Chapter 12 - Residential Mortgages (9%)

Question 1

Section 12.1: MORTGAGE THEORIES AND DOCUMENTS RELATED TO LOANS

:::STATE EXAM CONTENT AREA: XII.A: LEGAL THEORIES OF MORTGAGES:::

**Title Theory vs Lien Theory

Answer 1

Title vs. Lien Theory States
 Title theory –borrower takes possession
 Deed of trust conveys title to 3rd party (trustee)
 Reconveyance Deed
** Lien theory – borrower takes possession AND TITLE
** Lender holds lien
** Satisfaction of Mortgage

Question 2

Section 12.1: MORTGAGE THEORIES AND DOCUMENTS RELATED TO LOANS

:::STATE EXAM CONTENT AREA: XII.B: LOAN INSTRUMENTS:::

**Promissory Note and Mortgage

Answer 2

** Promissory Note (Note) -
** A promise to pay (evidence of a
debt)
** Must be signed by Mortgagor
(Borrower)
** States Details of the Loan

- Mortgage -
     Pledges property as security for a debt
    *** Hypothecate - pledging property as
       security without actually giving
       possession or title
     Mortgagor
         gives the mortgage
         receives the loan
     Mortgagee
         receives the mortgage
         gives the loan
    ** Satisfaction of Mortgage
        ** Mortgage is paid in full
        ** Mortgagee prepares Letter of Satisfaction
        ** Mortgagor receives Letter of Satisfaction
           within 60 days
        ** Records in public records
        ** Offsets the mortgage lien

REMEMBER: The Mortgagee is NEVER me

Question 3

Section 12.2: MORTGAGE THEORIES AND DOCUMENTS RELATED TO LOANS

:::STATE EXAM CONTENT AREA: XII.C: MORTGAGE CLAUSES:::

** Essential Elements

Answer 3

 Acceleration Clause
 Allows lender to advance the due date
(call the note) under certain circumstances
** Defeasance Clause
** Requires lenders to acknowledge borrowers
performance
** Only legally required clause in mortgage
 Due on Sale Clause
 Transfer of ownership
 Entire balance due
 Requires lender approval
** Escalator Clause
** Change of use in property
** Allows lender to increase rate
** Exculpatory Clause
** Foreclosure – lender looks to foreclosed
property only
** No deficiency judgment
** Called nonrecourse loan
 Insurance Clause
 Lender requires borrower to carry adequate
fire and hazard insurance
 Maintenance Clause
 Borrower must maintain & protect property’s
value
 Prepayment Clause
 States conditions and terms under
which a mortgage may be paid
early
 Allows lender to charge a fee for
paying loan early
 Receivership Clause
 Default of income producing real estate
 Court appoints trustee
 Collects rent
 Maintains property
 PARTIAL Release Clause
 BLANKET Mortgage covers more that one parcel
 Individual lots “released” from original loan
 Individual lots receive 1st mortgage loan
 Right to Reinstate Clause
 Borrower in default
 Before foreclosure
 Catch up everything in arrears
 Subordination Clause
 A recorded lien takes a secondary position to
a lien recorded at a later date

Question 4

Section 12.3: COMMON MORTGAGE FEATURES

** Mortgage Loan Fees

Answer 4

1) Loan Origination Fee
- pays the lender’s overhead for facilities, salaries, and
commissions

2) Discount Points
 Origination fee/discount points
 prepaid interest to lenders
 Borrowers pay 1% of the loan amount for
each discount point
 Increases yield by approximately 1/8 of
1% per discount point

• • 3) Effective Yield
• • Example: If the lender charges two points for the origination fee and two discounts points, the borrower would have to pay a total of 4 points. Using the 1/8 percent for each point pad, the effective yield (real rate of return to the lender) would be:

** 4 Points x 1/8% = 4/8% or 0.50% Increased interest rate

** ON CLASS TEST: If the answer is expressed in:
% —> Bank’s point of view
$ —> Borrower’s point of view
pts w/o loan amount —> Bank’s point of view

Question 5

Section 12.4: THE LOAN APPLICATION PROCESS

/* Equal Credit Opportunity Act

Answer 5

/* Equal Credit Opportunity Act
/* Prohibits discrimination in granting
loans based on
/* Race
/* Color
/* Religion
/* National origin
/* Sex
/* Marital Status
/* Age
/* Receipt of income from public assistance

Question 6

Section 12.5: MORTGAGE UNDERWRITING

:::STATE EXAM CONTENT AREA: XII.G: QUALIFYING THE BUYER:::

** Mortgage Underwriting (Analyzing Risk)

Answer 6

• • Qualifying process
  • • 1) Property
  • • 2) Applicant
• • 1) Qualifying the Property
    
    • • Property is collateral for loan
    • • Appraiser analyzes market value
    • • Underwriter wants market value
    • • Redlining - Illegal

