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Real Estate Finance: Chapter 6 Financial Agencies and Lending Programs

Terms in this set (48)


Department of Housing and Urban Development; regulates FHA and GNMA.

Under President Johnson, the Department of Housing and Urban Development (HUD) was given cabinet status in 1965.

It consolidated a number of older federal agencies.

HUD is the federal agency responsible for national policy and programs that address America's housing needs, improve and develop U.S. communities, and enforce fair housing laws.

HUD's mission is to help create a decent home and suitable living environment for all U.S. citizens.

HUD's primary activities include:

1. Supervising the Federal Housing Administration (FHA)
2. Directing Ginnie Mae
3. Directing development block grants
4. Enforcing fair housing and RESPA regulations
5. Managing the Housing Choice Voucher Program (formerly Section 8 Housing)
6. Regulating interstate land sales registration, urban renewal, and rehabilitation programs
7. As part of the Housing and Economic Recovery Act of 2008 (HERA), HUD has authorized a Neighborhood Stabilization program designed to reduce sources of abandonment and blight. Funds are provided to acquire and redevelop foreclosed properties.

One of the important functions of HUD is to provide information on home ownership to the public.

The HUD Web site is a tremendous resource for the public and for real estate practitioners.

The introductory page, "Homes and Communities," guides the visitor to numerous other pages offering detailed information on home mortgages lending, FHA loan guidelines, and sources for home ownership education and counseling.

The HUD Strategic Plan for 2006-2011 emphasizes the following strategic goals:

1. Increase home ownership opportunities
2. Promote decent affordable housing
3. Strengthen communities
4. Ensure equal opportunity in housing
5. Embrace high standards of ethics, management, and accountability.
After settlement the loan servicer must deliver an annual escrow loan statement to the borrower.

This document enumerates all escrow deposits and payments during the past year.

It indicates any shortages or surpluses in the escrow account and informs the borrower how to remedy them.

If the loan service is transferred to another servicer, a servicing transfer statement is delivered to the borrower.

Ex. Consider Sam Smit˙ w˙ø recently represented Ann Jones as her buyer agent for the purchase of a new town house. Sam recommended 3 different loan officers for Ann to contact regarding obtaining a home mortgage loan. Ann picked Jim Brown and was very happy with him until this morning when she received a truth-in-lending statement in the mail. She immediately called Sam, obviously very upset, saying: "You and Jim both assured me that I was getting a 6.5% loan and that I was going to be able to borrow $200,000. Today I get this statement in the mail saying that the interest rate will be 6.82% and that I'm only borrowing $194,000! Now I don't know what or who to believe!"

This is not an uncommon reaction to receipt of a truth-in-lending statement.

Fortunately, Sam has dealt with this many times before and was quickly able to calm Ann down.

He then explained to her that the Truth in Lending Act requires the lender to disclose exactly how much they are earning on the loan, including any loan fees and discount points that may have been charged.

Because there were 3 points on this $200,000 loan the lender only sends a check for $194,000 to the settlement table (they receive the other $6,000 in points, paid by the buyer, seller, or both).

When the discount points and additional loan fees of $500 are calculated, the lender's actual yield becomes 6.82%.

It's a Title VII of the Consumer Protection Act.

If prohibits lenders from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, or dependency on public assistance.

The basic provisions of the act include the following:

1. The lender may not ask if the applicant is divorced or widowed. However, the lender may ask if the borrower is married, unmarried, or separated. The term unmarried denotes single, divorced, or widowed person and, in a community property state, is of particular interest to local lenders.

2. The lender may not ask about the receipt of alimony or child support unless the borrower intends to use such income to qualify for the loan. The lender may ask about any obligations to pay alimony or child support.

3. The lender may not seek any information about birth control practices or the childbearing capabilities or intentions of the borrower or co-borrower.

4. The lender may not request information about the spouse or former spouse of the applicant unless that person will be contractually liable for repayment of the couple lives in a community property state.

