362-57. This legislation was signed into law by President Bill Clinton on November 12, 1999.
Changes caused by the Act Many of the largest banks, brokerages, and insurance companies desired the Act at the time. The justification was that individuals usually put more money into investments when the economy is doing well, but they put most of their money into savings accounts when the economy turns bad. With the new Act, they would be able to do both 'savings' and 'investment' at the same financial institution, which would be able to do well in both good and bad economic times.

Prior to the Act, most financial services companies were already offering both saving and investment opportunities to their customers. On the retail/consumer side, a bank called Norwest which would later merge with Wells Fargo Bank led the charge in offering all types of financial services products in 1986. American Express attempted to own almost every field of financial business (although there was little synergy among them). Things culminated in 1998 when Travelers, a financial services company with everything but a retail/commercial bank, bought out Citibank, creating the largest and the most profitable company in the world. The move was technically illegal and provided impetus for the passage of the Gramm-Leach-Bliley Act. Also prior to the passage of the Act, there were many relaxations to the Glass-Steagall Act. For example, a few years earlier, commercial Banks were allowed to get into investment banking, and before that banks were also allowed to get into stock and insurance brokerage. Insurance underwriting was the only main operation they weren't allowed to do, something rarely done by banks even after the passage of the Act.

Much consolidation occurred in the financial services industry since, but not at the scale some had expected. Retail banks, for example, do not tend to buy insurance underwriters, as they seek to engage in a more profitable business of insurance brokerage by selling products of other insurance companies. Other retail banks were slow to market investments and insurance products and package those products in a convincing way. Brokerage companies had a hard time getting into banking, because they do not have a large branch and backshop footprint. Banks have recently tended to buy other banks, such as the 2004 Bank of America and Fleet Boston merger, yet they have had less success integrating with investment and insurance companies. Many banks have expanded into investment banking, but have found it hard to package it with their banking services, without resorting to questionable tie-ins which caused scandals at Smith Barney.

Remaining restrictions Crucial to the passing of this Act was an amendment made to the GLBA, stating that no merger may go ahead if any of the financial holding institutions, or affiliates thereof, received a "less than satisfactory [sic] rating at its most recent CRA exam", essentially meaning that any merger may only go ahead with the strict approval of the regulatory bodies responsible for the Community Reinvestment Act (CRA). This was an issue of hot contention, and the Clinton Administration stressed that it "would veto any legislation that would scale back minority-lending requirements."
The GLBA also did not remove the restrictions on banks placed by the Bank Holding Company Act of 1956 which prevented financial institutions from owning non-financial corporations. It conversely prohibits corporations outside of the banking or finance industry from entering retail and/or commercial banking. Many assume Wal-Mart's desire to convert its industrial bank to a commercial/retail bank ultimately drove the banking industry to back the GLBA restrictions.

Some restrictions remain to provide some amount of separation between the investment and commercial banking operations of a company. For example, licensed bankers must have separate business cards, e.g., "Personal Banker, Wells Fargo Bank" and "Investment Consultant, Wells Fargo Private Client Services". Much of the debate about financial privacy is specifically centered around allowing or preventing the banking, brokerage, and insurances divisions of a company from working together.

In terms of compliance, the key rules under the Act include The Financial Privacy Rule which governs the collection and disclosure of customers personal financial information by financial institutions. It also applies to companies, regardless of whether they are financial institutions, who receive such information. The Safeguards Rule requires all financial institutions to design, implement and maintain safeguards to protect customer information. The Safeguards Rule applies not only to financial institutions that collect information from their own customers, but also to financial institutions such as credit reporting agencies that receive customer information from other financial institutions.

Privacy GLBA compliance is mandatory; whether a financial institution discloses nonpublic information or not, there must be a policy in place to protect the information from foreseeable threats in security and data integrity. Major components put into place to govern the collection, disclosure, and protection of consumers nonpublic personal information; or personally identifiable information include: Financial Privacy Rule Safeguards Rule Pretexting Protection Financial Privacy Rule (Subtitle A: Disclosure of Nonpublic Personal Information, codified at 15 U.S.C. 68016809) The Financial Privacy Rule requires financial institutions to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. The privacy notice must explain the information collected about the consumer, where that information is shared, how that information is used, and how that information is protected.

The notice must also identify the consumers right to opt-out of the information being shared with unaffiliated parties per the Fair Credit Reporting Act. Should the privacy policy change at any point in time, the consumer must be notified again for acceptance. Each time the privacy notice is reestablished, the consumer has the right to opt-out again. The unaffiliated parties receiving the nonpublic information are held to the acceptance terms of the consumer under the original relationship agreement. In summary, the financial privacy rule provides for a privacy policy agreement between the company and the consumer pertaining to the protection of the consumers personal nonpublic information.

Safeguards Rule (Subtitle A: Disclosure of Nonpublic Personal Information, codified at 15 U.S.C. 68016809) The Safeguards Rule requires financial institutions to develop a written information security plan that describes how the company is prepared for, and plans to continue to protect clients nonpublic personal information. (The Safeguards Rule also applies to information of those no longer consumers of the financial institution.) This plan must include: Denoting at least one employee to manage the safeguards, Constructing a thorough [risk management] on each department handling the nonpublic information, Develop, monitor, and test a program to secure the information, and Change the safeguards as needed with the changes in how information is collected, stored, and used. This rule is intended to do what most businesses should already be doing: protecting their clients. The Safeguards Rule forces financial institutions to take a closer look at how they manage private data and to do a risk analysis on their current processes. No process is perfect, so this has meant that every financial institution has had to make some effort to comply with the GLBA.

Pretexting protection (Subtitle B: Fraudulent Access to Financial Information, codified at 15 U.S.C. 68216827) Pretexting (sometimes referred to as "social engineering") occurs when someone tries to gain access to personal nonpublic information without proper authority to do so. This may entail requesting private information while impersonating the account holder, by phone, by mail, by email, or even by "phishing" (i.e., using a "phony" website or email to collect data). The GLBA encourages the organizations covered by the GLBA to implement safeguards against pretexting. For example, a wellwritten plan designed to meet GLBA's Safeguards Rule ("develop, monitor, and test a program to secure the information") would likely include a section on training employees to recognize and deflect inquiries made under pretext. In fact, the evaluation of the effectiveness of such employee training probably should include a followup program of random spot-checks, "outside the classroom", after completion of the [initial] employee training, in order to check on the resistance of a given (randomly chosen) student to various types of "social engineering" - perhaps even designed to focus attention on any new wrinkle that might have arisen after the [initial] effort to "develop" the curriculum for such employee training. Under United States law, pretexting by individuals is punishable as a common law crime of False Pretenses.

Financial institutions defined The GLBA defines "financial institutions" as: "companies that offer financial products or services to individuals, like loans, financial or investment advice, or insurance." The Federal Trade Commission (FTC) has jurisdiction over financial institutions similar to, and including, these: non-bank mortgage lenders, loan brokers, some financial or investment advisers, debt collectors, tax return preparers, banks, and real estate settlement service providers. These companies must also be considered significantly engaged in the financial service or production that defines them as a "financial institution". Insurance has jurisdiction first by the state, provided the state law at minimum complies with the GLBA. State law can require greater compliance, but not less than what is otherwise required by the GLBA.

Consumer vs. Customer defined The Gramm-Leach-Bliley Act defines a consumer as "an individual who obtains, from a financial institution, financial products or services which are to be used primarily for personal, family, or household purposes, and also means the legal representative of such an individual." A customer is a consumer that has developed a relationship with privacy rights protected under the GLBA. A customer is not someone using an automated teller machine (ATM) or having a check cashed at a cash advance business. These are not ongoing relationships like a customer might have; i.e., a mortgage loan, tax advising, or credit financing. A business is not an individual with personal nonpublic information, so a business cannot be a customer under the GLBA. A business, however, may be liable for compliance to the GLBA depending upon the type of business and the activities utilizing individuals personal nonpublic information.

Consumer/client privacy rights Under the GLBA, financial institutions must provide their clients a privacy notice that explains what information the company gathers about the client, where this information is shared, and how the company safeguards that information. This privacy notice must be given to the client prior to entering into an agreement to do business. There are exceptions to this when the client accepts a delayed receipt of the notice in order to complete a transaction on a timely basis. This has been somewhat mitigated due to online acknowledgement agreements requiring the client to read or scroll through the notice and check a box to accept terms.
The privacy notice must also explain to the customer the opportunity to opt-out. Opting out means that the client can say "no" to allowing their information to be shared with affiliated parties. The Fair Credit Reporting Act is responsible for the opt-out opportunity, but the privacy notice must inform the customer of this right under the GLBA. The client cannot opt-out of: information shared with those providing priority service to the financial institution marketing of products or services for the financial institution when the information is deemed legally required.

Effect on usury law in Arkansas & other states Section 731 of the GLBA, codified as subsection (f) of 12 U.S.C. 1831u, contains a unique provision aimed at Arkansas, whose usury limit was set at five percent above the Federal Reserve discount rate by the Arkansas Constitution and could not be changed by the Arkansas General Assembly. When the Office of the Comptroller of the Currency ruled that interstate banks established under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 could use their home state's usury law for all branches nationwide with minimal restrictions, Arkansas-based banks were placed at a severe competitive disadvantage to Arkansas branches of interstate banks; this led to out-of-state takeovers of several Arkansas banks, including the sale of First Commercial Bank (then Arkansas' largest bank) to Regions Financial Corporation in 1998.

Under Section 731, all banks headquartered in a state covered by that law may charge up to the highest usury limit of any state that is headquarters to an interstate bank which has branches in the covered state. Therefore, since Arkansas has branches of banks based in Alabama, Georgia, Mississippi, Missouri, North Carolina, Ohio and Texas, any loan that is legal under the usury laws of any of those states may be made by an Arkansas-based bank under Section 731. The section does not apply to interstate banks with branches in the covered state, but headquartered elsewhere; however, Arkansasbased interstate banks like Arvest Bank may export their Section 731 limits to other states. Due to Section 731, it is generally regarded that Arkansas-based banks now have no usury limit for credit cards or for any loan of greater than $2,000 (since Alabama, Regions' home state, has no limits on those loans), with a limit of 18% (the minimum usury limit in Texas) or more on all other loans. However, once Wells Fargo fully completes its proposed purchase of Century Bank (a Texas bank with Arkansas branches), Section 731 will do away with all usury limits for Arkansas-based banks since Wells Fargo's main bank charter is based in South Dakota, which repealed its usury laws many years ago.
PAGE #916 - Consumer Credit Protection Act

Consumer Credit Protection Act The Consumer Credit Protection Act (CCPA) (1969, P.L. 90-321) is the compendium of federal statutes found in Title 15 of the United States Code. Congress has amended the CCPA on several occasions by adding individual federal statutes, called subchapters, each focusing on a specific consumer issue. SUBCHAPTERS OF CCPA Subchapter I of CCPA is the Truth in Lending Act (TILA), becoming effective on July 1, 1969. Congress's primary purpose in adopting TILA was to ensure the meaningful disclosure of significant credit terms to consumers. The act requires those sellers, lenders, and lessors of personal property subject to the act to disclose certain credit terms with uniform terminology, location, and meaning in the contract,
regardless of where the parties sign the agreement.

To effectuate TILA, The Federal Reserve Board adopted "Regulation Z." TILA, along with Regulation Z, contain provisions regarding the issuance of credit cards, liability for unauthorized use of credit cards, credit card billing error resolution procedures, notice and disclosure requirements for credit card solicitations, disclosure requirements for high-rate mortgages and reverse mortgages, and rescission provisions for various types of transactions in which a security interest is retained in a consumer's principal residence. Subchapter II of the CCPA is the Restriction on Garnishment Act that became effective July 1, 1970. This law provides a maximum level of wage garnishment for any judgment debtor and prohibits an employer from terminating an employee based solely on the fact that the employee's wages have been garnished. Subchapter II-A is the Credit Repair Organizations Act, enacted by Congress on September 30, 1996. This statute pertains to credit repair organizations that provide services to individuals with debts resulting from consumer credit transactions. The law prohibits certain types of deceptive practices, requires mandatory disclosures in any contract signed by a customer of a credit repair organization, and allows the customer three business days from the date the contract is signed to rescind the contract.

Subchapter III of CCPA is the Fair Credit Reporting Reform Act of 1996 (FCRA) also enacted on September 30, 1996. This law applies to consumer reporting agencies, users of consumer reports, and persons or businesses that report negative information to consumer reporting agencies. The purpose of the FCRA is to protect individual consumers from false, misleading, or obsolete credit information by requiring consumer-reporting agencies to adopt reasonable procedures with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information. The FCRA also requires consumer reporting agencies and users of consumer credit information to make certain disclosures to consumers affected by use of that information. Administrative enforcement of the FCRA rests primarily with the Federal Trade Commission that has promulgated Statements of General Policy regarding the various provisions of the FCRA.

Subchapter IV of CCPA is the Equal Credit Opportunity Act (ECOA) and became effective on March 23, 1977. The purpose of the ECOA is to prohibit discrimination in credit transactions on one or more of nine bases: race, color, religion, national origin, sex, marital status, age, the fact that all or part of income derives from a public assistance program, or the fact that an applicant has in good faith exercised any right under the compendium of statutes in the Consumer Credit Protection Act. The ECOA applies to every aspect of credit transactions, from advertising of credit availability to the termination of existing credit. The act applies whether the credit is business or consumer credit, whether the obligation involves a finance charge or installment payments, or whether the person aggrieved by the discrimination is an individual or a business organization. The ECOA applies to the extension of credit where the right to defer payment of an obligation is granted. To enforce, interpret, and expand the ECOA, the Federal Reserve Board promulgated "Regulation B."
Subchapter V of CCPA is the Fair Debt Collection Practices Act (FDCPA) that became effective March 20, 1978. The purpose of the FDCPA is to eliminate unethical and abusive practices by debt collectors while engaged in the collection of consumer debts. The FDCPA attempts to accomplish this goal through a series of open-ended lists of prohibited activities. The Act applies to debt collectors who collect debts on behalf of third parties, but it does not apply to the collection efforts of original creditors. Under appropriate circumstances, an attorney is considered a debt collector subject to the provisions of the act. For example, an attorney who, in the regular course of business, represents creditors attempting to collect consumer debts would be considered a debt collector. The Federal Trade Commission issues official staff commentary that serves as official interpretations of the FDCPA.

Finally, Subchapter VI of CCPA is the Electronic Fund Transfers Act (EFTA), enacted on August 9, 1989. The purpose of the EFTA is to establish the basic rights, responsibilities, and obligations of consumers and financial institutions involved in transactions using electronic money transfer. The act provides limitations on the liability of consumers for the unauthorized use of access devices such as the codes, cards, or devices used to reach funds through an automated teller machine (ATM). It requires federal institutions to provide certain disclosures to consumers prior to issuing an access device, and sets out procedures for the investigation of the unauthorized use of an access device. To effectuate, interpret, and expand EFTA, the Federal Reserve Board adopted "Regulation E." All of the laws in the Consumer Protection Act provide for the recovery of damages by the aggrieved consumer, and have jurisdiction in either state or federal court.
PAGE #922 - Fair and Accurate Transaction Act (FACTA)

Fair and Accurate Transaction Act (FACTA) The Fair and Accurate Credit Transaction Act of 2003 (FACTA) added new sections to the federal Fair Credit Reporting Act (FCRA, 15 U.S.C. 1681 et seq.), intended primarily to help consumers fight the growing crime of identity theft. Accuracy, privacy, limits on information sharing, and new consumer rights to disclosure are included in FACTA. (Pub. L. 108-159, 111 Stat. 1952)

Red Flags Businesses that use consumer reports, under the new rules, must adopt a plan to detect, prevent and mitigate identity theft. The plan must be approved by the companys board of directors or senior management. The rules identity certain signals of actual or attempted identity theft, but each company is left to establish plans based upon a risk assessment of its own operations. Signals identified by the agencies as warranting increased alert include: Consumer's notation on a credit report such as a fraud alert, active duty alert, or credit freeze. Unusual patterns in the consumer's use of credit, such as a recent increase in inquiries or new credit accounts, changes in the use of credit, or accounts closed. Suspicious documents that appear to be alerted, forged or reassembled. Or documents that include information that is inconsistent with the person applying for credit.
Suspicious Social Security number (SSN), for example an SSN that has not been issued or is listed on the Social Security Administration's Death Master File. Another example would be one in which the SSN range does not match the date of birth or is the same SSN as provided by other persons opening an account. Suspicious address or phone number as follows: the address or phone number is known to have been furnished on fraudulent applications; the address either does not exist or is that of a mail drop or prison; the phone number is invalid or associated with a pager or answering service; or the address or phone number is the same or similar to information submitted by other persons opening accounts. Use of an account that has been inactive for a "reasonably lengthy period of time." Mail sent to the account holder is returned while transactions continue. Notice from the account holder or law enforcement that identity theft has occurred.

Disposal of Consumer Reports The practice known as "dumpster diving" provides identity thieves with a treasure trove of personal data. Irresponsible information disposal by businesses has been cited in numerous instances of fraud. Now under new FACTA provisions consumer reporting agencies and any business that uses a consumer report must adopt procedures for proper document disposal. The FTC, the federal banking agencies, and the National Credit Union Administration (NCUA) have published final regulations to implement the new FACTA Disposal Rule. The FTC's disposal rule applies to consumer reporting agencies as well as individuals and any sized business that uses consumer reports. The FTC lists the following as among those that must comply with the rule: Lenders Insurers Employers Landlords Government agencies Mortgage brokers Automobile dealers Attorneys and private investigators Debt collectors

Individuals who obtain a credit report on prospective nannies, contractors, or tenants Entities that maintain information in consumer reports as part of their role as service providers to other organizations covered by the rule. Notice of Consumer Rights Credit reporting agencies have a new obligation to give identity theft victims a notice of their rights. This includes, among other things, notice of: the right to file a fraud alert, the right to block information in a report that resulted from fraud, and the right to obtain copies of documents used to commit fraud.
This new notice of rights is in addition to a general notice of rights already required by earlier FCRA amendments. The FTC has issued final regulations and a sample copy of the identity theft rights. Under the FTC's rule consumers who report fraud to a consumer reporting agency will receive the special victims' notice of rights. The FTC's final rule also includes notices that explain the obligations of companies that furnish information on consumers as well as those that use consumer reports.

Negative Information in a Consumer Report The number one tip for detecting identity theft is to check your credit report regularly. Erroneous information about late payments and collection actions is what you don't want to see. But catching fraud early enables you to more quickly regain your financial health. FACTA now requires creditors to give you what might be called an "early warning" notice. This notice could alert you that something is amiss with an account. However, the notice is not a substitute for your own monitoring of credit reports, bank accounts, and credit card statements. And, you may have to look closely to even see this new notice. Starting in December 2004 a financial institution that extends credit must send you a notice before or no later than 30 days after negative information is furnished to a credit bureau. Negative information includes late payments, missed payments, partial payments, or any other form of default on the account.

Q&A Does this apply only to my accounts with a bank? No. A "financial institution" has the same meaning as under the Gramm-Leach-Bliley Act. In addition to a bank, this can mean a merchant that extends credit to you or a collection agency that routinely reports information to a credit bureau. For more on non-bank entities that are considered "financial institutions," see the FTC publication, How To Comply with the Privacy of Consumer Financial Information Rule of the Gramm-Leach-Bliley Act, www.ftc.gov/bcp/edu/pubs/business/idtheft/bus67.shtm. Do I get a notice every time the account is delinquent? Its a one-time notice as long as the late payment or other negative information has to do with the same account. After the one-time notice, the financial institution can continue to report negative information about the same account. For example, if you are late on your credit card payment three months straight, you are only entitled to the notice either before or within 30 days after the first late payment is reported.

Will I receive a separate notice or registered letter? You will almost certainly not receive a registered letter. FACTA requires the financial institution to give you this notice along with "any notice of default, any billing statement, or any other materials provided to [you]." The one place the notice cannot appear is in the Truth in Lending Act notice you get when you first open an account. The notice must be "clear and conspicuous," but need not be in bold or
enlarged type. Will the notice let me know when I'm a victim of identity theft? Not always. When an imposter opens up a new credit account in your name, the thief usually establishes an address different from yours. The address might be a post office box or a vacant apartment used as a mail-pickup by the thief. When the imposter fails to pay on the credit card account, which is usually the case, the creditor will send the warning notice to the address associated with the account. And that is not your address. So you will be in the dark about the impending negative notice to your credit report. The negative information will be recorded in your credit report, however. That is why we emphasize the importance of ordering your credit report at least once a year. If you are a victim of identity theft, you will learn of it on your credit report.

As you learned, FACTA gives consumers the ability to obtain one free credit report per year from each of the three credit bureaus. The major reason the law requires credit bureaus to provide free annual credit reports is so you can check for evidence of identity theft. We strongly encourage you to take advantage of this provision of FACTA. In short, you should not be lulled into a false sense of security just because a creditor must send you a notice before posting negative information to your credit report. Identity thieves operate in various ways. They might attempt to take over your existing accounts. And they might open up new accounts unbeknownst to you. Your best defense against fraud is always to review your credit reports as well as your monthly credit card and bank account statements.

Nationwide Specialty Consumer Reporting Agencies Consumer reports are generally thought to mean "credit" reports issued by one of the three national credit bureaus: Experian, TransUnion, or Equifax. However, consumer reports may also be issued for purposes other than credit applications. The FCRA also covers reports for insurance, employment, check writing, and housing rental history. Such reports are quite common and a number of companies now specialize in providing reports for these specific purposes. FACTA defines companies that issue non-credit reports as a "nationwide specialty consumer reporting agency" when reports relate to: Medical records or payments. Residential or tenant history. Check writing history. Employment history. Insurance claims. As of December 2004 consumers may request a free report annually for any of the specialty agencies.

The FTC has declined to publish a list of companies that meet the definition of "nationwide specialty consumer reporting agencies." For some specialties such as employment and rental history, there are many companies that meet the definition of consumer reporting agency and that follow the FCRA. Other
specialties are dominated by one or two companies, such as the following: Medical Records: Medical Information Bureau (www.mib.com) For more on the MIB, see PRC Fact Sheet 8, How Private is my Medical Information, http://www.privacyrights.org/fs/fs8-med.htm Insurance Reports: ChoicePoint's CLUE (www.choicetrust.com) and Insurance Services Office ISO APLUS Report, (www.iso.com/offices_contacts/index.html). For more on insurance reports, see PRC Fact Sheet 26, CLUE and You: How Insurers Size You Up, www.privacyrights.org/fs/fs26-CLUE.htm Check-writing history: Reports about your check writing history are also "specialty" reports. This includes reports obtained by banks or other financial institutions from ChexSystems.

ChexSystems is a consumer reporting agency that collects information from member financial institutions. If, for example, your checking account was closed because of overdrafts, this may appear on a ChexSystems report when you apply to open an account at another bank. Identity theft victims who have had checks stolen may also have a negative ChexSystems report. Check-writing history reports also cover information compiled and reported to member retailers. Check verification systems include information about returned checks or fraud. Check verification works at point of sale. If, for example, you have a check returned, the merchant will probably report this to a verification network. When the same checking account is offered to purchase something from another merchant, the check may be rejected. Identity theft or other check fraud may result in a negative entry with a check verification system. Two major check verifications systems are SCAN and TeleCheck.
PAGE #935 - Federal Truth in Advertising

Federal Truth in Advertising Under the Federal Trade Commission Act: Advertising must be truthful and non-deceptive; Advertisers must have evidence to back up their claims; and Advertisements cannot be unfair. Additional laws apply to ads for specialized products like consumer leases, credit, 900 telephone numbers, and products sold through mail order or telephone sales. And every state has consumer protection laws that govern ads running in that state. What makes an advertisement deceptive? According to the FTC's Deception Policy Statement, an ad is deceptive if it contains a statement - or omits information - that: Is likely to mislead consumers acting reasonably under the circumstances; and Is "material" - that is, important to a consumer's decision to buy or use the product.

What makes an advertisement unfair? According to the Federal Trade Commission Act and the FTC's Unfairness Policy Statement, an ad or business practice is unfair if:
it causes or is likely to cause substantial consumer injury which a consumer could not reasonably avoid; and it is not outweighed by the benefit to consumers.

How does the FTC determine if an ad is deceptive? A typical inquiry follows these steps: The FTC looks at the ad from the point of view of the "reasonable consumer" - the typical person looking at the ad. Rather than focusing on certain words, the FTC looks at the ad in context - words, phrases, and pictures - to determine what it conveys to consumers. The FTC looks at both "express" and "implied" claims. An express claim is literally made in the ad. For example, "ABC Mouthwash prevents colds" is an express claim that the product will prevent colds. An implied claim is one made indirectly or by inference. "ABC Mouthwash kills the germs that cause colds" contains an implied claim that the product will prevent colds. Although the ad doesn't literally say that the product prevents colds, it would be reasonable for a consumer to conclude from the statement "kills the germs that cause colds" that the product will prevent colds. Under the law, advertisers must have proof to back up express and implied claims that consumers take from an ad.

The FTC looks at what the ad does not say - that is, if the failure to include information leaves consumers with a misimpression about the product. For example, if a company advertised a collection of books, the ad would be deceptive if it did not disclose that consumers actually would receive abridged versions of the books. The FTC looks at whether the claim would be "material" - that is, important to a consumer's decision to buy or use the product. Examples of material claims are representations about a product's performance, features, safety, price, or effectiveness. The FTC looks at whether the advertiser has sufficient evidence to support the claims in the ad. The law requires that advertisers have proof before the ad runs.

Q&A What kind of evidence must a company have to support the claims in its ads? Before a company runs an ad, it has to have a "reasonable basis" for the claims. A "reasonable basis" means objective evidence that supports the claim. The kind of evidence depends on the claim. At a minimum, an advertiser must have the level of evidence that it says it has. For example, the statement "Two out of three doctors recommend ABC Pain Reliever" must be supported by a reliable survey to that effect. If the ad isn't specific, the FTC looks at several factors to determine what level of proof is necessary, including what experts in the field think is needed to support the claim. In most cases, ads that make health or safety claims must be supported by "competent and reliable scientific evidence" tests, studies, or other scientific evidence that has been evaluated by people qualified to review it. In addition, any tests or studies must be conducted using methods that experts in the field accept as accurate.

Are letters from satisfied customers sufficient to substantiate a claim? No. Statements from satisfied customers usually are not sufficient to support a health or safety claim or any other claim that requires objective evaluation. My company offers a money-back guarantee. Very few people have ever asked for their money back. Must we still have proof to support our advertising claims? Yes. Offering a money-back guarantee is not a substitute for substantiation. Advertisers still must have proof to support their claims. What kind of advertising claims does the FTC focus on? The FTC pays closest attention to: Ads that make claims about health or safety, such as: ABC Sunscreen will reduce the risk of skin cancer. ABC Water Filters remove harmful chemicals from tap water. ABC Chainsaw's safety latch reduces the risk of injury. Ads that make claims that consumers would have trouble evaluating for themselves, such as: ABC Refrigerators will reduce your energy costs by 25%. ABC Gasoline decreases engine wear. ABC Hairspray is safe for the ozone. Ads that make subjective claims or claims that consumers can judge for themselves (for example, "ABC Cola tastes great") receive less attention from the FTC.

How does the FTC decide what cases to bring? The FTC weighs several factors, including: FTC jurisdiction. Although the FTC has jurisdiction over ads for most products and services, Congress has given other government agencies the authority to investigate advertising by airlines, banks, insurance companies, common carriers, and companies that sell securities and commodities. The geographic scope of the advertising campaign. The FTC concentrates on national advertising and usually refers local matters to state, county, or city agencies. The extent to which an ad represents a pattern of deception, rather than an individual dispute between a consumer and a business or a dispute between two competitors. State or local consumer protection agencies or private groups such as the Better Business Bureau (BBB) often are in a better position to resolve disputes involving local businesses or local advertising. To get the address and phone number of your state Attorney General's office, your local consumer agency, or the nearest BBB, check your telephone directory. The amount of injury - to consumers' health, safety, or wallets - that could result if consumers rely on the deceptive claim. The FTC concentrates on cases that could affect consumers' health or safety (for example, deceptive health claims for foods or over-the-counter drugs) or cases that result in widespread economic injury.
What penalties can be imposed against a company that runs a false or deceptive ad? The penalties depend on the nature of the violation. The remedies that the FTC or the courts have imposed include: Cease and desist orders. These legally-binding orders require companies to stop running the deceptive ad or engaging in the deceptive practice, to have substantiation for claims in future ads, to report periodically to FTC staff about the substantiation they have for claims in new ads, and to pay a fine of $16,000 per day per ad if the company violates the law in the future. Civil penalties, consumer redress and other monetary remedies. Civil penalties range from thousands of dollars to millions of dollars, depending on the nature of the violation. Sometimes advertisers have been ordered to give full or partial refunds to all consumers who bought the product. Corrective advertising, disclosures and other informational remedies. Advertisers have been required to take out new ads to correct the misinformation conveyed in the original ad, notify purchasers about deceptive claims in ads, include specific disclosures in future ads, or provide other information to consumers.

