Mortgage Market Flashcards
What are the three most popular kinds of mortgages?
Fixed Rate Interest Mortgage (FRIM)
Constant payment each month for 15-30 years that includes components for interest and principal
Adjustable Rate Mortgage & Variable Rate Mortgage (ARM/VRM)
Initial below-market interest rate that gradually increases according to an index
Goes up or down by a limited amount each year
Reverse Annuity Mortgage (RAM)
AJ: Predatory loan, costs 3x the amount to originate
Allows retired folks to use equity in house as collateral for a loan
Guarantees mortgagor’s family loses property
What are the two theories of mortgages?
Title theory (classic): Deed in fee simple given to the moneylender with a condition subsequent clause providing that if borrower paid back sum owed on day due, deed would become void
Lien theory: Mortgagor keeps legal title and mortgagee has only a lien on the property
What is the process that contributed to the subprime mortgage housing crash?
ARMs/VRMS -> CDOs/MBSs -> Tranches -> Institutional investors
What are the Fremont qualities of an unfair mortgage?
ARM 3 year or less intro period
Introductory rate at least 3% below fully indexed rate
Made to borrowers for whom debt to income ratio would exceed 50% at fully indexed rate
Loan to value ratio 100% OR there is pre-payment penalty
What does the Dodd-Frank Act require and forbid?
Creditors must make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay a loan according to its terms
Excludes loans with negative amortization: Not paying enough to cover interest payment so that principal amount increases, interest-only payments, balloon payments: Large final payment due at end of term, terms that exceed 30 years, no-doc loans
What is the process of foreclosing a mortgage?
1) 30 day late fee (Max 10% payment)
2) 90 days to cure
3) 120 days late: Notice of intent to foreclose, debt accelerated
4) Mortgagor negotiates with the bank, has to pay everything
5) Mortgagor fails to pay or exceeds 2x annual cure limit
What is the equity of redemption?
Protection against foreclosure is the mortgagor’s interest in the property
What is statutory redemption (24 states)?
Mortgagor can retain property for a period of time after foreclosure
Mortgagor can buy back title from purchaser at judicial foreclosure sale for sales price within a specified period after the foreclosure sale
This does NOT come into play until equity of redemption is extinguished
What are the four kinds of foreclosures?
Strict foreclosure (least popular): Mortgagor ordered to pay within a given period or be forever barred
Judicial foreclosure sales (allowed in every state):
Decree from court ordering public sale and conveyance
Nonjudicial foreclosure sales (30 states):
Mortgagor grants mortgagee a power of sale, which permits mortgagee to hold public sale itself after giving notice to all interested parties
Deed of trust (Maj. Of jurisdictions, most popular and cheapest):
Borrower conveys title to a person, usually a 3rd person but can be lender
Trustee has power to sell property without going to court in case borrower defaults
What is a deficiency judgment? What are the limitations?
If the property is sold at reasonable market price but does not cover mortgagor’s debt, court will order them to pay the difference
In some states, only available at judicial sale
Courts will more heavily scrutinize a nonjudicial foreclosure sale if the bank is asking for a deficiency judgment
What is an installment land contract/contract for deed?
Purchaser takes possession and the seller contracts to convey title to the purchaser when the purchase has paid the purchase price in regular installments over a fixed period of time, which can last as long as forty years
Either payments are allocated to principal and interest, or there are annual payments of interest and balloon payment at the end
What are the three views on dealing with an installment land contract missed payment?
o Majority view: If contract contains a forfeiture clause, no matter amount of equity in property, if purchaser misses payment the vendor can evict
CA view: Treated like a mortgage, seller has to foreclose to evict
Middle view: Treated as contract when there is little equity, mortgage when there is a lot
Rule of Thumb: Equity > 30% = Mortgage
