Chapter 4 - Financing Flashcards
General Financing Concepts
Property owners and lenders have conflicting demands:
- OWNERS invest in real estate for shelter and income
- LENDERS invest in mortgages based on the real estate value as security.
The owners objectives are long-term Capital Growth and an annual return on their equity in the property they own. Alternatively, lenders seek an interest income portfolio yield, payable either directly from the properties rental income or the value of the owners use of the property, called implicit rent.
The Federal Reserve (the FED) is the Central Bank in control of regulating the US Financial and monetary system. Thus the FED plays an integral role in the overall economic and Financial Health of the nation. The FEDs mandate is to keep the economy stable. It’s a fulfills this task by maintaining sufficient dollars in circulation as our nation’s medium of exchange, and in doing so, maintaining both job and price stability
Purchasing power refers to a home buyers ability to purchase property funded by mortgage money based on 31% of their gross income for mortgage payments and current interest rates. A buyers debt to income ratio (DTI) has two components:
- the FRONT END DTI ratio - is the percentage of a buyer’s monthly pre-tax gross income spent on housing costs
- the BACK END DTI ratio - is the percentage of the buyer’s income spent monthly on all debt payments (child support, car payments, credit cards, all other payments Etc) .
Together, lenders use a borrower’s DTI to determine whether they qualify for a loan.
Sources of Financing
Most real estate sales hinge on financing some portion of the purchase price. In these PURCHASE ASSIST MORTGAGE financing arrangements, a lender generally funds the buyers purchase price.
In exchange for the mortgage, the buyer promises to pay a sum of money to the lender either in:
- installments (amortized monthly, usually, reducing principal and reducing interest)
- a single payment at a future time.
Alternatively, SELLER FINANCING or INSTALLMENT SALE or CREDIT SALE or CARRYBACK FINANCING, occurs when a seller carry-back a note and Trust deed executed by the buyer to evidence a debt owed for the purchase of the seller’s property. The amount of the debt is the remainder of the price due to the seller after deducting:
- the down payment and
- the amount of any existing or new mortgage used by the buyer to pay part of the price.
A SENIOR MORTGAGE or SENIOR LIEN or FIRST MORTGAGE is the first loan against a property and has priority. First Priority equal seniority.
A JUNIOR MORTGAGE or JUNIOR LIEN or SECOND MORTGAGE, is the second or subsequent loan on a property in a lesser, subordinate position. For example, a home equity line of credit (HELOC) is generally in a second position.
The PORTFOLIO YIELD, also known as the mortgage yield, is any earnings from fees or interest on a mortgage realized by a mortgage holder, such as a lender or carry-back seller.
An IMPOUND ACCOUNT or ESCROW ACCOUNT, is a money reserve of a property owner’s funds received and held by mortgage holder to pay the owner’s annual obligations owed for property taxes, Hazard insurance premiums, assessment liens and improvement bonds (like school bonds which are all listed in our property taxes.)
Mortgages - Deeds of Trust - Notes
The promise to pay the debt is set out in a written document called a PROMISSORY NOTE. A promissory note is a document given as evidence of a debt owed by one person (the borrower/debtor/payor) to another (the lender/carry-back seller/payee).
A NOTE documents the terms for repayment of a mortgage, including:
- the amount of the principal to be paid
- the interest rate charged on the remaining principal
- the periodic payment schedule and
- any due date.
A NOTE may be SECURED or UNSECURED. A secured note is a note evidencing debt which is backed by an asset, known as the security or collateral. The note is attached to property as a lien (voluntary lien) on title through the use of a security device.
IF THE NOTE IS SECURED BY REAL ESTATE, THE SECURITY DEVICE USED IS A TRUST DEED, COMMONLY CALLED A MORTGAGE.
When secured, the debt evidenced by the note becomes a voluntary lien on real estate described in the trust deed that references the note.
Promissory notes are categorized by the method for repayment of the debt as either:
- INSTALLMENT NOTES, amortized, paying less and less every month, all reducing, periodic
- STRAIGHT NOTES, which is a balloon payment at the end and does not include periodic payments.
An installment note calls for periodic payments of principal and interest (or interest only) until the principal is paid in full by amortization or a balloon payment at the end.
Amortization refers to the constant periodic payment of principal until the principal has been fully repaid. A balloon payment is any final payment on a note which is greater than twice the amount of any one of the six regularly scheduled payments immediately preceding the date of the balloon payment.