Will the FTC review my company's ads before they run to make sure that we've complied with the law? FTC staff cannot clear your ads in advance. However, there is guidance to help you comply with the law. Information about advertising particular kinds of products (for example, foods, dietary supplements, or "environmentally friendly" merchandise), advertising credit, and guidelines for advertising on the Internet is available at www.ftc.gov. For more general information on advertising policies, call the FTC's Division of Advertising Practices at 202-326-3090.

How can I keep up-to-date on what's going on at the FTC? The Federal Trade Commission website (www.ftc.gov) is updated almost every day, so bookmark it for instant access to FTC news and views, including recent enforcement actions, speeches, public hearings, and other business information. Before running an ad, check out what the FTC has had to say about products or advertising claims similar to yours. From the homepage, you can search the entire FTC website using key words or phrases. For example, a search using the word "diet" will yield cases, reports, news releases, and other materials related to FTC policies about the advertising of diet products and services. In addition, you can visit www.consumer.gov for consumer and business information from the FTC, FDA, SEC, and other federal agencies. You also may want to check with the Better Business Bureau for tips on truthful advertising, the BBB's voluntary Code of Advertising, and information about scams targeting small businesses.

How does the FTC address the needs of small businesses? In its continuing commitment to regulatory reform, the FTC has repealed almost 50% of its trade regulation rules and has streamlined and simplified remaining rules. The FTC's Small Business Compliance Assistance Policy Statement describes other forms of assistance available to small businesses to help them comply with truth-in-advertising laws. For example, the Business Guidance section of the FTC's website (www.ftc.gov) includes an expanding library of materials written especially for small businesses. Small businesses also may contact the FTC headquarters or one of the FTC's
regional offices with specific inquiries about how to comply with the law. In addition, one of the FTC's top law enforcement priorities is fighting fraudulent and deceptive practices aimed at small businesses. The agency has taken the lead in challenging deceptive invention promotion services, questionable franchise opportunities, bogus office supply scams, and other practices that prey on aspiring entrepreneurs.
PAGE #946 - Fair Housing Patriot Act

USA Patriot Act Section 326 The final rules for Section 326 provide that banks, credit unions and financial services companies must collect certain information and verify the identity of customers who open new accounts. These firms must implement Customer Identification Programs (CIPs) that include procedures to verify customer identity, using certain required information, within a reasonable time after the account is opened. To verify the identity of a customer, an institutions CIP must include procedures to utilize documentary verification and non-documentary verification. That information must be documented and retained for five years after an account is closed, and the identity of customers who open a new account must be compared to a government list of known or suspected terrorists or terrorist organizations. The final rules also require banks to give customers adequate notice of the financial institutions requirements to verify customer identity pursuant to its CIP.

Examples of Documentary Verification: For individuals, an unexpired government-issued identification that shows nationality or residence and a photo or similar safeguard such as a drivers license or passport. If the customer is an entity other than an individual, documents such as certified articles of incorporation, a business license issued by a governmental entity, a partnership agreement, or trust instrument may be used. Examples of Non-Documentary Verification: Direct customer contact, independent verification of the customers identity by comparing information given by the customer with information obtained from a consumer credit reporting agency, public database or other source, by checking references with other financial institutions, or obtaining the customers financial statement.

The institutions CIP must include procedures to determine if the customer appears on any list of suspected or known terrorists or terrorist organizations issued by a Federal government agency known informally as the Section 326 List. Additionally, the institution must maintain a record of all the information received for five years from the date the account is closed. Section 326 also requires firms to provide customers with adequate disclosure notice they are requesting information to verify their identity.
PAGE #949 - Flood Disaster Protection Act of 1973

Flood Disaster Protection Act of 1973 To expand the national flood insurance program by substantially increasing limits of coverage and total
amount of insurance authorized to be outstanding and by requiring known flood-prone communities to participate in the program, and for other purposes. Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "Flood Disaster Protection Act of 1973". Congress found that: (1) annual losses throughout the Nation from floods and mudslides are increasing at an alarming rate, largely as a result of the accelerating development of, and concentration of population in, areas of flood and mudslide hazards; (2) the availability of Federal loans, grants, guaranties, insurance, and other forms of financial assistance are often determining factors in the utilization of land and the location and construction of public and of private industrial, commercial, and residential facilities;

(3) property acquired or constructed with grants or other Federal assistance may be exposed to risk of loss through floods, thus frustrating the purpose for which such assistance was extended; (4) Federal instrumentalities insure or otherwise provide financial protection to banking and credit institutions whose assets include a substantial number of mortgage loans and other indebtedness secured by property exposed to loss and damage from floods and mudslides; (5) the Nation cannot afford the tragic losses of life caused annually by flood occurrences, nor the increasing losses of property suffered by flood victims, most of whom are still inadequately compensated despite the provision of costly disaster relief benefits; and (6) it is in the public interest for persons already living in flood-prone areas to have both an opportunity to purchase flood insurance and access to more adequate limits of coverage, so that they will be indemnified for their losses in the event of future flood disasters.

The purpose of this Act, therefore, is to substantially increase the limits of coverage authorized under the national flood insurance program; provide for the expeditious identification of, and the dissemination of information concerning, flood-prone areas; and require State or local communities, as a condition of future Federal financial assistance, to participate in the flood insurance program; to adopt adequate flood plan ordinances with effective enforcement provisions consistent with Federal standards to reduce or avoid future flood losses; and require the purchase of flood insurance by property owners who are being assisted by Federal programs or by federally supervised, regulated, or insured agencies or institutions in the acquisition or improvement of land or facilities located or to be located in identified areas having special flood hazards.

REQUIREMENT FOR MORTGAGE LOANS REGULATED LENDING INSTITUTIONS: Each Federal entity for lending regulation (after consultation and coordination with the Financial Institutions Examination Council established under the Federal Financial Institutions Examination Council Act of 1974) shall by regulation direct regulated lending institutions not to make, increase,
extend, or renew any loan secured by improved real estate or a mobile home located or to be located in an area that has been identified by the Director as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968, unless the building or mobile home and any personal property securing such loan is covered for the term of the loan by flood insurance in an amount at least equal to the outstanding principal balance of the loan or the maximum limit of coverage made available under the Act with respect to the particular type of property, whichever is less.
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PAGE #954 -
PROOF3
define Ethics; explain the history and theory of Ethics; and be able to list types of fraud and how to report them.
PAGE #957 - Ethics

Ethics History and Background of the Code of Ethics The purpose of a Code of Ethics is to establish a professional standard of conduct for mortgage practitioners. Without a Code of Ethics, the mortgage lending business would have a history of speculation, exploitation, and disorder. A mortgage Code of Ethics should be based on the concept of let the public be served and the central concept of public protection. Often, when license laws are established, many were based on the standards set in the Code of Ethics of established associations. Ethics Definition of Ethics: philosophy, the study and evaluation of human conduct in the light of moral principles. Moral principles may be viewed either as the standard of conduct that individuals have constructed for
themselves or as the body of obligations and duties that a particular society requires of its members. Approaches to Ethical Theory Ethics have developed as people reflected on the intentions and consequences of their acts. From this reflection on the nature of human behavior, theories of conscience have developed, giving direction to much ethical thinking.
PAGE #958 - Concepts

The Nature of the Good Another major difference in the approach to ethical problems revolves around the question of absolute good as opposed to relative good. Throughout the history of philosophy, thinkers have sought an absolute criterion of ethics. Concepts of Mortgage Code of Ethics Usually being licensed by the various State agencies, Mortgage Brokers and Loan Officers are held to a higher standing than non-licensed professionals. In keeping with those higher standards, the licensees are expected and required to act professionally, knowledgeably, and ethically. To do this, the licensee should subscribe to a Code of Ethics. The following section will describe a good model of a Code of Ethics. After each section description, a Case Study will follow. The case study will tell a story related to the current topic. Your job will be to exam the case study, and determine if the licensee portrayed in the case study has potentially violated the License Act or an Ethical Standard.
PAGE #959 - Mortgage Fraud

Mortgage Fraud - How to Avoid Mortgage Fraud What Constitutes Mortgage Loan Fraud? If you lie on your real estate loan application, it's mortgage fraud. Even tiny white lies constitute mortgage fraud. But many borrowers hedge a little there, puff a little here, often because they don't know any better or, worse, because a real estate professional suggested it's no big deal. It is a big deal. So-called "creative financing" went out in the 1970s, along with bell bottoms. If the lender subsequently discovers any part of your loan application is false, not only can it demand immediate full payment of your loan, but you could pay six-figure fines, find FBI ringing your doorbell and / or go to jail. What Constitutes Mortgage Loan Fraud The FBI defines mortgage fraud as "any material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan."

Here are a few examples of common mortgage fraud: Undisclosed kickbacks.
If you strike a deal with a home seller to give you a big wad of cash or to slip a check across the closing table, say, to pay for a new roof, and if the lender doesn't know about it -- because it's not disclosed in the purchase contract nor addendum nor your estimated closing statement - it's mortgage fraud. Silent second mortgage. A borrower without a down payment can commit mortgage fraud by borrowing the down payment from the seller in exchange for giving the seller a silent second mortgage, which is unrecorded (or records after closing) and hidden from the lender. Falsifying employment income. Stated income loans were originally created for self-employed individuals whose income is difficult to verify, but some employed borrowers inflate their income above and beyond a W-2. Non-owner occupant claiming occupancy. Lenders offer higher interest rates and less favorable terms to non-owner occupants because the lender's risk is higher. If you don't intend to live in the property, don't promise that you will.

Down payment gifts you will repay. Both parties, the giver and the recipient, commit loan fraud if the gift is to be repaid. Gifts cannot be repaid. Inflated purchase price. If you have two purchase contracts and send the false contract with the higher sales price to the lender in hopes of obtaining a higher appraisal, it's mortgage fraud. Falsifying deposits. Dishonest borrowers who do not have an earnest money deposit might state in the contract that the deposit was paid outside of escrow, which is fraudulent. Professional Mortgage Fraud Length of time in the business is no guarantee that your "trusted adviser" isn't a crook. A Pennsylvania mortgage broker got 30 years behind bars after defrauding more than 800 borrowers in a Ponzi scheme, which somehow kept all the balls in the air for 20 years. A Kansas City, Missouri, appraiser pleaded guilty to mortgage fraud and was sentenced to 20 years in prison, plus a $500,000 fine. Schemes are happening every day. The newspapers are filled with similar stories.
PAGE #962 - Discrimination

If You Suspect Mortgage Fraud If you are approached by a real estate professional who asks you to be part of a mortgage fraud scheme, report the perpetrators to the FBI. Remember, if it sounds too good to be true, it is likely a scam. Moreover, know that mortgage fraud is a prosecutable crime and against the law. If you suspect that you are being asked to break the law, at the very least, talk to a reputable real estate lawyer or the licensing authority in your state before moving forward with your plans. The Fair Housing Act and the Equal Credit Opportunity Act prohibit lending discrimination. Although
these laws have been in effect for many years, lending discrimination continues to be a cause for national concern. This guide will help lenders compare the treatment of loan applicants and identify differences that may be discriminatory. It offers suggestions on how to correct discriminatory practices and improve fair lending performance. Part One describes how to compare the experiences of testers to determine if all persons asking about credit are provided equivalent information and encouragement. Such lending tests can be performed internally by the lender or by using an independent contractor. The information provided here on how to plan and manage a pre-application testing program will help an institution decide. Testing can help to detect discrimination or it can reassure an institution that it does not discriminate. Its focus is the point where an applicant inquires about a loan, gathers information and receives counseling or an invitation to apply. Discrimination at this important stage of the loan process occurs before it is captured on paper and often results from how one person treated another. We encourage financial institutions to take whatever steps are necessary, including some form of pre-application testing, to inspect the treatment of potential applicants. It will help to prevent illegal discrimination, improve customer service and attain lending goals.

We also encourage institutions to compare the treatment of applicants after submission of an application through a comparative analysis of loan files. Part Two of the guide suggests one method of comparative file analysis. It also provides examples of how loan product features, underwriting standards, or instances of lender assistance to borrowers can be compared to identify unequal treatment that may constitute discrimination. Disparate treatment may occur among any applicants. However, the risk of disparate treatment occurring is higher among applicants who are neither clearly qualified nor clearly unqualified for a loan as there is more room for lender discretion. The system of comparing loan files set out in this guide helps to identify and evaluate such applications. Evaluating the results of a comparative analysis of tester experiences or actual loan applications requires identifying the different types of discrimination that may have occurred. Part Two discusses how to identify these including overt or subtle discrimination, disparate treatment, disparate impact, an individual instance of discrimination and a pattern or practice of discrimination. Further, it suggests several corrective actions that may be appropriate to consider depending on the circumstances.

Part Three presents excerpts from other widely distributed fair lending guides that provide information useful to the comparative evaluation process. We encourage lenders to review the guides in their entirety. As financial institutions and their legal counsel may want to evaluate all aspects of a self-assessment program, Part Four discusses what criteria will be used by the regulatory agencies in taking enforcement actions and seeking remedial measures. It further advises that the agencies must refer evidence of discrimination they may uncover to the Department of Justice or HUD even when discovered through a lender's self-testing effort. However, voluntary identification and correction of violations disclosed through a self-testing program will be a substantial mitigating factor in considering what further actions might be taken. Finally, the closing statement of this guide is perhaps the first step that an institution should take to ensure equal treatment of loan applicants. It highlights the importance of providing multicultural awareness, race, gender and handicap sensitivity training to all levels of an institution's staff.

PART ONE: PRE-APPLICATION TESTING
Self-testing allows an institution to compare, in a controlled manner, the treatment of customers and potential customers. Testing for discrimination can help to find potential problems, or it can reassure an institution that it does not discriminate. In addition, an institution can gain insight into how its lending practices appear from the loan applicant's perspective, a valuable insight not readily available through other internal audit methods. WHAT IS PRE-APPLICATION TESTING? Testing is a way of measuring differences in treatment. A financial institution can use pre-application testing to uncover instances of overt or subtle discrimination against individuals protected under the ECOA and the Fair Housing Act. To detect illegal discrimination, testers visit financial institutions posing as prospective loan applicants. While they do not actually complete a loan application, testers do experience the important pre-application phase of the loan process. After discussing loan possibilities, they objectively document how they were treated and the information given to them by the institution's personnel. There are three basic types of tests: paired, multi-layered or sandwich, and complaint. Paired Testing A paired test consists of sending two individuals (or two couples) separately to an institution to collect detailed information about its lending practices. The testers pose as potential applicants for the same type of loan. Example: To test for discrimination based on race, a white tester and a black tester separately visit a lending institution to ask about applying for the same type of loan. They would be provided with similar background information such as family size and employment. The black tester would generally have a slightly higher income and less debt in order to appear better qualified than his or her white counterpart. Otherwise, the individuals selected as testers should be similar in all significant respects except for the variable being tested (e.g., race, gender, familial status, etc.).

Their experiences would then be compared to determine if the individual in the protected class may have been the victim of discrimination. Importantly, in paired tests, the testers usually do not have knowledge of each other or the purpose of the test. Conducting the test in this manner helps ensure the validity of the test by minimizing the potential for bias in recording experiences. Multi-layered Testing Multi-layered testing or "sandwich" testing uses three testers, only one of whom is a protected class member. As with paired testing, the testers should be similar except for the variable being tested. Example: In testing for discrimination based on sex, the first tester would be male, the second tester would be female, and the third tester would be male. Marital status would be the same for all three and the female tester's qualifications would be slightly better than those of the male testers. This test structure limits non-gender variables leaving gender as the most likely basis for potential differences in treatment. In sandwich testing, as in paired testing, the testers separately ask about similar financing requirements.

Complaint Testing
Complaint testing, unlike the sandwich or paired scenarios, uses a single tester to evaluate the experience of an actual loan applicant who believes that an illegal discriminatory event has occurred. The tester assumes characteristics similar to the complainant's and attempts to obtain information about the same loan product. Example: The complainant is Hispanic and believes that his loan application was denied based on his national origin. A white tester would be assigned slightly worse financial and employment qualifications than those of the complainant. The complainant's experiences at the institution would be compared to the white tester's experiences to determine if there were any differences in treatment. If the tester is offered a loan or receives better treatment and more information, then the complainant may have been discriminated against on the basis of national origin. In all three types of testing, paired, multi-layered and complaint, the testers prepare an objective, factual written account of their experiences on a standardized report form.

Self-Testing or Contract-Testing Lending tests can be performed internally by the lending institution or by an independent contractor. The decision rests with the institution; however, it is important for each institution to weigh the advantages and disadvantages of either selection carefully. One advantage of in-house testing is that the institution directly controls the program as it hires the testers and analyzes the results. Disadvantages are that the testing program may divert employees from other tasks, and it may be more difficult to keep the testing confidential. In addition, it may be harder to analyze the results objectively. This may be especially true if the reviewer knows the employee who was tested. The use of an independent contractor, on the other hand, limits the use of an institution's personnel. Furthermore, objectivity and confidentiality are more easily maintained because fewer people within the institution are privy to testing program information. Disadvantages to using an independent contractor are that their methods may not suit a particular financial institution's needs, experience levels may vary, and costs may be significant. As testing expertise among contractors varies, it is important to verify a contractor's experience level, testing methodology and references. For example, a particular contractor's testing program may only deal with customer service issues and ignore testing for illegal discriminatory lending practices. The following guide to planning, conducting, and evaluating a test are provided for your financial institution's consideration in developing an internal self-testing program or in evaluating an independent contractor's program.

PLANNING THE TEST The first step in the planning process is to select a test manager knowledgeable in fair lending and capable of supervising all activities before, during and after the test. Planning should include: Researching the financial institution's loan products, local demographics, HMDA data and other pertinent information Determining which type of test to conduct (e.g., paired, sandwich, or complaint) Recruiting and training the testers
Providing testers with a testing identity and detailed instructions on how to complete the test The number of tests that should be performed to determine if a financial institution may have discriminatory lending practices that are illegal will vary according to the institution's size and loan volume. For example, if testing a multi-billion dollar institution operating in a large metropolitan area, several tests for each branch may be necessary. However, if the financial institution is small or has a low lending volume, more than a few tests may be impractical. The aim is to test a representative sample of an institution's lending staff over time. Institution size and loan volume also should determine the frequency of testing. For example, all the testing for race discrimination in a financial institution that typically has few minority loan applicants should not be performed in one week nor should the number of tests each week exceed the institution's weekly average of loan applications.

Selecting the Testers Properly trained, almost anyone can be a tester. The tester pool should reflect the general population in terms of race, color, religion, sex, national origin, age, marital status, and disability. Potential testers may include, retired individuals, teaching professionals, or graduate students among others. For example, the Philadelphia Commission on Human Relations hired as testers recently laid-off, experienced professionals through the area unemployment office. Typically, such recruits present themselves credibly and have good interpersonal and writing skills. Intelligent, dependable individuals who communicate well and think quickly are ideal tester candidates. Hiring testers should be like hiring any good employee. Independent testing contractors will generally already have a pool of testers. If your institution retains an independent firm, verify that the contractor's testers are representative of the protected classes you may want to have reflected in the tests. Training the Testers Training is a crucial component of any testing program. The amount of time needed to train testers adequately will vary depending upon the experience level of the trainees and of the trainers. Testers should be advised that testing may be conducted even where there is no prior evidence of illegal discrimination. The following issues also should be reviewed with them: Court acceptance of testing versus concern about testing as entrapment The tester's role as an objective observer and recorder of facts, not as a judge of illegal discrimination The need to comply closely with testing instructions How to handle unexpected questions In addition to this basic type of information and instructions on confidentiality, objectivity and accuracy, trainees also should be provided with necessary background information, a tester "identity", and instruction on completing Test Report Forms.

Providing Tester Identities Testers should be presented with a tester identity before the test. Ideally, a tester would use his or her actual background. However, since it is unlikely that two testers will have similar enough backgrounds,
fictitious identities are used for uniformity. The identities generally include information and instructions needed to complete the test; various personal and financial characteristics that the tester assumes for the test; and information about the lending institution to be tested. To maintain objectivity, however, a tester should not be provided with information about the identities of the other testers or the purpose of the test. Items that might be included in an identity are: Name, Age, Marital Status, and Number of Children Employers, Previous Employers, Occupations/Job Titles, Years of Work Experience, Income for the tester and, if applicable, spouse Current Address and Housing Information, Previous Address, Total Household Expense, and Prospective Property Information Loan Type and Amount, Savings and Debt Information Walk-in Interview or Appointment

As customer service personnel may ask why an applicant selected the particular financial institution, credible reasons for the choice and other pertinent information specific to the financial institution also should be provided to testers. Identity information should be sufficient for testers to answer adequately most questions asked by a lender. The protected class tester's financial situation and employment record would usually be slightly better than those of the control tester. These differences should only be slight so as to suppress all socioeconomic factors except one, status in a protected class. Identities should be varied to test for different types of illegal discrimination. For example, to test for discrimination based on receipt of public assistance income, one tester's identity should include that income source and the other tester's identity should not. Other information would generally remain the same. Individuals of the same race should be used when race discrimination is not the testing focus. Testers should thoroughly familiarize themselves with the information contained in their identity form and consider the following questions: Am I uncomfortable with any of the personal characteristics? Have I had any prior contact with the institution to be tested or with members of the institution's staff? Are any of the instructions unclear? If answers to any of the questions are yes, then a new tester should be assigned. In cases where the tester is known to institution personnel, or otherwise uncomfortable with the assignment, the test may be compromised.

CONDUCTING THE TEST As previously stated, testers, without knowledge of each other or the testing hypothesis (e.g., testing for race, age or gender discrimination, etc.), separately visit an institution. Testers are not actually requesting a loan; therefore, they do not file a completed application. However, they do experience the first phase of the loan application process. During the test, it is important for the test manager to ensure that testers: Maintain confidentiality & objectivity Follow test instructions Interview using the tester identities
Complete tests as scheduled Carefully document the test experience Maintaining Confidentiality & Objectivity The testing program must be kept confidential as any breach of confidentiality could invalidate the tests. Testers should not disclose their involvement in the testing program, or discuss their test experiences with anyone other than the test program manager. Moreover, testing should be an objective process used to investigate lending practices. Among other things, testers should: Remember that testing a particular lending institution does not necessarily indicate that discrimination occurs there Refrain from making leading statements that may induce lenders to make biased comments Respond neutrally if a lender makes a biased statement

For example, if a loan officer asks, Why are you looking in that neighborhood? Aren't there a lot of minorities there? The tester should simply respond, I'm just trying to get the best house for my money and that neighborhood is where I found it. If the lender makes an ambiguous statement, the tester should ask questions to get a clearer understanding of what the lender means. For example, if the lender says, You wouldn't want to buy a house in that neighborhood because your children will not be comfortable at the neighborhood school, the tester may ask questions to find out why the lender thinks the tester's children would not be comfortable at the school. Most importantly, testers collect facts. Testers should not: Make subjective judgments about the person(s) who served them Offer opinions concerning their treatment Make leading statements about specific protected classes Testers do not decide if there may have been illegal discrimination or disparate treatment. The test program manager makes that determination based on factual reports submitted by control testers, protected class testers or a complaint tester, depending on the type of test.

Following Test Instructions Testing is a controlled process. Therefore, testers should avoid deviating from the instructions given them by the test manager, as this, too, may invalidate test results. If a tester has any questions concerning a particular testing situation, the tester should contact the test manager. In instances where a telephone call was made to an institution before a site visit, the tester should review the telephone narrative to refresh his or her memory about the information that may have been exchanged. Testers should use common sense to determine suitable testing attire; however, dressing conservatively is usually a good rule to follow. Also, testers should not wear badges or buttons that suggest personal, political or social beliefs.
Interviewing Techniques Testers should act interested and enthusiastic about obtaining a loan. When testing for discrimination in mortgage lending, testers will usually portray themselves as first-time home buyers so it is plausible that they may not know a great deal about the mortgage lending process; however, some familiarity with basic lending terms is advisable. Testing identities are designed by the test supervisor to specifically control for a variety of discriminatory practices. Deviation from the assigned identity may invalidate the test results. Therefore, it is imperative that testers carefully follow their identity instructions. Testers should let the loan officer solicit information from them concerning their loan needs and personal qualifications. However, if by the end of the site visit, a loan officer has not been informative, a tester may ask, for example: Do you think I will qualify for the loan? What type of loan do you recommend based on my qualifications? How long is the application process? What else do I need to provide you with before submitting my application?

Scheduling the Test Typically, paired tests should be completed on the same day, preferably within a few hours of each other. However, as previously mentioned, the financial institution's size and loan volume will ultimately determine when tests are scheduled. For example, if a financial institution makes only a few loans per month, test scheduling should be flexible enough to permit an acceptable comparison without raising suspicion.

Documenting the Test It is natural for persons seeking a loan to take notes during a conversation with a loan officer or other institution personnel. Often, the information given to potential loan applicants is substantial and requires note-taking. However, testers should be careful. The lender may become uncomfortable or suspicious if the tester appears to be writing every word the lender says. Testers should collect materials such as the loan officer's business card or loan information pamphlets. Any written notes and materials should accompany the completed test report sent to the test manager. Testers should make objective observations of their surroundings during a site visit. Everything from desk nameplates to equal opportunity or fair housing signs posted on walls should be noted and recorded on the report forms at the conclusion of the test. Furthermore, testers should complete the test as scheduled and contact the test manager if any problems occur. Report forms should be completed immediately after each test while facts are still fresh in the tester's memory. Testers also should promptly deliver their test reports and materials obtained during the site visit to the test manager.

EVALUATING THE TEST
After completing the test, several critical steps are necessary to determine whether illegal discrimination has occurred during the test and what corrective measures should be considered. These include: Debriefing the testers Completing all test forms Analyzing each test carefully Writing a report on the results of the test Recommending corrective action

Debriefing the Testers Testers should contact the test manager after a site visit is completed or telephone interaction. This contact allows the test manager to debrief the tester and gives the tester an opportunity to describe any problems that may have arisen during the site visit. Debriefings will confirm that a test was performed and enable the supervisor to elicit information about the visit. Questions may include the loan representative's name, the interest rate quoted, the amount of time spent with the loan representative or other questions to clarify what the tester reports.

Completing a Report Nearly every test will require some type of report form. Report forms are used to record information exchanged between the tester and the loan representative during the site visit. Reports usually contain two sections. The first section contains specific questions soliciting information such as whether an appointment was made, the time the visit began and ended, how long the tester waited for an interview, and which loan products were discussed. The second section of a testing report would usually provide space for a tester's narrative, or a comprehensive description of the site visit. The narrative is particularly important because it can be used to validate the tester's responses to the specific questions in the first part of the report. The narrative should begin with the tester first contacting the lending institution, whether by telephone or in person, and should conclude with the tester leaving the institution. The narrative should include verbatim statements by the loan officer to the tester, where possible, as well as other information received during the test. As the narrative is one of the most important aspects of a report, it should avoid subjective or ambiguous comments.

In addition to the test there may be other reports for the tester to complete. The most common are: Telephone Contact Report: This type of form may be used to record any telephone calls made to a lending institution. Most telephone calls are made before a site visit to the institution. Information from this type of call would generally include: Name of the staff person Purpose of the call Whether the tester asked about any specific programs or products Whether the person informed the tester of a specific program or product Date of the call Whether the staff person requested specific personal financial information or information about the property such as its location or price
A narrative description of the conversation Follow-Up Report: This type of report may be used to record any post-test attempts by loan staff to contact a tester. Testers should record who made the contact, the type of contact (e.g., mail or telephone), whether a specific product or program was discussed, the date and time of the contact, and a narrative description of the conversation or nature of the contact.

Analyzing the Results The test manager has sole responsibility for collecting the reports, analyzing the data, and determining whether an institution may have engaged in discriminatory practices. The test results will either show that corrective measures should be considered by the lender or that the institution is serving its clients well and in a manner consistent with the fair lending laws. The manager analyzes the tester reports to determine if the Equal Credit Opportunity Act or the Fair Housing Act appear to have been violated. Comparing the reports side-by-side will help in identifying inconsistent statements by personnel of the lending institution. For example, report forms should be examined to see if the lender offered different terms or conditions concerning loan products, interest rates, application fees, loan terms, or provided different information regarding the availability of loans in certain neighborhoods.

Particular attention should be paid to service questions such as: How long did the tester wait for an interview? How was the tester greeted? Where was the tester interviewed? Although differences in the responses to these questions may not necessarily indicate illegal discrimination, different answers may reveal areas where customer service can be improved. Following the test manager's initial evaluation, another qualified person should analyze the test results. The second analysis provides an internal control against any possible bias of the test manager and may either verify or contradict the manager's initial findings. The second review person should evaluate the reports without knowing the outcome of the first evaluation. A summary report of both analyses should be completed. If any differences in treatment are discovered, it is important that legal counsel be notified to help determine if any fair lending laws were violated.

