Chapter 9

Escrow clause

requires a mortgage borrower to make monthly deposits into an escrow account

Insurance clause

requires the borrower/mortgagor to maintain property casualty insurance acceptable to the lender, giving the lender joint control in the use of the proceeds in case of major damage to the property

John purchased a property that has an existing mortgage. While he has agreed to make the payments in accordance with the terms of the note, he bears no personal liability in the event he defaults. In this example, John is said to have purchased the property

subject to the existing mortgage.

Term to maturity

term found in a balloon loan that determines when the entire remaining balance on the loan must be paid in full.

Redlining

term used to describe when mortgage lenders avoid certain neighborhoods without regard to the merits of the individual loan applications.

Margin

the "markup" typically two to three percentage points, over and above the index rate, which is charged on adjustable rate mortgages.

Mortgagor

the borrower or grantor of the mortgage claim.

Due-on-sale clause

the clause in a mortgage document that requires the borrower to pay off the loan in full if the property serving as security for the loan is sold.

Default

the consequence of prolonged delinquency: the failure of a borrower to meet the terms and conditions of a note.

Note

the document (contract) defining the exact terms of a debt obligation and the liability of the borrower for the obligation.

Teaser rate

the initial interest rate on an adjustable rate mortgage if it is less than the index rate plus the margin at the time of origination.

Mortgagee

the lender, who receives the mortgage claim.

Judicial foreclosure

the process of bringing the property of delinquent borrowers to public sale that involves court action. Proceeds from the foreclosure sale are used to pay off, to the extent possible the borrower's creditors.

Right of Prepayment

the right to retire a mortgage before maturity. The right of prepayment will depend on the law of the state where the property is located and on the particular mortgage contract.

Rescind

the termination of a contract by cancellation. Under the Truth-in-Lending Act, a borrower's right to cancel a loan contract within three days that is secured by his or her principal residence.

Bankruptcy

there are three types of bankruptcy distinguished by their section in Federal Statutes: Chapter 7, liquidation; Chapter 11, court supervised "work out"; Chapter 13, "wage-earner's proceedings."

Term for amortization

time period that determines the payment, and the schedule of interest and principal payments on a mortgage.

The two most common types of caps in an adjustable rate mortgage are: _______.

The two most common types of caps in an adjustable rate mortgage are periodic caps and overall caps.

The Real Estate Settlement Procedures Act does which of these:

1. Requires the use of a standard settlement statement for a mortgage loan closing 2. Prohibits kickbacks between vendors of closing-related services and lenders. 3. Requires that a borrower receive a good-faith estimate of closing costs shortly after a loan application. 4.Requires that the borrower be able to inspect the closing statement a day before the actual closing

Which of these statements is true about mortgage loans for income producing real estate?

1. They usually are partially amortizing loans. 2. They often have a prepayment penalty. 3. They often are non recourse loans. 4. They can be interest only loans.

The problem of negative amortization is that

1. interest payments made are less than the interest actually due. 2. the borrower may end up paying interest ON interest. 3. the loan balance may increase above the initial loan amount.

If the proceeds of a foreclosure sale are insufficient to satisfy the remaining loan balance, the lender

1. may obtain a deficiency judgment against the defaulted borrower. 2. may not have recourse against the defaulted borrower. 3. may have to write off the remainder as an uncollectible debt.

The Truth in Lending Act gives borrowers _____ days to change their mind and rescind certain mortgage loans.

3 days

The Truth in Lending Act gives some mortgage borrowers how long to rescind a mortgage loan?

3 days

The most internationally oriented index rate for adjustable rate mortgages is:

A LIBOR rate

What is a balloon loan?

A balloon loan has an amortization term that determines interest and principal payments as if it were a fully amortized loan and a shorter term for maturity at which the remaining loan balance must be paid in full.

A partially amortizing loan always will have:

A balloon payment

What two contracts are always involved in a mortgage loan?

A borrower always conveys a mortgage and a note to the lend in a mortgage loan.

Constant Maturity Rates

A common index for ARM home loans. The one-year constant maturity rate for example is the average of the market yield, found by survey on any outstanding U.S. Treasury debt having exactly one year remaining to final repayment, regardless of original maturity.

Community reinvestment Act

A congressional act that encourages mortgage originators to actively lend in their communities and that requires financial institutions to evaluate the fairness of their lending practices.

Chapter 11 Bankruptcy

A court supervised work out for a troubled business

What does a demand clause permit a lender to do?

