Download Chapter 7

California Real Estate
Principles, 10.1 Edition
Chapter 8
Introduction to Real Estate Finance
© 2016 OnCourse Learning
Chapter 8
1. Describe the types of promissory notes, then
explain adjustable rate loans.
2. Explain a deed of trust (trust deed), a mortgage,
installment sales contract, and foreclosure
procedures.
3. Define clauses common to financing documents:
acceleration, alienation, subordination,
prepayment penalty.
4. Outline the principles of loan regulations: TruthIn-Lending, RESPA, Fair Credit, Real Fair Credit
Reporting and Property Loan Law.
Financing Process
1.
2.
3.
4.
5.
APPLICATION: Lender form used to acquire information
on income, credit and assets.
ANALYSIS: Verification of income, credit and assets.
Underwriter decides if borrower is qualified. If so, loan
terms. The major issue the FICO score
PROCESSING: Papers drawn. Escrow instructions,
appraisal, loan documents.
CLOSING: Papers signed, loan funds, loan and escrow
closes, documents recorded, insurance issued
(property and title), closing statements issued
SERVICING: Process of collecting loan payments. Check
on loan until paid off. Pay impound bills.
Overview of Finance Documents
Financing Instruments
Note
Promise to RePay
Hypothecate
Security
Collateral Lien
Straight Note
Mortgage
Amortized Note
Deed of Trust
Land Contract
Partially Amortized
Fully Amortized
Installment Note
Promissory Notes
Legal obligation for the debt
Straight Note
Payments of Interest Only
Entire principal repaid on the final due date
Installment Note
Periodic payments of principal & interest
Amortized Note
Monthly payments which include both Principal and Interest
Fully Amortized type : Liquidates the debt with final payment
Partially Amortized : Balloon payment type requires larger final
payment
Real Estate Loans
•
•
•
•
•
•
•
•
Fixed Rate - The interest rate remains the same
Adjustable Rate Mortgage (ARM)-rate
– Lower initial rate than fixed-rate mortgage
– Rate cap and payment cap
Variable Interest Rate (VIR)
Graduated Payment Mortgage (GPM)-increasing
Graduated Payment Adjustable Mortgage (GPAM)
Growing Equity Mortgage (GEM)principal
All-Inclusive Trust Deed (AITD)
Reverse Annuity Mortgage (RAM)
VARIABLE PAYMENT PLANS
7
6
5
Loan Interest
Rate
Treasury
Securities Rate
4
3
2
1
0
Year
1
Year
2
Year
3
Year
4
Year
5
Year
6
• The interest rate may change and as a
result the following may be affected:
1. Payments
2. Principal owed
3. Term (length of the loan)
Adjustable Rate Loan TERMS
• INDEX: Measures need for a change in rate.
• MARGIN: The distance between actual and index
rate.
• ADJUSTMENT PERIODS: How often rate changes.
Typically every 6 or 12 months.
• CAP: Maximum rate over initial rate.
• TEASER: Very low initial rate for short period before
increase to normal ARM rate.
• CONVERTIBLE: During “window period” (2-5 years)
allowed to switch to fixed rate upon payment of fee.
Negative Amortized Note
• This is when the loan payment does not
cover the monthly interest
• Shortage is added to principal loan amount
• Results in increased loan balance
• AKA: Option Arm, Neg Am, Four-pay option
ARM
• Minimum payment , Interest only (I/O), 15
year, 30/40 year fully amortized.
Negative Amortized Note
• This is when the loan payment does not
cover the monthly interest
• Shortage is added to principal loan amount
• Results in increased loan balance
DEED OF TRUST
(Trust Deed)
•
•
•
•
•
Easier, cheaper, faster foreclosure
Creates a lien to secure repayment of a note
Trustor – Borrower
Trustee – Stakeholder or “naked” Titleholder
Beneficiary – BANK - Lender
Trustor
When debt
is paid
Deeds to
Trustee
Who holds title
until debt is paid
Reconveys
Trustor
Trustee
The Trustee returns title to the Trustor by a Deed of Reconveyance
Mortgagor - Borrower
Mortgagee - Lender
•
•
Loan Payoff
– Satisfaction of Mortgage
Foreclosure by default
– Law suit / Court order
– Decree of Foreclosure
– Notice of Sale
– Sheriff’s Sale
– Sheriff’s Deed
– Deficiency Judgment possible
– One-year Period of Redemption
MORTGAGE
(A Contract)
Common Provisions in
Security Instruments
Acceleration
Clause
Alienation
(Due-On-Sale)
Clause
Lock-In
Clause
or
Assumption
Provision
or
Prepayment
Provision
TRUST DEED vs. MORTGAGE
Deed of Trust
Comparison
Mortgage
If Foreclosure by Court Action: Same
as for Mortgage
Trustee’s Sale - No Deficiency
Judgment Possible
Lender’s
Rights
If Foreclosure by Court Action: Same
as for Mortgage
Trustee’s Sale
Notice of Default – Owner may
redeem by bringing payments current
within three months
Notice of Sale – Owner may redeem
only by paying entire indebtedness in
full Trustee’s Sale Sale final. No
redemption
Owner’s
Rights of
Redemption
Before Decree of Foreclosure
Owner may redeem anytime by
bringing payments current
After Decree of Foreclosure and Sale
Owner has one year “Equity of
Redemption”
Must pay indebtedness in full to
redeem
Trust Note – Outlaws four years after
due date
Trust Deed – Never outlaws – Lender
can always have trustee sell to
recover unpaid balance
Stature of
Limitations
Mortgage note and contract both
outlaw four years from due date, or
from date of last payment. No relief.
Monies involved not collectable.
Possible Deficiency Judgment
Mortgage versus Trust Deed
Mortgage
Deed of Trust
Foreclosure
Court action Only
Equitable Redemption
Notice of Default
Lawsuit/Court
Notice of Sale
Statutory Redemption
Sheriff’s Sale
Deficiency Judgment
Sheriff’s Deed
1 year to redeem
Court Action or Trustee’s Deed
Reinstatement Period
Notice of Default/3 months
Notice of Sale
21 day minimum publish
Trustee’s Sale
All sales final
Trustee’s Deed
No redemption
Owner’s
Rights of
Redemption
Before Decree of Foreclosure
Owner may redeem anytime by
bringing payments current
After Decree of Foreclosure and
Sale
Owner has one year “Equity of
Redemption”
Must pay indebtedness in full to
redeem
If Foreclosure by Court Action: Same as
for Mortgage
Trustee’s Sale
Notice of Default – Owner may redeem by
bringing payments current within three
months
Notice of Sale – Owner may redeem only
by paying entire indebtedness in full
Trustee’s Sale Sale final. No redemption
Buyer Takes Over Seller’s Loan