5. The lender may not discount or exclude any income because of the source of that income.

6. The lender must report credit information on married couples separately in the name of each spouse.

7. The lender MAY ask about the race or national origin of the applicant, but the borrowers can refuse to answer without fear of jeopardizing their loan.

The ECOA also prohibits lenders from discriminating against credit applicants who exercise their rights under the turth-in-lending laws.

Lenders and other creditors must inform all rejected applicants in writing of the principal reasons why credit was denied or terminated.

The focus of the ECOA is to ensure that all qualified persons have equal access to credit.

Both the Justice Department and HUD are charged with protecting borrowers from discrimination in lending practices under the fair housing laws and ECOA.

An example of ECOA's effectiveness is the case against Chevy Chase Federal Savings Bank in Washington DC, which was accused of violating the racial discrimination standards.

The bank denied all allegations but agreed to invest $11 million to open at least one new branch in an African American area of the city.

The bank also agreed to provide eligible borrowers discounted interest rates and grants equaling 2% of the loan down payment.
The rules and regulations of the Civil Rights Act (Title VIII -- Fair Housing) effective December 31, 1968, and amended, are of significance to finance students.

Upheld by the U.S. Supreme Court decision in Jones vs. Mayer (392 U.S. 409 88 S.C.T.2186 20 L.Ed.2d 1189), this act is designed to eliminate discrimination in the sale or rental of housing based on race, color, sex, or national origin.

Single-family homes sold without the services of a real estate broker or single-family homes rented by an owner who doesn't own more than three such houses at the same time -- as well as rooming houses for not more than four families where the owner resides on the property -- are exempt from the provisions of the act.

These exemptions do not indicate that the government sanctions discrimination under any circumstances.

The 1989 amendments expanded the act to include protection against discrimination of the handicapped and families with children.

The law now extends fair housing protection to both the mentally and physically handicapped.

It specifically excludes persons who would pose a direct threat to the health and safety of others.

The law stipulates that apartment buildings with four or more units and public buildings are to be made accessible to persons in wheelchairs.

In buildings with no elevators, only first-floor units are covered by the provisions.

All doorways and hallways in the building, as well as individual units, must be wide enough to allow passage by wheelchairs.

Light switches, electrical outlets, and other controls also must be wheelchair accessible.

Bathroom walls must be reinforced to accommodate the installation of grab bars, and kitchens and bathrooms must be designed to allow free mobility for the handicapped.

The law also extends fair housing coverage to families with children younger than 18, including pregnant women.

As a result of this expansion of the law, all-adult communities are banned except:

1. Those that operate specifically for the elderly under state or federal programs

2. Projects in which all residents are at least 62

3. Retirement housing in which at least 80% of the units are occupied by at least one resident who is 55 and if special services and facilities are provided for the elderly

Although the Fair Housing Act is a federal law and under the jurisdiction of HUD, its implementation is generally left to the individual states that have inaugurated their own open housing regulations.

These state laws are usually broader in scope than the federal law, and many include prohibitions against discrimination in the financing and appraising of property as well as in leasing and selling.

When a problem occurs under the open housing laws, a complaint is filed with the local commissioner, who investigates accordingly.

The commissioner attempts to solve the problem amicably and without litigation.

If a suit is necessary, it is initiated by the complainant in the appropriate state or federal court.

The U.S. Attorney General's office may bring an action for injunctive relief in the federal court having jurisdiction over the dispute.

A complainant can generally expect an answer to a locally filed action with 30-days. If filed at the federal court level, an answer will be presented within 100-days.

Violators who refuse to obey the orders of the court are held in contempt and fined or sent to prison for up to six months.

Person found guilty of bringing false charges or complaints with "willful intent" to falsify are subject to 5-years imprisonment or a fine.
The Unruh Civil Rights Act (Civil Code Section 51) requires the elimination of discrimination in "accommodations, facilities and services in all business establishments of every kind whatsoever..."

Discrimination applies to sex, race, color, religion, ancestry, national origin, persons with disabilities, and families with children.

The validity of this act has been upheld in the courts and it applies to all real estate activities in the state.

