Chapter 1: Mortgage Basics

Jennifer wants to buy a new home, so she takes out a loan from Muddy Bank. Three months later, Muddy Bank transfers her loan (and note) to its rival bank, Grassy Bank. Determine what happens with Jennifer's loan. A. Jennifer has to pay the remaining loan amount upon transfer. B. The balance of Jennifer's loan is absolved upon transfer. C. Jennifer has to complete a note transfer agreement with a lawyer's help. D. Jennifer's loan merely changes hands; she now owes her loan debt to Grassy Bank.

D. Lucky for Jennifer, loan ownership can be transferred between lenders. Now she will make loan payments to Grassy Bank.

tip to memorize mortgagor vs mortgagee

MOrtgagOr has two "O"'s, and so does bOrrOwer. MortgagEE has two "E"s, and so does lEndEr.

promissory note in relation to mortgage

Promissory note (borrower's promise and loan terms): States the terms of the loan and is also where the borrower promises to repay the loan Mortgage (the collateral): States that the lender and borrower agree that if the borrower does not keep their promise (in the promissory note), the lender can take ownership of the property basically, a mortgage is a pledge of property as collateral for the loan The mortgage creates a claim that the mortgage holder (lender) has on the property, otherwise known as a lien (Level 2 throwback).

power-of-sale (type of non-judicial foreclosure)

Some mortgage documents contain a power-of-sale clause, which allows the lender to bypass the courts and take possession of and sell a collateral property when the borrower defaults on their loan.

release clause

a clause in a mortgage that allows for one or more properties in a subdivision to be released blanket mortgage (a mortgage that covers multiple properties Neighborhood developers often have a release clause included in the mortgage contract. A buyer would pay a certain amount of money to have the property they are buying released from its blanket mortgage.

due-on-sale clause (alienation clause)

a clause in a mortgage that makes the entire loan balance due when a property is sold aka alienation clause The primary purpose for this clause is to prohibit a new buyer from being able to assume the terms of the original loan without the lender's approval and involvement.

acceleration clause

a clause in a security instrument which makes the entire loan amount due immediately upon default An acceleration clause states that, "in the event of borrower's default under the terms of this agreement, lender may declare the entire unpaid balance of the debt due and payable immediately."

statutory redemption

allows debtors to redeem a property AFTER a foreclosure sale Unlike equitable redemption where the foreclosure sale is prevented altogether, statutory redemption allows debtors to regain possession of the property. *NOT A POSSIBILITY IN NY

equitable redemption

allows defaulting debtors to pay the defaulted portion of the debt (as well as costs the lender incurred) BEFORE the foreclosure sale (auction) of a property in order to reinstate the loan and prevent a foreclosure sale

arrear

an unpaid overdue debt

deficiency judgement

court order that borrower pay money lost by lender after foreclosure Lenders sometimes seek a deficiency judgment against a defaulted borrower, guarantor on a loan, or endorsers if a foreclosure sale does not generate enough money to pay off the loan and cover the costs of the foreclosure. Deficiency judgments require the defaulted borrower to pay any remaining balance owed to the lender.

unsecured note (type of promissory note)

doesn't reference a security instrument Unsecured notes create the most risk for lenders. And because of the high risk, interest rates on unsecured notes are usually much higher than on secured notes.

secured note (type of promissory note)

references a security instrument (either a mortgage or deed of trust) as security for the loan In essence, a secured note is backed up by the borrower's assets, otherwise known as collateral. ex: A borrower signs a promissory note and a mortgage document that secures the note with their house. The borrower later defaults on their mortgage payments. The lender could then foreclose on the borrower's home in order to pay for the loan.

prepayment penalty clause

requires the borrower to pay a penalty if the mortgage is repaid in full within a certain period A borrower can lessen the term of their loan by making principal payments before they are due. This saves money because, provided that the monthly payments are enough to cover the interest on the loan, any prepayment goes directly toward reducing the principal balance. This is great for borrowers, but not ideal for lenders. For this reason, some notes have a prepayment penalty clause to help lenders recover lost interest.

forbearance

the act of refraining from exercising a legal right When the lender may legally foreclose due to default but chooses not to, it is called forbearance. It may help to remember the word "forbearance" as similar to "forgiveness." The borrower can work with a lender to develop a payment plan to make up for the missed payments.

