Real Estate Finance: Chapter 4 Noninstitutional Lenders

Nonistitutional Lenders

The second source of fund for real estate finance.
This heterogeneous group is composed of real estate mortgage brokers and bankers, real estate mortgage and investment trusts, real estate bond dealers, endowment fund managers, private loan companies, and

*Mortgage Brokers and Bankers

Financial intermediaries sometimes lack the capacity to expand beyond their local markets.
However, various commercial and savings banks do accumulate assets that exceed local needs. When this occurs, these institutions look to the regional and national m

Mortgage Brokers

Agent who joins borrower and lender for a real estate loan, thereby earning a placement fee. A borrower seeks the services of a mortgage broker to help secure the appropriate financing for a specific realty property.
Scrappy entrepreneurs and sales repres

National Association of Mortgage Brokers

Based in Washington DC.
The trade organization for mortgage brokers.
Emphasizing adherence to a strict code of ethics, this association promulgates a full range of educational programs for its members.
It promotes the licensing in all states of mortgage b

California Association of Mortgage Brokers

(CAMB)
Established in 1990 by mortgage professionals.

Mortgage Bankers

(Mortgage Companies according to California Bureau of Real Estate)
(Correspondents)
They manage real estate loans.
Financial intermediary who originates new mortgage loans, collects payments, inspects the collateral, and forecloses, if necessary.
Mortgage

Mortgage Lenders

Investors.

Mortgage Companies

Businesses designed to lend money on real or personal property.

Correspondents

A mortgage banker.
Not only originate new loans, but also collect payments, periodically inspect the collateral and supervise a foreclosure, if necessary.

Mortgage Bankers: Development

Mortgage banking was born when an individuals, maybe a lawyer, or perhaps, a real estate broker, arranged to lend money to a client to enable a real estate transaction to be closed.
This loan originator then sold the mortgage to another client who desired

Balloon Payment

The final payment of a partially amortized loan that is considerably larger than the required periodic payments.

Refinancing Process

Allows the lender an opportunity to take another look at the borrower's financial position, reinspect the physical conditions of the collateral property, adjust the interest to current market rates, and charge a new loan placement fee.

Federal Housing Administration

(FHA)
Formed in 1934.
FHA mortgage insurance program removed many of the risks previously involved in lending money for real estate mortgages.
The FHA encouraged hesitant lenders to reenter the real estate field by advancing a system of standardized crite

Mortgage Bankers: Operation

Mortgage banking is not traditional banking.
There are no tellers, cashiers, checking accounts, savings accounts, safe deposit boxes, or depositors.
Mortgage bankers are real estate loan administrators.
Some banks and bank holding companies own subsidiary

Mortgage Bankers: Servicing a Loan

Once a loan is closed, arrangements must be made to service it.
Principal and interest payments need to be collected in a timely manner and accurate records must be kept.
Some loan payments include amounts for property taxes and insurance.
The servicing a

Mortgage Bankers: Assignment of Loan

The servicing of real estate loans by financial institutions was the task of the lenders themselves because they maintained ownership of the securities.
This relationship has changed as the originators of loans have found it more expedient to sell these s

Mortgage Bankers: Activities

Mortgage bankers maintain a high community profile, taking active roles in social, political, and humanitarian efforts within their geographic regions.
They cultivate friendships with local land developers, builders, and real estate brokers in order to es

Line of Credit

An amount stipulated by a commercial bank to an active customer on an annual basis.
Must be brought to zero on an agreed upon regular date.

Warehousing

Guaranteeing for a specified time and fee, that funds will be available under certain terms and conditions; assembling into one package a number of mortgage loans, which the correspondent has originated, in anticipation of sale in the secondary market.

*Real Estate Trusts

Designed to provide vehicles by which real estate investors can enjoy the special income tax benefits granted to mutual funds and other regulated investment companies.
Unlike regular corporations, whose earning are taxed at the corporate level and again a

Investment Conduits

Real Estate investment trust; an unincorporated trust, set up to invest in real estate, that must have at least 100 investors; management, control, and title to the property are in the hands of trustees.

Real Estate Investment Trust

(REIT)
Real Estate investment trust; an unincorporated trust, set up to invest in real estate, that must have at least 100 investors; management, control, and title to the property are in the hands of trustees.
Designed to deal in equities, REITs are owne

Real Estate Mortgage Trust

(REMT)
A trust dealing in financing investments rather than in owning them.
Real estate mortgage trust; similar to REIT, but investment is made in mortgage securities rather than in real estate.
More significant to real estate finance are the REMTs.
Attra

Combination Trust

A trust that participates in real estate investments as both financier and investor.

Balanced Trust

A trust that participates in real estate investments as both financier and investor.

*California Syndication

Syndicates can take the form of a corporation, a full partnership, or, the most popular, a limited partnership.
A typical syndicate combines the money of the individual investors with the management expertise of a sponsor, known as the general partner, an

Syndicate

An organization of investors who pool their capital to make a real estate investment.

General Partner

In a limited partnership, the individual or company acquiring, organizing, and managing the investment.

