David M. Harrison, Ph.D. Real Estate Finance Texas Tech University What is a Mortgage? Definition: Mortgage Components Mortgage Deed or Deed of Trust Lien or Promissory Note

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Mortgage Deed Relationships Follow the Money BorrowerLender Cash Note & Mortgage Release Cash Repaid

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Basic Terminology Owner begins with “O” so: “...or” ==> Owner Ex. #1: “Lessor” is Owner (Landlord) “Lessee” is Renter Ex. #2: “Mortgagor” is Owner (Borrower) “Mortgagee” is Lender

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Types of Mortgages Mortgages ResidentialCommercial Govt Insured ConventionalPermanent Construction

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University How Big is the Mortgage Market? Federal Reserve Data Growth? Changes?

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University How Big is the Mortgage Market? Federal Reserve Data Growth? Changes?

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Mortgage Market Participants Originators – Conduits – Servicers – Insurers –

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Originators Who are these guys anyway? What happens after they make the loan?  Securitize -

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Origination Profits How Do Originators Make Money? Origination Fees: charging “points”  1 point = 1% of loan amount  Ex. 3 points on a $250,000 mortgage = $7,500 Application/Processing Fees Secondary Market Profit

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Conduits Fannie Mae (FNMA) Freddie Mac (FHLMC) Ginnie Mae (GNMA) Others

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Mortgage Servicers Who are these guys? What do they do?

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Servicing Profits How do they make money?

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Mortgage Insurance Loan Level Insurance Private Mortgage Insurance (PMI)  Government Subsidized  Pool Level Insurance

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University What is “Default”? Mortgage default is… The most common failure is… Mortgage default could also result… Defaults are…

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University What is “Foreclosure”? Foreclosure is… Technically, foreclosure is… Equity of redemption is: If a property is foreclosed upon…

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Why Foreclosure is Rare Incentives Matter! Consider a household that owns a house with a market value of $200,000. The household owes $170,000 to the lender…

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Mortgage Theory Title Theory Lien Theory Implications for Mortgage Terminations

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Priority of Claims in Foreclosure Priority established by Date of Recording, except: Property Tax Lien comes first Sometimes Mechanics Liens Explicit Subordination Clause(s) Bankruptcy Proceedings may modify debtholder rights “First Mortgage” (earlier recording) = “Senior Debt” “2nd (etc) Mortgage” = “Junior Debt”

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Foreclosure Priority Example Suppose a property owner encounters financial distress. The subject property is encumbered by the following three liens: 1st Mortgage = $90,000 2nd Mortgage = $20,000 3rd Mortgage = $10,000 If the subject property sells in foreclosure for 100,000, what are the payoffs to each of the mortgagees? 1st Mortgagee gets 2nd Mortgagee gets 3rd Mortgagee gets

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University Common Covenants and Clauses Promise to Pay Covenant to Avoid Liens with Priority over the Mortgage Hazard Insurance Mortgage Insurance

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University More Covenants and Clauses Escrow Order of Application of Payments Good Repair Clause Lender’s Right to Inspect

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University More Covenants and Clauses Joint & Several Liability Acceleration Clauses “Due-on-Sale” Clause Borrower’s Right to Reinstate

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University More Covenants and Clauses Lender in Possession Release (Defeasance) Clauses Estoppel Clause Prepayment Clause

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University More Covenants and Clauses Lender’s Right to Notice (Jr. Loans) Subordination Clause Future Advances Covenant against Removal

David M. Harrison, Ph.D. Real Estate Finance Texas Tech University More Covenants and Clauses Personal Property Clauses Owner Occupancy Clause Sale in One Parcel Clause Exculpatory Clause  Conclusion: