Principles of Real Estate Financing

Question 1

What are the primary and secondary markets for mortgage loans?

Answer 1

Primary market is local made up of various lending institutions in the community.

Secondary market is national, in which investors purchase loans from lenders. This allows lenders to raise more funds when local funds are scarce.

Question 2

Who are the major players in the secondary market?

Answer 2

Fannie Mae (FNMA) - private corporation chartered by the government.

Freddie Mac (FHLMC) - buys conventional, FHA and VA, government chartered.

Ginne Mae (GNMA) - Part of HUD, guarantees securities backed by government-insured loans made through FHA and VA programs

Question 3

What is a promissory note?

Answer 3

A promissory note is the primary evidence of a debt. The borrower is called the maker and the lender is called the payee. Contains:
- loan balance
- maturity date
- names of each party
- interest rate (no usury)

Question 4

What is a security instrument?

Answer 4

This is the mortgage or the deed of trust, and it makes the property collateral for the debt.
- Creates a lien
- To give title without giving up possession is called “hypothecation”

Question 5

Mortgage vs. Deed of Trust

Answer 5

Mortgage has two parties: Borrower and lender.

The deed of trust has three parties: trustor/grantor (borrower), beneficiary (lender) and trustee (third party). The trustee holds the deed during repayment and will handle foreclosure if necessary.

Question 6

What is a lien theory state?

Answer 6

WA is a lien theory state and it means that both deeds of trusts and mortgages only create a lien on the property.

Question 7

What is an acceleration clause?

Answer 7

A provision in the note or security instrument that allows the lender to “call the note” if the borrower defaults on the loan agreement.

Question 8

What is an alienation clause?

Answer 8

Due on sale clause. If there isn’t one, then when the property is sold the loan can be assumed by the next owner.

Question 9

What is “subject to”?

Answer 9

An alternative to assumption where buyer is liable to seller for payment, but buyer isn’t liable to lender for payment (seller remains liable for the debt).

Question 10

What is a subordination clause?

Answer 10

A provision in a security instrument that permits a later instrument to have a higher lien priority than the one containing the clause (common in land development).

Question 11

What is a defeasance clause?

Answer 11

States that when the debt has been paid, the security instrument lien will be cancelled.

Question 12

What is a deed of reconveyance?

Answer 12

A deed of reconveyance is
given by the trustee (third
party) to the trustor/grantor
(borrower) when the deed of
trust debt has been paid in
full. The trustor/grantor has
the deed of reconveyance
recorded.

Question 13

What is a satisfaction of mortgage?

Answer 13

The document which releases the lien on a property when the security instrument is a mortgage and it is paid in full.

Question 14

What is a judicial foreclosure?

Answer 14

When a lender files a lawsuit against the borrower for non-payment of their mortgage and the foreclosure is carried out by the court system.

Question 15

What is a decree of forclosure?

Answer 15

It is issued by the court if they find in favor of the lender, and orders a sheriff’s sale.

Question 16

What is an equitable right of redemption?

Answer 16

A borrowers right to regain the property while it is being foreclosed on by paying the debt in full plus any costs incurred.

Question 17

What is a statutory right of redemption?

Answer 17

After the sheriff’s sale, the borrower can regain the property for ONE YEAR unless the lender has waived their rights to a deficiency judgement and then it’s eight months. Borrower must pay entire debt, interest, costs and fees.

Question 18

What is a non-recourse mortgage?

Answer 18

A mortgage in which the
borrower is not held personally
liable on the note because the
lender is confident the
collateral property is adequate
security for the loan

Question 19

What is a deed of trust foreclosure?

Answer 19

This is a “trustees sale” – the deed of trust contains the power of sale clause that allows it to be sold through non-judicial foreclosure and use the proceeds to pay off the lender.

Question 20

What are the steps in a trustees sale?

Answer 20

• Notice of default (including to junior lienholders, if requested)
• Notice of sale (one month later, recorded with the county)
• Reinstatement (borrower can stop the process by paying past due, fees and interest)
• Successful bidder at trustees sale receives a trustees deed. No post-sale redemption period
• No deficiency judgments allowed

Question 21

What is a deed in lieu of foreclosure?

Answer 21

Deed in lieu of foreclosure:
a deed given by a borrower
to the lender, relinquishing
ownership of the security
property, to satisfy the debt
and avoid foreclosure.

Question 22

What is a short sale?

Answer 22

Alternative to deed in lieu of foreclosure, the lender allows the borrower to sell the property for whatever it will bring. The buyer must get advice on whether the lender can pursue a deficiency judgment.

Question 23

What is a Land Contract?

Answer 23

Also known as a real estate contract, this is for seller-financed transactions. The buyer takes possession of the property but the seller retains legal title until the full price has been paid. The buyer/vendee should record the contract to give constructive notice to the world of her equitable interest in the property. If a vendee defaults, the vendor can foreclose judicially or the vendee can forfeit the property.

Question 24

What is forefiture?

Answer 24

Forfeiture: loss of equitable
interest in property, as a
result of failure to perform
according to the terms of a
land contract

Question 25

What is a purchase loan?

Answer 25

Any loan used to buy the security property.

Question 26

What is a purchase money mortgage?

Answer 26

A mortgage/deed of trust that a buyer gives a seller in a seller-financed transaction.

Question 27

What is a budget mortgage?

Answer 27

A loan which includes PITI.

Question 28

What is a package mortgage?

Answer 28

It includes both real and personal property as security for the debt.

Question 29

What is a construction mortgage?

Answer 29

Secures a loan to finance construction. It’s a temporary/interim loan, and will be replaced with a take-out loan when the construction is complete.

Question 30

What is a blanket mortgage?

Answer 30

A mortgage that covers more than one piece of property.
- Common in subdivision developments
- Typically contain partial release clauses

Question 31

What is a participation mortgage?

Answer 31

A loan made in exchange for a share of the borrower’s equity in the property, or a share of its earnings.

Question 32

What is a wraparound mortgage?

Answer 32

Usually involves seller financing, but not always. It’s a junior loan to the seller’s underlying senior loan. The underlying loan cannot have an alienation clause or it would be due on sale and underlying loan should be paid off before buyer’s wrap loan.

Question 33

What is an open-end mortgage?

Answer 33

Sets a borrowing limit but allows the borrower to re-borrow, when needed. Can be paid off at anytime without prepayment penalty (similar to HELOC).

Question 34

What is a graduated payment mortgage?

Answer 34

A loan where the borrower makes smaller payments that gradually step up into larger payments. It risks negative amortization.

Question 35

What is a swing loan?

Answer 35

Also called a bridge loan or a gap loan, for when buyers need to purchase a new home before selling their current one.

Question 36

What is a reverse mortgage?

Answer 36

Designed to provide income to older homeowners, the owner borrows against the equity but receives only a monthly check. It is a non-recourse loan.