A demand clause permits a lender, from time to time, to demand prepayment of the loan.

Real Estate Settlement Procedures Act

A federal law requiring lenders to provide information on all costs associated with closing a residential loan within three business days of the loan application, to use the HUD-1 closing statement, to limit required escrow deposits, and to avoid kickbacks on loan-related services.

Deed in lieu of foreclosure

A legal instrument issued by defaulting borrowers that transfers all rights they have in a property to the lender. Does not necessarily convey a clean title, just whatever interest the defaulting borrower has at the time of conveyance.

What happens to the balance of a loan with negative amortization?

A loan balance with negative amortization will increase because the scheduled payment is insufficient to cover the accumulated interest.

Index Rate

A market determined interest rate that that is the "moving part" in an adjustable interest rate

Equity of redemption

A period of time allowed by courts in every state that grants delinquent mortgage borrower the opportunity to make overdue payments and come current on the mortgage before foreclosure is complete.

Foreclosure

A process to force the public sale of property to satisfy the financial obligations of a delinquent borrower to a lender. The legal purpose is to terminate ownership claims, and any subordinate leans, so that title can go to a buyer.

How does a sale by contract for deed differ from a normal real estate sale? What does the contract for deed accomplish?

A sale by contract for deed differs from a normal real estate sale in that actual delivery of the deed conveying ownership will not occur until well after the buyer takes possession of the property. This allows the seller to finance the sale through installment payments and to have recourse in case of default.

Contract for deed

A sales arrangement in which the actual delivery of the deed conveying ownership will not occur until well after the buyer takes possession of the property. This allows the seller to finance the sale through installment payments and to have recourse to the property in case of default by the buyer/borrower.

Ways that a lender may respond to a defaulted loan without resorting to foreclosure include all of the following except:

Accelerate the debt

If the lender in a standard first mortgage wishes to foreclose cost effectively, it is crucial to have which values in the mortgage?

Acceleration Clause

What clause in a mortgage allows the lender to declare the entire balance due and payable if the borrower misses a payment?

Acceleration Clause

Home Ownership and Equity Protection Act

An act of Congress that addresses abusive, predatory practices in subprime lending and sets a trigger annual percentage rate (APR) and fee levels at which loans become subject to the law's restrictions.

Home Mortgage Disclosure Act

An act of Congress that discourages lenders from avoiding, or redlining, certain neighborhoods in a manner related to minority composition.

Cost-of-funds index

An index for adjustable rate mortgages based on the weighted average of interest rates paid for deposits by thrift institutions (savings and loan associations and savings banks.)

A common risk that frequently interferes with a lender's efforts to work out a defaulted loan through either non foreclosure means or foreclosure is:

Bankruptcy

Overall caps

Caps on adjustable rate mortgages that limit interest rate changes over the life of the loan.

A court-supervised workout of a financially troubled business is _______________ bankruptcy.

Chapter 11

Which form of bankruptcy is least harmful to a lender's mortgage interest?

Chapter 7 bankruptcy is the least harmful type of bankruptcy to a lenders mortgage interest.

From a home mortgage lender's perspective, which statement is true about the effect of bankruptcy upon foreclosure?

Chapter 7 bankruptcy is the most "lender friendly" form

The problem of lenders denying loans of applicants who live in a certain area or neighborhood, even though the applicant is financially qualified has been addressed by the

Community Reinvestment Act.

To finance property where either the borrower, the property, or both fail to qualify for the standard mortgage financing, a common non mortgage solution is through the:

Contract for deed

With what type of loan security arrangement is the deed held by a neutral third party and returned upon payment of the mortgage in full?

Deed of trust

A lender may reserve the right to require prepayment of a loan at any time they see fit through a(n):

Demand Clause

Depending on the state, the process of foreclosure sale is either by _______ or _______. The method most favorable to a lender is _______.

Depending on the state, the process of foreclosure sale is either by judicial foreclosure or power of sale. The method most favorable to a lender is power of sale.

The characteristics of a borrower that can be considered by a lender in a mortgage loan application are limited by the:

Equal Credit Opportunity Act

The law that prohibits discrimination in lending based on the applicant's receipt of income from a public assistance program is the

Equal Credit Opportunity Act.

Which of these points in a mortgage loan would be addressed in the mortgage (possibly in the note as well?)

Escrows

What types of standard home loans are assumable?

FHA and VA loans are assumable, subject to the buyer's ability to qualify for the loan.

