Real Estate Chapter 9 11 SG2 Chapter 9 19 Questions Some effects of Mortgage Debt Homeowners can obtain credit on better terms than consumer debt o o o Tax favored Longer term borrow for long time Lower Interest Rate Finance benefit creates homeowners out of people who may not have been able to be Borrowing ownership benefit from improvements Two Elements of a Mortgage Loan Note Exact terms of the financial obligation Mortgage deed of trust lien against the Real Estate allows the lender to take the RE Refer back and forth The Promissory Note Interest Rates Personal promise to pay personal liability Banks want note for the house Fixed Rate stays the same for the life of the loan Annual fixed at 4 04 12 Adjustable Rate Change over life of the loan Margin lenders markup in our case always 2 Teaser rate Initial temporarily reduced interest rate Interest rate caps limit on changes in interest rate charged o o o Periodic Annual No matter what interest rate ant increase more than Lifetime The max the loan will ever be is Payment Caps Limit on payment changes rather than interest rate can result in negative amortization Unpaid interest added to the balance Payments Always appear at the end of the month arrears Negative amortization Owe More in the end The Note Right of Prepayment Read in Loan So you don t get fee Common law No right if not provided Why prevent Prepayment o Make more off of interest o o Bank doesn t want you to refinance Throw a penalty in Loans with restricted right of prepayment Subprime home loans Jumbo home loans large amount o o o Most income property mortgage loans Lender wants long term interest rate Refinance lower interest rate If rate goes from 8 6 pay 2 to pre pay lender The Note Other Terms Nonrecourse loan No personal liability No promissory note Why o o No one is willing to sign note in larger companies The banks still want to make money so they lend it anyways Demand Clause Right of lender to require prepayment Can relend out for higher interest rate if there is a sale of the property Acceleration Clause All remaining payment due Mortgage Deed of Trust Mortgageor Borrower Owner Mortgagee Lender Bank Difficult process of lender taking back Important Mortgage DOT Clauses Description of Property Insurance Clause require borrower to obtain insurance borrower pay lender Escrow Clause Borrower has to deposit each month Insurance Property tax lender pays o PITI Principle interest taxable insurance Acceleration Clause after 3 missed payments foreclose accelerate owe all plus Due on Sale Clause Outstanding balance is due like note C Hazardous substance clause don t do anything hazardous C Preservation and maintenance clause breach foreclosure When Things Go Wrong Default failure to meet requirements of the note or mortgage Fail to make payments 1 default Non foreclosure Response to Default Assisted Sale bank takes less then owed from sale owner gets nothing Deed in lieu of foreclosure I m going to give you title back o Better if you wave the deficiency judgment DEMAND Bad Scenarios Lender release lien but still have note obligation Short sale potential If the bank doesn t want to wave note then say Fine Foreclose me DEMAND Foreclosure o o o o o Legal process of terminating all claims of ownership Risk of failing to notify claimant must notify everyone Costly and time consuming Not good for banks Distressed sale empty every month loses Maybe a perfect opportunity for a quick sale private investors buys properties Deficiency judgment Judgment against mortgagor for unrecovered balanced Judicial foreclosure court administered public auction Power of sale public auction conducted by trustee or mortgagee bank Acquiring property with Existing Debt Subject to borrower does not sign mortgage note no personal liability Assumption buyer adds signature to note personal liability No transaction cost good deal not really around though Equal Credit opportunity Prohibits discrimination Reality loans given mostly to nonminority banks must prove they are not discriminating Redlining we are not going to give loans on property in that neighborhood Federal Truth in Lending Act TILA Statement on Annual Percentage Rate APR Shows true interest rate in lieu of fees and charges Real Estate Settlement Procedures Act RESPA Prohibits kickbacks from closing service vendors Use this mortgage broker company Why Because we pay them Chapter 10 20 Questions Mortgage Types and Borrower Decisions Overview FHA Mortgage government VA mortgage veterans Primary Mortgage Market Where loans are created Borrowers Lenders Secondary Mortgage Market Where existing home loans are resold Sale of most mortgages Government sponsored Enterprises GSEs Fannie Mae Freddie Mac Government National Mortgage Association GNMA Ginnie Mae Conventional Mortgage Loans Any standard home mortgage loan not insured by FHA or guaranteed by the Department of Veterans Affairs Private mortgage insurance 20 down The Language of Conventional Mortgage Loans Conforming loan Meets the requirements for purchase by Freddie Mac or Fannie Mae Standard note Standard mortgage Standard upprasial Size limit depends on what city and state you are in Non Conforming loan Does not meet GSE requirements in some respect Jumbo nonconforming in terms of size Lenders write loan and meet requirement of secondary markets o o o o o o o o o Private Mortgage Insurance PMI Protects lender bank Generally required for loans over 80 of value Protects lender for loses up to 20 of loan Insurer may allow termination if loan falls below 80 Must allow termination when loan falls to 80 of original value Must terminate when loan falls to 78 of original value Insuring top 20 FHA Mortgages Federal Housing Adminstration FHA is strictly a loan insurance programs Not free borrower pay Put 20 down How FHA Insurance Works Insures 100 of loan Premiums FHA Insurance Importance of FHA o o o o o o Up Front premium Annual premium based on average balance Created the level payment mortgage Influenced housing and subdivision standard Continues to innovate HECM program Insures 100 Veterans Affairs Guarantees Limited to qualified veterans of military service Always a little higher than FHA and PMI Other Mortgage Types Mortgages used to buy property Purchase money mortgage Package Mortgage Also finances appliances or other personality Home Equity Loans Some are closed end fixed term loans o o Mostly open end or line of credit loans HELOC o o o Tax deductable interest Strength of house as