9_Real Estate Finance

The basic elements of a Contract for Deed are:

1. A description of the deed for the property. 2. Conditions of the sale, such as purchase price and terms of the loan. 3. The buyer is responsible for paying taxes and insurance. 4. Signatures of both parties, dated and notarized. 5. Escrow provisions and prepayment privilege. 6. Protections for the seller, such as the right to declare entire purchase price due if buyer defaults.

lien theory; title theory

It is important to note the major difference between the title theory and the ______. In the________, the borrower deeds his property to the lender. The mortgage conveys title to the borrower when the property is paid for. In the lien theory, the borrower gives only a lien right to the lender. The borrower retains title to the property.

Seller Financing

Other forms of owner financing which were mentioned earlier are the purchase money mortgage and the installment land contract, or bond for deed.

federal mortgage insurance agency

The FHA rarely provides mortgage funds directly to borrowers; the FHA does not build houses and the FHA does not set interest rates. Rather, the FHA is a large _____ ______ ______ _______. FHA loans are insured by the federal government through the Department of Housing and Urban Development (HUD).

promissory note;

The promise to repay and its specific conditions and stipulations are contained in the central instrument of the loan agreement, the _______ _______. A ______ ______ is proof of the debt.

MORTGAGE FORECLOSURE

Upon default, the property is sold at the Sheriff's sale and proceeds, up to the amount of the debt, go to the lender.

allodial system

We now have the ______ ______ of land ownership which allows individuals to own land absolutely, without obligation to political superiors.

able to pay

a ready, willing, and able buyer, the word able means ______ _______ ________

Deed in Lieu of Foreclosure

also known as a "friendly foreclosure". Under this process the borrower, "sells" the property to the lender in return for the lender canceling the note. The lender does not retain the right of a deficiency judgment if the property sells for less than the borrower owed. *In Louisiana, this process is called dation en paiement.

A loan origination fee

is charged by most lenders for generating a loan. Loan origination fees are not prepaid interest. They are paid to the lender and are usually 1 percent of the loan amount.

Farmer Mac

(formerly the Federal Agricultural Mortgage Corporation, is similar to Fannie Mae and Freddie Mac except that it deals with agricultural loans. Farmer Mac purchases agricultural loans from original lenders and issues guaranteed mortgage-backed securities. The Farm Service Agency (FSA), formerly the Farmers Home Administration is a federal agency of the Department of Agriculture. The FSA offers programs to help families purchase or operate family farms. It also provides loans to help families purchase or improve single family homes in rural areas.

the principle secondary mortgage market lenders

1. Federal National Mortgage Association (FNMA) 2. Government National Mortgage Association (GNMA) 3. Federal Home Loan Mortgage Corporation (FHLMC) 4. Farmer Mac

Characteristics of Title Theory:

1. Lender's rights are manifested by contract for deed. 2. Lender remains the legal owner of the property until the debt is paid. 3. Borrower retains equitable rights in the property.

NON-INSTITUTIONAL LENDERS

1. Mortgage brokers 2. Mortgage bankers 3. Pension funds 4. Trust funds 5. Private individuals 6. Foreign investors 7. University and hospital endowment funds, credit unions

INSTITUTIONAL LENDERS

1. Savings and Loans 2. Commercial Banks 3. Mutual Savings Banks 4. Life Insurance Companies

unsecured note; signature

It is important to remember that a promissory note can be a debt instrument without a mortgage. If so, it is an _______ _______. A __________ loan is one having no mortgage and no collateral.

Mortgage insurance premium

_____ _______ ______ (MIP) - not to be confused with PMI for conventional loans- is required for all FHA loans, regardless of down payment size. You may also see this described as UFMIP, or upfront mortgage insurance premium. For most FHA programs, the MIP has an initial premium and an annual premium. The initial MIP on a new home purchase is 1.75% of the loan amount for 30-year loans, with and annual premium of 0.55% of the outstanding loan balance, divided into 12 monthly payments. The 15-year mortgage has the added benefit of a lower annual MIP. The initial MIP premium for new purchases is 1.75% of the loan amount, but the annual premium is on 0.25% of the outstanding loan balance divided into 12 equal monthly payments.