To secure payment of the debt by a parcel of real estate, the security device used is a trust deed. The trust deed is always the preferential method used to impose a lien on real estate.
The lien gives the lender or carry-back seller the right to foreclose on the real estate if the borrower defaults. All trust deed liens have a dollar value associated with them.
The trust deed identifies three parties, each of whom has distinctly separate roles in the mortgage transaction:
- the borrower/ owner (TRUSTOR), the owner of the trust deed, who voluntarily encumber their property with the trust deed lien.
- the middleman (TRUSTEE) who holds the power of sale to auction the property and
- the lender or carry-back cellar (BENEFICIARY) who benefits from the trust deed lien encumbering the property.
The trustor who signs and delivers a trust deed to A lender or carry-back seller is the owner of the real estate interest encumbered. Delivery is accomplished by recording the trust deed with the County Recorder, which affects its priority on title. Note a dead man can’t deliver a trust deed.
Types of Loans
An INSTALLMENT NOTE produces a schedule of constant periodic payments which amortize the principal. In doing so, the constant amount of schedule payments contains diametrically varying amounts of principal and interest from payment to payment. With each payment, the amount of principal reduction increases and the amount of interest paid decreases. The installment note is the standard type of loan for Consumer mortgage financing
A STRAIGHT NOTE calls for the entire amount of its principal, together with accrued interest, to be paid in a single lump-sum when the principal is due. Unlike in the installment note variation, a straight note does not include periodic payments of principal.
A note with a fixed interest rate, commonly called a FIXED RATE MORTGAGE (FRM), provides the classic method for calculating interest that accrues on principle. With a fixed rate mortgage (FRM), the interest rate remains fixed for the life of the mortgage.
However, variations on the interest rate and repayment schedule is contained in installment notes and straight notes exist:
- adjustable rate mortgage (ARM)
- graduated payment mortgage (GPM)
- all inclusive trust deed (AITD) note and
- shared appreciation mortgage (SAM)
The ADJUSTABLE RATE MORTGAGE (ARM), as opposed to a fixed rate mortgage, calls for periodic adjustments to the interest rate. In turn, the amount of the scheduled payments fluctuates with each interest rate adjustment based on movement in and agreed to index.
With a GRADUATED PAYMENT MORTGAGE (GPM), payments increase periodically by predetermined amounts until the payment fully amortizes the principal over the remaining life of the mortgage without a further increase in payments, the interest rate on the Note being fixed. These mortgages are very affordable in the beginning of the mortgage.
The ALL-INCLUSIVE TRUST DEED (AITD) variation of a note is common in carry-back transactions. The AITD note, also known as a WRAPAROUND NOTE or OVERRIDING NOTE, typically calls for the buyer to pay the carryback seller constant monthly installments of principal and interest. The carryback seller then pays the installment as they become due on the underlying (senior) mortgage, generally out of the payments received on the all-inclusive trust deed note.
The SHARED APPRECIATION MORTGAGE (SAM) repayment schedule variation calls for the buyer to likely pay interim interest at a fixed rate, then when the principal balance is due, to further pay the mortgage holder additional interest calculated as a fraction of the properties increase net value since origination. In return, the carryback seller receives part of the property’s appreciated value as additional interest, called CONTINGENT INTEREST, when the property is sold or the carryback shared appreciation mortgage is due.
When a debt secured by a trust deed lien on real estate has been fully paid, the lien is removed from the title in a process called RECONVEYANCE. For example when you pay off a vehicle, they send you back the pink slip.
Private Mortgage Insurance (PMI)
PRIVATE MORTGAGE INSURANCE (PMI) is default mortgage insurance coverage provided to a mortgage holder by private insurers on conventional mortgages with LOAN-TO-VALUE (LTV) ratios higher than 80%. LTV is a ratio stating the outstanding mortgage balance as a percentage of the mortgage properties fair market value (FMV). Thus private mortgage insurance (PMI) indemnifies a mortgage holder against losses on their investment in a mortgage when a borrower defaults.
For example CALVET Loans can be 100% no money down and FHA can be as little as 3.5% money down, therefore you must pay private mortgage insurance.
Generally, an acceptable LTV for conventional mortgages is 80% of the property’s value. And LTV of 80% requires the buyer to make a minimum 20% down payment. A greater LTV compels the lender to require the buyer to obtain PMI, private mortgage insurance.
