ch 7 p pt presentationca7

California Real Estate Finance

Seventh Edition

Nature and Cycle of California Real Estate Finance

Chapter 1

Historical Perspective

• Might and power• English feudal system• Allodial system

Nature of Real Estate Finance

• Ownership of property – Property – Real property – Personal property – Commercial fixtures

Estates in Realty

• Freehold estate – Fee simple absolute– Time-shares; condominiums– Legal title; equitable title– Concurrent ownership– Tenants in common and partnerships– Community property– Joint tenancy

• Leasehold estate

Real Estate Characteristics

• Physical• Economic• Social

– Police powers– Eminent domain– Condemnation

Characteristics of Real Property Investments• Fixity• Longevity• Permanence• Risk• Market segmentation

Purposes of Investing in Real Estate

• To preserve capital• To earn a profit• To enjoy tax relief

Advantages of Investing in Real Estate

• Relatively high yields• Leveraging opportunities• Income tax flexibility• High degree of personal control

Mortgage Lending Activities

• Primary market• Credit system economy• Financing relationships• Local markets• National markets

Real Estate Cycles

• Supply and Demand– Real estate– Money

• Population Characteristics

• Political attitudes

Money and the Monetary System

Chapter 2

What Is Money?

• Medium of exchange or means of payment• Storehouse of purchasing power• Standard of value

The Use of Paper Money

• As long as the public can exchange symbolic paper money for commodities of like value, the system works.

The Supply and Cost of Money

• M1 includes cash and checking accounts • M2 adds money market mutual funds and

savings and time deposits of less than $100,000

• M3 adds large time deposits at all depository institutions

• Creating money through credit

The Federal Reserve System (Fed)

• Central banking system that provides a rising standard of living through controlled growth of money and credit.

• Lender of last resort

Organization of the Fed

• Twelve Federal Reserve districts • Each district includes Federal Reserve Bank • Directed by board of governors • Membership

Functions of the FED

• Reserve requirements to protect depositors• Discount rates to regulate the cost of funds• Federal Funds Rate at which the Fed lends

money to member• Open market operations • Truth-in-Lending Act (Regulations Z)

The United States Treasury

• Balancing government’s income against its long-term and short-term debt instruments has a direct effect on the monetary and credit climate of the country.

• The Office of the Comptroller of the Currency (OCC)• Nation’s fiscal manager• The Treasury’s role• Office of the Comptroller of the Currency (OCC)• The Federal Deposit Insurance Corporation (FDIC)• Office of Thrift Supervision (OTS)

The Federal Home Loan Bank System (FHLB)• Organization• Activities

– Provides its members a national market for their securities

California Financial Agencies

• Department of Savings and Loans• California Housing Finance Agency (CalHFA)• Department of Financial Institutions• Department of Insurance• Department of Corporations (DOC)• Department of Real Estate (DRE)• Office of Real Estate Appraiser (OREA)

Institutional Lenders for Real Estate Finance

Chapter 3

Commercial Banks

• Origins– Goldsmiths and money lending – Advent and evolution of checking system – Underwriting

• Organization and operation • Mortgage loan activities

– Interim financing (construction loans)– Home improvement loans – Manufactured home loans – Equity loans

• Mortgage banking • Trust department activities

Savings and Loan Associations/Thrifts

• Origins and development • Organization• Mortgage lending activities• California chartered savings and loan

associations

Life Insurance Companies

• Seek safety and long-term stability of an investment

• Participation financing• Purchase of blocks of single-family

mortgages or securities from the secondary mortgage market

Pension and Retirement Programs

• Pension monies collect routinely, usually from payroll deductions, and are held in trust until needed at retirement

• Pension fund managers invest assets from accounts

Credit Unions

• Members deposit savings, usually through payroll deductions

• Members borrow at interest rates below competition

• Expanding in real estate finance

Noninstitutional Lenders

Chapter 4

Mortgage Brokers and Bankers

• Mortgage brokers match up borrowers and lenders• Mortgage bankers are intermediaries (known as

correspondents) originate new loans, collect payments, periodically inspect the collateral, and supervise foreclosure, if necessary.– Development; Interest only loans with balloon payments– High level of defaults during Great Depression– Formation of Federal Housing Administration (FHA) in 1934

• Operation• Servicing a loan• Assignment of loan• Activities

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– Real estate investment trust (REIT)– Real estate mortgage trust (REMT)– Combination trust

Trust Qualifications (1 or 2)

– Trust must not hold property primarily for sale to customers in the ordinary course of business.

