Real Estate Law Financing Real Estate Law Financing

Financing Subjects Covered: Legal Theories Legal Theories Financing Sources Financing Sources Types of Financing Instruments Types of Financing Instruments Types of Loans Types of Loans The Lending Process The Lending Process Preparation of Financing Instruments Preparation of Financing Instruments Secondary Markets Secondary Markets

Financing the Real Estate Purchase OTHER COMMON SECURITY DEVICES: security interests, guarantees and suretyship MORTGAGE - Conveyance of land given as transaction security for payment of debt. Definitions: Mortgagor or Debtor - Gives interest in real estate as security for debt. Mortgagee or Creditor - Person who takes interest in property as security for debt. Mortgage Loan - Loan obtained to pay portion of purchase price for real property which is secured by real property. Deed of Trust - Regular mortgage only involves two parties - borrower and lender, with a Deed of Trust, Borrower conveys land to third party (Trustee) in trust for benefit of lender or party who holds mortgage note.

Financing the Real Estate Purchase (cont’d) Purchase Money Mortgage - or - Seller Financed Mortgage - Seller takes a mortgage from Borrower for any amount of purchase price not paid. Equitable Mortgages - Any written instrument by which parties show intention that real estate be held as security for payment of debt will be considered an equitable mortgage. ALSO an instrument intended as a regular mortgage, but which contains a defect will be treated as an equitable mortgage. Example where court finds equitable mortgage to protect Creditor Example where court finds equitable mortgage to protect Debtor Title Theory States - Adheres to view that mortgage gives mortgagee some form of legal title to land. Lien Theory States - View that mortgage is not really a conveyance of land, but only a lien. Mortgagee has lien to secure the debt.

The Mortgage Transaction Application and Commitment 1. Loan Application serves two purposes: a. Provides information to lender so lender can determine whether to make loan. b. Defines term of loan contract. 2. Commitment – lender communicates acceptance to loan applicant Mortgage Note Note - The promise or agreement to repay debt in definite installments with interest. Chief function of Note is to make Mortgagor personally liable for payment of mortgage debt.

The Mortgage Transaction (cont’d) Notes can be negotiable or non-negotiable - Is negotiable when its holder, i.e., lender, may transfer his or her right to payment to third party by assigning instrument over to third party. Meets requirements of Section of UCC. Three main provisions of a Note 1. Payment Plans - Most payable monthly and payments computed by number of different payment plans. 2. Interest - Charge for the use of money. Generally, the interest portion of each payment covers charge for using borrowed money during previous month. a. Usury b. Prepayment 3. Acceleration - Mortgage and Note usually provide that if B defaults, the entire principal sum shall become immediately due and payable -- acceleration clause.

The Mortgage Transaction (cont’d) Requirements of a Mortgage Note 1. Promise to pay 2. Amount of debt (principal amount) 3. Interest Rate 4. Time and amount of principal and interest payments 5. Reference to the note’s security 6. Mortgagor’s signature Due on Sale Clauses - Prevents a future purchaser of property from being able to assume old loan at old low rate of interest. Clause provides that upon the sale of property by Borrower, lender has choice of either declaring entire debt immediately due and owing or permitting a qualified buyer to assume loan at current market rates.

The Mortgage The Mortgage - The conveyance of land given as security for payment of debt Describing the Debt - Must be defined with reasonable certainty to prevent subsequent purchasers or creditors from acquiring rights superior to those of Mortgagee. Parties must also be described with reasonable accuracy. Accurate Description of Property Mortgage Sets Forth Duties and Obligations of Mortgagee and Mortgagor Duties of Mortgagor 1. Pay debt in accordance with terms of Note 2. Pay real estate taxes on property given as security. 3. Maintain adequate insurance to protect lender in event of casualty 4. Obtain lender's authorization in event of major alterations to property 5. Maintain property in good repair

The Mortgage (cont’d) Default Provisions 1. If Mortgagor fails to meet any of his duties, generally causes default of mortgage. Generally, grace period provided before lender exercises right to foreclose. 2. Note: Use of acceleration clause - which allows lender to accelerate maturity of debt -- to declare entire debt due and owing. 3. Also, if Mortgagor fails to maintain property, pay taxes or pay insurance premiums, generally Mortgagee has right to maintain or make necessary payments. 4. Finally, some Mortgages provide that in addition to foreclosure remedies of 1) power of sale or 2) judicial foreclosure, Mortgagee may appoint receiver to take care of property.

