Glossary of Real Estate Terms
Abandonment – The intentional relinquishment of a known right. For example, by vacating a home and turning the keys over to the lender with a written statement indicating that the owner is giving up all right, title and interest to the property.
Abstract of Title – A summary of the documents recorded on the public record pertaining to the “chain of title” to a particular property. The abstract of a title is then reviewed for accuracy by an attorney. This process is not used in Oregon to determine the marketability of title being transferred. In Oregon, title companies (see definition) provide the parties with a “preliminary title report” summarizing the matters appearing on the public records, and then upon closing, issue a policy of insurance guarantying the marketability of the title subject to certain stated exceptions in the policy.
Acceleration – The process of calling the entire principal balance of a loan due and payable, when a default has occurred and was not cured in time. Acceleration of the unpaid principal balance upon default cannot occur unless the loan documents, usually the promissory note, contain an acceleration clause.
Acceptance – The method of creating a legally binding contract. When an offer is “accepted” on the same terms as the offer and that acceptance has been communicated back to the person or entity making it, it is said there has been a “meeting of the minds” and a legally binding contract is created. The person or entity making the offer is the “offeror” and the recipient of the offer is the “offeree.” If the acceptance is made upon different terms than the offer (that is, it varies the terms of the offer) it is a rejection of the offer and constitutes a “counteroffer.”
Acknowledgment – A process for determining that the person signing a legal document is, in fact, that person and that they are signing the document voluntarily. The identity of the signer (“the declarant”) is verified at the time of signature by a licensed notary who then affixes an official seal or stamp to the document. In Oregon, notaries are required to verify the signer’s identity through a reliable means of authentication and keep detailed records of each notarization. In Oregon, all documents transferring an interest in real property must be notarized before it will be taken by the official clerk for recording in the public records.
Addendum – A document added to an agreement either at the time of execution (signing) by the parties, or thereafter. If properly prepared and signed, the addendum becomes a legal part of the original agreement. Multiple addendums to a document are sometimes collectively referred to as “addenda.”
Adjustable Rate Mortgage (“ARM”) – A loan in which the stated interest rate can “adjust” or change, usually based upon the rise or fall of an identified index that is widely used. ARMs are typically subject to “caps,” or limits, on the amount of any single interest rate adjustment and on the total interest rate change permissible over the life of the loan.
Administrator – A person appointed by the court to carry out the probate of the estate of a deceased person who died without a will (or if there was a will, no personal representative was identified).
Adverse Possession – A real estate concept holding that if a person meets certain necessary conditions (or “legal elements”) for a consecutive number of years, they will be deemed to have become the legal owner of the property. It requires, among other things, that the person holds the property “openly” as their own and to the exclusion of others, without the record owner’s consent, and for a statutorily fixed period of time (called “the statute of limitations”). The statutory period in Oregon is ten (10) years and all of the legal elements must co-exist for at least that period of time to claim title by adverse possession. [PCQ Note: Subject to certain requirements, Oregon law permits “tacking,” which allows one adverse possessor to “tack” or add, their time of possession to that of their immediate predecessor(s) in order to reach the ten year minimum holding period.] Oregon has a statute that became effective in 1990 which prohibits one from claiming title by adverse possession unless they reasonably believed they were the legal owner of the property in the first place. (See, ORS 105.620) [PCQ Note: This statute only deals with time periods running on and after January 1, 1990. The “reasonable belief” requirement does not apply to the time period before then. This means that prior to January 1, 1990, one could acquire title by adverse possession even though they knew the land was not legally theirs.] In order to claim title by adverse possession, or to resolve a dispute as to whether an adverse possessor’s claim has ripened into ownership, a party must initiate a legal proceeding against the other, sometimes called a “suit to quiet title.” (See, ORS 105.605) In Oregon, there is no attorney fee entitlement to the prevailing party in adverse possession claims. In order to prevail, proof of adverse possession must be established by clear and convincing evidence.
Affidavit – A written statement of facts sworn to be true by the person making it. That person is called the “Affiant.”
Agent – Designates a person or entity authorized to act for and on behalf of a third party (known as the “principal”). The law generally imposes certain “fiduciary duties” such as good faith, fair dealing, honesty, full disclosure, etc. on agents when acting on behalf of their principal. Oregon real estate law, like most states, imposes these fiduciary duties on real estate agents. (See, ORS 696.800-696.995 governing the fiduciary duties of real estate agents.)
ALTA – Acronym for the “American Land Title Association,” which is the national industry organization that establishes standards, guidelines and forms for title insurance companies.
Alt-A Loans – These loans were a staple of the lending industry during the easy credit years of 2004 – 2007. The term “Alt-A” refers to a category of mortgages that based upon risk of default, are somewhere between subprime (i.e. the highest potential for default) and prime (i.e. loans given to the most qualified borrowers). Similarly, the borrower’s interest rate, which is the primary indicator of perceived loan risk, is generally higher that prime rates, but lower than sub-prime.
Amenities – A general term usually referring to the overall beneficial features of a property, such as the landscaping, a pool, gardens, etc.
Amortization – The gradual reduction of the principal balance of a loan resulting from periodic payments by the borrower. Once the last payment is made, it is said that the loan has been “fully amortized.”
Anticipatory Breach – Under contract law, the words or conduct of one obligated under a contract indicating that they have no intention of honoring the contract in the future. Under certain circumstances, such a declaration or conduct can be deemed sufficient to permit the non-breaching party to bring legal action immediately, without waiting for the actual breach to occur.
APR – Acronym for “annual percentage rate,” meaning the yearly cost of a loan, stated as a percentage of the original amount of the principal. However, APR is more than just the simple interest charged for the loan and includes other costs, such as points paid and certain other fees and charges. Thus, it can be a useful tool for comparing loans, since the APR gives the borrower the ability to compare the loan cost between different lenders.
Appraisal – The process of establishing the fair market value of a property. There are three different methods of appraisal of real property. For residential, the “market data” approach is the most common and involves an analysis of recent comparable sales of similar properties. Lenders require appraisals of property in order to establish how much to lend. If the bank’s appraised value is less than the sale price, the bank will only loan against the appraised value. The standard statewide sale form in Oregon published by Oregon Real Estate Forms, LLC [PCQ Note: Hereafter, this company will be referred to as “OREF”] contains a buyer contingency saying that if the property does not appraise for at least the appraised amount, the buyer may withdraw from the transaction and recover back their earnest money deposit.
Appreciation – The increase in market value of a property. It is the opposite of “depreciation.”
Arbitration – The process of private dispute resolution whereby one or more arbitrators are appointed or selected to decide a legal dispute. There is no jury. Depending upon state statute and the rules of arbitration that the parties have agreed upon, the parties may or may not be able to appeal or otherwise contest the decision of the arbitrator(s). Arbitration is strongly favored by the courts and judges as it removes cases from their overburdened judicial system. In Oregon, as in most states, the disputants cannot be required to arbitrate unless both have contractually agreed to do so in writing. However, Oregon does require that money claims of $50,000 or less must first go into mandatory arbitration, and only then can they go into the court system if one of the parties does not like the arbitrator’s decision. Unless one of the parties seeks to have the award filed in court, the outcome of the arbitration is a private matter and does not appear on any public records. The arbitration hearing – contrary to a court hearing – is not open to the public.
AS-IS – A term used to mean that one is transferring property in its existing condition, with all defects, apparent or not apparent. In most parts of the country, including Oregon, an “AS-IS” sale does not mean that the seller may conceal known material defects from the buyer.
Assessed Value – The value placed on real property by an assessor, such as the tax assessor. The “assessed value” is not the same as the appraised value (which is frequently higher).
Assessment – A charge made against a property, usually by a governmental entity, for taxation purposes or to recover the cost of some expenditure, such as a public improvement. Assessments – or the right of assessment – frequently appear on the public record and are picked up in preliminary title reports that are issued at the inception of a real estate transaction.
Assessor – A governmental officer responsible for assessing property for tax purposes. The assessor may or may not be the same as the tax collector, depending upon the city or county.
Asset – Something of value. It is the opposite of a liability, which on a balance sheet represents a charge against assets.
Assignment – The act of transferring certain rights, duties and obligations to a third party. In order to be effective, the third party, known as the “assignee,” usually must agree to assume these rights, duties and obligations. Most assignments do not automatically relieve the person making the assignment, known as the “assignor,” from liability for the obligations assigned.
Assumable Loan – A loan made to a borrower that the lender may permit to be transferred and assumed by another party. Most conventional loans today are not assumable, and in fact, if the property upon which the loan is made is transferred, the lender typically may call the entire loan due and payable. This remedy is contained in a “due on sale” or similar clause, found in most loan documents today. In the 1970s many loans were assumable, but at the end of the decade, when interest rates had climbed to 18% or more, lenders discontinued the practice of permitting loan assumptions – or if they did, the assumable rate was readjusted to reflect the current rate.
Attorney-in Fact – One acting under a written power of attorney on behalf of another. The attorney-in-fact’s authority is limited exclusively to the powers enumerated in the written document.
Attornment – A provision frequently found in commercial leases providing that the tenant agrees in advance to continue to be bound under the lease to the landlord’s successor should the landlord voluntarily transfer ownership of the property or should it be involuntarily transferred to a third party through foreclosure.
Automated Underwriting – The process of evaluating and deciding upon whether to make a loan based upon a computerized evaluation of the borrower’s credit credentials, thus eliminating any personal bias or subjectivity in the loan approval process.
Back-End Ratio – See Debt-to-Income Ratio (“DTI”), below.
Back-Up Offer – An offer, such as an offer to purchase real property that is made by a buyer and accepted by the seller with the written agreement that it does not become effective unless the prior accepted offer is terminated or withdrawn.
Balance Sheet – A financial statement showing assets and liability of a person or company. The difference between the assets and liabilities is called “net worth.”
Balloon Payment – A lump sum payment of unpaid principal made to the lender. It may be scheduled in the loan documents or, if the loan permits, by full or partial balloon payments, at any time the buyer decides to do so. A full balloon payment would be the sum necessary to pay off the entire loan, whereas partial balloon payment would not. Most loan documents provide that making a partial balloon payment will not excuse the borrower from continuing to make the remaining regularly scheduled payments of principal and interest. Frequent partial payments, such as every two weeks (rather than monthly) will have the effect of dramatically (a) reducing the total interest paid over the life of the loan and (b) accelerating the date the principal loan balance will be completely paid off.
Bankruptcy – A process under federal law whereby a debtor asks the court to take control of their non-exempt assets, if any, liquidate them, and distribute any proceeds to the unsecured creditors in full satisfaction of all of the bankrupt’s liabilities. This is known as a “Chapter 7 Bankruptcy.” Secured creditors typically have more protection in bankruptcy because they have the first right to attach and liquidate their security interest in the bankrupt’s assets. During the period of any bankruptcy all creditors are strictly forbidden from attempting to secure payment directly from the debtor without permission of the court. A Chapter 13 Bankruptcy sets up a payment plan between the borrower and the major creditors to be monitored by the court. The homeowner can keep the property, but must make payments according to the agreed-upon terms of the plan within a 3 to 5 year period.
Bargain and Sale Deed – One of the four major deeds used in Oregon. A bargain and sale deed conveys legal title to real property, but the grantor (the one making the conveyance) gives no warranties to the grantee (the one receiving the conveyance) regarding the quality of the title being conveyed. With certain exceptions, such as boundary encroachments, adverse possession, and other issues not appearing on the public record, taking title through a bargain and sale deed is not particularly risky, so long as the grantee obtains a policy of title insurance that includes extended coverage. As for off-record title defects such as encroachments and adverse possession, the risks can be minimized by (a) a survey, where appropriate, (b) locating boundary pins through a physical inspection, and (c) generally making sure that fence lines, outbuildings, and shrubbery are located on the appropriate property. A pre-closing discussion with adjacent neighbors is useful to find out if there are any disagreements over boundary lines. (See, ORS 93.860)
Basis – In reference to real estate, the “basis” is the acquisition cost, sometimes called the “cost basis.” The cost basis is adjusted upwards by certain expenses related to the acquisition such as escrow fees and closing costs. If capital improvements are made to the property the cost of those improvements are also added to the original basis. These upward adjustments result in an “adjusted basis.” To determine the amount of capital gain from the sale of real estate (excluding factors such as depreciation, etc., for income properties) the adjusted basis is subtracted from the sale price. [PCQ Note – This is intended to be a very simplified and lay explanation and should not be used in calculating taxes or other financial consequences arising from any specific sale or disposition of a capital asset. An expert in tax and accounting should be consulted.]