Addressing Lender Concerns Any discussion of pre-application testing would be incomplete without addressing some of the concerns that relate to the use of testers. Some people claim that testing is illegal because testers deliberately set out to look for discrimination, or they criticize testing because they say it is entrapment. If appropriate procedures are followed, testing is not illegal, nor is it entrapment. At least since 1973, Federal courts have approved using testers to investigate and prove allegations of housing discrimination. To quote one judge: "It would be difficult indeed to prove discrimination in housing without this means of gathering information." Hamilton v. Miller, 477 F.2d 908, 910 n.1 (10th Cir. 1973). Even though testers mislead commercial landlords and lenders, such deception is viewed by the courts as a relatively small price to pay to detect and prevent discrimination.

The criticism that testing is entrapment is insupportable because the defense of having been induced by the government to engage in an illegal act is available only in criminal actions, not under civil discrimination statutes, and where the government has allegedly induced the activity. In the present situation, the FDIC is advocating that institutions test themselves to discover civil violations of law. Therefore, no matter how objectionable testing may seem to some, it is not a defense to a civil charge of discrimination. Admittedly, some people are suspicious and critical of testing. They may not realize that testing is both a means to discover possible discrimination, and a protection for law-abiding lenders because it may provide evidence that an institution is not violating the discrimination laws. For example, testing may show that a complaint was unfounded because there is no evidence of discrimination or because a borrower has misinterpreted a lender's practices.

In the latter case, testing may enhance internal controls by bringing to light a practice that might be confusing or offensive to some borrowers. Corrective steps may then be taken. Correcting Discriminatory Practices It also should be noted that if an institution finds a pattern or practice violation through its own selftesting effort, and a federal regulatory agency becomes aware of it, the agency is required under the Equal Credit Opportunity Act, to refer the matter to the Department of Justice whether or not corrective action has been taken. To address lenders' concerns about possible referrals and to encourage the use of self-testing, several agencies, including the FDIC, have agreed not to require or request any information about a lender's self-testing program, except in cases where the agency has independently determined that a lender has unlawfully discriminated and the lender uses the results of self-tests to defend itself against the charge. Even the Department of Justice has announced that, as a general matter, it will not use evidence created by self-testing against the lender that undertook the selftesting, and will not request a lender's self-testing results to form a basis for determining whether to file a pattern or practice complaint. If a lender relies on the results of self-testing to defend itself against a Department of Justice charge of discrimination, the Department will expect the information to be disclosed. To that end, if a fair lending suit is authorized and litigation actually commences following unsuccessful settlement efforts, the Department has reserved the right to seek discovery at that time.

Financial institutions should check with their primary regulatory agency to determine the current position of the agency, or other agencies, on whether, or under what circumstances, it would ever seek the results of the institution's self-testing activity. However, it can only benefit an institution to discover and correct possibly discriminatory practices before an applicant is harmed or a federal regulatory agency learns of them. A testing program can help an institution assess its compliance with fair lending laws. How useful it will be is up to the institution. Testing should not be done to placate regulators and community groups. Instead, testing should be undertaken to facilitate an institution's ongoing evaluation of its lending policies and procedures in an effort to guarantee equal access to loans.

PART TWO: A COMPARATIVE ANALYSIS OF LOAN FILES Differences in treatment of applicants that may constitute a violation of fair lending laws can be
detected through the comparative analysis of a sample of loan files. The sample should include a target group of applicants from a protected group most at risk of discrimination on a prohibited basis. These should be compared against a control group of others not at risk. It is necessary to inspect and compare individual loan files for both accepted and rejected applicants to determine differences in the actual treatment of applicants and possible illegal discrimination. The following guidelines present a step-by-step approach to a comparative analysis of loan files. The focus here is on residential mortgage loans because residential mortgage loan applications provide most of the monitoring information necessary to test for illegal discrimination. However, the procedures also can be used to analyze other types of loan applications, such as consumer loans, to the extent that information contained in the applications would allow. The basic steps suggested provide some examples of how loan product features, underwriting standards, or instances of lender assistance to borrowers can be compared to discern differences in treatment. The more detailed the loan file comparison becomes, the better one will be able to test for discrimination and judge an institution's fair lending performance.

PLANNING THE ANALYSIS The first phase of a comparative analysis of loan application files involves planning and preparation. Steps in this process include: Selecting a target group from a prohibited basis category to test for differential treatment that may be discriminatory Selecting a control group of applicants from a different group not likely to experience illegal discrimination Creating a sample of approved and denied applications of the appropriate size from each group

Selecting the Target Group First, decide which group from a prohibited basis category to test. The selection process should begin with a review of the demographics of the institution's community, an analysis of the institution's HMDA data, and discussions with community representatives, including minority real estate brokers and small business owners who can provide insight into the credit needs of minority communities. A "hypothesis" can then be formed about which types of applicants might be discriminated against, in which loan products, and on what prohibited bases. Focus on groups in each prohibited basis category that have traditionally been disadvantaged and are most at risk of illegal discrimination. For example, when testing for gender discrimination, target women applicants; or when testing for discrimination based on race or national origin, separately target Black, Native American, Asian, or Hispanic applicants. Be careful not to group Non-White applicants as a "minority target group"; rather, compare each ethnic or racial group individually to White applicants. The loan product to consider might be the institution's most popular product in the community or a product line with a high number of denials to minority or other protected class applicants.

Selecting the Control Group The control group should be a sample of applicants who seem least likely to have experienced discrimination on a prohibited basis. This group will usually be white males or white couples but may vary depending on local situations.
Compare the treatment of applicants in the target group against this group to determine if the target group received less favorable treatment.

Creating the Sample It is important that all applications in the sample be drawn from the same time period to avoid any mitigating effect that changes in product features, underwriting standards or lending personnel would likely have on the test. For institutions subject to the Home Mortgage Disclosure Act (HMDA) the sample can be selected from entries on the institution's HMDA Loan Application Register (LAR). Include only approved applications in the control group sample 2, as this will provide evidence of the actual standards and practices used to approve loans.

For the target group sample, the population should include rejected, approved, and withdrawn applications. These should be compared against applications in the control group to identify common factors that would upon evaluation indicate disparate or less favorable treatment. Include approved applications and withdrawn applications from members of the target group, in addition to rejected applications, because these may also evidence disparate treatment. For example, members of protected groups may have been approved for loans but on more onerous terms, or applicants from protected groups may have been encouraged to withdraw applications. Where there are several branches or decision centers, the office locations may affect the type of applicant likely to be attracted to them. For example, if testing for race or ethnic origin discrimination, applications from a branch in an integrated or minority area should be included in the sample with applications from a branch in a predominantly white area to assure an adequate comparison of the treatment of minority and white applicants.

Determining the Sample Size Unless the total number of rejected and withdrawn application files is unusually large, all such files should be included in the target group sample. All rejected and withdrawn applicants of the targeted protected group should be presented on a sample spreadsheet. Once the target group sample is selected, you can calculate the size of the control group. Generally, the control group sample should be at least as large as the target group sample; but if the target group is small, the control group may need to be significantly larger (e.g., four times the size or more) to ensure that there is an adequate basis for comparison. The size of the sample will vary depending on the size of the institution, volume of loans, and the number of offices. If there is an insufficient loan volume from which to draw a valid sample, the period covered by the sample should be expanded.

COMPARING THE FILES Several basic steps can facilitate an orderly analysis of the sample of applications created. These
include: Placing the sample on a spreadsheet and developing a list of comparative factors Identifying any exceptions to institution lending policy or practices Comparing applications from the target group and the control group to determine differences in treatment of the applicants Creating a Comparison Spreadsheet After creating the sample of loan applications, place them on a spreadsheet. Using a spreadsheet will help to determine if the reasons for an applicant's denial are consistent with the institution's lending policies and practices and whether policies and practices are consistently applied without regard to any prohibited bases. Appendix D lists additional items that a lender might include on the spreadsheet to more adequately determine unfavorable treatment of target group applicants. Other factors can be added as a lender may deem necessary. In particular, a lender may want to include such items as assistance in completing an application or cross-selling more suitable loan products or other services. These and other factors could indicate whether the quality of assistance offered to target applicants and control applicants differ in any way.

Identifying Exceptions to Policy or Standard Practice Review all applicant profiles to identify any exceptions to loan policies for each item on the sample spreadsheet such as minimum and maximum mortgage loan amounts, analytical ratios and other decision factors used by the institution. In addition, any exceptions made to articulated policy standards or common practices regarding the nature and length of employment, credit history, underwriting and appraisal standards, or any other loan decision criteria should be identified. It also should be determined whether there is any pattern to the exceptions such that the exceptions may have become a standard practice or policy. The likely effect this may have on protected groups should be evaluated. Identifying Unequal Treatment The control group should be compared with the target group to establish equal or different treatment in the terms and conditions of loans (e.g., the length of the amortization periods, interest rates, special fees, or higher fees on smaller loans) and the quality of assistance offered to an applicant.

Terms and Conditions. Each key ratio should be compared for target applicants and control applicants to discern individual differences in treatment and possible patterns. Specific geographic areas should be reviewed for differential treatment as this may indicate "redlining". When comparing target group applicants to control group applicants, it is not necessary for all the applicant characteristics to be similar. The focus should be on similar "flaws" in applicant characteristics that may have resulted in the denial of a target group applicant but not a control group applicant. For example, if target group applicants appear to be denied credit based on debt-to-income ratios that exceed the institution's normal underwriting standards, you should look for approved control group applicants with debt-toincome ratios similar to those of denied applicants. Other inconsistencies may include: Minority applicants denied due to debt service ratios and non-minority applicants approved with identical debt service ratios Applicants from minority neighborhoods or with a handicap offered a shorter term than other applicants Interest rate inconsistencies that were not based on valid lending criteria Lower loan-to-value ratios that predominate for loans secured by property in minority neighborhoods

Quality of Assistance. It is important to remember that the risk of disparate treatment is higher in the treatment of applicants who are either "marginally" qualified or "marginally" unqualified. Here there is more room for lender discretion and "valid" reasons for denying loans to minority applicants may not have been applied in the cases of non-minority applicants with similar characteristics. In addition, offsetting reasons for approving a loan to a marginally qualified non-minority applicant could involve information the lender may usually fail to consider for minority applicants. For example, the lender may request an explanation for derogatory credit report information from a white applicant but fail to do so for a minority applicant, whose qualifications otherwise fall within the institution's underwriting guidelines, with derogatory credit information. A pattern of inconsistencies should raise questions that require a review of lending policies and discussions with loan staff. For example, if "insufficient income" is cited often as the reason for denial of applicants from a prohibited basis group, one might ask for the institution's definition of income; whether all of an applicant's income is considered; whether the loan policies are too restrictive; or whether more restrictive practices exist in the market area.

Another example would involve whether there is a possible pattern of "under-appraisals" for members of the target group. On the spreadsheet include a category for "Loan-to-Selling Price Ratio" to help determine if the loan-to-price ratio is consistently less than the loan-to-value ratios for members of the target group or for properties in some of the institution's lending areas. These ratios can indicate possible under-appraisals, which may be a problem for protected groups. An institution should then reconsider its appraisal review process and discuss the problem with staff or fee appraisers. In addition, foreclosure files, collection files, and institution owned real estate files should be reviewed individually or, if there is a large enough number, a sample may be reviewed. Exceptions found in the sample review process should be discussed with loan department personnel to establish any additional information that may have a bearing on a particular application's decision. Each file where an inconsistency is present should be reviewed to determine whether any practices have a discriminatory effect on minorities, women, or other protected groups. If no reasonable explanation for the inconsistencies can be determined, then a violation may exist. Where denials or more restrictive terms correlate with particular census tracts or neighborhoods and, again, no reasonable explanation for the inconsistencies can be determined, then unlawful redlining also may be a possibility.

EVALUATING THE RESULTS After each target group loan file has been reviewed and compared for different treatment, a determination must be made about whether the differing treatment constitutes a violation of law. Substantive as well as technical violations should be identified in addition to different types of discrimination. It also should be determined whether any violations constitute a pattern or practice of discrimination.

Identifying Technical and Substantive Violations Unlawful discriminatory practices range from the overt to the very subtle. The motivations behind such practices range from prejudice to simple ignorance of the law. Violations generally fall into two
categories: technical and substantive. Within the category of technical violations, some may be procedural, such as not having the Equal Housing Lender poster on display. However, technical violations, especially of a repetitive nature, can be indicators that possible substantive violations may also exist. Substantive violations involve actual discrimination on a prohibited basis, either disparate treatment or disparate impact. Identifying Types of Lending Discrimination When evaluating the results of the analysis, look for any evidence of overt discrimination, as well as evidence of disparate treatment and disparate impact. Evidence of overt discrimination exists when a lender openly and blatantly discriminates on a prohibited basis.

Disparate treatment occurs when a lender treats an applicant differently based on one of the prohibited bases. Disparate treatment ranges from overt discrimination to more subtle differences in treatment. As discussed earlier, disparate treatment may more likely occur in the treatment of applicants who are neither clearly well-qualified nor clearly unqualified for a loan. Even when there is an apparently valid explanation for a particular difference in treatment, further investigation may indicate disparate treatment. Disparate impact occurs when a policy or practice applied equally to all applicants has a disproportionate adverse impact on applicants in a protected group. However, identifying the existence of a possible disparate impact is only the first step in finding lending discrimination. The next step is to determine whether the policy or practice is justified by a "business necessity." For example, a lender's policy, in effect for several years, does not permit mortgage loans for less than $60,000. If this minimum loan amount is shown to disproportionately exclude potential minority applicants from consideration because of their income levels or the value of the houses in certain areas in which they live, the lender will be required to justify the "business necessity" for the policy.

The justification may not be hypothetical or speculative. Yet, factors that may be relevant to the justification could include, for example, cost and profitability. Even if a policy or practice that has a disparate impact on a prohibited basis can be justified by "business necessity," it may still be found to be discriminatory if an alternative policy or practice could serve the same purpose with less discriminatory effect. However, where the policy or practice is justified by "business necessity" and there is no less discriminatory alternative, a violation of the Fair Housing Act or the ECOA may not exist.

Identifying a Pattern or Practice It is important to identify both individual violations and possible patterns of violations. Isolated, unrelated or accidental occurrences will not constitute a pattern or practice of discrimination. However, repeated, intentional, regular, usual, deliberate or institutionalized practices will almost always constitute a pattern or practice. In determining whether a pattern or practice exists certain factors should be considered, including whether the conduct appears to be grounded in either written or unwritten policy or an established practice; whether there is evidence of similar conduct to more than one applicant; whether the conduct
is within an institution's control and the relationship of the number of instances of the conduct to total lending activity. Depending on the circumstances, violations that may involve only a small percentage of an institution's total lending activity could constitute a pattern or practice.

The evaluation should focus on detecting the presence of both individual instance and systemic violations, and should evaluate internal controls present within the institution to prevent and detect discrimination. Lenders should review any articulated standards or lending policies for possible violations and to detect: Purposeful discrimination. This includes both overt and the less obvious types of discrimination such as disparate treatment when strict standards are used to reject applicants on a prohibited basis, but more flexible standards are applied selectively to others; Disparate impact. This includes a policy or practice that may be applied equally to all credit applicants, but the policy or practice has a disproportionate adverse impact on applicants from a group protected against discrimination; and Unduly subjective standards. This includes no standards or non-specific standards. Such subjectivity can lead unintentionally to allowing prohibited factors to influence an institution's decision-making process. Historic customs concerning race, gender or handicap discrimination, for example, may continue to be practiced until clear and direct policies ensuring nondiscrimination are in place.

Correcting Discriminatory Practices If an institution discovers practices that may be discriminatory, it should determine the cause and consider taking appropriate corrective actions including, but not necessarily limited to: Identifying applicants whose applications were processed inappropriately and, with legal counsel's advice: offering to extend credit if applicants were denied improperly and compensating them for any damages, both out-of-pocket and compensatory, and notifying them of their legal rights Correcting any institutional policies or procedures that may have contributed to the discrimination Identifying, training or disciplining the employees involved Considering development of community outreach programs or changes in marketing strategy or loan products to better serve minority segments of the market area Improving audit and oversight systems to ensure there is no recurrence of the discrimination

PART THREE: OTHER GUIDES TO FAIR LENDING Many useful guides to detecting and preventing illegal lending discrimination have been developed in recent years by the regulatory agencies and others. With the passage of time, some may have been put aside, overlooked, or forgotten. Included in this section are excerpts from several that outline how lenders can evaluate and improve fair lending performance. How to Evaluate and Improve Fair Lending Performance Home Mortgage Lending and Equal Treatment, A Guide for Financial Institutions, published by the FFIEC in November, 1991, highlights some lending standards and practices that may on the basis of race, sex, handicap, or certain other factors adversely affect the ability of credit applicants to obtain home mortgages. A summary is provided here that alerts lenders to less obvious forms of discrimination discussed in the previous sections of this guide and suggests ways to avoid them.
Closing the Gap - A Guide to Equal Opportunity Lending, a publication of the Federal Reserve Bank of Boston released in April, 1993, presents a comprehensive approach that financial institutions can take to address possible discrimination in lending and improve fair lending performance. It emphasizes participation and involvement at all levels of lender operations. While the focus is on mortgage lending, most of the recommendations apply to other lending areas, including consumer, commercial and small business lending. A fair lending check list from Closing the Gap is highlighted here to assist lenders in evaluating performance.

Suggested Lending Activities. In a public announcement on May 27, 1993, the federal financial institutions supervisory agencies jointly communicated to lenders eleven activities suggested as a means to improve fair lending performance. The FDIC Compliance Examination Manual and the examination procedures and guidelines in use by other regulatory agencies are a useful source of information to assist financial institutions in developing self-assessment programs. Excerpts presented here from the FDIC Fair Housing Examination Procedures expand upon the discussion in the previous section on policies, procedures and subjective lending criteria that may raise questions of disparate impact discrimination.

We encourage financial institutions to contact the agencies cited for copies of the source documents in their entirety. Home Mortgage Lending and Equal Treatment A Guide for Financial Institutions Published by: Federal Financial Institutions Examination Council 1776 G Street, NW, Suite 850B, Washington, DC 20006 The FDIC distributed a camera-ready copy of this brochure in a letter to financial institutions on March 16, 1992 (FIL-19-92). It presents examples of lender requirements that may have a discriminatory effect on minority applicants and offers several recommendations. While the principles outlined apply to all forms of discrimination, the guide focuses on discrimination based on race in several areas of the lending process.

The following is a summary of several of its recommendations: Loan Origination Process To assure that lending personnel are applying standards appropriately, lenders should: Reassess property standards and minimum loan amounts that may not consider neighborhood differences in minority areas Investigate credit practices for possible pre-screening when disproportionate low application levels are found for particular groups Develop a simple "equal opportunity in lending" policy statement and periodically discuss it with staff Print detailed information about mortgage loan terms and qualifications and make it easily available to loan officers and the general public. Information about steps applicants can take to help them qualify, such as monetary gifts from others to meet a downpayment, can be made
available. Discrimination is less likely to occur if information regarding qualifications, rules, common exceptions, and helpful hints is clearly spelled out in writing, made available in the lobby, and explained to all applicants.

Appraisal Process If appraised values appear to play a substantial role in rejections or reductions of loan amounts in minority areas, lenders should: Determine that appraisers have recently received effective fair housing training and subscribe to current fair housing standards of the Appraisal foundation or other organizations Be alert to two appraisal practices most likely to cause equal opportunity problems: First, in the cost approach to value, racial bias may be reflected in unsupported adjustments for "functional and economic obsolescence." Lenders should not assume that large adjustments are appropriate just because a home or neighborhood is over a certain age. Second, in the comparable sales approach, racial bias may cause the appraiser to select comparables or make adjustments that are inappropriate.

Marketing Process Lenders also should be sensitive to potential discriminatory effects of their marketing practices, in particular: Where lender strategies fail to include contact with minority realtors and other realtors serving predominately minority areas, there is almost always a low level of minority applicants Similarly, lender advertising can have dramatic effects on the way minority borrowers view lenders. Failure to advertise in media directed to minority areas, or in media known to appeal to minorities, can limit the ability of an institution to attract minority applicants.

Private Mortgage Insurance In addition to reviewing and revising their own standards and practices lenders can also attempt to influence the standards of private mortgage insurers. Lenders should: Carefully review rejections of loans submitted to private mortgage insurance companies Select companies that may be more receptive to ideas for changes CLOSING THE GAP Published by: Federal Reserve Bank of Boston P. O. Box 2076 Boston, MA 02106 (617) 973-3459 Recognizing that fair lending is good business "Closing the Gap" states that lenders, and their regulators, should look for ways to eliminate the unjustified lending disparities that have been documented over the years. A series of questions from it are included here to assist lenders in
evaluating fair lending performance. 1. When hiring, do you seek cultural diversity which reflects the demo-graphics of your community? 2. When hiring lending staff, do you take into account possible racial, religious or other prejudices of job applicants?

3. Do you train all staff in the area of fair lending? 4. Do you have any mechanisms through which unfair lending practices, policies, or procedures may be detected? If so, are you able to determine the effectiveness of those mechanisms? 5. Do you inform all potential borrowers, regardless of their race or ethnic background or the location of the property, about all of your lending programs so they may decide which best fits their needs? 6. Do you deliberately steer minority applicants to federally insured programs because you assume that minorities are less credit-worthy? 7. Do you have mortgage lending practices that include location of property as a risk factor? 8. Does your mortgage prequalifying procedure tend to encourage or discourage minority applicants?

9. Do you offer home-buyer education programs for potential applicants who are unfamiliar with the mortgage lending process? 10. Do you regularly review your advertising to see if the choice of illustrations or models suggests a customer preference based on race? 11. Are you as assertive in attracting minority applicants as you are in attracting non-minority applicants? 12. Are you familiar with the practices of the real estate and mortgage brokers with whom you do business? 13. Do you encourage the brokers and appraisers with whom you do business to be constructively active in minority communities? 14. All things being equal, do non-minority and minority credit applicants have the same chance of getting a loan from this financial institution?
HOMEWORK
explain ethical standards; explain how to protect a consumers information; understand the requirement of disclosure; understand the necessity of confidentiality; discuss Discrimination; understand the ramification of following laws and regulations; and be able to list the National Association of Mortgage Brokers Code of Ethics.
PAGE #1020 - Ethical standards

Ethical Standards Licensees shall conduct their activities with honesty, integrity and professionalism, ensuring that they and their personnel are knowledgeable in the areas of the mortgage industry in which they participate.

Ethical Standards Case Study Mary Smith has been practicing as a loan officer for over 12 years with ABC Mortgage Inc. Mary has been working exclusively with residential mortgages ranging in loan amounts from $100,000 to $400,000. A former client refers a friend, John Alden, to contact Mary for help in his mortgage needs. John is seeking financing for a 1.2 million dream home he plans on building. Mary meets with John to discuss the loan, and get more specific details about Johns credit history. Mary explains to John that although she has over 12 years of experience, she has not funded many construction to perm loans, but suggests that John speak to a colleague of hers, Frank Spencer. Because of this, she contacts another ABC Mortgage loan officer, Frank Spencer, who specializes in these types of loans. Frank agrees to work on the transaction with Mary, adding his expertise and help in bringing the loan to the closing table. John was a little nervous, but was impressed with Marys honesty.

Ethical Standards Case Study Discussion Is Mary operating under ethical standards, considering her lack of experience? Yes. Mary advised the client of her lack of knowledge concerning these types of loans. Because of this disclosure and the recommendation to use Frank, Mary would not be in violation of this code. In addition, Mary did exactly what she should, by advising John that construction to perm loans were not her area of expertise.
Is she showing integrity and professionalism in referring this loan to Frank? Yes. Can Mary receive a commission? Yes. Mary can receive a commission from Frank.

What are the extra benefits for Mary beyond the commission? Mary has shown true professionalism, and no greed, by referring the client to another loan officer, more suited for this type of loan. More than likely, the borrower will pass along great comments on how Mary ensured the loan was completed professionally and accurately.
PAGE #1025 - Protection

Protection Licensees should use their best efforts to protect parties to a mortgage transaction and the public against fraud, misrepresentation, unethical practices or other violations of any applicable laws including, the Mortgage Broker License Act, RESPA, and Truth in Lending.

Protection Case Study Carol Chambers had been practicing as a loan officer for almost three years. Although fairly new, Carol prided herself in being ethical, and advancing her career by completing numerous continuing education courses throughout each year. Carol met Gina Morris, who was purchasing a home, and was represented by a REALTOR. Carol met with Gina, and completed a loan application. Carol went over all the disclosures, and explained to Gina the loan process, including lender approval, and the appraisal process. Gina informed Carol, she already had an appraiser as she was an investor, and had purchased several properties in the past. During the loan process, Carol starting receiving required paperwork from Gina. One document was the sales contract for the property. Carol was missing one page of the contract, so she contacted Ginas REALTOR for the page. After reading the sales contract, Carol noticed a couple of sections that were out of the norm. One section in the contract indicated that the seller would give $100,000 to a third party, to complete repairs and upgrades to the property. The statement was on an addendum. Gina had not given this page to Carol at time of loan application. Another abnormality, was the fact that the house was originally listed for $60,000, and the purchase price on the home was for $160,000. Carol had verified this by contacting the REALTOR. Obviously the increase in the price was to make up the $100,000 to be given to the third party. Carol was very surprised when the appraisal arrived, and the home had appraised for $160,000. Carol spoke to an appraiser friend, and ask the appraiser to look up the property, and give his opinion. The appraiser called back the next day, and told Carol, Theres no way the home is worth $160,000. Carol read through the original appraisal, and it did not indicate the price was based on future repairs, or upgrades.

Protection Case Study Discussion What should Carol, the loan officer do, if anything? Carol should immediately contact her Mortgage Broker. The Mortgage Broker will most likely contact the lender, to inform them of their concerns about the property price, and appraisal. The Mortgage Broker, along with the lender may stop the loan, due to the potential for mortgage fraud.

What is her ethical obligation concerning this potential fraud? Licensees should use their best efforts to protect parties to a mortgage transaction and the public against fraud, misrepresentation, unethical practices or other violations of the various laws.

What are the warning signs for potential mortgage fraud? The National Association of REALTORS has received reports that government regulators and the FBI are investigating allegations involving potential mortgage fraud in real estate transactions.

Here are Red Flags to Watch Which May Involve Mortgage Fraud: 1. The payment of an inflated price for the property [for example: $290,000 sales price for a house listed for $218,000. 2. Inflated appraisals [either knowingly by the appraiser or without the appraisers knowledge] 3. False financial statements for a borrower. 4. Contract and loan conditions that provide for purported future improvements to be made to the property, 5. False and inflated estimates from contractors for the purported improvements;

6. Extraordinarily high fees to the mortgage broker or to the real estate broker or both; 7. Last minute amendments to the contract inflating the sales price to a significantly higher amount. 8. The reports also indicate that many times the listing broker is required to change the original listing price to a higher price to reflect the contract sales price. 9. In addition, the seller often agrees to accept proceeds only up to the amount of the listing price and that the excess sales price over the listing price will be paid to the buyer, another person or another
entity.

In these suspect transactions, the purported improvements are never made, and eventually the property ends up in foreclosure. Title companies are also more aware of flags that identify these suspect transactions and may refuse to close such transactions. The National Association of REALTORS legal staff suggests that the listing broker advise the seller NOT TO ENTER INTO A SUSPECT TRANSACTION without the assistance of counsel and for the broker to withdraw from any transaction the broker has reason to believe involves mortgage fraud or is a highly suspect transaction.
PAGE #1033 - Disclosure

Disclosure Licensees should disclose to all appropriate parties to a mortgage transaction: a) any real or perceived conflicts of interest; b) all material information; and c) any personal interest, direct or indirect.

Disclosure Case Study Deshon Burks is a Mortgage Broker, and owns her own Mortgage Company. Having been in the business for over twenty years, Deshon is well known, and has many contacts throughout the industry. In addition, Deshon enjoys investing in real estate property, including rental property, and commercial construction. A separate corporation, in which she is part owner, was selling one of their investment properties. Deshon was completing a loan application with a borrower named Scott Walker. After completing the application, Deshon gave Scott a list of items she would need to proceed with the loan.

One of the items was the purchase contract, which Scott had available at the time of application. After the meeting ended, Deshon was reviewing the loan application, and other items. While reading the purchase contract, Deshon noticed that the investment company that she was co-owner of, was the owner and seller of the home Scott was buying. The fact that the contract had already been negotiated, Deshon felt there was no need to remove herself as the loan officer, and there was no need to inform Scott that she was part owner in the property he was buying.
Disclosure Case Study Discussion Has Deshon, the Mortgage Broker, done anything wrong? Yes. A licensee should disclose to all appropriate parties to a mortgage transaction any personal interest, direct or indirect.

