1. California Real Estate Principles, 10.1 Edition
Chapter 8
Introduction to Real Estate Finance

2. Chapter 8
Describe the types of promissory notes, then explain adjustable rate loans.
Explain a deed of trust (trust deed), a mortgage, installment sales contract, and foreclosure procedures.
Define clauses common to financing documents: acceleration, alienation, subordination, prepayment penalty.
Outline the principles of loan regulations: Truth-In-Lending, RESPA, Fair Credit, Real Fair Credit Reporting and Property Loan Law.

3. Financing Process
APPLICATION: Lender form used to acquire information on income, credit and assets.
ANALYSIS: Verification of income, credit and assets. Underwriter decides if borrower is qualified. If so, loan terms. The major issue the FICO score
PROCESSING: Papers drawn. Escrow instructions, appraisal, loan documents.
CLOSING: Papers signed, loan funds, loan and escrow closes, documents recorded, insurance issued (property and title), closing statements issued
SERVICING: Process of collecting loan payments. Check on loan until paid off. Pay impound bills.

4. Overview of Finance Documents
Hypothecate

5. Negative Amortized Note
This is when the loan payment does not cover the monthly interest
Shortage is added to principal loan amount
Results in increased loan balance

6. Promissory Notes Legal obligation for the debt
Straight Note
Payments of Interest Only
Entire principal repaid on the final due date
Installment Note
Periodic payments of principal & interest
Amortized Note
Monthly payments which include both Principal and Interest
Fully Amortized type : Liquidates the debt with final payment
Partially Amortized : Balloon payment type requires larger final payment

7. Real Estate Loans Fixed Rate - The interest rate remains the same
Adjustable Rate Mortgage (ARM)-rate
Lower initial rate than fixed-rate mortgage
Rate cap and payment cap
Variable Interest Rate (VIR)
Graduated Payment Mortgage (GPM)-increasing
Graduated Payment Adjustable Mortgage (GPAM)
Growing Equity Mortgage (GEM)-
principal
All-Inclusive Trust Deed (AITD)
Reverse Annuity Mortgage (RAM)

8. VARIABLE PAYMENT PLANS
The interest rate may change and as a result the following may be affected:
Payments
Principal owed
Term (length of the loan)

9. Adjustable Rate Loan TERMS
INDEX: Measures need for a change in rate.
MARGIN: The distance between actual and index rate.
ADJUSTMENT PERIODS: How often rate changes. Typically every 6 or 12 months.
CAP: Maximum rate over initial rate.
TEASER: Very low initial rate for short period before increase to normal ARM rate.
CONVERTIBLE: During “window period” (2-5 years) allowed to switch to fixed rate upon payment of fee.

10. Negative Amortized Note
This is when the loan payment does not cover the monthly interest
Shortage is added to principal loan amount
Results in increased loan balance

11. DEED OF TRUST (Trust Deed)
Easier, cheaper, faster foreclosure
Creates a lien to secure repayment of a note
Trustor – Borrower
Trustee – Stakeholder or “naked” Titleholder
Beneficiary – BANK - Lender
Who holds title until debt is paid
Deeds to
Trustor
Trustee
Reconveys
When debt is paid
Trustor
Trustee
The Trustee returns title to the Trustor by a Deed of Reconveyance

12. MORTGAGE (A Contract) Mortgagor - Borrower Mortgagee - Lender
Loan Payoff
Satisfaction of Mortgage
Foreclosure by default
Law suit / Court order
Decree of Foreclosure
Notice of Sale
Sheriff’s Sale
Sheriff’s Deed
Deficiency Judgment possible
One-year Period of Redemption

13. Common Provisions in Security Instruments
Acceleration Clause
Alienation (Due-On-Sale) Clause
Assumption Provision or
Lock-In Clause
Prepayment Provision or

14. TRUST DEED vs. MORTGAGE Deed of Trust Comparison Mortgage
If Foreclosure by Court Action: Same as for Mortgage
Trustee’s Sale - No Deficiency Judgment Possible
Lender’s Rights
Possible Deficiency Judgment
Trustee’s Sale
Notice of Default – Owner may redeem by bringing payments current within three months
Notice of Sale – Owner may redeem only by paying entire indebtedness in full Trustee’s Sale Sale final. No redemption
Owner’s Rights of Redemption
Before Decree of Foreclosure
Owner may redeem anytime by bringing payments current
After Decree of Foreclosure and Sale
Owner has one year “Equity of Redemption”
Must pay indebtedness in full to redeem
Trust Note – Outlaws four years after due date
Trust Deed – Never outlaws – Lender can always have trustee sell to recover unpaid balance
Stature of Limitations
Mortgage note and contract both outlaw four years from due date, or from date of last payment. No relief. Monies involved not collectable.

