Facing the Mortgage Crisis

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Mortgage Terminology

HUD Approved Non-profit Housing Counseling Agency – HUD provides housing counseling services directly or through private or public organizations with special competence and knowledge in counseling low and moderate-income families. These Agencies must have been in the community for at least one year, and employ staff trained in housing counseling. Approval by HUD of these agencies only means that the agency has met the qualification and conditions prescribed by HUD.

HUD Approved Non-profit Housing Counseling Agency Counselor – HUD approves Housing Counseling Agencies and not individual Counselors. HUD requires Housing Counseling Agencies to employ Counselors with at least 6 months experience. HUD makes available scholarships to nonprofits and local government housing counseling agencies and encourages the agencies to have their counselors obtain education and additional skills for their housing counseling programs.

Lender – The entity that gave you the mortgage loan. It may not be the same entity to whom you send your payments.

Servicer – The entity to whom you send your monthly payments. The lender has contracted with the servicer to handle your loan after closing. The servicer is your contact for any issues you have with your mortgage loan. Also called loan servicer or mortgage servicer.

Servicing - The administration of the loan by the servicer from the time you obtain your mortgage loan until it is paid off. Administration of a loan includes the collection and application of payments, payment of insurance and real estate taxes, maintaining records of payments and balances and working with the borrower to resolve delinquencies.

Investor – The entity that owns the loan. Oftentimes, the lender will sell your loan to another entity after closing. Most likely, the investor is generally not the same as the servicer or the lender. The servicer must follow the investor’s guidelines for servicing the loan.

Delinquency – A loan payment that is overdue but within the period allowed before actual default is declared.

Default – The failure of the borrower to make the loan payments as agreed in the promissory note or workout plan. Foreclosure - The legal process by which an owner’s right to a property is terminated, usually due to default. The mortgage lender sells at auction the property that secures a loan on which a borrower has defaulted. Typically, ownership of the property will be transferred to the financial institution. The institution will market and list for sale the property to recover the monies owed to them.

Customer ‘Workout’ – Process where a servicer and a borrower develop a mutual agreement to resolve a loan default and avoid foreclosure.

Auction – An auction is a process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the winning bidder. There are several variations on the basic auction form, including time limits, minimum or maximum limits on bid prices, and special rules for determining the winning bidder(s) and sale price(s).

Source: Arizona Foreclosure Prevention Task Force



Accelerate – An option given to lenders through an “acceleration” clause in the mortgage or deed of trust requiring the borrower to pay the entire balance of the loan in full if their loan is in default.

Appraisal – The process in which a third party, licensed appraiser gives an estimate of the property value. Amortization – The gradual repayment of a mortgage loan with equal periodic payments of both principal and interest calculated to retire the loan at the end of a fixed period of time.

Appreciation – The difference between the increased value of the property and the original value when the property was purchased. Annual Percentage Rate – The cost of your loan expressed as a yearly rate. Mortgages include interest, points, origination fees, and any mortgage insurance required by the lender.

Auction – A process of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the winning bidder. There are several variations on the basic auction form, including time limits, minimum or maximum limits on bid prices, and special rules for determining the winning bidder(s) and sale price(s).

Deed-in-Lieu of Foreclosure – An instance where the homeowner/borrower voluntarily conveys title to the lender in exchange for a discharge of the delinquent debt, rather than going all the way through the foreclosure process. Second mortgage lien-holders must be willing to waive their claims when a deed-in-lieu is used.

Deed of Trust – (DOT) The recorded document that shows the homeowner/borrower owes a principal balance to a financial institution for their home. The 3 parties included on this security instrument are the borrower, lender and trustee.

Default – A mortgage or deed of trust is said to be in default when the borrower fails to make the payments as agreed to in the original promissory note.

Debt-to-Income Ratio – Expressed as a percentage, the “DTI” is calculated by dividing the total house payment plus all other debt that appears on a credit report by the gross monthly income.