What type of disclosure, if any, should Deshon make? Deshon should disclose that she has an interest in the property to Scott and the Lender. In this situation, it would be better to simply remove herself as the mortgage broker, due to: arms length. Definition: arm's length - The condition of the parties to a business deal in which each has independent interests and one does not dominate the other -- often used in the phrase at arm's length (a contract made at arm's length)
PAGE #1038 - Confidentiality

Confidentiality Licensees should hold in strict confidence any information arising from the professional relationship concerning the business and affairs of his or her Client, and shall not divulge that information unless the Licensee is expressly authorized by the Client or required by law to do so. Licensees, acting for more than one party to a transaction shall not act to the detriment of any one of the parties by withholding material information.

Confidentiality Case Study Thomas Hilton, a loan officer, is helping Mike Tracey, who owns a mens clothing store, obtain preapproval on a residential home loan in his community. Thomas was at a monthly Lions Club meeting, and an informal discussion took place concerning donations for an upcoming fund raising drive to help needy people at a nearby womens shelter. Thomas tells the group, You need to ask Hal for a donation. With his business doing as well as it is, he can certainly afford to help.

Confidentiality Case Study Discussion Are Thomas remarks to the group appropriate? No. Have Thomas remarks broken Confidentiality?
Yes, by indicating the Mike has money to donate due to his business doing well. What is the rule of confidentiality? Licensees should hold in strict confidence any information arising from the professional relationship concerning the business and affairs of his or her Client, and shall not divulge that information unless the Licensee is expressly authorized by the Client or required by law to do so.
PAGE #1041 - Competence

Competence Licensees should endeavor to be informed regarding the law, proposed legislation, and other essential facts relevant to public policies related to the services they provide. When a Licensee is unable to render service in accordance with the standards required by the License Act, the Licensee shall decline to act. A Licensee should provide timely service and respond on a timely basis to inquiries from participants in a mortgage transaction.

Competence Case Study Hortence Plover is a loan officer at Provincial Mortgage Inc. Hortence, who has been in the mortgage industry for a number of years, agreed to obtain residential home financing for Herb and Pepper Plante when they approached her in mid-July. The real estate contract Herb and Pepper signed specifies that financing must be obtained by September 30th or the contract becomes null and void. The Plantes had tried contacting Hortence on several occasions with no avail. On August 29th, the Plantes attempted to contact Hortence, once again, at Provincial to inquire on the progress of their loan. They had provided all documentation requested at the beginning of the month. Provincial informed them that Hortence had embarked on a seven week world cruise without leaving word on how she could be contacted and no one in the office knew anything about the Plantes loan. Due to the delay, the Plantes missed their closing date, and were in default on their contract. Because of this, the Plantes earnest money of $2,000 was given to the seller of the property, and they were unable to proceed with the purchase.

Competence Case Study Discussion Should Hortences ethics in regard to competence be addressed? Yes. Who should handle this? Provincial Mortgage Inc. and Hortences Mortgage Broker of record should address this immediately. Do the Plantes have any legal recourse due to the loss of their earnest money?
Potentially yes. A Licensee should provide timely service and respond on a timely basis to inquiries from participants in a mortgage transaction.
PAGE #1044 - Member Competition

Member Competition Licensees shall not unfairly criticize a competitor Licensee nor refer to another Licensee in a disparaging manner. Member Competition Case Study Charlie Briggs and his wife were at a P.T.A. meeting. While drinking coffee, Charlie and his wife initiated a conversation with Perry Mason, another parent. In the course of their discussion, Charlie mentioned that he and his wife had applied for a home loan with Briggs Trueheart, a competitor of Perrys at Evermore Mortgage. Perry was disappointed and irritated that Charlie had not given him a chance to help them with their new home loan. Perry told them Boy did you ever pick a loser! Briggs Trueheart commits more fraud than an Enron Board Member!
PAGE #1045 - Member Competition

Case Study Discussion Are Perrys ethics acceptable when making these statements? No. What comments, if any, should Perry make in that scenario? Licensees shall not unfairly criticize a competitor Licensee nor refer to another Licensees in a disparaging manner.
PAGE #1046 - Advertising

Advertising All Licensees shall apply, set and maintain standards of honesty, truth, accuracy, fairness and propriety in advertising and shall comply with Mortgage Broker License Act.

Advertising Case Study A sign in a mortgage companys window says: We will get you a 5.00% loan when no one else can. Call ZYX Mortgage at (666) 666-6666.

Advertising Case Study Discussion Whats wrong with this sign? 1. It is very misleading, when indicating the mortgage company will give the consumer a loan when no one else can. 2. The advertisement is in violation of Regulation Z, by not fully describing the product being offered.
PAGE #1049 - No discrimination

No Discrimination Licensees shall not, when acting in a professional capacity, discriminate or participate in discrimination against any person and shall be aware of the rights and obligations of the applicable Fair Housing Laws.

No Discrimination Case Study Carl White, a loan officer, walked into a sales meeting at his company, The Right People Mortgage Company. He was clearly in a bad mood, so a colleague asked him, Whats wrong Carl? Carl explained that he had spent weeks working on a loan, that had just busted because the borrowers had lied about the amount of income they made annually. The colleague patted Carl on the back and said, It happens to us all just shake it off and keep going. Carl then made the comment, I will, but every time I take a loan from these people south of the border, they always pull a stunt like this. The next time I take a loan from one of those people, Im going to charge the highest fees as possible, to make up for all the times Ive lost money when trying to complete a loan for [those people].

No Discrimination Case Study Discussion Whats wrong with Carls comments to his colleague? Carls comments indicate that he will charge different fees to a certain race, whereas he normally would not. With this type of attitude, what laws (if any) might Carl potential be in violation? Fair Housing Laws
PAGE #1052 - Laws and regulations

Laws and Regulations Licensees shall conduct their activities in full compliance with all federal, and state laws and regulations. Laws and Regulations Case Study
Martha Stewart, a loan officer, had been practicing for over 30 years. Well known in her area, Martha often received new clients from various REALTORS. Knowing that image and branding were important to her business, Martha would often visit her REALTORS, and meet for lunch. One REALTOR, Ken Lay, had known Martha for many years. While having lunch one day, Martha was thanking Ken for sending her a client the previous month. Ken told her, Martha, I wouldn't send my clients to anyone else, mainly, because of the service you provide to my clients. Martha gave Ken a thank you card, which included a check for $2000, which she told him, This is a referral fee for all the business you give me. Ken thanked Martha, and said, WOW! Maybe I should get my loan officer license. Clearly the money is great.

Laws and Regulations Case Study Discussion Is what happened at the lunch OK? No. Did Martha violate any laws or acts? If so, which one(s)? Yes. Finance Code (Mortgage Broker License Act) Section 156.303(8) - paid compensation to a person who is not licensed or exempt under this chapter for acts for which a license under this chapter is required.

Did Ken violate any laws or acts? If so, which one(s)? Yes. Finance Code (Mortgage Broker License Act) Section 156.406(b) - A person who received money, or the equivalent of money, as a fee or profit because of or in consequence of the person acting as a mortgage broker or loan officer without an active license or being exempt under this chapter is liable for damages in an amount that is not less than the amount of the fee or profit received and not to exceed three times the amount of the fee or profit received, as may be determined by the court. An aggrieved person may recover damages under this subsection in a court.
PAGE #1055 - Association of Mortgage Brokers

There are many optional Associations a Loan Originator, Mortgage Broker, or Mortgage Banker may choose to join. This module reviews some sample rules and information of those associations. Be advised, that depending on your individual state or city, and Association, these rules may be different. Although these examples may be geared towards Mortgage Brokers for example, each association may have rules for all members, including Originators, Brokers, Bankers, Appraisers, etc. Association of Mortgage Brokers The National Association of Mortgage Brokers was organized for the following purposes: To promote the highest standards of professional mortgage brokering ethics. To promote the common business interest of those engaged in the mortgage brokerage industry and promote cooperative business transactions among its members. To protect the mortgage brokerage industry and the public through legislative actions and the
dissemination of information on legislation and regulatory activity affecting its members.
PAGE #1056 - Association of Mortgage Brokers

To promote and enhance the image of the mortgage brokerage profession throughout the State and foster a broader understanding and acceptance of the professional mortgage broker as a vital source of financing. To provide a forum for the effective exchange of knowledge, ideas, trends, and innovations in the mortgage brokerage industry through education seminars and professional meetings. To promote a cooperative liaison with other related professional groups.
PAGE #1057 - NAMB Code of Ethics

NAMB Code of Ethics HONESTY & INTEGRITY. NAMB members shall conduct business in a manner reflecting honesty, honor, and integrity. PROFESSIONAL CONDUCT. NAMB members shall conduct their business activities in a professional manner. Members shall not pressure any provider of services, goods or facilities to circumvent industry professional standards. Equally, Members shall not respond to any such pressure placed upon them. HONESTY IN ADVERTISING. NAMB members shall provide accurate information in all advertisements and solicitations.
PAGE #1058 - NAMB Code of Ethics

CONFIDENTIALITY. NAMB members shall not disclose unauthorized confidential information. COMPLIANCE WITH LAW. NAMB members shall conduct their business in compliance with all applicable laws and regulations. DISCLOSURE OF FINANCIAL INTERESTS. NAMB members shall disclose any equity or financial interest they may have in the collateral being offered to secure a loan.
PAGE #1059 - Sample mortgage broker regulations

SAMPLE MORTGAGE BROKER REGULATIONS This sample was originally from the Texas Law. It has been modified to show you possible regulation that may affect an originator. As always, you should research your applicable state for the full text of any laws that govern your particular license. DISCRIMINATORY PRACTICES 80.10. Prohibition on False, Misleading, or Deceptive Practices and Improper Dealings. (a) No Mortgage Broker or Loan Officer may: (1) knowingly misrepresent his or her relationship to a Mortgage Applicant or any other party to an actual or proposed Mortgage Loan transaction;
(2) knowingly misrepresent or understate any cost, fee, interest rate, or other expense in connection with a Mortgage Applicant's applying for or obtaining a Mortgage Loan; (3) disparage any source or potential source of Mortgage Loan funds in a manner which knowingly disregards the truth or makes any knowing and material misstatement or omission;

(4) knowingly participate in or permit the submission of false or misleading information of a material nature to any person in connection with a decision by that person whether or not to make or acquire a Mortgage Loan. (5) as provided for by the Real Estate Settlement Procedures Act and its implementing regulations, broker, arrange, or make a Mortgage Loan in which the Mortgage Broker or Loan Officer retains fees or receives other compensation for services which are not actually performed or where the fees or other compensation received bear no reasonable relationship to the value of services actually performed;

(6) recommend or encourage default or delinquency or continuation of an existing default or delinquency by a Mortgage Applicant on any existing indebtedness prior to closing a Mortgage Loan which refinances all or a portion of such existing indebtedness; (7) induce or attempt to induce a party to a contract to breach the contract so the person may make a Mortgage; or (8) engage in any other practice which the Commissioner, by published interpretation, has determined to be false, misleading, or deceptive.

(b) The term improper dealings in Section 156.303(a)(3) of the Act includes, but is not limited to the following: (1) Acting negligently in performing an act for which a person is required under the Act to hold a license; (2) Violating any provision of a federal, State, or local constitution, statute, rule, ordinance, regulation, or final court decision that governs the same activity, transaction, or subject matter that is governed by the provisions of the Act or this Chapter;

or (3) Violating any provision of the following statutes, regulations, and constitutional provisions, or their successor statutes, regulations, and provisions: (A) Real Estate Settlement Procedures Act, 12 U.S.C. Chapter 2600; (B) Regulation X, 24 C.F.R. Part 3500;
(C) Consumer Credit Protection Act, 15 U.S.C. Chapter 1600 (Truth in Lending Act); (D) Regulation Z, 12 C.F.R. Part 226; (E) Equal Credit Opportunity Act, 15 U.S.C. 1691; (F) Regulation B, 12 C.F.R. Part 202; and (G) Section 50, Article XVI, Constitution.

(4) No Mortgage Broker or Loan Officer shall represent to a Mortgage Applicant that a charge or fee which is payable to the Mortgage Broker, Loan Officer or the corporation, partnership or other entity through, or for which the mortgage broker conducts activities (the company affiliate) is a "discount point unless: (A) The Mortgage Broker or Loan Officer is the lender in the transaction. For purposes of this subsection (b)(4)(A), the Mortgage Broker or Loan Officer is deemed to be the lender if the Mortgage Broker, Loan Officer, or the company affiliate for which the mortgage broker conducts activities, as designated in the records of the Commissioner under the provisions of Finance Code 156.204(b) as of the date of the loan, is the person or entity to whom the mortgage obligation is initially payable as evidenced on the face of the note or other written evidence of indebtedness;

or, (B) When the Mortgage Broker, Loan Officer, or company affiliate is not the lender, the Mortgage Broker or Loan Officer demonstrates by clear and convincing evidence that the lender has charged or collected discount point(s) or other fees which the Mortgage Broker, Loan Officer, or company affiliate has paid the lender on behalf of the consumer, to buy down the interest rate on a loan and the receipt of the discount point(s) by the Mortgage Broker, Loan Officer, or company affiliate at closing is a reimbursement for the Mortgage Broker, Loan Officer, or company affiliates expenditure. (C) The discount points are retained or charged only in the event the loan closes.

(c) Nothing herein shall be construed to authorize a Mortgage Broker or Loan Officer to provide any of the services made the subject of fees. It is the responsibility of the Mortgage Broker or Loan Officer providing any such services to obtain any necessary, approvals, licenses, or permits and to comply with applicable legal and contractual requirements. (d) Nothing herein is intended to authorize the charging or retaining of a fee or charge which may be prohibited under other federal or state law.

(e) A mortgage broker or a loan officer, as applicable, engages in a false, misleading or deceptive practice or improper dealings when in connection with the origination of a mortgage loan:
(1) The person offers other goods or services to a consumer in a separate but related transaction and the person engages in a false misleading or deceptive practice in the related transaction. (2) The mortgage broker sponsors a loan officer or affiliates with another mortgage broker who offers other goods or services to a consumer in a separate but related transaction and the person engages in a false, misleading or deceptive practice in the related transaction; whether or not the sponsoring broker is aware of or participates in such act.

TYPICAL COMPLAINTS WITH REGULATORY AGENCIES Any person may file a complaint against a Mortgage Broker or Loan Officer if the person believes the licensee violated the Mortgage Broker License Act. Assuming that the commission has jurisdiction over the complaint, the commission will typically investigate the allegations by interviewing the parties and witnesses and gathering relevant information.

After review of the information, the enforcement division will notify the licensee if it intends to initiate disciplinary proceedings against the licensee. After a hearing or other settlement procedure, the commission will render a decision. If the evidence establishes a violation of the Mortgage Broker License Act, the commission may impose disciplinary action which may include: a reprimand; suspension of the license; revocation of the license; a fine; probation; or any combination of the foregoing.

SUBCHAPTER D. COMPLAINTS AND INVESTIGATIONS. MORTGAGE BROKER REGULATIONS 7 TAC Chapter 80 80.15. Complaints, Administrative Penalties, and Disciplinary and/or Enforcement Actions. (a) Upon receipt of a signed, written complaint setting forth known, suspected, or asserted facts relating to acts or omissions of a person required to be licensed under the Act, the Commissioner or the Commissioner's designee will: (1) make an initial determination whether the complaint sets forth reasonable cause to warrant an investigation; (2) if it has been determined that the complaint warrants an investigation, advise the Mortgage Broker or Loan Officer who is the subject of the complaint by written notice to the authorized office specified on that person's license that a complaint has been filed;

(3) if it is determined that a complaint does not warrant investigation, so advise the complainant and close the file, advising the complainant of the right to bring forth additional facts or information to have the initiation of an investigation reconsidered; (4) if an investigation is to be conducted, advise the party who is the subject of the complaint that an investigation will be conducted and conduct such investigation as is deemed appropriate in light of all the relevant facts and circumstances then known. Such investigation may include any or all of the following: (A) review of documentary evidence; (B) interviews with complainants, licensees, and third parties;

(C) obtaining reports, advice, and other comments and assistance of other state and/or federal regulatory, enforcement, or oversight bodies; and (D) such other lawful investigative techniques as the Commissioner reasonably deems necessary and/or appropriate, including, but not limited to, requesting that complainants and/or other parties made the subject of complaints provide explanatory, clarifying, or supplemental information. (b) The Commissioner may conduct an investigation only if the Commissioner, after due consideration of the circumstances, determines that the investigation is necessary to prevent immediate harm and to carry out the purposes of the Act.

(c) The Commissioner may authorize or direct an employee of the Department to initiate a complaint against a person licensed under the Act and to conduct the appropriate investigation if: (1) a judgment against that person has been paid from the Recovery Fund; (2) that person holds a provisional license issued under 156.207 of the Act and subsection (b) of 80.3 of this Chapter (relating to Provisional Licenses); (3) the Commissioner has reasonable cause to suspect or believe that person may have been convicted of a criminal offense which may constitute grounds for the suspension or revocation of that person's license; or (4) that person has failed to honor a check issued to the Commissioner. (d) If the Commissioner determines that a person has violated the requirements of the Act, this Chapter, or any order adopted under the Act or this Chapter, the Commissioner may impose an administrative penalty on that person. Such penalties shall not exceed $2500 per violation. Each day that a violation occurs or is continuing is deemed to be a separate violation for the purposes of imposing administrative penalties hereunder.

(e) In fixing the amount of any administrative penalty(ies) for any violation(s) of the Act or these regulations, the Commissioner shall consider:
(1) the seriousness of each violation, including, but not limited to, the nature, circumstances (including any mitigating circumstances), extent, and gravity of each violation; (2) the history of any previous violations; (3) the amount deemed necessary or appropriate to deter future violations; efforts to correct the violation(s); and (4) any other matter that justice may require or that the Commissioner determines has a reasonable bearing on the appropriateness of the amount of the administrative penalty.

(f) The enforcement of the penalty may be stayed while it is under judicial review if the person pays the penalty to the clerk of the court which is reviewing the penalty or files with such court a supersedes bond in the amount of the penalty. A person who cannot afford to pay the penalty or provide the bond may stay enforcement by filing an affidavit in the manner required by the Rules of Civil Procedure for a party who cannot afford to provide security for costs, subject to the right of the Commissioner to contest the affidavit as provided for by those rules.

(g) The Attorney General for the State may sue to collect a penalty imposed under the Actor these regulations. (h) A proceeding to impose an administrative penalty under the Act and these regulations is considered to be a contested case under Chapter 2001, Government Code. (i) If a person against whom an order is made requests a hearing, the Commissioner shall set and give notice of a hearing before the Commissioner or a hearings officer. The hearing shall be governed by Chapter 2001, Government Code. Based on the findings of fact, conclusions of law, and any recommendations of the hearings officer, the Commissioner shall by order find that a violation has or has not occurred.

(j) If a hearing has not been requested under the preceding subsection of these regulations within thirty days of the date on which the initial order is issued, such order will, with no further action by the Commissioner or anyone else, become final and not subject to appeal. (k) If the Commissioner has reasonable cause to believe that a person licensed under this Chapter has violated or is about to violate the Act, this Chapter, or an order under this Chapter, the Commissioner may, without notice and hearing, issue an order to cease and desist a particular action or an order to take affirmative action, or both, to enforce compliance with the Act and this Chapter. Any such order must contain a reasonably detailed statement of the facts on which the order is made. If a person against whom an order is made requests a hearing, the Commissioner shall set and give notice of a hearing to be held in accordance with this Chapter and Chapter 2001, Government Code. Based on the findings of fact and conclusions of law, the Commissioner may find by order that a violation has or has not occurred.
(l) In addition to or in lieu of an action to invoke or enforce suspension or revocation of a license or to impose administrative penalties or any other enforcement action permitted by the Act and this Chapter, the Commissioner may initiate an action which, upon notice and an opportunity for a hearing, will result in the affected licensee's being placed on probationary status. The order placing a licensee on probationary status shall specify the terms and conditions of probation.

(m) The Commissioner may, after giving notice, impose against any person who violates a cease and desist order, an administrative penalty in an amount not to exceed $1000 for each day on which the violation is continuing. In addition to any other remedy provided for by law, the Commissioner may institute in district court for Travis County an action for injunctive relief and/or to collect the administrative penalty. A bond is not required of the Commissioner with respect to any request for injunctive relief under this subsection. Any penalty collected under this subsection will be deposited in the Recovery Fund.
BLOG
explain how National Associations deal with complaints; explain the Code of Ethics for Inspectors; explain the Code of Ethics for Appraisers; explain Regulation Z and laws governing advertising; explain Fair Housing Laws; and be able to further explain the issues that RESPA covers on real estate and mortgage transactions.
PAGE #1083 - Mortgage Broker Association Complaints

Mortgage Broker Association Complaints There are many optional Associations a Loan Originator, Mortgage Broker, or Mortgage Banker may choose to join. This module reviews some sample rules and information of those associations. Be advised, that depending on your individual state or city, and Association, these rules may be different. Although these examples may be geared towards Mortgage Brokers for example, each association may have rules for all members, including Originators, Brokers, Bankers, Appraisers, etc. Texas Association of Mortgage Brokers (TAMB) Grievance Procedures 1. Submission of Complaints. Complaints concerning the conduct of TAMB members shall be submitted
in writing on the Complaint Form provided by TAMB and published on its website and available through TAMB's fax on demand. Complaints submitted anonymously will not be entertained. The Complaint should be submitted to the TAMB office at 502 E. 11th St., Suite 400, Austin, TX 78701. The TAMB office shall make an appropriate record of receiving the complaint and forward the complaint and accompanying materials to the Chairman of the Ethics, Grievance & Arbitration Committee. 2. Handling by the Ethics, Grievance & Arbitration Committee. The Chairman of the Committee shall review all complaint materials and make the following preliminary determinations: The subject of the complaint is a member of TAMB. The conduct complained of warrants TAMB's interest in pursuing a resolution of the complaint or some other action. The subject of the complaint is a licensed broker or loan officer under the Texas Mortgage Broker Act. The conduct complained of, if proven, warrants action by the Savings & Loan Commissioner's office under the Texas Mortgage Broker Act.

Should the Chairman make a positive determination as to (c), then a copy of the complaint shall be forwarded to the TAMB General Counsel, who shall make the final determination concerning referral to the Commissioner's office. In each case the complainant shall be advised of his/her option to submit the complaint directly to the Commissioner's Office. NOTE: It is current Policy of the Commissioner's Office to forward the written complaint in its original form to the party complained of and the author of the complaint is thus revealed. A copy of any complaint filed against a licensed loan officer shall be forwarded to the sponsoring licensed broker.

Should the Chairman determine that the conduct complained of does not warrant TAMB's interest, then the complainant shall be so advised that the conduct or dispute is not one that TAMB normally entertains. In this regard TAMB will not likely entertain jurisdiction of contract disputes between brokers and loan officers or broker companies and their net branches except in unusual cases. The complainant, will, however, be advised of their right to the full Board make such a determination. Upon consideration, the Board may pursue investigation of any such complaint by whatever means it considers appropriate. Should the Chairman determine that the party complained of is exempt under the Texas Mortgage Brokers Act, then the Chairman will forward the complaint, or advise the complainant to forward the complaint to the state or federal agency that may have jurisdiction of same including, but not limited to, the Federal Trade Commission, the Department of Housing and Urban Development, the State Attorney General's office, the Office of Consumer Credit Commissioner, etc. The Chairman shall confer with TAMB's general counsel concerning all such referrals.

3. Complaint Determination. The Committee shall make no finding with respect to a complaint, or recommend disciplinary action to the Board, without first giving the person, or persons, complained of an opportunity to respond to the allegations. The Chairman may enlist the support of committee members, board members or local chapter presidents in gathering information on pending complaints. After the parties complained of have had a reasonable opportunity to respond to the complainant's allegations, the Chairman shall make findings as to the truth of the allegations, submit a report of the
findings to the Board with or without a recommendation for Board action. The Board in its discretion, shall, accept the findings, request additional information, or conduct its own hearing, giving the parties reasonable notice and opportunity to be heard. Should the Board accept the findings of the Chairman, the Board shall, in accordance with law and the Bylaws of the Association take such disciplinary action as it deems appropriate. Action shall be taken by majority vote of the Board.

DISCLOSURE ADVERTISING Truthfulness in advertising is the most fundamental concept in all applicable statutory law, rules and regulations. The laws allow brokerage firms to advertise and promote their services and special expertise, as long as those advertisements are truthful. Typical laws authorize the Regulatory Agencies to take disciplinary action against a licensee who is responsible for an advertisement (in any media) that is likely to deceive the public or that in any manner tends to create a misleading impression, or one that fails to identify the advertiser as a licensed real estate broker or agent. To ensure compliance, a broker who is familiar with the rules should review all marketing materials and advertising copy. Questionable marketing materials should be submitted to the brokers legal counsel for review and approval.
PAGE #1088 - Code of Ethics for ASHI Inspectors

Code of Ethics for ASHI Inspectors Effective on June 13, 2004 The ASHI Code of Ethics details the core guidelines of home inspection professionalism and home inspection ethics. Covering crucial issues such as conflicts of interest, good faith and public perception, these home inspection ethics are central pillars of home inspection professionalism for the entire industry. Integrity, honesty, and objectivity are fundamental principles embodied by this Code, which sets forth obligations of ethical conduct for the home inspection profession. The Membership of ASHI has adopted this Code to provide high ethical standards to safeguard the public and the profession.

Inspectors shall comply with this Code, shall avoid association with any enterprise whose practices violate this Code, and shall strive to uphold, maintain, and improve the integrity, reputation, and practice of the home inspection profession. All inspector members of ASHI have agreed to abide by this Code of Ethics 1. Inspectors shall avoid conflicts of interest or activities that compromise, or appear to compromise, professional independence, objectivity, or inspection integrity. A. Inspectors shall not inspect properties for compensation in which they have, or expect to have, a
financial interest. B. Inspectors shall not inspect properties under contingent arrangements whereby any compensation or future referrals are dependent on reported findings or on the sale of a property. C. Inspectors shall not directly or indirectly compensate realty agents, or other parties having a financial interest in closing or settlement of real estate transactions, for the referral of inspections or for inclusion on a list of recommended inspectors, preferred providers, or similar arrangements. D. Inspectors shall not receive compensation for an inspection from more than one party unless agreed to by the client(s). E. Inspectors shall not accept compensation, directly or indirectly, for recommending contractors, services, or products to inspection clients or other parties having an interest in inspected properties. F. Inspectors shall not repair, replace, or upgrade, for compensation, systems or components covered by ASHI Standards of Practice, for one year after the inspection.

2. Inspectors shall act in good faith toward each client and other interested parties. A. Inspectors shall perform services and express opinions based on genuine conviction and only within their areas of education, training, or experience. B. Inspectors shall be objective in their reporting and not knowingly understate or overstate the significance of reported conditions. C. Inspectors shall not disclose inspection results or client information without client approval. Inspectors, at their discretion, may disclose observed immediate safety hazards to occupants exposed to such hazards, when feasible.

3. Inspectors shall avoid activities that may harm the public, discredit themselves, or reduce public confidence in the profession. A. Advertising, marketing, and promotion of inspectors' services or qualifications shall not be fraudulent, false, deceptive, or misleading. B. Inspectors shall report substantive and willful violations of this Code to the Society.
PAGE #1092 - Code of Professional Ethics of the Appraisal Institute

Code of Professional Ethics of the Appraisal Institute A Member Must Refrain from Conduct that is Detrimental to the Appraisal Institute, the Profession, and the Public Ethical Rules E.R. 1-1
It is unethical to knowingly: (a) act in a manner that is misleading or fraudulent; (b) use, or permit an employee or third party to use, a misleading analysis, opinion, conclusion, or report; (c) communicate, or permit an employee or third party to communicate, any analysis, opinion, conclusion, or report in a manner that is misleading;

(d) contribute to or participate in the development, preparation, or use of an appraisal, appraisal review, appraisal consulting, or real property consulting analysis, opinion, or conclusion that reasonable appraisers would not believe to be justified; or (e) contribute to or participate in the preparation or delivery of a report containing an appraisal, appraisal review, appraisal consulting, or real property consulting analysis, opinion, or conclusion that reasonable appraisers would not believe to be justified, whether or not such report is signed or delivered by the Member. E.R. 1-2 It is unethical to engage in misconduct of any kind that leads to a conviction of a crime involving fraud, dishonesty, or false statements or a crime involving moral turpitude.

E.R. 1-3 It is unethical to fail to properly identify the issue to be addressed and have the knowledge and experience to complete the service competently prior to agreeing to perform any service, or alternatively, to: (a) disclose the lack of knowledge and/or experience to the client before agreeing to perform the service; (b) take all steps necessary or appropriate to complete the service competently; and (c) describe the lack of knowledge and/or experience and the steps taken to complete the service competently in the report. CANON 2 10 Appraisal Institute Code of Professional Ethics A Member Must Assist the Appraisal Institute in Fulfilling Its Role Relating to Member Qualifications and Member Compliance with Ethics and Standards

Ethical Rules
E.R. 2-1 It is unethical: (a) to knowingly violate the rules set forth in the Regulations of the Appraisal Institute that govern the confidentiality of an admissions matter or the confidentiality of a peer review proceeding; or (b) for a Member who has made a referral initiating a peer review proceeding, or who has any knowledge of the existence of such referral or any subsequent screening or review of the matter, to fail to treat such knowledge confidentially.