Beneficiary – The person receiving a specified benefit under a trust, will, or a contractual provision. The beneficiary of a trust is the person or entity designated to receive some asset, money, or other consideration. In trust deed law, the beneficiary is the lender to whom repayment of the loan is to be made.
Bill of Sale – This is the instrument that conveys title to personal property from one party to the other. Its purpose is similar to that of a deed to real property – except that it conveys one’s interest in personal property.
Biweekly Payments – The payment of a loan twice a month. The effect of this arrangement is to reduce principal sooner, which means that there is less interest cost over the life of the loan. This arrangement also significantly accelerates the ultimate payoff of the entire principal loan balance.
Blanket Mortgage or Trust Deed – A mortgage or trust deed secured by more than one parcel of property. Frequently, when such an arrangement is established with a lender, the borrower insists upon a “partial release” provision, in order to allow parcels to be released from the lien of the blanket encumbrance as portions of the indebtedness are paid.
Bona Fide Purchaser – The term “bona fide” is Latin for “good faith.” A bona fide purchaser (or “BFP”) is one who pays full and fair consideration for a property, acting in good faith, and without notice of any adverse claims against the property. The law gives certain legal preferences to BFPs when there are competing claims to purchase the same property.
Bond – A written agreement or undertaking by a company that guarantees to third parties (such as a homeowner) that a person or company (such as licensed builders) will perform in accordance with the terms of their contract. In Oregon all licensed builders are required to be bonded. If the builder fails to properly perform, the homeowner may make a claim against their bond. A bond is different from insurance, since the bonding company has the right to come back against the builder for recovery of any moneys they paid in claims on his or her behalf. In financial or investment terms, a “bond” is a long-term debt obligation issued by a company or government. Bonds are generally sold by the issuer to finance other acquisitions and purchased by the investor for the interest rate returns offered.
Breach of Contract – A violation of, or failure to perform, the terms of any contract without legal excuse. Most written contracts provide for legal remedies for a material breach of the contract.
Bridge Loan – A loan given by a lender for a short period of time. Bridge loans were frequently given to “bridge” or cover the carrying costs (such as mortgage payments) for a borrower who had acquired a second residence, but had not yet been able to sell their first home. Bridge loans are less frequent today due to the tightening of credit standards and slowing of housing sales.
Broker – An intermediary involved in the sale of a product or service, such as a stock broker, mortgage broker, insurance broker, business chance broker, or real estate broker. In many states there is a two-tiered system, whereby a real estate broker is a person who supervises licensed real estate sales associates. Some brokers also represent buyers and sellers of real property in addition to their supervisory responsibilities. In Oregon the terminology is somewhat different – and confusing for the public. Today, all real estate licensees are “brokers” unless they are “principal brokers.” There are additional time and testing requirements to become a principal broker. Until 2010, “principal brokers” could only hold that designation if they were responsible for supervising other brokers. Now, principal brokers do not have to supervise in order to earn that designation, which has resulted in an informal distinction being created called “managing principal brokers” to distinguish them from non-managing principal brokers. ORS Chapter 696 is the state law governing all real estate licensees, residential and commercial. The administrative rules for real estate licensees are found at Oregon Administrative Rules Chapter 863.
Broker Price Opinion (“BPO”) – The opinion issued by a licensed real estate broker, concerning the present value of a property for resale purposes. Banks frequently obtain BPOs from brokers prior to deciding whether to modify a loan, accept it back in lieu of foreclosure, or take some other action regarding a distressed property. BPOs are not “appraisals,” although they may both reach similar conclusions regarding present value. However, in Oregon, appraisals may only be issued by state licensed appraisers.
Building Code – The regulations governing construction of all structures including residential, commercial and industrial properties. Most jurisdictions within a state, including the state itself, have their own building codes. The Uniform Building Code (“UBC”) is a uniform set of standard building codes that has been widely adopted throughout the country.
Building Permit– A permit granting one to commence certain types of construction. While some work does not require a permit, such as the painting of a home or similar minor cosmetic improvements, most jurisdictions have building departments governing whether and when a permit is necessary. Once issued (for a fee), the jurisdiction then checks the improvement at various stages to confirm that all building and safety codes have been followed. Some cities and counties have this information on-line thus enabling buyers to easily determine if certain improvements were performed with or without a permit. Unpermitted work usually means that it was never checked for code compliance by a building official. Oregon’s Seller’s Property Disclosure form asks if permits were obtained when improvements have been performed on the home.
Business Day – Usually Monday through Friday, excluding state and national holidays. In Oregon the definitions are contained in ORS 187.010 and 187.020.
Buy Down – The cost, expressed as a percentage of the loan, as “points” or in dollars, to reduce the stated interest rate charged on that loan. In effect, it is a prepayment of interest at the com mencement of the loan in order to bring down the effective interest rate on the unpaid principal. Buy downs can be for a short term period (one to five years) or for the life of the loan.
Cancellation of Debt (“COD”) – This is the term used to refer to any event in which a debtor (e.g. a borrower under their note and mortgage) is forgiven of the duty to repay the balance owed on their debt. Subject to several exceptions, the IRS taxes COD income at the debtor’s ordinary income tax rate. Foreclosures, deeds-in-lieu, short sales and even loan modifications may all be taxable COD events. For distressed homeowners, an important exception to the COD tax is the Mortgage Debt Relief Act of 2007, which expires at the end of 2012. Subject to certain exclusions (e.g. non-principal residences or non-purchase money home loans), this federal legislation permits taxpayers to exclude taxable COD income arising from the discharge of debt on their principal residence. For more information, see IRS Code §108. [PCQ Note: Capital gains under IRS Code §121 is not a part of the Mortgage Debt Relief Act of 2007.]
Central Oregon Association of Realtors® (“COAR”) – The local Realtor® organization for Realtor® members in Central Oregon. It is headquartered in Bend, Oregon.
Cap – The maximum limit placed on an adjustable rate mortgage (“ARM”). For example, the ARM may have a cap on the amount of any periodic interest rate increases, as well as maximum interest rate cap over the life of the loan.
Capital Asset – An asset held for investment by the taxpayer that receives more favorable tax treatment. Capital assets are best defined by what they are not, such as inventory, property held for resale, real or personal property used in a trade or business, certain copyrights, etc. A taxpayer’s residence or rental property (assuming the rental property is not held as a part of a trade or business) are capital assets. Capital assets are usually not liquid and have a long term useful life, such as land, buildings, equipment, etc.
Capital Gain – The gain received by a taxpayer upon sale or other disposition of a capital asset. Gain is measured by the profit received based on the difference between the original purchase price (original basis), adjusted upward based upon the addition of capital improvements, and the total sale price.
Capital Improvement – Any material improvement to a capital asset (usually structural, such as a new furnace, a new addition, new garage, etc.) that generally increases value or adds to its useful life over one year. The cost of a capital improvement is added to the original basis of the property (generally the purchase price) when calculating any capital gains (or losses) upon resale. Not all improvements are regarded as “capital improvements” even though they may improve the appearance of the property or make it more valuable. Routine repair or maintenance is not a capital improvement.
Casualty Insurance – Insurance covering loss from damage to property resulting from risks such as fire, wind, earthquake, etc.
Certificate of Eligibility – The document used by the federal Department of Veterans Affairs (“VA”) to certify that the veteran is eligible for a guaranteed loan. The certificate can be obtained through a VA approved lender, the VA website or by mail.
Certificate of Reasonable Value (“CRV”) – The document used by the federal Department of Veterans Affairs to designate its opinion of value based upon an appraisal and the maximum allowable loan amount it will permit.
Chain of Title – The successive conveyances of title (usually, but not always by deed) to improved or unimproved real property. The chain usually starts from the federal land patent and continues by successive conveyances of record to the present day. A “clean” chain of title would indicate that there were no unbroken “links” in the chain, that is, all of the prior recorded owners properly conveyed their interest to their successor owners.
Clear Title – Usually designates that the property is “marketable,” that is it is clear of any objectionable liens or encumbrances. If property is not “clear,” it is not marketable.
Closing – Sometimes known as “settlement,” especially on the East Coast. Closing is the time at which title is conveyed by the seller in exchange for full payment by the buyer and the recording of the deed in the public records of the county in which the real property is located. Closing is also the time at which title to the property must be cleared, usually by the payoff of all loans, judgment or tax liens. The closing date is normally set forth in the sale agreement. In Oregon, almost all closings are handled by licensed escrow companies that also act in conjunction with a title insurance company. Attorneys are exempted from the escrow licensing requirement, but rarely close real estate transactions in Oregon.
Closing Costs – The charges paid at the time of closing and include such things as the title insurance premium, prorated items such as prepaid property taxes, costs of escrow, recording fees, real estate commissions and lender charges.
Cloud On Title – An expression referring to any matter appearing on the public record that negatively affects the marketability of title to real property.
Collateral – The property used as security for repayment of a debt. The security is in written form and recorded in the public records where the property is located. In Oregon the written security interest is known as a “trust deed” or “deed of trust” and recording gives notice to the world that the property is subjected to the lender’s interest which acts as a “lien” on the property. If the borrower defaults on the loan, the lender may foreclose their trust deed on the land that is the “collateral.” If something is “collateralized,” it means that some or all of it is secured, usually to a lender who loaned money for its purchase.
Collateral Debt Obligation (“CDO”) – A generic term used to describe any security that collateralizes the cash flows generated by a pool of debt obligations. If the securitized pool consists of mortgages, it is called a “Collaterized Mortgage Obligation” or “CMO”; A “Commercial Mortgage-Backed Security” is a “CMBS.”
Collection Account – An account, usually handled by a licensed escrow, set up between seller and buyer for purposes of collecting the buyer’s payments, depositing them in the bank, remitting payment to the seller, paying the property taxes and hazard insurance, and maintaining an accounting for the parties. Collection accounts are not uncommon when property is sold on a land sale contract. Sometimes the seller places a pre-signed fulfillment deed in escrow with instructions to record it when the entire contract balance is paid in full.
Commission – In real estate brokerage law, the charge made (usually to the seller) for marketing a property and procuring a ready, willing and able buyer. Agreements to pay a commission are commonly addressed in the listing agreement between the seller and seller’s agent. If the buyer has a separate real estate agent, a portion of the gross commission is split with that agent. Commissions are normally paid at the time of closing from the seller’s gross proceeds of sale.
Commitment Letter – A letter issued by a lender indicating its willingness to make a loan to a borrower based upon certain pre-set conditions and assumptions.
Common Area – In condominiums and planned community developments, common areas usually consist of the land, structures and other amenities owned by an association of unit owners, or home owner associations, for their common use and enjoyment. All costs of the common areas, such as maintenance, repairs, taxes and insurance are shared proportionately based upon a formula and prorated among all owners (called “common area (or “common elements”) assessments”).
Community Property – A form of joint ownership of property between husband and wife, regardless of whether both spouses are on title. Applies primarily to all real and personal property acquired during the marriage and is the basis of dividing the marital property upon divorce. Each state’s laws are different regarding ownership of spousal property. Oregon is not a community property state, although upon divorce in Oregon a court can divide or apportion property as it sees fit based upon the parties’ specific circumstances such as the length of the marriage, available liquid funds, earnings, earning potential, etc.
Comparables – In establishing residential real property values, real estate agents and appraisers rely most heavily on the use of comparables or “comps,” which consist of property sales data obtained by a review of the most recent arms-length transactions (that is, not between related parties, etc.) of similar properties in similar neighborhoods. The motive for selling affects the validity of a comp, since short sales and other distressed transactions reflect prices in which the seller is operating under different motivations than obtaining the highest and best price.
Common Law – The basis of American jurisprudence first established in England and then adopted and developed in the United States. Common Law is based upon “precedent,” that is, earlier court decisions developed over time. The Common Law does not include statutory laws or administrative laws enacted by the legislative or executive branches of government.
