REAL ESTATE FINANCE
By Michael Lustig
Copyright 2011 Real Estate License Services, Inc.
Smashwords Edition
REAL ESTATE FINANCE
Textbook and Student Workbook, Combined
Course
by Corespondence.
For Qualification For a California Real Estate
Broker
License or to Extend a California Real Estate Sales
License (D.R.E.Approval #1223-90)
New Department of Real Estate Rules Allow You to Avoid All Quizzes and to Go Straight to Your Final Exam, Which is Open Book! You May Suggest Your Own Test Administrator Also! For Details, Please Turn This Page and Read the Student Instructions/General Information Page.
REAL
ESTATE LICENSE SERVICES
5059 Newport Avenue, #209
San
Diego, CA 92107
(619) 222-2425
Includes “Student Instructions,” Quiz Questions and Answers, and Page References for the Quiz Questions for the Course “Real Estate Finance.” Please Read and follow the complete “Student Instructions” just after this page.
Copyright 2011, 2003, 2000, 1991, 1990, 1989, 1988, 1987, 1983 Real Estate License Services, Inc. Copyright registered. All rights reserved. No part of this material may be reprinted, reproduced, transmitted, stored in a retrieval system, placed in a computer or on the Internet, or otherwise utilized, in any form or by any means electronic or mechanical, including photocopying or recording, now existing or hereinafter invented, nor may any part of this course be used for teaching without permission from the copyright holder.
STUDENT INSTRUCTIONS/GENERAL INFORMATION
The California Department of Real Estate DOES NOT REQUIRE COMPLETION OF QUIZZES OR ESSAYS PRIOR TO YOUR FINAL EXAM. Study the "Written Assignment" questions based on the chapter readings as well as the answers with page references that are on the following page. YOU DO NOT NEED TO SEND IN ANY "WRITTEN ASSIGNMENT" ANSWERS. To complete this course, just study the practice questions and answers, take the final exam online or on paper and, if on paper, make sure the final exam question sheets and completed Scantron answer forms are returned to us along with the completed "Certification of Test Administrator." THE FINAL EXAM IS OPEN BOOK. If you have any questions, please call (619) 222-2421.
1) This course consists of text reading and a final examination.
2) Practice questions ("Written Assignments") covering most of the chapters in the book are based on the text reading in each chapter. Answers to those practice questions (with page references) are included for your convenience and may be found on the page after this page. The "Written Assignments" are for your practice only. NO QUIZ QUESTIONS ARE REQUIRED PRIOR TO YOUR FINAL EXAM.
3) The minimum time limit to complete one course is 20 days from the date of enrollment. The maximum time limit to complete one course is six (6) months from the date of enrollment. Two three (3) month extensions may be obtained (see section below on Extensions and Re-enrollments). Under no circumstances can your enrollment last beyond twelve (12) months.
FINAL EXAMINATION: When you are ready to take the final test, please fill out the form "Request To Take Final Exam." You may mail it to Real Estate License Services, 5059 Newport Ave., #209, San Diego, California 92107, or fax to (619) 222-8593. Real Estate License Services will arrange for your final examination online or with a test administrator. If your final exam is not online, you may suggest who your test administrator will be. The examination consists of 100 multiple choice questions and you must complete it within 150 minutes (2.5 hours). When you finish the test, If your final exam is not online, turn it in to the test administrator, who will mail it to Real Estate License Services. The questions used for the final exam must be mailed to Real Estate License Services along with the answers.
GRADING OF THE FINAL EXAM AND ISSUING OF CERTIFICATES: A passing grade is based on a minimum passing score of 60% on the final examination. Only the final examination grade is used in determining the student's overall grade. Students will be assigned a letter grade, but the grading system reflects the 60% passing requirements.
% OF POINTS = GRADE
100% - 90% = A
89% - 80% =
B
79% - 70% = C
69% - 60% = D
59% - 0%
= Fail. In this case the course would have to be repeated and passed
in order to receive credit.
