Modern Real Estate Practice in Pennsylvania 12th Edition Chapter 12: Principles of Real Estate Financing

2 ©2012 Kaplan, Inc. 12Principles of Real Estate Financing Learning objectives –Describe the primary and secondary mortgage market, and their impact on real estate financing –Identify the basic provisions in promissory notes, mortgage documents, and land contracts –Explain the procedures involved in a foreclosure –Distinguish between methods of repayment commonly used in real estate finance –Define key terms

12Principles of Real Estate Financing Real estate financing market –Government influences — Federal Reserve System –Primary mortgage market Originates loans Income from finance charges, recurring income (interest) and servicing loans 3 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Major lenders in primary market –Thrifts, savings institutions, commercial banks –Insurance companies –Credit unions –Pension funds –Endowment funds –Investment group financing –Mortgage banking companies –Mortgage brokers 4 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing In Pennsylvania –Mortgage Bankers and Brokers and Consumer Equity Protection Act Mortgage broker is any person or company who, for a fee, arranges or negotiates a first mortgage loan Failure to obtain a license is felony offense of third degree 5 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Pennsylvania mortgage broker –At least 20 hours of education –Pass the test –Undergo a criminal background history check –Post surety bond between $50,000 to $150,000 –Collecting fees in advance: post penal bond of $100,000 –Annual continuing education required 6 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Secondary mortgage market –Helps lenders raise capital –Loans are bought and sold after being funded –Fannie Mae –Freddie Mac –Ginnie Mae 7 ©2012 Kaplan, Inc.

8 12Principles of Real Estate Financing When the Money is BorrowedWhen the Money is Repaid Mortgage — Two Parties

9 ©2012 Kaplan, Inc. 12Principles of Real Estate Financing Mortgage law –Mortgagor = Borrower –Mortgagee = Lender –Title theory –Lien theory

12Principles of Real Estate Financing Security and debt –Hypothecation –Mortgage loan instruments Promissory note Mortgage 10 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Provisions of the note –Negotiable instrument –Interest –Usury –Discount points –Loan origination fee –Prepayments –Payment plans Straight loans Amortized loans 11 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Provisions of mortgage documents –Property is security for a debt –Voluntary, specific lien –Duties of mortgagor –Provisions for default Alienation clause –Assignment of the mortgage –Release of the mortgage lien Defeasance clause Satisfaction of mortgage 12 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Provisions of mortgage documents –Tax and insurance reserves Federal flood insurance may be required Lenders must comply –Assignment of rents –Buying subject to or assuming a seller’s mortgage –Alienation clause –Recording mortgages 13 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Foreclosure –Legal process in which property pledged as security is sold to satisfy the debt –Brings rights of all parties to a conclusion –Passes title –Foreclosure sale –Property sold free of foreclosing mortgage and all junior liens Homeowner Emergency Assistance Program (HEMAP) 14 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Methods of Foreclosure –Judicial foreclosure –Nonjudicial foreclosure –Strict In PA failure to pay mortgage –Act 91 notice –Notice to file for HEMAP assistance –Act 6 notice In PA, failure to pay taxes: Act 1 notice 15 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Alternatives to foreclosure –Deed in lieu of foreclosure –Short sale –Redemption Equitable Statutory (not in Pennsylvania) –Deed to purchaser at sale –Deficiency judgment 16 ©2012 Kaplan, Inc.

12Principles of Real Estate Financing Land contracts –Contract for deed or installment contract –Other financing may not be available –Buyer = vendee –Seller = vendor –Owner financing 17 ©2012 Kaplan, Inc.©2010 Kaplan, Inc.

18 ©2012 Kaplan, Inc. 12Principles of Real Estate Financing