Community Property – A form of joint ownership of property between husband and wife, regardless of whether both spouses are on title. Applies primarily to all real and personal property acquired during the marriage and is the basis of dividing the marital property upon divorce. Each state’s laws are different regarding ownership of spousal property. Oregon is not a community property state, although upon divorce in Oregon a court can divide or apportion property as it sees fit based upon circumstances such as the length of the marriage, available liquid funds, earning potential, etc.
Comparative Market Analysis (“CMA”) – An analysis performed by a licensed real estate broker by comparing and analyzing the prices of recent sales of comparable properties. The Oregon statute refers to CMAs as a “competitive market analysis” for unknown reasons, but it is the same thing. (See, ORS 696.010(7)) Similar to BPOs (“Broker Price Opinions”), CMAs are not “appraisals” even though the process and outcome of the analysis may be similar.
Conditions, Covenants and Restrictions (“CC&Rs”) – The legally enforceable deed restrictions that are recorded on land by a current or prior owner. Since they are binding upon all who subsequently purchase the property encumbered by the restrictions, they are said to “run with the land,” meaning that they continue indefinitely. They regulate such things as permitted uses for the property (such as single family residential) and impose certain architectural controls, etc. In Oregon, CC&Rs that discriminate against certain constitutionally protected classes (for example, race, religion, etc) are unenforceable today by statute.
Condominium – A unique form of property ownership in which the owner (called the “unit owner”) acquires the interior space of a unit together with the exclusive right to use other portions of the property, such as the deck and/or parking space (known as “limited common elements”) and a nonexclusive right to use other portions, such as a clubhouse, hallways, etc. (known as “general common elements”). Governance regarding enforcement of the recorded rules (called the Declaration), and corporate regulations such as bylaws, is through a Unit Owners’ Association which has the power to assess dues to cover maintenance, repair and replacement of limited and general common elements. (See, ORS Chapter 100)
Condominium Conversion – The creation of a condominium form of ownership from a pre-existing structure, such as an apartment building or multi-plex structure, thus allowing the owner/developer to sell individual units within the structure. The conversion process is governed by statutes found in ORS 100.300 – 100.320.
Conforming Loan – A loan that complies with the guidelines set by one of the two GSEs, the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). The best known guideline is the maximum amount of such a loan which is $417,000 in most parts of the country but under the Economic Stimulus Act of 2008, was amended and raised to $729,000 in high cost areas.
Consideration – Anything of value that is given in exchange for something else. It can consist of something tangible, such as money; an act, such as performance; or forbearance to act, such as an agreement not to sue. Contractual agreements must be supported by some form of consideration in order to be enforceable.
Construction Loan – A loan made for purposes of constructing a structure. Construction loans are short term and not the same as “permanent loans.” Partial payment of the construction loan (known as “draws”) are usually tied to the lender’s verification that certain stages of the project have been completed.
Contingency – A provision in a contract that ties its performance, completion or enforceability to the occurrence (or sometimes non-occurrence) of a designated event. Most real estate transactions contain several contingencies, such as a professional inspection, appraisal, financing, condition of title, etc. For example, a buyer may make the purchase of a home contingent upon the sale of his or her existing home. Most – but not all – contingencies are usually for the buyer’s benefit.
Contract – An agreement between two or more parties to take some sort of action (e.g. the sale and purchase of real property) or to refrain from taking action (e.g. an agreement to settle all disputes and release all claims). There are several “elements” that go into making a binding contract, such as an offer; acceptance on the same terms as the offer; consideration (something of value between the parties), etc. An acceptance of an offer that materially varies from, or attempts to change, the terms of the offer, is regarded as a rejection of the offer and is called a “counter-offer.”
Contribution – A legal action usually brought by a defendant against whom a money claim has been made, against a third party, in an effort to recover some or all of the moneys sought against that defendant. A defendant’s right of contribution against a third party is usually based upon a contractual, statutory, or common law (i.e. case law precedent) duty to share in, or pay, the cost of the claim brought against the defendant.
Conventional Loan – A loan from a private bank or other institutional lender as opposed to one guaranteed or insured by the federal government.
Conversion Clause – A clause in a loan containing an adjustable interest rate that permits the borrower to “convert” it to a fixed rate loan for the balance of the term. The new fixed term interest rate is usually tied to some well-known index or rate. These types of loans are sometimes called “Convertible ARMs.”
Cooperative (Co-op) – A form of ownership in which an entity, such as a nonprofit corporation, owns a multifamily residential property. The individual shareholders have a right to live in a designated unit through a long term lease and bear a prorata share of the costs and loan payments. Co-ops are rare on the West Coast. Some co-ops impose strict exclusivity requirements based upon financial capacity and the shareholders have a right to vote on whether a particular purchaser will be permitted to acquire a unit.
Counter-Offer – The rejection of an offer that proposes new or different terms to a pending offer.
Covenant – A promise. In real estate transactions, covenants are usually found in written and recorded documents affecting (and frequently limiting) the use of the property. These documents are often referred to as “CC&Rs,” or “Conditions, Covenants and Restrictions.” Most CC&Rs are legally enforceable by the person(s) benefited by them. In Oregon, CC&Rs that discriminate against certain constitutionally protected classes (such as race, religion, etc) are unenforceable today by statute.
Credit – In lending, the extension of “credit” is the making of a loan subject to certain repayment terms.
Credit Bureaus – Companies that for a fee provide consumer information and data on the payment histories of people who have consumer loans, credit cards, or other financial obligations such as rental history.
Credit Counseling Services – Public or private agencies that help educate consumers on controlling or avoiding spending, and the accumulation of debt.
Credit Default Swaps (“CDS”) – These exotic financial instruments acted as a loose and unregulated form of insurance (which ultimately took on the appearance of wagers) that paid the insured if a particular obligation, such as a mortgage backed security (“MBS”) defaulted. (See, definitions of Moral Hazard,” “Securitization,” and “REMICs”, below.) Not only did the issuers of the MBS instruments purchase CDSs, but strangers to the underlying transactions bought them. Ultimately the volume of such activity created a separate CDS market creating an appearance that CDS purchasers were betting that certain investments would fail – which they ultimately did. American International Group (“AIG”), the giant international insurance company, was a primary issuer of CDSs, and became so top-heavily invested in this side of their business, that when the MBSs and other securitized debt failed, it was unable to pay the investors who purchased the swaps. The result, a $182 billion bailout for AIG that resulted, in part, because risk could be quantified, sold, and traded for profit.
Credit Rating Bureaus – These are firms that rate the quality of bonds and other securities such as packaged mortgage investments. Investors rely upon the ratings in order to evaluate risk and the probability of default. The best known rating bureaus are Standard and Poors, Fitch, and Moody’s. The Securities and Exchange Commission regulates the ratings bureaus.
Credit History – The record of one’s repayment of debt. Credit history is used to evaluate one’s fitness for loan repayment as well as judging the risk of default, which is reflected in the interest rate charged. The greater the risk, the higher the rate. Credit history is reflected in a report and is often accompanied by a credit “score” such as a “FICO” score.
Credit Report – A written report containing detailed information about a consumer’s credit history. It includes such things as all identifying information and past names, open and closed credit accounts, loans, bankruptcies and late payment history. Some credit reports also disclose recent credit inquiries. Credit reports are ordered (with the borrower’s consent) by prospective lenders, to determine their creditworthiness and ultimately their ability to repay the loan applied for.
Credit Union – Member-owned non-profit lending institution that provides certain financial services including savings accounts and lending. Joining a credit union frequently requires that one belongs to a participating entity, such as a school district or other large employer.
Creditor – One to whom a debtor, such as a borrower, owes money.
Debtor – The person or entity owing money to a creditor such as a bank or other lender. In real estate finance, the “debtor” is the borrower.
Debt-to-Income (“DTI”) Ratio – The relationship between one’s monthly debt versus their monthly income. The total monthly debt service on one’s loan (that is, principal, interest, taxes, insurance and HOA dues) versus their gross monthly income from all sources, will yield a ratio called “the front-end DTI.” One’s total reoccurring monthly expenses (both housing and non-housing) compared to their gross monthly income is known as the “back-end DTI.” Although ratios may vary, many conventional lenders insist that borrowers’ front-end DTI not exceed 28% and their back-end DTI not exceed 36%. The lower these ratios, the better one’s chances are to obtain a loan.
Deed –The document used to convey title to real property. An owner who makes the conveyance by deed is the “grantor” and the person acquiring the title is the “grantee.” Deeds are normally recorded in the public records at the time of closing of the transaction. In Oregon there are four primary types of deeds; each differs based upon the representations the grantor makes to the grantee about the quality of the title. In order of protection to the grantee (from the most to the least), they range from Warranty (or General Warranty) Deed, Special Warranty Deed, Bargain and Sale Deed, and Quitclaim Deed.
Deed-in-Lieu-of- Foreclosure – A deed given by a borrower to the lender transferring title in the secured property back to the lender. Although it avoids the unpleasantness of going through a foreclosure, legal advice should be obtained before giving property back in this manner, as there can be unintended legal and tax consequences.
Default – The failure to honor the terms of a contract. Most contracts, such as a note and mortgage or trust deed, require that written notice of default be given before the lender may institute foreclosure action. A default is not necessarily the same as a breach of contract. Some defaults may be cured. An uncured default becomes a breach and provides the basis for one to take legal action.
Defendant – One against whom a lawsuit is filed in court. In arbitration the defendant is called the “respondent.”
Deficiency – In its most general sense, a “deficiency” is any shortfall in the repayment of a debt or other financial obligation.
Depreciation – In real estate terminology, the loss in value of property due to market conditions, age, excess wear and tear, and other causes. In income tax terminology, depreciation of certain property is a deductible item representing the cost of replacement over the life of the asset.
Desk Top Underwriting (“DU”) – A proprietary computer program used by Fannie Mae to evaluate loan applications, including the borrower’s financial and credit history and information about the subject property.
Discount Points – A “point” is normally equal to 1% of the amount of the loan. Points are paid for purposes of reducing or “buying down” the interest rate on a loan. By reducing the interest rate, the monthly payments are also reduced, meaning that it becomes more affordable to those whose income would not qualify them for a higher monthly installment. Points are a form of pre-paid interest and thereby increase the lender’s yield on the loan.
Distressed Housing – Residential housing that has lost value when compared to its value when originally purchased. Frequently, distressed housing is also characterized by a mortgage and/or other liens that together exceed the price the home can be sold for today.
Distressed Transaction – Any type of real estate transaction in which the seller is compelled to sell or transfer the property back to the bank or to a third party due to adverse factors such as the inability to refinance a loan coming due, a falling real estate market, lack of renters or buyers (if investment, retail or commercial property) or other similar factors. Examples of distressed transactions include transfers by deed-in-lieu-of-foreclosure, short sales, etc. Distressed transactions are primarily characterized by a property that has lost significant value, usually below the total indebtedness due on it and/or mortgage repayment terms that the borrower can no longer meet.
Domestic Partnership – In Oregon, a 2008 Iaw known as the Oregon Family Fairness Act that permits same sex couples to register as domestic partners. A Declaration of Domestic Partnership form must be signed and notarized before it can be accepted. On January 1, 2010 domestic partners can now document the legal name each will use after the Declaration is filed. For more information see: http://www.oregon.gov/DHS/ph/chs/order/dp.shtml
Down Payment – The principal amount paid at the time of closing that represents the buyer’s cash contribution toward the purchase price of a property. Down payment includes any pre-paid earnest money deposit. The balance of the purchase price is the amount financed, either by a lender, the seller, or a combination of the two. An 80% loan would mean that 20% of the purchase price is represented by the buyer’s down payment.
Dual Agency – In real estate brokerage terminology, dual agency means that the listing agent (that is, the seller’s agent) or the listing agent’s company also represents the buyer in the same transaction. Each state has its own statutes, regulations and disclosures regarding dual agency. In Oregon, dual agency is legal if properly documented. It is called “disclosed limited agency.” (See, ORS 696.800(4))
Due on Sale Clause – A clause in a loan that permits the lender to declare a default should the borrower/owner convey the property to a third party without the lender’s written approval. Most due on sale clauses are very detailed and prohibit any form of transfer of the property or any interest therein, including the right of possession through rental or lease.
