Finance Flashcards
Chapter 3
Mortgage
A conditional transfer or pledge or real estate as security for the payment of a debt. Also the document creating a mortgage lien.
Mortgage Note
Sometimes called a promissory note, it is a signed instrument acknowledging a debt and promising payment to the lender. The note is a negotiable instrument and must be in writing.
Mortgage Note Requirements
- A promise to repay 2. A stated amount to be repaid, interest 3. The period of time of the debt (term) 4. Identification of the payee 5. Words of negotiability (pay to the order of 6. Signature of all parties
Mortgage Note Suggested Elements
Dates (signed), Prepayment privileges and/or penalties, Acceleration (default) clause
Mortgage Document
creates the lien and is the security of pledge instrument. Must be in writing in accordance with the Statute of Frauds and be signed by both parties. It lays out the rules of the Mortgage
Hypothecation
to pledge real property as security for a debt without giving up possession.
Mortgagor covenants
Pay Taxes, Keep property Insured, Protect against removal, Keep property in good repair, allow mortgagee (lender) the right of re-entry
Lien Theory
[SC adheres to this] If the mortgagor (borrower) defaults, the lender has the right to initiate foreclose procedures through court action. The mortgagor (borrower) normally receives legal title at closing. These are prioritized by date and time.
Title Theory
the lender has title rights at closing. It is held in a trust until the loan is satisfied. Leanders utilize a three-party instrument known as the deed of trust or trust deed to secure and finance the property.
Deed of trust / Trust Dead
Conveys naked title or bare legal title (title without the right of possession). It is given as a security for the loan not a third party called the trustee. It establishes the actions the trustee may take if the borrower (the truster) defaults under any of the deed of trust.
Trustee
holds bare title on behalf of the lender in a Deed of Trust. Usually the lender chooses the trustee and reserves the right to substitute trustees in the event of a death or dismissal. State law dictates who can serve as a trustee
Beneficiary
(The lender) holder of the note in a Deed of Trust.
Parties of a deed of trust
Trustor = the mortgager (borrower)
Trustee = a third party (bank or title company
Beneficiary = the mortgage (lender)
Methods of Payment
- Amortized Loans, 2. Straight Term Mortgage, 3. Budget Mortgage P.I.T.I, 4. Graduated Payment Mortgage, 5. Blanket Mortgage, 6. Package Mortgage, 7. Open End Mortgage, 8. Sale and Leaseback 9. Wraparound Loan, 10. Land Contract, 11. Purchase Money Mortgage
Amortized Loans
Period payments include principal and interest over the term of the loan. Fully Amortized - Direct reduction) fixed level payments are made over a specified period or term. Pays off entire balance (principal) of the loan. Partially Amortized - periodic payments at fixed rates. It keeps down the monthly payments but a balloon payment is required at the end of the loan
Straight Term Mortgage
Pays off interest only. At the end of the term, the principal is paid in full. Usually short term (less than 5 years). Not amortized
Budget Mortgage
P.I.T.I Payments include insurance and taxes as well as principal and interest. Taxes and insurance are prorated and placed in an escrow account. Escrow process is sometimes referred to as impounds.
Graduated Payment Mortgage
takes into account a borrowers present and future financial position. Payments start as a low level, then increase periodically to a cap level. Usually the loan is fully amortized by the end of the loan period, but can result in negative amortization - increase in the principal balance due resulting from unpaid interest added to the principal periodically.
Blanket Mortgage
pledges more than one property as security under the same mortgage. Primarily used by developers and usually contains a partial release clause.
Partial Release Clause
as portions of the debt are paid in a blanket mortgage, the individual lots can be released.
Package Mortgage
combines personal and real property in the financing arrangements. Think of Coastal Homes that sell the property furnished. Advantage - finance personal property over a longer period of time. Disadvantages - pay much more for the property than. it is worth and personal property can be depreciated .
Open End Mortgage
lender agrees to advance additional funds based upon equity built up, using the original mortgage as security. It can be used for improvements, college education, etc.
Sale & Leaseback
property sold to an investor and the seller leases the property back from the buyer. Used primarily by commercial and industrial firms to free up capital. Vendor (seller) becomes a lessee and the vendee (buyer) becomes lessor.
Wraparound Loan
a second mortgage whereby the new lender assumes payment of an existing mortgage and gives the borrower a new loan at a higher interest rate.
Land Contract
(contract for a deed, installment contract) between buyer (vendee) and seller (vendor) which is a form of seller financing whereby the buyer agrees to pay the seller a down payment and then make periodic payments for a specific number of years. The vendor holds fee simple title while the vendee possesses the equitable title during financing.
