Intro to Real Estate Financing

Question 1

short sale

Answer 1

homeowner sells the home “short” of what they owe the bank. This typically happens if a homeowner is underwater (they owe more than they can sell their home for). In a short sale, the bank settles with the homeowner for whatever sales price the homeowner can obtain on the open market, and writes off the remaining loan balance as a loss. Real estate agents often help homeowners sell their home in a short sale, though the process can take quite a bit of time due to the need for the bank’s approval of any offers.

Question 2

REO

Answer 2

If the lender owns the property after foreclosure they will sell it on the market as a “Real Estate Owned” property.

Question 3

strict foreclosure

Answer 3

the lender can sue the borrower, and if the borrower does not pay what they owe within the timeframe ordered by the court, the lender receives title to the property automatically. Usually this is used for underwater properties, which are properties that are worth less than what is owed on the loan.

Question 4

note

Answer 4

Evidence of the debt. Think of it as an IOU

Question 5

two clauses that might appear in the note:

Answer 5

Acceleration clause – Permits the lender to accelerate the maturity date (due date) of the loan in the event of a default on the terms of the mortgage. This is called calling in the note, and is the lender’s first step in the foreclosure process.

Prepayment penalty clause – Requires the borrower to pay a penalty for prepayment of the loan. It is used to guarantee that the lender gets paid the interest on the loan. Prepayment penalty clauses are uncommon in residential loans, but are common in commercial loans.

Question 6

mortgage

Answer 6

is the security for the note. It provides a piece of property as collateral for the loan. Under the mortgage the borrower hypothecates their property (gives it up as security while retaining possession).

Question 7

Lien Theory vs Title Theory

Answer 7

Lien Theory- borrower will hold legal title during the life of the loan.

Title Theory- the bank will hold legal title during the life of the loan

Massachusetts is a title theory state, which means that the bank legally owns the property until the borrower pays off the loan. Under the loan the borrower has equitable title (a future right to gain legal title).

Question 8

common features of mortgages are:

Answer 8

Mortgage covenants – Everything the borrower promises to do: make monthly payments, pay their property taxes as impounds to the bank, keep the property insured, etc.

Power of sale clause – Permits the lender to take the property and sell it in the event of a default on the terms of the loan (most often non-payment of the loan).

Defeasance clause – Automatically relieves the collateral of the bank’s claim when the loan is paid back.

Due on sale (or alienation/ assumption) clause – Permits the bank to accelerate the maturity date of the loan in the event of most (but not all) title transfers. It prevents transferring the mortgage to a third party. Under the Garn-St.

Germain Act the due on sale clause cannot be triggered on death, devising of the property, leasing, marriage, divorce, or transfer to a family trust.

Subordination clause – Makes the mortgage junior to any future mortgage.

Partial release clause – Used in blanket mortgages (mortgages that cover several parcels of land). This clause releases a portion of the collateral in exchange for partial payment of the loan. Might be seen in subdivision development or cross-collateralized loans.

Question 9

Point

Answer 9

is one percent of the loan.

Points are often used to increase the value of a loan. Basically, if the interest rate on a loan is so low that it isn’t worth making, a lender can charge the borrower points as an origination fee (a fee for getting the loan) to increase their profit on the loan and make it worthwhile.

Question 10

Math on points

Answer 10

A property was sold for $100,000 with a loan for $80,000. The lender charged the borrower two points. How much did the points cost the borrower? $80,000 x .02 = $1,600

Question 11

Discount Points

Answer 11

A borrower can use discount points paid up front to buy down the loan interest rate. This means the borrower owes less interest every month because they have paid some of the interest up front, which reduces their monthly payment.

Question 12

Mortgage Brokers

Answer 12

are third parties that do not originate the loan, but instead broker the loan between the borrower and lender.

Mortgage brokers may offer more flexible loan options for your clients by comparing different banks’ offerings, though often at a higher cost (because the broker charges a fee).

Question 13

mortgage bankers

Answer 13

who work directly for the lender and do originate the loan.