3 / FIDUCIARY SOURCES FOR REAL ESTATE FINANCE

This chapter is the first of two chapters that answers the question Where do we get the money? and describes the sources of funds for real estate finance. The activities of commercial banks, thrift, life insurance companies, pension programs and credit unions are examined as to their fiduciary responsibilities to their depositors and premium payers.

Unlike some of the lenders we will examine in the next chapter, the aforementioned participants in the mortgage market do not lend their own money. Whenever the companies described in this chapter enter into a financial agreement with a borrower, they are lending other people's money: the money entrusted to them to be held and returned intact when called for. Thus, these lenders are charged with an extra amount of trust. They must be careful about their investment decisions and constantly aware of their fiduciary responsibilities.

For a long time, the banking industry had enjoyed the full confidence of their depositors until recently, when the savings and loan debacle hit and turned the industry upside down. From a prominent provider of most housing loans, the savings industry has diminished to the point of elimination. Most small savings and loan associations have been absorbed by larger companies while many have gone out of business altogether. The RTC is currently trying to dispose of the assets of these defunct organizations. Those that are still functioning are extremely reluctant to make long-term real estate loans while they are trying to recover their equilibrium. The commercial banks and other fiduciaries have survived the crisis for the most part, and are beginning to show profits again.

In the restructuring of the banking industry since the crisis, interest rates were lowered considerably, creating a refinancing frenzy. Currently, these rates have risen, slowing somewhat the recovery in the real estate markets.

Upon completion of this chapter, the student should be able to:

1. Define a fiduciary and understand the responsibilities of a fiduciary relationship;
2. Define a financial fiduciary (intermediary) as an organization which holds money for depositors;
3. Identify the fiduciary sources for financing real estate loans;
4. Understand the conservative attitude of financial fiduciaries in minimizing risks for the benefit of their depositors and premium payers;
5. Know the real estate loan investment activities of these fiduciaries in terms of types of property involved;
6. Identify the sources and costs of funds available to financial fiduciaries;
7. Realize the emerging importance of pension funds and credit unions as sources of funds for real estate finance.

I. Understanding the market

A. Definition of a fiduciary

1. Acts as an agent for another

2. Based on trust and confidence

3. Financial intermediaries are fiduciaries

B. Activities of financial fiduciaries

1. Total assets

2. Mortgage loans outstanding by type of property—Table 3.1

4. Multi-family mortgage loans outstanding by lender, Table 3.3

II. Financial Fiduciaries (Intermediaries)

A. Commercial banks

1. History of banking

a. Money holders vs. money lenders

b. Evolution of checking system

c. Underwriting requirements

2. Organization and operation

3. Mortgage loan activities

a. Construction loans

b. Home improvement loans

c. Mobile home loans

d. Equity loans

e. Mortgage banking

f. Trust department activities

4. California chartered banks

b. Limits on real estate lending

B. Savings and loan associations/savings banks

1. Origins and development

a. Self-terminating trusts

b. Serial associations

2. Still under the FHLB

3. Now regulated by the OTS

a. Accounts insured by the SAIF

b. Must be chartered

4. California chartered savings and loan associations

a. Regulated by the California Department of Savings and Loans

c. No single loan can exceed one percent of the lender's total assets

C. Life insurance companies

1. Control about 12% of all savings

2. Invest 20-30% of assets in real estate loans

3. Concerned more with safety than liquidity

4. Activities

b. Commercial and industrial loans

c. Participation loans

d. Purchase blocks of loans in secondary market

D. Pension and retirement programs

1. 250 million persons in some retirement program

2. Hold over $50 billion in mortgage-related investments

3. Prefer office building loans

4. Purchase mortgages in the secondary market

E. Credit unions

1. Competitive interest rates offered to their members

2. Make real estate and personal property loans

3. Make junior loans