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BUS 116 Chap020 mortgages
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  • Thefinal consequences were inevitable. The crash occurred when the high-risk borrowers couldnot make their payments. Land values collapsed and, in the wink of an eye, Roubini andMihm’s financial earthquake shook the very foundation of the economy.
  • 1. Lenders are now required to make a good faith attempt to insure that all borrowershave the financial ability to repay the loan taken out to finance the mortgage.2. Lenders must also make a good faith attempt to determine whether the borrower canalso pay all taxes, insurance, and all other assessments.3. A good faith attempt must include an examination of specifically defined documentsthat provide concrete verifiable evidence of the borrower’s income stream, credithistory, debt-to-income situation, employment, financial resources not (counting theequity in the real property involved in the current loan).4. The Lender is required to use documentation supplied by the Internal Revenue Service(IRS) or some other comparable third party which is also regulated by the act.5. Certain types of mortgage arrangements are either outlawed or limited by theact, including mortgages with balloon payments that more than double theprevious payments.

Transcript

  • 1. Mortgages and Security Interests Chapter 20
  • 2. Learning Objectives 1. Differentiate between a secured and an unsecured loan. 2. Identify the types of mortgages that are available to borrowers. 3. Explain the legal effect of recording a mortgage. 4. Describe the rights and duties of the mortgagor and those of the mortgagee. 5. Differentiate among Fannie Mae, Ginnie Mae, and Freddie Mac. 2
  • 3. Learning Objectives (cont.) 6. Define securitization and connect it to the financial crisis. 7. Explain the nature of a liar loan and a NINJA loan. 8. Describe how a security interest is created for personal property. 9. Decide whether security interests are perfected. 10. Determine priorities when parties claim a security interest in the same property. 3
  • 4. Real Property as Security Security Secured loan • the assurance that a creditor will be paid back for any money loaned or for credit extended to a debtor • one in which creditors have something of value from which they can be paid if the debtor does not pay 4
  • 5. Real Property as Security Security interest • The right to use collateral to recover a debt Unsecured loan • one in which creditors have nothing of value that they can repossess and sell to recover the money owed to them by the debtor. 5
  • 6. Real Property as Security • A transfer of an interest in property Mortgage for the purpose of creating a security for a debt. 6
  • 7. Real Property as Security • Mortgagor - the borrower • Mortgagee – the Mortgage lender • Lien – legal claim to the property 7
  • 8. Mortgage Costs Mortgage application fee Appraisal fee Credit report fee Inspection fee. Document preparation, Attorney’s fees, Title insurance Mortgage insurance Homeowner’s insurance. 8
  • 9. Some Methods of Financing a House 9
  • 10. Some Methods of Financing a House 10
  • 11. Types of Mortgages Conventional mortgage • involves no government backing by either insurance or guarantee • loan is made by private lenders, and the risks of loss are borne exclusively by them 11
  • 12. Types of Mortgages Adjustable rate mortgage (ARM) (variable,flexible) • has a rate of interest that changes according to fluctuations in the index to which it is tied • must include a maximum rate that cannot be exceeded 12
  • 13. Types of Mortgages Interest-only mortgage • Buyer will agree to pay only the interest on the loan for a set period of time set by the agreement Graduatedpayment mortgage • has a fixed interest rate during the life of the mortgage • the monthly payments made by the mortgagor increase over the term of the loan 13
  • 14. Types of Mortgages A balloon-payment mortgage • has comparatively low fixed payments during the life of the mortgage, followed by one large final (balloon) payment. • The mortgage has a fixed interest rate, but it is written for a short time period, such as five years. 14
  • 15. Types of Mortgages Reverse mortgage • type of loan that allows home owners to convert some of the equity in their home into cash while retaining ownership of their home 15
  • 16. Types of Mortgages Deed of trust • the mortgagor conveys his or her interest in the property to a disinterested third party, known as a trustee. • The mortgagor remains on the property, but the trustee holds certain rights to that property as security for the mortgagor’s creditors. 16
  • 17. Types of Mortgages Subprime mortgage • borrowers have been disqualified from conventional loan because of a bad credit history or because of a low debt-to-income ratio. • These loans generally have a much higher default rate than most of the conventional loans and are thus disfavored by lenders 17
  • 18. Types of Mortgages Junior mortgage •a mortgage subject to a prior mortgage. •also called a second (or subsequent) mortgage 18
  • 19. Types of Mortgages Home equity loan • an outright loan or a line of credit made available to homeowners based on the value of the property over and above any existing mortgages. 19
  • 20. Recording the Mortgage • A mortgage must be in writing and delivered to the recorder’s office in the county where the property is located. • Recording a mortgage notifies any third party who may be interested in purchasing the property that the mortgagee has an interest in the real property covered by the mortgage. 20
  • 21. Rights and Duties of the Mortgagor Right to possess the property. Right to any income produced by the property. Right to use the property for a second or third mortgage. Right to pay off the mortgage in full 21
  • 22. Rights and Duties of the Mortgagor • Make payments on time • Preserve and maintain the mortgaged property • Must pay all taxes and assessments 22
  • 23. Rights and Duties of the Mortgagee • Unrestricted right to sell, assign, or transfer the mortgage to a third party • Right to receive each installment payment as it falls due. • Right to apply to a court to have the property sold If the mortgagor has defaulted • Cannot lose their interest in property without due process 23
  • 24. The Causes of the 21st Century Financial Crisis • Creation and later mismanagement of Fannie Mae and Freddie Mac, • The development of securitization and • The increased use of faulty loans 24