Purchase Money Mortgage
seller agrees to take back part of the purchase price (often the down payment) secured by a note and mortgage on the property. The seller lends the borrower a part of the purchase price. Could also lend the entire amount ; could be first or second mortgage. Title does pass at closing unlike a land contract.
Land Contract Advantage / Disadvantage
Dis - title does not pass until the last payment is made. Vendee could lose everything and judge could count payments as rent. A lender may not lend additional money, since the buyer only has equitable title and not fee simple title. Adv - usually higher interest and is often used when purchaser may have bad credit. The buyer pays all taxes, insurance repairs, and upkeep
Classifications of Loans (as to time of payments)
SHORT TERM (less then 10 years): Construction loan & Bridge Loan. LONG TERM: 1st, 2nd, 3rd. First has priority, therefore may result in lower interest rates than subsequent mortgages
Adjustable Rate Mortgages (ARMs)
a mortgage loan in which the interest rate may increase or decrease at specified intervals within limits based on an economic indicator (usually T-bills, which is the Govs way of financing deficit spending)
Interest affect on ARMs
- maturity is fixed and changes in the interest rate will affect the monthly payment 2. maturity could vary according to changes in the interest rate and the payment fixed. 3. both maturity and interest rate vary
Rate Caps
caps set on the adjustment periods (1-3 years) and lifetime caps (usualy 5% or 6%) which is the maximum percent the loan can increate or decrease over the loan term
Payment Caps
the mortgage is protected against the possibility of payments that they cannot afford. Sometimes caps are set on the amount of payment instead of the interest rate.
Margin
The percent difference between the index and the interest rate charged the borrower
Adjustment period
establishes how often the loan rate my be changed
Conversion option
permits the mortgagor to convert from an adjustable rate mortgage to fixed rate mortgage at certain intervals during the life of the mortgage
Growth Equity Mortgage (GEM)
rapid-pay off mortgage - for senior citizens. If they are retired, they face the reverse problem of young families in that their incomes are usually lower and they have equity built up in their homes. The lender would pay the owner an annuity (cash payment) based on a percentage of the equity value of the home.
Shared Appreciation Mortgage (SAM)
typically associated with commercial transactions. The lender gets a share in equity through appreciation when the property is sold. The borrower gets a favorable interest rate usually several points below the going rate.
Home Equity Mortgage (HELOC)
a loan based upon the equity accumulated in a home. It can be a source of funds for a variety of financial needs such as : financing purchase of an expensive item (car, boat), consolidating existing installment loans or credit card debt. Paying medical, education, home improvement or other expenses.
Conventional Loan
any mortgage that does not have government support. Maximum loan determined by : 1. lender policy, 2. the property being used to satisfy the debt 3. borrowers qualification
Private Mortgage Insurance (PMI)
Insurance provided by private carriers that protects a lender against a loss in the event of a foreclosure and deficiency
Loan Origination Fees
usually charged to buyer to pay for lenders expenses in generating the loan. May range from 1-3% of the loan
Discount Points
charged as. a method of offering a borrower a reduced interest rate or discounts the loan in order to sell it in the secondary money market. Charged to raise the lenders monetary return (effective yield) on a loan without raising the interest rate. Each point raises the effective yield by 1/8 of 1%. A discount point is worth 1% of the loan amount. Main purpose is to increase the lenders yield.
FHA Loan
Federal Housing Administration was formed in 1934 with the passing of the National Housing Act. Operates under HUD and is available to both vets and non vets. It insures the loan & lender but not the property. Must be written in increments of $50
Mortgage Insurance Premiums
MIP is provided by the FHA but is normally paid by buyer. The borrower usually charges an up front premium on the outstanding loan amount for FHA insurance at closing or the MIP can be financed into the loan amount.
VA Loan
loans for a qualified veteran and his or her sound who apply for a certificate of eligibility which remains in effect until used. The VA issues a certificate of reasonable value which is a VA appraisal. The loan cannot exceed the appraisal value of the home.
Primary Money Market
involves lenders who provide money to the public for real estate purpose. Money flows from the secondary market to the primary market.
Secondary Money Market
existing mortgages are bought and sold. It provides an outlet for lenders to sell existing mortgages thus providing more money for additional loans.
