Real Estate Law Financing Real Estate Law Financing

Real Estate Law

Financing

Real Estate Law

Financing

FinancingFinancing

Subjects Covered:Subjects Covered:

Legal TheoriesLegal Theories

Financing Financing SourcesSources

Types of Types of Financing Financing InstrumentsInstruments

Types of LoansTypes of Loans

The Lending The Lending ProcessProcess

Preparation of Preparation of Financing Financing InstrumentsInstruments

Secondary Secondary MarketsMarkets

Financing the Real Estate PurchaseFinancing the Real Estate Purchase

OTHER COMMON SECURITY DEVICES:OTHER COMMON SECURITY DEVICES: security interests, security interests, guarantees and suretyshipguarantees and suretyship

MORTGAGEMORTGAGE - - Conveyance of land given as transaction Conveyance of land given as transaction security for payment of debt. security for payment of debt.

Definitions:Definitions:

Mortgagor or DebtorMortgagor or Debtor - Gives interest in real estate as - Gives interest in real estate as security for debt.security for debt.

Mortgagee or CreditorMortgagee or Creditor - Person who takes interest in - Person who takes interest in property as security for debt.property as security for debt.

Mortgage LoanMortgage Loan - Loan obtained to pay portion of - Loan obtained to pay portion of purchase price for real property which is secured by real purchase price for real property which is secured by real property.property.

Deed of TrustDeed of Trust - Regular mortgage only involves two - Regular mortgage only involves two parties - borrower and lender, with a Deed of Trust, parties - borrower and lender, with a Deed of Trust, Borrower conveys land to third party (Trustee) in trust Borrower conveys land to third party (Trustee) in trust for benefit of lender or party who holds mortgage note.for benefit of lender or party who holds mortgage note.

Financing the Real Estate Purchase (cont’d)Financing the Real Estate Purchase (cont’d)

Purchase Money MortgagePurchase Money Mortgage - or - - or - Seller Financed MortgageSeller Financed Mortgage - - Seller takes a mortgage from Borrower for any amount of Seller takes a mortgage from Borrower for any amount of purchase price not paid.purchase price not paid.

Equitable MortgagesEquitable Mortgages - Any written instrument by which parties - Any written instrument by which parties show intention that real estate be held as security for payment show intention that real estate be held as security for payment of debt will be considered an equitable mortgage. ALSO an of debt will be considered an equitable mortgage. ALSO an instrument intended as a regular mortgage, but which contains instrument intended as a regular mortgage, but which contains a defect will be treated as an equitable mortgage.a defect will be treated as an equitable mortgage.

Example where court finds equitable mortgage to protect Example where court finds equitable mortgage to protect Creditor Creditor

Example where court finds equitable mortgage to protect Example where court finds equitable mortgage to protect DebtorDebtor

Title Theory StatesTitle Theory States - Adheres to view that mortgage gives - Adheres to view that mortgage gives mortgagee some form of legal title to land.mortgagee some form of legal title to land.

Lien Theory StatesLien Theory States - View that mortgage is not really a - View that mortgage is not really a conveyance of land, but only a lien. Mortgagee has lien to conveyance of land, but only a lien. Mortgagee has lien to secure the debt.secure the debt.

The Mortgage TransactionThe Mortgage Transaction

Application and CommitmentApplication and Commitment1. Loan Application serves two purposes:1. Loan Application serves two purposes:

a. Provides information to lender so lender can a. Provides information to lender so lender can determine whether to make loan. determine whether to make loan.

b. Defines term of loan contract. b. Defines term of loan contract.

2. Commitment – lender communicates acceptance to loan 2. Commitment – lender communicates acceptance to loan applicantapplicant

Mortgage NoteMortgage NoteNoteNote - The promise or agreement to repay debt in definite - The promise or agreement to repay debt in definite installments with interest. installments with interest.

Chief function of NoteChief function of Note is to make is to make Mortgagor personally liable Mortgagor personally liable for payment of mortgage debtfor payment of mortgage debt. .

The Mortgage Transaction (cont’d)The Mortgage Transaction (cont’d)

Notes can be negotiable or non-negotiableNotes can be negotiable or non-negotiable - - Is negotiable Is negotiable when its holder, i.e., lender, may transfer his or her right to when its holder, i.e., lender, may transfer his or her right to payment to third party by assigning instrument over to third payment to third party by assigning instrument over to third party. Meets requirements of party. Meets requirements of Section 3-104 of UCC. Section 3-104 of UCC.