Late fees

Fees assessed for standard home loans when payments are received after the 15th of the month the payment is due. Also found in commercial mortgages.

List five requirements of RESPA for a standard first mortgage home loan.

Five requirements of RESPA for a standard home mortgage loan are 1. A standard format closing statement 2. Presentation of a booklet explaining closing fees and the HUD-1 Settlement Statement 3. Good-faith estimate of closing costs, to be provided within three business days of the loan application 4. Opportunity to examine the closing statement at least 24 hours in advance of the loan closing. 5. Prohibition of kickbacks and referral fees between the lender and providers of services in connection with the loan closing.

Foreclosure tends to be quickest in states that:

Have power of sale

In practice, lenders commonly define default as occurring when a loan is _______ days overdue.

In practice, lenders commonly define default as occurring when loan is 90 days overdue.

The element of an adjustable interest rate that is the "moving part" is the:

Index

Which of these aspects of a mortgage loan will be addressed in the note rather than in the mortgage?

Late fee

Lien Theory

Legal theory that interprets a mortgage as a lien rather then a temporary conveyance of title

Give two reasons a lender might be ill-advised to accept a deed in lieu of foreclosure for a distressed property.

Lenders may ill be advised to accept a deed in lieu of foreclosure because general liens may remain with the property even after it is conveyed back to the lender. Also, if the borrower claims bankruptcy, the lender may ultimately lose its priority claim to the property.

Which statement is correct about the right of prepayment of a home mortgage loan?

Most home mortgage loans have the right of prepayment without charge, but not all, and the borrower should check the loan carefully

Of these types of loans, which typically have prepayment restrictions or penalties? a. Standard home loan. b. Large home loan. c. Subprime loan. d. Commercial property mortgage loan.

Prepayment penalties occur mainly in large home loans, subprime loans, and commercial mortgage loans.

What liens would have priority over the mortgage of a lender?

Property taxes, property assessments, community development district obligations, and previous mortgages have priority over the mortgage of a lender.

Chapter 13 Bankruptcy

Similar to chapter 11, but applies to a household, that allows the petitioner to propose a repayment plan to the court.

When a buyer of a property with an existing mortgage loan acquires the property without signing the note for the existing loan, the buyer is acquiring the property:

Subject to the mortgage

A type of loan that occurred in recent years, which raised concerns about predatory lending practices, was the:

Subprime mortgage

Artificially low, temporary introductory rates used in many adjustable rate mortgages are called

Teaser Rates

What law prohibits discrimination in lending by race, sex, religion, and national origin? What types of income discrimination does it prohibit?

The Equal Credit Opportunity Act prohibits discrimination in lending by race, sex, religion, and national origin. It also prohibits discrimination because an applicant receives income from a public assistance program.

What are four sources of index interest rates for use in adjustable interest rates?

The U.S. Treasury constant maturity rate, the cost of funds index rate, the commercial bank "prime rate", the mortgage loan index rate, and the LIBOR rate are all sources for index interest rates for adjustable interest rates.

Change date

The date the interest rate on an ARM is recomputed

Deficiency judgement

The legal right of lenders to file suit against borrowers when the proceeds from a foreclosure sale do not fully pay off an outstanding loan, as well as any late fees and charges.

What is the monthly interest rate for a mortgage loan with a 12 percent annual rate?

The monthly interest rate for an annual interest rate of 12 percent is 1 percent

Why does a mortgage lender want to be able to pay the property taxes on behalf of a mortgage borrower?

The mortgage lender wants to be able to pay the property taxes on behalf of the borrower because the property tax lien is superior to the mortgage and can preempt it in default.

Chapter 7 Bankruptcy

The traditional form of bankruptcy wherein the court simply liquidates the assets of the debtor and distributes the proceeds to creditors in proportion to their share to the total claims

Equal Credit Opportunity Act

This act prohibits discrimination in lending practices on the basis of race, color, religion, national origin, sex, marital status, age, or because all or part if an applicant's income derives from a public assistance program.

Under the Truth-in-Lending Act, for how many days after closing does a borrower have the right to rescind a mortgage loan agreement?

Under the Truth-in-Lending Act, some borrowers have three days to rescind a non-purchase mortgage loan agreement.

When a purchaser of mortgaged real estate accepts personal liability for an existing mortgage loan on the property, the borrower is said to _______.