Economic obsolescence

______ _______, that is, forces outside the property itself which cause a decline in its value, is also considered. Note however, that federal legislation prohibits the lender from refusing to make a loan on a property based solely on undesirability of the location. In the past, some lenders have systematically discriminated against certain neighborhoods by use of a practice

statutory rights of redemption

_______ ______ ____ _______ - occurs after the actual foreclosure sale. Depending on the state, the borrower may have up to two years to redeem his property by paying off the debt in full, and he may be permitted to remain in possession of the property. During this period, the court may appoint a receiver to pay operating costs, collect rents, and otherwise look after the property. The time limit for statutory redemption varies from state to state. *In Louisiana there is no statutory redemption except for tax sales which is 3-5 years..

equitable redemption

_______ _______ - occurs during the period of time after the borrower goes into default but before the actual foreclosure sale. During this period, the borrower, or other lien holder, can redeem the property by paying the current indebtedness. If the mortgage contains an acceleration clause, the entire debt may have to be paid in order to redeem the property.

Purchase money agreements

_______ _______ ______ may be either first or second mortgages. If a first purchase money mortgage is executed simultaneously with a deed to the property, the purchase money mortgage has first claim against the property, superseding any homestead rights which might normally prevail in the state in which the property is located

Sale-and-leaseback arrangements

___________ ________ ________ are used to finance large commercial or industrial properties. The land and building, usually used by the seller for business purposes, are sold to an investor, such as an insurance company. The real Estate is then leased back by the buyer to the seller, who continues to conduct business on the property as a tenant. The buyer becomes the lessor, and the original owner becomes the lessee. This enables a business firm with money invested in the real estate to free that money so it can be used as working capital.

The wrap-around mortgage

_____________ is used for owner financing and is originated by a second lender combining equity and money owed into a second mortgage. In a common wrap-around transaction, a second lender agrees to assume payments on the borrower's original loan and also to lend the borrower the additional funds he requires. The wrap-around loan may be at a higher interest rate than the original loan, but still below the current market rate.

Construction Loan

are used for building or repairing either residential or commercial property and is a type of interim financing. The loan is committed for the total cost of the construction project, but is paid out in draws at regular intervals after each stage of construction has been completed. Interest is paid only on the total amount of disbursements. Construction loans are generally made for periods of three years or less.

Federal Home Loan Mortgage Corporation (FHLMC)

"Freddie Mac" was founded in 1971 to allow savings and loans liquidity for their mortgage assets. FHLMC buys mortgages from these institutions and supplies them with cash to originate new mortgages. Like FNMA, is now a government-owned enterprise that provides a secondary market for mortgage loans, primarily conventional loans.

Usury laws

(____ _____ set the maximum interest rate that can be charged.)

RESPA applies only to first mortgage transactions which are financed by federal programs including FHA and VA backed loans, HUD administered programs, loans from lenders with federally insured deposits, and loans that are to be bought by FNMA, GNMA, FHLMC, or other federally controlled secondary mortgage market institutions. The RESPA requirements are:

1. Borrower must be given a copy of the HUD settlement booklet 2. Lender must prepare a good faith estimate of closing costs within 3 days of the loan application. 3. Borrower must be given a copy of HUD's Uniform Settlement Statement. 4. No overcharging on escrow accounts for property taxes and insurance. 5. No kickbacks or fees for services not performed during the sale closing.

Characteristics of Lien Theory:

1. Borrower's and lender's rights are described in a promissory note and mortgage agreement. 2. Borrower holds legal title with the lender having a lien or security interest. 3. The defaulted borrower is allowed to retain possession, title and rights in the property until the lien is perfected by foreclosure. 4. Borrower, after default, may have equitable right of redemption. After foreclosure sale, borrower may have statutory period of redemption. *In Louisiana, we only have equitable right of redemption. This right is extended from the notice of foreclosure until the property actually is sold at sheriff's sale.