  • 25. Fannie Mae, Ginnie Mae, and Freddie Mac • Federal National Mortgage Association (Fannie Mae) does not make mortgage loans. • It purchases loans that were made based on strict guidelines set up by the Federal Housing Association (FHA) and the Veterans Administration (VA). 25
  • 26. Fannie Mae, Ginnie Mae, and Freddie Mac • Congress created the Government National Mortgage Association ( Ginnie Mae), which then took over much of Fannie’s debt, freeing Fannie to buy mortgages insured by the government 26
  • 27. Fannie Mae, Ginnie Mae, and Freddie Mac • Congress also created the Federal Home Loan Mortgage Corporation (Freddie Mac), another government-sponsored enterprise (GSE) to help support the mortgage market. 27
  • 28. Securitization and Mortgage Backed Securities • Process of securitization works like this – A lender lends money to a borrower who pays off the loan over time with interest. The lender makes money on the interest at a slow and steady rate over a period of years. Someone decided that it would be better to bundle a bunch of these mortgages together and sell them as bonds (now called mortgage-backed securities) to big investors 28
  • 29. Securitization and Mortgage Backed Securities • The investor would then reap the benefit of the interest payments multiplied by the number of loans purchased in that bundle over a long period of time, while the lender received a big payment up front, allowing it to bundle more and more mortgages more and more rapidly • Fannie, Ginnie , and Freddie were all authorized to purchase these mortgage backed securities. 29
  • 30. Securitization and Asset-Backed Securities Three effects: • First, someone decided that, what worked for mortgages would work for car loans, furniture loans, boat loans, home improvement loans, student loans, construction loans, and so on. • There is a growing popularity of asset-backed securities 30
  • 31. Securitization and Asset-Backed Securities • Second, the original lenders began to care less and less about whether the borrowers were financially qualified to pay back the loans because, well, the lenders were passing the risk on to those who purchased the securities • At this point subprime loans, as well as other radical loan practices like the so-called liar loans and the NINJA loans began to appear 31
  • 32. Securitization and Asset-Backed Securities • Third, everybody got into the act, not only government sponsored entities, like Fannie, Ginnie , and Freddie, but also commercial banks, investment banks, and dozens of private lending firms, such as Merit Financial, that appeared and vanished overnight. 32
  • 33. Liar Loans and NINJA Loans • Liar loans – those that deliberately misstate the qualifications of a borrower to push a loan through the approval process. • NINJA loan – one that has been negotiated by a borrower with “no income, no job, and no assets 33
  • 34. The Fannie and Freddie Takeover • The two GSEs were hit by enormous losses as the housing crisis hit and mortgages began to default • Their portfolios were filled to capacity with mortgages purchased by subprime borrowers, ARMs , and NINJAs • The government stepped in to save both institutions 34
  • 35. Troubled Asset Reform Program (TARP) • Troubled Asset Reform Program – program was designed to allow the government to buy many of the so-called troubled assets that had resulted from the securitization epidemic 35
  • 36. Home Affordable Modification Program • Home Affordable Modification Program (HAMP) – established by the Department of the Treasury to support the efforts of homeowners who, though in default, wished to continue to make payments on their mortgages. 36
  • 37. Dodd-Frank Wall Street Reform and Consumer Protection Act • Dodd-Frank Wall Street Reform and Consumer Protection Act (The DoddFrank Act) . – consists of 16 separate titles many of which are often referred to as separate acts. Thus, Title XIV is also called the Mortgage Reform and Anti-Predatory Lending Act. Title XIV is especially pertinent to because the new act is designed to prevent the problems previously discussed 37
  • 38. Personal Property as Security • Collateral – The property that is subject to the security interest • Secured party – The lender or seller who holds the security interest 38
  • 39. Personal Property as Security • • • • • • • Consumer goods Equipment Farm products Inventory Fixtures Purchase money security interest Buyer in the ordinary course of business 39
  • 40. Security Agreement • Security agreement – an agreement that creates a security interest – must be in writing, be signed by the debtor, and contain a description of the collateral that is used for security 40
  • 41. Attachment of a Security Interest Attachment occurs when three conditions are met: 1. The debtor has some ownership or possessive rights in the collateral 2. The secured party transfers something of value to the debtor 3. The secured party takes possession of the collateral or signs a security agreement that describes the collateral 41
  • 42. Perfection of a Security Interest Perfection by Filing Perfection by Attachment Alone Perfection by Possession 42
  • 43. Priorities and Claims • When two or more parties claim a security interest in the same collateral the UCC contains provisions stating who prevails over whom in particular situations 43
  • 44. Default of the Debtor • If a debtor defaults by failing to make payments when due, the secured party may satisfy the debt by taking possession of the collateral. 44
  • 45. Question? What is property that is subject to the security interest ? A. Collateral B. Guarantee C. Lien D. Pledge 45
  • 46. Question? What type of mortgage allows home owners to convert some of the equity in their home into cash while retaining ownership of their home? A. Fixed-rate B. Conventional C. Balloon-payment D. Reverse 46
  • 47. Question? A ____________ is an outright loan made available to homeowners based on the value of the property. A. Junior mortgage B. Home equity loan C. Conventional loan D. Balloon mortgage 47
  • 48. Question? A __________ mortgage is subject to a prior mortgage. A. Fixed-rate B. Junior C. Balloon-payment D. Reverse 48
  • 49. Question? What is the right to use collateral to recover a debt? A. Lien interest B. Loan assurance C. Security interest D. Security assurance 49
  • 50. Question? What is the assurance that a creditor will be paid back for any money loaned? A. Security B. Insurance C. Lien D. Mortgage 50