Promissory notes typically contain a LATE CHARGE PROVISION. A late charge provision calls for an additional charge if payment is not received by the mortgage holder when due or within a GRACE PERIOD after which the payment is delinquent. Also, the minimum grace period before a mortgage encumbering an owner-occupied, 124 unit residential property is delinquent is TEN DAYS-10 DAYS after the due date without receipt of the payment.
Related to the note and trust deed is the LAND SALES CONTRACT or CONDITIONAL SALES CONTRACT or INSTALLMENT SALES CONTRACT or REAL PROPERTY SALES CONTRACT which all equal SELLER FINANCING!
LAND SALES = CONDITIONAL SALES = INSTALLMENT SALES = REAL PROPERTY SALES
LAND SALES is also the CONDITIONAL INSTALLMENT of REAL PROPERTY
Under a LAND SALES CONTRACT, which is a form of seller financing, a buyer and seller enter into a contract for the sale of property. The buyer takes possession of the property and makes payments according to the terms of the contract. Title does not normally pass to the buyer by grant deed until the buyer pays the seller in full. Think of this like a pink slip again, the buyer does not get the pink slip until he pays the seller in full.
On the sale of a parcel of real estate, existing financing encumbering the property sometimes remains of record and is taken over by a buyer. The buyer generally takes title to the property under one of two procedures:
- a FORMAL ASSUMPTION between the mortgage holder and the buyer or
- a SUBJECT TO ASSUMPTION between the seller and the buyer.
A FORMAL ASSUMPTION is a buyer’s promise to perform all the terms of the mortgage, given to the mortgage holder on the buyer’s takeover of an existing mortgage, typically involving a modification of the interest rate and payments and an assessment of points and fees.
A SUBJECT TO ASSUMPTION agreement is a promise given by the buyer to the seller to perform all the terms of a mortgage taken over by the buyer on the property purchased. In this case the seller is still on the hook if the buyer doesn’t pay.
Government Programs
A variety of state and federal loan programs exist, offering down payment assistance for low to moderate-income buyers and first-time buyers, mortgage refinance or modification programs to distressed owners, and special programs for veterans.
FEDERAL PROGRAMS ARE:
- Federal Housing Admin (FHA) Insured Mortgage:
the FHA insures lenders against loss for the full amount of a mortgage. FHA-insured mortgages permit small cash down payments and higher LTV requirements in mortgages originated by conventional lenders. The FHA acts as an insurer of the loan which is originated by a lender or mortgage company.
They insure the big lenders, not the actual lender. - US Department of Veterans Affairs (VA) Mortgage Guarantee: this is a VA loan. the VA mortgage guarantee program assists qualified veterans or their surviving spouses to buy a home with zero down payment. This is a one-time option for zero down payment and no closing costs.
NOTE - While neither the FHA or VA will guarantee properties intended for business (motel or agriculture included), FHA will indeed do small 124 unit RESIDENTIAL RENTALS.
Federal National Mortgage Association (Fannie Mae),
Federal Home Loan Mortgage Corp (Freddie Mac) and
Government National Mortgage Association (Ginnie Mae):
Fannie Mae, Freddie Mac and Ginnie Mae are government-sponsored Enterprises (GSEs) designed to help facilitate home purchases for low to moderate-income buyers. Fannie Mae and Freddie Mac do not provide home mortgages directly. Instead, they purchase and package pools of qualifying mortgages originated by Mortgage Bankers, known as conforming mortgages, as mortgage-backed bonds (MBBs). They then sell the MBBs to Wall Street Bankers on the secondary mortgage market. This allows the investor like me to invest in REIT on Wall Street.
NOTE - The FNMA was created to repurchase qualifying loans, thus placing cash in the lenders’ hands to facilitate a continuing source of monies to loan.
STATE PROGRAMS
California Housing Finance Agency (CalHFA): CalHFA administers several first-time home buyer assistance programs, offering 30-year fixed rate mortgages (FRMs) with interest rates and fees typically lower than conventional financing. Great for college and Military. Love this one.
California Department of Veterans Affairs (CalVET): CalVET provides a veteran with a mortgage at a rate generally below Market, low monthly payments and flexible credit standards, as compared to conventional financing or mortgages insured by the FHA or guaranteed by the VA. A CalVET buyer finances the property with a CONTRACT OF SALE. CalVET loans are LAND SALES CONTRACT PURCHASES with the state functioning as the VENDOR.
California Department of Housing and Community Development (HCD): HCD programs fund local public agencies and private entities which produce affordable housing for rental or ownership.