MORTGAGE COVENANTS:

1. Covenant to pay taxes and special assessments. 2. Insurance covenant 3. Covenant of good repair 4. Covenant against removal 5. Property inspection covenant 6. Alienation clause 7. Receiver clause 8. Owner's rent clause 9. Subordination clause

The Truth in Lending Law requires that the lender provide the borrower with a formal disclosure statement containing the following items:

1. Date finance charge will begin to accrue 2. annual percentage rate (APR) 3. number of monthly payments 4. due date of payments 5. prepayment penalties 6. balloon payments 7. default and delinquency charges 8. legal description of property 9. amount of credit which will be made available to the borrower 10. credit sales, cash price and total unpaid balance

Regulation "Z" establishes guidelines for three aspects of the lending process:

1. Disclosure of Loan Cost 2. Borrower's Right of Rescission 3. Fair Advertising Practice

The Package Mortgage

A package mortgage is secured by both real and personal property, that is, both movables and immovables. This type of loan is commonly used to finance new homes along with major household appliances.

Fully Amortized Loan

Also known as the direct reduction loan, this loan type features a schedule of equal payments consisting of both principal and interest. This is normally a long term loan, up to thirty years. The portion of the monthly payment that is applied toward the principal increases each month, and the amount applied toward the interest decreases each month. In other words, as the loan matures, more and more of each payment is applied toward the principal, so that, in the beginning you are paying mostly interest, and at the end of the loan, you are paying mostly principal.

ELEMENTS OF A MORTGAGE:

Clause #1: contains date, place and names of parties. Clause #2: amount of mortgagor's debt and schedule of payments. Clause #3: the granting clause, pledging the collateral property to the mortgage. In lien theory states, this clause will read "mortgage and pledge"; in title theory states, it will read "mortgage and grant". Clause #4: legal description of mortgaged property, also listing any personal property included in the mortgage. Clause #5: the warranty of title clause, affirms that mortgagor holds good and clear title to the property and has the right to convey it. Clause #6: the defeasance clause removes the mortgage when the debt is paid. There may also be an escalation clause which gives the lender the right to increase the rate of interest during the length of the mortgage.

Promissory Note

Clause #2, the late pay clause, is self evident. This clause both encourages the borrower to make his payments on time and compensates the lender for delays in receiving his expected payments.

Promissory Note

Clause #3 of the note is termed the acceleration clause, and is included in the promissory note as well as the mortgage. It gives the lender the right to demand payment in full of the entire unpaid debt in the event of default. Without this clause the lender would have to go into court month by month to collect a delinquent borrower's obligation. This process could conceivably last as long as the duration of the loan itself. The lender avoids the possibility of having to go through this process by incorporating the acceleration clause. Once the borrower defaults, his entire debt comes due automatically.

rate equalization factors,

Discount points, also known as _______ ___ ______, are used to lower the interest rate on the loan while increasing the yield to the lender. Discount points can be thought of as pre-paid interest, as they are paid as a lump sum at the time of closing. They are also considered to be increased yield to the lender since the lender is getting more money at the time of sale.

$150,000 X 80% = $120,000 (loan amount) $150,000 - $120,000 = $30,000 (down payment) $120,000 X 2% = $2,400 (cost of points) $30,000 + $2,400 = $32,400 (cash needed at closing)

Example: A house sold for $150,000. The buyer obtains an 80% loan and is paying 2 discount points. How much cash will he need to bring to the closing?

CONVENTIONAL LOAN INSURANCE

Generally, any loan approved for more than 80% LTVR must have private mortgage insurance (PMI). The borrower pays an insurance premium for an insurance policy which covers the top portion of the loan proceeds advanced over and above the standard 80%. This insurance covers the potential deficiency in proceeds which the lender might experience after foreclosure and sale of the collateral.

Sale without Appraisement

If no appraisal has been made, the lender forfeits the right to obtain a deficiency judgment.

hypothecate

In states which apply the lien theory to real property pledged as collateral, the borrower is said to _______ title to the lender.

The Open End Loan

In this type of loan the borrower increases his existing mortgage to the original amount. This is, in effect, a way of borrowing against your equity without taking out a second mortgage. This usually results in the borrower having a higher monthly note since the full amount must be repaid by the original expiration date of the loan.

