Unit 12: Principles of Real Estate Financing

Income from Servicing

(1)Collecting payments (including insurance and taxes) (2)Accounting (3)Bookkeeping (4)Preparing insurance and tax records (5)Processing payments of taxes and insurance (6)Following up on loan payment and delinquency

Income on loans in a primary mortgage

(1)Finance charges at closing (such as loan origination fees and discount points) (2)Recurring income (interest collected during a loan

Methods of Foreclosure

(1)Judicial (2)Nonjudicial (3)Strict

Duties of the Mortgagor/Borrower

(1)Payment of the debt in accordance with the terms of the note (2)Payment of all real estate taxes on the property given as security (3)Maintenance of adequate insurance to protect the lender if the property is destroyed or damaged by fire, windstorm, or other hazards (4)Maintenance of the property in good repair (5)Receipt of lender authorization before making any major alterations to the property

Lenders in the primary market

(1)Thrifts, savings institutions, and commercial banks (2)Insurance companies (3)Credit unions (4)Pension funds (5)Endowment funds (6)Investment group financing (7)Mortgage banking companies (8)Mortgage brokers

Prepayment clause

A clause in a trust deed that allows a lender to collect a certain percentage of a loan as a penalty for an early payoff.

Deed in Lieu of Foreclosure

A deed given by the mortgagor to the mortgagee when the mortgagor is in default under the terms of the mortgage. This is a way for the mortgagor to avoid foreclosure.

Deed of trust

A deed to real property, which serves the same purpose as a mortgage, involving three parties instead of two. The third party holds naked title for the benefit of the lender. Beneficiary (Lender), Trustor (Borrower), Trustee (Third Party) (NOT IN PA)

Satisfaction of Mortgage

A document acknowledging the payment of a mortgage debt.

Discount Points

A fee charged by the lender at settlement that results in increasing the lender's effective yield on the money borrowed. For example, the interest rate that a lender charges for a loan might be less than the yield an investor demands. To make up the difference, the lender charges the borrower discount The number of points charged depends on two factors: (1)The difference between the loans staged interest rate and the yield required by the lender (2)How long the lender expects it will take the borrower to pay off the loans One discount point equals one percent of the loan amount.

Thrifts

A generic term for savings associations

Mortgage

A lien or encumbrance on the real property of the debtor, called a mortgager.

Straight Loan

A loan in which only interest is paid during the term of the loan, with the entire principal amount due with the final interest payment.

Amortized Loan

A loan in which the principal as well as the interest is payable in monthly or other periodic installments over the term of the loan.

power-of-sale clause

A provision in a financing instrument that allows the property used as security for a debt to be sold in the event of the borrower's default without a judicial proceeding.

Alienation Clause

A provision in a mortgage requiring full payment of the debt upon the transfer of title to the property, due on sale. Prevents loan assumptions.

Insurance Companies

Accumulate large sums of money from the premiums paid by the policyholders

Judicial Foreclosure

Allows the property to be sold by court order after the mortgagee has given sufficient public notice

Usury

Charging interest in excess of the maximum rate allowed by law

Credit Unions

Cooperative organizations whose members plan money in savings account. They routinely originate longer first and second mortgage and deed of trust loans

Mortgage Bankers and Brokers and Consumer Equity Protection Act

Defines a mortgage broker as any person or company, who for a fee, arranges or negotiates a first mortgage loan. Failure to obtain a license is a felony of the 3rd degree

Short Sale

Enables the property owner to get out from under an unaffordable loan and the lender to recapture capital (and write off the loss) without the cost associated with foreclosure.

Secondary Mortgage Market

Exists to help lenders raise capital to continue making mortgage loans, it does not interact directly with borrowers.