Three main provisions of a NoteThree main provisions of a Note

1. 1. Payment PlansPayment Plans - - Most payable monthly and Most payable monthly and payments computed by number of different payment plans.payments computed by number of different payment plans.

2. 2. Interest - Charge for the use of money. Generally, Interest - Charge for the use of money. Generally, the interest portion of each payment covers charge for using the interest portion of each payment covers charge for using borrowed money during previous month.borrowed money during previous month.

a. Usurya. Usuryb. Prepayment b. Prepayment

3. Acceleration - Mortgage and Note usually 3. Acceleration - Mortgage and Note usually provide that if B defaults, the entire principal sum provide that if B defaults, the entire principal sum shall become immediately due and payable -- shall become immediately due and payable -- acceleration clause. acceleration clause.

The Mortgage Transaction (cont’d)The Mortgage Transaction (cont’d)

Requirements of a Mortgage NoteRequirements of a Mortgage Note

1. Promise to pay1. Promise to pay

2. Amount of debt (principal amount)2. Amount of debt (principal amount)

3. Interest Rate3. Interest Rate

4. Time and amount of principal and interest payments4. Time and amount of principal and interest payments

5. Reference to the note’s security5. Reference to the note’s security

6. Mortgagor’s signature6. Mortgagor’s signature

Due on Sale ClausesDue on Sale Clauses - Prevents a future purchaser of property - Prevents a future purchaser of property from being able to assume old loan at old low rate of interest. from being able to assume old loan at old low rate of interest. Clause provides that upon the sale of property by Borrower, Clause provides that upon the sale of property by Borrower, lender has choice of either declaring entire debt immediately lender has choice of either declaring entire debt immediately due and owing or permitting a qualified buyer to assume loan due and owing or permitting a qualified buyer to assume loan at current market rates. at current market rates.

The MortgageThe Mortgage

The Mortgage -The Mortgage - The conveyance of land given as security for The conveyance of land given as security for payment of debtpayment of debt

Describing the DebtDescribing the Debt - Must be - Must be defined with reasonable certaintydefined with reasonable certainty to to prevent subsequent purchasers or creditors from acquiring rights prevent subsequent purchasers or creditors from acquiring rights superior to those of Mortgagee.superior to those of Mortgagee.

PartiesParties must also be must also be described with reasonable accuracydescribed with reasonable accuracy..

Accurate Description of PropertyAccurate Description of Property

Mortgage Sets Forth Duties and Obligations of Mortgagee and Mortgage Sets Forth Duties and Obligations of Mortgagee and Mortgagor Mortgagor

Duties of MortgagorDuties of Mortgagor

1. Pay debt in accordance with terms of Note1. Pay debt in accordance with terms of Note2. Pay real estate taxes on property given as security. 2. Pay real estate taxes on property given as security. 3. Maintain adequate insurance to protect lender in 3. Maintain adequate insurance to protect lender in event of casualty event of casualty 4. Obtain lender's authorization in event of major 4. Obtain lender's authorization in event of major alterations to property alterations to property 5. Maintain property in good repair5. Maintain property in good repair

The Mortgage (cont’d)The Mortgage (cont’d)

Default ProvisionsDefault Provisions

1. If 1. If Mortgagor fails to meet any of his duties, generally Mortgagor fails to meet any of his duties, generally causes default of mortgage. Generally,causes default of mortgage. Generally, grace period grace period provided provided before lender exercises right to foreclose.before lender exercises right to foreclose.

2. 2. Note: Note: Use of acceleration clauseUse of acceleration clause - which allows lender - which allows lender to accelerate maturity of debt -- to declare entire debt due and to accelerate maturity of debt -- to declare entire debt due and owingowing..

3. 3. Also, Also, if Mortgagor fails to maintain propertyif Mortgagor fails to maintain property, pay taxes , pay taxes or pay insurance premiums, generally or pay insurance premiums, generally Mortgagee has right to Mortgagee has right to maintainmaintain or make necessary payments or make necessary payments..