An official certificate of your course grade will be mailed to you within two weeks after receipt of your completed final examination if taken with a test administrator. Additional certificates are $15.00 each.
REFUNDS: Students may apply in writing to REAL ESTATE LICENSE SERVICES, mailing address, 5059 Newport Ave., #209, San Diego, California 92107 within 15 days from the date of enrollment and cancel and receive a refund for the full tuition. All REAL ESTATE LICENSE SERVICES materials must be returned in good condition at the time of cancellation; the materials should not be soiled, torn or marked upon. Refunds are not allowed if any work has been submitted.
EXTENSIONS AND RE-ENROLLMENTS: If the course has not been completed within six (6) months of enrollment, the student may receive an extension of three (3) months by paying an extension fee of $35.00. If at the end of that three month extension the student still has not completed the course, a second three (3) month extension may be obtained by paying an additional fee of $30.00. IN NO CASE MAY THE PERIOD OF ENROLLMENT EXTEND BEYOND TWELVE (12) MONTHS. If the student has not completed the course within 12 months from the original date of enrollment, the enrollment expires and no further extensions are allowed. The student must re-enroll and begin the course over again in order to complete the course. The student may re-enroll under such circumstances for a discounted re-enrollment of $40.00 per course.
TRANSFERS: Courses may be transferred to another person by paying a transfer fee of $30.00 per course. Transfers are not allowed if any work has already been submitted.
REAL ESTATE FINANCE
To finish this course, you need to do the following:
1. Quizzes are NOT required. Included below are the answers to the questions at the end of each chapter. Page references for topics in each question and answer are also listed. Read the book and study the questions and answers. You may take your final exam 18 days after having possession of the textbook.
2. When you are ready to take the final exam, please fill out the form "Request To Take Final Exam," and fax to (619) 222-8593 or mail to: Real Estate License Services, 5059 Newport Ave, #209, San Diego, CA 92107. Real Estate License Services will arrange for your final exam online or with a test administrator.
Answers with Page References to Practice Questions at the end of Each Chapter in the Textbook:
TABLE OF CONTENTS
Chapter 1 THE REAL ESTATE FINANCIAL ENVIRONMENT
Chapter 2 THE PRIMARY MORTGAGE MARKET, PART I
Chapter 3 THE PRIMARY MORTGAGE MARKET, PART II
Chapter 4 THE SECONDARY MORTGAGE MARKET
Chapter 5 OTHER GOVERNMENT FINANCIAL PROGRAMS
Chapter 8 BASIC FINANCIAL CONCEPTS OF MORTGAGE LENDING
Chapter 10 FINANCIAL CONSIDERATIONS OF OPERATING A REAL ESTATE BUSINESS
Chapter 11 REAL ESTATE FINANCE AND THE ECONOMY
Chapter 12 LENDING INSTITUTIONS
Chapter 13 CASE LAW: COURT DECISIONS IN REAL ESATE FINANCE
Chapter 14 THE TRANSFER OF REAL PROPERTY
Chapter 1
THE REAL
ESTATE FINANCIAL ENVIRONMENT
INTRODUCTION
The process of financing real estate transactions involves many variables. It does not take place in a vacuum. Many factors interact together. These conditions comprise the real estate financial environment.
The reader should keep in mind that this environment is not static. A shift in one of the variables of real estate finance will cause the environment to undergo a subsequent change.
HISTORY OF REAL ESTATE FINANCING
Real estate financing has been around for many years. However, its early formation was very unfavorable for the borrower. Prior to the Great Depression, the borrower traditionally only obtained a loan for an approximate period of five years. Interest payments were made periodically. The entire principal amount was due in a lump sum at the end of the loan period. Even in a good economy, this system presents problems for the borrower.