E.R. 2-2 It is unethical to accept an appointment to, or to fail to immediately resign from, an Appraisal Institute committee dealing with an admissions matter or peer review proceeding if the Member is unable or unwilling to fulfill the responsibilities of a member of said committee. E.R. 2-3 It is unethical to knowingly: (a) make false statements or submit misleading information to the Appraisal Institute, an Appraisal Institute committee or member thereof, or one of their duly authorized agents; (b) fail or refuse to promptly submit any relevant documentation or information that is or should be in the possession or control of such Member when requested to do so by the Appraisal Institute, an Appraisal Institute committee or member thereof, or one of their duly authorized agents;

(c) fail or refuse to promptly answer all relevant questions when requested to do so by the Appraisal Institute, an Appraisal Institute committee or member thereof, or one of their duly authorized agents; (d) fail or refuse to appear for a personal interview or participate in an interview conducted by telephone when requested to do so by the Appraisal Institute, an Appraisal Institute committee or member thereof, or one of their duly authorized agents; (e) fail to comply with the terms of a summons issued by a duly authorized Hearing Committee; (f) fail or refuse to cooperate with the Appraisal Institute, an Appraisal Institute committee or member thereof, or one of their duly authorized agents; or (g) fail or refuse to fulfill each of the Members obligations under the Bylaws, Regulations, and policies of the Appraisal Institute.

E.R. 2-4 It is unethical to fail to prepare a workfile for each service (appraisal, appraisal review, appraisal consulting, or real property consulting). The workfile must be prepared for each service prior to the issuance of an oral or written report.
E.R. 2-5 It is unethical to fail to preserve each workfile for: (a) a period of five years from the date of preparation of such workfile; (b) a period of two years following final disposition of a proceeding in which the Member gave testimony pertaining to the subject matter of the workfile; (c) a period commencing upon notification that a service is the subject of a peer review proceeding under Regulation No. 6 until notification by the Appraisal Institute of final disposition of such peer review proceeding; (d) a period commencing upon a request from Admissions relating to a service (appraisal, appraisal review, appraisal consulting, or real property consulting) until notification by the Appraisal Institute of the completion of review by Admissions; or (e) a period of two years following the final disposition of a review of a service (appraisal, appraisal review, appraisal consulting, or real property consulting) by a state licensing and/or certification board, whichever period shall be the last to expire.

E.R. 2-6 It is unethical to enter into a contract that: (a) places one or more obligations on the Member that are inconsistent with the requirements of the Code of Professional Ethics & Standards of Professional Appraisal Practice, Bylaws, or Regulations of the Appraisal Institute; or (b) does not provide that the Member will develop and report a service (appraisal, appraisal review, appraisal consulting, or real property consulting) in conformity with and subject to the requirements of the Code of Professional Ethics & Standards of Professional Appraisal Practice of the Appraisal Institute.

E.R. 2-7 It is unethical to fail to sincerely and demonstrably seek other employment if: (a) the Members employer prevents such Member from complying with the requirements of the Code of Professional Ethics or Standards of Professional Appraisal Practice of the Appraisal Institute; or (b) the Member knows that the Members employer fails to comply with the Code of Professional Ethics or Standards of Professional Appraisal Practice of the Appraisal Institute.

CANON 3 Appraisal Institute Code of Professional Ethics 13
In Providing Services (Appraisal, Appraisal Review, Appraisal Consulting, or Real Property Consulting), A Member Must Develop and Report Unbiased Analyses, Opinions, and Conclusions Ethical Rules E.R. 3-1 It is unethical to knowingly contribute to or participate in the development, preparation, use, or reporting of an analysis, opinion, or conclusion that is biased. E.R. 3-2 It is unethical to knowingly permit an entity that is wholly or partially owned or controlled by a Member to contribute to or participate in the development, preparation, use, or reporting of an analysis, opinion, or conclusion that is biased.

E.R. 3-3 It is unethical to agree to provide or provide a service (appraisal, appraisal review, appraisal consulting, or real property consulting) that is contingent upon reporting a predetermined analysis, opinion, or conclusion. E.R. 3-4 It is unethical to agree to or accept compensation for an appraisal, appraisal review, or appraisal consulting assignment when such compensation is contingent on the analysis, opinion, or conclusion reached, the attainment of a stipulated result, or the occurrence of a subsequent event. E.R. 3-5 It is unethical to agree to or accept compensation for a real property consulting service when such compensation is contingent on the analysis, opinion, or conclusion reached or the occurrence of a subsequent event, unless: (a) the Member is not acting in a disinterested manner and would not reasonably be perceived as performing a service that requires impartiality; and (b) the Member clearly and conspicuously discloses the existence and basis of any contingent fee in reporting the results of the service. E. R. 3-5 does not apply to a Member when providing real property consulting services that are subject to the requirements of another licensed occupation or profession.

E.R. 3-6 It is unethical to agree to provide or provide a service (appraisal, appraisal review, appraisal consulting, or real property consulting) that includes a hypothetical condition, unless: (a) use of the hypothetical condition is clearly required for legal purposes, for purposes of reasonable analysis, or for purposes of comparison;
(b) use of the hypothetical condition results in a credible analysis; and (c) the Member complies with the applicable disclosure requirements set forth in USPAP for hypothetical conditions.

E.R. 3-7 It is unethical to agree to provide or provide a service (appraisal, appraisal review, appraisal consulting, or real property consulting) that includes an extraordinary assumption, unless: (a) the extraordinary assumption is required to properly develop credible opinions and conclusions; (b) the Member has a reasonable basis for the extraordinary assumption; (c) use of the extraordinary assumption results in a credible analysis; and (d) the Member complies with the applicable disclosure requirements set forth in USPAP for extraordinary assumptions.

E.R. 3-8 It is unethical to agree to provide or to provide a service (appraisal, appraisal review, appraisal consulting, or real property consulting) if a Member has any direct or indirect, current, or prospective personal interest in the subject or outcome of the service or with respect to the parties involved in the service, unless: (a) prior to agreeing to provide the service, the Member carefully considers the facts and reasonably concludes that his or her judgment will not be affected and reasonable persons, under the same circumstances, would reach the same conclusion; (b) such personal interest is fully and accurately disclosed to the client prior to the Member agreeing to provide the service; and (c) such personal interest is fully and accurately disclosed in each report resulting from such service.

E.R. 3-9 It is unethical, during the period that commences at the time that a Member is contacted concerning a service (appraisal, appraisal review, appraisal consulting, or real property consulting) and expires a reasonable length of time after the completion of such service, to knowingly acquire an interest in property or assume a position that could possibly affect the Members judgment or violate the Members responsibilities to the client unless, prior to such acquisition or change of position, (a) the Member carefully considers the facts and reasonably concludes that the proposed acquisition or change of position will not affect the Members judgment or violate the Members responsibilities to the client; (b) the Member makes full disclosure to the client and obtains from the client a written statement
consenting to or approving such acquisition or change of position; (c) at the time of such disclosure, the Member gives the client the right to terminate the service without payment of any fee or other charge; and (d) the facts concerning such acquisition or change of position are fully and accurately described in each report resulting from the service.

CANON 4 16 Appraisal Institute Code of Professional Ethics A Member Must Not Violate the Confidential Nature of the Member-Client Relationship Ethical Rules E.R. 4-1 It is unethical to disclose confidential information or an analysis, opinion, or conclusion specific to a service (appraisal, appraisal review, appraisal consulting, or real property consulting) to anyone other than: (a) the client and those persons specifically authorized by the client; and (b) third parties, when and to the extent that the Member is legally required to do so by statute, ordinance, or court order; and (c) the duly authorized committees of the Appraisal Institute.

E.R. 4-2 If a Member is furnished confidential information by a client and a third party subsequently requests a service (appraisal, appraisal review, appraisal consulting, or real property consulting) that will be materially affected by the use of, or the failure to use, such confidential information, it is unethical to agree to provide such subsequent service, unless: (a) the source that provided such confidential information permits the information to be used in the subsequent service; (b) such information has subsequently been made public or is available from another source and therefore is no longer confidential.

E.R. 4-3 It is unethical for a current or former Appraisal Institute committee member to discuss or disclose confidential information, analyses, opinions, conclusions, or factual data, derived through committee activities with anyone other than:
(a) the Member whose report or workfile contains the confidential information, analyses, opinions, conclusions, or factual data; (b) such Members client and those persons specifically authorized by that client to receive the confidential information, analyses, opinions, conclusions, or factual data; (c) third parties, when and to the extent that the committee member is legally required to do so by statute, ordinance, or court order; and (d) committee members and their duly authorized agents within the scope of the Bylaws and Regulations of the Appraisal Institute.

CANON 5 18 Appraisal Institute Code of Professional Ethics A Member Must Not Advertise or Solicit in a Manner that is Misleading or Otherwise Contrary to the Public Interest Ethical Rules E.R. 5-1 It is unethical to utilize misleading advertising. Further, it is unethical to knowingly permit a business entity that is wholly or partially owned or controlled by a Member to utilize misleading advertising.

E.R. 5-2 It is unethical to use or refer to the Appraisal Institute or its membership designations in a manner that is misleading, or to use or display the registered designations, logos, or emblems of the Appraisal Institute in a manner contrary to Regulation No. 5. E.R. 5-3 It is unethical to solicit services (appraisal, appraisal review, appraisal consulting, or real property consulting) in a misleading manner. Further, it is unethical to knowingly permit an entity wholly or partially owned or controlled by a Member to solicit services in a misleading manner.

E.R. 5-4 It is unethical to fail to disclose the payment by the Member, or by an entity wholly or partially owned or controlled by the Member, of a fee, commission, or thing of value for the procurement of a service (appraisal, appraisal review, appraisal consulting, or real property consulting). The disclosure of fees, commissions, and things of value paid in connection with the procurement of a service must appear in the certification of any resulting written report and in any transmittal letter in which an analysis, opinion, or conclusion is stated. Intra-company payments to employees or partners for business development are not deemed to be a
fee, commission, or thing of value for the purpose of this Rule. E.R. 5-4 does not apply to a Member when providing real property consulting services that are subject to the requirements of another licensed occupation or profession. E.R. 5-5 It is unethical to prepare or use in any manner a resume or statement of qualifications that is misleading.
PAGE #1113 - Typical Proper Identification in Ads

TYPICAL Proper Identification in Ads MORTGAGE BROKER REGULATIONS Title 7. Banking and Securities Part 4. Savings and Loan Department Chapter 80. Mortgage Broker and Loan Officer Licensing 80.11 Advertising. (a) Any advertisement of Mortgage Loans which are offered by or through a Mortgage Broker or Loan Officer shall conform to the following requirements: (1) If an advertisement states a rate of finance charge, it shall state the rate as an "annual percentage rate," using that term (as defined in 12 CFR 226,22). If the annual percentage rate may be increased after consummation, the advertisement shall state that fact. The advertisement shall not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the annual percentage rate.

(2) If any of the following terms is set forth in an advertisement, the advertisement shall meet the requirements of paragraph (3) of this subsection: (A) The amount or percentage of any down payment. (B) The number of payments or period of repayment. (C) The amount of any payment. (D) The amount of any finance charge. (E) The amount of any closing costs (for example: total closing costs only $100.00 or No Closing Costs)

(3) An advertisement stating any of the terms in paragraph (2) of this subsection shall state the following terms, as applicable (an example of one or more typical extensions of credit with a statement of all the terms applicable to each may be used):
(A) The amount or percentage of the down payment. (B) The terms of repayment. (C) The annual percentage rate, using that term, and, if the rate may be increased after consummation, that fact. (4) An advertisement shall be made only for such products and terms as are actually available and, if their availability is subject to any material requirements or limitations, the advertisement shall specify those requirements or limitations;

(5) An advertisement shall not make any statement or omit to make any statement the result of which is to present a misleading or deceptive impression to consumers; (6) Except as provided in subsection (c) of this section, if the person who caused the advertisement to be published is a Mortgage Broker or a Loan Officer, the advertisement shall contain: (A) the name of the Mortgage Broker or Loan Officer followed by the phrase Mortgage Broker or Loan Officer or the name of the corporation, partnership or other entity through, or for which the mortgage broker or loan officer conducts activities (the company affiliate), as designated in the records of the Commissioner under the provisions of Finance Code 156.204(b) as of the date of the advertisement; (B) the license number of the Mortgage Broker or Loan Officer; and (C) the physical street address of the Mortgage Broker or Loan Officer or company affiliate; and (7) An advertisement shall otherwise comply with applicable state and federal disclosure requirements.

(b) A Mortgage Broker or Loan Officer receiving a verbal or written inquiry about his or her services shall respond accurately to any questions about the scope and nature of such services and any costs. (c) For purposes of this rule 80.11, an advertisement means a commercial message in any medium that promotes directly or indirectly, a credit transaction. However, the requirements of subsection (a) (6) of this section shall not apply to: (1) any advertisement which indirectly promotes a credit transaction and which contains only the name of the mortgage broker, loan officer, or company affiliate and does not contain any contact information, such as the inscription of the name on a coffee mug, pencil, youth league jersey or other promotional item; or (2) any rate sheet, pricing sheet, or similar proprietary information provided to realtors, builders, and other commercial entities that is not intended for distribution to consumers.
PAGE #1118 - Regulation Z

Regulation Z Regulation Z, which was issued after Congress passed the Truth in Lending Act, generally covers advertisements for residential property only and does not govern loans primarily for commercial, investment or agriculture purposes. Regulation Z applies regularly to banks, mortgage companies and
other arrangers of credit. Brokers who advertise credit terms are subject to Regulation Z as well.

There are three major disclosure requirements in advertising residential mortgage loans. 1. If an advertisement includes information about loan terms, those terms must actually be available to a qualified borrower. 2. If an advertisement states a rate of finance charge (defined as interest, points and loan fees), the advertisement must use the words annual percentage rate (APR). The advertisement must state the APR, and, if the finance charge can increase over the terms of the loan, the ad must disclose that fact. 3. Additional disclosure is triggered if an advertisement contains any of the following: the amount or percentage of any down payment, the number of payments or term of the repayment period, the amount of any regular installment payment on the loan or the amount of any finance charges.

If any of these triggers appears in the advertisement, all of the following information must be disclosed in the advertisement. Amount of percentage of the down payment (e.g., $5,000 down, 10 percent down or zero down) Terms of repayment ($650 per month for 30 years) Annual percentage rate (the interest rate) Whether the rate may be increased at a later date If specific information is mentioned in the advertisement, such as $150,000 assumable note at 7.25 percent APR, the disclosure requirements are triggered, and the advertisement must contain all of the above information. The safest practice is to mention only the APR in the advertisement and suggest that prospects call for further information.
PAGE #1121 - Advertising samplesAdvertising Samples

Incorrect Advertisement:
5.00%!!!! 15 YEAR LOAN Come and get it while it lasts! Call TODAY!! ZYX MORTGAGE (666) 626-6262
PAGE #1122 - Advertising samplesAdvertising Samples
Correct Advertisement: 5.00%* RATE / 5.24%* APR Historically GREAT RATES Before rates rise again, think about your housing needs and give us a call for a free loan analysis of our purchase or refinance programswith your specific needs in mind! ZYX MORTGAGE | (666) 626-6262 12345 Hwy. 88 North, Suite 1011, Anywhere, Texas 75209 Texas Broker License #999999 *15 year simple fixed rate loan with 20% down payment required on a $100,000 value with monthly P&I of $632.65effective 10/24/04 - offer may terminate at any time without notice-rate and annual percentage rate (APR) calculated on a 365 day year with typical/normal closing costsRates/APRs subject to change with changes in closing costs-properties and applicants must qualify - other restrictions may apply.
PAGE #1123 - Advertising samples

NOTE: You should read the Truth in Lending Regulation Z as well as any State rules that require additional disclosures. Remember: 1. fully describe the offered product, 2. where you state the interest rate you must also state the APR (same size and font) with an explanation of how it is calculated (can be in a footnote), 3. state the effective date and end date of the offer, 4. state the address/phone number the consumer can come to or call (must be the office[s] of record at the SML), 5. company and/or accountable broker name, 6. SML license number, and 7. all conditions/restrictions that may apply.
PAGE #1124 - Advertising samples
If you do not state an interest rate/APR or specific loan terms you still must state 4 - 7 listed previously to be in compliance. If any payment(s)/loan terms/product descriptions are disclosed, all of the above are required. This explanation is not all-inclusive of the requirements that may apply to any unique ads.
PAGE #1125 - Fair Housing Laws

Fair Housing Laws Advertising also is governed by guidelines issued by the U.S. Department of Housing and Urban Development (HUD) pursuant to Section 804(c) of the Federal Fair Housing Act (the act). Section 804(c) prohibits advertisements that state a preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status or national origin. The act applies to publishers, as well as to the party placing the advertisement. Brokers should be extremely careful about loosely worded ads that may inadvertently imply a limitation or preference with respect to a protected class. HUD regulations also require diversity among the models in advertising photography.
PAGE #1126 - Prohibited words and phrases

Prohibited Words and Phrases Racial and Ethnic terms The use of words describing current or potential residents, the neighbors or the neighborhood in racial or ethnic terms will create liability under the act. HUD has published a list of words and phrases that should never be used including white private home, Hispanic resident, Oriental neighborhood, or predominantly African-American schools. Religious Preference Advertisements must not contain any explicit preferences or limitations concerning religion. However, the advertisement may describe amenities without stating a preference, such as apartment complex with chapel or kosher meals available. If the legal name of the entity contains a religious reference, such as Methodist Village Apartments, the advertisement should include a disclaimer stating that the owner-lessor does not discriminate. Gender Preference Advertisements must contain no explicit reference for the gender of the renter. One exception is for shared living spaces. Accordingly, a female advertiser may advertise, female roommate wanted. Other common phrases permissible in advertising include bachelor apartment or motherin-law suite. These phrases are commonly used as physical descriptions of the available premises.
PAGE #1127 - Prohibited words and phrases

Handicapped Persons Advertisements must not discriminate or exclude handicapped persons.
Descriptions of properties as well as of services and amenities are permissible such as jogging trails, great view. It is also permissible to describe conduct required of potential tenants. Advertising for nonsmoking or sober tenants does not violate the Act. Age Advertisements must not contain limitations on the number or age of children or express a preference for adults, couples or single persons. There is an exemption for developments that qualify as housing for older persons in one of two ways. The first is housing intended for and occupied solely by persons 62 years of age or older. The second is housing intended for occupancy by at least one person at least 55 years of age or older per unit.
PAGE #1128 - Mediation

DISPUTE RESOLUTIONS Mediation Various statutes define a mediation resolution procedure as a forum before an impartial person (the mediator) designed to facilitate communication between parties and to promote reconciliation, settlement or understanding. In a successful mediation, the parties agree on a settlement in writing which then becomes binding on both parties. Mediators are neither judges nor arbitrators. They are neutral facilitators in establishing dialogue between (or among) the parties to mutually reach a settlement. A mediator may not impose his or her judgment on the issues. The mediator need not be an attorney or hold any special license or credential, but should possess some knowledge of the subject matter, the outcome of prior cases involving the controversy and recoveries for similar matters in local courts.
PAGE #1129 - Mediation

Although the mediator should remain neutral, his or her expertise may provide valuable guidelines for settlement. There are numerous mediation service providers, such as county supported mediation services, private mediators, university law schools and REALTOR Associations. Contact your county or district court clerk for a list of mediators in your area. In 1987 mediation became one of the five statutorily recognized Alternative Dispute Resolution (ADR) procedures. Many judges require court-ordered mediation before hearing a case. The Real Estate Center at Texas A&M University surveyed practitioners to determine how often mediation is used to settle real estate disputes. Researchers found that mediation was used to settle a high percentage of disputes.
PAGE #1130 - Arbitration

Arbitration Various statutes define arbitration as a forum where parties and counsel present their positions before an impartial third party who renders a specific award. The parties must agree in writing to arbitrate a dispute. There are numerous arbitration providers, such as the American Arbitration Association, private
attorneys, private arbitrators and REALTOR Associations. Typically the arbitration procedure calls for a complaint or petition to be filed describing the dispute. The respondent will be given the opportunity to respond. A hearing is convened at which the parties present evidence and make arguments. The arbitrator(s) renders an award. The prevailing party may seek to enforce the award as a judgment by requesting that a court of law do so. Arbitration awards may be appealed on procedural or due process grounds. Brokers should always be proactive in their handling of potential complaints. Many consumer complaints escalate to mediation, arbitration or even lawsuits due to the initial response (or lack thereof) to the first signs of a problem. The State Association of REALTORS sponsor an Ombudsman Dispute Resolution Service. The ombudsman mediates an informal telephone meeting between the consumer and the licensee and attempts to help the parties resolve any issues. The program has been highly successful and has helped to raise the level of consumer confidence in the real estate profession.
PAGE #1131 - RESPA

The Real Estate Settlement Procedures Act (RESPA) The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute, first passed in 1974. One of its purposes is to help consumers become better shoppers for settlement services. Another purpose is to eliminate kickbacks and referral fees that increase unnecessarily the costs of certain settlement services. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers. RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting anything of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company. Generally, RESPA covers loans secured with a mortgage placed on a one-to-four family residential property. These include most purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit. HUD's Office of Consumer and Regulatory Affairs, Interstate Land Sales/RESPA Division is responsible for enforcing RESPA.
PAGE #1132 - RESPA Facts

More RESPA Facts DISCLOSURES: Disclosures At The Time Of Loan Application When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers: a Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only). a Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use of a particular settlement provider, then the lender must disclose this requirement on the GFE.
PAGE #1133 - RESPA Facts

a Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution. If the borrowers don't get these documents at the time of application, the lender must mail them within three business days of receiving the loan application. If the lender turns down the loan within three days, however, then RESPA does not require the lender to provide these documents. The RESPA statute does not provide an explicit penalty for the failure to provide the Special Information Booklet, Good Faith Estimate or Mortgage Servicing Statement. Bank regulators, however, may impose penalties on lenders who fail to comply with federal law.
PAGE #1134 - Disclosures before settlement

Disclosures Before Settlement (Closing) Occurs A Controlled Business Arrangement (CBA) Disclosure is required whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest. The referring party must give the CBA disclosure to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower estimate of the second provider's charges. Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender's interest in the transaction, the referring party may not require the consumer to use the particular provider being referred. The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.
PAGE #1135 - Disclosures at settlement

Disclosures at Settlement The HUD-1 Settlement statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. it is not the practice that the borrower and seller attend settlement, the HUD-1 should be mailed or delivered as soon as practicable after settlement. The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges anticipated to be paid from the escrow account during the first twelve months of the loan. It lists the escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it.
PAGE #1136 - Disclosures after settlement

Disclosures After Settlement Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. The annual escrow account statement summarizes all escrow account payments during the servicer's twelve month
computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken. A Servicing Transfer Statement is required if the loan servicer sells or assigns the servicing rights to a borrower's loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments.
PAGE #1137 - RESPA's consumer protections and prohibited practices

RESPA's Consumer Protections And Prohibited Practices Section 8: Kickbacks, Fee-Splitting, Unearned Fees Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback or any thing of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee splitting and receiving unearned fees for services not actually performed. Violations of Section 8's anti-kickback, referral fees and unearned fees provisions of RESPA are subject to criminal and civil penalties. In a criminal case a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service. Section 9: Seller Required Title Insurance Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company, either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance.
PAGE #1138 - RESPA's consumer protections and prohibited practices

Section 10: Limits on Escrow Accounts Section 10 of RESPA sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. RESPA does not require lenders to impose an escrow account on borrowers; however, certain government loan programs or lenders may require escrow accounts as a condition of the loan. At settlement, Section 10 of RESPA prohibits a lender from requiring a borrower to deposit more than the aggregate amount needed to cover escrow account payments for the period since the last charge was paid, up until the due date of the first mortgage installment. During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month the lender may require a borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year. The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of $50 or more must be returned to the borrower.

RESPA Enforcement Civil law suits Individuals have one (1) year to bring a private law suit to enforce violations of Section 8 or 9. A person may bring an action for violations of Section 8 or 9 in any federal district court in the district in which the property is located or where the violation is alleged to have occurred. HUD, a State Attorney General or State insurance commissioner may bring an injunctive action to enforce violations of Section 8 or 9 of RESPA within three (3) years. Loan Servicing Complaints Section 6 provides borrowers with important consumer protections relating to the servicing of their loans. Under Section 6 of RESPA, borrowers who have a problem with the servicing of their loan (including escrow account questions), should contact their loan servicer in writing, outlining the nature of their complaint. The servicer must acknowledge the complaint in writing within 20 business days of receipt of the complaint. Within 60 business days the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. Until the complaint is resolved, borrowers should continue to make the servicer's required payment. A borrower may bring a private law suit, or a group of borrowers may bring a class action suit, against a servicer who fails to comply with Section 6's provisions. Borrowers may obtain actual damages, as well as additional damages if there is a pattern of noncompliance.

Other Enforcement Actions Under Section 10, HUD has authority to impose a civil penalty on loan servicers who do not submit initial or annual escrow account statements to borrowers. Borrowers should contact HUD's Office of Consumer and Regulatory Affairs to report servicers who fail to provide the required escrow account statements. Filing a RESPA Complaint Persons who believe a settlement service provider has violated RESPA in an area in which the Department has enforcement authority (primarily sections 8 and 9), may wish to file a complaint. The complaint should outline the violation and identify the violators by name, address and phone number.
PAGE #1141 - National Association of Professional Mortgage Women
The NAPMW Vision
Provide business, personal, and leadership development advancing women in mortgage-related professions. Defining Statement NAPMW serves all mortgage professionals who want to excel and employers who want excellence. Purposes To promote and foster educational opportunities for its members. To maintain the high standards of the profession. To work for equal recognition and opportunities for women. To bring its members together for the exchange of experiences, ideas and interests in all phases of mortgage banking on the local, region, and national levels. To encourage women to choose the mortgage banking profession as a career.
PAGE #1142 - National Association of Professional Mortgage Women

NAPMW Code of Ethics Members shall recognize the magnitude of the responsibility in accepting this field as a career, and shall engage themselves individually and collectively to further the purposes of the Association and bind themselves to the provisions of this Code. In fulfilling the obligations of our profession we... Shall adhere to the Articles of Incorporation, Bylaws and Standing Rules and accept the responsibility of membership in this Association with integrity and dignity. Shall accord just and equitable treatment to all members of the profession in the exercise of their professional rights and responsibilities. Shall not misrepresent an institution or organization with which we are affiliated and shall take adequate precautions to distinguish between personal, institutional and organizational views. Shall be guided in all our activities by the highest ideals for which the Association of Professional Mortgage Women stands, and be aware of our commitment to ourselves, the profession and the community.
explain FHA Programs and the history of FHA; discuss Mortgage Insurance Premiums; explain VA Programs; and be able to explain the difference between Traditional and Non-traditional Mortgage Products.
PAGE #1145 - FHA programs

FHA Programs In 1965 the Department of Housing and Urban Development (HUD) was formed. Within HUD operates the Federal Housing Administration (FHA), which has the primary responsibility for administering the government home loan insurance program. This program allows a first time home buyer who might otherwise not qualify for a home loan to obtain one because the risk is removed from the lender by FHA who insures the loan for the lender. The most popular FHA home loan program for a first time home buyer is by far is the 203(b). This is your standard fixed rate loan for 1-4 family owner occupied houses and only requires a minimum of 3.5% from the borrower. This loan also permits 100% of their money needed to close to be a gift from a relative, non-profit organization, or government agency. The main advantage to a FHA home loan is that the credit criteria for a first time borrower are not as strict as Conventional Loans sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC). Someone who may have had a few credit problems or no traditional credit should not have a problem obtaining FHA financing. Also, FHA home loans are assumable, allowing a person to take over the mortgage without the additional cost of obtaining a new loan.
PAGE #1146 - FHA programs

In addition, the seller or lender must pay for part of the "traditional" closing costs (called non-allowable costs) while a borrower's allowable costs can partially be wrapped into the loan. The monthly mortgage insurance premium is cheaper for an FHA loan verses a conventional loan with 3% down. Finally, FHA loans may require less income to qualify as they will exceed the Conventional debt ratios. Many people make the mistake and assume that FHA loans are only available for first time home buyers. This is not true. FHA loans are available to anyone, whether your first or fifth home and can be used to purchase a home or refinance a home. If refinancing a home the current loan DOES NOT have to be an FHA loan. The greatest disadvantage of FHA home loans is that FHA limits the loan size that a borrower can borrow. Others may try and convince you that the FHA upfront mortgage insurance premium (MIP) is a disadvantage. However this amount makes just a very small increase in the borrower's month payment and is partially refundable in certain cases.
PAGE #1147 - FHA Q&A

Q&A Why choose an FHA-insured loan? There are lots of good reasons to choose an FHA-insured loan, especially if one or more of the following apply to you: You're a first-time homebuyer. You don't have a lot of money to put down on a house. You want to keep your monthly payments as low as possible. You're worried about your monthly payments going up. You're worried about qualifying for a loan. You don't have perfect credit.

