Commercial banks

The forerunners of today's banks were first established in the Colonies in the 1660s. Banks have historically focused on commercial lending-that is, lending for commerce and industry-and residential mortgage lending has generally been a relatively small activity.

A commercial bank functions as a depository for funds and a place from which to borrow money. They are not to be confused with "industrial banks" or so-called finance companies. Commercial banks have two different forms of deposits, demand deposits and time deposits. The bulk of their funds are in demand deposits, which are deposits in business and personal checking accounts. Rarely are such funds used for long-term mortgage lending, due to the highly volatile nature of such funds-that is, they may be withdrawn on demand by the depositor and therefore cannot be depended on to remain in the account for very long. For this reason they are also referred to as transaction money or transaction accounts.

♦ Type of institution - Depository financial intermediary.

♦ Time deposits or interest-bearing savings accounts, provide the bank with long-term funds that are invested into a variety of outlets, including real estate financing. Commercial banks may make almost any type of loan on virtually any type of reasonable collateral. Although their primary function is to make short-term business loans, California banks are aggressive players in the home loan market.

♦ Organization - Commercial banks are stockholder owned and subject to federal corporate income taxes. They may be chartered under either federal or state laws. Federally chartered or national banks are regulated by the Comptroller of the Currency, must be members of the Federal Reserve System (Fed), and have their deposits insured by the Federal Deposit Insurance Corporation (FDIC). State chartered banks may elect to belong to the Fed, in which case they are regulated by the Fed; or they may be insured and regulated by the FDIC. A few state chartered, non-member banks are regulated under state laws. Banks range in size from under $5 million in assets to over $100 billion.

♦ Types of loans - Commercial banks provide the most significant aid to housing through construction period loan-funds advanced during construction and prior to permanent mortgage financing. Banks routinely account for over 40% of home construction loans, and the majority of apartment project loans.

Commercial banks are a primary source for short-term construction financing, when the builder or developer has a "take-out" commitment from some other lender-most often a savings bank-for the permanent mortgage loan following completion of improvements. Large commercial banks play a major role in financing business and commercial properties, while some smaller ones deal largely with home loans.

Banks may make home loans up to 95% loan-to-value ratio, for as long as 30 years on single-family dwellings. Many banks require private mortgage insurance on loans whose ratio of loan-to-value is in excess of 80 percent.

Banks make swing loans, sometimes referred to as bridge loans, which are short-term interim loans used to bridge the time during which a property remains unsold. For example, if you as home-owner purchase a replacement house before selling the first house, a swing loan would provide the funds to fill the gap until the sale proceeds provide the funds to pay off the loan. In short, you found the right house at the right price, but haven't sold your existing home, so you secure a loan to purchase the replacement dwelling, with the loan to be repaid as soon as the existing house sells. The lien may exist on both the old and the new homes. Swing/bridge loans may have monthly payments or may be set up to be paid in a single lump sum upon sale of the old home.

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