– Trust must be owned beneficially by at least 100 investors.

– Trust must not have fewer than five persons who own more than 50 percent of the beneficial interest.

– Trust’s beneficial interests must be evidenced by transferable shares or certificates of interest

– Ninety-five percent of the trust’s gross income must be derived from its investments.

Trust Qualifications (2 or 2)

– Seventy-five percent of the trust’s gross income must be derived from real estate investments.

– No more than 30 percent of the trust’s gross income may result from sales of stocks and securities held for less than 12 months or from the sale of real estate held for less than four years.

– Ninety-five percent of the trust’s gross income must be distributed in the year it is earned.

– All trust income must be considered passive by the IRS.

Real Estate Investment Trusts (REITS)

• Invest in improved income properties • Income derived from rents and capital gains • Individual investors pay income tax only at

participant level

Real Estate Mortgage Trusts (REMTs)

• Expand their financial base with strong credit at their commercial banks.

• Make mortgage loans on commercial income properties.

• Income from mortgage interest, origination fees, and profits made from buying and selling mortgages.

Balanced Trusts

o Combine REIT with REMT, earning profits from rental income and increased property values as well as mortgage interest and placement fees.

California Syndication

• Organizations of investors pooling capital for real estate investments

• Can be corporations, general partnerships, or limited partnerships

• Investment conduits that pass profits and losses through to investors in proportion to their ownership shares

California Syndication

• Controlled by the California Department of Corporations

• Limited partners may become liable for the total debts of the partnership if they take an active role in the management of the partnership

• Limited liability company (LLC) combines single-level tax benefit of partnership with organizational structure and limited liability of limited partnerships and corporations.

Real Estate Bonds

• Can be used to secure funds for financial real estate projects through 1) issuance and sale of mortgage bonds and

2) issuance and sale of municipal, county, or state bonds for purposes of financing community improvements.

Nature of Bonds

• Secured and unsecured (debentures) • Coupon; registered coupon • Classification by nature of issuer, nature of

security, or by maturity date• Issuance of banks• Market prices of bonds• Ratings

Uses for Bond Issues

• Use has faded since depression of 1930s• Many companies today use debenture bonds as

a source of raising long-term funds

• General obligation bonds• Tax privilege of exempting interest income

earned on state and local securities• Industrial revenue bonds • Industrial development bonds• Mortgage revenue bonds • Zero coupon bonds • Mortgage loan bonds

California Bonds

• Issued by Community Redevelopment Agencies

• Money used to make below-market interest rate loans to qualified developers of low-income and medium-income residential projects

• Mortgage-backed bonds issued by savings associations

Endowment Funds

• Provides a permanent source of income • Managers responsible to develop income

while preserving capital

Private Loan Companies

• Usually deal in junior finance • Often charge higher than market interest

rates • Must adhere to Truth-In-Lending laws

California Real Property Loan Law

• Limits on amount of commission and fees that can be charged for making or arranging a hard money loan

Individuals

• Sellers as lenders • Families as lenders• Other lenders

Conventional, Insured, and Guaranteed Loans

Chapter 5

Conventional Loans (1 or 2)• Fixed-rate loans• Interest-only loans• Private Mortgage Insurance (PMI)• Permanent/temporary (escrow) buydown

Plan• Borrower’s qualifications

– Four Fannie Mae and Freddie Mac guidelines

Conventional Loans (2 or 2)• Jumbo loans• Home equity loans• Automatic rate reduction• Subprime loans

Predatory Lending

• Flipping• Packing• Charging excessive fees

Home Ownership and Equity Protection Act of 1994

• Addresses deceptive and unfair practices in home equity lending

Refinancing Existing Conventional Loans

• Costs of refinancing are unregulated and vary dramatically among lenders

• Alternative is loan modification with existing lender

Electronic Real Estate Loan Services

• Borrower can arrange for a residential loan on the computer

• Still requires filing of a loan application and the probably submission of ancillary documents

FHA Organization and Requirements

• Lenders must grant long-term, self-amortizing loans at market interest rates

• All properties must meet minimum standards of acceptability

• Careful loan application review• Comprehensive written appraisal report on property• Borrower required to receive and sign a form

entitled “For Your Protection: Get a Home Inspection”

FHA Program Summary

• Not a direct lender• Reduced the down payment obstacle for

cash-short borrowers• Helps stabilize the mortgage market

Existing FHA Programs

• Title I—light or moderate rehabilitation of properties; manufactured homes, developed lot, or combination of lot and home.