Federal National Mortgage Association. (FANNIE MAE)
established by the federal government in 1938, it was later reorganized in 1968 as a government sponsored corporation who’s entire ownership is private. It is created to expand the flow of mortgage money by creating secondary mortgage markets to provide affordable home ownership to low, moderate and middle income Americans. Largest provider of funds
Government National Mortgage Association (GINNIE MAE)
established in 1968 to promote home ownership/ A wholly-owned government corporation within the dept of House and Urban Development, the mission is to expand affordable housing by channeling global capital into the nations housing financial markers.
Federal Home Loan Mortgage Corporation (FREDDIE MAC)
second largest provider of funds. A government sponsored enterprise charters by congress to stabilize the nations residential mortgage markets and expand opportunities for home ownership and affordable rental housing.
Default
violation of the terms of the mortgage
Equitable right of redemption
period after the default but before the property is sold at mortgage foreclosure or tax sale whereby the owner can redeem the property by paying what is due.
Statutory Right of Redemption
Period after a tax sale where the owner can redeem property for a statutory period. The taxpayer will pay all taxes plus all interest owed and entitles the purchaser to a certificate of sale. They can then apply for the tax deed
Acceleration Clause
The clause in a mortgage stipulating that the entire debt is due and payable upon default. (Foreclosure - can be result of an alienation clause)
Prepayment penalty clause
A clause stating that the mortgagor can be charged a prepayment penalty if the loan is paid off early. NOT legal in SC on loans of 150,000 or less.
Alienation Clause
stipulates that if the owner of a mortgaged property sells the property to someone else, the entire mortgage will be due on sale. It tends to prevent the assumption of the mortgage debt without the lenders approval.
Escalation Clause
Clause in some mortgages that allows the lender to increase the interest rate and payments
Defeasance Clause
asserts that when the mortgage has been paid in full, the mortgagee (lender) is to execute a satisfaction of mortgage showing in public record that the debt had been paid and the mortgage released (satisfaction of mortgage)
Subordination Clause
The priority of a mortgage or trust deed liens may be changed by the signing of a subordination agreement. It subordinates the first lenders mortgage to the second mortgage
Usury
The maximum amount of interest or penalty that may be charged onto a mortgage loan and is set by state law. Charging in excess of that rate is usury. Federally related first mortgage loans are generally exempt from law. SC does not have this
Foreclosure
The legal procedure whereby a property pledged as security for a debt Is sold to satisfy the debt in the event of default of the mortgage note or default of other terms in the mortgage document.It brings all the rights of lien holders to a conclusion and title passes to the lien holder or the purchaser at the foreclosure sale.
Judicial Foreclosure
the court orders the property sold to the highest bidder. Proceeds are used to pay the lien holders. Any amount remaining is paid to the borrower.
Non-judicial foreclosure: process not handled by the courts, title theory states
Strict Foreclosure
No sale of the property by the courts. Instead, the court gives title to the property to the lender and ends the debt. Not common
Power of Sale
lender has right to sell the property if the mortgagor defaults, without going through foreclosure proceedings. If sale proceeds are not enough to satisfyy the debt, the lender would have to go to the court to obtain a deficiency judgement
Deed in lieu of foreclosure
“Friendly foreclosure. mortgagee (lender) takes the title to the property subject to any other liens. Mortgagor has no redemption rights
Assignment of Mortgage
mortgage note is a negotiable instrument and may be sold to a third party when they execute this document.
Assumption
The process whereby the buyer agrees to become personally liable for the sellers mortgage debt. The seller can get a mortgage release or satisfaction piece to relieve secondary liability.
Subject to Sale
the buyer is not personally obligated to pay the debt in full on an existing loan. The purchaser take the title to the property knowing they must make payments on the existing loan. Upon default, the lender forecloses and the property is sold by court order to pay the debt.
Loan underwriting
process of analyzing and approving loans. They consider: the borrowers ability and willingness to pay, the properties condition, age, location and usage, all relevant economic influence, laws concerning foreclosure procedures and assignment of rent, any unusual conditions that may exist.
Loan to value ratio
denotes the amount of the loan as a percentage of the value of the property. The higher the loan to value ratio, the great the risk, and thus the higher the interest rate and discount.
Conforming Loan
a loan that conforms to Fannie Mae and Freddie Mac guidelines
Federal Reserve System
established in 1913 under Wilson, it operates to maintain sound credit conditions, help counteract inflationary and deflationary trends and create a favorable economic climate. Keeps the flow of money. It does not insure loans or savings accounts
Principal
the capital sum that is borrowed. It does not include interest, taxes or insurance
Interest
the charge for the use of money and profit incentive for the lender. Interest usually is paid in arrears - pays for the previous month
Hypothecation
the process to pledge real property as security for a debt without giving up possession
