David M. Harrison, Ph.D. Real Estate Finance Texas Tech University What is a Mortgage? Definition:...

David M. Harrison, Ph.D.Real Estate FinanceTexas Tech University

What is a Mortgage?

Definition:

Mortgage Components Mortgage Deed or Deed of Trust

Lien or Promissory Note


Mortgage Deed Relationships

Follow the Money

Borrower Lender

Cash

Note & Mortgage

Release

Cash Repaid


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


Types of Mortgages

Mortgages

Residential Commercial

GovtInsured

Conventional Permanent Construction


How Big is the Mortgage Market?

Federal Reserve Data

Growth? Changes?


Mortgage Market Participants

Originators –

Conduits –

Servicers –

Insurers –


Originators

Who are these guys anyway?

What happens after they make the loan?

Securitize -


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


Conduits

Fannie Mae (FNMA)

Freddie Mac (FHLMC)

Ginnie Mae (GNMA)

Others


Mortgage Servicers

Who are these guys?

What do they do?


Servicing Profits

How do they make money?


Mortgage Insurance

Loan Level Insurance Private Mortgage Insurance (PMI)

Government Subsidized

Pool Level Insurance


What is “Default”?

Mortgage default is…

The most common failure is…

Mortgage default could also result…

Defaults are…


What is “Foreclosure”?

Foreclosure is…

Technically, foreclosure is…

Equity of redemption is:

If a property is foreclosed upon…


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…


Mortgage Theory

Title Theory

Lien Theory

Implications for Mortgage Terminations


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”


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


Common Covenants and Clauses

Promise to Pay

Covenant to Avoid Liens with Priority over the Mortgage

Hazard Insurance

Mortgage Insurance


More Covenants and Clauses

Escrow

Order of Application of Payments

Good Repair Clause

Lender’s Right to Inspect



Joint & Several Liability

Acceleration Clauses

“Due-on-Sale” Clause

Borrower’s Right to Reinstate



Lender in Possession

Release (Defeasance) Clauses

Estoppel Clause

Prepayment Clause



Lender’s Right to Notice (Jr. Loans)

Subordination Clause

Future Advances

Covenant against Removal



Personal Property Clauses

Owner Occupancy Clause

Sale in One Parcel Clause

Exculpatory Clause

Conclusion:

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University What is a Mortgage? Definition:...

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