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

Modern Real Estate Practice in Pennsylvania 12th Edition

Chapter 12: Principles of Real Estate Financing

2©2012 Kaplan, Inc.

12 Principles 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


• Real estate financing market– Government influences — Federal Reserve

System– Primary mortgage market

• Originates loans• Income from finance charges, recurring income

(interest) and servicing loans



• 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



• 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



• 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



• Secondary mortgage market– Helps lenders raise capital– Loans are bought and sold after being funded– Fannie Mae– Freddie Mac– Ginnie Mae




Mortgagee(Lender)

Mortgagor(Borrower)

Mortgagor(Borrower)

Mortgage—TwoParties

Mortgagee(Lender)

When the Money Is Borrowed

Note andMortgage Loan $

When the Money Is Repaid

Pays theLoan $

Satisfactionof Mortgage

When the Money is Borrowed When the Money is Repaid

Mortgage — Two Parties



• Mortgage law– Mortgagor = Borrower– Mortgagee = Lender– Title theory– Lien theory


• Security and debt– Hypothecation– Mortgage loan instruments

• Promissory note• Mortgage



• Provisions of the note– Negotiable instrument– Interest– Usury– Discount points– Loan origination fee– Prepayments– Payment plans

• Straight loans• Amortized loans



• 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



• 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



• 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.


• 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 notice15©2012 Kaplan, Inc.


• Alternatives to foreclosure– Deed in lieu of foreclosure– Short sale– Redemption

• Equitable• Statutory (not in Pennsylvania)

– Deed to purchaser at sale– Deficiency judgment



• 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.



Date ofDefault

Date ofSale

End ofRedemption

Rights

Equitable Redemption(before the sale)

Statutory Redemption(after the sale)

Documents

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