978-0324784640 Chapter 10 Solution Manual

CHAPTER 10

HOME EQUITY LENDING

OBJECTIVES OF CHAPTER

Upon successful completion of this chapter, students should be able to:

 Discuss the importance of this type of loan to the

homeowner and to mortgage lenders.

 Understand the differences in documentation,

processing, underwriting and closing between this

type of loan and first mortgage loans.

 Be able to explain the difference in compliance for

this type of loan and other mortgage loans.

 Explain why the home equity line of credit (HELOC)

is a variable-rate.

 Provide examples of how the interest rate of a

HELOC is calculated at and how it can change.

 Discuss the various methods for accessing a HELOC

and which is the most rapidly growing way.

 Examine the most productive ways to market equity

loans.

I. Introduction to Equity Loans

A. Nomenclature and Types of Home Equity Loans

B. Consumer loans or a Mortgage loans?

C. How important are equity loans to lenders?

D. Consumers’ choice

II. Home Equity Loan Program Design and

Origination Practices

A. Loan Amount

B. Loan to Value

C. Types of Collateral

D. Home Equity Loan Processing

E. Appraisals

F. Qualifying Ratios

G. Disclosures

H. Loan Approval

I. Closing Home Equity Loans

J. Title Insurance or Title Search?

K. No Closing Cost Programs

L. Security Documentation

M. Keys to Success

III. Closed-End Second Mortgages

A. Closed End Second as a Fixed Rate Product

B. Closed End Program Design

IV. Home Equity Line of Credit Programs

A. HELOCs Should Use Variable Rates

B. Index and margin

1. Introductory rate

2. Tier Rates

C. Maximum Loan to value

D. Term

E. Payment method

1. Interest- only Payments

2. Other Payment Methods

F. Adjustment periods

G. Methods of access

H. Closing Costs and Other Fees

K. Annual fee

L. Periodic Statements

Discuss the different types of home equity

programs and how each product choice might

be different for a certain borrower:

Explain in terms of advantages and

disadvantages for different borrower types.

Discuss the same topics from the lender’s

perspective.

HELOCs and second mortgage became a big

part of the mortgage boom. How do you think

these loan programs playpart in the foreclosure

world?

Do you think that if lenders were more careful

with the piggy-back loans, it could have saved

many borrowers from default as well as

preserving equity in homes?

Discuss reverse mortgages and the role they

play in the housing market.

What unique issues (risks) do reverse mortgage

programs present to the consumer and to the

lender?

Should the government loan programs

participate in the home equity lending market,

or has it proven too risky? How does the

perception of these loan products compare to

historical delinquency?

Teaching Tips

V. Marketing Equity Loans

A. Marketing plan

B. Understand your market

C. Type of media used

VI Reverse Annuity Mortgages (RAMSs)

A. Reverse Mortgage Amount and Funding

B. FHA Home Equity Conversion Mortgage

C. Consumer Protection for Reverse Mortgages

D. Reverse Mortgage Program Suitability

SUGGESTED TRUE/FALSE QUIZ

1. Approximately 30 percent of homeowners have a home equity loan.

2. An example of a common home equity loan is a 125 % LTV loan.

3. The average FICO score for a home equity borrower is below 660.

4. Most lenders used internal staff to close home equity loans.

5. Most home equity lenders use the same processing and underwriting

standards as for first mortgage loans.

6. Reverse mortgage origination volume increase almost tenfold from

1998 to 2008.

7. Both the closed-end home equity loan and the home equity line of

credit have a draw period and a repayment period

8. The interest rate on a HELOC is established by using an index and a

margin.

9. The most common repayment method for HELOCs today is similar to

a self-amortizing first mortgage.

10. A periodic statement is a Federal Reserve requirement for all home

equity loans.

MULTIPLE CHOICE QUESTIONS. More than one answer may be

correct – select all correct answers. (Correct answers are italicized.)

1. At the end of 2002 what percentage of homeowners had a home

equity loan?

a. 10 percent

2. Closed-end home equity loans typically have the following

characteristics:

d. requires a separate draw and repayment period

3. Often home equity lines of credit have tiered rates. Features than can

cause rates to vary include:

a. length of ownership

4. The most common index for a HELOC is the:

a. LIBOR

5. The most common repayment term for a HELOC is:

a. amortized over life of loan

ANSWERS TO ORAL DISCUSSION POINTS

The discussion points at the end of each chapter are intended for oral

discussion in class. Suggested answers/points to emphasize for the questions

are found below.

1. Why are equity loans so popular with consumers?

ANSWER: Equity loans are very popular with consumers for a number of

reasons. Probably the most important reason is that the interest on the loan

In the last decade, consumer attitudes toward home equity changed and more

2. Identify and discuss the keys for success from a mortgage lender’s

perspective.

ANSWER: Because the competition for home equity loans is so intense,

lenders must be aggressive in two areas if they want to attract consumers for

3. What are the important differences between a closed-end home equity loan

and a home equity line of credit (HELOC)?

ANSWER: The so-called traditional home equity loan, often called a

second mortgage, is a closed-end loan whereby the borrower is approved for

a certain dollar amount that is advanced all at once and is repaid on an

4. What is the most popular method of repaying a HELOC? Why is this

payment method so popular?

ANSWER: The vast majority of lenders (over 75 percent) today offer

The reason so many lenders have converted to “interest only” is the

5. What is the “Periodic Statement” that is used with HELOC? What

information is contained in this statement?

ANSWER: Truth in Lending requires mortgage lenders with a HELOC

product to send out a periodic statement to each HELOC borrower.

It will include the balance outstanding at the beginning of the billing cycle,

6. What factors determine the loan amount for reverse mortgages?

ANSWER: These amounts are determined by several factors, including the

7. What are important differences in reverse mortgage programs?

ANSWER: The biggest difference in programs is how the money is

distributed. Some programs offer the money to the borrower in one lump