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.
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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
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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.
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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
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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
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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
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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.
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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).
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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
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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
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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
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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
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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
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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
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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
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Editor's Notes
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.
