Chapter 1: Legal Ethics 1

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 1.What is a subprime mortgage? How does it differ from a standard fixed- rate mortgage? 2.When is private mortgage insurance required? Which party does it protect? 3.Does the Truth-in-Lending Act (TILA) apply to all mortgages?  2

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives 3.(cont’d) How do the TILA provisions protect borrowers and curb abusive practices by mortgage lenders? 4.What is a short sale? 5.In a mortgage foreclosure, what legal rights do mortgage holders have if the sale proceeds are insufficient to pay the underlying debt? 3

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  A mortgage is a written instrument that gives the creditor (the mortgagor) an interest in, or lien on, the property being acquired by the debtor (mortgagee) as security for the debt’s payment. 4

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Types of Mortgages. – Fixed Rate Mortgages: standard mortgage with a fixed interest rate and fixed payments for the life of the loan. – Adjustable-Rate Mortgages (ARM): rate of interest changes periodically as do the payments.  5

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Types of Mortgages (cont’d). – Interest-Only Mortgages. – Subprime Mortgages: loan made to a borrower who does not qualify for a standard mortgage. – Construction Loans: series of ‘draws’ to build new home on vacant land.  6

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Types of Mortgages (cont’d). – Participation Loans. – Balloon Mortgages: similar to ARM, starts with lower payments for 7-10 years, then large ‘balloon’ note is due. Most buyers refinance at that point. – Hybrid and Reverse Mortgages. 7

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Home Equity Loans. – Bank accepts borrower’s equity as collateral for a loan, which the lender can seize in the loan is not paid on time. – Home equity loans are subordinated to the main home loan. 8

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Creditor Protection. – Private mortgage insurance required if the down payment is less than 20%. – Creditor records mortgage with appropriate local/state government. – Statute of Frauds: mortgage must be in writing to be enforceable. 9

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Creditor Protection (cont’d). – Important Mortgage Provisions: 1.The terms of the underlying loan. 2.Provisions for maintenance of the property. 3.Homeowner’s insurance. 4.Nonloan financial obligations by borrower. 5.Borrower pays some or all the taxes, insurance, assessments, or other regular expenses. 10

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Predatory Lending and Other Improper Practices. – Steering and Targeting. – Loan Flipping.  Truth in Lending Act (TILA). – Required Disclosures: loan principal, interest rate, the annual percentage rate, and all fees and costs.  11

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Truth in Lending Act (cont’d). – Prohibitions and Requirements: TILA addresses unfair or deceptive mortgage practices. Right to Rescind. Written Representations. 12

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Protection for High-Cost Mortgage Loan Recipients. – Special Consumer Protections: Home Ownership and Equity Protection Act (HOEPA) – Remedies and Liabilities: HOEPA prohibits lenders from certain practices. 13

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Protection for High-Cost Mortgage Loan Recipients. – Remedies and Liabilities: (cont’d). – CASE 20.1 I N RE K ITTS (2011). – CASE 20.1 I N RE K ITTS (2011). The lender failed to make material disclosures required under TILA and HOEPA. 14

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Protection for Higher-Priced Mortgage Loans: new type of expensive mortgage called Higher- Priced Mortgage Loans (HPML). Only mortgages secured by a consumer’s principal residence qualify to receive HPML designation.  15

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Protection for HPML’s (cont’d). – Requirements to Qualify: loan rate exceed average prime offer rate by 1.5 points for primary consumer residence. – Special Protection for Consumers: verification of repayment, and prepayment penalties curtailed. 16

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  Default: if homeowner fails to make mortgage payments, lender has the right to foreclose.  How to Avoid Foreclosure. – Forbearance of payments. – Workout Agreement. – Housing and Urban Development Assistance. 17

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  How to Avoid Foreclosure (cont’d). – Short Sales: sale of property for less than balance of the mortgage loan. Less negative impact than foreclosure; much less expensive for lender, but borrower still loses home. – Sale and Leaseback.  18

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  How to Avoid Foreclosure (cont’d). – Home Affordable Modification Program. – Voluntary Conveyance : deed in lieu of foreclosure. – Friendly Foreclosure. – Prepackaged Bankruptcy. 19

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  The Foreclosure Procedure. – Foreclosure extinguishes the borrower’s equitable right of redemption. Two types of foreclosure: Judicial Foreclosure: court-supervised process. Power of Sale Foreclosure: lender controls the process.  20

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  The Foreclosure Procedure (cont’d). – CASE 20.2 U.S. B ANK N ATIONAL A SSOCIATION V. I BANEZ (2011). – CASE 20.2 U.S. B ANK N ATIONAL A SSOCIATION V. I BANEZ (2011). Why did the court rule in favor of the defendants (homeowners)? – Acceleration Clauses: lender can call the entire loan due.  21

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  The Foreclosure Procedure (cont’d). – Notice of Default and of Sale. To initiate a sale, Lender must record a notice of default with the appropriate county office, and Borrower is then on notice of a possible foreclosure. If not paid within reasonable time, there is a notice of sale, and property is sold at an auction.  22

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  The Foreclosure Procedure (cont’d). – Notice of Default and of Sale. – CASE 20.3 M ITCHELL V. V ALTEAU (2010). – CASE 20.3 M ITCHELL V. V ALTEAU (2010). What are the purposes of the notice provisions in the Louisiana Code? Did the court stay true to them? 23

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  The Foreclosure Procedure (cont’d). – Deficiency Judgments: borrower is responsible for difference between auction price an loan amount.  Redemption Rights. – Buyer can pay full amount and exercise his equitable right of redemption. 24