Term
| ch. 2 Mortgage Insturments |
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Definition
Appropriate identification of mortgagor and mortgagee
Proper description of the property serving as security for the loan
Covenants of seisin and warranty
Provision for release of dower rights
Any other desired covenants and contractual agreements |
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Term
| ch. 2 Important clauses of mortgage |
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Definition
Funds for Taxes & Insurance
Charges & Liens
Hazard Insurance
Preservation and Maintenance of the property
Transfer of property or a beneficial interest in borrower (“Due on sale clause”)
Borrower’s Rights to Reinstate
Right of Entry: Lender in Possession
Future Advances
Subordination Clause |
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Term
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Definition
Liability
Release of grantor from assumed debt |
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Term
| ch. 2 "subject to" a mortgage |
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Definition
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Term
| ch. 2 Restructuring a loan |
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Definition
Recasting
Extension Agreement
Alternatives |
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Term
| ch. 2 deed in lie of foreclosure |
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Definition
| deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings. |
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Term
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Definition
| restructure loan, transfer, voluntary conveyance, friendly foreclosure, prepackaged bankruptcy, short sale |
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Term
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Definition
Equity of Redemption
Prior to foreclosure
Statutory Right of Redemption
After foreclosure
Not in every state |
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Term
Ch. 2 statutory right of redemption
v
Equity of Redemption |
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Definition
After foreclosure
Not in every state
v
prior to foreclosure |
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Term
| ch. 2; power of sale clause |
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Definition
| court authority not necessary |
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Term
| ch. 2 Trust deed aspects; |
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Definition
| trustor, trustee, beneficiary, power of sale clause, used in a limited number of states |
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Term
| ch. 2 types of foreclosure |
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Definition
| judicial, redemption, property sale, partys (senior and junior claimant), deficiency judgement, tax in default |
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Term
| ch. 2 deficiency judgment |
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Definition
Property price does not cover claim
Several states limit the applicability of deficiency judgments |
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Term
| ch. 3 FV (REAL) GENERAL EQ |
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Definition
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Term
| ch. 3 two alts for multiple compounding periods |
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Definition
You can change P/Y to the number of compounding periods
Example: Change P/Y to 2 for semiannual compounding
You can enter a periodic rate
Example: Enter i/2 as the interest rate for semiannual compounding |
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Term
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Definition
| converting future cash flows to the present |
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Term
| ch. 3 PV general equation |
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Definition
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Term
| ch. 3 PV if compounded monthly equation |
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Definition
| PV= FVn(1/(1+(i/m))^(n*m) |
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Term
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Definition
a fixed sum of money paid to someone each year, typically for the rest of their life.
Level Cash Flow Stream Terminates Ordinary Annuity Cash flows begin one period from today Annuity Due Cash flows begin immediately |
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Term
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Definition
| Cash flows begin one period from today |
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Term
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Definition
| Cash flows begin immediately |
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Term
| ch. 3 general equation for annuity (slides a bit confusing) |
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Definition
| FV= P(1+i)^n-1) + P(i+i)^(n-2) + .... ****incorporate i/m and (n*m-1) if it is monthly**** |
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Term
| ch. 3 example for solving FVA (FV of annuity) |
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Definition
FVA= 200* ((1+.15)^5 -1)/.15
= 1348.48 |
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Term
| ch. 3 PVA (PV of annuity) equation |
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Definition
PV= PMT*(1/(1+i)^1) + PMT*(1/(1+i)^2) ... + PMT*(1/(1+i)^n)
would need to include i/n (i/12) if it is received monthly |
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Term
| ch. 3 general concept of TVM |
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Definition
Given the basic equations that we have discussed, we can solve for any missing single variable.
??? |
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Term
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Definition
| Equivalent nominal annual rate |
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Term
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Definition
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Term
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Definition
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Term
| ch. 4 time preference for consumption |
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Definition
All things being equal, we would rather consume now.
Interest is compensation to delay a purchase |
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Term
| ch. 4 production opportunities in the econ |
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Definition
| Competition for funds when there are other investment opportunities |
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Term
| ch. 4 real rate of interest |
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Definition
Time Preference for Consumption
All things being equal, we would rather consume now.
