Unit 12

Question 1

Federal Reserve System

Answer 1

Role is to maintain sound credit conditions, help counteract inflationary and deflationary trends, and create a favorable economic climate. 12 federal reserve districts , each served by a federal reserve bank. Regulates the flow of money and interest rates in the marketplace through its member banks by controlling their reserve requirements and discount rates.

Question 2

Primary Mortgage Market

Answer 2

Consists of lenders that originate loans. They make money available directly to borrowers.
Income for the lender from the loan:
Finance charges- loan origination fees (1%- 3% of loan amount) and discount points
Recurring income- interest collected during the term of the loan
Servicing loans

Question 3

Mortgage Broker

Answer 3

Any person or company who for a fee arranges or negotiates first mortgage loan. Failure to obtain a license is a felony in the third degree. For license they need 20 hours of education, passing test, criminal background check, and posting a surety bond between $50,000 and 150,000.

Question 4

Secondary Mortgage Market

Answer 4

Exists to help lenders raise capital to continue making mortgage loans, it does not interact directly with borrowers. Stimulates the housing construction market and the mortgage market by expanding the types of loans available. Various agencies purchase a number of mortgage loans and assemble them into packages (pools). Institutions include Fannie Mae, Freddie Mac, and Ginnie Mae.

Question 5

Fannie Mae

Answer 5

Deals in conventional and Federal Housing Administration FHA and Department of veterans affairs VA loans. Not sources of money it is a government insured loan.

Question 6

Freddie Mac

Answer 6

Primarily for conventional loans.

Question 7

Ginnie Mae

Answer 7

Special assistance loans.

Question 8

Title theory

Answer 8

the mortgager actually gives legal title to the mortgagee and retains equitable title. Legal title is returned to the mortgagor when the debt is paid in full. If the mortgagor defaults the lender has right to immediate possession.

Question 9

Lien theory

Answer 9

Mortgager retains both legal and equitable title. The mortgagee simply has a lien on the property as security for the mortgage debt. If the mortgagor defaults the mortgagee must go through formal foreclosure proceedings to obtain legal title.

Question 10

Intermediary Theory

Answer 10

PA adopted this theory. The property owner does not automatically forfeit the real estate on default of the debt. The borrower must first be given notice of intention to foreclosure before the lender can file suit and proceed with foreclosure.

Question 11

Two parts of a Mortgage Loan

Answer 11

Promissory note (financing instrument) states the amount owed and a security document specifying the collateral (mortgage or deed of trust) used to secure the loan.

Question 12

Hypothecation

Answer 12

A borrower is required to pledge specific real property as security for the loan. The debtor retains the right of possession and control while the creditor receives an underling equitable right to the pledged property.

Question 13

Deed of trust

Answer 13

3 part instrument. Trust deed conveys naked title which is title without the right of possession. The deed is given as security for the loan to a third party called a trustee. The trustee holds bare title on behalf of the lender who is known as the beneficiary. The beneficiary is the holder of the note.

Question 14

Usury

Answer 14

Charging interest in excess of the maximum rate allowed by law.

Question 15

Discount Points

Answer 15

Used to increase the lenders yield on its investment. 1% of the amount being borrowed.

Question 16

Prepayment Penalty

Answer 16

Charge against the unearned portion of the interest for any payment paid ahead of schedule. Not permitted in PA for residential mortgage loans when the amount is $50,000 or less.

Question 17

Straight Loan (term loan/ interest only loan)

Answer 17

Divides the loan into 2 amounts to be paid off separately. The borrower makes periodic payments of interest only followed by the principle in full at the end of the term.

Question 18

Amortized Loan

Answer 18

Each payment partially pays off both principal and interest. Loans are paid off slowly over time in equal payments. 15 years or 30 years is common. Each payment is applied first to the interest owed the balance of the payment is then applied to the principal ammount

Question 19

Duties of a Mortgagor

Answer 19

The borrower is required to pay the debt in accordance with the note, pay real estate taxes , maintain insurance , maintain property, and get authorization before making major alterations.

Question 20

Acceleration Clause

Answer 20

Assists the lender in foreclosure. If a borrower defaults the lender has the right to accelerate the maturity of the debt (can ask for entire debt to be due).

Question 21

Defeasance Clause

Answer 21

The mortgagee is required to execute satisfaction of mortgage when the note has been fully paid. Returns the borrower all interest. Release in the public records shows the mortgage lien is removed.

Question 22

Basic recurring components of a borrowers months loan payment

Answer 22

Principal
Interest
Taxes
Insurance

Question 23

Federal Flood Insurance Reform Act

Answer 23

Imposes certain mandatory obligations on lenders and loan services to set aside funds for flood insurance on new loans for property in flood prone areas. Borrower has 45 days to purchase flood insurance.

Question 24

Alienation Clause/ resale clause/ due on sale clause

Answer 24

When a property is sold the lender may either declare the balance of the sellers debt due immediately or permit permit the buyer to assume the loan at an interest rate acceptable to the lender.

Question 25

Homeowner Emergency Assistance Program (HEMAP)

Answer 25

Provides counseling and loans to help people pay delinquent mortgage loans. Qualifying families may have to pay 40% of their net monthly income toward their housing expense.

Question 26

Methods of Foreclosure

Answer 26

Judicial- Allows the property to be sold by court order after the mortgagee has given sufficient public notice.
Non Judicial- No court action is required. This is when security instruments contain a power of sale clause.
Strict- If the borrower does not pay off the loan by the date set the court simply awards full legal title to the lender. No sale takes place.

Question 27

Foreclosure in PA

Answer 27

• If foreclosure is due to default on a mortgage loan the borrower first receives a Act 91 notice
• Then they can file an application for HEMAP assistance
• The borrower then receives an Act 6 notice known as a notice of intention to foreclosure
• the borrower has 30 days to contact the lender and set up a schedule of payments
• If no action is taken the lender can issue a complaint. They have 30 days to respond to the complaint.
• If the borrower fails to answer the lender can obtain a judgement and are permitted to sell the property in a sheriffs sale.
• If foreclosure is because they fail to pay taxes or other specific lien they receive an Act 1 demand letter.
• Owner has 15 days notice to pay the amount owed
• If they fail to pay they receive a complaint and have 30 days to file an affidavit of defense.
• The municipality or service company may obtain a judgement permitting to property be sold at a sheriffs sale

Question 28

Deed in Lieu of Foreclosure

Answer 28

Carried out my mutual agreement instead of by lawsuit. All junior liens are eliminated. Adverse element in borrowers credit history and lose right pertaining to FHA, VA guarantees and private mortgage insurance.

Question 29

Short Sale

Answer 29

Best way to avoid foreclosure is to sell the property in the marketplace. Difficult when the debt is more than the market value. They may the lender to accept less than what is owed.

Question 30

Equitable Right of Redemption

Answer 30

Most states give defaulting borrowers a chance to redeem their property before going through with foreclosure. Borrower pays the lender the amount of the default plus cost the debt will be reinstated.
In PA a borrower can cure a default by bringing payments up to date on a loan of $50,000 or less

Question 31

Statutory Right of Redemption

Answer 31

Some states (not PA) allow defaulted borrowers a period in which to redeem their real estate after the foreclosure sale.

Question 32

Deficiency Judgement

Answer 32

Personal judgement against the borrower for unpaid balance for the mortgagee.