• Title II– Section 203(b)—Mortgage Insurance for One-Family to

Four-Family– Section 203(k)—Rehabilitation Mortgage Insurance– Section 234(c)—Mortgage Insurance for Condominium

Units– Section 251—Insurance for Adjustable Rate Mortgages– Other Title II programs

Special HUD/FHA Programs

• Energy Efficient Mortgage (EEM)• Home Equity Conversion Mortgage (HECM)• Good Neighbor Next Door• Homeownership Vouchers• Native American Housing

Underwriting Guidelines

• Maximum loan limitations• Down payment requirements• Borrowers’ income qualifications• Non-traditional credit• Mortgage insurance premium (MIP)• Allowable closing costs• Second mortgage/buydowns

Frequently Used FHA Loans

• Section 203(b): One-Family to Four-Family Mortgage Insurance

• Section 234(c): Mortgage Insurance for Condominium Units

• Section 251: Insurance for Adjustable-Rate Mortgages

• Section 203(k): Rehabilitation Mortgage Insurance• Streamline Refinance

Additional FHA Issues

• Direct endorsement and coinsurance• Advantages of FHA mortgage• FHA contributions to real estate finance

The U.S. Department of Veterans Affairs Real Estate Loan Guarantee Program

• Program Application– Eligibility/entitlement– Certificate of eligibility– Partial entitlement– Certificate of reasonable value (CRV)– Interest– Income qualifying requirements

The U.S. Department of Veterans Affairs Real Estate Loan Guarantee Program, cont.

• Program Application– Closing costs—may not be included in DVA loans– Funding fee– Second mortgages– Buydowns– Assumptions– Release of liability/novation

Additional DVA Loan Guarantee Programs

• DVA Adjustable-Rate Mortgage (ARM)• DVA Streamline Refinance• Cash Out Refinance• Conventional to DVA Mortgage

California Veterans Home and Farm Purchase Program (CAL-VET)

• Funding and title • Eligibility requirements

– All veterans are eligible – 90 days active service or meet other qualifications– Honorable discharge – Active service within designated periods– Veteran receiving approved medals during peacetime may

also qualify– Un-remarried spouses of veterans killed in active duty also

eligible

• Qualifying procedures – Maximum property values on single family

homes, condos and mobile homes on owned lots – Maximum for manufactured homes– Maximum for self-supporting farms and ranches– Downpayment differs depending on type of loan– Most loans amortized over 30 years – Fixed an variable rate loans available – Insurance against floods and earthquakes

required

• Special Conditions– New construction– Funds for Refinancing– Junior financing– Occupancy– Others

Financial Agencies and Lending Programs

Chapter 6

Agricultural Lending

• Need for flexibility • Open-end mortgages• Moratorium on payments

The Farm Credit System (FCS)

• Farm Credit Administration (FCA)• Federal Agriculture Mortgage Corporation (Farmer

Mac)• The U.S. Department of Agricultural Rural

Development Program (USDA Rural Development)

U.S. Department of Housing and Urban Development (HUD)• Supervises the Federal Housing Administration

(FHA)• Directs Ginnie Mae• Directs development block grants• Enforces fair housing and RESPA regulations• Manages the Housing Choice Voucher Program• Regulates interstate land sales registration, urban

renewal, and rehabilitation programs• Stabilization Project

HUD Strategic Plan

• Increase home ownership opportunities• Promote decent affordable housing• Strengthen communities

HUD: Other Program

• Urban renewal• Subsidized housing• Community Development Block Grants

(CDBG)• Public Housing

The Real Estate Settlement Procedures Act (RESPA)

• Protects participants in a real estate transaction by providing closing cost information so they better understand the settlement procedures

• Disclosures– At time of loan application– Before settlement closing– At settlement– After settlement

The Federal Equal Credit Opportunity Act (ECOA)• Prohibits lenders from discriminating against

credit applicants on the basis of race, color, religion, national origin, sex, marital status, age, or dependency on public assistance.

Interstate Land Sales

• Established criteria for the dissemination of vital information to potential buyers of residential land.