If any of these things describe you, then an FHA-insured loan may be right for you. Why? FHA-insured loans offer many benefits and a level of security that you won't find in other loans including: Low cost: FHA-insured loans have competitive interest rates because the federal government insures the loans for lenders. Smaller downpayment: FHA-insured loans have a low 3.5% downpayment and the money can come from a family member, employer or charitable organization as a gift. Easier qualification: Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify. Less than perfect credit: You don't have to have perfect credit to get an FHA-insured mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA-insured loan than a conventional loan. More protection to keep your home: The FHA has been helping people since 1934. Should you encounter hard times after buying your home, the FHA has many options to keep you in your home and avoid foreclosure.

FHA insures loans for lenders against defaults - it does not lend money or set interest rates. For the best interest rate and terms on a mortgage, you should compare mortgages from several different lenders. An FHA-approved lender can help you start the loan application process. You may use an FHA-insured mortgage to purchase or refinance a new or existing 1-to-4 unit home, a condominium or a manufactured or mobile home (provided it is on a permanent foundation). What kinds of insured loans does FHA offer? Fixed-rate loans - Most FHA-insured loans are fixed-rate mortgages (loans). The advantage of a fixedrate mortgage is that your interest rate stays the same during the loan period, so you know exactly how much your monthly payment will be.

Adjustable rate loans - First-time homebuyers can be a little stretched financially. With FHA's adjustable rate mortgage (ARM), the initial interest rate and monthly payments are low, but these may change during the life of the loan. FHA uses the 1-Year Constant Maturity Treasury Index (CMT) to calculate the changes in interest rates. An index is a measure of interest rate changes that determine how much the interest rate on an ARM will change over time. The maximum amount that the interest rate on your loan may increase or decrease in any one year is 1 or 2 percentage points, depending upon the type of ARM you choose. Over the life of the loan, the maximum interest rate change is 5 or 6 percentage points from the initial rate. The advantage of selecting an ARM is that you may be able to expand your house-hunting value range because your initial interest rate will be low, as will your payment.

Purchase/Rehabilitation loans - Sometimes you might see a home you'd like to buy, but it needs a lot of work. FHA has a loan for rehabilitating and repairing single-family properties called the SF Rehabilitation Loan program (203k). You can get one loan which combines the mortgage and the cost of repairs. The mortgage amount is based on the projected value of the property with the work completed. The
advantage of this loan is that you can buy a home that needs a lot of work, but have only one mortgage payment, and you can complete the repairs after buying the home. Indian Reservations and Other Restricted Lands - A family who purchases a home under this program can apply for financing through an FHA-approved lending institution such as a bank, savings and loan, or a mortgage company. To qualify, the borrower must meet standard FHA credit qualifications. An eligible borrower can receive approximately 97% financing and use a gift for the downpayment. Closing cost can be financed; covered by a gift, grant or secondary financing; or paid by the seller without reduction in value.

How do FHA-insured loans compare to subprime loans? Subprime loans are loans designed for homebuyers who don't have a strong credit history or can't qualify for a regular or prime loan. Lenders charge a high interest rate on subprime loans because the risk that a homebuyer may not make their payments is high. Because FHA insures the lender against this risk, the interest rates on FHA-insured loans are generally among the lowest in the market. Most subprime loans carry interest rates at least 3 percentage points higher than an FHA-insured loan. On a $100,000 mortgage, the monthly payment for a subprime loan would be over $200 a month higher than an FHA-insured loan. The majority of subprime loans are also ARMs, where the interest rate can change a lot and greatly increase your monthly payments. Most FHA-insured loans are fixed-rate loans where the mortgage payment always stays the same. If you have an FHA-insured ARM loan, the rate can't go up by more than one or two points in a year. The fees that lenders charge their borrowers for processing a subprime loan are also generally higher than on an FHA-insured loan.

Most subprime loans carry a heavy prepayment penalty that you must pay if you want to refinance your loan to a lower interest rate. These penalties can cost you hundreds or even thousands of dollars. There is never a prepayment penalty on an FHA-insured loan. You can refinance at any time and not worry about paying any penalties. Unfortunately, because they don't know these facts, many homebuyers who could qualify to buy a home with a fixed-rate FHA-insured loan only apply for subprime loans. Check out an FHA-insured loan before settling for a subprime loan!

How do FHA-insured loans compare to conventional loans? Conventional loans usually require a larger downpayment than FHA and if you have less than perfect credit you may not qualify for an affordable mortgage with a low interest rate. The best thing to do is compare the cost of the conventional loan to an FHA-insured loan line-by-line. What are the fees for each? What is the interest rate? How much is the mortgage insurance? How much downpayment is required? For some borrowers, a conventional loan may be less expensive. For many others, getting an FHA-insured loan is the way to go.

Do you have to buy mortgage insurance on an FHA-insured loan?
Yes - as you will with most loans. The Housing and Economic Recovery Act of 2008 provides for a one-year moratorium on the implementation of FHAs risk-based premiums beginning October 1, 2008. Consequently, effective with new FHA case number assignments on or after that date, FHA will no longer base its mortgage insurance premiums on a combination of credit bureau score and loan-to-value ratio. The new premiums (upfront and annual) to be implemented for all loans for which a case number is assigned on or after October 1, 2008, are described below. Mortgagee Letter 2008-16 is rescinded in its entirety. Please note that certain parts of that mortgagee letter are retained and reiterated in the guidance that follows.

Upfront Premiums: FHA will charge an upfront premium. Annual Premiums: An annual premium, shown in Mortgagee Letter 2008-22, to be remitted on a monthly basis, will also be charged based on the initial loan-to-value ratio and length of the mortgage (except for FHA Secure delinquent mortgages). Most loans require mortgage insurance when your downpayment is less than 20% of the sales price. On conventional and subprime loans, mortgage insurance is provided by private companies. Whether private mortgage insurance is less than, equal to, or more than an FHA-insured loans insurance will depend upon the loan program and your qualifications. Compare the cost of FHA to subprime and conventional types of loans over the life of your loan. Then compare how much each one costs monthly. With the protection and value you get from FHA - it's a very good deal.

FHA insured mortgages offer many benefits and protections that only come with FHA: Easier to Qualify: Because FHA insures your mortgage, lenders may be more willing to give you loan terms that make it easier for you to qualify. Less than Perfect Credit: You don't have to have a perfect credit score to get an FHA mortgage. In fact, even if you have had credit problems, such as a bankruptcy, it's easier for you to qualify for an FHA loan than a conventional loan. Low Down Payment: FHA loans have a low 3.5% downpayment and that money can come from a family member, employer or charitable organization as a gift. Other loan programs don't allow this. Costs Less: FHA loans have competitive interest rates because the Federal government insures the loans. Always compare an FHA loan with other loan types. Helps You Keep Your Home: The FHA has been around since 1934 and will continue to be here to protect you. Should you encounter hard times after buying your home, FHA has many options to help you keep you in your home and avoid foreclosure.

FHA does not provide direct financing nor does it set the interest rates on the mortgages it insures. For the best interest rate and terms on a mortgage, you should compare mortgages from several different lenders. In order to initiate the loan application process, please contact an FHA approved lender.
An FHA insured mortgage may be used to purchase or refinance a new or existing 1-4 family home, a condominium unit or a manufactured housing unit (provided the manufactured housing unit is on a permanent foundation). HUD's internet site can provide additional information on FHA mortgages by going to: www.hud.gov/buying/index.cfm You can also find an FHA approved lender in your area by going to: http://www.hud.gov/ll/code/llslcrit.html You may also wish to contact a HUD approved housing counseling agency in your area for unbiased and free counseling on your particular situation. You can find a list of these agencies at www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm There are also many local and State government programs available that use HUD and/or non-HUD funds to provide grants for the downpayment or to help pay closing costs. To find out what programs are available in your area visit www.hud.gov/buying/localbuying.cfm NEWS: On 1-20-2010 FHA announced policy changes to address risk and strengthen finances. This involves MIP, Credit Scores and Seller concessions. Visit the following link to read the press release: http://portal.hud.gov/portal/page/portal/HUD/ press/press_releases_media_advisories/2010/HUDNo.10-016
PAGE #1159 - Mortgage Insurance Premium (MIP)

Mortgage Insurance Premium (MIP) Mortgage insurance (also known as mortgage guarantee) is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee (MIG), particularly in the UK. For example, Mr. Smith decides to purchase a house which costs $150,000. He pays 10% in $15,000 downpayment and takes out a $135,000 mortgage. Lenders will often require mortgage insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale price. Because of his limited equity, the lender requires that Mr. Smith pay for mortgage insurance that protects the lender against his default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the 135,000, or $33,750, leaving the lender with an exposure of $101,250. The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by mortgage insurers can vary from 20% to 50% and higher.

To obtain public mortgage insurance from the Federal Housing Administration, Mr. Smith must pay a mortgage insurance premium (MIP) equal to 2.25 percent of the loan amount at closing. (Increased to 2.25% effective April 5, 2010). This premium is normally financed by the lender and paid to FHA on the borrower's behalf. Depending on the loan-to-value ratio, there may be a monthly premium as well. The United States Veterans Administration also offers insurance on mortgages. Private mortgage insurance is typically required when down payments are below 20%. Rates can range from 1.5% to 6% of the principal of the loan based upon loan factors such as the percent of the loan insured, loan-to-value (LTV), fixed or variable, and credit score. The rates may be paid annually,
monthly, or in some combination of the two (split premiums). In the U.S., payments by the borrower are tax-deductible until 2010.

Borrower-Paid Private Mortgage Insurance (BPMI or "Traditional Mortgage Insurance") A default insurance on mortgage loans provided by private insurance companies and paid for by borrowers. BPMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The US Homeowners Protection Act of 1998 requires PMI to be canceled when the amount owed reaches a certain level, particularly when the loan balance is 78 percent of the home's purchase price. Often, BPMI can be cancelled earlier by submitting a new appraisal showing that the loan balance is less than 80% of the home's value due to appreciation (this generally requires two years of on-time payments first).

Lender-Paid Private Mortgage Insurance (LPMI) Similar to BPMI, except that it is paid for by the lender, and the borrower is often unaware of its existence. LPMI is usually a feature of loans that claim not to require Mortgage Insurance for high LTV loans. The cost of the premium is built into the interest rate charged on the loan.

MI Q & A What is private mortgage insurance? Private mortgage insurance (MI) is insurance that protects lenders from foreclosure losses on low down payment loans. As a result, private MI helps families buy homes with minimal cash out of pocket, making the American dream of homeownership attainable sooner than otherwise possible. What's the difference between private MI and FHA insurance? Private MI is the private sector alternative to Federal Housing Administration (FHA) mortgage insurance, which is a government program backed by taxpayers. There are some important differences: Private MI typically may be cancelled sooner. Private MI is available on a wider variety of loan products. Are private mortgage insurance and mortgage life insurance the same thing? No. Mortgage life insurance pays off a mortgage if the homeowner dies or becomes disabled. Also, private MI should not be confused with homeowners' insurance, which protects homeowners from loss due to theft, fire or other disaster. Private MI protects the lender and investor from loss, not the borrower.

Why is private MI needed?
Experience shows that homeowners with less than 20% invested in the cost of a home are significantly more likely to default, making low down payment mortgages riskier for lenders and investors. To offset that risk, lenders and investors typically require mortgage insurance for loans with down payments of less than 20%. How do borrowers benefit from private MI? Private MI makes it possible for families to buy homes with a low down payment, helping them become homeowners sooner than otherwise possible. (For more information about how private mortgage insurance can help your borrower, visit www.privatemi.com.) For first-time buyers, private MI helps clear the biggest hurdle to homeownership: coming up with the traditional 20% down payment. For trade-up buyers, private MI allows them to consider a wider range of homes and leverage their investment in their homes. Both first-time and move-up buyers can benefit by putting less money down and keeping cash for other uses: making investments, paying off debt, or paying for home improvements or emergencies.

Are MI premiums tax-deductible? Borrower-paid MI premiums are tax-deductible through the year 2010. Households with adjusted gross incomes of $100,000 or less will be able to deduct 100% of their MI premiums. The deduction is reduced by 10% for each additional $1,000 of adjusted gross household income, phasing out after $109,000. Married individuals filing separate returns who have adjusted gross incomes of $50,000 or less will be able to deduct 50% of their MI premiums. The deduction is reduced by 5% for each additional $500 of adjusted gross income, phasing out after $54,500. The deduction is not restricted to first-time homebuyers.

More information about tax-deductible MI Who orders the MI? Generally, MI is ordered by the lender while the loan is being underwritten. The loan originator consults with the home buyer to determine which loan product best meets their needs, and then determines the MI requirements. Who determines the amount of MI coverage needed for the loan? The investor typically determines the amount of MI coverage required for each specific loan product. Since Fannie Mae and Freddie Mac are the most prominent investors in the marketplace today, they set the standard minimum coverage requirements for the industry. We recommend lenders consult with their investors to determine the appropriate amount of coverage to order.
Q&A How much does private MI cost? Premium prices vary. They are based on the size of the down payment, type of mortgage and amount of insurance coverage. Typically, premiums are included in the monthly mortgage payment. Can private MI be cancelled? Yes. Mortgage lenders/investors will typically permit the cancellation of private MI when the homeowner builds up enough equity in the home. Investors establish criteria for private MI cancellation, and most will cancel private MI upon request for borrowers who have a good payment history, more than 20%-25% equity, and have had the mortgage for at least two to three years. Under federal law, private MI on most loans made on or after July 29, 1999, will end automatically on the date the mortgage is scheduled to reach 78% of the original value of the house.

Are MI premiums refundable? Although refundable premiums are available, generally nonrefundable premium plans are selected for monthly payment policies. Mortgage insurance premiums paid in a single sum at closing or annually may be partially refundable upon cancellation, but nonrefundable premiums are often selected in order to reduce closing costs for borrowers. For all premium plans, a portion of the premium may be refundable if the policy is cancelled under the Homeowners Protection Act.
PAGE #1169 - VA programs

VA Programs A VA loan is a mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs. The loan may be issued by qualified lenders. The VA loan was designed to offer long-term financing to American veterans or their surviving spouses (provided they do not remarry). The basic intention of the VA direct home loan program is to supply home financing to eligible veterans in areas where private financing is not generally available and to help veterans purchase properties with no down payment. Eligible areas are designated by the VA as housing credit shortage areas and are generally rural areas and small cities and towns not near metropolitan or commuting areas of large cities. The VA loan allows veterans 100% financing without private mortgage insurance or 20% second mortgage. A VA funding fee of 0 to 3.3% of the loan amount is paid to the VA and is allowed to be financed. In a purchase, veterans may borrow up to 100% of the sales price or reasonable value of the home, whichever is less. Since there is no monthly PMI more of the mortgage payment goes directly towards qualifying for the loan amount, allowing for larger loans with the same payment. In a refinance, veterans may borrow up to 90% of reasonable value, where allowed by state laws.

VA loans allow veterans to qualify for loans amounts larger than traditional Fannie Mae / conforming loans. VA will insure a mortgage where the monthly payment of the loan is up to 41% of the gross
monthly income vs. 28% for a conforming loan assuming the veteran has no monthly bills. As of January 1, 2006, the maximum VA loan amount with no down payment is $417,000 and can be as high as $625,500 in certain high cost areas. VA also allows the seller to pay all of the veteran's closing cost as long as the cost do not exceed 4% of the sales price of the home.

The history of VA loan The original Servicemen's Readjustment Act, passed by the United States Congress in 1944, extended a wide variety of benefits to eligible veterans. The loan guarantee program of the Veterans Administration has been especially important to veterans. Under the law, as amended, the Veterans Administration is authorized to guarantee or insure home, farm, and business loans made to veterans by lending institutions. Over the history of the program, 18 million VA Home Loans have been insured by the government. The VA can make direct loans in certain areas for the purpose of purchasing or constructing a home or farm residence, or for repair, alteration, or improvement of the dwelling. The terms and requirements of VA farm and business loans have not induced private lenders to make such loans in volume during recent years. The Veterans Housing Act of 1970 removed all termination dates for applying for VA-guaranteed housing loans. This 1970 amendment also provided for VA-guaranteed loans on mobile homes.

More recently, the Veterans Housing Benefits Improvement Act of 1978 expanded and increased the benefits for millions of American veterans. Despite a great deal of confusion and misunderstanding, the federal government generally doesn't make direct loans under the act. The government simply guarantees loans made by ordinary mortgage lenders (descriptions of which appear in subsequent sections) after veterans make their own arrangements for the loans through normal financial circles. The Veterans Administration then appraises the property in question and, if satisfied with the risk involved, guarantees the lender against loss of principal if the buyer defaults. In association with the VA's program, the Servicemembers' Civil Relief Act protects service members from financial woes on their home loan that may occur as a result of active duty commitments, freezing their interest rates at 6%.

Private mortgage insurance Private mortgage insurance (PMI) guarantees home mortgage loans that are conventional, that is, nongovernment loans. This private business loan program is equivalent to the FHA and the VA loan programs. The PMI company insures a percentage of the consumer's loan to reduce the lender's risk; this percentage is paid to the lender if the consumer does not pay and the lender forecloses the loan. Lenders decide if they need and want private mortgage insurance. If they so decide, it becomes a requirement of the loan. PMI companies charge a fee to insure a mortgage loan; the VA insures a loan at no cost to a veteran buyer; the FHA charges a fee to guarantee the loan.
PAGE #1174 - VA Q&A

Q&A about who is eligible for a VA loan and reuse of eligibility for another VA loan. Q: How do I apply for a VA guaranteed loan? A: You can apply for a VA loan with any mortgage lender that participates in the VA home loan program. At some point, you will need to get a Certificate of Eligibility from VA to prove to the lender that you are eligible for a VA loan. Q: How do I get a Certificate of Eligibility? A: Complete a VA Form 26-1880, Request for a Certificate of Eligibility: You can apply for a Certificate of Eligibility by submitting a completed VA Form 26-1880, Request For A Certificate of Eligibility For Home Loan Benefits, to the Winston-Salem Eligibility Center, along with proof of military service. In some cases it may be possible for VA to establish eligibility without your proof of service. However, to avoid any possible delays, it's best to provide such evidence.
PAGE #1175 - VA Q&A

Q: Can my lender get my Certificate of Eligibility for me? A: Yes, it's called Web LGY. Most lenders have access to the Web LGY system. This Internet based application can establish eligibility and issue an online Certificate of Eligibility in a matter of seconds. Not all cases can be processed through Web LGY - only those for which VA has sufficient data in our records. However, veterans are encouraged to ask their lenders about this method of obtaining a certificate.
PAGE #1176 - VA Q&A

Q: What is acceptable proof of military service? A: If you are still serving on regular active duty, you must include an original statement of service signed by, or by direction of, the adjutant, personnel officer, or commander of your unit or higher headquarters which identifies you and your social security number, and provides your date of entry on your current active duty period and the duration of any time lost. If you were discharged from regular active duty after January 1, 1950, a copy of DD Form 214, Certificate of Release or Discharge From Active Duty should be included with your VA Form 26-1880. If you were discharged after October 1, 1979, DD Form 214 copy 4 should be included. A PHOTOCOPY OF DD214 WILL SUFFICE.....DO NOT SUBMIT AN ORIGINAL DOCUMENT. If you are still serving on regular active duty, you must include an original statement of service signed by, or by direction of, the adjutant, personnel officer, or commander of your unit or higher headquarters which shows your date of entry on your current active duty period and the duration of any time lost. If you were discharged from the Selected Reserves or the National Guard, you must include copies of adequate documentation of at least 6 years of honorable service. If you were discharged from the Army or Air Force National Guard, you may submit NGB Form 22, Report of Separation and Record of Service, or NGB Form 23, Retirement Points Accounting, or its equivalent. If you were discharged from the Selected Reserve, you may submit a copy of your latest annual points statement and evidence of honorable service. Unfortunately, there is no single form used by the Reserves or National Guard similar to the DD Form 214. It is your responsibility to furnish adequate documentation of at least 6 years of honorable service. If you are still serving in the Selected Reserves or the National Guard, you must include an original statement of service signed by, or by the direction of, the adjutant, personnel officer, or commander of your unit or higher headquarters showing the length of time that you have been a member of the Selected Reserves. Again, at least 6 years of honorable service must be documented.
PAGE #1177 - VA Q&A

Q: How can I obtain proof of military service? A: Standard Form 180, Request Pertaining to Military Records, is used to apply for proof of military service regardless of whether you served on regular active duty or in the selected reserves. This request form is NOT processed by VA. Rather, Standard Form 180 is completed and mailed to the appropriate custodian of military service records. Instructions are provided on the reverse of the form to assist in determining the correct forwarding address.
PAGE #1178 - VA Q&A

Q: I have already obtained one VA loan. Can I get another one? A: Yes, your eligibility is reusable depending on the circumstances. Normally, if you have paid off your prior VA loan and disposed of the property, you can have your used eligibility restored for additional use. Also, on a one-time only basis, you may have your eligibility restored if your prior VA loan has been paid in full but you still own the property. In either case, to obtain restoration of eligibility, the veteran must send a completed VA Form 26-1880 to our Winston-Salem Eligibility Center. To prevent delays in processing, it is also advisable to include evidence that the prior loan has been paid in full and, if applicable, the property disposed of. This evidence can be in the form of a paid-in-full statement from the former lender, or a copy of the HUD-1 settlement statement completed in connection with a sale of the property or refinance of the prior loan.
PAGE #1179 - VA Q&A

Q: I sold the property I obtained with my prior VA loan on an assumption. Can I get my eligibility restored to use for a new loan? A: In this case the veterans eligibility can be restored only if the qualified assumer is also an eligible veteran who is willing to substitute his or her available eligibility for that of the original veteran. Otherwise, the original veteran cannot have eligibility restored until the assumer has paid off the VA loan. Q: My prior VA loan was assumed, the assumer defaulted on the loan, and VA paid a claim to the lender. VA said it wasnt my fault and waived the debt. Now I need a new VA loan but I am told that my used eligibility cannot be restored. Why? Or, Q: My prior loan was foreclosed on, or I gave a deed in lieu of foreclosure, or the VA paid a compromise (partial) claim. Although I was released from liability on the loan and/or the debt was waived, I am told that I cannot have my used eligibility restored. Why? A: In either case, although the veterans debt was waived by VA, the Government still suffered a loss on the loan. The law does not permit the used portion of the veterans eligibility to be restored until the loss has been repaid in full.
PAGE #1180 - VA Q&A

Q: Only a portion of my eligibility is available at this time because my prior loan has not been paid in full even though I dont own the property anymore. Can I still obtain a VA guaranteed
home loan? A: Yes, depending on the circumstances. If a veteran has already used a portion of his or her eligibility and the used portion cannot yet be restored, any partial remaining eligibility would be available for use. The veteran would have to discuss with a lender whether the remaining balance would be sufficient for the loan amount sought and whether any down payment would be required.
PAGE #1181 - VA Q&A

Q: Is the surviving spouse of a deceased veteran eligible for the home loan benefit? A: The unmarried surviving spouse of a veteran who died on active duty or as the result of a serviceconnected disability is eligible for the home loan benefit. If you wish to make application for the home loan benefit as a surviving spouse, contact our Winston-Salem Eligibility Center. In addition, a surviving spouse who obtained a VA home loan with the veteran prior to his or her death (regardless of the cause of death), may obtain a VA guaranteed interest rate reduction refinance loan. For more information, contact our Winston-Salem Eligibility Center. [NOTE: Also, a surviving spouse who remarries on or after attaining age 57, and on or after December 16, 2003, may be eligible for the home loan benefit. However, a surviving spouse who remarried before December 16, 2003, and on or after attaining age 57, must apply no later than December 15, 2004, to establish home loan eligibility. VA must deny applications from surviving spouses who remarried before December 16, 2003 that are received after December 15, 2004.] Q: Are the children of a living or deceased veteran eligible for the home loan benefit? A: No, the children of an eligible veteran are not eligible for the home loan benefit.
PAGE #1182 - VA Q&A

Understanding Your VA Loan: Separating Fact from Fiction Serving in the military gives you access to several benefits, such as the VA Home Loan. However, despite the popularity of this product, many service members have yet to fully understand what the VA Loan offers them. In fact, one of the most common misconceptions about the VA Home Loan is that you can only use your VA Loan privileges only once, and the purchased home must be in the veterans name alone, reports the Chicago Tribune. But, the VA Loan which can offer you up to $417,000 towards the purchase of a home is a reusable benefit and can be used to buy another home once the original loan is paid off. Purchasing a home is the most important purchase you can make, and its vital you understand your VA Home Loan.
PAGE #1183 - VA Q&A

The following questions and answers originally published on Military.com can help you understand this benefit and tell fact from fiction. Q&A Why get a VA loan over other types?
Simply put, a VA Home Loan allows qualified buyers the opportunity to purchase a home with no down payment. There are also no monthly mortgage insurance premiums to pay, limitations on buyer's closing costs, and an appraisal that informs the buyer of the property value. For most loans on new houses, construction is inspected at appropriate stages and a one-year warranty is required from the builder. VA also performs personal loan servicing and offers financial counseling to help veterans having temporary financial difficulties.
PAGE #1184 - VA Q&A

What if I've used a VA Home Loan before? You can have previously-used entitlement "restored" one time only in order to purchase another home with a VA loan if: The property purchased with the prior VA loan has been sold and the loan paid in full. A qualified veteran-transferee (buyer) agrees to assume your VA loan and substitute his or her entitlement for the same amount of entitlement you originally used. The property purchased with a prior VA loan is both paid in full and still owned by the veteran, then the entitlement used in connection with that loan may be restored. Also, veterans who have used a VA loan before may still have remaining entitlement to use for another VA loan. A veteran's maximum entitlement is $89,912, and lenders will generally loan up to four times your available entitlement without a down payment, provided your income and credit qualifications are fine, and the property appraises for the asking price. Lenders may require that a combination of the guaranty entitlement and any cash down payment must equal at least 25 percent of the reasonable value or sales price of the property, whichever is less.
PAGE #1185 - VA Q&A

For Alaska, Hawaii, Guam, and U.S. Virgin Islands residents, note that maximum original loan amounts have now been increased 50 percent higher for first mortgages. Remaining entitlement and restoration of entitlement is not automatic. It can be requested through the nearest VA office by completing VA Form 26-1880. The entitlement may also be restored one time only if the veteran has repaid the prior VA loan in full but has not disposed of the property purchased with the prior VA loan. What service is not eligible for a VA Home Loan? You are not eligible for VA financing solely based upon service in World War I, Active Duty Training in the Reserves, or Active Duty Training in the National Guard. Note: Guard and Reservists are eligible if they were "activated" under the authority of title 10 U.S. Code as was the case for the Iraq/Afghanistan.
PAGE #1186 - VA Q&A

Do all local lenders offer VA Loans? Not necessarily. Choose a VA-approved lending institution that can handle your home loan. A lender can help you review your credit history and determine how much of a loan you can qualify for. Be aware that different lenders have different closing costs and other fees, so it pays to shop around. What types of repayment options are available? The guarantees 30-year loans with a choice of repayment plans: Traditional fixed payment (constant principal and interest); Graduated Payment Mortgage, or GPM (low initial payments which gradually rise
to a level payment starting in the sixth year); and in some areas, Growing Equity Mortgages, or GEMs (gradually increasing payments with all of the increase applied to principal, resulting in an early payoff of the loan). There is no prepayment penalty.
PAGE #1187 - VA Q&A

What is the maximum VA loan? Although there is no maximum VA loan (limited only by the reasonable value or the purchase price), lenders generally limit the maximum VA loan to $417,000. The VA maximum loan amount in the states of HI, CA and AK was increased to the maximum FHLMC limit for those states, $539,475. If I was discharged years ago and want to qualify for a VA loan, what forms or other documents will I need? Everyone is required to obtain a Certificate of Eligibility. If you do not have this Certificate, you will need to apply using VA Form 26-1880 and this will require a copy of DD-214 (Certificate of Release or Discharge from Active Duty) showing character of service. Along with the Certificate of Eligibility, loan applicants will need to document their credit, savings and employment information.
PAGE #1188 - VA Q&A

Does a veteran's home loan entitlement expire? No. Home loan entitlement is generally good until used if a person is on active duty. Once discharged or released from active duty before using an entitlement, a new determination of their eligibility must be made based on the length of service and the type of discharge received. Reservists are eligible for VA Loans, too. Who qualifies? Eligibility extends to members who have completed a total of six years in the Selected Reserves or National Guard (member of an active unit, attended required weekend drills and two-week active duty for training) and received an honorable discharge; continue to serve in the Selected Reserves. Individuals who completed less than six years may be eligible if discharged for a serviceconnected disability. In addition, reservists and National Guard members who were activated on or after Aug. 2, 1990, served at least 90 days and were discharged honorably are eligible. Eligibility for Selected Reservists is due to expire on Sept. 30, 2009.
PAGE #1189 - VA Q&A

Can a veteran get a VA farm loan? No, except for a farm on which there is a farm residence that will be personally occupied by the veteran as a home. Other types of farm financing may be obtained through the Farmers Home Administration. Can I build a home with a VA Home Loan? Yes. But there are several clauses that may make this difficult to accomplish. Many veterans use their VA Home Loan Certificate of Eligibility to negotiate in good faith a private home construction loan and then refinance the completed home using VA Home Loans.
PAGE #1190 - VA Q&A
Can you take out a VA loan for a second home or vacation cabin? The law requires that you certify that you intend to occupy the property as your home. But it specifically provides that occupancy by the veteran's spouse satisfies the personal occupancy requirement. However, there are no provisions for other family members. VA Home Loans are available for a variety of purposes including building, altering, or repairing a home; refinancing an existing home loan; buying a manufactured home with or without a lot; buying and improving a manufactured home lot; and installing a solar heating or cooling system or other weatherization improvements. You are also allowed to buy income property consisting of up to four units, provided you occupy one of the units. Can a veteran obtain a VA loan for the purchase of property in a foreign country? No. The property must be located in the United States, its territories, or possessions. The latter consist of Puerto Rico, Guam, Virgin Islands, American Samoa and Northern Mariana Islands.
PAGE #1191 - VA Q&A

What is a VA-guaranteed manufactured home loan? A private lender makes a VA-guaranteed manufactured home loan. The VA will protect the lender against loss if the veteran or a later owner fails to repay the loan. The amount VA will guarantee is 40 percent of the loan amount or the veteran's available entitlement, up to a maximum amount of $20,000. The guaranty amount is not the same as the amount a veteran can borrow. If a borrower has used a VA loan in the past, can that person be eligible again? Veterans who had a VA loan before may still have "remaining entitlement" to use for another VA loan. The current amount of entitlement available to each eligible veteran is $36,000. Veterans can have previously-used entitlement "restored" to purchase another home with a VA loan if: the property purchased with the prior VA loan has been sold and the loan paid in full, or if a qualified veteran buyer agrees to assume the VA loan and substitute his or her entitlement for the same amount of entitlement originally used by the veteran seller. The entitlement may also be restored one time only if the veteran has repaid the prior VA loan in full, but has not disposed of the property purchased with the prior VA loan.
PAGE #1192 - Difference between traditional and non-traditional mortgage products

Difference between Traditional and Non-traditional Mortgage Products The S.A.F.E. ACT defines Non-traditional Mortgage Products to mean any mortgage product other than a thirty year fixed mortgage. This is not to be confused with Non-conforming or Sub-prime mortgage products. Some History on various products There has been a proliferation of new mortgage products in recent years. Until even a few years ago, lenders offered essentially two mortgage products: fully amortizing, fixed rate and adjustable rate mortgages. In the past few years there has been an explosion of newer mortgage products which have never been a significant part of the mortgage market. Expanded borrower choice allows households to more carefully tailor their loans to their circumstances, but the expanded choices may be confusing to some borrowers who may not understand the implications of the wide variety of mortgages. Many of these new mortgage products will also expose some borrowers to payment shocks when their payments sharply increase when the terms of the loans change abruptly. As the FDIC pointed out in a consumer brochure in the summer of 2005, many new loan products are being widely offered that could benefit some people but be huge mistakes for others.

