Chapter 13 Real Estate Financing Flashcards
Lien Theory
- two party mortgage instrument used as security
for the debt - borrower (mortgager) retains both legal and
equitable title to the property - lender (mortgagee) given the right to have the
property sold through judicial foreclosure and
applied to the debt should they default.
Title Theory: North Carolina
- three party instrument as security for the debt
- borrower (grantor or trustor) conveys legal title to
the trustee(third party) to hold for the lender
(beneficiary) until the debt is satisfied. - borrower retains equitable title to the property.
-right to use and possess the property as if
he/she owned it and to demand the return of
the legal title when the debt is repaid. - lender can request that trustee initiate power of
sale foreclosure to sell the property if the debt is
not paid per the terms of the promissory note. - lender’s legal ownership is subject to the
termination on full payment of the debt or
performance of the obligation
Promissory Note : Mortgage loan instrument
- ONLY borrower signs the promissory note
- financing instrument, written promise or
agreement to repay a debt in definite installments
with interest. - negotiable instrument -lenders often sell their
mortgage loans in the secondary mortgage
market.
Mortgage or Deed of Trust: Mortgage Loan instrument
security instrument, is the document that pledges the property to the lender as security or collateral for a debt
borrower conveys naked title or bare legal title without the right of possession to a trustee who is the beneficiary for the lender.
Hypothecation
The act of pledging real property as security for a payment of a loan without giving up possession of the property.
Elements of a Valid Note
1) Term
2) promise to pay
3) signature of the borrower
Simple document that states the amount of the debt, the time and method of payment, and the rate of interest.
- signed by borrowers only.
- Not recorded (only security instrument is)
- one original signed at closing
Negotiable instrument
- promissory note
- Checks
- bank drafts
- must be in writing
- made by one person to another and signed by
the maker - unconditional promise to pay a sum of money on
demand in the future - payable to the order of a specifically named
person or to the bearer.
Acceleration Clause: Special Note Provision
If a borrower defaults, the lender has the right to accelerate the maturity of the debt
Prepayment Penalty Clause: Special Note Provision
When a loan is paid off before its full term, the lender collects less interest from the borrower in the form of a prepayment penalty against the unearned portion of the interest for any payments made ahead of schedule.
In NC
* Lenders are NOT allowed to charge a prepayment
penalty on any residential loan w/ an original
balance of $150,000 or less that is the first lien on
the borrowers primary residence.
* Federal law prohibits from charging prepayment
penalty on any FHA insured VA guaranteed loan.
Due on Sale Clause: Special Note Provision
AKA Alienation Clause : Transfer
* Provides that on sale of the property by the
borrower to a buyer who wants to assume the
loan, the lender has the choice of either declaring
the entire debt to be due and payable
immediately or permitting the buyer to assume
the loan at current market interest rates.
- TRIGGERS the acceleration clause
- Absence of due on sale clause would permit a
loan assumption without the lender’s prior
consent.
P & I or Debt Service Payments
loan payments
Payment in Arrears
- interest due at the end of each payment
Payment in Advance
- interest due at the beginning of each payment period
Amortized Loans
Installment plan
- level payments made
- applied first to interest then to principal
- 15 years or 30 years
- each month borrower required to pay 1/12th of annual real property taxes and 1/12th of various annual insurance premiums. (PITI)
Direct Reduction Loan
- require a fixed amount of principal to be paid in each payment with the amount applied to interest varying as the balance is reduced.
Fully Amortized Fixed Rate Mortgage
- mortgagor pay a constant amount, usually
monthly that will completely pay off the loan
amount with the last equal payment. - The mortgagee first credits each payment to the
interest due and then applies the balance to
reduce the principal of the loan.
Partially Amortized Fixed Rate Mortgage
- monthly principal and interest payments are a
constant amount - Payment amount not sufficient to completely pay
off the loan within the loan term. - Larger Balloon payment due at the maturity of the
loan.
Straight Line Amortized Mortgage
- Direct reduction mortgage loan
- mortgagor may pay a different amount with each
installment- each payment consisting of a fixed amount
credited toward the principal plus and additional
amount for the interest due on the principal
outstanding since the last payment was made.
- each payment consisting of a fixed amount
Simple Interest
I = P x R x T Interest = Principal x Rate x Time
Usury
Charging more than the max rate of interest legally charged on loans
Discount Points
- Prepaid interest charged by a lender to make up
the difference between the mortgage interest rate
and the required investor yield. - 1 discount point equals 1 percent of the original
loan amount and increases the yield of a loan by
approx 1/8th percent. - CAN be charged on FHA insured, VA-guaranteed,
and conventional loans.
2 points 1/4 increase
4 points 1/2 percent
6 points 3/4
8 points 1 percent
Example loan with 9 1/2 % & 6 discount points (3/4) = 10 1/4 % yield to investor
Amortization (debt liquidation)
process of paying off a home loan by making periodic (monthly) payments of Principal (P) and interest (I), called debt service.
* to kill a debt
PITI
Principal, Interest, Taxes, Insurance
borrower places into escrow 1/12th of the annual property taxes and 1/12th of the homeowners annual insurance premium each month along with PI debt service payment.
Mortgage Debt Reduction
Monthly PI payment will
- principal portion will reduce the debt by the
amount of monthly principal paid
- interest portion will supply the lender’s yield on
the loan.
Loan origination fee
1% of loan amount and discount points charged by the lender to increase the yield.
Fixed Rate Level Payment Mortgage
- most popular repayment plan
- Level payment simple interest loan.
- preferred by mortgagors
- Interest rate and debt service amount set for life
of the loan.