Government National Mortgage Association (GNMA)

Known as "Ginnie Mae", this organization is sponsored and administered by the federal government and is under the auspices of the department of Housing and Urban Development. GNMA acquires loans for urban renewal projects, housing for the elderly, and other federal housing programs which assist low and moderate income households.

trust deed

Like the mortgage, the _____ _____is an instrument that is employed to pledge an interest in real property in exchange for a loan or other consideration. However, unlike the mortgage, the trust deed involves not two, but three parties. The borrower is the trustor, the lender is the beneficiary, and the added third party is the trustee.

Sale with Appraisement

Louisiana permits this type of foreclosure. If the property does not sell for the full amount owed, the creditor may obtain a deficiency judgment for the amount owed by the borrower above the proceeds of the sheriff's sale. The debtor has the right to bid for the property only if the bid equals at least two-thirds of the appraised value.

Graduated Payment Mortgage

Payments on a graduated loan start small and become larger as the mortgage goes on. For example, in a thirty year graduated payment loan, payments for the first ten years may be based on a forty year amortization, payments for the next ten years on a twenty-five year amortization schedule, and payments for the last ten years on a twenty year schedule. GPM's are generally used for commercial loans enabling a new business to defer a portion of their mortgage payments in the expectation of increased income in the future. In some GPM's, the borrower pays only interest for the first few years.

certificate of reasonable value (CRV)

The VA will also issue a _______ ____ _______ _____ for the property being purchased stating the current market value based on a VA-approved appraisal.

lien theory

The ____ _____is used in most states, including Louisiana. A lien simply confers the legal right to attach a claim against a property, to go into court, if necessary, to enforce that claim, and to secure whatever compensation the court deems just and appropriate.

VA

The ____ program was established in 1944 to aid veterans or their surviving spouses in obtaining financing for the purchase or construction of owner-occupied homes and farms. VA financing is also available for owner-occupied mobile homes and condominiums.

Federal Housing Administration

The _____ _______ _____ does not have income limits to determine who is eligible for FHA assistance. Anyone who is a U.S. citizen, permanent resident, or non-permanent resident with a work visa and who meets the lending guidelines can obtain a loan. The FHA does, however, set a maximum mortgage amount that it will insure.

feudal system; freehold system; fee simple

The ______ ______ was a carefully structured pyramid of lords, knights, vassals, and serfs which gradually evolved into the _______ ______ of land ownership and which allowed ownership in ____ _____, that is, the private ownership of real property

Federal Housing Administration (FHA)

The federal government created the ______ in 1934, as an alternative to conventional lending practices when it became apparent that conventional lenders were unable to cope with extreme fluctuations in the economy.

entitlement

The loan guarantee amount which the veteran is eligible to receive on a VA loan is referred to as his ________.

mortgage; deed

The primary difference between a mortgage and a trust deed is that a ______ creates a lien and a _____ conveys title. The clauses and covenants of the trust deed are basically similar to those of a mortgage. However, it should be noted that three parties must be named in the trust deed as opposed to two in the mortgage. The trust deed also contains a power of sale clause, warranty to title clause, reconveyance clause, acceleration clause, receiver clause, and owner's rent clause.

underwriting; loan qualification

The process of determining the risk a lender is incurring by lending a sum of money to a certain borrower to finance a particular property is referred to as _________, or _____ ______. When underwriting a loan, the lender concentrates on three areas: 1. the borrower 2. the property 3. the location of the property.

straight term loan

This loan, also known as the _______ ______ _____, calls for payments of interest only for the term of the loan. At the end of the term, the entire sum of the principal is due in one balloon payment plus any remaining interest.