Deferred Payments – Payments that the lender or mortgage servicer authorizes to be postponed in a loan workout.

Deficiency Judgment – A judgment against the borrower for the remaining balance on the loan after a foreclosure sale.

Equity – The net value of an asset. In the case of real estate, it would be the difference between the present value of the property and the mortgage amount owed on that property.

Escrow Account – A segregated trust account in which escrow funds are held. This account is held by a lender for payments of taxes, insurance, or other periodic debts against real property. Part of the borrower's monthly payment goes into this account so funds will be available to pay the taxes, insurance and other impounded matters when due to avoid the need for the borrower to pay a lump sum payment.

Fair Market Value – The price a property would sell for on the open market. (Were you to sell your home today, how much would it sell for?)

Forbearance – An agreement to suspend or reduce normal monthly payments for a fixed period of time. At the end of the forbearance period, the borrower must cure the delinquency through a lump sum payment or a long-term repayment plan.

Foreclosure – The forced sale of property pledged as security for a debt that is in default. It is the legal process by which an owners right to a property is terminated, usually due to default. The mortgage lender sells at auction the property that secures a loan on which a borrower has defaulted. Typically, ownership of the property is transferred to the financial institution. The institutions will sell the home to recover the monies owed to them.

Free & Clear – Ownership of property free of all indebtedness. Zero balance owing on any loans or liens against the property. Grace Period – The length of time between the due date and the date when late fees are assessed.

Good Faith Estimate – A written estimate of costs and fees associated with a mortgage loan.

Housing Ratio – Expressed as a percentage, the housing ratio is calculated by dividing the expected total monthly house payment by the gross monthly income. The maximum percent of gross monthly income that can be used for a monthly mortgage payment

Interest Rate – The percentage of a sum of money charged for its use

Investor – The entity that owns the loan. Oftentimes, the lender will sell your loan to an investor after closing. Most likely, the investor is generally not the same entity as the servicer or the lender. The servicer must follow the investor’s guidelines for servicing the loan. An investor is any person or institution that invests in mortgages. The investor is the owner of the loan who has the ultimate power to make decisions on work-out solutions.

Judicial Foreclosure – A foreclosure that is processed by a court action. This action is seldom used in Arizona (Arizona is typically a non-judicial foreclosure state.)

Lis Pendens – A recorded notice of pending lawsuit.

Lender – The initial entity that gave you the mortgage loan. It may not be the same entity to whom you send your monthly mortgage payments.

Loan Modification – A written agreement that permanently changes one or more of the original terms of the loan, such as the interest rate, payment amount, maturity date, or the amount of the unpaid principal balance. Typically, the arrearage (the amount of the delinquent debt plus fees) is added to the remaining balance of the loan and then the loan is re-amortized. Interest rate may be reduced or a portion of the remaining balance forgiven in order to make the loan affordable for the homeowners. Lenders may also consider converting mortgages from adjustable to fixed rate loans that will remain affordable for the homeowner.

Loan Servicer – (or Servicer) The entity to whom you send your monthly mortgage payments. The Lender has contracted with the servicer to handle your loan after closing. The servicer is your contact for any issues you have with your mortgage loan. A mortgage function which includes the receipt of payments, customer service, escrow administration, investor accounting, collections and foreclosures. Also called “loan administration.” The “loan servicing” is not typically the same company where a borrower obtained their home loan. Loan servicing is often sold, and can be sold multiple times.

Loan-to-Value Ratio – the comparison of the amount of the loan to the value or selling price of real property expressed as a percentage. For example, if a home with a $100,000 value has an $80,000 mortgage on it, the loan to value is 80%

Loss Mitigation – the department within the loan servicer’s company that handles foreclosure. This is the department beyond “customer service” that a borrower must speak contact to discuss the possibility of any workout solutions.

Non-Judicial Foreclosure – The non-judicial process of foreclosure is used when a power of sale clause exists in a deed of trust. A “power of sale” clause means the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of their default. This process is typical of foreclosures in Arizona. The timeframe from Initiation of Foreclosure to the Foreclosure Sale in Arizona is 90 days.