Interest Only Mortgage (term loan)
- periodic payments of interest only, with the
principal to be paid in full at the end of the loan
term. - straight loan or term loan
- thought to be contributor to mortgage crisis
Adjustable Rate Mortgage (ARM)
- orginate at one rate of interest
- rate fluctuates up or down during the loan term
based on the movement of a published index - loan payments may change.
- Note rate/Contract Rate
- Index
- Margin
- Interest Rate Caps
- Payment Cap
- Adjustment Period
- Conversion Option
Note Rate: ARM
The original rate charged, which is stated in the closing documents
Index: ARM
Interest rate on the outstanding balance of the loan is increased or decreased according to the movements of a named publicly published index such as the short term US treasury bill rate
Margin: ARM
The amount of interest a lender charges over and above the index rate
* amount of margin remains fixed on the life of the
loan
Interest Rate Caps : ARM
Rate Caps limit the amount the interest rate may increase or decrease in any one adjustment period, called the anniversary or periodic interest rate cap.
limit the amount the interest rate can increase over life of the loan /lifetime loan cap.
Payment Cap : ARM
sets a maximum amount for payment changes, protects the mortgagor against the possibility of individual payments that the mortgagor cannot afford.
Can lead to Negative Ammortization/increase in loan balance
Adjustment Perioud
How often the loan rate may change.
every year 1-year ARM
every three years 3-year ARM
every five years 5-year ARM
Conversion Option
permits the mortgage to be converted from an adjustable rate to a fixed rate loan at certain intervals during the life of the mortgage.
Graduated Payment Mortgage (GPM)
Flexible payment plan
* allows a mortgagor to make lower monthly
payments for the first few years of the loan and
larger payments for the remainder of the term,
when the mortgagors income is expected to have
increased.
* fixed on the life of the loan
* early years monthly payments are lower than the
payments required to fully amortize the loan =
negative amortization
- GPMs are utilized to enable first time buyers and
buyers in times of high interest rates to purchase
real estate.
Balloon Payment Loan
Partially Amortized Loan and Term Loan
higher payment at end of the loan.
- common in seller financed situations/ cashed out.
3-5 years of the sale.
Growing Equity Mortgage (GEM)
rapid payoff mortgage
* fixed interest rate
* payments of principal are increased according to
an index or a schedule.
* Total payment increases and loan paid off more
quickly.
Rights & Duties of Borrower: Mortgage or Deed of Trust Instrument
- Payment of the debt in accordance with the
terms of the note. - Payment of all real estate taxes
- Maintenance of adequate insurance
- Maintenance of property
- Lender Authorization before making any
alterations or demolitions
Failure to meet any obligations can result in buyers default.
Borrower has right of Defeasance to have legal title to the property transferred back to him or her when the loan is paid in full.
Satisfaction of Mortgage/ Deed of Release/ Reconveyance Deed
When note is fully paid, the trustee is required to execute a release of mortgage discharge.
Rights of Lender: Mortgage or Deed of Trust Instrument
Right to assign the mortgage debt as well as the right to foreclose the mortgage or deed of trust if the borrower defaults.
Note is a negotiable instrument and may be sold to a third party without consent of borrower.
Methods of Foreclosure
Judicial Foreclosure
Non Judicial Foreclosure
Strict Foreclosure
Judicial Foreclosure:
Court process
Property sold
new owner receives title by way of Sheriff’s Deed.
NON Judicial Foreclosure AKA Power of Sale Foreclosure
Deed of trust NOT foreclosed through court action
*Power of Sale Clause gives the trustee the power to sell the property and use the proceeds to repay the debt.
Strict Foreclosure
Not used in NC
Distribution of Proceeds after Sale: 5 steps
1) pay all costs of sale
- court costs
- trustee fees
- legal fees
- advertising fees
2) pay any outstanding & real property taxes or
assessments
3) pay mortgages or deeds of trust debt if 1st
priority over other liens
4) pay off any other liens in order of priority
5) pay any surplus(equity) to the borrower
Redemption
Equity Right of redemption
Statutory right of redemption
Statutory Right of Redemption
after upset bit period/auction a NC mortgagor can try to raise funds to redeem the property.
- each upset bid 10 day period
- if defaulted borrower can pay all that is owed to the lender anytime prior to confirmation of sale, borrower redeems the property, receives legal title and eliminates the previous winning bid.
- Foreclosure sale becomes final at the end of any 10 day period when no new bid is filed and the borrowers right to redeem the property is terminated.
Deficiency Judgement
Foreclosure sale does not produce enough funds to pay loan balance and accrued unpaid interest plus costs of sale, lender may be entitled to a personal judgement against
- the maker of the note
- any owners of mortgaged property who have
assumed the debt by written agreement
for the unpaid balance.
* FORBIDDEN when purchase- money /seller financing is used
Deed in Lieu of Foreclosure
aka Friendly Foreclosure by agreement
Disadvantage is mortgagee takes the real estate subject to all junior liens; foreclosure eliminates such liens.
Short Sale
When proceeds of sale are not sufficient to fully satisfy the outstanding balance on the sellers existing mortgage.
- lender agrees to discount remaining loan balance and allow seller to sell the property for less than the outstanding balance on the loan and cedes all of the proceeds to the lender in full satisfaction of the mortgage debt.
- can be prevented by junior lien holders such as second mortgages, tax liens, or mechanics liens
Mortgage Debt Relief Act of 2007
- Taxpayers are permitted to exclude from taxable income, the amount of debt reduced through mortgage restructuring, as well as mortgage debt forgiven through foreclosure or short sale.
- applies to debt forgiven in years 2007- 2012
Property Sold Subject to Mortgage
Buyer will not be personally obligated to pay the debt in full.
- buyer takes title to real estate and makes payments on existing loan.
- upon default, purchaser is not liable for the difference, seller is.
Loan Factor
Monthly P & I amount in dollars needed to amortize a $1000 loan. determined by interest rate and term of loan.
