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Real estate, in its broadest definition, is land and that which is attached to it. The subject of financing real estate could include the activities of farming, mining, drilling, the supporting services for each of these, plus surface development. This text focuses on surface development: the building of houses, shopping centers, office buildings, warehouse space, factories, and recreational facilities. Primary emphasis is given to residential financing because it comprises three-fourths of total mortgage lending and has developed some uniform practices not yet found in commercial loans. The financing of surface development was the largest single demand on this country's credit markets until 1992, when it was surpassed by needs of the federal government. Even so, at the end of 1998, mortgage debt outstanding exceeded $5.7 trillion while the government reported a surplus that is reducing its demand for credit.
The present-day practices and procedures that make the mortgage loan system function have resulted from long-term experience in meeting constantly changing needs. Still, a few of the basic credit restraints go back to lessons learned and regulations created during the Depression years of the 1930s. Since then, many improvements have been made, reflecting the efforts of men and women working through private industry and government agencies to achieve a more stable and equitable system.
Any person interested in real estateas an investor or a sales agentshould have a sound understanding of the specialized financing procedures that are used today. A major change has occurred in the shift of sources for mortgagemoney. The former dependence for funding on a limited pool of savings accounts held primarily by savings associations has shifted to the huge financial markets through the sale of mortgage-backed securities. This has opened the door to many new primary market lenders. Further, in 1998 the Federal Home Loan Bank system began to encourage the banking system to originate more mortgage loans by offering its Mortgage Partnership Finance program to all of its members.
An important new factor in mortgage lending has resulted from the use of Internet facilities. Today, thousands of Web sites offer considerable information on the mortgage loan market. It is possible for a consumer to arrange for a mortgage loan via the Internet. Unfortunately, sound advice by a knowledgeable loan officer is not always available on the Internet. Nevertheless, the availability of competitive information on many Web sites and the freedom for an individual to act will change the mortgage market of the future.
The variety of mortgage repayment plans that proliferated for a while has settled down to a few more commonly used methods. Loan qualification standards, never fully uniform, continue to reflect lenders' concern for full repayment of their loans. Government assistance programs, as offered by both the PHA and VA, continue to support the goal of providing suitable housing for all qualified persons.
However, overtaking government-assisted loans has been a series of conventional mortgage loan programs instigated by the Community Reinvestment Act and its amendments, under the umbrella term of "affordable housing loans." These programs offer different standards for credit qualification and add some prepurchase home buyer education requirements for low- and moderate-income families to qualify. Other conventional loans now offer up to 97 percent loan-to-value ratio with more flexibility in meeting down payment requirements.
The real estate market has a cyclical nature: it will flourish at times, then languish for a while. Such ups and downs are the normal workings of the free market system. There is no central government planning authority empowered to set limits on the number of housing units that can be built in any given market area. So market demand is controlling. Overbuilding does occur and provides the necessary check rein. Nevertheless, other things than market influences can drive supply. An example of this occurred in the early 1980s when tax incentives substantially distorted true market needs and created substantial overbuilding. Even so, an overall reading of market needs presents some problems. As one wag recently commented: "We had a need for 5,000 new units here and ten developers jumped in, each building 5,000 units!" Some are hurt financially, but in the long run, we all benefit from the freedom on which the system is based. It could be said that the mortgage lending industry attempts to match dreams with reality and make them come true.
The author gratefully acknowledges the expert advice, assistance, and encouragement of the following individuals who have contributed to making this book possible.
PADDY D. AMYETT, McLennan Community College, Waco, Texas
JO ANN CAMPBELL, Summit Mortgage Company, Houston, Texas
RICHARD L. CHUMBLEY, Richland College, Dallas, Texas
LEE E. DILLENBECK, Elgin Community College, Elgin, Illinois
JOE GOETERS, Houston Community College, Houston, Texas
CHARLES J. JACOBUS, Attorney at Law, Bellaire, Texas
DOROTHY A. LEWIS, Houston Community College, Houston, TX
DONALD McGREGOR, JR., Real estate investor, Houston, Texas
GEORGE YOUNG, In memoriam and grateful remembrance, University of Houston, Houston, Texas.
And a special acknowledgment to my wife, Margaret Ivy Wiedemer, for organization and editing assistance plus her kind patience.
John P. Wiedemer