Mortgage Insurance - A policy that protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan; mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home's purchase price

Negative Amortization – This occurs when there is a gradual increase in the mortgage loan balance when the monthly payment is not enough to cover the monthly principal and interest payments. The shortfall each month is added to the balance from the month before and the total amount owed to the lender increases as a result. Adjustable rate mortgages with payment caps and negative amortization are re-amortized at some point to that the remaining loan balance can be fully paid off during the term of the loan. This could result in a substantial increase in the borrower’s monthly payment.

Notice of Trustee Sale – A notice giving specific information about the loan in default and the foreclosure proceedings about to take place. This notice is recorded with the county where the property is located and advertised as stated in the deed of trust and as dictated by state law. In Arizona, the trustee must mail, via certified mail, a copy of the notice of sale to all parties named in the DOT w/in 5 days of recording.

Partial Claim or Partial Release – If your mortgage is insured by FHA, you may qualify for a low interest or interest-free loan to bring your loan current through the FHA. This loan would be repaid at a later date, usually when you pay off your first mortgage or sell your home.

Postponement – The trustee may postpone the sale to a later time, or another place, by giving notice of the new date, time and place by announcing it at the time and place the sale was to occur. The new date must be within 90 calendar days of the postponement. No other notice is required.

Pre-Foreclosure Sale or Short Sale – If you can no longer afford your home, this option involves selling your house to prevent foreclosure. If you own more on the home than its current value, your lender may agree to accept less than what is owed on the mortgage. There may be income tax consequences with a short sale, so please talk to a tax preparer to find out more information.

Pre-Payment Penalty – Is a fee charged by a lender when a borrower pays off a mortgage loan in full or part prior to the maturity date. Fees are generally only applicable within the first few years of the loan and will typically be assessed on prepayments of 20% of the loan balance or more.

Public Notice - Once a week for four consecutive weeks the notice must appear in a newspaper in the county where the property is located. The last notice must be published not less than 10 days prior to the sale date. A notice is to be posted at least 20 days before the date of sale in some conspicuous place on the property. Notice shall also be posted at least 20 days before the date of sale at the county superior court.

Refinance – Qualifying for a new mortgage to pay off an existing mortgage.

Reinstatement – Reinstatement is when you pay the full amount you owe (total of past due monthly payments plus all fees) in a lump sum by a specific date.

Repayment Plan – An arrangement by which a borrower agrees to make additional payments to pay down past due amounts while still making regularly scheduled payments.

Request for Notice – A recorded document requiring a trustee send a copy of a Notice of Default or Notice of Sale concerning a specific deed of trust in foreclosure to the person who filed/recorded the document.

Servicing - The administration of the loan by the servicer from the time you obtain your mortgage loan until it is paid off. Administration of a loan includes the collections and application of payments, payment of insurance and real estate taxes, maintaining records of payments and balances and working with the borrower to resolve delinquencies.

Short Sale – see Pre-Foreclosure Sale.

Short Refinance – The refinancing of a mortgage by a lender for a borrower currently in default on his or her payments. This is done to avoid foreclosure. Typically, the new loan amount is less than the existing outstanding loan amount and the difference is typically forgiven by the lender. This is one of several alternatives that might be more cost effective for the lender instead of foreclosing on the property.

Trustee – A neutral party who advertises the foreclosure property for sale and conducts the auction to sell the property to the highest bidder. Trustee Sale – An auction of real property conducted by a trustee.

Work-Out – Process where a servicer and a borrower develop mutual agreement to resolve a loan default and avoid foreclosure. An alternative action to foreclosure for the benefit of the lender and the borrower. Alternative options include: loan modification, short sale, and various forms of forbearance. Also called the “restructure.”

Source: Freddie Mac, Department of Housing and Urban Development, and Neighbor Works America

 

Facing the Mortgage Crisis is part of CPB's Public Service Media Economic Response Initiative.

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