Earnest Money Agreement – A real estate sale agreement where the parties, i.e. seller and buyer, agree upon the price and terms of the sale. The agreement usually includes some payment or agreement to pay an “earnest money deposit” (or “binder” or “good faith money”). If the buyer fails to perform, the agreement usually contains a provision for the forfeiture of the deposit to the seller. If properly prepared, executed and signed, an Earnest Money Agreement is a binding contract, the breach of which can result in various remedies to the injured party. The term “Sale Agreement” is frequently used interchangeably with “Earnest Money Agreement.”
Earnest Money Deposit – A deposit made by a buyer that accompanies the offer of purchase. Some deposits are by check, but most frequently they take the form of a promissory note redeemable within a certain period of days following seller acceptance of the offer. In Oregon, the standard real estate form sale agreements published by Oregon Real Estate Forms LLC (“OREF”) provide that the earnest money deposit will be forfeited to the seller if the buyer defaults or fails to close without legal excuse. The printed form also provides that retaining the deposit is the seller’s sole remedy. However, if the transaction fails to close due to the seller’s default, or the failure of a buyer contingency such as financing, the entire deposit is to be refunded, although this does not limit the buyer from exercising any other legal remedies against the seller.
Easement – A legal right of use (as opposed to possession) over a parcel of land. The easement, which should always be recorded, sets out the prescribed use to which it will be used, such as access, installation and maintenance of utilities, views, etc. A well-drafted easement will also address other issues, such as (a) The duty and cost to maintain the easement area; (b) Insurance; (c) Methods of dispute resolution; (d) Whether the easement is permanent or limited in duration, and; (e) Whether it is exclusive or nonexclusive. The person whose property is encumbered by the easement is the “servient tenant” and the person benefitted is the “dominant tenant.” The use of an exclusive easement is limited to the dominant tenant and a non-exclusive easement means that both the dominant and servient tenants may use it. In drafting, it is important that the intended use be clearly defined, as a use by the dominant tenant that exceeds the permitted use can be prohibited by the servient tenant. This is called “overburdening” the easement.
East Metro Association of Realtors® – The local Realtor® association for Realtors® whose business is primarily located in the east county portions of the Portland-Metro area. It is headquartered in Gresham, Oregon.
Eminent Domain – The power that a government (federal, state, municipal) and certain quasi-government agencies have to take private property for public use. The landowner receives payment based upon the fair market value of the property taken. If the parties cannot agree on the value, a proceeding called “condemnation” occurs where the value is established in court. Juries are permitted to make the determination in Oregon.
Encroachment – Any incursion of one’s property upon the land of another. Most encroachments are the result of the placement of a structure, a portion of which “encroaches” over the boundary line into neighboring property. Encroachments must be removed by the encroacher or a solution, such as an easement or boundary line adjustment, must be reached between the parties.
Encumbrance – A generic term referring to anything on the public record affecting title to a property. Some encumbrances are reasonable and necessary, such as easements for the installation, maintenance and repair of underground utilities. This type of encumbrance does not impair the marketability of a property. Other recorded encumbrances, such as judgments, tax liens, recorded mortgages and trust deeds, do affect marketability, and must be removed prior to closing in order to transfer clear title to the property.
Environmental Protection Agency (“EPA”) – The large federal agency charged with developing and enforcing rules and regulations over all aspects of the environment. (See, http://www.epa.gov/)
Equal Credit Opportunity Act (ECOA) – A federal law that requires lenders to make credit equally available without regard to race, religion, color, national origin, age, sex, marital status, or source of income.
Equity – The difference between the fair market value of a property and the total balance due on all recorded financial claims owed against it (such as loans, judgments, taxes, etc).
Equitable Relief – A generic designation for certain legal claims filed in civil (as opposed to criminal) court, where the plaintiff is seeking some form of relief other than money damages, which are inadequate under the circumstances. Such forms of relief include specific performance, where a party is seeking to compel another to perform under the terms of a contract, such as a contract to sell real property. Rescission, where a party asks the court to “rescind” a contract, thus restoring the status quo before the parties became bound. The usual basis for rescission is due to fraud, misrepresentation, or mutual mistake by the parties, where there was no meeting of the minds. Injunctive relief, i.e. asking the court to compel or stop (“enjoin”) an act, is another form of equitable relief, where money damages are an insufficient remedy.
Escrow – The service provided by licensed companies acting as a neutral third party between seller and buyer in a real estate transaction. Escrow only acts on written instructions from the parties, known as “escrow instructions.” An escrow officer assigned to the transaction collects all sums due (such as the buyer’s down payment and the lender’s loan funds), solicits payoff statements from all existing creditors of record, and distributes all funds to those persons or companies necessary for removal of their recorded liens and other financial claims appearing on the public record. This process is known as “closing” and in Oregon closings are handled by licensed escrow companies. Under the statewide OREF Sale Agreement form in Oregon, if the transaction fails to close on the closing date (or mutually extended closing date) it can constitute an automatic termination of the transaction. Oregon attorneys rarely close real estate transactions although they are permitted to do so without an escrow license. In Oregon, most escrow companies are affiliated with title companies.
Escrow Account – An account handled by escrow. Distribution of funds from this account cannot occur without joint written instructions from the parties. If any party objects to a disbursement, escrow will not do so until it has consent from everyone. If that cannot be obtained, it will tender the money into court and ask for judicial directions through a process called “interpleader.”
Estate – In real estate law, an “estate” is an interest in real property. In probate law, an “estate” is the totality of one’s property, both real and personal, owned at the time of their death.
Estoppel – A legal concept holding that one may not conduct oneself in a certain way, causing another to rely to their detriment, and then subsequently taking a contrary position. For example, permitting a debtor to consistently pay a creditor on a date that is well after the due date and saying nothing about it may create an “estoppel,” thus preventing the creditor from later declaring the debtor in default due to late payments.
Estoppel Certificate – A written document signed by a tenant stating that they have no claims against the landlord or defenses against full enforcement of the lease. Commercial leases usually contain a cooperation provision providing that if the building or property is to be sold, the tenant will sign an estoppel certificate which the owner-seller would give to prospective buyers to provide assurances that there are no unresolved claims or defenses that have not been disclosed.
Eviction – The process of removing a commercial or residential tenant from the property they are possessing under a rental or lease agreement. The technical name for the process is a “forcible entry and detainer” or “FED,” which is a “summary” or fast-track proceeding usually taking less than two weeks, unless contested. (See, ORS 105.105 to 105.168)
Exclusive Agency Listing – The written agreement between a real estate broker and property owner authorizing the broker to secure a ready, willing and able buyer for the listing price or such other price and terms as the seller may agree. Upon doing so the agreement provides for payment of a commission which is usually an agreed-upon percentage of the sale price at closing. An “exclusive agency” listing makes the broker the owner’s exclusive agent for purposes of earning the commission entitlement, but permits the owner to avoid payment of the commission if they find their own buyer. Obviously, this is not the preferred form of listing for brokers, since it pits them against their own seller in an effort to be the first one to find the right buyer.
Exclusive Right to Sell Listing – Differs from the Exclusive Agency Listing in that it requires the payment of a commission regardless of whether the seller finds their own buyer. The net effect of this type of listing is that it effectively removes the seller from the marketing and sale process, thus permitting the broker to concentrate on accomplishing their objective.
Fair Credit Report Act – The federal law enforced by the Federal Trade Commission (“FTC”) that is designed to promote accuracy and ensure the privacy of the information used in consumer credit reports. It also places certain requirements on credit reporting agencies.
Fair Housing Act – The federal law that prohibits discrimination in the sale, rental or financing of residential property based upon race, religion, color, national origin, familial status (families with children), sex, and disability.
Fair, Isaac and Company (“FICO”) – Through a complicated, secret, and proprietary set of algorithms, this company has developed the “FICO score” which is heavily relied upon by lending institutions (and other industries, e.g. insurance) in evaluating a person’s credit and their ability to timely repay debt. The lower the score, the greater the perceived risk of default. FICO scores are based upon credit information from the three major credit bureaus, Experian, TransUnion and Equifax. Scores range between 300 and 850.
Fair Market Value – The value of a property that would be paid by a hypothetical ready, willing, able and knowledgeable buyer in a voluntary arms-length purchase transaction. The price paid for a property in foreclosure or some other forced or distressed sale proceeding is not necessarily the fair market value; although the collective effect of multiple short sales and foreclosures in a neighborhood can have a negative impact on fair market value.
Fannie Mae (“FNMA”) – Its full name is the Federal National Mortgage Association. It is similar to Freddie Mac (the Federal Home Loan Mortgage Association). Both associations are privately held, shareholder-controlled, corporations, with the purpose of purchasing residential loans from originating lenders, thus allowing the lenders to re-lend the funds to other home purchasers. Both FNMA and Freddie Mac are government sponsored enterprises (or “GSEs”). Today, these GSEs comprise almost the entire “secondary mortgage market.” During the easy-credit years of 2004 – 2007 Fannie and Freddie acquired nearly 50% of the loans sold into the secondary mortgage market. The remainder of the secondary market consisted of private investors and similar entities, sometimes know as the “private label market.” Since the credit and lending crisis of 2008 and thereafter, the private label secondary mortgage market has dried up, leaving Fannie and Freddie as the only major players. Because Fannie and Freddie were awash in debt, the federal government has taken them over. Whether, and when, they will be replaced is a matter currently under review.
Fed Funds Rate – The interest rate at which depository institutions (banks and S&Ls that take customer deposits in order to fund loans and other investments) lend to other depository institutions overnight.
Federal Housing Administration – The federal agency generally known as “FHA” that provides mortgage insurance on loans made by its approved lenders. The FHA does not make direct loans but insures mortgages on single family and multifamily homes and manufactured homes. Its mortgage insurance provides lenders with protection against losses resulting from borrower default. FHA-insured loans permit low down payments and more lender flexibility in borrower debt-to-income ratios. The mortgage insurance premium is passed along to the homeowner and generally is included in the monthly payments.
Federal Reserve System – The Federal Reserve System is the central bank of the United States. It is agency of the federal government, with the Board of Governors located in Washington, D.C. There are 12 regional Reserve Banks located in Atlanta, Boston, Chicago, Cleveland, Dallas, Kansas City, Minneapolis, New York, Philadelphia, Richmond, San Francisco, and St. Louis.
Fee Title – This term, derived from old English Common Law, refers to the full legal “bundle of rights” that the owner has in real property. It is assumed today in most transactions, that the owner has fee title and thereby the ability to convey all right, title and interest in the property. This fact is usually verified by the issuance of a policy of title insurance to the buyer or new owner [PCQ Note: Having fee title is not the same as having “marketable title” (defined below). One can have “fee title” that is encumbered by liens or other claims such that it is not marketable and therefore, not saleable].
Fiduciary – A general term used to identify one upon whom the law imposes certain special duties, such as good faith, full disclosure, fair dealing and other responsibilities arising as a result of their position of trust and confidence. For example, real estate agents have fiduciary responsibilities to their clients, as do lawyers and physicians [PCQ Note: For unknown reasons, in Oregon’s real estate licensing law, these fiduciary duties are called “affirmative obligations” even though they apply between the agent and their principal (and even though the statutes make it clear they are not intended to dilute any of the fiduciary duty laws developed by the courts, i.e., “the Common Law”). (See, ORS 696.800 – 696.895)] ).
FIRPTA – “FIRPTA” stands for “Foreign Investment in Real Property Tax Act. It requires buyers to withhold a portion of a seller’s proceeds (“Withholding Requirement”) if the real property is located within the United States and the seller is a “foreign person” who does not qualify for an exemption. A “foreign person” includes a non-resident alien individual, foreign corporation, foreign partnership, foreign trust or a foreign estate. Subject to certain exceptions, the buyer must deduct and withhold a tax on the total “amount realized” by the foreign person on the disposition. The rate of withholding generally is 15%. The “amount realized” is the sum of: (a) The cash paid, or to be paid (principal only); (b) The fair market value of other property transferred, or to be transferred; and (c) The amount of any liability assumed by the transferee or to which the property is subject immediately before and after the transfer. If the seller is a foreign person and buyer fails to withhold, buyer may be held liable for the tax. See, https://www.irs.gov/individuals/international-taxpayers/firpta-withholding.