Real estate brokers and their salespersons who deny full and equal representation to clients and customers are liable for the offense and must remit actual damages suffered plus a fine.

The California Fair Employment and Housing Act (Government Code Section 12900), which is an expanded version of the Rumford Act, parallels the Unruh Act.

The provisions of this act apply not only to some private owners of businesses and real estate, but also to real estate brokers and their salespersons, other agents, and financial institutions.

This law prohibits discrimination in supplying housing accommodations as rentals, sales, leasing, or financing.

Complaints should be directed to the Department of Fair Employment and Housing, and actions are brought in the Superior Court.

If a violation is declared, the commissioner may order payment of punitive damages.

The law exempts only rental to one roomer or boarder in a single-family house.

The California Bureau of Real Estate under its Business and Professional Code, Section 10177(1), specifies a cause for disciplinary action to be the inducement of the sale, lease or listing for sale or lease of a residential property on the grounds, wholly or in part, of loss in value, increase in crime or decline in the quality of the schools due to the present or prospective entry into the neighborhood of a person or persons of another race, color, religion, ancestry or national origin."
Federal Usury Laws.

Usury is defined as the charge of an excessive rate or amount of interest.

Historically, the Church of England established usury rates above which it was unconscionable to charge for a loan.

When early banking regulations were established in the United States, this awareness for citizens' interest was adopt by many of the states.

Some placed specific limitation on interest for real estate loans.

Others allowed the rates to float freely in the marketplace, conditions that continued for decades.

Those that stipulated ceilings that were less than market rates found that they were hurting the very people whom they were trying to help.

In order to make loans at low interest rates, lenders were forced to charge high placement fees and points at a loan's inception to raise the yields to acceptable levels.

This placed heavy cash burdens on the borrowers.

When some legislatures blocked this effort to raise yields by including front-end charges in the interest rate, the monies left those states with low usury rates to find more profitable areas for investment.

To relieve this problem, Congress passed the Deregulation Act in 1980 and the Garn-St.

Germain Bill in 1982 that stipulated that the laws of any state limiting the rate of interest would not apply to loans issued for purchasing a house, condominium, cooperative apartment, or a manufactured home.

These loans would have interest rates set by the market.

Most states have followed the lead established by this bill and have updated their usury laws.
CalHFA Programs:

Established in 1975, CalHFA was chartered as the state's affordable housing bank to make low interest rate loans through the sale of tax-exempt bonds for eligible first-time homebuyers.

Periodically they also offer down payment assistance programs.

A completely self-supporting state agency, bonds are repaid by revenues generated through mortgage loans, not tax-payer dollars.

CalHFA's loan requirements include:

1. Be a first-time homebuyer (not having owned and occupied a home in the past 3-years)

2. Live in a targeted area: Census tract in which 70% or more of the families have incomes at or below 80% of the state median family income or are in a Federally designated "Target Area"

3. Have an annual household income within CalHFA's guidelines for the county the home is located

4. Purchase a home within CalHFAs price limits based on family size and county home is located

5. Occupy the home as primary residence

6. Meet credit and income requirements of the CalHFA lender and the mortgage insurer

7. Citizen or other national of the United States or a qualified alien

8. Complete a homebuyer education counseling course through an approved organization

On May 4, 2009, CalHFA announced it would continue programs that offer down payment assistance to first-time homebuyers and support local communities to promote affordable housing.

They offer the California Homebuyer's Down Payment Assistance Program, which provides loans of up to 3% of a home's value to assist with down payment and/or closing costs.

Conditional grants for buyers of new construction are available through the School Facility Fee Down Payment Assistance Program.

They have made commitments to the Residential Development Loan Program, which provides local communities with funds to promote infill development for affordable, owner-occupied housing.

CalHFA doesn't lend money directly to consumers.

CalHFA works through and uses approved private lenders to qualify consumers and to make all mortgage loans.

CalHFA then purchases closed loan that meet CalHFA's requirements.

The fees consumers pay could be different depending on the lender and the program.