Buyer assumes existing loan

Substitution of Liability

Buyer takes title “Subject to” existing loan.
Prepayment Penalty
• Certain California lenders prohibited from charging
prepayment penalty on owner-occupied home
loans if the loan has been on the lender’s books for
more than 3 years.
• Does not apply to federally supervised lenders
• No prepayment penalty on FHA, VA, or Cal-Vet loans
SECOND DEED OF TRUST
Junior Lien – Purpose: Close the gap between the
sales price and the first loan plus down payment
• Types: “Hard” money second – cash from lender
“Soft” money second – credit from seller
• Default: Junior lienholder may foreclose
REQUEST FOR COPY OF NOTICE
OF DEFAULT AND SALE
Purpose: To inform holders of junior liens when the
holder of a senior lien (deed of trust) is about to
foreclose
SALES CONTRACT
•
•
•
•
•
•
•
•
Land Contract or Installment Sales Contract
Vendor - Vendee
Low down payment usually required
Allows marginal buyer to acquire real estate
Buyer gets immediate possession
Buyer receives full legal title after loan paid off
Seller must follow statutory notice requirements
if buyer defaults
All parties should consult their attorney
Vendee may receive poor title.
Vendor may have problems during the term.
Sales Contract (cont.)
•
•
•
•
•
Buyer usually receives equitable,
insurable, recorded title
The contract cannot prohibit recording
Creates a cloud on vendor’s title
Removed by court or vendee signing a
quitclaim deed
Vendee may assign all rights if no release
from vendor
Basic Rule of Finance
• If you don’t pay … they will take it away !
TRUSTEE’S SALE STEPS
1. Beneficiary requests trustee to foreclose
2. Trustee records Notice of Default
3. Three-month waiting period
(Borrower has reinstatement period)
4. Advertise “Notice of Sale” with date, time and
place of sale
(Borrower has limited right to reinstate)
5. Sale to highest bidder for cash
(loan amount + costs)
6. Trustee’s deed is issued (all sales final;
borrower has no right of redemption)
7. Disbursement of funds
TRUTH IN LENDING LAW
Regulation Z (TIL)
• Purpose – disclosure of credit
• A.P.R. – cost of credit in
percentage terms
• Right of rescission
• Annual Percentage Rate (APR)
must be stated when
advertising financing
Equal Credit
Opportunity Act
• Enforced by the Board of Governors of the Federal Reserve System,
through the Federal Reserve Board.
• Prohibits lender or mortgage broker from discriminating against
credit applicants on the basis of race, color, religion, national origin,
sex, marital status, or age, among other things.
• Lender cannot ask borrower if: divorced, separated, has
childbearing plans, receives alimony or child support (unless using
the income to qualify for the loan).
• Lender has 30 days to approve or disapprove.
• If not approved, lender must state why.
Fair Credit
Reporting Act
Requires that, if a loan is denied, lender or mortgage
broker must:
• Give applicant a statement of denial reasons.
• Include the name of the federal agency that can be
contacted if the applicant feels discriminated against.
• If denial is based on information contained in the
applicant’s credit report, inform applicant of the right to
receive a free copy of the report, and how to do so.
• Information can be obtained from the Board of
Governors of the Federal Reserve System, through the
Federal Reserve Board.
Real Estate Settlement
Procedures Act (RESPA)
• Requires lender or mortgage broker to disclose any
affiliated business arrangement with an individual or
entity offering settlement services.
• Special information booklet (Buying your Home:
Settlement Costs and Helpful Information) within three
days of loan application.
• Good Faith Estimate of settlement service charges
must be provided within 3 business days of loan
application.
Truth in Lending Disclosure
Settlement Statement
• May inspect one day before closing
• Includes disclosure of lender-paid broker
fees
• Escrow Account Statement
– No more than two months of excess payments
• Accounting provided within 45 days
• Annual review of escrow account
www.hud.gov
Mortgage Broker Limits
• COSTS:
– Limits amount of costs and expenses
– Cannot be over 5% of the loan amount
• Actual costs, or
• $390
– Cannot exceed $700 for costs and expenses.