Federal Legislation

• Fair Housing Act• Uhruh Civil Rights Act (Civil Code Section 51)• Community Reinvestment Act• The Home Mortgage Disclosure Act• Truth-in-Lending (Regulation Z)

– Advertising– Right of rescission

• Usury Laws– Federal– California

State Financing Agencies

• Industrial Development Agency• Community Redevelopment Agency (CRA)

– Tax-increment financing– Mortgage revenue bonds– Special assessments

California Housing Finance Agency (CALHFA)• Affordable housing bank to make low

interest rate loans through the sale of tax-exempt bonds for eligible first-time homebuyers– Not a direct lender– Works through approved lenders

City Of Los Angeles Home Mortgage Program• Provides mortgage loans to low-income and

moderate-income first-time homebuyers who wish to purchase from selected new homes and condominiums.

The Housing Financial Discrimination Act of 1977 (Holden Act)

• Offsets illegal practice of redlining• Prohibits discrimination• Encourages increased lending in areas

where financing has been unavailable

Junior Loans in Real Estate Finance

Chapter 7

Junior and Senior Liens

• Distinguishing first and junior lien by date and time of recording

• Junior financing by thrifts and commercial banks

• Junior financing provides funds for land developers to pay for offsite improvements

Anatomy of a Second Mortgage/Deed of Trust • Second deed of trust is in junior position to an

existing senior loan • Junior loan holder in higher-risk position • In event of default, senior lender will usually give

junior lender a chance to make delinquent payments

• Clauses protect junior lien holder’s position against that of senior lender

• Junior loan risks• Junior loan interest rates and usury

Home Equity Loans

• Offered by many lenders • Interest is tax deductible, unlike interest on

consumer debt, which is not • Attractive interest rates, sometimes for only short

period of term• Face high default rates when economy slows• Freddie Mac has program for purchase of secured

home improvement loans

Loan Terms and Note Payments

Chapter 8

Interest

• Simple Interest—paid only on the amount of principal still owed.

• Term Loan—requires payments of interest only with the entire principal being repaid at a specified time.

• Amortization—payments include portions for both principal and interest.

• Distribution of Principal and Interest

Variations in Payments and Interest Rates

• Graduated-Payment Mortgage (GPM)• Adjustable-Rate Mortgage (ARM)

– Adjustment periods– Initial rate– Note rate– Qualifying rate– Index– Margin– Interest rate caps– Payment caps

Innovative Payment Plans

• The 15-Year Mortgage• Reverse Annuity Mortgage (RAM)• Fannie Mae Senior Housing Program• Fannie Mae’s Two-Step Mortgage Plan

Variations in Formats

• Open-end mortgage• Construction mortgage• Blanket mortgage• Release clauses• Leasehold mortgage• Package mortgage• Manufactured home mortgages• Purchase-money mortgage• Hard-money mortgage (equity mortgage)• Bridge loan• Wraparound encumbrance (Wrap)• Mortgage participation

Tax-Deferred Mortgage Lending

• Installment sales• Option to buy• Lease with option of buy• Exchanges—Internal Revenue Code Section

Instruments of Real Estate Finance

Chapter 9

Terminology

• Encumbrance—right or interest in a property held by one who is not the legal owner of the property

• Lien—financial encumbrance; a charge against a specific property wherein the property is made the security for the performance of a certain act, usually the repayment of a debt– Voluntary liens and involuntary liens– General and specific liens

Interests Secured by a Real Estate Loan

• Fee simple ownership• Less than freehold interest• Title and lien theories

– Equitable rights– Title theory in which lender’s rights are superior to borrower’s– Redemption right– Statutory redemption period– Lien theory recognizes the rights of lenders in collateral property

being equitable rights, while borrowers retain their legal rights in the property

– California has taken modified position between the title and lien theories

• General requirement for a finance instrument

Note and Deed of Trust (Trust Deed)

• Deed of Trust—evolved to become the dominant security instrument for financiers of California real estate

• Advantage of trust deed over mortgage is shorter foreclosure period

• Judicial foreclosure; nonjudicial foreclosure; power-of-sale clause; naked title; beneficiaries

Note Secured by Deed of Trust

• Date signed• Participants’ identities• Promise to pay• Payment due dates• Amount and terms• Reference to security• Signatures and endorsements• Cosigners

Deed of Trust

• Executed by the trustor to transfer a form of legal fee ownership to the trustee to be held for the beneficiary, while the trustors maintain their equitable ownership.