Financing - Credit Laws
The Real Estate Settlement Procedures Act (RESPA) is a federal law promoting lender transparency in their mortgage origination process to protect consumers from KICKBACKS and uncompetitive or DUPLICATED FEES. RESPA mandates lenders and mortgage holders disclose all mortgage-related charges on mortgages used to purchase, refinance or improve 124 unit residential properties.
Mortgage-related charges include:
- origination fees
- credit report fees
- Insurance costs and
- prepaid interest.
RESPA is administered and enforced by the Consumer Financial Protection Bureau (CFPB).
A RESPA-controlled lender provides the buyer with:
- a LOAN ESTIMATE (LE) of all mortgage terms quoted by the lender within 3 business days of the lender’s receipt of the buyers mortgage application
- a SPECIAL INFORMATION BOOKLET published by the CFPB to help the buyer understand the nature and scope of real estate settlement costs within 3 business days after the lender’s receipt of the buyers application
- a CLOSING DISCLOSURE (CD) which summarizes the final mortgage terms and details, provided by the lender at least 3 days before the consumer closes on the mortgage and
- a list of HOMEOWNERSHIP COUNSELING ORGANIZATIONS.
The Loan Estimate under the Truth In Lending Act (TILA)-RESPA Integrated Disclosure (TRID) rules replaces the previously required Good Faith Estimate (GFE) of settlement costs and Truth in Lending Act (TILA) disclosure.
Similarly, the Closing Disclosure replaces the HUD-1 Settlement Statement and the final Reg Z. disclosure. The Closing Disclosure contains the actual terms and cost incurred in the transaction, which is then compared by the borrower against the Loan Estimate form. If the amounts paid by the borrower at closing exceed the amount disclosed in the loan estimate by more than the set tolerances, the excess is to be refunded to the borrower within 60 days of closing.
The Equal Credit Opportunity Act (ECOA) is a federal law enacted in 1974 prohibiting discrimination in lending based on race color religion national origin sex marital status or age, provided an individual is of legal age. The anti-discrimination rules apply to institutional lenders, loan brokers (MLOs), and others who make or arrange loans.
California’s USURY LAW limits the interest rate on non-exempt real estate loans to the greater of:
- 10% or
- the discount rate charged by the Federal Reserve Bank of San Francisco, plus 5%
Usury laws apply only to a LOAN OF MONEY for the FOREBARANCE OF PAYMENT on a money loan, thus seller carry-back notes are not covered by usury law.
Loan Brokerage
The 2008 Secure and Fair Enforcement for Mortgage Licensing Act (SAFE ACT) created a uniform National licensing scheme for Mortgage Loan Originators (MLOs) and the Nationwide Mortgage Licensing System and Registry (NMLS) for registering MLOs.
The SAFE Act applies to Residential Mortgages.
To implement the SAFE ACT, the Department of Real Estate and the NMLS work together.
The DRE sets the minimum standards for the DRE licensees who arranged consumer mortgages for a fee as MLO endorsees.
The NMLS:
- processes MLO applications
- assigns unique NMLS ID numbers and
- administers the National mlo Registry.
DRE licensees are required to obtain an MLO endorsement and unique NMLS ID when they:
- take an application for or negotiate a residential mortgage loan, an activity called arranging and
- they receive fees for arranging the residential mortgage loan.
Types of Loan Originators
When applying for a mortgage, a buyer has several types of lenders to choose from, including
- PORTFOLIO LENDERS, such as Banks, thrifts and credit unions ( Navy Credit Union) - focus on relationships. A portfolio lender uses its own money to grant loans and does not sell its loans to institutional investors.
- INSTITUTIONAL LENDERS, such as insurance companies and trade association pensions. An institutional lender, also known as a financial intermediary, is any depository that pools funds of clients and depositors and invests them into real estate loans. Focused on group lending.
- WHAREHOUSING LENDERS, such as Mortgage Bankers who resell the mortgage in the secondary mortgage Market. These are MBBs, or mortgage backed bonds.
Portfolio lenders are local banks that lend their own money and do not sell their loans.
Most national banks sell their loans on Wall Street and those loans must meet specific guidelines. A portfolio lender can be a great asset because they may be more willing to finance a real estate investor. While portfolio and institutional lenders typically service their own mortgages, they often originate mortgages for immediate sale in a process called warehousing.
Warehoused mortgages are sold on the secondary mortgage market to investment pools, such as Fannie Mae, Freddie Mac and Ginnie Mae. The two largest investors in mortgages, Fannie Mae and Freddie Mac, buy only loans that meet their strict underwriting standards because they want to minimize risk for their investors.