First Mortgage – A “first” mortgage means that it was recorded in the public records before any others on the same property. The time of recording is determined by the time affixed to it by the recording clerk immediately upon taking it for filing. Being “first” in time of recording generally gives the holder of the mortgage priority over junior (or “subordinate”) mortgages that were subsequently recorded. This priority means that upon foreclosure, the sale proceeds will be applied first toward debt reduction of the first mortgage holder before debt due to the holders of the second and third mortgages. It also means that if the first mortgage holder forecloses, the holder of the second mortgage must pay off the first mortgage in order to avoid foreclosure of its own interest [PCQ Note: The date of execution, i.e. signing, of a mortgage does not determine its priority – only the date of its recording in the public records where the property is located].
Fixed-Rate Mortgage – A mortgage with an interest rate that remains at the same level for the balance of the loan term. In other words, it does not “adjust” at given intervals, such as an adjustable rate mortgage (“ARM”).
Fixture – Personal property that is “affixed” to land or a structure on the land such that removal would cause significant damage to the land or structure. In the sale of a home or building, fixtures are regarded as part of the real property purchased. The only exception is in commercial properties, where “trade fixtures” may be removed before closing, although the property must be restored by the seller after doing so. Sellers and buyers should be careful to designate what goes and what stays in order to avoid arguing (usually after closing) whether the buyer had the right to remove the item. Fireplace inserts, chandeliers, and similar items are good examples of personal property that should be specifically identified if the buyer wants them.
Flood Insurance – Insurance protecting homeowners from loss by flood. The Federal Emergency Management Agency (“FEMA”) makes flood plain maps, which are relied upon by lenders and others in determining whether flood insurance must be purchased as a condition to making a loan.
Forbearance – The act of giving up entitlement to exercise a legal right or remedy. To forbear taking action is not necessarily the same as a complete waiver of the legal right to later do so, but merely a suspension on taking certain action.
Foreclosure – The name of the process whereby a lender (or seller) exercises their rights under a mortgage, trust deed, or land sale contract, to cut off (or “foreclose”) all legal rights of the borrower to the secured property. Foreclosures are governed by state law. (See, ORS Chapter 86.) Upon foreclosure, the lender usually holds a publically advertised sale at a specified time and place, designed to yield sufficient funds to repay the indebtedness and costs of sale. In many – but not all cases – if there is a shortfall in the proceeds obtained at the time of sale, that amount, known as a “deficiency” becomes a personal repayment obligation of the borrower to the lender. When the borrower and lender agree, the borrower may voluntarily deed the property back to the lender through a document known as a “deed in lieu of foreclosure.” However, this should not be done without the advice of legal counsel, as the procedure can result in future tax or other financial liability to the borrower.
Foreign Investment in Real Property Tax Act – See, “FIRPTA” above.
Fractional Ownership – A percentage ownership interest in real or personal property. Fractional ownership is different from a “time share,” since the former is shared ownership based upon title, while the latter is merely a sharing of time, where title is held in a third party.
Freddie Mac – See “Fannie Mae” above.
Front End Ratio – See Debt-to-income ratio, above.
FSBO – The acronym used to identify homes being sold by owners without the use of an agent, that is, “For Sale by Owner.”
Gentrification – A term used to describe the general upgrading in appearance and value of an area or neighborhood, usually through a change in its demographics, such as the introduction of newer, younger and more affluent homeowners.
General Contractor – One who contracts directly with the owner of a property to construct a structure or perform certain repairs or improvements. The general contractor oversees the project and is in charge of selecting the subcontractors, overseeing their work, and paying their invoices.
General Warranty Deed – One of the four major deeds used in Oregon. A general warranty deed (or “warranty deed”) conveys full title to real property and gives the grantee (the one receiving the conveyance) the maximum amount of protection to a buyer through the use of certain written warranties, guaranteeing the quality of the seller’s title. (See, ORS 93.860)
Ginnie Mae (“GNMA”) – Stands for Government National Mortgage Association. This quasi-governmental agency or “GSE” (define below), acts as a secondary market for the purchase of federally insured or guaranteed loans, such as the FHA, DVA and the Rural Housing Service. Since these loans are guaranteed or insured, the original lenders are able to make lower interest loans with more flexible terms, thus enabling lower and middle income borrowers to obtain housing funds. These mortgages are then pooled and sold as securities to investors who are guaranteed the timely payment of principal and interest.
Good Faith Estimate (“GFE”) – The former name of a document given by lenders, mortgage brokers and other loan originators to borrowers upon loan application. The GFE provides an estimate of the settlement charges (i.e. closing costs) and loan terms the borrower may expect if approved for their particular loan. Under the TILA-RESPA Integrated Disclosure Rule (“TRID”), the Good Faith Estimate has been renamed (with new rules) the “Loan Estimate“. [Don’t ask me why they took “good faith” out of the new name.] See “Loan Estimate” below.
Government Sponsored Enterprise (“GSE”) – The primary examples are Fannie Mae, Freddie Mac and Ginnie Mae. Although they were federally created initially as privately held entities designed to purchase mortgages in the secondary market, they were regarded as having the implicit “full faith and credit” of the United States behind them – that is, they were “too big to fail.” Recent events have tended to confirm that the federal government will not let Fannie and Freddie fail, although they are in continuous need of infusions of money to stay afloat. Recently, they have been taken over by the federal government and are no longer a part of the private secondary money market.
Graduated Payment Mortgage (“GPM”) – Mortgages that have graduated payments, that is, commencing with lower monthly installments of principal and interest, and growing larger over a designated period of time, ultimately reaching a fixed level for the remainder of the loan term.
Grantee – A term used in a deed of conveyance to refer to the recipient of the real property interest.
Grantor – A term used in a deed of conveyance to refer to the person or entity making the conveyance of the real property interest.
Gross Income – One’s income from all sources before adjustments for taxes and deductible items.
Guarantee – A promise to be responsible for the payment or performance of a third party should they default in their obligations. A guarantee can also refer to a warranty or promise to replace or repair a product.
HAFA – Home Affordable Foreclosure Alternatives. This program is a part of the Making Home Affordable Program and gives servicer guidance for expediting certain pre-foreclosure events such as short sales or deeds-in-lieu of foreclosure. It is reserved for borrowers who did not qualify or were unsuccessful under a HAMP modification. (See below). It remains to be seen if HAFA will have any significant effect in speeding up the short sale process.
HAMP – Home Affordable Modification Program. This is a loan modification program under the umbrella of the Making Home Affordable Program. HAMP is designed to facilitate and implement practices and procedures in the modification of home loans for owners of distressed properties.
HARP – This is a loan refinance program under the umbrella of the Making Home Affordable Program. It is designed to facilitate and implement practices and procedures in the refinancing of home loans for owners of distressed properties.
Hard Money Loans – Loans made at high interest rates to borrowers who may have credit issues or other constraints that make it difficult or impossible for them to obtain a standard conventional loan. Hard money loans focus less on the buyer’s credit and more on the value of the security. They are usually processed and made within a short period of time.
HASP – This housing rescue plan (“Housing Affordability and Stability Plan“) targets homeowners who are having difficulty paying their mortgage, by permitting them to refinance their homes even if they owe more on their mortgage than the home is worth. Unfortunately, the maximum amount of indebtedness over the market value is only 5%, which would translate to $210,000 on a $200,000 home. In today’s depressed real estate market, many, many homes are far over the 5% cap, so the ability of the program to help many homeowners is problematic, at best.
Hazard Insurance – Insurance designed to cover an insured’s loss such as fire, wind or other casualties. Lenders usually require as a condition to making a loan that the borrower/homeowner maintain hazard insurance naming the lender as an additional insured to the extent of the lender’s remaining principal balance under the loan.
Highest and Best Use – An appraisal or valuation term meaning the best use for the property that results in the highest present value yielding the greatest net return over a given period of time or the foreseeable future. Considerations of neighboring uses, physical and financial potential, and applicable zoning and land use laws are important factors in arriving at “highest and best use.”
Home Equity Line of Credit (“HELOC”) – A line of credit loan available up to a certain limit and secured by the borrower’s equity in their property. There is generally no restriction on the use of the proceeds and the homeowner can draw the funds out as he or she wishes, with repayment of principal and interest tied to the sums drawn out. Interest is usually based upon an indexed rate. HELOCs permitted some homeowners to live beyond their incomes and due to massive defaults of these loans in 2008 and thereafter, are much more tightly controlled than in the past. HELOC loans were typically in a second or third position behind superior loans, so when the borrower defaulted on a superior loan, foreclosure also wiped out the HELOCs security position. Seeing this, many lenders froze borrowers’ HELOCs based not on poor repayment performance, but out of concern that home depreciation in the borrower’s particular neighborhood (such as their zip code) would jeopardize the lender’s security should a default ever occur.
Home Equity Loan – Any loan secured by the borrower’s equity in their home.
Home Inspections – Generally refers to “professional” inspections of a home, in most cases imposed by the buyer as a contingency to their closing the purchase. Normally the inspector contractual limits his or her liability for errors to the cost of the inspection, which can range from $300 and up, depending upon the size of the home and other factors. In Oregon home inspectors are regulated and licensed by the Construction Contractor’s Board (“CCB”) and are prohibited from contracting to perform the repairs noted in their report. Home inspection contracts in Oregon specifically exclude an evaluation of building code compliance. The scope of such inspections are usually limited to visible physical structure (often excluding the roof) and the operation of such systems as heating, cooling, plumbing, electrical, etc.
Home Warranty – A policy of insurance that covers the repair costs due to the failure of certain appliances and mechanical systems. Coverage can be limited in many ways and the contract should be reviewed closely. Home warranties do not provide insurance against losses for damage to the residential structure itself – only to the performance of the system insured.
Homeowner Association (“HOA”) – An association of owners of property within a particular development such as condominiums (sometimes called a “Unit Owner’s Association”), or planned communities with common areas. HOA’s are required to be formed under many state laws with a primary purpose to oversee, manage and maintain common areas, enforce violations of the CC&Rs, and collect HOA dues.
Homeowner Insurance – Hazard insurance (see above) covering losses due to certain listed risks such as fire, wind, etc. Normally requires the occurrence of a spontaneous “event” and does not insure against losses due to mold, mildew, termites, or other casualty that results in loss to the homeowner over a period of time. Unless required by the lender, homeowner insurance does not normally include damage resulting from floods. Homeowner insurance can and should be obtained with additional coverage against (non-auto related) liabilities claimed against the homeowner for negligence or other acts.
Homestead Exemption – A “homestead” refers to the primary home in which one actually lives. Most states set a figure – in Oregon it is $40,000 for a single debtor and $50,000 for joint debtors – that is “exempt” from execution in the event of a forced sale of a home by a judgment creditor. This does not mean the home cannot be sold, but merely that a portion of the debtor(s’) equity up to the exemption may be retained from the sale proceeds. (See, ORS 18.395)
Housing and Urban Development (“HUD”) – A federal agency whose mission it is “…to increase homeownership, support community development and increase access to affordable housing free from discrimination. To fulfill this mission, HUD will embrace high standards of ethics, management and accountability and forge new partnerships–particularly with faith-based and community organizations–that leverage resources and improve HUD’s ability to be effective on the community level.” (See, http://hud.gov)
HUD-1 Statement – The document required to be completed and given to buyers and sellers at the time of closing. Also known as the “settlement sheet” or “closing statement.” It itemizes all costs related to the closing of the transaction, such as (on the buyer’s sheet) the costs related to the loan, points, fees, prorated taxes, etc. On the seller’s sheet the HUD-1 discloses the funds received and disbursed, such as real estate commissions, escrow fees, title insurance premium (if paid by the seller as is customary in Oregon), etc. The HUD-1 form was substantially revised effective January 1, 2010 and replaces all prior such forms. It now shows buyer the actual loan costs compared with those disclosed on the Good Faith Estimate (“GFE”).
HVAC – Acronym for “Heating, Ventilation and Air Conditioning.” Essentially, this is the property’s heating and cooling system.
Hybrid Loans – Any loan with terms that combine fixed rate and adjustable rates. Typically, they commence with a low fixed rate and within a three to ten year period, change to an adjustable rate. While the initial terms can seem attractive, they should be closely reviewed before commitment in order to evaluate their longer term affordability.