Federal Laws Governing Real Estate Lending Fair Lending Laws 1. Fair Housing Act – See notes in section regarding Brokers 2. Equal Credit Opportunity Act - prohibits lenders from discriminating against credit applicants on basis of race, color, religion, national origin, sex, marital status, age or dependence on public assistance. State laws and local ordinances may increase the number of protected classes. a. Lender must notify loan applicant with 30 days of credit decision. b. Lender must provide notice of right to receive copy of appraisal. c. Special rules regarding collecting information about principal’s or borrower’s spouse.

Federal Laws Governing Real Estate Lending (cont’d) 3. Community Reinvestment Act – Attempt to eliminate redlining. Redlining is a practice of refusing to make mortgage loans or issue insurance policies in certain areas without regard to economic qualifications of applicant. 4. Home Mortgage Disclosure Act (HMDA) – Requires lender to report statistical information to the federal government regarding applications and loans to purchase or refinance a home. Information is collected for multi-family and single-family residences. 5. Home Ownership and Equity Protection Act (HOEPA) – Created to protect borrowers from predatory lending practices.

Federal Laws Governing Real Estate Lending (cont’d) Disclosure of Loan Terms and Procedures Truth in Lending Act - Enacted in Object of law was to require credit institutions to inform borrowers of true cost of obtaining credit. 1. Regulation Z issued by FRB to implement Truth in Lending. 2. All residential real estate transactions are protected by Act. 3. Additionally, credit transactions with individuals are covered for personal, family, household and agricultural uses NOT exceeding $25K. 3. Additionally, credit transactions with individuals are covered for personal, family, household and agricultural uses NOT exceeding $25K. 4. Regulation Z does NOT apply to business or commercial loans.

Federal Laws Governing Real Estate Lending (cont’d) Real Estate Settlement Procedures Act 1. Enacted: (a) to ensure that both Buyer and Seller in residential real estate transactions have knowledge of all settlement costs; (b) eliminate kickbacks or referral fees that tend to increase certain settlement services; and (c) reduce amount needed to place in escrow account 2. RESPA applies to all purchases financed by a federally related mortgage loan; loan secured by first or subordinate lien on residential property; and residential property contains 1 to 4 family structure.

Federal Laws Governing Real Estate Lending (cont’d) 3. REQUIREMENTS OF RESPA a. Lender must provide copy of HUD book, "Settlement Costs and You" to every person making loan application within three days. (General information regarding settlement costs.) b. Lender must provide Borrower with good faith estimate of settlement costs within three business days after submission of loan application. Amounts stated as dollar amount or dollar range. c. Loan closing information must be prepared on special HUD form which details transaction -- Itemizes all charges imposed by lender. d. Borrower permitted to review settlement statement one day prior to closing. e. Prohibits kickbacks (i.e., when insurance company pays lender for referring one of lender's customers to agency.) f. Limits amount Borrower required to pay into escrow account at closing.

Quiz Multiple Choice 1. This lending source is a cooperative association that permits members to borrow money for both short-term and long-term residential loans. a. savings and loan association b. credit union c. mutual savings bank d. none of the above B

Quiz (cont’d) 2. This lending source is found primarily in the Northeast, is owned by depositors, and makes loans for both residential and income-producing properties. a. savings and loan association b. credit union c. mutual savings bank d. none of the above C

Quiz (cont’d) 3. Private mortgage insurance is associated with this type of loan. a. conventional insured loan b. FHA loan c. VA loan d. none of the above A

Quiz (cont’d) 4. This federal law requires lenders to make full disclosure of all costs incurred in obtaining credit. 1. Federal Truth in Lending Act 2. Real Estate Settlement Procedures Act 3. Equal Credit Opportunity Act 4. none of the above A

Quiz (cont’d) 5. This federal law requires the lender to provide the borrower with a good faith estimate of closing costs within three (3) days of the loan application. a. Federal Truth in Lending Act b. Real Estate Settlement Procedures Act c. Equal Credit Opportunity Act d. none of the above B

Quiz (cont’d) True/False 6. Commercial banks are a major source of long- term residential loans. 7. A mortgage is a three-party instrument. 8. Richard Price is purchasing a house for $400,000. He is taking out a loan for 80% of the purchase price. The lender is charging him an interest rate of 7% and one point. The point will cost Richard $4,000. F F F

Quiz (cont’d) 9. The margin is the amount of percentage points the lender adds to the index rate to come up with the ARM interest rate. 10. A secondary market is a market for the purchase and sale of existing mortgages. T T