The business of servicing mortgages is also bought and sold. This causes the mortgage to appear to be changing hands. Typically, the originating lender continues to service the mortgage when they sell the mortgage to an investor.
Default and Foreclosure - Judicial Foreclosure
When a mortgage is in default, a mortgage holder may foreclose on a property in one of two ways:
- JUDICIAL FORECLOSURE under mortgage law, also called a Sheriff sale, or court-ordered sale
- NON-JUDICIAL FORECLOSURE, under the power of sale provision in the trust deed or other security device, also called a trustee’s sale.
JUDICIAL FORECLOSURE is the court-ordered sale by public auction of the secured property. A judicial foreclosure allows the mortgage holder to obtain a money judgement against a property owner for any deficiency in the value of the mortgage property to fully satisfy a RECOURSE DEBT, as occurs on a negative equity property. A recourse debt means you can get a money judgment.
The public sale held by a court appointed receiver or sheriff is conducted as an AUCTION. A CERTIFICATE OF SALE is issued to the successful bidder on the completion of a Judicial foreclosure sale.
Although the bidder purchased the property at the public auction, they will not become the owner of the property or be able to take possession of it until the applicable REDEMPTION PERIOD expires.
On a judicial foreclosure, the property owner has THREE MONTHS after the judicial sale to redeem the property by paying off the entire debt and costs.
However, if the owner is liable on a RECOURSE DEBT for a deficiency in the property’s value, the owner has UP TO ONE YEAR AFTER the judicial sale to redeem the property.
Further, a junior trust deed holder may REINSTATE the note by paying the trust deed delinquencies and foreclosure costs, bringing the trust deed note current. The junior lienholder has until the time the property is sold at the judicial foreclosure sale to redeem the property.
Once a property is sold at a judicial foreclosure sale, any liens subordinate to the foreclosing mortgage holders trust deed are wiped out and eliminated from the title.
The judicial foreclosure process can last from eight months to multiple years before it is completed.
Default and Foreclosure - Non-Judicial Foreclosure
Alternatively, when a mortgage holder NON-JUDICIALLY FORECLOSES by a trustee’s sale, the property is sold as authorized by the trust deed provisions at a public auction, called a TRUSTEE’S SALE. This is easier and quicker.
Unlike a Judicial foreclosure sale, the completion of a trustee sale bars the foreclosing mortgage holder from obtaining a money judgment for any unpaid balance remaining after the Foreclosure sale due to insufficient value in the secured property.
The non-judicial foreclosure process has three stages:
- the NOTICE OF DEFAULT (NOD) is recorded and mailed
- the NOTICE OF TRUSTEE’S SALE (NOTS) is recorded, posted and mailed
- the TRUSTEE’S SALE of the real estate by auction occurs, followed by the execution of the trustee’s deed and distribution of sales proceeds.
A first mortgage on a homeowner’s principal residence needs to be at least 120 days delinquent before the mortgage holder may cause a Notice of Default (NOD) to be recorded. A trustee needs to wait at least 3 months after recording a Notice of Default (NOD) before posting the Notice of Trustee’s Sale (NOTS) .
After a Notice of Default (NOD) is recorded and prior to 5 business days before the trustee sale, the owner is able to terminate the Foreclosure proceedings by paying:
- the DELINQUENT AMOUNTS DUE on the mortgage as described in the NOD and foreclosure charges, called REINSTATEMENT, brought all current
- the ENTIRE AMOUNT DUE on the mortgage, plus foreclosure charges, called Redemption. In this case they must sell the property before the auction to have REDEMPTION of the property.
On average, it takes approximately 4 months to non judicially foreclose on a property, though this can be longer when mortgage holders are inundated with a high volume of foreclosures to process.
Alternatively, when a property owner with negative equity defaults, a mortgage holder May 1st attempt to arrange for a DEED-IN-LIEU OF FORECLOSURE before initiating a trustee’s foreclosure. A deed-in-lieu is a grant deed conveying the mortgaged real estate to a mortgage holder which is accepted from the property owner in exchange for cancelling the mortgage debt to avoid foreclosure. A trustor can sign a deed in lieu of foreclosure and give it to the lender. If a lender accepts the deed in lieu of foreclosure, the lender assumes any junior liens and becomes responsible for all liens junior to their position.
Acceleration
Acceleration - a demand for immediate payment of all amounts remaining unpaid on a loan or extension of credit by a mortgage lender or carry-back seller.