Partially Amortized Loan

This type of loan is known as the limited reduction loan or the renegotiable rate mortgage. Payments are typically calculated over a 20 or 30 year amortization period with a loan term of 5 years. The partially amortized loan is repaid in regular installments of principal and interest, but one or more payments is a balloon payment, that is, a payment larger than the loan's regular payment amounts. The effect of the balloon payments is to reduce the amount of the regular payments.

hypothecate

To _______ an interest in real property is to pledge a specific property as collateral without actually giving up possession or the other rights associated with ownership. The mortgagee's rights of hypothecation allow him to go into court and obtain a judgment against the mortgagor in the event of his default.

foreclosure by sale

Under the method termed strict foreclosure, if the amount received from the sale exceeds the borrower's debt, the lender profits. This method has gradually been modified to treat the borrower more fairly. Under the practice which has evolved, ______ __ ____, the lender is required to refund to the borrower any profit realized on the sale of the foreclosed property.

THE REAL ESTATE SETTLEMENT PROCEDURES ACT

When a sale is closed, a settlement statement is used to show the items and amounts charged or credited to each party. The Real Estate Settlement Procedures Act covers the disclosure of settlement costs, the expenses a buyer must pay at the closing before he receives actual possession of the property.

Reverse mortgages

_____ ______are tailored for older homeowners, retired, or near retirement, who own a home free and clear and wish to use some of the equity they have in their home. Regular monthly payments are made to the borrower based on the equity the homeowner has invested in the property. The loan is eventually paid from the sale of the property or from the borrower's estate upon his or her death.

CONTRACT FOR DEED

_______ _____ ______ , also known as the Installment Land Contract, Conditional Sales Contract, Agreement to Convey, and in Louisiana, Bond for Deed.

Mortgage brokers

_______ ________do not use their own funds. They find money to lend, acting as intermediaries between the borrower and the lender. He has nothing to do with servicing the loan.

Mortgage bankers

_______ _______set up loan transactions using their own capital, and also service the loan.

Clause #1

________ of the note contains the name of the borrower and the lender, the amount of the borrower's debt (loan principle), and the specifics of arrangements for repayment: the rate of interest, which cannot exceed the usury rate, the amount and number of monthly installments, and the duration of the loan - its time of beginning and ending.

The FHA's Mutual Mortgage Insurance Fund (MMI)

___________________ provides a function similar to private mortgage insurance companies: Insuring private lenders against losses caused by borrower defaults on FHA-insured loans.

collateral; lien theory; title theory

the promise to repay has been traditionally backed up by some sort of security arrangement, a second loan instrument with which the borrower pledges an interest of one kind or another in the property he is financing to the lender. The pledged property is called _______. In the United States, the exact relationship between the borrower, the lender, and the collateral property is not legally uniform from state to state. Most states follow what is known as the ____ ___ ____ (the lender holds a lien), but some follow the ___ ____ (the lender holds the title), and a few use a mixture of both concepts.

Subrogation

the right of a title company to receive any damages available to the insured when the title company has made a payment to settle a claim covered by a policy.

Requirements for FHA insured loans:

• Downpayment of at least 3.5% of the purchase price, but closing costs can be included in the loan • Borrower is charged a mortgage insurance premium • Property must be appraised by an approved FHA appraiser • Maximum mortgage limits are set for various regions of the country • Borrower must meet standard FHA credit qualifications • Includes financing for manufacture or factory-built housing

The mechanics of the trust deed:

1. The owner of a property (trustor) transfers title to a third party (trustee) in exchange for a loan or other consideration from the lender or beneficiary. The borrower or trustor executes both a promissory note and a trust deed. The borrower's signature is required on both documents. 2. The trustee holds the title for the benefit of the lender or beneficiary to secure the loan the lender has made to the trustor. 3. The trust deed is said to convey "bare" or "naked" title which is held by the third party, the trustee. As long as the trustor does not go into default, he retains full legal rights to the property. The trust deed conveys along with the title, a power of sale. If the trustor does not pay his debt, the trustee may sell the property and turn the proceeds of the sale over to the lender. 4. When the trust deed is paid off, the trustee must give the trustor a deed of reconveyance which transfers the title back to the original owner. (The clause of reconveyance is analogous to the defeasance clause in a mortgage).

Elements of a Mortgage:

1. The provisions of the agreement. 2. Legally competent parties. 3. Mutual consent. 4. Exchange of consideration. 5. Legal purpose.

