Chapter 5: Mortgage loans

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Chapter 5 Mortgage loans

• Andrew Davidson
• Anthony B. Sanders
• Lan-Ling Wolff
• Anne Ching

2
What is a Mortgage?

• A mortgage is an instrument in which the title to
  real estate is held as a security against the
  repayment of a debt.
• A lien is a legal claim on the property that
  allows the lien holder to satisfy the debt
  through foreclosure and sale of the property, if
  necessary.

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Mortgage deed and promissory note

• All mortgages are basically composed of two
  parts 1) the mortgage deed or deed of trust, and
  2) the promissory note.
• The mortgage deed describes the real estate to be
  used as collateral against the repayment of the
  note.
• A deed of trust is similar to a mortgage deed
  except that the borrower creates a trust and
  conveys the title of the property to a trustee
  who holds it as security for the benefit of the
  lender.
• The promissory note is a personal promise to
  repay the note, and even in the absence of any
  real estate security, the borrower would still
  have an obligation to repay the note.
• The note spells out the financial terms of
  repayment as well as the rights and interest of
  the lender and borrower.

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Title theory and lien theory

• There are two general approaches used in most
  states to establish the legal relationship
  between a borrower and a lender.
• One is called title theory, where title is held
  by, or rests with, the mortgagee (lender).
• The other is called lien theory, where the
  mortgagor (borrower) retains title and the
  mortgagee merely has a lien against the property.
  
• Lien theory is more modern in origin and the most
  common approach in most states, although many
  states have a hybrid approach encompassing both
  theories in part.

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Size of the mortgage market

• The mortgage market in the U.S. is the largest in
  the world and has exceeded 7.5 trillion as of
  2001 in terms of mortgage debt outstanding (see
  Table 5.1).
• Mortgages can be categorized by either the type
  of underlying property or by the type of
  institution that holds or owns the mortgage
  loans.
• In terms of property type, Table 5.1 shows that
  the outstanding mortgage debt is dominated by
  residential property also commonly referred to in
  mortgage parlance as 1-4 Family.
• Commercial mortgages represent the second largest
  segment of outstanding mortgage debt with over
  1.3 trillion as of 2001.

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Size of the mortgage market
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Types of mortgages

• Fixed-rate mortgages
• Maturity (30 year and 15 year)
• Type (conforming and non-conforming)
• Adjustable-rate mortgages
• Key terms
• LTV
• Points
• Lock
• APR

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Types of mortgages (example)
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Fixed-rate mortgages

• A fixed-rate mortgage has a fixed-rate of
  interest for the term of the loan.
• Loan terms can vary from 15 to 30 years, although
  other terms are available as well.
• There are several variations of amortizing
  mortgages.
• Constant payment mortgage (CPM).
• Constant interest mortgage (CIM).
• Constant amortization mortgage (CAM)

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Comparative mortgage designs
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The constant payment mortgage
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Amortization of mortgages
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Adjustable-rate mortgages

• ARMs differ from fixed-rate mortgages in that the
  rate on the mortgage varies every month or year
  (depending on the terms of the ARM).
• There are a number of variations on the
  adjustable rate mortgages (also known as variable
  rate mortgages).
• Adjustable rate mortgages are not as popular in
  the current low interest rate environment, but
  may return to popularity when interest rates
  begin to increase.

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Features of ARMs

• ARM Indexation
• Adjusting the ARM Payment
• Adjustable Rate Mortgage with Capped Payments
• Adjustable Rate Mortgage Terms

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Other mortgage types

• Graduated payment mortgages
• Shared appreciation mortgages
• Reverse annuity mortgages

16
Mortgage Default and Legal Issues Concerning
Mortgages

• What is Default?
• What is Foreclosure?
• Why Most Mortgages Dont Proceed to the
  Foreclosure Stage

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Important Clauses in Uniform Mortgages

• Acceleration Clause
• Defeasance Clause
• Prepayment Clause
• Subordination Clause
• The Estoppel Clause

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Issues in mortgages

• Mortgage priority
• Due-on-sale clause
• Redlining
• The FNMA/FHLMC Uniform Loan Contract