assumption

the act of taking on a previous borrower's loan

default

the failure to fulfill an obligation; i.e., when a borrower fails to make payments on a loan

strict foreclosure (type of non-judicial foreclosure)

the lender gives notice of the default, and, if it is not paid in some specified time period, the lender may foreclose on the property, eliminating the borrower's redemption rights (both equitable and statutory).

amortization

the process of paying off a debt/mortgage in regular installments based on a fixed payment schedule

In which scenario would a lender MOST likely want a mortgage subordination agreement signed? A. A homeowner has a second mortgage and wants to refinance their first mortgage with the lender. B. The homeowner has paid over half of the loan principal. C. The homeowner wants to refinance their only mortgage on the home with the lender. D. A homeowner has a tax lien on their property.

A. If a homeowner had two mortgages and wanted to refinance the first mortgage, the lender of the first mortgage would want the secondary mortgage holder to sign a mortgage subordination agreement to protect their place in line.

What information is specified by the note? A. the amount of the debt, the interest rate, and the terms of repayment B. the due date of repayment and inspection report of the collateral C. the rate of return, the interest rate, and the amount of repayment D. the amount of the debt, credit history of the borrower, and terms of repayment

A. The promissory note is a negotiable instrument that can be sold to another investor or lender. It specifies the amount of the debt, the rate of interest, the date on which interest charges are to begin, and the amount and terms of repayment.

A provision in the mortgage contract that triggers the payment in full of the loan upon the sale or conveyance of the property is known as a(n): A. alienation clause B. breach letter C. deficiency judgement D. equitable redemption

A. alienation clause

Joe wants to finance the sale of his personal home to Nancy. Which of the following parts of Joe's mortgage agreement would prevent him from doing this? A. alienation clause B. prepayment penalty clause C. acceleration clause D. release clause

A. alienation clause An alienation clause would trigger the full balance to be due when the property is sold, removing seller financing as an option for this transaction.

When a loan is amortized, the monthly payments _____ for the term of the loan. At the end of the term, the balance will be $0. A. are the same B. increase C. decline D. are unpredictable

A. are the same If a loan is amortized, there will be equal monthly payments that contribute to both principal and interest until the entire loan is paid. The payments will be credited first to the interest when due, with any remainder credited to the principal.

Which could NOT cause a borrower to default? A. failure to keep up with roof maintenance B. failure to maintain the original landscaping C. failure to maintain proper insurance D. failure to pay property taxes

B. Changing the landscaping would not be a possible reason for the bank to foreclose.

Brooke is in the mortgage industry. Primarily, she talks with buyers and helps them locate the right lender for their financial situation. Brooke is a: A. mortgage banker B. mortgage broker C. listing agent D. buyer's agent

B. mortgage broker Brooke isn't helping originate the loans herself, she is simply connecting lenders and borrowers. This is the job of a mortgage broker.

In order to purchase her dream house, Jane is taking out a loan. In exchange for the loan, Jane is giving her lender a mortgage. What term best describes Jane? A. beneficiary B. mortgagor C. license holder D. mortgagee

B. mortgagor Mortgagor best describes Jane as she is a borrower who is creating a mortgage in exchange for her loan.

When a borrower goes to a mortgage loan officer to apply for a loan, they are talking to someone in which type of market? A. secondary B. primary C. All choices are correct. D. government sponsored

B. primary The mortgage market has a two-tiered structure. At the first level is the primary market, where lenders underwrite loans to borrowers seeking to purchase real property. The secondary market is where the notes themselves are bought and sold.

Equitable redemption occurs before the auction of property and allows: A. a debtor to resume normal monthly payments B. a debtor to take a lender to court over default payments C. a defaulting debtor to pay the defaulted portion of the debt and prevent foreclosure D. a lender to recast a loan for the defaulting debtor in lieu of foreclosure

C.

negative amortization

the result of making loan payments that are not sufficient to cover the interest due, causing the unpaid interest to be added to the principal balance, creating a larger balloon payment

moratorium

the suspension of loan payments for a period of time If a borrower is delinquent because of a temporary setback (the loss of a job, illness, a death in the family, and so forth) the lender may consider a moratorium on payments, allowing the buyer to not make principal and/or interest payments for a certain period of time.

mortgage subordination agreement

works to identify which mortgage will take precedence over the other