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Financing Residential Real Estate, 13th Edition.

Financing Residential Real Estate, 13th Edition by Megan Dorsey and David Rockwell

Published by Rockwell Publishing Company, Bellevue, WA, 2005, 595 pages

$39.95, softcover

Given the strong ties between housing markets and mortgage markets, residential real estate agents who wish to better serve their clients should have a good understanding of the system used to funnel investment capital into the hands of mortgage borrowers. Real estate agents who are more familiar with the residential financing process may be able to close more transactions and thus earn greater compensation.

The thirteenth edition of Financing Residential Real Estate by Megan Dorsey and David Rockwell presents a summary of the residential financing system in a professional training guide format for use in real estate agent licensing and continuing education programs. Although this book is not targeted at members of the appraisal profession, entry-level appraisers who could use a refresher course on the residential financing system might gain some insights from reading it. More experienced appraisers might be intrigued by the way the book encourages real estate agents to help appraisers solve the low appraisal problem.

The first four chapters of the book provide a broad perspective of the residential financing system. The authors begin with a discussion of how investors with available investment capital evaluate the risk/return combinations of alternative investment opportunities and how some of their capital is ultimately attracted to the primary mortgage market by way of the secondary mortgage market. The authors present much of this material along a loosely defined timeline that begins at the Great Depression and carries through to the present. Major points along the timeline include the creation of various government and quasi-government entities that continue to shape the residential financing system, including the Federal Housing Administration, Fannie Mae, Ginnie Mae, and Freddie Mac. Significant changes in government policy that impacted the evolution of the housing financing system are addressed, including the deregulation of the depository institutions in the early 1980s; the subsequent savings and loan crises; and the eventual bailout of the industry by Congress with the passage of the Federal Institutions Reform, Recovery and Enforcement Act of 1989. This introductory section concludes with a discussion of how the Federal Reserve implements monetary policy with the goal of promoting healthy growth in the national economy.

Beginning with Chapter 5, the focus of the material narrows dramatically. Chapter 5 is devoted to various legal concepts that are important to the residential financing system, including promissory notes, various security instruments, lien and title theories, the foreclosure process, and the specific clauses frequently encountered in mortgage loan documents.

The next two chapters are devoted to describing the features of fixed-rate and adjustable-rate residential loans and the financing process. Somewhat surprisingly, the discussion of amortization of mortgage loans is presented without any demonstration of the calculations necessary to determine the mortgage payment amounts. There is little discussion of how the payments can be broken down into their interest and principal components and little discussion of how the loan balance decreases at an increasing rate over the loan term as payments are made to the lender. Furthermore, the authors provide only the timeworn rules of thumb to describe how discount points and origination fees increase the effective interest rate on a loan and affect a borrower's choice between competing loans. These rules of thumb ignore the practical fact that the average maturity of mortgage loans is much less than the full term due to prepayment by borrowers. Thorough and valuable discussions on the process of amortization; the impact of points, fees, and prepayment on the effective cost of mortgage debt; and the choice between competing loans would require the use of present value mathematics. Such an approach appears to be beyond the scope of this professional training guide.

Chapter 8 of the book provides a useful discussion of how lenders evaluate a loan applicant's credit worthiness using income ratios, net worth, and credit history; Chapter 9 gives the reader an overview of how lenders rely on appraisers to evaluate the property as collateral for the debt. In particular, Chapter 9 provides a simplified explanation of the appraisal process. With the unstated implication that appraisers tend to err on the side of caution, the authors spend several pages offering real estate agents advice on how to solve the low appraisal problem that might prevent their transactions from closing. The recommended solutions include getting sellers to set more realistic asking prices; making sure sellers and buyers exclude personal property from negotiated transaction prices; accompanying the appraiser on the property inspection visit to make sure "none of the property's positive features get overlooked"; and providing comparable sales to the appraiser that support the transaction price so that "the appraiser might decide to use them instead of seeking out others." The last two of these recommendations might raise the eyebrows of professional appraisers who read this book.

Chapters 10 through 15 of the book discuss several different loan products that are available to borrowers, including two-step mortgages, balloon/reset mortgages, interest-first mortgages, FHA-insured loans, VA-guaranteed loans, and seller financing. The authors provide several simple classroom exercises within the body of the chapters to help real estate agents understand how the qualification standards are applied to each of these loan products. Appropriately, the chapter on seller financing encourages real estate agents who have clients interested In this type of financing arrangement to secure the services of an attorney who specializes in this area of law rather than providing unqualified legal advice to the client. The book ends with a discussion of various fair lending rifles and consumer protection rules that regulate the residential financing industry, including the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Truth in Lending Act, and the Real Estate Settlement Procedures Act.

Overall, the material presented in Financing Residential Real Estate should prove useful to the intended readers: real estate agents who seek to better serve their clients in owner-occupied house transactions. While certainly not rigorous enough to qualify as an academic textbook or a reference source for appraisers, the authors succeed in providing a professional training guide that could help real estate agents increase their effectiveness for their clients.

(Reviewed by Marcus T. Allen, PhD, Professor of Real Estate, College of Business, Florida Atlantic University, Fort Lauderdale, Florida.)
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Author:Allen, Marcus T.
Publication:Appraisal Journal
Article Type:Book review
Date:Jun 22, 2006
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