1. Revised: 7-30-08 Chapter 15 Slide #1 Copyright – David A. McGowan All rights reserved Chapter 15 REAL ESTATE FINANCING: PRINCIPLES Mortgage (Page 295) Use of real property as collateral for a loan Hypothecation (Page 296) Pledging of real property as collateral for a loan Terms

2. Revised: 7-30-08 Chapter 15 Slide #2 Copyright – David A. McGowan All rights reserved TERMS Mortgagor – giver of the mortgage Mortgagee – receiver of the mortgage Principle – the sum of money due the lender Interest – a charge for using lender’s money

3. Revised: 7-30-08 Chapter 15 Slide #3 Copyright – David A. McGowan All rights reserved Term – # of years granted to repay the loan Rate - the percentage of annual interest charged by the lender Impound or Escrow Account – Lender holds funds for taxes & insurance Usury – maximum interest rate a lender can charge legally TERMS

4. Revised: 7-30-08 Chapter 15 Slide #4 Copyright – David A. McGowan All rights reserved THEORIES (Page 295) Title Theory Lien Theory Lender - legal title Borrower - equitable title Lender - Lien Borrower – legal & equitable title Illinois Intermediate theory

5. Revised: 7-30-08 Chapter 15 Slide #5 Copyright – David A. McGowan All rights reserved FORECLOSURE (Page305) Nonjudicial foreclosure No court involvement Power of Sale Clause Judicial foreclosure Court authorization Property sold at public auction Strict foreclosure Court authorization Property awarded to lender

6. Revised: 7-30-08 Chapter 15 Slide #6 Copyright – David A. McGowan All rights reserved FORECLOSURE TIMELINE Notice Publication Deed Sherriff’s Deed Court Auction Court Statutory Right of Redemption Equitable Right of Redemption Statutory Right of Reinstatement 1. Court order of Foreclosure 2. Deficiency Judgment Certificate of Sale REO – Real Estate Owned – foreclosed property acquired by the lender upon receipt of the sheriff’s deed. Lis Pendens

7. Revised: 7-30-08 Chapter 15 Slide #7 Copyright – David A. McGowan All rights reserved MORTGAGE LOAN INSTRUMENTS Promissory Note Mortgage Contract 2 party agreement Deed of Trust 3 party agreement Security Instrument Debt Instrument

8. Revised: 7-30-08 Chapter 15 Slide #8 Copyright – David A. McGowan All rights reserved DEED OF TRUST (Page 296) Trusto r Creator Rights Trustee Legal Title Holder Beneficiary Lender “Power of Sale” Trust Agreement

9. Revised: 7-30-08 Chapter 15 Slide #9 Copyright – David A. McGowan All rights reserved DEED OF TRUST (Page 296) Trustor Trustee Beneficiary Deed in Trust is a deed – Deed of Trust is a relationship Deed Review

10. Revised: 7-30-08 Chapter 15 Slide #10 Copyright – David A. McGowan All rights reserved MORTGAGE CONTRACT Acceleration Clause (Page 295) Defeasance Clause (Page 295 & 302) Satisfaction of Mortgage – Mortgage Contract Deed of Reconveyance – Deed of Trust Prepayment Clause (Page 299)

11. Revised: 7-30-08 Chapter 15 Slide #11 Copyright – David A. McGowan All rights reserved Duties of the mortgagor (Page 300) Payment of debt Payment of real estate taxes Maintenance of adequate insurance Maintenance of the property Consent to make alterations MORTGAGE CONTRACT

12. Revised: 7-30-08 Chapter 15 Slide #12 Copyright – David A. McGowan All rights reserved Assignment of the mortgage Assignment of rents Alienation Clause Prevents an assumption Prevents selling “Subject To” MORTGAGE CONTRACT

13. Revised: 7-30-08 Chapter 15 Slide #13 Copyright – David A. McGowan All rights reserved MORTGAGE INTEREST CALCULATIONS Straight Loan Interest only Balloon payment of entire principle at the end of the term Amortized Loan Direct reduction loan Payment is part principle and part interest

14. Revised: 7-30-08 Chapter 15 Slide #14 Copyright – David A. McGowan All rights reserved INTEREST CALCULATIONS Straight v. Amortized

15. Revised: 7-30-08 Chapter 15 Slide #15 Copyright – David A. McGowan All rights reserved Purpose - retain the same yield earned on a mortgage loan while lowering the interest rate to benefit the borrower Borrower can afford more property with a lower interest rate DISCOUNT POINTS (Page 299)

16. Revised: 7-30-08 Chapter 15 Slide #16 Copyright – David A. McGowan All rights reserved DISCOUNT POINTS (Page 299) 6 9 8 7 Each space = 1 discount point 1 discount point = 1% of the mortgage amount % % % % Math Calculation Current Rate = 8.25% Desired Rate = 7.5% 7.5% 8.25% 123456

17. Revised: 7-30-08 Chapter 15 Slide #17 Copyright – David A. McGowan All rights reserved PROMISSORY NOTE (Page 297) Amount of the debt Time and method of payment Rate of interest Note is a negotiable instrument

18. Revised: 7-30-08 Chapter 15 Slide #18 Copyright – David A. McGowan All rights reserved WHY DOES THE LENDER SELL YOUR PROMISSORY NOTE $200,000 @ 8% interest for 30 years $16,000 earned in 1st year 12.5 years to recapture the $200,000

19. Revised: 7-30-08 Chapter 15 Slide #19 Copyright – David A. McGowan All rights reserved Face Value of Note $200,000 Lender receives 95% $190,000 Investor collects $200,000 from borrower Makes $10,000 profit WHY DOES THE LENDER SELL YOUR PROMISSORY NOTE

20. Revised: 7-30-08 Chapter 15 Slide #20 Copyright – David A. McGowan All rights reserved 8% Interest Rate WHY DOES THE LENDER SELL YOUR PROMISSORY NOTE Lender collects 2% of mortgage amount $4,000 in 1 st year Investor collects 6% of mortgage amount $12,000 in 1 st year

21. Revised: 7-30-08 Chapter 15 Slide #21 Copyright – David A. McGowan All rights reserved $16,000 # Loan Amount Investor Share Lender Share 1200,00012,0004,000 2190,00011,4003,800 3180,50010,8303,610 4171,47510,2893,430 5162,9019,7743,258 6154,7569,2853,095 7147,0188,8212,940 $24,133 Total interest in Year 1 - $51,321 $75,471 WHY DOES THE LENDER SELL YOUR PROMISSORY NOTE