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Chapter 20: Mortgages and Foreclosures after the Recession. Learning Objectives. What is a subprime mortgage? How does it differ from a standard fixed-rate mortgage? When is private mortgage insurance required? Which party does it protect?
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Learning Objectives • What is a subprime mortgage? How does it differ from a standard fixed-rate mortgage? • When is private mortgage insurance required? Which party does it protect? • Does the Truth-in-Lending Act (TILA) apply to all mortgages?
Learning Objectives • (cont’d) How do the TILA provisions protect borrowers and curb abusive practices by mortgage lenders? • What is a short sale? • In a mortgage foreclosure, what legal rights do mortgage holders have if the sale proceeds are insufficient to pay the underlying debt?
Mortgages • A mortgage is a written instrument that gives the creditor (the mortgagor) an interest in, or lien on, the property being acquired by the debtor (mortgagee) as security for the debt’s payment.
Mortgages • Types of Mortgages. • Fixed Rate Mortgages: standard mortgage with a fixed interest rate and fixed payments for the life of the loan. • Adjustable-Rate Mortgages (ARM): rate of interest changes periodically as do the payments.
Mortgages • Types of Mortgages (cont’d). • Interest-Only Mortgages. • Subprime Mortgages: loan made to a borrower who does not qualify for a standard mortgage. • Construction Loans: series of ‘draws’ to build new home on vacant land.
Mortgages • Types of Mortgages (cont’d). • Participation Loans. • Balloon Mortgages: similar to ARM, starts with lower payments for 7-10 years, then large ‘balloon’ note is due. Most buyers refinance at that point. • Hybrid and Reverse Mortgages.
Mortgages • Home Equity Loans. • Bank accepts borrower’s equity as collateral for a loan, which the lender can seize in the loan is not paid on time. • Home equity loans are subordinated to the main home loan.
Mortgages • Creditor Protection. • Private mortgage insurance required if the down payment is less than 20%. • Creditor records mortgage with appropriate local/state government. • Statute of Frauds: mortgage must be in writing to be enforceable.
Mortgages • Creditor Protection (cont’d). • Important Mortgage Provisions: • The terms of the underlying loan. • Provisions for maintenance of the property. • Homeowner’s insurance. • Nonloan financial obligations by borrower. • Borrower pays some or all the taxes, insurance, assessments, or other regular expenses.
Real Estate Financing Law • Predatory Lending and Other Improper Practices. • Steering and Targeting. • Loan Flipping. • Truth in Lending Act (TILA). • Required Disclosures: loan principal, interest rate, the annual percentage rate, and all fees and costs.
Real Estate Financing Law • Truth in Lending Act (cont’d). • Prohibitions and Requirements: TILA addresses unfair or deceptive mortgage practices. • Right to Rescind. • Written Representations.
Real Estate Financing Law • Protection for High-Cost Mortgage Loan Recipients. • Special Consumer Protections: Home Ownership and Equity Protection Act (HOEPA) • Remedies and Liabilities: HOEPA prohibits lenders from certain practices.
Real Estate Financing Law • Protection for High-Cost Mortgage Loan Recipients. • Remedies and Liabilities: (cont’d). • CASE 20.1 In re Kitts (2011). The lender failed to make material disclosures required under TILA and HOEPA.
Real Estate Financing Law • Protection for Higher-Priced Mortgage Loans: new type of expensive mortgage called Higher-Priced Mortgage Loans (HPML). Only mortgages secured by a consumer’s principal residence qualify to receive HPML designation.
Real Estate Financing Law • Protection for HPML’s (cont’d). • Requirements to Qualify: loan rate exceed average prime offer rate by 1.5 points for primary consumer residence. • Special Protection for Consumers: verification of repayment, and prepayment penalties curtailed.
Foreclosures • Default: if homeowner fails to make mortgage payments, lender has the right to foreclose. • How to Avoid Foreclosure. • Forbearance of payments. • Workout Agreement. • Housing and Urban Development Assistance.
Foreclosures • How to Avoid Foreclosure (cont’d). • Short Sales: sale of property for less than balance of the mortgage loan. Less negative impact than foreclosure; much less expensive for lender, but borrower still loses home. • Sale and Leaseback.
Foreclosures • How to Avoid Foreclosure (cont’d). • Home Affordable Modification Program. • Voluntary Conveyance : deed in lieu of foreclosure. • Friendly Foreclosure. • Prepackaged Bankruptcy.
Foreclosures • The Foreclosure Procedure. • Foreclosure extinguishes the borrower’s equitable right of redemption. Two types of foreclosure: • Judicial Foreclosure: court-supervised process. • Power of Sale Foreclosure: lender controls the process.
Foreclosures • The Foreclosure Procedure (cont’d). • CASE 20.2 U.S. Bank National Association v. Ibanez (2011). Why did the court rule in favor of the defendants (homeowners)? • Acceleration Clauses: lender can call the entire loan due.
Foreclosures • The Foreclosure Procedure (cont’d). • Notice of Default and of Sale. • To initiate a sale, Lender must record a notice of default with the appropriate county office, and Borrower is then on notice of a possible foreclosure. If not paid within reasonable time, there is a notice of sale, and property is sold at an auction.
Foreclosures • The Foreclosure Procedure (cont’d). • Notice of Default and of Sale. • CASE 20.3 Mitchell v. Valteau (2010). What are the purposes of the notice provisions in the Louisiana Code? Did the court stay true to them?
Foreclosures • The Foreclosure Procedure (cont’d). • Deficiency Judgments: borrower is responsible for difference between auction price an loan amount. • Redemption Rights. • Buyer can pay full amount and exercise his equitable right of redemption.