Homeowners may deduct from their gross income:

1. mortgage interest payments on most first and second homes 2. real estate taxes (but not interest paid on overdue taxes) 3. certain loan origination fees 4. loan discount points (whether paid by buyer or seller) 5. loan prepayment penalties

mortgage; trust deed

A _______ (or _______) is a security instrument that creates a lien, or in other words, it is a document that makes property security for the repayment of a debt. This collateral interest is created on behalf of the lender.

Buydowns

A _________ is a way of temporarily lowering the initial interest rate on a mortgage or deed of trust loan. By "pre-paying" some of the interest to the lender on the borrower's behalf, one can "buy down" the original interest rate for a period of time. Typical buydown arrangements reduce the interest rate by 1 to 3 percent over the first one to three years of the loan.

The Blanket Mortgage

A blanket mortgage covers several properties, but each may be released from the mortgage separately. A partial release clause drafted into the mortgage permits each parcel to be released from the mortgage as it is sold. This is the type of mortgage that is usually used by a developer constructing tracts of homes.

Promissory Note

Clause #4, the interest escalation clause, pushes the interest rate up to the highest rate allowed by law if default occurs and the debt is accelerated. (The practice of charging more that the legally allowable interest is termed usury)

Promissory Note

Clause #5 is the prepayment clause or the prepayment penalty clause. (This clause is absent in FHA and VA loans). Many notes include a penalty for prepayment or restrict loan prepayment, following the legal reasoning that the lender has contracted to perform no more and no less than stated in the note. Since accepting payments larger than their agreed upon amount or before their due dates in effect deprives the lender of a portion of the interest which the borrower has promised to pay, lenders protect their yield through the prepayment penalty clause. To asses a penalty fee, the fee is based on a percentage of the unpaid loan balance if the note is paid in advance of its maturity date. Prepayment penalties are usual in the first few years of existence of the note. If the borrower is not permitted to pay off any or all of the loan's balance before the regularly scheduled payment dates, the prepayment penalty clause is called a lock-in clause.

Promissory Note

Clause #6 is especially important in that it joins the promissory note to the mortgage or trust deed agreement. Without this clause, the promissory note would be a personal loan agreement. With it, the note is supported, or secured, by the mortgage, the borrower's actual pledge of real property which backs up his promise to pay.

Federal National Mortgage Association (FNMA)

Nicknamed "Fannie Mae", the original purpose of this program was to establish a market for the buying and selling of government insured mortgages and thereby to assist holders of certain residential mortgages. FNMA buys conventional and FHA and VA backed loans. In September 2008, Fannie Mae became a government-owned enterprise. Until that time it was a privately owned corporatin that issued its own stock.

security instrument

The _______ _______ , that is, the mortgage or trust deed, gives the lender legal recourse in the event of the borrower's failing to meet his obligations as contained in the promissory note, and they also contain certain covenants regarding how the borrower may or may not use the collateral property.

promissory note

The _______ _______ is the borrower's personal, unconditional promise to repay the loan. This promise can be found in clause #1 of the specimen note which follows. The borrower's promise to repay is construed to be an unconditional promise, that is, it makes the note a negotiable instrument, one which may be assigned freely by the lender to another party, in much the same way as a check can be endorsed to make it payable to another party.

mortgagor; mortgagee

The _______ is a person or entity who makes a mortgage, the borrower. The mortgagor conveys a lien on his or her property to another person, bank or other institution. The mortgagee is the party receiving the mortgage, the lender. The ________ receives a lien on the borrower's property as security for the debt.

Adjustable Rate Mortgage

The adjustable rate mortgage, or variable rate mortgage, is one in which the interest rate fluctuates according to some external index, such as the open market interest rate, prime lending rate, or consumer price index. Normally, the rate is adjusted once a year and cannot change more than 2% in any one year period. There is also a ceiling or upper limit on the interest rate, and a lower limit.

"equitable right of redemption"

The borrower, in a phrase still in use today, could hope to be allowed an _______ _______ _______, that is, additional time within which to pay his debt.