Mortgage Fundamentals

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1 Ohio SSO Conference November 2, 2013 Mortgage Fundamentals Presented by: Tera Doak, Associate General Counsel, HFHI

2 What is MPAR? The Mortgage Procedures and Regulations (MPAR) initiative offers several distinct, but related, resource collections to assist affiliates with their efforts to comply with all applicable regulations and best practices in the origination and servicing of their mortgage loans. For more information, visit the MPAR homepage on My.Habitat under the Housing Finance Knowledge Center. 2

3 Topics to be covered today: Conveyance Documentation Mortgage Documentation Title Insurance Overlap between Mortgage and Pricing Common Origination Errors to Avoid Truth in Lending/RESPA Other Consumer Protections Compliance 3

4 Mortgage Fundamentals - Documentation The Conveyance Policy 22 requires affiliates convey marketable title at closing. Marketable title is title that includes standard and reasonable exceptions acceptable to the buyer. Warranty Deed - warrants extends back to property origins and is not limited to time of grantor s ownership Limited Warranty Deed (preferred) - warrants property as free of all liens and encumbrances made by and through grantor, subject to a list of exceptions Quit-Claim Deed - no warranty / as-is 4

5 Mortgage Fundamentals - Documentation A right of repurchase is required by Policy 24. If this right is in the deed or a separate document, it will not disappear when the mortgage is paid off. Right of first purchase (preferred method): Affiliate is given opportunity to purchase home before homeowner tries to sell it. Purchase price is pre-determined, usually off of a formula. Right of first refusal: Affiliate must usually match a third party offer. Often ignored by other parties. Many buyers will not make an offer on a home with a right of first refusal. 5

6 Mortgage Fundamentals - Documentation The Loan: Promissory Note Establishes the borrower s promise to pay Keep original Promissory Note to enforce debt in court Customary disclaimers (notice of presentment, dishonor) Keep it simple no need for provisions in the note beyond basic legal requirements Promissory Note should contain: Principal amount owed Amount of monthly payments (excluding taxes and insurance) When and where payments are due First and last dates (maturity date) that payments are due Borrower s and Affiliate s accurate and complete legal name 6

7 Mortgage Fundamentals - Documentation Mortgage Basics: Secures the payment and grants affiliate right to foreclose on house if homeowner fails to make monthly payments. May be referred to as a Deed of Trust or Deed to Secure Debt Must refer to an existing Promissory Note dated on or before the date of the Mortgage. The Mortgage and Promissory Note should be executed and in place before the family moves into the home. Mortgage must be recorded with proper governmental entity (usually county) Keep all mortgage documents in one fireproof location 7

8 Mortgage Fundamentals - Documentation Mortgage Basics What s in the fine print? Mortgage should accurately state: Borrower s name Principal amount of Promissory Note Date of Promissory Note Some states may require more terms what for changing laws! Must have a legally sufficient description of the property Must include express foreclosure or power of sale provision (to proceed with non-judicial foreclosure) Include requirement that Habitat home must be homeowner s primary residence 8

9 Mortgage Fundamentals - Documentation What is title insurance? Title insurance provides coverage for future claims or future losses due to hazards and defects already existing in the title at the time of purchase. Title insurance covers: Mistakes in title examinations; Property or title claims by third parties; Gap between closing and time of recording the documents - Pay close attention to the Exceptions and obtain copies of all covenants and other use restrictions that will survive closing. Insurable title is not necessarily Marketable title. - What about donated land?? (Hint: there might be a reason it s being donated) Make sure a full title search is performed (not just a bringdown of the lender s policy) 9

10 Mortgage Fundamentals Other Closing Issues Closing Attorney and Title Agent: Closing attorney should have experience with real estate closings and be responsive to your questions or requests. Make sure to inform attorneys and title companies new to Habitat closings of Habitat-required provisions (rights to repurchase, second mortgages, occupancy requirements, etc.) 10

11 Mortgage Fundamentals Errors to Avoid Most Common Errors with Mortgage Documents: Amounts, names or dates do not match on Promissory Note and Mortgage Affiliate or homebuyer name is not correct Omitting monthly payment amount Monthly payment amounts do not add up to principal amount Combining escrow amounts with principal payment Failing to provide for adjustment of escrow amounts Improper execution (state specific), including proper witness and notary acknowledgment 11

12 Mortgage Fundamentals Errors to Avoid Most Common Errors with Mortgage Documents (Continued): Incomplete legal description Omitting requirement that the home will be the homebuyer s primary residence Not maintaining original mortgage documents in safe location (and keep copies if outsource servicing) Not recording the mortgage immediately, or in wrong order (after the deed) Not performing full due diligence review when acquiring the property Title defects, environmental conditions, zoning issues impact ability to convey good title Allowing homebuyer to move into the home before the mortgage is executed and delivered (Policy 22, Section 3.4; limited exceptions require occupancy agreement and specific date for title transfer) 12

