1. Chapter 9 Real Estate Finance: The Laws and Contracts
Fall 2017
Dr. David P. Echevarria
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2. General Characteristics of Real Estate Contracts
Most real estate transactions involve debt financing
Most businesses prefer to have their cash in the bank rather than tied up in real estate
Most investors leverage their investments in order to increase their returns on equity
Mortgage debt financing is a major aspect of real estate decisions
Dr. David P. Echevarria
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3. General Characteristics of Real Estate Contracts
Mortgage lending is a major industry in United States and many other countries
A mortgage loan creates documents: a note and a mortgage or deed of trust
Debt financing also has tax advantages
Dr. David P. Echevarria
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4. The Note Interest rates - Interest charges
Interest rates may be fixed or variable
Mortgages are amortized
Payments consist of principal and interest
The principal portion increases over time
The interest portion decreases over time
The mortgage rate determines when the 50/50 point occurs
The lower the rate, the sooner the 50/50 point occurs
Extra payment toward Principal reduces maturity.
Dr. David P. Echevarria
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5. Principal & Interest: 30 Year Mortgage $100,000 @ 8% per annum
Total Interest:
$166,482.30
Dr. David P. Echevarria
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6. Principal & Interest: 15 Year Mortgage $100,000 @ 8% per annum
Total Interest:
$75,244.32
Dr. David P. Echevarria
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7. Principal & Interest: 30 Year Mortgage $100,000 @ 8% per annum: Extra Principal
Extra $1000 per year
Total Interest Paid:
$113,009.52
Savings:
$54,472.78
Dr. David P. Echevarria
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8. The Note Adjustable Rate Mortgages
Adjustable-rate mortgages generally use an index
The index might be U.S. Treasury constant maturity rates (10-year) or the LIBOR
As the index changes the adjustable rate changes
All adjustable-rate mortgages have floors and caps
A floor is the lowest rates can go
A cap Is the highest rates can go
Margin is the lenders markup above the index rate
Teaser rates: a reduced interest rate for a short period of time
Dr. David P. Echevarria
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9. Interest Rate Volatility
Dr. David P. Echevarria
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10. Interest Rate Volatility October 2007 – Sept 2017
Dr. David P. Echevarria
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11. The Note Payments Loans with restricted right of prepayment
Some loans may be interest only
Some loans may involve negative amortization
Additional principal to each payment reduces term
All “conforming” and FHA/VA loans
Home equity credit lines
Loans with restricted right of prepayment
Subprime home loans
“Jumbo” home loans
Most income property mortgage loans
Lender may impose prepayment penalties
Dr. David P. Echevarria
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12. The Note B. Other Terms Nonrecourse loan: No personal liability
Exculpatory clause: relieves one party if damages caused during execution of the contract
Lender prohibited from charging back unpaid claims due to borrower’s inability to pay.
Demand clause: Right of lender to require prepayment
Inclusion of mortgage clauses by reference
Dr. David P. Echevarria
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13. The Mortgage vs. Deed of trust
Mortgagor: Borrower
Mortgagee: Lender (holds deed to property)
Deed of Trust: Deed help by Trustee
Title vs. lien theory
Title theory: Mortgage a temporary transfer of title
Lien theory: Mortgage is a lien
Historic difference was lender’s claim to rents and possession in case of default
Dr. David P. Echevarria
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14. The Mortgage (Deed of trust)
Some Important Mortgage (DOT) Clauses
Description of the property
Insurance clause
Escrow clause
Acceleration clause
Due-on-sale clause
Hazardous substances clause
Preservation and maintenance clause
Dr. David P. Echevarria
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15. Default Failure to meet requirements of the note or mortgage
Technical default: Any violation of terms
Substantive default: Three missed payments (90 days)
Non-Foreclosure Responses to Default
Counseling and consumer debt reorganization
Temporary reduction of payments
Assisted sale
Short sale
Deed in lieu of foreclosure
Advantages: quick, quiet, cheap
Disadvantages: other liens remain;
Dr. David P. Echevarria
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16. Default
Foreclosure
Legal process of terminating all claims of ownership and all liens inferior to foreclosing lien
Negatives
Risk of failing to notify a claimant
Presence of superior liens
Costly and time consuming
Distressed sale
Importance of lien priority
Dr. David P. Echevarria
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17. Default Recourses of the defaulted mortgagor
Equity of redemption
Statutory right of redemption
Deficiency judgment: Judgment against mortgagor for unrecovered balance
Example:
Net foreclosure auction price: $100,000
Remaining loan balance: $120,000
Deficiency : $20,000
Judicial foreclosure vs. power of sale
Judicial foreclosure: Court-administered public auction
Power of sale: Public auction conducted by trustee or mortgagee (preferred by lenders)
Dr. David P. Echevarria
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18. Bankruptcy Three forms of bankruptcy
Chapter 7: Liquidation
Chapter 11: Court supervised “workout”
Chapter 13: Wage-earner’s proceeding
No form of bankruptcy can set aside a mortgage lien
Chapters 11 and 13 can result in delays
Dr. David P. Echevarria
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19. Bankruptcy Act Important Changes to 2005 Rev.
law passed in 2005 prohibits some filers with higher incomes from using Chapter 7 bankruptcy (liquidation) vs. Chapter 13 (repayment)
Before you can file for bankruptcy under either Chapter 7 or Chapter 13, you must complete credit counseling with an agency approved by the United States Trustee's office:

20. Bankruptcy Act Important Changes to 2005 Rev.
How property is valued: at replacement cost instead of at auction value, which means more debtors are at risk of having their property taken and sold by the trustee.
How long a filer must live in a state to use that state's bankruptcy exemption laws
Chapter 13: repayment from disposal income under numbers provided by IRS rather than bankrupt’s budget info.

21. Regulation of Home Mortgage Lending
Equal Credit Opportunity Act: no discrimination (protected classes)
Federal Truth-in-Lending Act (TILA): full disclosure
Real Estate Settlement Procedures Act (RESPA): Standard HUD forms/requirements
Other laws
Home Ownership and Equity Protection Act
Home Mortgage Disclosure Act
Community Reinvestment Act
Dr. David P. Echevarria
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22. Regulation of Home mortgage Lending
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Given oversight and enforcement power for:
All federal consumer financial protection laws
Anti-discrimination laws in consumer finance
To restrict unfair, deceptive or abusive practices
Receive consumer complaints
Promote financial education
Power to monitor emerging consumer financial risks
Centralizes a multitude of regulators within one agency for home mortgage lending
Dr. David P. Echevarria
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23. Homework Assignment
Key terms: Adjustable-Rate Mortgage, Balloon Loan, Contract For Deed, Deed Of Trust, Default, Foreclosure, Libor, Negative Amortization, Nonrecourse Loans, Recourse Loans, Short Sale, Term To Maturity, LIBOR
Study Questions: 1, 4, 6 - parts a, b, c, d
Dr. David P. Echevarria
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