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Chapter 5: Mortgage loans Andrew Davidson Anthony B. Sanders Lan-Ling Wolff Anne Ching What is a Mortgage? A mortgage is an instrument in which the title to real estate is held as a security against the repayment of a debt.

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chapter 5 mortgage loans

Chapter 5: Mortgage loans

Andrew Davidson

Anthony B. Sanders

Lan-Ling Wolff

Anne Ching

what is a mortgage
What is a Mortgage?
  • A mortgage is an instrument in which the title to real estate is held as a security against the repayment of a debt.
  • A lien is a legal claim on the property that allows the lien holder to satisfy the debt through foreclosure and sale of the property, if necessary.

Chapter 5

mortgage deed and promissory note
Mortgage deed and promissory note
  • All mortgages are basically composed of two parts: 1) the mortgage deed or deed of trust, and 2) the promissory note.
    • The mortgage deed describes the real estate to be used as collateral against the repayment of the note.
    • A deed of trust is similar to a mortgage deed except that the borrower creates a trust and conveys the title of the property to a trustee who holds it as security for the benefit of the lender.
    • The promissory note is a personal promise to repay the note, and even in the absence of any real estate security, the borrower would still have an obligation to repay the note.
      • The note spells out the financial terms of repayment as well as the rights and interest of the lender and borrower.

Chapter 5

title theory and lien theory
Title theory and lien theory
  • There are two general approaches used in most states to establish the legal relationship between a borrower and a lender.
    • One is called title theory, where title is held by, or rests with, the mortgagee (lender).
    • The other is called lien theory, where the mortgagor (borrower) retains title and the mortgagee merely has a lien against the property.
    • Lien theory is more modern in origin and the most common approach in most states, although many states have a hybrid approach encompassing both theories in part.

Chapter 5

size of the mortgage market
Size of the mortgage market
  • The mortgage market in the U.S. is the largest in the world and has exceeded $7.5 trillion as of 2001 in terms of mortgage debt outstanding (see Table 5.1).
  • Mortgages can be categorized by either the type of underlying property or by the type of institution that holds or owns the mortgage loans.
    • In terms of property type, Table 5.1 shows that the outstanding mortgage debt is dominated by residential property also commonly referred to in mortgage parlance as 1-4 Family.
    • Commercial mortgages represent the second largest segment of outstanding mortgage debt with over $1.3 trillion as of 2001.

Chapter 5

types of mortgages
Types of mortgages
  • Fixed-rate mortgages
    • Maturity (30 year and 15 year)
    • Type (conforming and non-conforming)
  • Adjustable-rate mortgages
  • Key terms:
    • LTV
    • Points
    • Lock
    • APR

Chapter 5

fixed rate mortgages
Fixed-rate mortgages
  • A fixed-rate mortgage has a fixed-rate of interest for the term of the loan.
  • Loan terms can vary from 15 to 30 years, although other terms are available as well.
  • There are several variations of amortizing mortgages.
    • Constant payment mortgage(CPM).
    • Constant interest mortgage (CIM).
    • Constant amortization mortgage (CAM)

Chapter 5

adjustable rate mortgages
Adjustable-rate mortgages
  • ARMs differ from fixed-rate mortgages in that the rate on the mortgage varies every month or year (depending on the terms of the ARM).
  • There are a number of variations on the adjustable rate mortgages (also known as variable rate mortgages).
  • Adjustable rate mortgages are not as popular in the current low interest rate environment, but may return to popularity when interest rates begin to increase.

Chapter 5

features of arms
Features of ARMs
  • ARM Indexation
  • Adjusting the ARM Payment
  • Adjustable Rate Mortgage with Capped Payments
  • Adjustable Rate Mortgage Terms

Chapter 5

other mortgage types
Other mortgage types
  • Graduated payment mortgages
  • Shared appreciation mortgages
  • Reverse annuity mortgages

Chapter 5

mortgage default and legal issues concerning mortgages
Mortgage Default and Legal Issues Concerning Mortgages
  • What is “Default?”
  • What is “Foreclosure?”
  • Why Most Mortgages Don’t Proceed to the Foreclosure Stage

Chapter 5

important clauses in uniform mortgages
Important Clauses in Uniform Mortgages
  • Acceleration Clause
  • Defeasance Clause
  • Prepayment Clause
  • Subordination Clause
  • The Estoppel Clause

Chapter 5

issues in mortgages
Issues in mortgages
  • Mortgage priority
  • Due-on-sale clause
  • Redlining
  • The FNMA/FHLMC Uniform Loan Contract

Chapter 5