Real Estate Finance
Real Estate Finance Fin 4440
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This 6 page Class Notes was uploaded by Anna Notetaker on Thursday August 25, 2016. The Class Notes belongs to Fin 4440 at Middle Tennessee State University taught by Phil A Seagraves in Fall 2016. Since its upload, it has received 14 views.
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Date Created: 08/25/16
Real Estate Finance Week 1 Notes from Tuesday: An assignment in the world of Real Estate Finance consists of transferring some or all of their property rights, mortgage account, interest and obligations to someone else through a written, legal contract. A lender sees value in assigning a mortgage loan for a couple of reasons. The first could be in regards to capital restraints. This frees up money for them to lend to others. Another reason is because they make money off of the sale from interest off of monthly payments, fees as well as commission. The bank or mortgagee finds it necessary to foreclose because they are mortgagors who fail to keep up with their payments. And instead of taking a voluntary deed which a transfer of property made because if taking a voluntary deed that means you will have two loans you have to owe and they will have a high interest rate so therefore they will end up not having any money. Foreclose is better because they don’t have to own so much loans. And another thing the mortgager can do if their house is foreclosed they can find someone to buy the house and pay the difference so they don’t end up having money issues and banks hunting them down and they will be loan free. Lender may allow you to assume the mortgage when someone wants to sell- name gets replaced on mortgage. You will be liable for payments, and if the sale price does not cover the mortgage, the lender may take action against you to pay the difference. (If you buy for 60,000 and the mortgage is 80,000, you will pay the 20,000 difference on the mortgage) Can keep interest rate if lower than current. VA loans and government backed loans are generally assumable. There is more than one outcome for the lender in this situation. First the lender, let’s call them the bank, would lose the money it was planning on making from interest. Second it doesn’t mean they are going to lose money, they, for the most part would take the house to auction, with the starting bid being the amount left on the mortgage plus the interest lost during the foreclosure process. Now if the starting bid isn’t met the bank takes control of the house including taxes, and can list it on the market for the price they are asking. However, this is when things get messy, seeing as if the market is way down or the previous owner didn’t take care of the home the taxes alone can cost more than the house is worth. At this point both parties (owner and bank) might walk away, this is known as a Red Flag Home. Equity of redemption is the right of a mortgagor over the mortgaged property, especially the right to redeem the property on payment of the principal, interest, and costs. Statutory redemption refers to a mortgagor's right to regain their ownership of property that has been foreclosed. Statutory redemption laws allow the borrower a limited amount of time to redeem their property if they are able to pay the amount that the property was sold for at a foreclosure sale. What special advantages does a mortgagee have in bidding at the foreclosure sale where the mortgagee is the foreclosing party? How much the mortgagee will normally bid at the sale? The mortgagee, or lender, can use the claims that they already have on the property as a form of payment for the property, whereas any other individual would either have to pay cash at the foreclosure sale or secure a new loan for the property. So basically, if the mortgagee is owed $60,000.00 for a property, then they can use that $60,000.00 as a bid at the sale. The mortgagee will still have to pay the costs associated with foreclosure, holding, and resale though. Those costs must all be paid in cash. From what I've found, the mortgagee will usually pay up to their full claim minus the costs associated. They are just trying to get as much of their money back as they can in the transaction. If a borrower has a loan with a good interest rate another party may be more willing to take over his loan rather than getting his own loan. The new loan may have a higher interest rate than the one that the original borrower. Which means that if the party were to assume the borrower’s liability the payments would be cheaper than getting a new loan. If you sell a house as the mortgagor on a subject to basis. They take over payments on the mortgage but you are legally liable if the payments are not made. Meaning if the person who took over the mortgage does not make payments it means the bank will come and sue you for the money and foreclose the house. You can sue the person that did not make payments but it could be hard to get your money back the people could file for bankruptcy so many different situations that could go wrong trying to sue that person. Acceleration can be good in some cases, but not when it comes to a lender. When it comes to the acceleration clause in a mortgage, it is not good for the borrower. Acceleration clause is the beginning process of a foreclosure on a home when the borrower breaks his/her promise to pay their loan. Even if they miss just one payment. The lender can choose when to start the process as early as the first payment of the loan was missed. The borrower would now have to pay back the entire loan at once including the interest that accrued since the clause was invoked. Other reasons a lender might invoke the acceleration clause would be failing to pay or cancelling homeowner’s insurance and not paying property taxes. Foreclosure is not only a lengthy process, but lenders typically don’t like it because they end up losing money in the end. Forbearance by the lender allows the borrower a temporary suspension of loan payments due to financial hardship. Interest will continue to accrue and could possibly increase the payments once they are able to start paying again. First, one must understand what exactly a lien is in regards to Real Estate. A lien is some sort of, “charge created by an agreement against a property as security for a debt” (pg. 285). A lien can be on any materials located on the property. Second, one must understand the difference when it comes to a mechanic’s lien. Generally, a first mortgage lender will verify if the property has any type of priority. For instance, if a contractor has begun construction on the property and supplies has been dropped off by the lumber company that the contractor paid out of pocket for on the project, this would create a mechanic’s lien. This is known as a mechanic’s lien since money is now owed to the contractor for the lumber that has been bought