Freddie Mac

Federal Home Loan Mortgage Corporation. Like Fannie Mae, Provides a secondary market for mortgage loans, but primarily conventional loans

Fannie Mae

Federal National Mortgage Association. Was government-owned until 2008, but is now privately owned. Provides a secondary market for mortgage loans. Deals in conventional, FHA, and VA loans. Essentially, it buys from a lender a block or pool of mortgages that may then be used as collateral for mortgage-backed securities that are sold on the global market

Ginnie Mae

Governmental National Mortgage Association. A division of the US HUD. It administers special-assistance programs and guarantees mortgage-backed securities using FHA na VA loans as collateral. Only buys loans from government

Acceleration Clause

If a borrower defaults, the lender has the right to accelerate the maturity of the debt. In fact, they may declare the entire debt due

Title theory

In these states, mortgagor gives legal title to mortgage and maintains equitable title (Historically in PA, but no more)

Lien theory

In these states, mortgagor maintains both legal and equitable title. The mortgage simply has a lien on the property as security for the mortgage debt. If the mortgagor defaults, the mortgagee must go through a formal foreclosure proceeding to obtain legal title

Investment group financing

Large real-estate projects, such as high-rise apartment buildings, office complexes, and shopping centers, are often financed as joint ventures through group financing arrangements like syndicates, limited partnerships, and real estate investment trusts

Escrow Account

Money in a bank account held in trust to pay taxes and insurance when due

Mortgage banking companies

Originate mortgage loans with money belonging to insurance companies, pension funds, and individuals, and with funds of their own. Make real estate loans with the intention of selling them to investors and receiving a fee for servicing the loans. As a source of real estate financing, they are subject to fewer lending restrictions than are commercial banks or savings associations. They are not mortgage brokers.

Basic Components of a Borrower's Monthly Loan Payment

PITI (1)Principal (2)Interest (3)Taxes (4)Insurance

Mortgage loans

Perceived as secure investments for generating income and enable savings institutions to pay interest to their depositors

Intermediary theory

Property owner does not automatically forfeit the real estate on default of the debt. The borrower must first be given a notice of intention to foreclose before the lender can follow a suit (in PA)

Federal Reserve System

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

Mortgage Loans

Secured loans; They have two parts: (1)The debt itself (2)The security for the debt When a property is mortgages, the owner must sign two things: (1)A promissory note stating the amount owned (2)A security document, either a mortgage or deed of trust specifying collateral used to secure the loan

Interest

The charge for the use of money

Prepayment penalty

The charge levied by the lender for paying off a mortgage prior to its maturity date.

Loan Origination Fee

The expenses a lender incurs in processing a mortgage loan

Equitable right of redemption

The right of a defaulted property owner to recover the property prior to its sale by paying the appropriate fees and charges.

Prepayment

The unscheduled partial or complete payment of the principal amount outstanding on a mortgage or other debt before it is due.

Thrifts, savings institutions, and commercial banks

These institutions are known as fiduciary obligations to protect and preserve depositors' funds

Defeasance Clause

When the debt is satisfied, this clause causes title to pass automatically back to the borrower. Satisfaction of mortgage; release from records.

Nonjudicial Foreclosure

When the security instrument contains a power-of-sale clause. In this type of foreclosure, no court action is required.

Primary Mortgage Market

Where borrowers directly interact with lenders.

Deficiency Judgement

a court order stating the the borrower still owes money when the security for a loan does not entirely satisfy a defaulted debt.

Conventional Loans

arranged between borrower and lending institution

Pension funds

have begun to participate actively in financing real estate projects because of the comparatively high yields and low risks offered by mortgages

Deed to Purchaser at Sale

if redemption is not made or state law does not provide for a redemption period the successful bidder at the sale receives a deed to the real estate.

Federal Flood Insurance Program

insurance for property loss caused by flooding

Mortgage brokers

intermediaries who bring borrowers and lenders together. They locate potential borrowers, process preliminary loan applications, and submit the application to lenders for final approval. They do not service loans once they are made

Strict foreclosure

sets out the amount due under the mortgage, orders it to be paid within a particular time limit, and provides that if payment is not made, the mortgagor's right and equity of redemption are forever barred and foreclosed. If the mortgagor does not pay within the time designated, then title to the property vests in the mortgagee without any sale thereof.

Fiduciary lenders

subject to standards and regulations established by governmental agencies such as the FDIC

Endowment Funds

the endowments of hospitals, schools, charities, and other institutions provide a good source of financing for low-risk commercial and industrial properties

Hypothecation

the pledge of property as security for a loan