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REAL3000 > Chapter 9 > Flashcards

Chapter 9 Flashcards

1
Q

Mortgage debt

A

A loan secured (collateral) by a lien on real property

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2
Q

Why would an individual want to use mortgage debt?

A

So that they can own their home rather than having to rent.

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3
Q

Why would Apple use mortgage debt to finance a new property?

A

So that they can save cash for core activities, which might be harder to get loans for. RE is easy to get loans.

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4
Q

Why would I use mortgage debt as an investor?

A

So that I can diversify my investments more and leverage. Ex. $500k to invest. Buy one house for $500k or invest $100k in five houses and take mortgage out on remaining balance.

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5
Q

When earnings > cost to borrow, what type of leverage is this?

A

Positive leverage

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6
Q

How is mortgage debt better than commercial and consumer debt (ex. student)?

A
  1. Longer term/duration, which means lower payments
  2. Lower interest rate (safe due to RE collateral)
  3. Tax favored (can deduct interest on loan, which lowers effective rate of payments)
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7
Q

What are the two elements of a mortgage loan?

A
  1. Promissory Note

2. Mortgage or Deed of Trust

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8
Q

What is a promissory note and what are the elements?

A

A negotiable instrument (can be passed on like a check) that says the borrower promises to repay.

  1. Promise to repay
  2. Terms of repayment
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9
Q

What are the elements of a mortgage or deed of trust?

A

???1. Pledges the real property as security (collateral) for payment of the promissory note.
2. Conveys a lien (a non-possessory property right/interest)

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10
Q

What is the equation for calculating interest?

A

rate * outstanding principal balance = interest

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11
Q

When is interest paid?

A

At the end of the period (in arrears)

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12
Q

How often does interest accrue?

A

Daily

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13
Q

Daily rate

A

= (rate / 365) * outstanding principal balance that day

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14
Q

Monthly rate

A

= = (rate / 12) * outstanding principal balance that day

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15
Q

Adjustable rate

A

Rate adjusts periodically per terms of note. = index rate + margin

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16
Q

Index rate (used in adjustable rate)

A

Objective variable rate beyond control of either party (ex. US Treasury Rate, LIBOR, Prime Rate)

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17
Q

Margin (used in adjustable rate)

A

Fixed markup over index rate (ex. 200-400 basis point, which is 2-4% over index rate)

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18
Q

Rate caps (used in adjustable rate)

A

Limit changes in interest rate. Generally safer. Periodic or lifetime caps.

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19
Q

Rate floor

A

Typically initial rate, specifies lowest possible rate

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20
Q

Payment caps (used in adjustable rate)

A

Limit changes in payment. Can be periodic or lifetime caps.

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21
Q

What is the problem with payment caps?

A

They limit changes in payment, but INTEREST ALWAYS GETS REPAID. Unpaid interest is loaned to borrower and added to loan amount.

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22
Q

If I borrow $500 with an interest rate of 5% (payments at $25/mo) but there’s a payment cap of $15/mo, what will happen?

A

Unpaid $10 will be added to loan amount and each payment will be considered paid.

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23
Q

What are the different types of mortgage loan payments?

A
  1. Fully amortizing level payment loan (LPL)
  2. Partially amortized (“balloon loan”)
  3. Interest only (“bullet loan”)
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24
Q

Fully amortizing level payment loan (LPL)

A

Payments never change. Fixed rate over X years.

25
Q

Partially amortized (“balloon loan”)

A

Ex. Amortize it over 30 years but due at 20. At 20 years the entire missing amount. Interest will = less bc you aren’t paying interest over last 10 years.

26
Q

Interest only (“bullet loan”)

A

Only paying back interest. Principal due is at the end, generally 5 years (shorter).

27
Q

Will you be paying more principal at the beginning or end of the term for an amortizing loan?

A

At the end. With every successive payment, principal paid goes UP and interest paid goes DOWN

28
Q

In the pink and black graph, how could we determine full loan amount?

A

Adding up all the pink in the graph

29
Q

Interest only loan gives (highest/lowest) possible payment relative to loan amount.

A

Lowest. Interest only allows me to borrow a higher principal. Very risky though.

30
Q

How is adjustable rate shown in the pink and black graph?

A

Interest would look like graph for first X yrs (until change date) and then black bars would rise.

31
Q

Prepayment

A

Refers to payment of principal prior to

a. Schedule
b. Maturity

32
Q

Traditionally would a borrower initiate prepayment?