With the advent of the disastrous economic crisis of 1929, borrowers could no longer meet these extreme loan conditions. Mass foreclosures resulted. As is always the case, neither party benefited from this situation. The borrower had no home in which to live in. The lender, on the other hand, was stuck with property that was of little value. Property values became depressed. In addition, consumers could no longer afford to purchase property because of the mass unemployment.
The Federal Government instituted many programs to counteract this big problem. Of major significance was the formation of the Federal Housing Administration (FHA). Under it, fixed-rate loans were made for periods up to 40 years in duration. Principal and interest payments were paid monthly with no balloon payment.
To counteract the unprecedented withdrawal of funds that accompanied the start of the Depression, the Federal Deposit Insurance Corporation (FDIC) and the Federal Savings and Loan Insurance Corporation (FSLIC) were created. They provided stability for the financial institutions by insuring the funds of individual depositors. This sense of security helped restore the depositors’ confidence in the institutions. With this renewed confidence, the financial environment stabilized. Consumers could afford to borrow the capital to buy property. As a result, housing construction increased.
After World War II, the demand for housing became phenomenal. The economy was very conducive to expansion. Several credit crunches appeared from time to time. However, the market always seemed to recover. Growth in housing construction continued. Finally, in the 1970s, the credit crunch became very severe. Depositors were withdrawing their funds from regular savings accounts earning low interest and reinvesting their capital in high-yield investments. This practice is known as "disintermediation". In an effort to keep the investors’ capital, institutions were forced to offer higher interest rates on their savings accounts. At the same time, borrowers were still paying the same low, fixed rate that was assured to them years before. The institutions were losing money. Many of them went out of business. Those that managed to survive encountered a lack of working capital with which to loan.
In an effort to remain viable and profitable in an ever-changing economy, several changes occurred in the policies and procedures of lenders. Many different types of loan packages were developed that could be altered to accommodate changes in the market. These packages, which will be detailed later, include such innovations as the variable rate loan and the graduated payment plan. Also, the nature of the loan instruments has been changed. This will also be examined later.
THE CREDIT SYSTEM
The concept of credit is a critical element in real estate finance. Financial lenders forward capital to borrowers that allow them to buy property. The lenders extend this credit even though the borrower cannot presently afford to pay the entire obligation. Their inherent risks are rewarded with the payment of interest by the borrower. To lower their risk, collateral is used as loan security pledged by the borrower.
With this system, a seller forwards products or services to a party who does not have the capital to afford the entire amount at that time. The seller relies upon the promise of the buyer to repay the debt in the future. Often, the buyer must show the ability to pay the debt with his or her employment record. In addition, a buyer normally must demonstrate a propensity for paying credit obligations with a favorable credit history. This is documented with computer systems such as the TRW service.
The use of credit has increased tremendously over the years. Total outstanding credit for 1960 was $779.9 billion dollars. By 1981, this figure had risen to $5,127.7 billion. In the category of total residential mortgage loans, credit was utilized in the amount of $162.7 billion. By 1981, this figure had risen to $1,000.1 billion.
Obviously, not every purchase made in the United States uses credit. Other possible forms of symbolic money used in this country include coins, paper currency, and demand deposits. Coins comprise approximately two percent of our total money supply. Our system of coins includes the penny, nickel, dime, quarter, half-dollar, silver dollar, and Susan B. Anthony dollar. The final type of coin was only issued for a very short time. It was discontinued because it was easily confused with a quarter.
Approximately 20 percent of our total money supply is comprised of paper money. Paper bills are essentially promissory notes that are issued by the Federal Reserve. Contrary to popular opinion, our paper money is not backed by gold. The United States went off the gold standard in 1933. While each paper dollar is backed with a small portion of gold, its main protection is the confidence of the American people. Without it, the dollar would fall dramatically and not be universally honored.
The final category of symbolic money used is demand deposits. These are negotiable instruments drawn against checking accounts. They are commonly called checks. Demand deposits constitute approximately 78 percent of our total money supply. They play an integral role in our current society. The use of demand deposits should continue to grow as we gravitate toward a coinless and paperless money society.