Finance Laws Flashcards
A negotiable instrument
is a written, unconditional promise to pay, on demand or at a specified future time, a sum of money “to order” or “to bearer,” signed by its maker or payor (the borrower).
an endorsement
If the note is negotiable, the payee may transfer the note to another party, by writing their name across the back of the note. This signature is called an endorsement. When notes used in real estate loan transactions are sold, the endorser may endorse it “without recourse,” making it a qualified endorsement. Under a qualified endorsement, the endorser has no liability for default on the note. The holder of the note would have recourse only against the maker of the note and the property securing the note.
a prepayment privilege, or right to prepay
This gives the borrower the right to pay all or some of the outstanding principal balance during the term of the note before it is due, either with or without a prepayment charge. A prepayment privilege could be written simply as an “or more” clause, allowing the borrower to pay the specified amount or more without a penalty.
a prepayment penalty
A prepayment privilege could include a prepayment penalty clause providing for a fee for the privilege of paying off the loan ahead of schedule.
a lock-in clause
A note may contain a lock-in clause prohibiting any loan prepayment, at least for a certain period.
a late payment penalty
A note may include a late payment penalty provision to create motivation for timely payment. The penalty could be a specified dollar figure or a percentage of the overdue payment.
An acceleration clause
An acceleration clause allows the lender to declare the entire unpaid loan balance due upon a default of any of the terms or conditions of the document, including failure to pay insurance premiums, property taxes, or the principal and interest on the debt.
an alienation clause (or due-on-sale clause or call provision)
It provides that, if title is alienated (transferred to another) without the lender’s prior written consent, the lender may, at its option, call the loan due at once and require immediate payment in full of all sums owed. This provision prohibits assumption of the loan without the lender’s permission, so the lender can require that the new borrower submit to qualification on the same basis as the original borrower to ensure that their risk is not increased.
A defeasance clause
if the loan is paid according to the terms of the note and the other covenants are fulfilled, the lender will release the lien, so the borrower will regain clear title.
an assignment of rents clause
provides that the rents from the property are assigned to the lender as security for payment of the debt. As long as the borrower does not default in the loan terms, they may collect and retain the rents. If they default and the note is accelerated, or if they abandon the property, the lender has the right to enter the property, take possession and manage it, and collect all rents earned by the property.
A request for notice of default clause
provides for notification to the lender if another lien against the property is in default so the lender may take action to prevent loss resulting from foreclosure of the other lien.
mortgagor
the borrower gives the mortgage, the borrower is called the mortgagor.
mortgagee
the lender is receiving the mortgage, the lender is called the mortgagee.
a judicial foreclosure and sale
This would result in the property being foreclosed and sold through court action.
strict foreclosure
This would result in judicial foreclosure and the property given to the lender instead of being sold. In most states, this is not allowed.
a power of sale clause
This clause gives the lender the power to sell the property without a judicial foreclosure, upon default. The actual sale could be executed by the lender or its representative, typically referred to as a trustee.
equitable right of redemption (or equity of redemption)
A foreclosure wipes out the borrower’s equitable right of redemption (or equity of redemption). This is the right to pay off the mortgage debt plus interest and costs before the foreclosure.
A foreclosure sale
is an auction sale to the highest bidder.
a statutory right of redemption
allowing the mortgagor a period of time after the foreclosure sale, to buy back the property.
A deed of trust (also called a trust deed)
is a form of mortgage that is available in many states, particularly those that do not have laws allowing for a power of sale provision in a mortgage. It has the same type of provisions as a mortgage, with the major difference being in provisions relating to foreclosure.
A fixed-rate mortgage
provides for an interest rate that will remain fixed for the entire term of the loan.
adjustable-rate mortgage (ARM), variable-rate mortgage, flexible-rate mortgage, renegotiated-rate mortgage, or rollover mortgage
A mortgage that provides for the interest rate to go up or down according to some indicator (e.g., an index tied to Treasury bill rates).
It has a variable interest rate provision that allows the interest rate to be increased in an inflationary economy or decreased when market conditions cause current interest rates to drop.
Term (Straight)
provides for payment of interest only, with no amortization (reduction of the loan balance) during the term of the loan.
The word “term” describes the fact that the entire principal amount is due at the end of the term.
The word “straight” describes the fact that the loan amount, as well as the interest payment, is straight, or level, throughout the term.
The payment made at the end of the term would be called a balloon payment, as it would be considerably larger than the previous payments.
Reverse Annuity
A reverse mortgage or reverse annuity mortgage is a loan secured by real estate that is due on default or when the property is sold or no longer used as a principal residence.