Interest is compensation to delay a purchase
Production Opportunities in the Economy
Competition for funds when there are other investment opportunities |
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Term
| ch. 4 Inflation expectation |
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Definition
| directly impacts interest rates |
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Term
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Definition
| anticipated and unanticipated inflation |
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Term
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Definition
| Governments periodically change the “rules of the game”. As a lender, you take on the very real risk that the government may change the laws that permit you to collect on a legitimate debt after you have made the loan. |
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Term
| ch. components of mortgage interest rate |
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Definition
| R1= real rate, P1= risk premium, F1= inflation rate |
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Term
| ch. 4 Equation for mortgage interest rate |
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Definition
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Term
| ch. 4 Mortgage loan terms |
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Definition
Loan amount
Loan maturity date
Interest rate
Nominal vs. real
Periodic payments
Effective annual rate of interest
Constant Payment Mortgage (CPM) |
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Term
| ch. 4 calcualating payment for CPM |
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Definition
$100,00 Mortgage
7% Interest divide by 12
30 Years multiply by 12
Monthly Payments
FV= 0 , PV = 100k, anser (PMT) = 665.3 |
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Term
| ch. 4 Mortgage payment patters |
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Definition
- interst portion declines monthly
- principal portion declines monthly |
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Term
| ch. 4 what is computing a loan balance essential? |
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Definition
| "removing" the interest that was built into the payment |
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Term
| ch. 4 Additional finance charges for loan closing costs |
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Definition
Loan Origination Fees
Cover origination expenses
Loan Discount Fees – “Points”
Used to raise the yield on the loan
Borrower trade-off: points vs. contract rate
1 Point = 1% of the loan amount |
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Term
| ch. 4 With loan discount fees why do we use points (part of loan closing costs) |
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Definition
Sticky mortgage rates
It’s a way to price in the risk of a borrower.
Early repayment of a loan does not allow recovery of origination costs. It’s a way to cover the lender for the overhead of running its business.
Earn a profit on loans sold to investors at a yield equal to the loan interest rate. |
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Term
| ch. 4 How do you calculate the impact of "points" on loan fees and borrowing cost |
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Definition
Loan Amount = $200,000
- Points Paid = (.04 x $200,000)
= Amount Received = $192,000 |
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Term
| ch. 4 effective interest cost? (loan fees and borrowing cost) |
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Definition
| using the Amount Received from Step 2 (loan amount minus points paid (point turned into decimal multiplied by the loan amount) & Payment from Step 1 (calculator work) |
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Term
| ch. 4 what is present value of 250,000 home loan with 80% LTV loan |
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Definition
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Term
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Definition
| By adjusting the fees that are charged, different effective rates of interest may be achieved. |
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Term
| ch. 8 non conforming loans |
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Definition
“Jumbo” loans
Large dollar amount loans
Higher interest rate
Subprime
ALTA (or “low-doc”) |
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Term
| ch. 8 private mortgage insurance |
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Definition
Insurer assumes default risk of the larger loan
Covers loan amount > 80% LTV
Generally no loan maximum but 95% is as far as most insurers will go |
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Term
| ch. 8 insured conventional mortgages |
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Definition
LTV usually > 80%
Private Mortgage Insurance |
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Term
| ch. 8 FHA insured mortgages |
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Definition
Lender completely insured against default loss
Strict qualification procedures for borrower and property
Lower borrower down payments
Loan maximums
Section 203b most common program |
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Term
| ch. 8 VA guaranteed mortgage loans difference from FHA insured mortgages |
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Definition
| Unlike FHA program, the VA is providing a loan guarantee, not default insurance |
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Term
| ch. 8 VA guaranteed mortgage loans |
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Definition
Qualified veterans
Guarantee may not exceed 25% of loan
Veteran pays a funding fee
Certificate of reasonable value (“CRV”)
Loan entitlement |
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Term
| ch. 8 borrower income (as part of underwriting process) |
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Definition
Verify employer, wages, expected continuity
Verify other income
Will it continue?
Is it verifiable on prior tax returns?
Dual income
Stability of joint income |
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Term
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Definition
Verify closing cost and down payment funds
Additional savings and investments |
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Term
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Definition
Principal & Interest
Mortgage insurance
Property taxes
Hazard insurance
Homeowners association dues (if applicable) |
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Term
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Definition
Close the buyer’s loan and transfer title
Loan and title transfer happen at the same time
Financing costs
Property taxes, prorations, and escrow accounts
Mortgage insurance and escrow accounts
Hazard insurance and escrow accounts
Mortgage cancellation insurance
Title insurance, lawyer’s title opinion
Release fees
Attorney’s fees
Pest inspection
Real estate commission
Statutory Costs |
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Term
| ch. 8 does truth-lending apply to commercial transactions? |
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Definition
NO, LAW DOESNT APPLY TO COMMERCIAL TRANSACTIONS
In general, there are more consumer protections in place for residential real estate ownership, lending, and tenancy than there is for the commercial side of the industry. |
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Term
| ch. 5 Three variable payment patterns |
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Definition
Fixed Rate Mortgages
Adjustable or Floating Rate Mortgages
Price Level Adjusted Mortgage (PLAM)
Loan balance adjusted for inflation
New payment computed using adjusted balance |
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Term
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Definition
Price Level Adjusted Mortgage (PLAM)
Loan balance adjusted for inflation
New payment computed using adjusted balance |
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Term
| ch. 5 fixed rate mortgage |
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Definition
Fixed rate mortgages can lose substantial value if an unanticipated rise in inflation occurs after the mortgages have been made.