Impound Account – An account into which funds are placed as a reserve for payment to a third party for a given purpose. The most common impound accounts are required by lenders for taxes and insurance, into which the borrower pays on a monthly basis so that there will be sufficient funds for the lender to pay the annual insurance premium and yearly property taxes.
Indemnification – The duty of being responsible to a third party for the debt or default of another. Indemnification can occur through a formal voluntary contractual arrangement or be based upon Common Law concepts where one person’s active conduct creates liability for another who did not cause that liability but is held – or threatened to be held – financially responsible for it. For example, the seller of a swing set might be held financially liable for an injury to a child using it, but if the real cause was a construction or design defect, the seller might seek indemnification from the manufacturer or designer.
Index – When used in reference to interest rates or any other payment obligation, the term usually refers to an independent table of figures whose accuracy is not in dispute, which is used to calculate the increase or decrease in the rate or other payment obligation. A common example is the consumer price index (“CPI”). Many adjustable rate mortgages contain provisions tying the applicable interest rate to a certain index such as LIBOR (London Inter Bank Offering Rates). (See, http://mortgage-x.com/general/mortgage_indexes.asp)
Inflation – An increase in the cost of goods and services. As inflation increases the value of the dollar decreases, since it take more dollars to purchase the same goods and services.
Inflation Endorsement – A provision in a hazard insurance policy, such as fire insurance, that provides for a gradual increase in the amount of the coverage (from the initial date of the policy) to adjust for the effect of inflation and appreciation.
Ingress and Egress – Terms frequently associated with easements, such as an access easement. They refer to the right to enter (“ingress”) and exit (“egress”).
Insolvency – A financial condition in which one’s liabilities exceed their assets.
Interest – A charge for the use of another’s money. Interest must be “earned” in that it only becomes due after the lapse of time. Interest is typically not paid in advance except in the case of discount points paid by a borrower to reduce the offered interest rate at the commencement of the loan. Such points are essentially the prepayment of interest so that the lender’s yield is made comparable to what it would have been with the higher offered rate.
Interest Rate – The charge stated as an annual percentage of the unpaid principal balance due on a loan. For example, an interest rate of 5.00% on $100,000 is $5,000 annually if no principal is paid back during that year. If the loan called for 12 equal monthly payments of principal and interest, the 5.00% would be charged first to the interest due on principal balance and the remainder would be applied to reduce the principal. (PCQ Note: Taxes and insurance are excluded from this example.)
Interpleader – A legal action in court brought by a neutral third party (sometimes called a “stakeholder”) who is holding property or funds of another. In most cases, there is a dispute over the funds between competing parties, and the third party wants direction from the court for disbursement. Escrow companies are a common example of such a neutral, and they will file an interpleader action if they are holding funds and the seller and buyer have made competing demands for disbursement. The stakeholder is entitled to attorney fees from one or both of the parties seeking disbursement.
Joint Liability – Liability by two or more persons for the same debt or claim.
Joint and Several Liability – A claimant or creditor may proceed legally against all persons or entities (joint liability) for a debt or claim, or against only certain ones of the group, for the entire indebtedness (that is, they may be “severed“ from the larger group to be held accountable for the full liability).
Joint Tenancy – A joint tenancy under Common Law was a form of co-ownership in which, upon death, one’s ownership interest in real property automatically transferred to the remaining survivor(s) (known as “the right of survivorship”). The last remaining joint tenant would own 100% of the property. Joint tenancy laws have been altered by state statutes, and in Oregon, ownership by joint tenancy has been technically abolished except as to personal representatives. This is not to say that the equivalent of a joint tenancy cannot be created in Oregon – it can. (See, ORS 93.180 and 93.190)
Joint Venture – The combination of two or more persons or entities for a specific business purpose. Upon completion of that purpose, the joint venture is at an end. Joint ventures are different than partnerships primarily because the partnership may exist for an indeterminate duration until voluntarily or involuntarily dissolved.
Judgment – In Oregon, a legal document, that if properly recorded in the public records, becomes a lien (that is, a charge) against all non-exempt property that the judgment debtor owns in the county of recording. A judgment may be recorded in one or more Oregon counties. Under most circumstances, the property encumbered by the judgment lien can be foreclosed, thus forcing a sale of the property to satisfy the debt due. In Oregon, absent some other agreement of the parties, such as a specified contract rate, judgments normally bear interest at the annual rate of 9.00%, are valid for ten years, and can be renewed if timely done.
Judicial Foreclosure – The process whereby a lender uses the court system to foreclose out a borrower’s interest in the secured property. This entails the filing of a complaint for foreclosure in court and the defendant filing an answer. In Oregon the vast majority of real property loans are secured by trust deeds, and therefore, most foreclosures occur non-judicially by “advertisement and sale.”
Jumbo Loan – A loan that exceeds Fannie Mae’s and Freddie Mac’s applicable loan limits. Also known as a “non-conforming” loan. Rates on jumbos are typically higher than rates on conforming loans..
Junior Mortgage – A mortgage (or trust deed) that is recorded later in time than an earlier recorded mortgage or trust deed on the same property. In Oregon, subject only to limited exceptions (such as certain construction liens), the time of recording determines the order of priority when multiple claims are made upon the same property. The significance of being “junior” means that in the event of foreclosure by a superior mortgage or lien holder, the holder of the junior interest could have their lien rights extinguished. In other words, they would have no further claim against the property to satisfy the indebtedness. This does not mean that the debt is eliminated by loss of the lien rights, but following foreclosure by the superior lien holder, the junior’s claim is no longer secured by the property.
Kick-back – A term found in Section 8 of the federal Real Estate Settlement Procedures Act or “RESPA” that prohibits anyone from giving or accepting a fee, kickback or anything of value in exchange for referrals of settlement service business (for example, title insurance business, escrow business, etc.) involving a federally related mortgage loan. Violators are subject to criminal and civil penalties.
Land Sale Contract – A written contract between the owner-seller (known as the “vendor”) and a buyer (known as the “vendee”) setting forth the price and terms of the sale. The contract, or (more likely) a memorandum of the contract, is recorded in the county where the property is located. Under a land sale contract, title is not conveyed at the commencement of the transaction. Rather, the seller retains title until the contract is fully paid off and satisfied. At that time, the seller issues a “fulfillment deed” which is equivalent to a satisfaction of mortgage (in mortgage law) or a deed of reconveyance (in trust deed law). Although the land sale contract buyer is said to have “equitable title” during the life of the contract (as opposed to “legal title”), for all practical purposes they are substantially the same. So long as the contract (or memorandum thereof) is promptly recorded at the time of closing, it will take priority over subsequent liens or other encumbrances recorded on the property even though they may be filed of record before the fulfillment deed is recorded. The contract buyer may obtain a “purchaser’s policy” of title insurance at the inception of the transaction. It is not unusual for the seller’s fulfillment deed to be pre-signed and placed in escrow with appropriate instructions at the commencement of the transaction. This avoids difficulties should the seller die before the contract is fully paid off. Collection accounts are also not unusual at the start of the contract in order to collect the payments, keep records thereof, and pay taxes and insurance.
Landlord – One who rents or leases to another the right to occupy property under a written or oral tenancy agreement. Also called a “Lessor.”
Late Payment Charges – A lender imposed charge assessed on borrowers whose payment is received after expiration of the grace period.
Lead-Based Paint – Pre-1978 paint that contained lead as one of its components. Lead can be harmful to humans, especially young children. Because of lead-based paint’s widespread use in the residential and multi-family housing industry, its use has been banned. However, pre-1978 housing (called “target housing”) still contains lead-based paint. As a result, sellers and lessors (landlords) of target housing are required to provide buyers and tenants with certain information and documentation and be given an opportunity to have the property inspected for the presence of lead-based paint and lead-based paint hazards. (See, http://www.epa.gov/lead/pubs/paint.htm)
Lease – An agreement between an owner (“landlord” or “lessor”) and tenant (“lessee”) in which possession of real property is transferred for a fixed period of time in exchange for the payment of an agreed-upon amount of rent. Under a lease, the tenancy begins and ends on fixed dates. Residential leases are governed in Oregon by the Oregon Residential Landlord-Tenant Act (“ORLTA”) found in ORS Chapter 90. No comparable statutory regulation exists over commercial leases, although both are subject to essentially the same laws governing the eviction process. (See, ORS 105.105 – 105.168)
Lease Option – A lease of property coupled with a separate right for the lessee (i.e. the tenant) to purchase it upon pre-agreed terms and conditions. The option right is normally paid for separately and may be exercised during a certain period of time by the giving of written notice to the landlord. Usually, the agreement provides that a portion of the lease payments will be applied toward the purchase price if the option is timely exercised..
Legal Description – There are several forms of legal descriptions, the purpose of which is to assist sellers and buyers to properly identify property being sold. If a contract does not properly or sufficiently identify the location of the subject property it may not be enforceable should there be a dispute concerning its whereabouts. Property can best be identified – if it is located in a subdivision – by its lot and block number, for example, Lot 1, Block 4, Smith’s Addition, City of Portland, County of Multnomah, State of Oregon. If the property is not in a subdivision, it likely contains a metes and bounds legal description (see definition) which would also be sufficient to locate it. These are generally referred to as “formal” legal descriptions. Sometimes “informal” legal descriptions, such as a street address, are used to identify property; but good practice suggests that it should be supplemented or accompanied by a formal legal description.
Leverage – The degree to which a person or business uses borrowed funds in the acquisition of assets or operation of a business. Since there are certain tax advantages associated with some leverage (e.g. deductibility of home mortgage interest) it can have certain advantages. Where leverage becomes problematic is when it exceeds the ability of the borrower to repay, refinance or liquidate the assets or business. The housing and foreclosure crisis was brought on, in part, by the creation of innovative lending programs that encouraged 100% (or more) financing, which resulted in many borrowers becoming over-leveraged. Theoretically, this would not have been a problem if prices had continued to rise, homes continued to sell, and banks continued to lend based upon their formerly lax (or nonexistent) underwriting policies.
Liability Insurance – Insurance coverage against certain claims, such as negligence or other acts of the insured that result in personal injury or property damage to others.
LIBOR – Acronym for “London Inter-Bank Offered Rate.” It is based on rates that participating London banks offer each other for inter-bank loans. LIBOR is one of the major indices used for calculating interest rate adjustments on adjustable rate mortgages or “ARMS.” (Typically, the borrower’s rate included a fixed margin or constant of X%, that when added to the LIBOR rate equaled the borrower’s adjusted rate. As the credit markets siezed up in 2008, LIBOR became involved in a scandal involving artificially rigging the quoted rates. Now, in the U.S., the Federal Reserve Bank of New York has introduced a new reference rate, the “Secured Overnight Financing Rate”, or “SOFR”, in cooperation with the U.S. Treasury Department’s Office of Financial Research.
Lien – A charge against real property, the nonpayment of which can result in a sale of that property. Some liens are voluntary, such as mortgages and trust deeds, and others are involuntary, such as tax liens and judgment liens. A lien “clouds” or burdens the marketability of title to real property and prevents it from being conveyed to others unless the holder of the lien voluntarily removes it, usually following payment of the amount due under the lien.
Lien Waiver – A document that releases an owner from any further obligation for payment of the indebtedness due once the lien has been paid in full. Lien waivers are frequently used to protect homeowners from lien claims by subcontractors whose general contractor received payment but did not pay his or her subs or other suppliers who provided labor and materials to the construction project.
Lifetime Cap – In an adjustable rate mortgage (“ARM”) total maximum and minimum interest rates for the full term of the loan.
Life Estate – An estate in land that lasts as long as the owner’s life. The document conveying the interest, such as a deed or will, usually provides that upon the death of the owner of the life estate, the property will either revert back to the grantor (the one making the conveyance) or their estate, or pass to the grantee’s (the one receiving the life estate) estate. Caution should be exercised in creating life estates, as they can be complex.
Line of Credit – An agreement by a lender to extend credit to an approved borrower for loan funds up to a pre-agreed amount. Such agreements frequently give the lender the right to require the borrower to periodically submit updated financial information in order to assure the lender that the borrower’s financial condition has not materially changed for the worse while the line of credit is still open.
Liquid Assets – Those assets that can quickly be converted into cash. Company stock traded on a national exchange is a typical example.