Adjustable Rate Mortgage
Teaser Rate
Adjustable Rate Mortgage (ARM) - a variable interest rate note, often starting out with an introductory teaser rate, only to reset at a much higher rate in a few months or years based on a particular index.
A Teaser Rate - a temporary, low introductory interest rate found in adjustable-rate mortgages.
Amortization
Amortization - the reduction in principle - liquidation - of a mortgage obligation on an installment basis.
annual percentage rate
Annual Percentage Rate (APR) - the relative cost of credit as determined in accordance with Regulation Z (Reg Z) of the Board of Governors of the Federal Reserve System for implementing the Federal Truth In Lending Act (TILA_.
Assignment
Assignment - A transfer to another of a person’s rights under a contract such as a mortgage, lease, purchase agreement or option.
Assumption
Assumption - a promise to pay the debt of another, typically a mortgage, given by a buyer of property.
balloon payment
Balloon payment - any final payment on a note which is greater than twice the amount of any one of the six regularly scheduled payments immediately preceding the date of the final balloon payment.
Beneficiary
Beneficiary - one entitled to the benefits of a trust. One who received benefits from an estate, the title of which is vested in a trustee. The lender holding a note and deed of trust.
beneficiary statement
Beneficiary statement - a document issued by lender on request noting further payment schedules, interest rates and balances on a mortgage assumed by an equity purchase investor. A lender (beneficiary) delivers a ‘beneficiary statement’ to escrow as a statement of required funds to release the existing debt.
blanket mortgage
Blanket Mortgage - a mortgage which is secured by two or more Parcels of real property.
NOTE - A blanket encumbrance created for a real estate loan benefits the lender/beneficiary, because it gives the lender/beneficiary added security for the loan.
CalHFA
California Housing Finance Agency (CalHFA) - an independent California state agency that makes low rate housing loans through the sale of taxable and tax-exempt bonds.
The California Housing Finance Agency (CalHFA) is a loan program that requires payment of mortgage insurance premiums and will make loan payments for up to six months if the borrower becomes involuntarily unemployed.
CalVET
CalVET - a program administered by the State Department of Veterans Affairs for the direct financing of Farm and Home purchases by eligible California veterans of the Armed Forces. A CalVET buyer finances the property with a contract of sale. It is a LAND SALES CONTRACT.
construction loan
Construction Loan - a loan made to finance the actual construction or Improvement on land. Funds are usually dispersed in increments as the construction progress.
conventional mortgage
Conventional mortgage - a mortgage securing a loan made by investors without governmental underwriting, for example, which is not FHA insured or VA guaranteed. The type customarily made by a bank or Savings and Loan Association.
debt to income ratio
Debt to income ratio (DTI) - percentage of monthly gross income that goes towards paying debt.
deed in lieu of foreclosure
Deed in lieu of foreclosure - a deed to real property accepted by A lender from a defaulting borrower to avoid the necessity of foreclosure proceedings by the lender.
deficiency judgment
Deficiency Judgment - a judgment awarded by a court in a Judicial foreclosure when the value of mortgage property on the borrowers default is insufficient to pay off the Mortgage Debt. The house is worth less than the loan amount.
A deficiency judgment cannot be obtained if:
- the security is a purchase money trust deed. A purchase-money trust deed/mortgage – also called seller or owner financing – is a mortgage issued to the buyer by the seller of a given property.
- mortgage holder must use a judicial foreclosure option vs trustees sale to receive a deficiency judgement
- if FMV is higher than the amount due on the mortgage
Deflation
Deflation - a fall in the pricing of goods or property and the value of money increases. Deflation is the opposite of inflation.
due on clause
Due on clause - a trust deed provision used by lenders to call the loan immediately due and payable, a right triggered by the owners transfer of any interest in the real estate, with exceptions for intra-family transfers of their home.
A lender will generally NOT enforce the due on sales clause in a promissory note:
- when a new loan is made at a lower rate of interest than the existing loan,
- when high unemployment rates cause a glut of residences to be on the market, and when deflation occurs and
- there are more houses for sale then there are buyers.
Note all these conditions make it less likely a lender would want to accelerate the loan by enforcing the due on clause.
Federal Reserve
Federal Reserve - the federal banking system of the United States managed by a central Board of governors ( Federal Reserve board) and comprising a bank in each of 12 geographical districts with broad powers for setting monetary policy to control the level of price inflation and employment, primarily accomplished through the setting of short-term interest rates.