4. 4. Finally, some Mortgages provide that in addition to Finally, some Mortgages provide that in addition to foreclosure remedies of 1) power of sale or 2) judicial foreclosure remedies of 1) power of sale or 2) judicial foreclosureforeclosure, Mortgagee may , Mortgagee may appoint receiver to take care of appoint receiver to take care of propertyproperty. .

Federal Laws GoverningFederal Laws Governing Real Estate Lending Real Estate Lending

Fair Lending LawsFair Lending Laws1. 1. Fair Housing ActFair Housing Act – See notes in section regarding Brokers – See notes in section regarding Brokers

2. 2. Equal Credit Opportunity ActEqual Credit Opportunity Act - - prohibits lenders from prohibits lenders from discriminating against credit applicants on basis of race, color, discriminating against credit applicants on basis of race, color, religion, national origin, sex, marital status, age or dependence on religion, national origin, sex, marital status, age or dependence on public assistance. State laws and local ordinances may increase public assistance. State laws and local ordinances may increase the number of protected classes.the number of protected classes.

a. Lender must notify loan applicant with 30 days of credit a. Lender must notify loan applicant with 30 days of credit decision. decision.

b. Lender must provide notice of right to receive copy of b. Lender must provide notice of right to receive copy of appraisal.appraisal.

c. Special rules regarding collecting information about c. Special rules regarding collecting information about principal’s or borrower’s spouse.principal’s or borrower’s spouse.

Federal Laws GoverningFederal Laws Governing Real Estate Lending (cont’d) Real Estate Lending (cont’d)

3. 3. Community Reinvestment ActCommunity Reinvestment Act – Attempt to eliminate – Attempt to eliminate redlining. Redlining is a practice of refusing to make mortgage redlining. Redlining is a practice of refusing to make mortgage loans loans oror issue insurance policies in certain areas issue insurance policies in certain areas withoutwithout regard to economic qualifications of applicant.regard to economic qualifications of applicant.

4. 4. Home Mortgage Disclosure Act (HMDAHome Mortgage Disclosure Act (HMDA) – Requires ) – Requires lender to report statistical information to the federal lender to report statistical information to the federal government regarding applications and loans to purchase or government regarding applications and loans to purchase or refinance a home. Information is collected for multi-family refinance a home. Information is collected for multi-family and single-family residences. and single-family residences.

5. 5. Home Ownership and Equity Protection Act (HOEPAHome Ownership and Equity Protection Act (HOEPA) ) – Created to protect borrowers from predatory lending – Created to protect borrowers from predatory lending practices.practices.

Federal Laws GoverningFederal Laws GoverningReal Estate Lending (cont’d)Real Estate Lending (cont’d)

Disclosure of Loan Terms and ProceduresDisclosure of Loan Terms and ProceduresTruth in Lending ActTruth in Lending Act - E - Enacted in 1969. Object of law nacted in 1969. Object of law

was to require credit institutions to inform borrowers of was to require credit institutions to inform borrowers of true cost of obtaining credit.true cost of obtaining credit.

1. 1. Regulation Z issued by FRB to implement Truth in Regulation Z issued by FRB to implement Truth in Lending.Lending.

2. 2. All residential real estate transactions are protected All residential real estate transactions are protected by Act.by Act.

3. Additionally, credit transactions with individuals are 3. Additionally, credit transactions with individuals are covered for personal, family, household and agricultural covered for personal, family, household and agricultural uses NOT exceeding $25K.uses NOT exceeding $25K.

4. Regulation Z does NOT apply to business or 4. Regulation Z does NOT apply to business or commercial loans.commercial loans.


Real Estate Settlement Procedures ActReal Estate Settlement Procedures Act

1. 1. Enacted: (a) to ensure that both Buyer and Seller in Enacted: (a) to ensure that both Buyer and Seller in residential real estate transactions have knowledge of residential real estate transactions have knowledge of all settlement costs; (b) eliminate kickbacks or referral all settlement costs; (b) eliminate kickbacks or referral fees that tend to increase certain settlement services; fees that tend to increase certain settlement services; and (c) reduce amount needed to place in escrow and (c) reduce amount needed to place in escrow accountaccount

2. 2. RESPA applies to all purchases financed by a RESPA applies to all purchases financed by a federally related mortgage loanfederally related mortgage loan; loan secured by first or ; loan secured by first or subordinate lien on residential property; and residential subordinate lien on residential property; and residential property contains 1 to 4 family structure.property contains 1 to 4 family structure.