Covenants of California Deed of Trust

• Preservation and maintenance• Fire insurance• Legal action• Taxes and assessments• Beneficiary and trustee expenditures• Condemnation• Late payments• Reconveyance• Extensions, subordination, and modifications• Assignment of rents

Note and Mortgage

• Note Secured by a Mortgage• Mortgage

– Recording information– Participants– Pledge– Property description – Covenant of seisin– Note attachment

Note and Mortgage

• Mortgage, cont.– Mello-Roos disclosure– Property taxes– Insurance– Defeasance clause and acceleration– Maintenance of the collateral– Signatures and acknowledgement– Release of mortgage

Real Property Sales Contract (Land Contract) • Single, complete financing and sales

agreement executed between buyer and seller

Special Provision in Real Estate Finance Instruments

• Late payment penalty • Prepayment privilege • Prepayment penalties• Lock-in clause• Due-on-sale clause• Assumption versus subject to• Subordination clause• Release clause• Extensions and modifications

Real Estate Loan Underwriting

Chapter 10

Underwriting

• Estimating the value of the property being pledged as collateral to guarantee repayment and determining the ability of a borrower to repay the loan

Definition of Value

• Value in use • Value in exchange • Market value

Appraisal

• Estimate of property’s value at a specific point in time

The Appraisal Process

• Drive-by appraising• Defining the appraisal problem• Determining the purpose for the appraisal• Examining the neighborhood and property being

appraised• Collecting the pertinent data• Applying approaches to estimate value• Reconciling values estimated• Preparing the report

Appraisal Approaches

• Direct sales comparison approach• Cost approach

– Depreciation• Income capitalization approach• Gross rent multiplier (GRM)• Reconciliation of data and opinion of value

Qualifying the Borrower

• Loan application • Financial statement

– Assets– Liabilities– Net worth

Qualifying the Borrower, cont.

• Data verification – Deposits– Employment– Credit report– Credit evaluation– Credit scoring– Loan qualifying income ratios

Processing Real Estate Loans

Chapter 11

Qualifying the Title

• Notices—constructive notice and actual notice

• Abstracts and opinion of title• Title insurance• Title faults• Surveys

Disclosures in California Real Estate Transactions• Real estate transfer disclosures• Delivery of a pest control inspection report• Disclosure of geological hazards• Disclosure of hazardous waste deposits• Thermal insulation disclosure

Disclosures in California Real Estate Transactions, cont.• Special flood area disclosure• Special city and country ordinances• Foreign investment real estate tax• Condominium documents disclosure• Disclosure for real property loans

Costs of Securing a Loan

• RESPA requires good-faith estimate• Points• Placement or origination fee• Impound funds (escrow accounts)• Property taxes• Hazard insurance• Title insurance• Mortgage insurance• Assessment liens• Interest adjustments• Prepayment penalties

Additional Costs

• Prorations• Interest• Property taxes• Insurance premiums• Additional prorations

Additional Processing Concerns

• Closing statements• Servicing the loan• Assignment of the loan

The Secondary Mortgage Market

Chapter 12

Introduction to Secondary Market

• Originators of new loans are called primary lenders • Most loans created by primary lenders are sold in

the secondary market – Lenders acquire money for new loans; avoid the risk of

holding long-term fixed interest loans – Emergence of securitization of pools of mortgage loans

Federal Housing Financing Agency (FHFA)

• Regulates Fannie Mae, Freddie Mac, and Federal Home Loan Bank (FHLB)

• Goal is to restore confidence in Fannie Mae and Freddie Mac; enhance their ability to fulfill their mission

Fannie Mae

• Shareholder-owner company• Purchases mortgages; enters into servicing

agreement • Sells mortgages in open-market transactions• Administered price system• Mortgage-backed securities (MSBs)

Underwriting Standards for Conventional Loans Sold to Fannie Mae

• Conforming and nonconforming loans• Automated underwriting system• Credit scoring

Freddie Mac

• Created to provide secondary mortgage market for lending institutions that were members of the Federal Home Loan Bank System