Blue-Sky Provision

Requiring full disclosure of all risks in a limited partnership solicitation under the Uniform Partnership Act.

Limited Partner

In a syndicate or regular partnership, the owners other than the general partners.
Liability in limited to the amount of their investment.

Limited Liability Company

(LLC)
A form of business organization with limited liability.
It avoids the restriction of limited partnership and is taxed like a partnership.

*Real Estate Bonds

Bonds can be used to secure funds for financing real estate projects in two distinct ways.
1. The issuance and sale of mortgage bonds by business firms, usually corporations, as means of raising capital.
2. The issuance and sale of municipal, county, or s

Municipal Bonds

Bonds issued for purposes of financing public improvements, such as schools, parks, and renewal projects.

Nature of Bonds

Corporate bonds are credit instruments used to raise long-term funds.
When these bonds are backed by a mortgage on specifically described real property, they are call secured bonds.
When a company issues bonds that are a claim against its general assets,

Secured Bonds

When these bonds are backed by a mortgage on specifically described real property.

Debentures

(Unsecured bonds)
Bonds issued without any specific collateral pledge but secured by the general assets of the issuer.

Bearer Bonds

Coupon bonds have interest coupons attached, which are removed as they become due and are cashed by the bearer.
Interest is paid to the person possessing the coupon.

Registered Bonds

Issued to a specific owner and cannot be transferred without the owner's endorsement.
Under this form of bond, interest is paid to the last registered owner.

Registered Coupon Bonds

Registered coupon bonds have only the face amount of the bonds, the principal amount, registered.

Uses for Bond Issues

Designed to attract small investors into large investment pools, bonds were issued to finance office buildings, apartment projects, and commercial developments.
The bonds were repaid from the flow of rents coming from these income properties and were a po

Municipal Bonds & Private Bonds

A more popular use for real estate bonds is to finance municipal improvement projects.
By issuing general obligation bonds guaranteed by the taxing power and full faith and credit of the community, governments can raise funds for financing schools, street

General Obligation Bonds

Public improvement bonds to be paid from property taxes.

Revenue Bonds

Bonds that pay interest from specified revenue sources (e.g., airports, school districts, counties, toll-road authorities, and governmental bodies)

Industrial Revenue Bonds

Bonds issued for developing an industrial park or for constructing a building for lease to commercial tenants.

Industrial Development Bonds

A bond that allows private investors to finance apartment and commercial developments by using tax-exempt, inexpensive funds.
TRA'86 imposed severe restrictions on this financing technique.
Unlike industrial revenue bonds, which are issued by a municipali

Mortgage Revenue Bonds

A type of industrial development bond that is offered by state and local governments through their housing financing agencies and is tax-exempt.
A form of industrial development bond.
The bond issue is tax-exempt because it is offered by state and local g

Zero Coupon Bonds

(Zero treasuries)
A single-payment bond that grows to its face value over a prescribed time period at a specified interst rate.
All interim compound interest is tax-deferred until the bond is cashed.
Represent an old approach to bond buying that has been

Mortgage Loan Bonds

Some states issue income-tax-free bonds to secure funds for relatively low-cost mortgage loans.
These loans are available to eligible persons to help them acquire homes and condominium apartments.
The interest income from these bonds is tax-exempt at both

California Bonds

Community Redevelopment Agencies (CRAs) are authorized under the Community Redevelopment Law (Health and Safety Code, Section 33,000) to carry out redevelopment programs at the local level.
CRAs can finance projects by issuing general obligation bonds.
CR

*Endowment Funds

Endow means to provide with a permanent fund of source of income.
A myriad of educational institutions and research foundation enjoy the earnings from endowment funds established by generous donors.
The basic quality of an endowment is its permanence, wit

*Private Loan Companies

Privately owned loan companies are found throughout the U.S.
Ranging from large national companies with branches in almost every city to individual entrepreneurs who may personally buy and sell loans, these private lenders deal primarily in junior financi

Truth in Lending

(Regulation Z)
Truth-in-lending provision that requires lenders to reveal the actual costs of borrowing.

Rescission

Agreement to cancel the contract, enforceable only if both parties have some performance remaining (otherwise no consideration)

*California Real Property Loan Law

Under Article 7, Chapter 3 of the California Real Estate Law, a real estate broker or mortgage broker is limited in the amount of commission and fees that can be charged for making or arranging a hard money loan.
A hard money loan s an equity loan and not

*Individuals

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Sellers as Lenders

Sellers participate in the finance market by financing a portion of the sales price with carryback loans.
Using junior loans, land contracts, wrap-arounds, and other creative financing devices, sellers frequently agree to help finance some of the property

Families as Lenders

Family members also participate as lenders on real estate.
Frequently, they provide the cash necessary for the down payment and closing costs toward the purchase of a residence or investment property.
Sometimes, to allow the buyer to secure the loan, fami

Cosigners

Additional signers to a financial agreement adding their guarantees to that of the borrowers.

Other Lenders

Various foreign sources of funds for real estate financing activities in our country have not yet been clearly identified.
The oil-producing countries of the Middle East and North Africa have billions of dollars on deposit in U.S. banks.
These monies subs