15. Mortgage versus Trust Deed
Deed of Trust
Foreclosure
Court action Only
Equitable Redemption
Notice of Default
Lawsuit/Court
Notice of Sale
Statutory Redemption
Sheriff’s Sale
Deficiency Judgment
Sheriff’s Deed
1 year to redeem
Court Action or Trustee’s Deed
Reinstatement Period
Notice of Default/3 months
21 day minimum publish
Trustee’s Sale
All sales final
Trustee’s Deed
No redemption
Owner’s Rights of Redemption
Before Decree of Foreclosure
Owner may redeem anytime by bringing payments current
After Decree of Foreclosure and Sale
Owner has one year “Equity of Redemption”
Must pay indebtedness in full to redeem
If Foreclosure by Court Action: Same as for Mortgage
Notice of Default – Owner may redeem by bringing payments current within three months
Notice of Sale – Owner may redeem only by paying entire indebtedness in full Trustee’s Sale Sale final. No redemption

16. Buyer Takes Over Seller’s Loan
Buyer assumes existing loan
Substitution of Liability
Buyer takes title “Subject to” existing loan.

17. Prepayment Penalty
Certain California lenders prohibited from charging prepayment penalty on owner-occupied home loans if the loan has been on the lender’s books for more than 3 years.
Does not apply to federally supervised lenders
No prepayment penalty on FHA, VA, or Cal-Vet loans

18. REQUEST FOR COPY OF NOTICE OF DEFAULT AND SALE
SECOND DEED OF TRUST
Junior Lien – Purpose: Close the gap between the
sales price and the first loan plus down payment
Types: “Hard” money second – cash from lender
“Soft” money second – credit from seller
Default: Junior lienholder may foreclose
Notice
REQUEST FOR COPY OF NOTICE OF DEFAULT AND SALE
Purpose: To inform holders of junior liens when the holder of a senior lien (deed of trust) is about to foreclose

19. Land Contract or Installment Sales Contract
Vendor - Vendee
Low down payment usually required
Allows marginal buyer to acquire real estate
Buyer gets immediate possession
Buyer receives full legal title after loan paid off
Seller must follow statutory notice requirements if buyer defaults
All parties should consult their attorney
Vendee may receive poor title.
Vendor may have problems during the term.

20. Sales Contract (cont.)
Buyer usually receives equitable, insurable, recorded title
The contract cannot prohibit recording
Creates a cloud on vendor’s title
Removed by court or vendee signing a quitclaim deed
Vendee may assign all rights if no release from vendor

21. Basic Rule of Finance Foreclosure
If you don’t pay … they will take it away !
Foreclosure

22. TRUSTEE’S SALE STEPS Beneficiary requests trustee to foreclose
Trustee records Notice of Default
Three-month waiting period
(Borrower has reinstatement period)
Advertise “Notice of Sale” with date, time and place of sale
(Borrower has limited right to reinstate)
Sale to highest bidder for cash
(loan amount + costs)
6. Trustee’s deed is issued (all sales final; borrower has no right of redemption)
7. Disbursement of funds

23. TRUTH IN LENDING LAW Regulation Z (TIL)
Purpose – disclosure of credit
A.P.R. – cost of credit in percentage terms
Right of rescission
Annual Percentage Rate (APR) must be stated when
advertising financing

24. Equal Credit Opportunity Act
Enforced by the Board of Governors of the Federal Reserve System, through the Federal Reserve Board.
Prohibits lender or mortgage broker from discriminating against credit applicants on the basis of race, color, religion, national origin, sex, marital status, or age, among other things.
Lender cannot ask borrower if: divorced, separated, has childbearing plans, receives alimony or child support (unless using the income to qualify for the loan).
Lender has 30 days to approve or disapprove.
If not approved, lender must state why.

25. Fair Credit Reporting Act
Requires that, if a loan is denied, lender or mortgage broker must:
Give applicant a statement of denial reasons.
Include the name of the federal agency that can be contacted if the applicant feels discriminated against.
If denial is based on information contained in the applicant’s credit report, inform applicant of the right to receive a free copy of the report, and how to do so.
Information can be obtained from the Board of Governors of the Federal Reserve System, through the Federal Reserve Board.

26. Real Estate Settlement Procedures Act (RESPA)
Requires lender or mortgage broker to disclose any affiliated business arrangement with an individual or entity offering settlement services.
Special information booklet (Buying your Home: Settlement Costs and Helpful Information) within three days of loan application.
Good Faith Estimate of settlement service charges must be provided within 3 business days of loan application.

27. Truth in Lending Disclosure Settlement Statement
May inspect one day before closing
Includes disclosure of lender-paid broker fees
Escrow Account Statement
No more than two months of excess payments
Accounting provided within 45 days
Annual review of escrow account

28. Mortgage Broker Limits
COSTS:
Limits amount of costs and expenses
Cannot be over 5% of the loan amount
Actual costs, or
$390
Cannot exceed $700 for costs and expenses.