Lis Pendens – In Oregon a law that permits one who has filed a claim affecting an interest in the real property of another to also file in the deed records a document informing the public that the claim has been filed. It essentially says that “litigation is pending.” (See, ORS 93.740)
Listing Agreement – A contract between a property owner and a real estate agent/broker wherein the agent agrees to provide certain professional real estate services to the owner in an effort to sell the property to a ready, willing and able purchaser for the listed price or such other price and terms as the seller may agree upon. Listing agreements usually provide for the payment of a pre-agreed commission at the time of closing, based upon the gross sale price of the property. In Oregon under the Statute of Frauds, listing agreements must be in writing. (See, ORS41.580(1)(g))
Loan Estimate. The Loan Estimate (formerly known as the “Good Faith Estimate”) provides prospective borrowers with important loan information, including the estimated interest rate, monthly payment, closing costs, and estimated taxes and insurance. In addition, the Loan Estimate informs prospective borrowers if the loan has certain features, such as a prepayment penalty. (See link here for more information).
Loan Fraud – The term is most frequently used to describe any intentional misstatement of material information at any stage of the lending process. Loan fraud is generally divided into two categories: (a) Fraud committed in the acquisition of property, and (b) fraud committed solely for profit (such as using a straw purchaser or fraudulent appraisal), and usually involving a subsequent flip of the property, after the fraud. See, U.S. Code Chapter 47 – Fraud and False Statements.
Loan Officer – Although they may go by different titles, a loan officer is a representative of a lending institution whose responsibility is to secure prospective borrowers and provide documents, applications, credit and qualification information to them throughout lending process.
Loan Origination Fee – A fee or charge made by lenders, mortgage brokers or other loan originators for the administrative costs of processing a loan. The charge is usually stated in “points” with one point equaling one percent of the loan amount. The charge is paid at the time of closing. Since lender and broker fees can vary significantly, prospective borrowers should competitively shop their loan before making a final decision.
Loan Servicer – The company to whom a borrower makes their monthly payments. The servicer is responsible for handling the proper accounting and disbursement of these payments and for making sure property taxes and insurance is paid. The loan servicing company also monitors nonperforming loans and is usually the entity defaulting borrowers deal with in negotiating any adjustments to their loan terms, such as modification. Some lenders have departments that service their own loans and others contract with separate entities to do so.
Loan to Value Ratio (“LTV”) – The ratio, expressed in a percentage of the appraised value of the home, that describes how much will be loaned. An 80% LTV means that the lender will loan up to 80% of the appraised value. It also implies that the remaining 20% will represent the amount of down payment the lender will expect the buyer to pay at the time of closing. When the sale price of the property exceeds the appraiser’s opinion of value, it usually means one of two things: (a) The buyer and seller will have to reach agreement on how the additional amount above the appraised value will be dealt with – either the buyer pays the amount, the seller reduces the sale price, or some combination of the two; or (b) The transaction will fail.
Lock-In – Refers to fixing or “locking” the interest rate that the lender will charge on the loan. Locks can range in the amount of time the lender will commit to and when the lock period starts and stops. If the lock is lost before closing, it usually means that the current market rate will apply. If the rate is significantly higher that the locked rate, the buyer may wish to “buy down” the rate through a lump sum payment at closing. If rates are falling, some borrowers may decline to lock in, preferring instead to let the loan rate “float.”
Loss Mitigation – To “mitigate” damage is to try to reduce its negative impact. During the credit and housing crisis, in order to deal with the numerous loan defaults, some lenders developed their own loss mitigation departments to deal with defaulting borrowers and try to work out solutions that would avoid the need to foreclose on the property.
Margin – The interest rate, usually in the 2% to 3% range, that is added to the indexed rate to arrive at the total applicable interest rate on an adjustable rate mortgage or “ARM.” The margin component of the ARM rate does not adjust – only the indexed portion. So when shopping various ARMs, prospective borrowers should always want to know both rates, since the high fixed margin rate will remain high throughout the life of the loan.
Market Value – Also expressed as “fair market value” or “FMV.” The fair market value is the price a willing, ready and able buyer would pay to a willing, ready, and able seller for a property. Market value assumes that the parties are not operating under any external influences and have adequate time to negotiate. A price paid to a seller who is facing an impending foreclosure may not reflect the market value.
Maturity – The date a loan becomes fully due and payable. The maturity date will be found in the promissory note that accompanies the mortgage or trust deed.
Mechanics Lien – A somewhat misleading name for a construction lien which entitles licensed contractors the right to record a lien upon real property to which they have provided labor, services or materials. Mechanics liens have a “super priority” under Oregon law, and subject to certain limitations, can take precedence even over lenders who have recorded their trust deed before the lien claimant has done so.
Median Price – A term used to refer to the price of housing that falls into the statistical middle of the total number of homes for sale (or sold) in a certain area. Thus, a “median sale price” of $300,000 means that in a given sampling over a specific period of time, there are an equal number of homes sale above $300,000 as below $300,000.
Mediation – A private and confidential dispute resolution process where the parties use a neutral third person to reach consensus on a settlement. The mediator does not make a “ruling” about who is right or wrong, and cannot force the parties to settle. The fact that the parties participated in mediation or that one party refused to do so is not admissible in trial. [PCQ Note: For purposes of establishing attorney fees, especially in contractually required mediation and arbitration under the OREF Sale Agreement form, this rule is substantially relaxed.] However, if the parties sign a written settlement agreement at the end of the mediation, it can become a legally enforceable document. Everything said in the mediation is confidential unless the parties agree otherwise, and the mediator cannot be brought into court to testify what one of the parties said in confidence during a mediation session.
Merged Credit Report – One issued by a credit reporting company that contains combined information from multiple credit bureaus.
Metes and Bounds Legal Description – A legal description usually written from a survey which contains directions and distances starting at a point of beginning and coming back to the same point, thus creating an enclosure. An example of a metes and bounds description is the following: “Beginning at a point on the Southerly line of said Lot 7 distant thereon North 45° East 150.00 feet from the most Southerly corner thereof *** thence tangent to said curve South 65° 30¢ West 70.00 feet; thence South 12° 30¢ East 190.00 feet; thence Southeasterly 78.00 feet to the point of beginning.” (PCQ Note: The identification of the parcel, by itself, is inadequate as a formal legal description, and should identify the governmental jurisdictions, such as the city, county and state.
Mezzanine Financing – Financing that gives the lender the right, upon default, to convert its interest into equity or ownership of the company to whom the loan is made. Because of the limited due diligence by the lender and the speed with which it is closed, such loans are aggressively priced in the marketplace. Companies eligible for such financing usually have a solid reputation and track record.
Modification – A term in common usage today referring to an agreement between lender and borrower to change one or more repayment terms of a loan. Loan modifications can range from a temporary or permanent reduction in the interest rate to a deferral or reduction of the principal balance. In some cases the loan maturity date is extended and re-amortized (such as changing the principal and interest payments from a 30-year fully amortizing loan to a 40 year fully amortizing loan, thereby reducing the monthly payments). Evaluation of the benefits of loan modifications should be done by a qualified professional, as recent experience has suggested that there is a significant re-default rate on such programs.
Moral Hazard – A term used during the real estate and credit crisis to explain risk-taking behavior. The concept is based upon the theory that where downside risk is limited or insured against, it will encourage more risk-taking activity. The insurance industry is often used as an example, where the financial consequences of a certain activity are insured against (to a point), such as risky driving. A more contemporary example is the use of credit default swaps (“CDSs” defined above), which acted as a loose and unregulated form of insurance (which ultimately took on the appearance of “bets”) that paid the insured if a particular obligation, such as a mortgage backed security (“MBS”) defaulted. (See, definitions of “Securitization” and “REMICs,” below.) Not only did the issuers of these MBS instruments purchase CDSs, but strangers to the underlying transactions bought them. Ultimately the volume of activity created a separate CDS market, which created an appearance that CDS purchasers were betting that certain investments would fail. American International Group (“AIG”), the giant international insurance company, was a primary issuer of CDSs, and became so top-heavily invested, that when the credit crisis hit, it was unable to pay the investors who purchased the swaps. The result, a $182 billion bailout that resulted, in part, because risk could be quantified, sold, and traded for profit.
Mortgage – The name of the instrument used by some lenders to secure the promissory note given by the borrower for repayment of a loan. The mortgage, once recorded in the public records, acts as notification to the world that the lender holds a secured position on certain real property for repayment of a debt. The mortgage sets forth the lender’s legal rights of foreclosure should the borrower default in repayment of the note. Although mortgages are legal in Oregon they are rarely used as the security document of choice. Most Oregon lenders prefer to use trust deeds. (See, ORS Chapter 86) Mortgages and trust deeds serve exactly the same purpose; they differ only in the terminology and the methods of foreclosure. Many people use the term “mortgage” interchangeably with “trust deed”.
Mortgage-Backed Securities (“MBS”) – The name of the security document used by institutions such as Fannie Mae who purchase loans from banks in the secondary mortgage market so that the banks will have sufficient funds to continue lending. These mortgages are packaged and sold as securities (for example, shares of stock) to investors. The collective mortgage payments of principal and interest made by the borrowers are used to pay the investors who bought the securities. There are many different types of mortgage backed securities with varying degrees of risk and each with their own name and set of abbreviations: RMBS = Residential Mortgage Backed Securities; CMBS = Commercial Mortgage Back Securities; CMO = Collateralized Mortgage Obligations; CDO = Collateralized Debt Obligations.
Mortgage Banker – An entity or person that not only acts as an originator of loans, such as a mortgage broker, but also makes direct loans which are then usually resold into the secondary mortgage market. Some mortgage bankers also act as servicers of the loans they originate and sell.
Mortgage Broker – A person or institution that originates and processes loans using a number of different lending sources. In Oregon, mortgage banking, lending, and brokering are regulated by the Division of Finance and Corporate Securities (“DFCS”).
Mortgage Electronic Registration System (“MERS”) – Electronic registration emerged as an intended solution to the problem of paper. All states require some method of tracking the successive transfers of real estate and the successive creation of interests in real estate (e.g. mortgages, liens, easements, etc.). The usual method is to require that the actual document creating or transferring the interest be recorded in the county where the property is located. The actual date and time of recording determines the priority of the transfer or interest – such as the priority between a first and second mortgage. However, with the creation of the mortgage securitization industry (see “Real Estate Mortgage Investment Conduit – REMIC” defined below), lenders soon began to lose track of their paper – or neglect to create it in the first place. This problem was compounded by the fact that lenders frequently transferred mortgages between themselves without recording the transaction. This failure became serious when it came time to foreclose a mortgage, since the public record did not always identify the current owner of the mortgage. Enter MERS, which was the mortgage banking industry’s attempt to address the recordation problem by using electronic commerce to eliminate paper. Although it does not cover all mortgages across the country, by some estimates MERS has registered 65 million mortgages since 1997. The concept is that MERS acts as “nominee” on the actual mortgage document that is recorded in the county land records. Alternatively it assigns a number on that document. According to their website a “…loan registered through the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.” However, with the onslaught of foreclosures over the last few years, and the increasing number of borrowers fighting them, some courts are now rejecting the MERS concept of “inoculation,” and instead, are insisting that if a lender is going to foreclose, the original note and mortgage (together with evidence of successive transfers) must be produced – i.e. registration with MERS alone is insufficient legal proof of current ownership of the paper for purposes of foreclosure.
Mortgage Life and Disability Insurance – Life insurance purchased by borrowers to pay off a loan in the event of their death or disability. As the mortgage debt declines so does the amount of coverage.
Mortgage Insurance – Insurance that is required of borrowers from conventional lenders (as opposed to government insured or guaranteed programs, such as FHA and VA). Typically, such insurance is required when the borrower is unable to pay a minimum 20% down payment on their residential loan. The policy protects the lender against a portion of the loss that may occur if the borrower defaults on a loan. The premium is calculated into the monthly mortgage payment and continues until the unpaid principal falls below either 80% of the original loan, or (usually following appraisal) 80% of the then-current market value of the property. Mortgage insurance also is available through certain government agencies, such as the Federal Housing Administration (FHA) or private companies, such as Private Mortgage Insurance (“PMI”).