When a purchaser of mortgaged real estate accepts personal liability for an existing mortgage loan on a property, the borrower is said to assume the loan.

LIBOR

a common index of interest rates for income producing property, the London Interbank Offering Rate is a short-term interest rate for loans among foreign banks based in London.

Truth-in-Lending Act (TILA)

a federal law requiring lenders to provide residential loan applicants with estimates of the total finance charges and the annual percentage rate (APR).

Mortgage

a lien on real property as security for a debt. A special contract by which the borrower conveys to the lender a security interest in the mortgaged property.

Partially amortizing

a loan alternative in which the outstanding principal is partially repaid over the life of the loan, then fully retired with a larger lump sum "balloon" payment at maturity.

Yield maintenance prepayment penalty

a mortgage loan prepayment penalty computed as the present value of interest income to be lost by the lender due to the early prepayment. The idea is to "make whole" the lender. Yield maintenance penalties are found strictly in loans on income -producing properties

Nonjudicial foreclosure

a process of bringing the property of defaulting borrowers to public sale by the lender or a trustee, outside of the court system. It must follow statutory guidelines, particularly concerning public notices of the sale.

Demand clause

a right that permits the lender to demand prepayment of the loan

Escrow account

a segregated account held by brokers for the deposit of earnest money (deposit) funds. Also, a trust account of a lender used to [pay for property taxes, hazard insurance or other items on behalf of a borrower.

Adjustable rate mortgage (ARM)

alternative mortgage from where the interest rate is tied to an indexed rate over the life of the loan, allowing interest rate risk to be shared by borrowers and lenders.

Assumable loan

an existing loan that can be preserved by a buyer instead of being repaid by the seller when title to the mortgaged property changes hands

Assumability

an important characteristic of a loan that permits a subsequent owner of the property to preserve the outstanding loan.

Deed of trust

an instrument used instead of a mortgage in some states. The borrower conveys a deed of trust to a trustee, who holds the deed on behalf of both borrower and lender. If the loan obligation is paid off in accordance with the note, the trustee returns the deed to the borrower. But if the borrower (trustor) defaults, the trustee exercises his power of sale to dispose of the property on behalf of the lender.

Prepayment penalty

charges, designed to discourage prepayment, incurred when a mortgage is repaid before maturity.

Acceleration clause

clause that makes all future payments due upon a single default of a loan. Prevents lender from having to sue for each payment once a single payment is late.

When a lender allows a defaulted borrower to simply convey the property to the lender, this is referred to as

deed in lieu of foreclosure.

Statutory right of redemption

in foreclosure, this is the right afforded the defaulting mortgage to recover the foreclose property for a period of time after foreclosure sale by paying the full amount of the defaulted loan plus legal costs of the foreclosure. This right is not available in all states. In states where it exists, it ranges for a few days to several years.

Trustee

in mortgage lending, person who holds the deed on behalf of both the borrower and lender in a deed of trust.

Title theory

lender receives title to the mortgaged property that ripens upon default.

Personal liability

liability assumed by borrowers that allows lenders to sue them personally for fulfillment of the contract.

Balloon Loan

loan characterized by an amortization term that is longer than the loan term. Because the loan balance will not be zero at the end of the loan term, a balloon payment is necessary to pay off the remaining loan balance in full.

Exculpatory clause

loan provision that releases the borrower from liability for fulfillment of the contract.

Recourse loans

loans in which the borrower has personal liability and the lender has legal recourse against the borrower in case of default.

Subprime loans

loans made to homeowners who do not qualify for standard home loans. Subprime loans can have high fees, and costly prepayment penalties that "lock in" the borrower to a high interest rate.

Non recourse loans

loans that relieve the borrower of personal liability but do not release the property as collateral for the loan.

Non amortizing

loans that require interest payments but no regularly scheduled principal payments.

Power of sale

mortgage provision that grants the authority to conduct foreclosure to either the lender or a trustee. Enables nonjudicial foreclosure.

Negative Amortization

occurs when the loan payment is not sufficient to cover the interest cost and results in the unpaid interest being added to the original balance, causing the loan amount to increase.

Payment caps

protects the borrower against the shock of large payment changes; it is possible for the interest rate to increase enough that the resulting payment increase will not cover the additional interest costs.

Periodic caps

provisions in adjustable rate mortgages that limit change in the contract interest rate from one change date to the next.

Subject to

when a buyer acquires a property having an existing mortgage loan and begins making the required payments without assuming personal responsibility for the note.