Financing Real Estate

Question 1

Reasons for financing

Answer 1

Reasons for financing: couldn’t afford full amount or take advantage of deduction on mortgage interest

Question 2

Process

Answer 2

1. promissory note (promise to repay) with interest over x amount of years payable usually on a monthly basis.
2. mortgage: a legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt.

security for lender loan will be repaid) must pay property taxes and maintain property so value does not decline.

If buyer defaults go to foreclosure

Who regulates? State requirements in addition to federal rules

Question 3

Mortgage Fairness Standard

Answer 3

Unfair methods of competition and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful (says in state and us code)

Characteristics in assessing fairness in mortgage (can it be repaid?):

How long does the introductory rate last?

What is debt to income ratio?

Is prepayment or refinance allowed?

What is the difference between introductory rate and average rate?

Question 4

Commonwealth v. Fremont Investment & Loan (mortgage fairness)

Answer 4

Rule of Law

A lender may not sell a mortgage to a borrower if the lender reasonably expects that the borrower will default on the mortgage.

Facts

Sold houses to poor people when they knew they could not pay it back (default)

Holding and Reasoning (Botsford, J.)

No. A lender may not sell a mortgage to a borrower if the lender reasonably expects that the borrower will default on the mortgage. Under Massachusetts law, a lender may not use unfair or deceptive practices to sell or service a mortgage. If a lender reasonably expects that a borrower will default on a mortgage, it is unfair for the lender to sell that mortgage. For example, a lender should know that an adjustable-rate mortgage is unfair and a borrower is likely to default on it if: (1) the introductory rate lasts for three years or less; (2) the introductory rate is at least 3 percent less than the fully indexed or later rate; (3) the borrower’s debt-to-income ratio exceeds 50 percent if measured using the payments due after the introductory period; and (4) the loan has a substantial prepayment penalty, a prepayment penalty period that extends beyond the introductory period, or a loan-to-value ratio of 100 percent. Here, Fremont sold many adjustable-rate mortgages that had all four unfairness characteristics. Fremont knew or should have known that these borrowers were likely to default. Therefore, by selling those mortgages, Fremont likely acted unfairly in violation of state consumer-protection law. The preliminary injunction temporarily preventing Fremont from foreclosing on these unfair mortgages is affirmed, and the case is remanded.