Lenders have long offered more flexible mortgage products, but primarily they were offered only to upscale borrowers. Wealthier, sophisticated borrowers might opt for a mortgage with low monthly payments so they could capitalize on other investment opportunities. Recently, changes in the mortgage market including the increased use of automated underwriting, credit scoring and risk-based pricing including subprime loans have allowed lenders to offer a broader range of products to more borrowers with a wider range of incomes and creditworthiness. Additionally, housing price escalation has made these loans seem less risky to lenders because the underlying asset was increasing in value. On one hand, these changes have allowed more applicants to qualify for loans to purchase the homes they want. The non-traditional mortgages may be one important way for some borrowers to become homeowners. However, consumers need to understand how these mortgage products work and how the terms of these mortgages will impact their families finances over the lifetime of the mortgage. Many, including Consumer Federation of America, are justifiably concerned that the proliferation of new mortgage products is not appropriate for many borrowers who receive them and that over the long term these mortgages could threaten homeownership sustainability.

There is particular concern over the homeownership sustainability for more vulnerable consumers first time homebuyers, unsophisticated financial consumers, and consumers traditionally underserved by the mortgage market, especially lower-income and minority consumers. These borrowers are less likely to understand their ability to negotiate mortgage terms, the complexity of the mortgage vehicles they are offered, and the long-term monthly payment variation between the different products now available on the market. Additionally, the terms of some of these loans may mitigate some of the wealth-building effects of homeownership. Interest-only mortgages and payment option loans, which can negatively amortize, can mean that for the initial borrowing period, the wealth gain from the mortgage comes entirely from appreciating home prices and not from the repayment of the principal. If housing prices rise more slowly than they have recently or stagnate, these borrowers will have built little household wealth. If home prices fall, these borrowers could owe more in mortgage debt than their homes are worth.

Finally, the increase in the number of non-traditional mortgages could have implications for the lending industry. Although some thrifts have been offering some of these products for many years, many lenders are new to these products. Lenders who have specialized in these nontraditional mortgages could find that if a large number of borrowers face sharp payment shocks when their loans are recalculated after the initial low monthly payment rate, interest rates increase or housing prices slide, that the lenders have a larger number of non-performing loans on their books. The majority of non-traditional mortgages originated during 2004 and 2005 will season in 2006 and 2007, so consumers could start facing payment shocks soon. There are some financial analysts that are concerned that the credit scoring mechanisms that have been used to assess repayment and default risks for traditional 30-year mortgages may be ill suited to measure the risks of these emerging nontraditional mortgage products. Banking regulators have been warning the lending industry of such an eventuality more consistently than the regulators have been warning consumers about the risks of taking these more complicated financial products.
This paper examines the non-traditional mortgage market and its potential impact on borrowers and lenders. First, it describes the range of non-traditional mortgage products, their typical loan terms, market distribution and potential effects for consumers. Second, it examines the market conditions that have fostered non-traditional mortgage lending, the underwriting and credit implications of nontraditional mortgage lending for originators and the potential for payment shocks and defaults for borrowers. Third, it analyzes information gathered regarding the characteristics of non-traditional mortgage borrowers in terms of income, credit scores and loan-to-value ratios relative to all mortgage borrowers. Fourth, it lays out the key concerns over non-traditional mortgage borrowing for consumers and the housing market. Fifth, it discusses some actions that are needed to ensure that these products are not aggressively marketed to vulnerable consumers. Last, it discusses the proposed federal regulatory guidance on non-traditional mortgages.

Over the past few years, the number of loan products available to homebuyers has exploded, but there is little understanding by many borrowers about how to compare or even understand the differences between these loan products. The language the lending industry uses has contributed to this confusion, since the multiplying number of loan products are described by a multiplying number of labels or names. Even the broader industry description of non-traditional or exotic mortgages confers little information to average consumers at the same time that more people are paying closer attention to the real estate market since housing prices began to steeply appreciate.

Over the past fifty years, borrowers traditionally used loan products that were primarily either fixed rate or adjustable rate 30-year mortgages. Fixed rate mortgages had monthly payments which were constant for the duration of the mortgage; adjustable rate mortgages (ARMs) had monthly payments that would vary from month to month or year to year based on an interest rate index which moved with market interest rates. Generally, what non-traditional mortgages have in common is that they feature lower initial monthly payments than do traditional fixed or adjustable rate mortgages. Interest-only, payment option, piggyback, and low- or no-documentation loans are all non-traditional mortgages. These mortgages often combine the non-traditional features with newer adjustable rate mortgage features or with other non-traditional features. So it is not impossible to imagine a low-documentation, interest-only hybrid ARM that permits negative amortization. These layered risk combinations only serve to concentrate the risk to the borrower and the lender. John Dugan, Comptroller of the Currency, noted, There is no doubt that when several risky features are combined in a single loan, the total risk is greater than the sum of its parts.

Interest-only mortgages (I/O Loans) allow borrowers to defer payment of principal and thus pay only the monthly interest on their mortgages for a set period of time (usually 1, 3, 5 or 10 years) after which the borrowers must pay down (or amortize) their mortgage at a faster rate. Payment option (or option ARMS or pick-a-payment mortgages) allow borrowers to choose their monthly payment structure either amortizing, interest-only or minimum payment (which is often even lower than the monthly interest payment). This may be somewhat familiar to consumers because it is similar to the way credit card bills are presented a minimum payment which makes little if any dent in the principal of the consumer loan.
Hybrid ARMs start as fixed rate mortgages which convert to adjustable rate mortgages after an initial period and thus offer the prospect of higher monthly payments should interest rates rise. Piggyback (no money down, 80/20, or 80/10/10 loans) allow borrowers to purchase a home with little or nothing down and without requiring private mortgage insurance. Lenders have recently been offering mortgage products which help borrowers avoid the costs of paying PMI by making an 80 percent of the home price traditional mortgage and a 10 percent second lien for borrowers with a 10 percent down payment or in some cases with a 20 percent second lien mortgage to make the down payment to the seller.

Low-documentation, no-documentation or Alt-A loans are alternative qualification standards where borrowers pay a premium for lenders to approve mortgages for applicants who do not present detailed proof of income or assets that traditionally have been required; borrowers certify their income instead.

Mortgage lenders traditionally required borrowers to make down payments of at least 20 percent of the real estate purchase price to qualify for a loan. Borrowers who cannot put 20 percent down on their home purchases are typically required to buy private mortgage insurance (PMI) which insures the lender against the risk of borrower default. For years, borrowers with high incomes who had their wealth tied up in investments were able to receive no down payment loans. Over the past fifteen years, the proportion of loans that have been made to borrowers making small down payments has increased significantly. In 1990, less than 3 percent of borrowers made down payments smaller than 5 percent, but the share of low or no down payment mortgages has grown more than fivefold to about 16-17 percent after 2000. The National Association of Realtors reported last year that 43% of first-time homebuyers purchased homes with no-money down (compared to 28% of all homebuyers). About half of all mortgages currently being written are either piggyback or lower-documentation loans.

Lenders have recently been offering mortgage products which help borrowers avoid the costs of paying PMI by making a first-lien mortgage covering 80 percent of the home price, financed with a fixed rate, or increasingly, an ARM. The second lien loan is used to cover an additional 10 percent or even the remaining 20 percent to cover the down payment to the lender. The second mortgage is either a closed-end loan, or more often, an open-ended Home Equity Line of Credit (HELOC) with an adjustable rate. In 2004, three fifths (41.7%) of home purchase mortgage borrowing utilized piggyback loans, and by the first half of 2005 the proportion of borrowing using piggyback mortgage loans rose to nearly half (48.2%). The average piggyback loan for home purchase was $46,000, or about 20 percent of average existing home prices.

Wall Street Journal/Harris Interactive poll found that 4 percent of households had used a piggyback mortgage. These no-downpayment mortgages have higher interest rates to compensate lenders for the additional risk. Borrowers who rely on 80/20 mortgages could be pinched if the value of their home is steady or declines if they want to sell, because they will have built up very little equity.

FDIC noted that, when mortgaging the entire value of a home, the risk of losing your home increases substantially and theres no margin for error. One advantage is that the interest rate payments on the second mortgage (though not the principal) are tax deductible, compared to PMI premiums which do not receive tax benefits. Piggyback borrowers could also end up upside down in their homes if housing prices declined within a few years of purchasing their homes. Borrowers who make down payments can survive small fluctuations in the real estate market, but borrowers who owe 100 percent of the value of their homes could owe more than their homes are worth even with minor downturns in the real estate market.
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explain Adjustable Rate Mortgages; list 10 things to know about Reverse Mortgages; discuss the history of Non-traditional Lending; and be able to discuss Rural and Farm Loans.
PAGE #1208 - Adjustable Rate Mortgages (ARM)

Adjustable Rate Mortgages (ARM) An ARM is an Adjustable Rate Mortgage. Unlike fixed rate mortgages that have an interest rate that remains the same for the life of the loan, the interest rate on an ARM will change periodically. The initial interest rate of an ARM is lower than that of a fixed rate mortgage, consequently, an ARM may be a good option to consider if you plan to own your home for only a few years; you expect an increase in future earnings; or, the prevailing interest rate for a fixed rate mortgage is too high. An ARM has four components: (1) an index, (2) a margin, (3) an interest rate cap structure, and (4) an initial interest rate period. When the initial interest rate period has expired, the new interest rate is calculated by adding a margin to the index. Your lender will disclose the margin at time of loan application (margins may vary from lender to lender, so it's is a good idea to shop around for a low margin). As the index figure moves up or down, your interest rate will be adjusted accordingly. Acceptable index options on FHA insured ARM loan transactions are 1) the Constant Maturity Treasury (CMT) index (weekly average yield of U.S. Treasury securities, adjusted to a constant maturity of one year); or 2) the 1-year London Interbank Offered Rate (LIBOR). Increases or decreases in the interest
rate will be limited by the interest rate cap structure of your loan.

The interest rate cap structure provides some protection from large interest rate swings. There are two types of caps: (1) annual, and (2) life-of-the-loan. The annual cap restricts the amount your interest rate can change, up or down, in any given year, while the life-of-the-loan cap limits the maximum (and minimum) interest rate you can pay for as long as you have the mortgage. FHA offers a standard 1-year ARM and four "hybrid" ARM products. Hybrid ARMs offer an initial interest rate that is constant for the first 3-, 5-, 7-, or 10 years. After the initial period, the interest rate will adjust annually. Below are the different interest rate cap structures for the various ARM products: 1-year ARM and 3-year hybrid ARM have annual caps of one percentage point, and life-of-theloan caps of five percentage points. (Example - if your initial interest rate were 5.00%, the highest possible interest rate would be 10.00%) 5-, 7-, and 10-year hybrid ARM have annual caps of two percentage points, and life-of-the-loan caps of six percentage points.

An adjustable rate mortgage (ARM) is a mortgage loan where the interest rate on the note is periodically adjusted based on a variety of indices. Among the most common indices are the rates on 1year constant-maturity Treasury (CMT) securities, the Cost of Funds Index (COFI), and the London Interbank Offered Rate (LIBOR). A few lenders use their own cost of funds as an index, rather than using other indices. This is done to ensure a steady margin for the lender, whose own cost of funding will usually be related to the index. Consequently, payments made by the borrower may change over time with the changing interest rate (alternatively, the term of the loan may change). This is not to be confused with the graduated payment mortgage, which offers changing payment amounts but a fixed interest rate. Other forms of mortgage loan include the interest only mortgage, the fixed rate mortgage, the negative amortization mortgage, and the balloon payment mortgage.

Adjustable rates transfer part of the interest rate risk from the lender to the borrower. They can be used where unpredictable interest rates make fixed rate loans difficult to obtain. The borrower benefits if the interest rate falls and loses out if interest rates rise. Adjustable rate mortgages are characterized by their index and limitations on charges (caps). In many countries, adjustable rate mortgages are the norm, and in such places, may simply be referred to as mortgages.

Characteristics Index Rates for some common indexes used for Adjustable Rate Mortgages (1996-2006)
All adjustable rate mortgages have an adjusting interest rate tied to an index. In Western Europe, the index may be the ECB Refi rate (where the mortgage is called a tracker mortgage), TIBOR or Euro Interbank Offered Rate (EURIBOR). Six common indices in the United States are: 11th District Cost of Funds Index (COFI) London Interbank Offered Rate (LIBOR) 12-month Treasury Average Index (MTA) Constant Maturity Treasury (CMT) National Average Contract Mortgage Rate Bank Bill Swap Rate (BBSW)

In some countries, banks may publish a prime lending rate which is used as the index. The index may be applied in one of three ways: directly, on a rate plus margin basis, or based on index movement. A directly applied index means that the interest rate changes exactly with the index. In other words, the interest rate on the note exactly equals the index. Of the above indices, only the contract rate index is applied directly. To apply an index on a rate plus margin basis means that the interest rate will equal the underlying index plus a margin. The margin is specified in the note and remains fixed over the life of the loan. For example, a mortgage interest rate may be specified in the note as being LIBOR plus 2%, 2% being the margin and LIBOR being the index. The final way to apply an index is on a movement basis. In this scheme, the mortgage is originated at an agreed upon rate, then adjusted based on the movement of the index. Unlike direct or index plus margin, the initial rate is not explicitly tied to any index; the adjustments are tied to an index.

Basic features of ARMs The most important basic features of ARMs are: Initial interest rate. This is the beginning interest rate on an ARM. The adjustment period. This is the length of time that the interest rate or loan period on an ARM is scheduled to remain unchanged. The rate is reset at the end of this period, and the monthly loan payment is recalculated. The index rate. Most lenders tie ARM interest rates changes to changes in an index rate. Lenders base ARM rates on a variety of indices, the most common being rates on one, three, or five-year Treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations. The margin. This is the percentage points that lenders add to the index rate to determine the ARM's interest rate. Interest rate caps. These are the limits on how much the interest rate or the monthly payment can be changed at the end of each adjustment period or over the life of the loan. Initial discounts. These are interest rate concessions, often used as promotional aids, offered the first year or more of a loan. They reduce the interest rate below the prevailing rate (the index plus the margin).
Negative amortization. This means the mortgage balance is increasing. This occurs whenever the monthly mortgage payments are not large enough to pay all the interest due on the mortgage. This may be caused by the payment cap contained in the ARM when are high enough that the principal plus interest payment is greater than the payment cap. Conversion. The agreement with the lender may have a clause that allows the buyer to convert the ARM to a fixed-rate mortgage at designated times. Prepayment. Some agreements may require the buyer to pay special fees or penalties if the ARM is paid off early. Prepayment terms are sometimes negotiable. It should be obvious that the choice of a home mortgage loan is complicated and time consuming. As a help to the buyer, the Federal Reserve Board and the Federal Home Loan Bank Board have prepared a mortgage checklist.

Limitations on charges (caps) Any mortgage where payments made by the borrower may increase over time brings with it the risk of financial hardship to the borrower. To limit this risk, limitations on charges - known as caps in the industry - are a common feature of adjustable rate mortgages. Caps typically apply to three characteristics of the mortgage: frequency of the interest rate change periodic change in interest rate total change in interest rate over the life of the loan, sometimes called life cap

For example, a given ARM might have the following types of caps: Interest rate adjustment caps: interest adjustments made every 6 months, typically 1% per adjustment, 2% total per year interest adjustments made only once a year, typically 2% maximum interest rate may adjust no more than 1% in a year Mortgage payment adjustment caps: maximum mortgage payment adjustments, usually 7.5% annually on pay-option/negative amortization loans Life of loan interest rate adjustment caps: total interest rate adjustment limited to 5% or 6% for the life of the loan.

Caps on the periodic change in interest rate may be broken up into one limit on the first periodic change and a separate limit on subsequent periodic change, for example 5% on the initial adjustment and 2% on subsequent adjustments. Although uncommon, a cap may limit the maximum monthly payment in absolute terms (for example, $1000 a month), rather than in relative terms. ARMs that allow negative amortization will typically have payment adjustments that occur less frequently than the interest rate adjustment. For example, the interest rate may be adjusted every
month, but the payment amount only once every 12 months. Cap structure is sometimes expressed as initial adjustment cap / subsequent adjustment cap / life cap, for example 2/2/5 for a loan with a 2% cap on the initial adjustment, a 2% cap on subsequent adjustments, and a 5% cap on total interest rate adjustments. When only two values are given, this indicates that the initial change cap and periodic cap are the same. For example, a 2/2/5 cap structure may sometimes be written simply 2/5.

Option ARMs An "option ARM" is typically a 30-year ARM that initially offers the borrower four monthly payment options: a specified minimum payment, an interest-only payment, a 15-year fully amortizing payment, and a 30-year fully amortizing payment. These types of loans are also called "pick-a-payment" or "pay-option" ARMs. When a borrower makes a Pay-Option ARM payment that is less than the accruing interest, there is "negative amortization", which means that the unpaid portion of the accruing interest is added to the outstanding principal balance. For example, if the borrower makes a minimum payment of $1,000 and the ARM has accrued monthly interest in arrears of $1,500, $500 will be added to the borrower's loan balance. Moreover, the next month's interest-only payment will be calculated using the new, higher principal balance. Option ARMs are often offered with a very low teaser rate (often as low as 1%) which translates into very low minimum payments for the first year of the ARM.

During boom times, lenders often underwrite borrowers based on mortgage payments that are below the fully amortizing payment level. This enables borrowers to qualify for a much larger loan (i.e., take on more debt) than would otherwise be possible. When evaluating an Option ARM, prudent borrowers will not focus on the teaser rate or initial payment level, but will consider the characteristics of the index, the size of the "mortgage margin" that is added to the index value, and the other terms of the ARM. Specifically, they need to consider the possibilities that long-term interest rates go up; their home may not appreciate or may even lose value or even; and that both risks may materialize.

Option ARMs are best suited to sophisticated borrowers with growing incomes, particularly if their incomes fluctuate seasonally and they need the payment flexibility that such an ARM may provide. Sophisticated borrowers will carefully manage the level of negative amortization that they allow to accrue. In this way, a borrower can control the main risk of an Option ARM, which is "payment shock", when the negative amortization and other features of this product can trigger substantial payment increases in short periods of time.

For example, the minimum payment on an Option ARM can jump dramatically if its unpaid principal balance hits the maximum limit on negative amortization (typically 110% to 125% of the original loan amount). If that happens, the next minimum monthly payment will be at a level that would fully amortize the ARM over its remaining term. In addition, Option ARMs typically have automatic "recast" dates (often every fifth year) when the payment is adjusted to get the ARM back on pace to amortize the ARM in full over its remaining term. For example, a $200,000 ARM with a 110% "neg am" cap will typically adjust to a fully amortizing payment, based on the current fully-indexed interest rate and the remaining term of the loan, if negative amortization causes the loan balance to exceed $220,000. For a 125% recast, this will happen if the loan balance reaches $250,000. Any loan that is allowed to generate negative amortization means that the borrower is reducing his equity in his home, which increases the chance that he won't be able to sell it for enough to repay the loan. Declining property values would exacerbate this risk. Option ARMs may also be available as "hybrids," with longer fixed-rate periods. These products would not be likely to have low teaser rates. As a result, such ARMs mitigate the possibility of negative amortization, and would likely not appeal to borrowers seeking an "affordability" product.
PAGE #1223 - Reverse Mortgages

Reverse Mortgages Top Ten Things to Know about a Reverse Mortgage Reverse mortgages are becoming popular in America. HUD's Federal Housing Administration (FHA) created one of the first. The Home Equity Conversion Mortgage (HECM) is FHA's reverse mortgage program which enables you to withdraw some of the equity in your home. The HECM is a safe plan that can give older Americans greater financial security. Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more. You can receive free information about reverse mortgages in general by calling AARP toll free at (800) 209-8085. Since your home is probably your largest single investment, it's smart to know more about reverse mortgages, and decide if one is right for you! 1. What is a reverse mortgage? A reverse mortgage is a special type of home loan that lets you convert a portion of the equity in your home into cash. The equity that built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. FHA's HECM provides these benefits. You can also use a HECM to purchase a primary residence if you are able to use cash on hand to pay the difference between the HECM proceeds and the sales price plus closing costs for the property you are purchasing.

2. Can I qualify for FHA's HECM reverse mortgage? To be eligible for a FHA HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home. You are further required to receive consumer information from an approved HECM counselor prior to obtaining the loan. You can contact the Housing
Counseling Clearinghouse on (800) 569-4287 for the name and telephone number of a HUD-approved counseling agency and a list of FHA-approved lenders within your area.

3. Can I apply if I didn't buy my present house with FHA mortgage insurance? Yes. It doesn't matter if you didn't buy it with an FHA-insured mortgage. Your new FHA HECM will be FHA-insured. 4. What types of homes are eligible? To be eligible for the FHA HECM, your home must be a single family home or a 1-4 unit home with one unit occupied by the borrower. HUD-approved condominiums and manufactured homes that meet FHA requirements are also eligible.

5. What's the difference between a reverse mortgage and a bank home equity loan? With a traditional second mortgage, or a home equity line of credit, you must have sufficient income versus debt ratio to qualify for the loan, and you are required to make monthly mortgage payments. The reverse mortgage is different in that it pays you, and is available regardless of your current income. The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You don't make payments, because the loan is not due as long as the house is your principal residence. Like all homeowners, you still are required to pay your real estate taxes, insurance and other conventional payments like utilities. With an FHA HECM you cannot be foreclosed or forced to vacate your house because you "missed your mortgage payment."

6. Can the lender take my home away if I outlive the loan? No. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current. You can never owe more than the value of your home at the time you or your heirs sell the home. 7. Will I still have an estate that I can leave to my heirs? When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs. 8. How much money can I get from my home? The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA's mortgage limits for your area, whichever is less. Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow. You can use an online calculator like the one on the AARP website to get an idea of what you may be able to borrow.

9. Should I use an estate planning service to find a reverse mortgage? FHA does NOT recommend using any service that charges a fee for referring a borrower to an FHA lender. FHA provides this information free, and HUD-approved housing counseling agencies are available for free or at very low cost, to provide information, counseling, and a free referral to a list of FHA-approved lenders. Search online or call (800) 569-4287 toll-free, for the name and location of a HUD-approved housing counseling agency near you. 10. How do I receive my payments? You have five options: Tenure - equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence. Term - equal monthly payments for a fixed period of months selected. Line of Credit - unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted. Modified Tenure - combination of line of credit with monthly payments for as long as you remain in the home. Modified Term - combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

Reverse Mortgages: Get the Facts before Cashing in on Your Homes Equity If youre 62 or older and looking for money to finance a home improvement, pay off your current mortgage, supplement your retirement income, or pay for healthcare expenses you may be considering a reverse mortgage. Its a product that allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. The Federal Trade Commission (FTC), the nations consumer protection agency, wants you to understand how reverse mortgages work, the types of reverse mortgages available, and how to get the best deal. In a regular mortgage, you make monthly payments to the lender. In a reverse mortgage, you receive money from the lender, and generally dont have to pay it back for as long as you live in your home. The loan is repaid when you die, sell your home, or when your home is no longer your primary residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions.

Types of Reverse Mortgages There are three types of reverse mortgages: single-purpose reverse mortgages, offered by some state and local government agencies and nonprofit organizations federally-insured reverse mortgages, known as Home Equity Conversion Mortgages (HECMs) and backed by the U. S. Department of Housing and Urban Development (HUD) proprietary reverse mortgages, private loans that are backed by the companies that develop them

Single-purpose reverse mortgages are the least expensive option. They are not available everywhere and can be used for only one purpose, which is specified by the government or nonprofit lender. For example, the lender might say the loan may be used only to pay for home repairs, improvements, or property taxes. Most homeowners with low or moderate income can qualify for these loans. HECMs and proprietary reverse mortgages are more expensive than traditional home loans, and the upfront costs can be high. Thats important to consider, especially if you plan to stay in your home for just a short time or borrow a small amount. HECM loans are widely available, have no income or medical requirements, and can be used for any purpose.

Before applying for a HECM, you must meet with a counselor from an independent governmentapproved housing counseling agency. Some lenders offering proprietary reverse mortgages also require counseling. The counselor is required to explain the loans costs and financial implications, and possible alternatives to a HECM, like government and nonprofit programs or a single-purpose or proprietary reverse mortgage. The counselor also should be able to help you compare the costs of different types of reverse mortgages and tell you how different payment options, fees, and other costs affect the total cost of the loan over time. To find a counselor, visit www.hud.gov/offices/hsg/sfh/hecm/hecmlist.cfm or call 1-800569-4287. Most counseling agencies charge around $125 for their services. The fee can be paid from the loan proceeds, but you cannot be turned away if you cant afford the fee.

How much you can borrow with a HECM or proprietary reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, and current interest rates. In general, the older you are, the more equity you have in your home, and the less you owe on it, the more money you can get. The HECM lets you choose among several payment options. You can select: a term option fixed monthly cash advances for a specific time. a tenure option fixed monthly cash advances for as long as you live in your home. a line of credit that lets you draw down the loan proceeds at any time in amounts you choose until you have used up the line of credit. a combination of monthly payments and a line of credit. You can change your payment option any time for about $20. HECMs generally provide bigger loan advances at a lower total cost compared with proprietary loans. But if you own a higher-valued home, you may get a bigger loan advance from a proprietary reverse mortgage. So if your home has a higher appraised value and you have a small mortgage, you may qualify for more funds.