3. 3. REQUIREMENTS OF RESPAREQUIREMENTS OF RESPA

a. Lender must provide copy of HUD book, "Settlement a. Lender must provide copy of HUD book, "Settlement Costs and You" to every person making loan application Costs and You" to every person making loan application within within three daysthree days. (General information regarding settlement costs.). (General information regarding settlement costs.)

b. Lender must provide Borrower with b. Lender must provide Borrower with good faith good faith estimate of settlement costsestimate of settlement costs within three business days after within three business days after submission of loan application. Amounts stated as dollar submission of loan application. Amounts stated as dollar amount or dollar range.amount or dollar range.

c. c. Loan closing information must be prepared on Loan closing information must be prepared on special HUD formspecial HUD form which details transaction -- Itemizes all which details transaction -- Itemizes all charges imposed by lender.charges imposed by lender.

d. d. Borrower permitted to reviewBorrower permitted to review settlement statement settlement statement one day prior to closingone day prior to closing. .

e. Prohibits kickbacks (i.e., when insurance company e. Prohibits kickbacks (i.e., when insurance company pays lender for referring one of lender's customers to agency.)pays lender for referring one of lender's customers to agency.)

f. f. Limits amount Borrower required to pay into escrow Limits amount Borrower required to pay into escrow accountaccount at closing. at closing.

QuizQuiz

Multiple ChoiceMultiple Choice

1.1. This lending source is a cooperative This lending source is a cooperative association that permits members to association that permits members to borrow money for both short-term and borrow money for both short-term and long-term residential loans.long-term residential loans.

a.a. savings and loan associationsavings and loan associationb.b. credit unioncredit unionc.c. mutual savings bankmutual savings bankd.d. none of the abovenone of the above

BB

Quiz (cont’d)Quiz (cont’d)

2.2. This lending source is found primarily in This lending source is found primarily in the Northeast, is owned by depositors, and the Northeast, is owned by depositors, and makes loans for both residential and makes loans for both residential and income-producing properties.income-producing properties.

a.a. savings and loan associationsavings and loan associationb.b. credit unioncredit unionc.c. mutual savings bankmutual savings bankd.d. none of the abovenone of the above

CC


3.3. Private mortgage insurance is associated Private mortgage insurance is associated with this type of loan.with this type of loan.

a.a. conventional insured loanconventional insured loanb.b. FHA loanFHA loanc.c. VA loanVA loand.d. none of the abovenone of the above

AA


4.4. This federal law requires lenders to make This federal law requires lenders to make full disclosure of all costs incurred in full disclosure of all costs incurred in obtaining credit.obtaining credit.

1.1. Federal Truth in Lending ActFederal Truth in Lending Act2.2. Real Estate Settlement Procedures Real Estate Settlement Procedures

ActAct3.3. Equal Credit Opportunity ActEqual Credit Opportunity Act4.4. none of the abovenone of the above

AA


5.5. This federal law requires the lender to This federal law requires the lender to provide the borrower with a good faith provide the borrower with a good faith estimate of closing costs within three (3) estimate of closing costs within three (3) days of the loan application.days of the loan application.

a.a. Federal Truth in Lending ActFederal Truth in Lending Actb.b. Real Estate Settlement Procedures Real Estate Settlement Procedures

ActActc.c. Equal Credit Opportunity ActEqual Credit Opportunity Actd.d. none of the abovenone of the above

BB


True/FalseTrue/False6.6. Commercial banks are a major source of Commercial banks are a major source of

long-term residential loans.long-term residential loans.

7.7. A mortgage is a three-party instrument.A mortgage is a three-party instrument.

8.8. Richard Price is purchasing a house for Richard Price is purchasing a house for $400,000. He is taking out a loan for 80% $400,000. He is taking out a loan for 80% of the purchase price. The lender is of the purchase price. The lender is charging him an interest rate of 7% and charging him an interest rate of 7% and one point. The point will cost Richard one point. The point will cost Richard $4,000.$4,000.

FF

FF

FF


9.9. The margin is the amount of percentage The margin is the amount of percentage points the lender adds to the index rate to points the lender adds to the index rate to come up with the ARM interest rate.come up with the ARM interest rate.

10.10. A secondary market is a market for the A secondary market is a market for the purchase and sale of existing mortgages.purchase and sale of existing mortgages.

TT

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