for the property. In conclusion, a mechanic’s lien has priority over a first mortgage lien only if a contractor has begun work or materials have been supplied to the property. This means that the mechanics’ lien will have priority over the deed of trust and will be paid in full in a foreclosure sale before the deed of trust is paid anything. All in all, these actions must occur before the first mortgage has been recorded or signed in regards to the property. A land contract is an agreement between a buyer and seller of property in which the buyer makes payments toward full ownership (as with a mortgage), but in a land contract, the owner holds the title or deed until the full payment is made. It is a form of seller financing and is sometimes referred to as a “lease with an option to buy.” Technically, it is not a legally binding agreement and, therefore, many different types of payment formats can be found. A land contract buyer must be very careful to ensure that the terms of the contract are legally binding in case a dispute arises in the future. If the buyer defaults on the land contract, the seller can file a court action called land contract forfeiture. If this occurs, the seller keeps all money received and the real estate. This protects the seller from a defaulting buyer while retaining the property to offer for sale to someone else. Since the seller does not receive the full purchase price up front, he may be able to negotiate a higher purchase price on the property. He may also require and receive a large down payment. Lastly, land contracts are often used by purchasers that would not otherwise qualify for a mortgage or by investors who wish to complete a purchase faster than a regular mortgage would allow. Default is a failure to meet legal negotiations (or conditions) of a loan. This occurs when a borrower consecutively fails to meet set obligations of repaying a debt in both current and possible future situations. The agreed upon repayment process is based on the contract between a debtor and borrower. For example, if a borrower has consistently neglected payments on a student loan, then the loan will become in a default (or past due) state thus starting the process of collections. A Note by itself is simply one party promising to pay another party. It can exist without a mortgage. In a situation where there was only the Note and the borrower stopped paying, the lender could sue the borrower but could not retake ownership of the property. A Mortgage is a transfer of interest in a property. While a Mortgage is tied to a Note, the Mortgage itself does not promise to pay the debt of the Note, but instead gives the lender the right to take the property if a borrower doesn't pay the Note. The key difference between the two is that a Note is what the borrower signs to pay back the lender, while a Mortgage is what the borrower signs to assure the lender that if the borrower stops paying, the lender can retake ownership of the property. First of all, deficiency judgment is ordered by the court and is only made when the lender decides to take action. Deficiency judgment takes place when a borrower fails to cover the difference between the rest of the loan they borrowed and the value of the mortgage they sold. Many borrowers think that a home is security for the loan. However, in many cases when a home is bought and a loan is taken out, the value decreases over time so when the owner sells the house or forecloses on it, they get less money than they paid for it. Therefore, the difference between the remaining unpaid loan and the money they received after selling their home needs to be paid. The deficiency judgment means the lender can come after personal property or garnish wages in order to receive the money they lend out. Non-recourse finance is a loan from the bank where the lender is only entitled to the repayment from the profit of the land the loan is funding. The lender is not entitling to any of the borrower’s assets if thing were to go south and the loan were to go into default. Interest rates are higher because the banks are taking a very high risk and the loan periods are longer because of the uncertainty of the loan. Lenders do not receive any payment on the debt. Notes from Thursday: What is Real Estate Finance? Real Estate Finance is the management of money in relations to Real Estate Properties. This type of Finance is an agreement to individuals to gain funding in regards to Real Estate Investments – this could be seen as a bank loan based on an appraisal of the property and an comparison of the Real Estate Market. How Does it Work? First, the individual must be aware of the state of the Real Estate Market. Second, the individual should be aware of his or her own financial situation and get approved for a loan amount. Third, the individual must analyze the Real Estate Market to see if his or her choice in property investments will be financially feasible. Finally, the individual will choose either to invest or decline the property. What are the Options? Banking Financing will involve the individual’s line of credit being approved for a certain amount, which will be given in a loan. Private Lenders are similar to Banking Financing. These Lenders agree to terms and conditions for the loan, which can be done with a Mortgage Company, family, friends, or Lending Institutions. Often, these rates are higher in regards to the loan. Grants come from the Federal Agency and can be seen in homes that need improvement. An example of this type of Agency is the Federal Housing Authorities known as FHA Loans. Credit Line Agreements is an extension of credit that is secured by the Loan Office. This extension is done when an individual owns a property that is paid-in-full or has high equity. This is very risky since you are borrowing against a property, which can potentially result in losing both properties if payments are not made. Creative Financing is when an individual seeks an agreement with a third party. This could be with family, friends, seller financing, as well as loan assumptions. Often this option is done when an individual cannot be approved for a traditional loan (banking financing). Why is this Important? First, our economy relies on the buying and selling of properties. New businesses cannot come into a town without development in the Real Estate Market. Second, Real Estate Financing involves multiple employment opportunities ranging from the Loan officer at the bank to the Contractor, Realtor, or Appraiser for the property. Third, it displays the supply and demand of our economy. This allows growth in towns as well as predictions of our financial state as a country. Finally, it is most important to the individual because it allows him or her to see if a property will be financially feasible before actions occur like remodeling or construction of a home.
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