13 Mortgage Fundamentals How do Mortgage and Pricing Policies Work Together? 13

14 House Pricing 3 Key Principles (Policy 23) No Profit: The repayable portion of the purchase price (i.e., the amount of the first mortgage) may not in any event exceed the total development cost of the house. No Negative Equity: The total of all Habitat mortgages may not exceed the fair market value of the house at closing (the upside down house scenario). Affordability: The purchaser s monthly payments may not exceed 30% of household s gross income at the time of purchase. 14

15 But what is the Sales Price??? Sales Price = Fair Market Value - Protects market values in the community - Ensures Habitat homebuyers are treated equitably - Contributes to transparency of the transaction - Backing into sales price by reference to mortgages might distort the picture - Mortgage may include closing costs - Need to factor in down payment 15

16 House Pricing Down Payment and Closing Costs How should an affiliate treat a down payment? A down payment by the partner family (or other subsidy provider) will reduce the principal amount of the first mortgage. This is not the same as closing costs. This does not impact sales price; only the mortgage amount. How should an affiliate treat closing costs? Closing costs are amounts, over and above the price of the property, that buyers and sellers incur to complete a real estate transaction Typical closing costs include appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges. Closing costs must be disclosed to the homebuyer on the Good Faith Estimate and HUD- 1 disclosures required by RESPA. Either the affiliate or the partner family may pay the closing costs, or each may cover a portion of the closing costs. If the affiliate is advancing closing costs, consider whether these costs should be added to the first mortgage amount. Remember that the total of all Habitat mortgages may not exceed FMV (PAS 23). 16

17 House Pricing - Summary Sales price = FMV Generally, sum of mortgages plus any down payment The first mortgage amount should be the lesser of the TDC and FMV, or such lesser amount as is required to make the home affordable under Policy 23. A second mortgage (or other equity protection device) should be used to protect equity up to the FMV of the home at closing. 17

18 Equity Protection Policy 24 provides that affiliates should utilize some form of equity protection. Types of equity protection models: Silent or soft subordinate mortgages Shared appreciation agreements Land trusts Deed restrictions Why do we need to protect the equity? 18

19 Equity Protection - Subordinate Mortgages One of the most common forms of equity protection is the soft or silent subordinate mortgage. Often called a silent second by Habitat affiliates, even though it may not be in the second position. Silent second fills gap between FMV and first mortgage, and covers the amount of any affordability write down. Not allowed for a development subsidy. Historically silent seconds required no monthly payments and were forgiven over a period of time unless the homeowner defaulted refinanced first mortgage or sold the house 19

20 Equity Protection - Subordinate Mortgages What did the Sustainability Policy (Policy 28) do? Affiliates are specifically allowed to keep a second mortgage out for the entire amount for full term of the first mortgage. Affiliates are specifically allowed to require repayment of any affordability write down at the end of term of first mortgage (but cannot require repayment of gifted equity ). Affordability write down = difference between the TDC of a home and the affordable first mortgage amount. This should not be a balloon payment. however. It is expected that Affiliates will work with partner families to establish payment terms or assist with third party financing. Gifted Equity = difference between the TDC of a home and the FMV at closing 20

21 Equity Protection - Subordinate Mortgages The Sustainability Policy (Policy 28) gives permissions, not requirements. Affiliates and their boards of directors have discretion. Things to consider: Fairness to the family Sustainability of affiliate Existing restrictions on title and requirements of other subsidy providers Put a policy in place and follow it consistently: What is your policy on forgiveness and recapture? Homebuyer education Properly document your policy If affordability write-down is recaptured, how will it be paid? 21

22 Deferring $20K Example #1: Gifted Equity $ 100K Total Development Cost $100K Affordability Index $120K FMV Purchaser can afford monthly payments on a $100K 0% Mortgage First Mortgage = $100,000 Soft Second = $20,000 (Gifted Equity; must be forgiven if first mortgage is paid in full) Sales Price = $120,000 22

23 Deferring $30K Example #2: Gifted Equity + Affordability Writedown $ 100K Total Development Cost $ 90K Affordability Index $120K FMV Purchaser can afford monthly payments on a $90K 0% mortgage First Mortgage = $90,000 Soft Second = $10,000 (Affordability Write-down; may be recaptured after first mortgage is paid in full) Soft Third = $20,000 (Gifted Equity; must be forgiven if first mortgage is paid in full) Sales Price = $120,000 23

