RE 310 Principles of Real Estate Mortgages and Mortgage Markets 1 What is a Mortgage a A mortgage is simply a as collateral for a Although we usually speak of the mortgage as if it were a loan technically it is a security instrument putting up the property as collateral for the loan b The or financing instrument is the document that actually creates the debt and specifies the terms of the loan c The is also known as the security instrument This is what gives the lender the right to sue for foreclosure in the event of default The mortgage typically contains certain uniform covenants promises that require the borrower to Pay the debt in accordance with the terms of the note Pay real estate taxes on the property Keep insurance on the property and Maintain the property Other clauses in the mortgage may Allow the lender to collect reserves for taxes insurance and flood insurance Provide that rents from the property be assigned to the lender in the event of default Require the lender to release the mortgage in a timely fashion when the loan is repaid and Allow the lender to assign the mortgage to a new lender The book has samples of both documents d In these documents the is called the mortgagor while the is called the mortgagee e Mortgages must be recorded in the register of deeds office in order to be valid This provides constructive notice of the claim and establishes priority in relation to other claims 2 2 Mortgage Loan Default and Foreclosure a Default occurs when the borrower fails to make his or her payment on time or violates any of the terms of the note or mortgage b Foreclosure refers to the process of seizing the property and having it sold to repay the debt c In the event that the sale of the property does not pay off all the debt the mortgagee may be entitled to a personal against the borrower d Lenders prefer to avoid foreclosure and are typically willing to make concessions to keep the borrower paying on the loan Recasting or modifying the loan Allow the loan to be assumed Short sale Deed in lieu of foreclosure 3 e Redemption rights Equitable right of redemption Prior to the foreclosure sale if the borrower pays the amount in default plus costs the debt may be reinstated Statutory right of redemption A period of time in which the borrower can redeem his property even after the foreclosure sale In Kansas is this is generally 12 months depending on the circumstances 3 Other Mortgage Tidbits a Mortgage Alternatives Deed of trust Land contracts A variety of names are used for this arrangement Real estate contract Contract for deed Installment sales contract Owner carry Agreement to convey Don t confuse this with seller financing 4 b Purchasing a mortgaged property Assuming the mortgage Purchase subject to an existing mortgage 4 Mortgage Markets a U S Mortgage Market Structure b Primary Mortgage Market In the primary mortgage market new mortgage loans are created and funds are advanced to borrowers 5 Major players in the primary mortgage market include Depository institutions commercial banks savings banks credit unions etc Mortgage banks Mortgage brokers Institutional Investors Lenders in the primary mortgage market earn income from three basic sources c Secondary Mortgage Market In the secondary mortgage market existing mortgages are bought and sold by investors What is the purpose of the secondary mortgage market 6 Mortgage backed securities Players in the secondary mortgage market Government Sponsored Enterprises GSEs Fannie Mae Federal National Mortgage Association Freddie Mac Federal Home Loan Mortgage Corporation Ginnie Mae Government National Mortgage Association Federal Home Loan Bank System Investment banks Private investors 7 How do firms earn income in the secondary mortgage market Commercial mortgage backed securities 8 5 Classifications of mortgage loans a Conventional loans Uninsured vs insured conventional mortgages Private mortgage insurance protects the against Conforming vs nonconforming mortgages Jumbo loans Qualified Residential Mortgages b Government backed mortgages Federal Housing Administration FHA insured loans Veterans Administration VA guaranteed loans 9 6 Mortgage Loan Underwriting a Credit history Installment loans Revolving accounts Mortgage loans Bankruptcies judgments and chargeoffs Lenders often use credit scores FICO scores to summarize the applicant s credit history b Income capacity Will the applicant be able to make the required monthly payment on the loan The lender will verify the income reported by the applicant by inspecting past tax returns and calling employers 10 The front end housing expense ratio FER is the percentage of the applicant s monthly income needed to meet required monthly housing expenses Housing expenses include Thus the front end ratio is equal to Conforming lenders typically require that the applicant s FER be no greater than Example Suppose a borrower has monthly income of 3 000 The proposed mortgage payment is 550 per month while taxes and insurance are expected to be 250 per month What is this applicant s front end ratio Doe he meet the traditional mortgage underwriting guidelines 11 The back end total debt ratio BER is the percentage of the applicant s monthly income needed to meet all of his or her debt payment obligations including both the housing expenses and any other required monthly debt payments Other debt payments include almost all other monthly obligations the applicant may have Conforming lenders typically require that an applicant s BER be no greater than Example Suppose the applicant above has a car loan requiring a monthly payment of 350 and a student loan with a monthly payment of 200 What is his back end ratio Does he meet the traditional underwriting requirements c Collateral Finally lenders want to make sure that the property provides adequate collateral for the loan Does the applicant have clear title to the property Does the property meet the lender s criteria Is the value of the property high enough 12 The loan to value LTV ratio is used to determine whether the value of the collateral is high enough Conventional lenders typically require the LTV ratio be no greater than 80 With private mortgage insurance PMI the LTV ratio can be as high as 95 FHA loans can have LTV ratios of up to 98 75 Example A property is selling for 115 000 and has been appraised at 112 500 The loan amount is 90 000 What is the LTV Ratio 7 Housing Finance Regulations a Equal Credit Opportunity Act ECOA Prohibits