Loan Features
Reverse mortgage loan advances are not taxable, and generally dont affect your Social Security or Medicare benefits. You retain the title to your home, and you dont have to make monthly repayments. The loan must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence. In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid. If youre considering a reverse mortgage, be aware that: Lenders generally charge an origination fee, a mortgage insurance premium (for federally-insured HECMs), and other closing costs for a reverse mortgage. Lenders also may charge servicing fees during the term of the mortgage. The lender sometimes sets these fees and costs, although origination fees for HECM reverse mortgages currently are dictated by law.

The amount you owe on a reverse mortgage grows over time. Interest is charged on the outstanding balance and added to the amount you owe each month. That means your total debt increases as the loan funds are advanced to you and interest on the loan accrues. Although some reverse mortgages have fixed rates, most have variable rates that are tied to a financial index: they are likely to change with market conditions. Reverse mortgages can use up all or some of the equity in your home, and leave fewer assets for you and your heirs. Most reverse mortgages have a nonrecourse clause, which prevents you or your estate from owing more than the value of your home when the loan is repaid. Because you retain title to your home, you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you dont pay property taxes, carry homeowners insurance, or maintain the condition of your home, your loan may become due and payable. Interest on reverse mortgages is not deductible on income tax returns until the loan is paid off in part or whole.

Getting a Good Deal If youre considering a reverse mortgage, shop around. Compare your options and the terms various lenders offer. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. That can help inform the questions you ask that could lead to a better deal. If you want to make a home repair or improvement or you need help paying your property taxes find out if you qualify for any low-cost single-purpose loans in your area. Area Agencies on Aging (AAAs) generally know about these programs. To find the nearest agency, visit www.eldercare.gov or call 1-800-677-1116. Ask about loan or grant programs for home repairs or improvements, or property tax deferral or property tax postponement programs, and how to apply.

All HECM lenders must follow HUD rules. And while the mortgage insurance premium is the same from lender to lender, most loan costs, including the origination fee, interest rate, closing costs, and servicing fees vary among lenders.
If you live in a higher-valued home, you may be able to borrow more with a proprietary reverse mortgage, but the more you borrow, the higher your costs. The best way to see key differences between a HECM and a proprietary loan is to do a side-by-side comparison of costs and benefits. Many HECM counselors and lenders can give you this important information.
PAGE #1238 - History of non-traditional lending and trends

History of Non-Traditional Lending and Trends An FDIC Outlook Breaking New Ground in U.S. Mortgage Lending Mortgage lending activity has been expanding in the United States for decades. The nation has seen a substantial increase in homeownership in just the past ten years, while the recent housing boom has further boosted the demand for mortgage credit. A series of historical legislative and regulatory changes in the 1970s and 1980s shaped the mortgage market, transforming it into a more competitive marketplace. The mortgage market has again been transformed in recent years as significant product innovation by lenders has expanded the supply of mortgage credit to meet the rising demand. Despite the rapid growth in credit volumes, mortgage loan performance among financial institutions insured by the Federal Deposit Insurance Corporation (FDIC) is favorable at present. Nevertheless, growth has not come without risk. Widespread marketing of non-traditional products could be raising the risk profile of some mortgage lenders and consumers. Growing unease about risk taking by lenders and consumers recently led bank regulators to propose new supervisory guidelines on risks of, and disclosures for, various mortgage products.

This article examines historical developments in mortgage loan volume and underwriting trends. It also assesses the significance of recent market and institutional innovations in light of historical trends, reviews mortgage loan performance trends, discusses the role of regulation, and considers the nearterm outlook for the mortgage lending cycle. A Look Back Government involvement has played a fundamental role in shaping the U.S. mortgage credit market. Historical legislative reforms intended to improve housing affordability and increase homeownership have been an important factor in a strong upward trend in mortgage loan volume. At the same time, history shows us that the volume and quality of mortgage credit exhibit cyclical patterns as economic and housing cycles further influence credit availability and performance. For example, periods of high interest rates and inflation during the late 1970s and early 1980s dampened mortgage growth.

Credit quality also deteriorated considerably during this time of economic stress. However, beginning in the late 1980s, mortgage credit volume grew significantly, and the dramatic upswing in mortgage volume since 2000 has been unprecedented. The housing boom in the early 2000s reflects the confluence of rising borrower demand, historically low interest rates, intense lender competition, innovations in the structure and marketing of mortgages, and an abundance of capital from lenders and mortgage securities investors. A look at historical milestones that helped define the current mortgage credit landscape will assist in understanding the evolution of the mortgage market.

Impact of Legislative Reforms Key influences on the U.S. mortgage credit cycle during the past century are legislative reforms and the mandates of certain government and quasi-government institutions. For example, the establishment of the Federal Home Loan Bank system in 1932 and the Federal Housing Administration in 1937 broadened borrower qualifications for mortgages and paved the way for the modern mortgage market. By the beginning of the 1980s, the mortgage market was delineated such that savings and loan associations (S&Ls) processed conventional mortgage loans, mortgage bankers originated government mortgage loans, and mortgage brokers handled the balance, including second mortgages and those with elevated credit risk. Before 1980, institutional lenders were subject to strict interest rate ceilings on their deposits, established by the Federal Reserves Regulation Q. This regulation provided for higher ceilings on thrift institution deposits than on commercial bank deposits, securing S&Ls funding advantage. The late 1970s inflationary environment opened an unsustainable gap between income generated by assets and short-term funding costs, thereby undermining S&Ls theoretical foundation that had provided economic stability for them in the past.

Further, as inflation soared, depositors fled from S&Ls to higher-yielding opportunities outside the regulated banking system. The resulting disintermediation helped set the stage for the enactment of the Depository Institutions Deregulation and Monetary Act of 1980, which mandated a six-year phase-out of the Regulation Q interest-rate ceiling and created the money market deposit to enable FDIC-insured institutions to compete with brokerage houses for wholesale funds. Although it helped S&Ls retain deposits, the elimination of Regulation Q ended their favored status in the U.S. mortgage market. The enactment of the Alternative Mortgage Transaction Parity Act in 1982 eliminated regulatory disparities between state- and federal-chartered mortgage banks by granting state-chartered institutions the authority to issue alternative mortgages, including the use of variable interest rates and balloon payments, regardless of state mortgage lending laws. This legislation increased the supply of mortgage credit. The Tax Reform Act of 1986 then stimulated demand for mortgage debt by retaining the deduction for home mortgage interest while eliminating the deduction for nonmortgage consumer debt, such as car loans and educational loans. The tax-deductible status of debt secured by homes made mortgage debt a more attractive after-tax financing option than nondeductible consumer debt.

Impact of Mortgage Securitizations Following the elimination of Regulation Q, control of the mortgage market shifted dramatically in the 1980s from savings institutions to banks and to federal government-sponsored enterprises (GSEs), which played a major role in the creation of mortgage-backed securities (MBS). These securitizations further opened the U.S. mortgage market to investors, introducing considerable new liquidity. By 2005, almost 68 percent of home mortgage originations were securitized. This reliance on securitization underscores its importance as a risk-management tool that allows lenders to shift mortgage credit risk and interest rate risk to investors who have greater risk tolerance.

A significant development in the mortgage securities market is the recent and dramatic expansion of
private-label MBS, which are securitized by entities other than the GSEs and do not carry an explicit or implicit guarantee. Total outstanding private-label MBS represented 29 percent of total outstanding MBS in 2005, more than double the share in 2003. Of total private-label MBS issuance, two-thirds comprised nonprime loans in 2005, up from 46 percent in 2003. With the increased exposure to private-label MBS and a large share of higher-risk nontraditional mortgages being securitized in this sector, investors appear willing to assume greater risk in their search for yield. Recent Innovations in Mortgage Products The U.S. mortgage market, which for decades was dominated by fixed-rate mortgages, now includes innovations such as nontraditional mortgages, simultaneous second-lien (or piggyback) mortgages, and no-documentation or low-documentation loans. Nontraditional mortgages allow borrowers to defer payment of principal and, sometimes, interest and include interest-only mortgages (IOs) and adjustable-rate mortgages (ARMs) with flexible payment options (also called pay-option ARMs, or POs).

Although perceived as fairly new, many of these loan types are a repackaging of existing products, marketed again in the 2000s in response to growing demand. For example, record-high fixed rates in the late 1970s and early 1980s stimulated innovation in the form of various types of ARMs. Some of todays pay-option ARMs are a reincarnation of negative amortization loans that were popular in the 1980s, but then fell out of favor in the early 1990s when rising interest rates and falling home prices in certain areas left some borrowers owing more than their homes were worth. Since 2003, strong home price appreciation and declining affordability have helped drive growing demand for nontraditional mortgage products that can be used to stretch home-buying power. Aided by new computer models and an easing in lending standards, many lenders have accommodated this demand by expanding the variety of nontraditional mortgage products offered while also extending loans to borrowers with less-than-stellar credit histories. As a result, by 2005, nonprime lending, comprised of subprime and Alt-A (low- or no-documentation) loans, accounted for about 33 percent of all mortgage loan originations, up from almost 11 percent in 2003.

Rapid growth also has occurred among some of the higher-risk mortgage alternatives within the nonprime arena. As recently as 2002, IOs and pay-option ARMs represented only 3 percent of total nonprime mortgage originations that were securitized. However, the IO share of credit to nonprime borrowers has soared during the past two years to 30 percent of securitized nonprime mortgages, while the pay-option product jumped to a similar share in less time. Furthermore, the low- or nodocumentation share of subprime lending has grown significantly since 2001, from about 25 percent to just over 40 percent. Lenders continue to diversify mortgage offerings as they compete to attract borrowers and accommodate prospective homebuyers financing needs. Many banks now offer 40-year mortgages, which are gaining in popularity as an alternative to IOs and pay-option ARMs. The extended amortization period reduces monthly mortgage payments, thereby stretching a buyers purchasing power, and allows equity to build from the first mortgage payment.

Risk Layering among Nontraditional Mortgage Products Raises Concerns Nontraditional loan products can be appropriate for financially savvy borrowers with low credit risk. Indeed, many of these products have been offered for years to such borrowers, and credit quality generally has been good. What has changed, however, is how these loans have been marketed and
used in recent years. Lenders have targeted a wider spectrum of consumers, who may not fully understand the embedded risks but use the loans to close the affordability gap. The degree to which mortgage market innovation, fueled by significant MBS liquidity, boosted home sales last year is unknown. Anecdotal evidence suggests that affordability and financing played a strong role in extending the volume component of the mortgage credit cycle last year. For example, there is a correlation between nontraditional mortgage loans and home price growth. An analysis of state-level data from Loan Performance Corporation shows the penetration of IOs and pay-option ARMs for nonprime borrowers into areas with strong price appreciation and reveals a strong positive relationship between the concentration of such loans and home price growth. This analysis illustrates the recent development of borrowers increasingly using IOs and pay-option ARMs to purchase homes they might not otherwise have been able to afford. A June 2006 study by Harvards Joint Center for Housing Studies also confirms this trend.

Analysts are concerned that higher-risk borrowers are more likely to be affected by a major payment shock during the life of their mortgage and may be more likely to default. Compounding this possibility is the fact that the increasing availability of mortgage credit is occurring at a time when mitigating controls on credit exposures have weakened. Evidence of loosening underwriting standards was noted in the Office of the Comptroller of the Currencys annual survey of credit underwriting practices at nationally chartered banks. A telling result of the 2005 survey was the significant extent to which banks had relaxed underwriting standards for home equity and first mortgage loans (notably, the first time in the surveys 11-year history that a net easing has been reported) by allowing lower minimum credit scores, reduced documentation in evaluating the applicants creditworthiness, and simultaneous second-lien mortgages. As a result, risk layering appears to have become more prevalent. For example, there is growing evidence of non-amortizing IOs and pay-option ARMs being made to borrowers with little or no documentation to verify income sources or financial assets. When one loan combines several such features, the total risk is heightened. The risk compounds in the case of a high loan-to-value ratio of a first-mortgage loan that is combined with a second-lien mortgage because, historically, as combined loan-to-value ratios rise, defaults have tended to rise as well.

Mortgage Loan Performance Trends Even in stressful times, mortgages have been among the best performing assets held by banks and thrifts. In the early 1990s, a time of serious dislocation in housing markets in California and the Northeast, FDIC-insured institutions reported exceptionally low net charge-off rates of less than 1 percent nationwide on home equity and residential mortgage loans compared to other loan types, ranging up to 12 percent for commercial and industrial loans. Mortgage charge-off rates barely budged during the 2001 recession, and large and small banks alike survived the recession with only a slight decline in credit quality.

In recent years, the combination of strong home price appreciation and a low interest rate environment has benefited homeowners and stimulated strong mortgage demand. FDIC-insured institutions are reporting exceptionally strong asset quality, and charge-off rates are at historic lows. On a quarterly basis, one-to-four family mortgage charge-off rates are in the single digits (in basis points) and considerably lower than in earlier stress periods. The loss rate also is well below historical averages. The same is true for home equity lines of credit (HELOCs), although this may in part reflect their rapid
growth of more than 40 percent during 2004. The sustainability of solid mortgage performance and historically low losses among FDIC-insured institutions is at the forefront of current industry analysis. How long can such favorable conditions last, especially in light of recent developments? There are growing signs that mortgage loan performance may have peaked. The increase in risk layering in residential mortgage lending as well as recent market and institutional developments support this perception. Lenders themselves exhibit modest concern about nontraditional mortgage loan quality, as reported in the Federal Reserve Boards quarterly survey of senior loan officers. Almost 41 percent of respondents believe credit quality on nontraditional loans is likely to decline in 2006, compared with 12 percent who view similar worsening in traditional mortgage loans.

Outlook for Nontraditional Mortgages The growing popularity of nontraditional products may have moved the mortgage credit cycle into uncharted territory. Industry analysts are uncertain how loans such as IOs and pay-option ARMs might perform in periods of rising rates or in stagnant housing markets. Recent media attention has highlighted the risk of payment shock when interest rates are adjusted, or reset, for IOs and hybrid ARM products. Despite favorable delinquency and default trends thus far, analysts fear that the current rising interest rate environment, combined with cooling home price appreciation, will limit borrowers options when they face large monthly payment increases. Homeowners who have not built up sufficient equity to either cover the cost of refinancing or pay down additional debt could face delinquency, particularly within the subprime markets.

A recent Fitch analysis warns that the payment shock associated with subprime IOs of 2005 vintage is strong even if rates do not rise. When rates do reset, these loans high margins and low initial rates will make the monthly payment increases significantly greater than the increase from principal. Despite favorable performance of previous years subprime IOs, the ratings agency expects subprime IO loan delinquency rates to increase, because those borrowers may not be able to keep up with payment increases, especially if the housing market softens. Although some analysts emphasize borrowers susceptibility to increasing monthly payments, others foresee a more balanced outcome. A national analysis of mortgage payment reset undertaken by First American Real Estate Solutions suggests that mortgages originated or refinanced before 2004 have built sufficient equity as a result of strong home price appreciation and are not as likely to default. This study also puts the volume of potential loss associated with interest rate resets into perspective, finding that the volume of ARM defaults is relatively small compared to overall mortgage originations. The majority of homeowners will not be significantly adversely affected by reset.

Regulatory Guidance for HELOCs and Nontraditional Products To address potential concerns associated with risk layering and changes in mortgage lending practices, federal bank regulators issued guidance in May 2005 on home equity lending and proposed guidance in December 2005 on nontraditional mortgages. While acknowledging that nontraditional IOs and payoption ARMs may benefit some borrowers, the proposed guidance targets lending to borrowers who qualify for loans according to initial minimum payments but who may have difficulty making future payments as a result of delayed or negative amortization. Furthermore, the proposed guidance addresses a number of specific issues - including product development, underwriting compliance, and
risk-management functionsto help lenders and customers address the uncertainty raised by nontraditional mortgage products.

Some lenders contend that the loans discussed in the proposed guidance are made only to borrowers with high credit scores and larger down payments. Comments also suggest that the guidance, as proposed, could penalize legitimate lenders and limit market competition. However, investors at a recent housing finance symposium did not share this view - MBS investors voiced concern about easing underwriting standards, calling them lax and too lenient, particularly in subprime markets where the weakest borrowers are choosing ARMs. These varied opinions aside, the challenges of todays complex mortgage market call for an approach that encourages sound underwriting without inhibiting innovation, which regulators recognize has created opportunities for millions of homeowners.

Conclusion The mortgage credit cycle has changed dramatically during the past several decades. More than other lending types, mortgage lending practices have been shaped by government influence and product innovation. More recently, rapid home price escalation has constrained housing affordability in many regions of the country, contributing to rising demand for non-traditional mortgages as borrowers try to maximize purchasing power. Mortgage originators have found ways to accommodate borrower demand, offering new mortgage products and extending loans further along the credit spectrum. These developments in the mortgage cycle have led to increased credit risk held by both homeowners, as they have sought to stretch affordability during an unprecedented housing boom, and by investors seeking yield. The benign credit landscape of recent years may have encouraged increased risk taking. Based on historical experience, and despite recent strong performance, a gradual rise in delinquency and foreclosure rates could occur over the next few years. Mortgage delinquencies are likely to increase over time as rising interest rates and the expiration of below-market teaser rates result in higher monthly payments for many borrowers.

Some households with limited financial assets, lower incomes, or an inability to refinance due to poor credit, lack of appreciation, or high leverage may not be able to accommodate these higher payments. Finally, if a recession or other severe economic shock were to send local home prices and incomes sharply lower, or interest rates sharply higher, this additional stress could contribute to higher mortgage losses. However, banks and thrifts will head into the next phase of the mortgage credit cycle from a position of strength. In recent years, the industry has generated record earnings and reached near-record capital levels. Given a gradual transition to higher delinquency and foreclosure rates and assuming only modest potential declines in collateral values, it does not appear at this time that deteriorating mortgage credit performance would present unmanageable risks to most FDIC-insured institutions.

In recent years, the combination of low interest rates and rapidly appreciating housing values resulted
in a surge of mortgage equity withdrawals. Mortgage debt grew by nearly $4 trillion from year-end 2000 to year-end 2005, with an estimated one-half of this growth resulting from the refinancing of existing mortgages. Many homeowners who refinanced were able to take advantage of the low mortgage interest rates, taking cash out and still reducing their monthly payments. A 2002 Federal Reserve survey found that approximately 25 percent of mortgage refinance funds were used to pay for consumer expenditures. The switch from consumer debt to mortgage debt is evident in that growth in home equity lines of credit (HELOCs) outstripped growth in credit card debt, even though the average interest rate for credit cards declined. Although growth in HELOCs continued to outpace that of credit cards, HELOC growth fell from 40 percent in 2004 to 8 percent in 2005. Rising interest rates and slowing home price appreciation may make home equity lending and cash-out refinancing less financially advantageous, which in turn could reinvigorate growth in other forms of consumer lending, such as credit cards.
PAGE #1258 - Rural and farm loans

Rural and Farm Loans The U.S. Department of Agriculture (USDA) makes direct and guaranteed operating and farm ownership loans to eligible farmers and ranchers. Under its direct operating loan program, USDA also makes loans to rural youth to establish and operate income-producing projects of modest size in connection with their participation in 4-H clubs, FFA, and similar organizations. Guaranteed loans are made through private lenders with a guarantee of up to 95 percent of the loss of principal and interest. Direct and guaranteed operating loans can be used to purchase livestock, equipment, feed, seed, and other material essential to a farm or ranch operation. Direct and guaranteed farm ownership loan funds may be used to purchase land, construct buildings, or make farm improvements. Guaranteed operating and farm ownership loans may also be used to refinance debt. USDA also provides assistance to beginning farmers and ranchers under its Direct Farm Ownership Down Payment Loan Program, and provides retiring farmers the opportunity to transfer their land to future generations of farmers and ranchers.

USDA also targets a portion of its direct and guaranteed operating loan and farm ownership loan funds to beginning farmers and ranchers and Socially Disadvantaged Applicants (SDAs). Emergency loans are available to established farmers and ranchers who have suffered losses as a result of a natural disaster or quarantine. The individual loan limits for each program are set by statute as follows: direct operating loan $200,000; direct operating loan-youth $5,000; direct farm ownership $200,000; direct farm ownership down payment $100,000; guaranteed operating loan and farm ownership $852,000 (adjusted annually for inflation); and emergency loans $500,000.

The Consolidated Farm and Rural Development Act (CONACT) of 1961 authorized direct operating loan and farm ownership assistance. The Rural Development Act of 1972, which amended the CONACT, authorized the agency to make guaranteed operating loans, as well as farm ownership, emergency, and youth loans. The targeting of SDA farm ownership loan funds was authorized under the Agricultural Credit Act of 1987, and the 1990 farm bill authorized the targeting of operating loan funds to SDA. The targeting of direct and guaranteed operating and farm ownership loan funds to beginning farmers and ranchers was authorized under the Agricultural Credit Improvement Act of 1992.
To be eligible for direct and guaranteed operating loan and farm ownership assistance, applicants must be a U.S. citizen or legal resident alien; be unable to obtain sufficient credit from other sources; not be delinquent on any Federal debt; have acceptable credit history, adequate collateral, and sufficient loan repayment ability; and meet other criteria.

Individuals requesting direct farm ownership assistance must have participated in the business operations of a farm or ranch for at least 3 years, but not necessarily have been the primary operator of the farm or ranch. To qualify for the Direct Farm Ownership Down Payment Loan Program, applicants must be beginning farmers and ranchers, provide a down payment of at least 10 percent of the purchase price, and meet all other direct farm ownership eligibility requirements. Concerning the loan targeting, beginning farmers and ranchers and SDAs must meet all basic loan program eligibility requirements. Beginning farmers and ranchers must have operated a farm or ranch for not more than 10 years, and if applying for a farm ownership loan, must not own farm property totaling more than 30 percent of the average farm acreage in the county, and meet all other eligibility requirements. SDAs include women, African Americans, Alaska Natives, American Indians, Hispanics, Asians, and Pacific Islanders.

To be eligible for emergency loan assistance, the applicants operation must be located in, or contiguous to, a county that has been declared a disaster area by the President or designated a disaster or quarantine area by the Secretary of Agriculture. The applicant must have suffered a qualifying production or physical loss as the direct result of a natural disaster or quarantine. An applicant must be unable to obtain credit elsewhere and must meet other eligibility criteria. To be eligible for a direct operating youth loan, an applicant must also be between 10 and 20 years old and live in a town of fewer than 10,000 people. The Farm Service Agency (FSA) farm loans have provided thousands of direct and guaranteed loans to farmers and ranchers who need aid with startup costs and other financial or technical assistance to maintain the profitability of their operations. Since FY 1994, FSA has provided more than $7.6 billion in direct and guaranteed loan funds to 87,660 beginning farmers and ranchers. From FY 2001 to FY 2005, FSA has provided more than $1.7 billion in loan funds to 19,996 SDA individuals.

General Opinions Expressed Participants generally expressed support to increase the guaranteed and direct operating and farm ownership loan limits. The general consensus was that the current direct loan limits have not been changed in many years and have not kept pace with inflationary changes that have occurred in the agricultural economy. Many asked to have the direct and guaranteed loan term limits abolished so producers have sufficient time to recover from financial hardships. Many expressed concerns about the complicated process of applying for FSA loan assistance. They routinely stated the loan process needs to be streamlined for simplicity. They also expressed concern that too much time elapses between application filing and loan closing.

Many participants expressed support for the beginning farmer loan program and helping beginning farmers. The general consensus was that funding needs to be increased. Low interest loans should be provided to young farmers under this program. Participants also supported added incentives to encourage new farmers to get into farming. Many said that better rates and terms should be provided to beginning farmers seeking agency loan assistance. Participants also expressed general support for the continuation of the FSA direct and guaranteed operating loan programs. Many commented that the programs should be expanded to allow loan funds to be used for custom farming, value-added crops, niche farming, and organic farming. Other commenters encouraged FSA to increase credit supervision to prevent misuse and abuse of its program loan funds.

Several comments were made concerning the continuation and improvement of the Rural Youth Loan Program. Participants expressed support for increasing the loan limit of the program. Some participants expressed a need for additional technical assistance and education programs for farmers and ranchers. The general consensus on this topic was that more management training is needed for farmers; minority farmers need increased opportunities for education and technical assistance; and more technical and business planning help is needed for farmers. Some participants expressed a need for increased outreach efforts and activities by FSA concerning the existence and availability of loan programs. Participants stated the agency does a poor job of informing the farming public regarding the availability of financial programs.

Some participants stated that FSA needs to do a better job of supporting minority and socially disadvantaged farmers, as well as small farmers. Some participants said that they had no confidence in the local FSA directors regarding receiving guaranteed loan assistance. General support was expressed for intergenerational transfer of assets and farm operations within families. Some want simplified methods of applying for conservation contracts and loan restructure which would preserve farm operations and prevent farmland from being lost to residential and industrial development. Many felt that relaxed recordkeeping requirements are needed. Leniency on bank loans due to rising energy costs was encouraged.
PAGE #1267 - References/Bibliography

References / Bibliography Comptroller of the Currency, www.occ.treas.gov Deshon Knoflicek, Real/Mortgage Broker, deshon@houstonassociates.com
Federal Deposit Insurance Corporation, www.fdic.gov Federal National Mortgage Association, www.fanniemae.com Federal Home Loan Mortgage Corporation, www.freddiemac.com Federal Emergency Management Agency, www.fema.gov The National Association of REALTORS The National Association of Professional Mortgage Women The National Association of Mortgage Brokers U.S. Department of Housing and Urban Development, www.hud.gov U.S. Department of Treasury, www.ustreas.gov Howard Walker, Attorney, hwalker@hwalker.com
HOMEWORK
PAGE #1269 - Final Thoughts

Practicing as a Loan Officer or Mortgage Broker is a huge responsibility. Consumers rely on you for: understanding; professionalism; and ethic standards. Be sure to continuously train and receive additional continuing education to advance your Mortgage Lending Career.
PAGE #1270 - Final Exam
EXAM PAGE
PAGE #1271 -
PROOF9
PAGE #1272 - Evaluation
EVAL
PAGE #1273 - Finished

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PAGE #0 - Getting Started

PAGE #1 - Course Name

PAGE #2 - Disclosure Notice

PAGE #3 - Course Purpose

PAGE #4 - Instructor Background and Contact Information

PAGE #5 - Course Description and Objectives

PAGE #6 - Requirements for text or other Course Materials

PAGE #7 - Policy and Course Completion Expectations, Attendance and Grading

PAGE #8 - End of course completion requirements

PAGE #9 - Instructions on moving through the course

PAGE #10 - Instructions on moving through the course

PAGE #11 - Lesson 1

PAGE #12 - Learning Objectives for Lesson 1

PAGE #13 - Basic understanding of Lending

PAGE #14 - Basic understanding of Lending

PAGE #15 - Basic understanding of Lending

PAGE #16 - Basic understanding of Lending

PAGE #17 - Basic understanding of Lending

PAGE #18 - Basic understanding of Lending

PAGE #19 - Basic understanding of Lending

PAGE #20 - Basic understanding of Lending

PAGE #21 - Baloon mortgage

PAGE #22 - Blanket Loan

PAGE #23 - Bridge Loan

PAGE #24 - Equity Loan

PAGE #25 - Graduated payment mortgage loan

PAGE #26 - Hard money loan

PAGE #27 - Hard money loan

PAGE #28 - Jumbo mortgage

PAGE #29 - Jumbo mortgage

PAGE #30 - Jumbo mortgage

PAGE #31 - Jumbo mortgage

PAGE #32 - Package loan

PAGE #33 - Reverse mortgage

PAGE #34 - Reverse mortgage

PAGE #35 - Reverse mortgage

PAGE #36 - Reverse mortgage

PAGE #37 - Reverse mortgage

PAGE #38 - Reverse mortgage

PAGE #39 - Reverse mortgage

PAGE #40 - Reverse mortgage

PAGE #41 - Reverse mortgage

PAGE #42 - Wraparound mortgage

PAGE #43 - Wraparound mortgage

PAGE #44 - Negative amortization loan

PAGE #45 - Negative amortization loan

safer in a falling rate market and riskier in a rising rate market.

PAGE #46 - Negative amortization loan

PAGE #47 - Hybrid

PAGE #48 - Negative amortization loan

PAGE #49 - Negative amortization loan

PAGE #50 - Negative amortization loan

PAGE #51 - Non-conforming mortgage

PAGE #52 - Loan to value and downpayments

PAGE #53 - Value

PAGE #54 - Payment and debt ratios

PAGE #55 - Standard or conforming mortgages

PAGE #56 - Capital and interest

PAGE #57 - Interest only

PAGE #58 - No capital or interest

PAGE #59 - Foreclosure and non-recourse lending

PAGE #60 - US mortgage process

PAGE #61 - US mortgage process