17 - Mortgage Math Flashcards
(46 cards)
What is a default in mortgage terms?
Any failure to meet the requirements of the note and mortgage.
What is a technical default?
A minor violation (e.g., a late payment or lapse in insurance).
What is a substantive default?
A major violation warranting action (e.g., 90 days late in payment).
How can a mortgage holder respond to a default?
Through foreclosure or various non-foreclosure responses.
What does counseling and debt reorganization involve?
Providing financial coaching to help the borrower get overall finances and debt payments back on track.
Provide borrower with financial coaching to get their overall finances in order, and debt payments on track.
What is a temporary reduction of payment?
Lowering required payments for a short period (often via negative amortization) to help a borrower through a temporary hardship.
Reduce required payments temporarily (i.e. negative amortization), to help borrower overcome a temporary challenge
What is an assisted sale?
Quickly selling the property to clear mortgage debt for the borrower, often more efficient than foreclosure.
- Help borrower clear mortgage debt by rapidly selling property.
– A special case is a short sale. In this case the value of sale does not cover the full cost of debt outstanding. This is legally more expedient and clean than foreclosure.
What is a short sale?
A type of assisted sale where the sale proceeds don’t fully cover the outstanding debt, but is legally cleaner than foreclosure.
What is a deed in lieu of foreclosure?
The borrower voluntarily conveys the property to the lender, avoiding a formal foreclosure (though the lender assumes any remaining liens).
Rather than sell property, borrower conveys the property to the lender directly. This can be risky, as mortgage holder may be assuming a property with liens that need to be resolved
What is foreclosure?
A court-supervised process terminating the borrower’s ownership claims and liens so the lender can sell the property.
Court-supervised process of terminating claims of ownership by the borrower, and liens, to allow for sale of the property by the lender.
A foreclosure is a legal filing (i.e. a lawsuit), and must adhere to legal
processes and procedures.
– A foreclosure filing
– A hearing
– A court-administered public auction of the property (i.e. “Sheriff’s sale”)
An alternative is power of sale, where the lender directly conducts
the sale of the property.
What are the typical legal steps in a foreclosure?
1) Foreclosure filing (lawsuit)
2) Court hearing
3) Public auction of the property (“Sheriff’s sale”).
What is a power of sale alternative?
A clause allowing the lender to sell the property directly, without court oversight.
Why do foreclosure auctions often sell below market value?
Poor marketing, property deterioration, questionable title, and stigma reduce buyer interest.
- Property is not well marketed in foreclosure sale.
- Property has likely deteriorated or not been maintained leading up to foreclosure.
- Title is more questionable.
- Foreclosure may cast a stigma on the property – especially for commercial properties.
How does poor marketing affect foreclosure sale prices?
Limited exposure means fewer bidders and lower bids.
How does property condition affect foreclosure sale prices?
Neglect or deterioration leading up to sale deters buyers and lowers value.
Why does stigma lower foreclosure sale prices?
Buyers fear hidden issues or legal complications, especially for commercial properties.
How long can foreclosure take?
It can be a long process, sometimes lasting years.
What is the equity of redemption?
The borrower’s right to stop foreclosure by paying the amount due plus legal costs, up until the sale.
How can a borrower stop a foreclosure under equity of redemption?
By paying off the overdue balance and associated legal/foreclosure costs before auction.
What is the statutory right of redemption in many states?
A legal period after the sale during which the borrower can still redeem the property by paying the sale price and costs.
What three factors drive the time value of money?
Opportunity cost (foregone returns), inflation, and risk/uncertainty.
Given these options for investing $100, which yields the highest present value at a positive discount rate?
Plan A: $10 at end of year 1, then $100 in year 10
Plan B: $1 at end of each year for 10 years, then $100 in year 10
Plan C: $110 in year 10
Plan B, because earlier cash flows can be reinvested and thus have higher present value.
What’s the main advantage of receiving periodic payments over a single lump sum at maturity?
You can reinvest each payment sooner, capturing additional compounding.
What is future value (FV)?
The amount your investment grows to at a given interest rate after a specified period.