** 2) Qualifying the Applicant
** Analyze desire and ability to pay
** 3 CRITERIA
**a ) Credit History
** Fair Isaac & Company (FICO)
** 35% - payment history
** 30% - outstanding debt
** 15% - credit history
** 10% - credit report
** 10% - type of credit
** b) Income
** Dependable and stable
** Employment – 2 years
** Wages, bonuses, commissions
alimony, child support
** Not:
** Temporary employment
** Unemployment
** Contributions from family members

* * c) Other assets
        * * Reviewed by underwriter
        * * Other real estate
        * * Automobiles
        * * Stocks, bonds, etc.
        * * Assets attached in foreclosure

Question 7

Section 12.6: LENDER RISK

:::STATE EXAM CONTENT AREA: XII.G: QUALIFYING THE BUYER:::

** Income Ratios and Loan-to-value ratios

Answer 7

• • 1) Income Ratios
    
    • • 2 QUALIFYING RATIOS
    • • a) Housing Expense Ratio
        
        • • “Front-end” ratio
        • • 28% for conventional
        • • 31% for FHA
        • • None for VA
• • Monthly Housing Expense (PITI)/Gross Monthly Income
    • • b) Total obligations ratio
        
        • • “Back-end” ratio
        • • 36% for conventional
        • • 43% for FHA
        • • 41% for VA
• *Total Monthly Obligations/Gross Monthly Income

** 2) Loan –To-Value-Ratio (LTV)
** Relationship between loan amount and selling
price or appraised value - whichever is less
** Expressed as a percentage, (e.g.: 80% LTV)
** If stated “80-20” - first number represents loan
percentage
** Sale Price times the Loan to value equals the
loan
** Sale Price minus the Loan equals the Down
Payment
**LOAN/VALUE

Question 8

Section 12.7: SALE OF MORTGAGE PROPERTY

:::STATE EXAM CONTENT AREA: XII.E: METHODS OF PURCHASING MORTGAGED PROPERTY:::

** Cash sale, Assumption of mortgage, Assumption w/novation, and Subject to mortgage

Answer 8

1) Cash sale - Property delivered free
and clear
 If there is no due on sale clause
** 2) Assumption of mortgage - New note
makes buyer liable for debt along with
seller (LIABILITY - 1) NEW and 2) OLD)
3) Novation - New note makes buyer liable
for debt instead of seller (seller is
released) (LIABILITY - NEW ONLY)
** 4) Subject To mortgage - note remains the
responsibility of the seller (LIABILITY - OLD ONLY)

Question 9

Section 12.7: SALE OF MORTGAGE PROPERTY

:::STATE EXAM CONTENT AREA: XII.E: METHODS OF PURCHASING MORTGAGED PROPERTY:::

Selling the Mortgage Contract

Answer 9

 Legal Instrument that states Mortgagee (lender) transfers mortgage and note to Purchaser
 Signed by Mortgagee (Assignor)
 Received by Investor (Assignee)
 Certificate of Estoppel (Estoppel Letter)
 Legal instrument establishing
 That a claim exists against a property
 Verify outstanding balances of
Principal, Interest, escrow items, other
amounts due

Question 10

Section 12.6: LENDER RISK

:::STATE EXAM CONTENT AREA: XII.D.1-3: TYPES OF MORTGAGE LOANS - FHA, VA, AND CONVENTIONAL:::

** FHA, VA, and Conventional

Answer 10

• • 1) FHA
    * * MAX Housing Expense ratio of 31%
    * * MAX Total Obligations ratios of 43%
  2) VA
  - MAX Total Obligations ratios of 41%3) Conventional
  - MAX Housing Expense ratio of 28%
  - MAX Total Obligations ratios of 36%

Question 11

Section 12.8: DEFAULT

** Equity of Redemption, Statutory Right of Redemption, and Right to Reinstate

Answer 11

** Equity of Redemption
** Borrowers cures default before foreclosure
** Pays entire loan balance due + interest
** UP TO MOMENT of foreclosure in Florida
 Statutory Right of Redemption
 Borrower can redeem property AFTER
foreclosure – not in Florida
 Right to Reinstate
 Borrower satisfies late payments
 Pays interest, late charges and legal fees
 Resumes scheduled payments

Question 12

Section 12.8: DEFAULT

** Foreclosure

Answer 12

 Judicial process to enforce the terms
of the mortgage
 Upon default by a borrower, the
lender can
     Initiate Foreclosure Proceeding – against
       the property
     Lis pendens – public notice
** Excess after sale
    ** Paid to mortgagor
** Deficiency after sale
    ** Deficiency judgment – promissory note

a) Strict foreclosure
- Lien holder takes possession of property after default
- Not permitted in FL
b) Judicial foreclosure
 Property is sold at auction
 Proceeds distributed according to final
decree
c) Deed in lieu of Foreclosure
 Voluntary default
 Deed given to lender
 In lieu of default
 Lender may not accept