• Generally follows Fannie Mae’s underwriting standards

Ginnie Mae

• Government National Mortgage Corporation, • Mission is to expand affordable housing by

linking domestic and global capital markets to the nation’s housing markets

• Offers mortgage backed securities (MSBs)– Pass-through certificates

Loan Defaults and Foreclosures

Chapter 13

Defaults

• Breach of one or more of the conditions or terms of a loan agreement

• Acceleration clause activated• Lenders seek to avoid foreclosure• Acceleration and foreclosure as last resort

Delinquencies

• Principal and interest• Grace period• Late period charge

• Property taxes• Other liens• Hazard insurance• Poor property management

Adjustments

• Workouts• The Soldiers and Sailors Civil Relief Act of

1940 • The Housing Act of 1964 • Avoiding a foreclosure • Moratoriums (forbearance) and recasting • Voluntary conveyance of deed

Foreclosures

• Process to recover lender’s collateral—borrower’s rights of redemption are eliminated and all interests in the subject are removed– Equitable redemption period– Strict forfeiture– Statutory redemption period

Power-of-Sale Foreclosures

• Deeds of trust– Beneficiary notices payment delinquencies;

borrowers are unable to remedy– Beneficiary notifies trustee to foreclose– Trustee files Notice of Default– Reinstatement period– Notice of trustee’s sale and publication of date,

time, and place of sale– Sale is held and highest cash bidder wins– Trustee’s deed is given to successful bidder

Judicial Foreclosure and Sale• Conventional mortgages

– Lender notifies delinquent mortgagor – If no solution, complaint is filed by mortgagee in county

court– Title search made; lis pendens filed– Complaint brought before presiding judge– Judgment decree– Public sale

• Conventional guaranteed mortgages• Equitable redemption• Statutory redemption

Loans with Special Foreclosure Requirements• FHA-insured loans • DVA-guaranteed loans• Junior loans

Investment Financing Strategies

Chapter 14

Sale-Leaseback

• Owner of property sells it to an investor and, at the same time, leases it back.

• Seller-lessees retain possession while obtaining full sales price; free capital frozen in equity

• Investor-landlord receives fair return on and of the investment in the form of rent during the lease term and ownership of a depreciable asset already occupied by a “good “ tenant; buying guaranteed income stream that can be sheltered through proper use of allowable deductions.

Seller Refinances Prior to the Sale

• Seller can refinance the property in order to secure a loan that can be assumed by the buyer

Trading on Seller’s Equity

• Buyer refinances property instead of assuming the existing loan

Equity Participation

• Sale-Buyback • Splitting ownership • Joint ventures

Tax-Deferred Financing Concepts

• Realized capital gains—the difference between the total consideration received and the adjusted book basis of the property transferred.

• Recognized capital gains—profits that are actually taxable.

• Owners can refinance their properties during their lifetimes, generating tax-deferred dollars for reinvestment. At time of death, properties receive step-up basis to fair market value and could be distributed to heirs free of potential income tax on any appreciation to time death.

Pyramiding Through Refinancing

• Periodically refinance properties already owned and use proceeds to purchase new properties

• Anticipates that original property will increase in value over time

• Capital gains are delayed through refinancing process

Distribution to Heirs

• Federal estate tax• California inheritance tax• Gift tax

Mathematics of Real Estate Finance

Chapter 15

Interest

• Rent—paid for the use of money

Simple Interest

• Paid only on the amount of principal still owed – Interest ceases on principal repaid – Derived from I=PRT

Add-On Interest

• Rent paid on the entire amount of principal for the entire period

• Disregards any principal repaid • Acts to almost double contract rate • Derived from AIR=2IC/P (n+1)

Nominal and Effective Rates of interest

• Nominal rate of interest is contracted rate • Effective rate of interest is the actual rate

paid by the borrower

Compound Interest

• Interest paid on interest earned

Compound Worth of an Annuity

• Calculating the future worth of a series of regular deposits, each made at the beginning of a period

Time Value of Money

• Money not received until some time in the future is worth less today

• Present worth of money • Present worth of an annuity

Payment Schedules

• Amortization—systematic repayment of a debt

• Annual payments • Monthly payments • Loan constants • Distribution of principal and interest • Total interest costs

Measuring Profitability

• Breakeven analysis• Return on investment (ROI)• Lender’s profitability calculations• Investor’s profitability calculations• Net present worth method

Discounting Trust Deeds and Mortgages

• Point—one percent of loan amount• Discounts

– Rule-of-thumb method– Discount cash flow method

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