A

No, buyer had no right of prepayment. It was an investment for the lender, prepayment meant less opportunity for stable profits.

33
Q

Today does borrower have right of prepayment?

A

Yes, today opportunity is common because prepayment is required for conforming loans (most easily sold into secondary market).

34
Q

What are the three loans we talked about with restricted prepayment?

A
  1. Subprime (non-conforming) home loans.
  2. Jumbo loans (really big loans)
  3. Institutional commercial loans (ex. insurance co, REIT, pensions)
35
Q

Why would institutional commercial loans not accept prepayment?

A

They make loans as investments, they expect a steady return. Prepayment would lower their return.

36
Q

Recourse vs. non-recourse loans

A

Recourse: Full personal liability of borrower.

Non-recourse: No personal liability of borrower.

37
Q

Partial recourse loans

A

Limited personal liability of borrower. Not joint and several, so for multiple borrowers owning a property, each person is only responsible for their share.

38
Q

What type of recourse are residential loans?

A

Always full recourse! You’re putting your house as collateral. If house val can’t cover, other assets may be seized.

39
Q

What type of recourse are commercial loans?

A

Loans vary. Borrower is usually an entity (ex. LLC) which in effect makes the loan non-recourse (unless owner provides a personal guarantee)

40
Q

Single asset bankruptcy remote entity

A

Legal entity that only owns one asset. Protects against recourse. Ex. Atimol 1, 2, 3…

41
Q

Mortgagor

A

Borrower (“grantor” in DOT)

42
Q

Mortgagee

A

Lender (“beneficiary” in DOT)

43
Q

Foreclosing on mortgage vs. deed of trust

A

Mortgage: Generally require judicial foreclosure. Court-administered public auction. Lender has to PROVE borrower is in default.
Deeds of trust: Borrower gives trustee power of sale. If lender says borrower is in default, trustee can hold sale.

44
Q

Default

A

Failure to fully perform obligations of promissory note/mortgage/deed of trust

45
Q

What are some non-foreclosure responses to default?

A
  1. Temp. cessation or reduction of payments.
  2. Sale for less than amt owed (short sale, leads to deficiency)
  3. Deed in lieu
46
Q

How is a deed in lieu different than foreclosure?

A

Deed in lieu: Lender assumes all implications on the house beforehand. Ex. Liens, leases, etc.
Foreclosure: All claims beforehand go away and a new “branch” is created (think of drawing in notes)

47
Q

Deficiency

A

Unpaid balance after foreclosure or short sale

48
Q

Can a lender collect on deficiency of a non-recourse loan?

A

No! Once the property has been claimed through either short sale or foreclosure, the lender cannot go after other assets.

49
Q

Why wouldn’t the lender sue the borrower for the deficiency?

A

The borrower already has no money! It’s deemed fruitless - often more costly than the deficiency.

50
Q

What is the most common way a lender deals with a deficiency?

A

Lender expenses the deficiency as a bad debt expense. Borrower has to claim this expense as income and pay INCOME TAX.

51
Q

Foreclosure

A

Legal process of selling the property and applying the proceeds to pay the obligation secured by property.

52
Q

When my house is foreclosed upon, where does the money go?

A

The money goes towards the liens on the house (ex. HOA dues, maintenance dues, etc.). First in time, first in right! So senior liens are paid first.

53
Q

Redemption

A

Right of borrower to protect themselves from foreclosure by paying off the foreclosing lien holder.

54
Q

If a mortgage company begins foreclosure on Jeremy’s house, how can he avoid foreclosure?

A

He can pay off the mortgage company (the foreclosing lien holder). Redemption!

55
Q

If lenders foreclose the Palm Springs house, and take the house “subject to” liens totaling $10,000 what happens to the property value? Who pays the lien?

A

Seller will retain these liens. If he can’t the sale price will likely be $10,000 less as buyer assumes she will need to pay lien.

56
Q

Assumption aka assumable loan

A

Buyer of foreclosure agrees to become borrower and continue to pay. Would generally continue monthly payments. Buyer becomes PERSONALLY LIABLE.

57
Q

Assumable loans are very rare today. What is more common?

A

Loans are DUE ON SALE. After sale, buyer will make a new loan.

58
Q

Subject to vs. assumption

A

When a buyer buys “subject to,” they do not incur the liens on the house. These remain in the name of the seller. With assumption, buyer assumes liens and debts.

REAL3000 (12 decks)

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