© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 13: Mortgages and Foreclosures after the Recession © 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Mortgages  A mortgage is a written instrument that gives the creditor (the mortgagor) an interest in, or lien on, the property being acquired by the debtor (mortgagee) as security for the debt’s payment. 2

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Types of Mortgages. Interest-Only Mortgages. Subprime Mortgages: loan made to a borrower who does not qualify for a standard mortgage. Construction Loans: series of ‘draws’ to build new home on vacant land. Participation Loans.  3

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Types of Mortgages. Balloon Mortgages: similar to ARM, starts with lower payments for 7-10 years, then large ‘balloon’ note is due. Most buyers refinance at that point. Hybrid and Reverse Mortgages. 4

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Home Equity Loans. Bank accepts borrower’s equity as collateral for a loan, which the lender can seize in the loan is not paid on time. Home equity loans are subordinated to the main home loan. 5

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Creditor Protection. Private mortgage insurance required if the down payment is less than 20%. Creditor records mortgage with appropriate local/state government. Statute of Frauds: mortgage must be in writing to be enforceable.  6

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Mortgages  Creditor Protection. Important Mortgage Provisions: 1.The terms of the underlying loan. 2.Maintenance of the property. 3.Homeowner’s insurance. 4.Nonloan financial obligations by borrower. 5.Borrower pays some or all the taxes, insurance, assessments, or other regular expenses. 7

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Predatory Lending and Other Improper Practices. Steering and Targeting. Loan Flipping.  Truth in Lending Act (TILA). Required Disclosures: loan principal, interest rate, the annual percentage rate, and all fees and costs.  8

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Truth in Lending Act (cont’d). Prohibitions and Requirements: TILA addresses unfair or deceptive mortgage practices. Right to Rescind. Written Representations. 9

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Protection for High-Cost Mortgage Loan Recipients. Special Consumer Protections: Home Ownership and Equity Protection Act (HOEPA) Remedies and Liabilities: HOEPA prohibits lenders from certain practices.  10

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Protection for High-Cost Mortgage Loan Recipients. Remedies and Liabilities: (cont’d). CASE 13.1 I N RE K ITTS (2011). CASE 13.1 I N RE K ITTS (2011). What did Winterfox fail to do? 11

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Protection for Higher-Priced Mortgage Loans. New type of expensive mortgage called Higher-Priced Mortgage Loans (HPML). Only mortgages secured by a consumer’s principal residence qualify to receive HPML designation.  12

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Real Estate Financing Law  Protection for HPML’s (cont’d). Requirements to Qualify: loan rate exceed average prime offer rate by 1.5 points for primary consumer residence. Special Protection for Consumers: verification of repayment, and prepayment penalties curtailed. 13

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  Default:  Default: if homeowner fails to make mortgage payments, lender has the right to foreclose.  How to Avoid Foreclosure. Forbearance of payments. Workout Agreement. Housing and Urban Development Assistance.  14

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  How to Avoid Foreclosure. Short Sales: sale of property for less than balance of the mortgage loan. Less negative impact than foreclosure; much less expensive for lender, but borrower still loses home. Sale and Leaseback.  15

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  How to Avoid Foreclosure. Home Affordable Modification Program. Determination if a Homeowner Qualifies. Steps Taken to Alleviate the Mortgage Burden. Voluntary Conveyance : deed in lieu of foreclosure. Friendly Foreclosure. Prepackaged Bankruptcy. 16

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  Foreclosure extinguishes the borrower’s equitable right of redemption.  Two types of foreclosure: Judicial Foreclosure: court-supervised process. Power of Sale Foreclosure: lender controls the process.  17

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  Foreclosure Procedure. CASE 13.2 U.S. B ANK N ATIONAL A SSOCIATION V. I BANEZ (2011). CASE 13.2 U.S. B ANK N ATIONAL A SSOCIATION V. I BANEZ (2011). What did Wells Fargo Bank fail to do? Acceleration Clauses: lender can call the entire loan due. Notice of Default and of Sale. 18

© 2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.Foreclosures  Foreclosure Procedure. Deficiency Judgments: borrower is responsible for difference between auction price an loan amount.  Redemption Rights: Buyer can pay full amount and exercise his equitable right of redemption. 19