It is designed to enable a person who already owns real estate to convert some of their equity into cash.
It is available to people age 62 or older who own their home and need cash to meet their expenses.
An amortized loan
involves gradual liquidation or extinction of the loan during the term of the loan through periodic payments to principal as well as interest.
The term “amortization” also can be used in connection with paying off a land sales contract or with writing off depreciation for tax purposes.
A partially amortized (balloon) mortgage
provides for some, but not total, amortization during the term of the mortgage. The term “balloon” refers to the large payment needed to pay off the unamortized principal balance during or at the end of the loan period.
A fully amortized (self-liquidating) mortgage
provides for periodic payments resulting in the loan being repaid in its entirety by the end of the mortgage term without the need for a balloon payment. Methods of payment used for these loans might be level payment, a graduated payment mortgage, budget mortgage, and direct principal reduction.
The level payment mortgage
provides for equal payments of principal and interest throughout the loan period. As the principal balance is paid down, the portion of each payment that applies to principal increases while the portion applying to interest decreases. However, the total payment remains the same.
A graduated payment mortgage
provides for payments to start out relatively low, rise at a set rate over a set period (e.g., five years), and then remain constant for the duration of the loan.
A budget mortgage or PITI mortgage (for principal, interest, taxes, and insurance)
rovides that an amount equal to one-twelfth of the estimated annual property insurance premiums, property taxes, homeowners association dues, or special assessments, if any, will be paid to the mortgagee, together with the monthly installment of principal and interest.
a direct principal reduction loan
periodic payments include a fixed amount of principal, for example, $1,000 per month, plus interest on the unpaid balance. Under this payment method, the periodic payments get smaller with each payment as less interest is added on each month.
a first mortgage
A mortgage is called a first mortgage if there are no other mortgages on the property with prior lien rights.
A junior mortgage
is a lien on real property that is subordinate to another mortgage that previously was recorded. It may be in second, third, or lower priority.
A second mortgage exists when there is one other mortgage that has a prior lien on the property ahead of it; a third mortgage exists when there are two other mortgages that have a prior lien on the property.
A wraparound mortgage
is a second mortgage, which is subordinate to an existing first and unsatisfied lien on the property.
It differs from other junior liens in that the face amount of the wrap includes the amount borrowed on the junior lien plus the amount owed on the first lien.
A chattel mortgage
is a mortgage lien encumbering only personal property (i.e., chattel).
The chattel mortgage has been replaced in many areas of the country by a security agreement regulated by the Uniform Commercial Code.
A package mortgage
is a mortgage using both real property and personal property as security for the loan.
Items such as ranges, ovens, refrigerators, freezers, rugs or dishwashers may be included in the sale price of the property but are not considered real property.
A blanket mortgage
is one mortgage that covers more than one parcel of real estate as security.
A participation mortgage
is used most often in loans for development of large commercial real estate projects.
The lender conditions the loan commitment upon receiving part ownership interest in the development.
They earn interest as well as a percentage of the project’s net income or its ownership in return for granting the loan or for granting concessions, such as a higher loan-to-value ratio or a lower interest rate.
a shared appreciation (shared equity) mortgage
In return for a relatively low interest rate, the borrower agrees to share with the lender a sizeable percent (e.g., 30% to 50%) of the appreciation in the value of the property, either after a specified number of years or when title is transferred.
Closed-End Mortgages
Most mortgages are closed end. In other words, a fixed amount is borrowed, and no additional funds can be borrowed without a new note and mortgage.
An open-end mortgage (or mortgage for future advances)
allows the borrower to borrow additional funds up to a specified maximum amount without negotiating a new mortgage (This is similar to using a credit card, with a mortgage making the real property security for repayment.)
a construction mortgage
Construction financing usually is designed as a high-interest, short-term loan to finance the cost of labor and materials used during the construction of a new building.
It is a form of interim (or temporary) financing, extending from the commencement of the work until the work is completed and the loan is replaced by a more permanent form of financing.
A home equity loan
is most often a junior loan in which the homeowner uses the equity in their home as a basis for a loan.
A home equity loan can be used for anything: home improvements, consolidating and paying credit card and consumer debts, car purchases, education, and medical expenses.
A home equity line of credit (HELOC)
is a form of revolving credit in which a person’s home serves as collateral. By using their equity in the home, a borrower may qualify for a sizable amount of credit at an interest rate that is relatively low. The borrower is approved for a specific credit limit based on a percentage (e.g., 75%) of the appraised value of the home less the balance owed on the existing mortgage.
