Essentials of Real Estate Finance

Fourteenth Edition

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Essentials of

Real Estate Finance

David Sirota, PhD ? Doris Barrell, GRI, DREI, CDEI

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This publication is designed to provide accurate and authoritative information

in regard to the subject matter covered. It is sold with the understanding that the

publisher is not engaged in rendering legal, accounting, or other professional

advice. If legal advice or other expert assistance is required, the services of a

competent professional should be sought.

President: Dr. Andrew Temte

Chief Learning Officer: Dr. Tim Smaby

Executive Director, Real Estate Education: Melissa Kleeman-Moy

Development Editor: Kari Domeyer

ESSENTIALS OF REAL ESTATE FINANCE FOURTEENTH EDITION

?2015 Kaplan, Inc.

Published by DF Institute, Inc., d/b/a Dearborn Real Estate Education

332 Front St. S., Suite 501

La Crosse, WI 54601

All rights reserved. The text of this publication, or any part thereof, may not be

reproduced in any manner whatsoever without written permission from the

publisher.

Printed in the United States of America

ISBN: 978-1-4754-2839-1 / 1-4754-2839-1

PPN: 1557-1015

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Contents

I

2

Preface

Acknowledgments

Contributors

vii

ix

ix

The Nature and Cycle of Real Estate Finance

1

The Nature of Real Estate Finance

Mortgage Lending Activities

Real Estate Cycles

Impact of the Financial Crisis

Summary

Internet Resources

Review Questions

2

4

9

15

15

16

18

Money and the Monetary System

What Is Money?

The Federal Reserve System (the Fed)

Instruments of Credit Policy

The U.S. Treasury

The U.S. Mint

The Federal Deposit Insurance Corporation (FDIC)

The Federal Home Loan Bank (FHLB) System

Summary

Internet Resources

Review Questions

19

20

22

24

30

32

33

34

34

35

36

iii

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iv

3

Essentials of Real Estate Finance Fourteenth Edition

Additional Government Influence

U.S. Department of Housing and Urban Development (HUD)

Consumer Financial Protection Bureau

Significant Federal Legislation

State and Local Programs

Agricultural Lending

Summary

Internet Resources

Review Questions

4

The Secondary Mortgage Market

Major Participants in the Secondary Market

The Government-Sponsored Enterprises (GSEs)

Fannie Mae

Freddie Mac

Ginnie Mae

Federal Home Loan Bank (FHLB)

Farmer Mac

Real Estate Mortgage Investment Conduits (REMICs)

Summary

Internet Resources

Review Questions

5

Sources of Funds: Institutional, Non-Institutional, and

Other Lenders

Commercial Banks

Mutual Savings Banks

Savings Associations/Thrifts

Life Insurance Companies

Pension and Retirement Programs

Credit Unions

Mortgage Brokers and Bankers

Real Estate Trusts

Real Estate Bonds

Private Lenders

Foreign Lenders

Summary

Internet Resources

Review Questions

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37

38

42

44

48

50

51

52

54

55

56

58

60

64

66

67

68

68

68

69

71

72

73

75

76

77

78

78

79

82

84

88

90

90

92

93

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Contents

6

7

8

Instruments of Real Estate Finance

95

Encumbrances and Liens

Loan Secured by a Real Estate Interest

The Note and Deed of Trust (Trust Deed)

Note and Mortgage

Contract for Deed (Land Contract)

Junior Finance Instruments

Special Provisions in Mortgage Lending Instruments

Summary

Internet Resources

Review Questions

96

97

100

101

106

108

110

114

116

117

Real Estate Financing Programs

119

Interest

Types of Loans

Private Mortgage Insurance

Refinancing Existing Conventional Loans

Subprime and Predatory Lending

Variations in Formats

Participation Agreements

Tax Impacts in Mortgage Lending

Summary

Internet Resources

Review Questions

120

124

133

135

138

142

147

150

154

154

156

Government Loans

Federal Housing Administration (FHA)

FHA-Insured Loan Program

FHA Contributions to Real Estate Finance

VA Loan Guarantee Program

Additional VA Loan Programs

Summary

Internet Resources

Review Questions

9

Processing Real Estate Loans

Qualifying the Borrower

Qualifying the Collateral

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v

158

159

160

172

173

181

182

183

184

186

188

195

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