As you might expect, the popularity of fixed rate mortgages ebbs and flows with the state of the market and the participants’ perception of the stability of inflation rates. |
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Term
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Definition
| designed to avoid the loss that would otherwise occur due to unanticipated inflation. |
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Term
| ch. 5 PLAM adjust for inflation but still has TWO problems.. |
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Definition
CPI is not a perfect index for housing prices
If borrower’s incomes do not increase at CPI, this may lead to the borrower’s inability to repay. |
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Term
| ch. 5 basic issues w. ARM |
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Definition
ARMs do not eliminate interest rate risk
The longer the adjustment interval, the more interest rate risk the lender will take on
As the lender assumes less interest rate risk by putting it onto the borrower, the lender should expect to receive a lower rate of interest than it would otherwise receive with a fixed rate mortgage. |
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Term
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Definition
adjustable rate mortgages, a new loan payment is computed at each reset date
DEFINITION OF 'RESET DATE'
The point in time when the initial fixed interest rate on an adjustable rate mortgage changes to an adjustable rate. This date is commonly one to five years from the start date of the mortgage. After the initial reset date, the interest rate will continue to reset as often as once a month.
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Term
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Definition
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Term
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Definition
Interest rate that the lender does not control
Treasury securities
Cost Of Funds Index (COFI)
London Interbank Offered Rate (LIBOR) |
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Term
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Definition
| premium added to the index |
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Term
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Definition
Reset Date
Negative Amortization
Caps
Floors
Assumability
Points
Prepayment
Conversion |
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Term
| ch. 5 negative amortization |
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Definition
| Payment does not cover the interest due |
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Term
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Definition
| When mortgage payment is readjusted |
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Term
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Definition
| Longer initial reset period, 3/1, 5/1, and 7/1 |
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Term
| ch. 5 Interest only ARM and floating rate |
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Definition
I.O. for initial period
Then, depending on what has been negotiated
Pay interest only
Pay interest & some principal
Sometimes negative amortization
Fully amortizing payments required in future |
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Term
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Definition
| initial rate below market composite rate |
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Term
ch. 5 for residenital loans, TEASER RATE = important
(aspects of teaser rate/ influences?) |
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Definition
Initial rate below market composite rate
Market Competition
Accrual Rate
Negative Amortization
Payment Shock |
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Term
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Definition
| It is not clear whether all residential borrowers comprehend or appropriately price the inherent risks in adjustable rate mortgages. |
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Term
| ch. 5 ARM yields are a function of... (5 things) relating to rates |
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Definition
Initial interest rate
Index & margin
Any points charged
Frequency of payment adjustments
Inclusion of caps or floors on the interest rate, payments, or loan balances |
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Term
| ch. 5 Default risk (yield and risks) |
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Definition
Can borrower afford new payments?
Impact of negative amortization |
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Term
| ch. 5 Pricing risk (yield and risks) |
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Definition
allocation of interest rate risk
impact on default risk of specific borrowers |
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Term
| ch. 5 Basic relationships of ARM (yield and risks) |
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Definition
- FRM vs. ARM yield at origination
- Short-term vs. Long-term indices
- Shorter vs. Longer time intervals between adjustments
- Impact of caps & floors
- Negative amortization |
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Term
| ch. 5 Issue with unfixed rates in ARMs |
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Definition
Note the payment increase:
$662.21 - $536.82 = $125.39
This could be a problem for a borrower on a tight budget. |
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Term
| ch. 5 relationship of interest rate caps with ARMs |
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Definition
The new interest rate cannot be higher than 9% due to the interest rate cap.
If the Composite Rate = 10%, the 2% cap applies and the interest rate is 9%.
If the Composite Rate = 8%, the 2% cap does not apply and the interest rate is 8%. |
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Term
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Definition
| effectively makes the current claim in the agreement senior to any other agreements that come along after the original agreement |
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Term
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Definition
| A hybrid has a fixed rate for an initial period, as short as three years before turning into a one-year ARM. These initial periods are offered in 3, 5, 7, and 10 year terms. |
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