real property rights (3)
o Possession to the exclusion of others
o Use and enjoyment
o Disposition
co-ownership (3 confusing forms)
� Tenancy in common: Shared right of use/enjoyment, exclusion, and disposition. As close to full rights as possible. Rights of disposition
� Joint tenancy: right of survivorship. Interest divides among surviving co-owners at the death of one co-owner
� Te
deed (definition)
contract conveying permanent interest in real estate
o Can convey a wide variety of real property interests
grantor/grantee
Seller is grantor. Receiver is grantee.
a loan is evidenced by a:
A "Promissory Note" specifying (required):
� Principle amount: what is owed.
� Interest rate: in most instances "interest" is required.
� Due date: the date repayment must be made.
Contain numerous provisions (always there as a practical matter):
1. Amoun
Purchase Money Mortgage is either:
a. A loan/mortgage to purchase improved property
b. For this class: a loan whereby the seller is the lender
mortgage (definition)
� Ties the real estate to the loan.
� It is a document that ties the collateral (real property) to the loan, as security for repayment. It is separate from the note.
� Requirements:
1. A debt obligation
2. A pledge of real property as security
Mortgage loan
a loan secured by real property
Mortgage note
the promissory note that evidenced the debt, for which the real property is serving as security.
o Therefore, the lender has two means to collect�note and mortgage.
If there is default, the lender:
o Sues on the note, AND
o Foreclose on the mortgage
o SIMULTANEOUSLY
mortgagor/mortgagee
the borrower/the lender
what has to be in writing?
mortgage, and:
Under the statute of frauds, any transfer of interest in real estate must be in writing
Assumption of a mortgage
� A transfer of responsibility to pay a debt
� Borrower/mortgagor "transfers" the duty to pay the debt to a third party. New owner is liable for the debt.
� The initial borrower is still liable for the loan, unless the lender releases the original borrowe
Acquiring title "Subject to" a mortgage
Similar to an assumption, but...
o The third party buyer does not assume liability for the debt.
o Rather, they take the property only.
o If the loan is not paid, the bank can foreclose, but cannot seek payment from the new owner.
o Original owner is stil
land contracts
o An agreement to convey title, after the buyer completes payment. Not as secure as a purchase money mortgage.
o It is not a mortgage (because seller still owns the property); seller retains title until it is conveyed.
Judicial foreclosure:
sue on the note, and then execute the judgment against the property.
o Benefit: the mortgagee can access other property to pay any deficiency
In a regular foreclosure, the bank sells the forclosed home in an auction, with the major drawback that the mortg
Other possibilities to foreclosure-called workouts
� Restructuring of the mortgage loan
� Transfer of the mortgage to a new owner
� Voluntary conveyance of the title to the mortgagee/lender
� Deed in lieu of foreclosure�get out of lawyer bills
� A "friendly foreclosure"
� A prepackaged bankruptcy
� A "sho
bankruptcy, and its three types:
� A court takes a person's or business's property to satisfy the claims of creditors
� Three types:
o Chapter 7: liquidation
o Chapter 11: plan of reorganization: normally used by corporations and the very wealthy
o Chapter 13: individual reorganization
IRR
Interest rate that equates the PV of cash inflows to PV of cash outflows.
� Rate that causes NPV to equal zero
Negative NPV projects have IRRs lower than investor's required rate of return.
mortgage loan parties
o Borrower, lender, third party to whom the loan is being sold
� The lender is really an intermediary. Gives out loan and sells it to a third party (typically a GSE government sponsored entity)
As with any investment, the factors that influence its value are:
� Size, timing, and uncertainty (risk) of the cash flows
Types of risk that lenders and investors are concerned about (in order of importance to the lender) (5):
1) default risk
2)interest rate risk
3)prepayment risk
4)liquidity risk
5) legislative risk
prepayment risk is bad for the bank because:
�Bank has to find new investments-new borrower.
�If the interest rate goes down and the borrower pays off the loan. This eliminates the opportunity for the lender to earn the original interest rates. What if rates go up? is this a risk? Yes, it is interes
Liquidity risk:
there is a mismatch in the maturities between its assets and liabilities. Deposits are liabilities for the bank that can be called at any time. Loans are assets for the banks that will not be paid off until 30 years. This mismatch makes the bank illiquid.
Interest rate to a specific entity =
Interest rate to a specific entity = risk-free rate + risk premium + a premium to reflect anticipated inflation
accrual rate
the amount of interest that is added to a loan between payments. The cost of borrowing the loan balance for any given period of time
Loan origination fees�to cover expenses of lender related to the loan (6):
� Loan application fee
� Appraisal fee
� Credit report fee
� Processing of loan
� Loan document fee
� Overnight delivery fee
reasons for loan discount fees (points) (5):
� Borrower buy down of loan.
� Lenders don't have to adjust their quoted rates every day.
� Provide uniformity in loans so they can be bundled and sold.
� A hedge against declining rate before loans are packaged and sold.
� Flexibility in pricing the loan
If a loan is paid off early, does the effective borrowing cost change?
Yes, the effective borrowing cost is increased, as compared to if the loan was taken to maturity. This is because you're spreading the discount points/origination fees cost over a shorter period of time, rather than the full 360 months.
composite rate
the sum of the market rate or index rate, PLUS the margin
Price Level adjusted Mortgage (PLAM)�just know what it is, not how to solve.
� Payment changes accordingly
� PLAM removes the risk of inflation from the loan and adjusts it periodically to account for changes in inflation
3/1 hybrid ARM
FRM for 3 months, then becomes ARM.