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What is a Mortgage?

What is a Mortgage?. Definition: Mortgage Components Mortgage Deed or Deed of Trust Lien or Promissory Note. Cash. Note & Mortgage. Borrower. Lender. Release. Cash Repaid. Mortgage Deed Relationships. Follow the Money. Basic Terminology. Owner begins with “O”

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What is a Mortgage?

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  1. What is a Mortgage? • Definition: • Mortgage Components • Mortgage Deed or Deed of Trust • Lien or Promissory Note

  2. Cash Note & Mortgage Borrower Lender Release Cash Repaid Mortgage Deed Relationships • Follow the Money

  3. Basic Terminology • Owner begins with “O” • so: “...or” ==> Owner • Ex. #1: • “Lessor” is Owner (Landlord) • “Lessee” is Renter • Ex. #2: • “Mortgagor” is Owner (Borrower) • “Mortgagee” is Lender

  4. Types of Mortgages Mortgages Residential Commercial Govt Insured Conventional Permanent Construction

  5. How Big is the Mortgage Market? • Federal Reserve Data • Growth? • Changes?

  6. How Big is the Mortgage Market? • Federal Reserve Data • Growth? • Changes?

  7. Mortgage Market Participants • Originators – • Conduits – • Servicers – • Insurers –

  8. Originators • Who are these guys anyway? • What happens after they make the loan? • Securitize -

  9. Origination Profits • How Do Originators Make Money? • Origination Fees: charging “points” • 1 point = 1% of loan amount • Ex. 3 points on a $250,000 mortgage = $7,500 • Application/Processing Fees • Secondary Market Profit

  10. Conduits • Fannie Mae (FNMA) • Freddie Mac (FHLMC) • Ginnie Mae (GNMA) • Others

  11. Mortgage Servicers • Who are these guys? • What do they do?

  12. Servicing Profits • How do they make money?

  13. Mortgage Insurance • Loan Level Insurance • Private Mortgage Insurance (PMI) • Government Subsidized • Pool Level Insurance

  14. What is “Default”? • Mortgage default is… • The most common failure is… • Mortgage default could also result… • Defaults are…

  15. What is “Foreclosure”? • Foreclosure is… • Technically, foreclosure is… • Equity of redemption is: • If a property is foreclosed upon…

  16. Why Foreclosure is Rare • Incentives Matter! • Consider a household that owns a house with a market value of $200,000. The household owes $170,000 to the lender…

  17. Mortgage Theory • Title Theory • Lien Theory • Implications for Mortgage Terminations

  18. Priority of Claims in Foreclosure • Priority established by Date of Recording, except: • Property Tax Lien comes first • Sometimes Mechanics Liens • Explicit Subordination Clause(s) • Bankruptcy Proceedings may modify debtholder rights • “First Mortgage” (earlier recording) = “Senior Debt” • “2nd (etc) Mortgage” = “Junior Debt”

  19. Foreclosure Priority Example • Suppose a property owner encounters financial distress. The subject property is encumbered by the following three liens: • 1st Mortgage = $90,000 • 2nd Mortgage = $20,000 • 3rd Mortgage = $10,000 • If the subject property sells in foreclosure for 100,000, what are the payoffs to each of the mortgagees? • 1st Mortgagee gets • 2nd Mortgagee gets • 3rd Mortgagee gets

  20. Common Covenants and Clauses • Promise to Pay • Covenant to Avoid Liens with Priority over the Mortgage • Hazard Insurance • Mortgage Insurance

  21. More Covenants and Clauses • Escrow • Order of Application of Payments • Good Repair Clause • Lender’s Right to Inspect

  22. More Covenants and Clauses • Joint & Several Liability • Acceleration Clauses • “Due-on-Sale” Clause • Borrower’s Right to Reinstate

  23. More Covenants and Clauses • Lender in Possession • Release (Defeasance) Clauses • Estoppel Clause • Prepayment Clause

  24. More Covenants and Clauses • Lender’s Right to Notice (Jr. Loans) • Subordination Clause • Future Advances • Covenant against Removal

  25. More Covenants and Clauses • Personal Property Clauses • Owner Occupancy Clause • Sale in One Parcel Clause • Exculpatory Clause • Conclusion:

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