24 Write Off $20K Example #3: Development Subsidy $ 100K Total Development Cost $100K Affordability Index $80K FMV* *FMV below cost has been more prevalent in the current real estate market Purchaser can afford monthly payments on a $100K 0% mortgage First Mortgage = $80,000 Soft Second = $0 Sales Price = $80,000 Affiliate does not charge more than FMV for the house. The additional $20,000 in costs are not included in a soft second. A shared appreciation provision may allow affiliate to capture the $20K subsidy on a sale or refinance (to the extent the property has appreciated). 24

25 Equity Protection - Subordinate Mortgages Things to consider on layered subsidies and mortgages totaling more than the FMV: Habitat Policy provides that the total of all Habitat mortgages granted at closing should not exceed the FMV of the house at closing (Policy 23 Advisory Statement) For some subsidy providers, the amount of all mortgages and down payments paid by the partner family may never exceed the FMV at closing. Carefully consider possibility of adverse public reaction (think subprime lender ). Carefully consider impact on the partner family. Ensure that deferred mortgages have a net proceeds clause (amounts are payable only to the extent net proceeds are available from the sale). Consider using a shared appreciation agreement as a component of the program 25

26 Disclosure Requirements RESPA and TILA RESPA Real Estate Settlement Procedures Act Regulates and requires disclosures of fees charged for sales and financing of real estate Updated in January 2010 in light of foreclosure crisis; consolidated disclosure form still to come Affects closing documentation and escrow analysis Affiliates that originate more than $1,000,000 per year in mortgages must comply with RESPA in the origination and servicing of mortgages. This includes the face amount of silent second or other subordinate mortgages held by the affiliate. Failure cannot be corrected retroactively; now standard operating procedure; subsidy providers; eligibility for leveraging and discounting programs; Habitat servicing standards

27 Required Disclosures under RESPA Pre-closing Disclosures: Good Faith Estimate ( GFE ) Summary of Settlement Charges Summary of Loan Escrow Account Information HUD Special Information Booklet Servicing Disclosure Statement Affiliated Business Arrangement Disclosure Right to Receive Copy of Appraisal

28 Required Disclosures under RESPA Closing Disclosures: HUD-1 Settlement Statement Price Amount Financed Closing and Other Costs (taxes, insurance, recording fees, etc.) Net Cash at Closing Initial Escrow Statement

29 Required Disclosures under RESPA Ongoing Disclosures: Annual Escrow Statement Notice of Transfer of Servicing

30 Seven Factors that Trigger the GFE 1. Name 2. Monthly Income 3. Social Security Number 4. Property Address 5. Estimated Value of the Property 6. Mortgage Loan Amount Sought 7. Any Other Information Deemed Necessary

31 If the Seven Factors are met 1. The definition of loan application under RESPA is met, and a GFE must be given to family within 3 business days; and no less than 10 business days before closing. 2. The GFE may not be changed except for changes in certain circumstances ( tolerances ). a. Some changes don t allow you to change GFE: e.g., escrow, transfer taxes b. Some changes are acceptable if stated within 10% of the original amount: e.g. document recording fees, e.g. c. Some changes are always allowed: e.g., necessary changes in the loan amount

32 TILA Truth in Lending Act The federal Truth in Lending Act (TILA) promotes the informed use of consumer credit by requiring disclosures about the terms and cost of credit, and standardizes the manner in which costs associated with borrowing are calculated and disclosed. - All Habitat Affiliates must comply - TIL must be delivered no less than 7 days before closing.

33 Truth in Lending AKA Regulation Z APR Finance Charge Total Loan Amount Sales Price Other terms such as number of payments, amount of payment, when payments are due, prepayment penalties. Just because the loan bears no interest, does not mean there is no finance charge for purposes of TIL.

34 Conclusion Proper loan and mortgage documentation is critical to protecting your affiliate s rights in its mortgage portfolio. Always work with your local attorney to make sure your documents are properly drafted, executed and recorded. 34

35 More Resources Please see these additional Mortgage Fundamentals resources, available on the MPAR homepage of My Habitat: Sales price worksheet Glossary of Commonly Used Mortgage Terms Mortgage fundamentals checklist U.S. Policy Handbook on My.Habitat: Habitat House Pricing Policy (No. 23), Policy Advisory Statement 23, Mortgage Policy (No. 24), Sustainability Policy (No. 28), Authorized Financing Options (No. 29) RESPA/TILA Resources

36 More Resources Other MPAR resource collections include: Servicing Standards and Practices Delinquency and Foreclosure Protection Dodd-Frank Wall Street Reform Act RESPA/TILA SAFE Act Anti-Money Laundering Program And more.

37 Questions? Additional questions may be directed to the Affiliate Support Center or ) Other HFHI Contacts: - Natosha Reid Rice - Sonia Lee - Joe Honeycutt - Tera Doak 37

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