Mortgage Insurance Premium (MIP) – The premium charged to a borrower for mortgage insurance. MIP is currently tax deductible under certain circumstances.
Mortgage Interest Deduction – The deduction one may take against gross income for interest payments made on a primary and secondary residence. There are many exceptions and stipulations, the main one being that the total mortgage debt may not exceed $1,000,000. (See, http://www.irs.gov/publications/p936/ar02.html)
Mortgage Qualifying Ratios – The ratios or guidelines used by many lenders to calculate a borrower’s capacity to afford a certain mortgage and set of monthly mortgage payments. These ratios compare the borrower’s monthly income to their mortgage expenses. (See, Debt-To-Income Ratio)
Mortgagee – The term used in a mortgage document to identify the lender. In Oregon, under trust deed law, the mortgagee is known as the “Beneficiary.”
Mortgagor – The term used in a mortgage document to identify the borrower. In Oregon, under trust deed law, the mortgagor is known as the “Trustor” or “Grantor.”
Multifamily Housing – Any residential structure containing multiple housing units, usually five or more.
Multiple Listing Service (MLS) – A database for participating real estate agents to collectively share all of their listing information. Under most MLS rules, the pooled information is available to all participating agents and an “offer of compensation” is made by the listing agent to share a designated portion of their gross commission with the agent who brings the seller a ready, willing and able buyer that purchases the property for the listing price, or such other price and terms as the seller and buyer agree.
National Association of Realtors® (“NAR”) – The national Realtor® association to which all Realtors® throughout the country belong. It is headquartered in Washington, DC.
Negative Amortization – A process whereby the monthly interest payment on a loan is insufficient to pay the monthly interest due under the promissory note. The result is that the interest shortfall is added back to the principal balance thus increasing the principal amount due under the loan. During the credit bubble, when housing prices skyrocketed, some lenders offered loan programs that permitted borrowers to pay less than the total interest due for a period of time. They were sometimes referred to as “Neg-Am Loans.” These programs were attractive to borrowers who could not afford a fixed rate, fully amortizing, loan and believed that housing prices would continue to rise so that eventually they could refinance out of their current loan – or sell the property to extricate themselves from the compounding effect of the negative amortization process. When housing prices dropped, many of these borrowers found themselves “underwater” – meaning that they owed more on their loan than the home was worth. Negatively amortizing loans were outlawed by the 2009 Oregon Legislature.
Negative Equity – This term refers to the difference between the current balance of all unpaid mortgages on a property (residential or commercial) and its current fair market value. For example, if the mortgage(s) total(s) $300,000 and the current fair market value is $200,000, the negative equity is $100,000. In today’s vernacular, that property is “underwater.”
Net Income – The total income from all sources, less all expenses for the same period.
Net Present Value (“NPV”) or NPV Test – Ignoring the terminology, formulas, and acronyms used, the NPV Test is basically a number-crunching analysis of the underlying investment (e.g. the borrower’s loan) based upon two opposite scenarios: (1) What is the net present value of the loan if the pre-foreclosure event (loan mod, short sale, deed-in-lieu) is approved, versus (2) The net present value of the investment if it is foreclosed. If the NPV figure is higher under the pre-foreclosure scenario, the result is declared “positive” and the requested pre-foreclosure solution will be approved – since it is in the economic interest of the investment’s owner (e.g. the bank or investor) to do so. If the NPV analysis is higher under the foreclosure scenario, the test results are deemed “negative” and the borrower’s requested pre-foreclosure solution will be denied.
Net Worth – One’s financial worth arrived at by deducting all liabilities from all assets including cash.
No Cash-Out Refinance – A refinancing of the unpaid principal balance of an existing loan where the borrower does not receive any of the funds from the refinancing.
No Cost Loan – A broad term referring to any of several types of loans that do not include typical borrower costs such as title insurance, escrow fees, closing cost, appraisal fees, recording fees, etc. No points may be charged, as well. The purpose of such loans is to reduce the upfront cost to the buyer. The interest rate may be higher to make up for the fact that the lender is initially absorbing these costs.
No Doc Loans – These loans were a staple of the lending industry during the easy credit years of 2004 – 2007. They were usually based upon the borrowers’ “stated income” or “stated assets.” Often referred to as ‘liar loans,” since by their nature, they encouraged or resulted in borrowers misstating their financial qualifications to obtain the loan. Lenders demanded little or no documentation for the loans made to borrowers, so long as the borrowers’ credit met the lender’s guidelines. The reason for this lax or non-existent underwriting was due, in part, to the widely held belief that property values would continue to rise, so neither borrower nor lender were at much risk. The other reason for the poor underwriting practices was that at the mortgage origination level, no one really cared. In fact, higher risk loans were encouraged since due to their higher yield, investors would pay more for them. (See definition of “yield spread premium” below.) Mortgage brokers got paid for making the loans – they didn’t have to service them. And banks got paid in full once their loans were either resold or packaged into securitized pools that investors scooped up.
Non-Judicial Foreclosure – In Oregon, trust deeds are primarily foreclosed non-judicially. That is, the process occurs without the filing of a foreclosure complaint in court. Instead, the trust deed foreclosure process is conducted by advertising in a newspaper of general circulation and by mailing of the appropriate documentation to all persons whose interest is being foreclosed or who may have some recorded interest in the property.
Nonperforming Asset – A term frequently used today to refer to loans being carried on a bank’s books that are significantly delinquent and not being repaid.
Note – See Promissory Note.
Note Rate – The interest rate stated on a promissory note that is secured by a trust deed or mortgage.
Notice of Default – A formal written notice informing one obligated under a contract that they are in default. A Notice of Default (“NOD”) is usually required under most contracts, especially a note and mortgage or trust deed. The Notice of Default typically gives one a limited period of time, such as ten days, within which to cure the default.
Non-Conforming loan – A loan that exceeds Fannie Mae’s and Freddie Mac’s loan limits. (See Conforming Loan.)
Notary Public – One who is licensed by a public body to certify the authenticity of a signature. Under Oregon law, recording a document on the deed records and other public records requires notarization. Before such certification, the notary is required to verify the identity of the signer and actually observe them signing the document. It is illegal to notarize a document that was pre-signed outside the presence of the notary.
Offer – Under real estate law, an offer made in writing and indicating the willingness by a prospective buyer to purchase the property of another. If an offer is accepted on the same terms and that acceptance is communicated to the one making the offer, it is said that there is a “meeting of the minds” and a legally binding contract is formed. The person making the offer is known as the “offeror” and the one to whom the offer is made in known as the “offeree.” [PCQ Note: The mere listing or advertising of a property with or without a real estate agent is not an “offer” that can be accepted by a buyer to create a binding contract. The listing or advertising of property for sale is deemed only an invitation for buyers to submit offers. Thus, an owner of listed property is entitled to reject a full price offer. The major exception is for auctions held “without reserve” meaning that the auctioneer seller must sell for the highest auction price received regardless of amount. In essence, the auctioneer is actually making an “offer” to the audience, who, by their “bid” “accept” the offer].
Option – The right to purchase one’s property (usually) at a given price within an agreed upon period of time. Options (or a memorandum thereof) should be recorded so that the owner of the property does not convey the interest to a third party, who will not be bound under the terms of the option agreement. Options can be quite detailed setting forth not only the option period, but the method for exercising the right to purchase, and once exercised, the timing for the sale to close. Options must be supported by separate consideration, and are different from earnest money agreements primarily because the option money is not refundable and the right of purchase can last much longer than that usually set forth in an earnest money agreement. Earnest money agreements are rarely recorded, while options frequently are.
Oregon Association of Realtors® (“OAR”) – The statewide Realtor® organization to which all Oregon Realtors® belong. It is headquartered in Salem, Oregon.
Oregon Real Estate Forms, LLC (“OREF”) – The statewide real estate provider of Realtor® forms. It is a for-profit corporation (as opposed to non-profit) and is owned jointly by the Portland Metropolitan Association of Realtors® (50%), the Eugene Association of Realtors® (30%) and the Oregon Association of Realtors® (20%). (See, http://www.orefonline.com)
Origination Fee – The charge for processing a loan. It includes preparation of the loan documents, submitting and evaluating the application, verifying the borrower’s credit, and coordinating and arranging other related activities, such as the appraisal, etc. It is frequently expressed in “points” with one point equaling one percent of the loan amount.
Owner Financing – A home sale in which the seller agrees to “carry-back” or “take back” a promissory note secured by a trust deed (or mortgage) from the buyer of the subject property. The debt may be for all or part of the purchase price. Owner financing is most common when the buyer cannot qualify for a loan from a bank, or cannot come up with all of the down payment. For example, in the case of an 80% bank loan, a buyer with only 10% down may try to get the owner to “finance” the additional 10%, by taking back a note and trust deed for that amount. (The owner does not actually pay cash to the bank on behalf of the buyer at closing.) Some lenders holding a first trust deed or mortgage may prohibit this, as they want to have the buyer fully invested up to the entire 20%.
Ownership – This generally refers to one’s entire right, title and interest in real or personal property. One has full “ownership” even though they may owe money on the property. Ownership should not be confused with “equity.” When ownership is transferred, the documentation of such transfer is through the delivery and recording of a deed, if real property, and a bill of sale, if personal property.
Owner’s Policy of Title Insurance – The policy issued to the purchaser-owner of real property guaranteeing to them that they have marketable title, free and clear of any objectionable liens or encumbrances. An owner’s policy will include a list of exceptions to this guarantee for many standard items recorded against the property such as deed restrictions, utility easements, and current, but unpaid property taxes. And since the title insurance company does not physically inspect (nor survey) the property – they just review the public records – the owner’s policy also excludes those matters an inspection or survey would reveal, thus leaving it to the buyer and buyer’s experts to perform these on-site functions. The “preliminary” title report is issued at the start of the transaction, shortly after escrow is opened. It is not “insurance” and is preliminary only. The owner’s policy is issued at the end of the transaction, shortly after closing (“settlement”). It not only informs the buyer-owner of the status of record title, but it also insures them that there are no undisclosed title defects, subject only to the standard and special exceptions. In Oregon, it is customary for the seller to pay for the buyer’s owner’s policy.
PITI – Stands for “Principal, Interest, Taxes, and Insurance” which make up the bulk of most borrowers’ monthly installments to the lender for repayment of the residential purchase loan. The taxes and insurance are frequently held by the lender in an “impound account” and paid on an annual basis.
Partial Payment – The payment of less than the total amount owed. Partial payments normally do not have to be accepted by lenders where the loan documents specify a minimum monthly installment.
Partition – A legal action available to co-owners of real property, such as tenants in common, designed to either physically divide the property, or more commonly, force a sale of the property and divide the proceeds, based upon the co-owners’ respective interests.
Payment Cap – A limit or ceiling on the amount of any single increase on an adjustable rate mortgage (“ARM”) due to an increase in the index to which the interest rate is tied. The payment cap refers to the size of any installment payment due upon adjustment in the interest rate. A payment cap (referring to dollars) is not the same as an interest rate cap (referring to the percentage interest rate charged for the loan at any given time). Typically, ARMS do not have both an interest rate cap and a payment cap.
Payment Change Date – The date when monthly installments on an adjustable rate mortgage (“ARM”) or a graduated-payment mortgage (“GPM”) will change. Generally, the payment change date occurs in the month immediately following the interest rate adjustment date.
Payment Due Date – The date in the promissory note and mortgage (or trust deed), when periodic payments, usually monthly, are due. Most loan agreements have a payment due date, followed by a grace period of a few days, and a date after which a late charge is assessed to the borrower.
Personal Property – Any property that is not real property. The only exception is when personal property becomes a “fixture” (that is, it becomes affixed to the land or structure) and is then deemed to become a part of the real property. Fixtures (except trade fixtures used in a trade or business) are legally included the conveyance of real property, unless specifically carved out of the transaction.
Personal Representative Deed – A deed given by the personal representative of an estate in order to transfer the decedent’s interest to one or more heirs or third –party purchasers from the estate. The deed makes no warranties by the personal representative, but merely transfers the decedent’s interest.
Plaintiff – One who brings a claim in court seeking some remedy or relief. If the claim is brought in arbitration, the plaintiff is called the “claimant.”
Planned Unit Development (PUD) – Refers to a planned residential development that is constructed as a part of a single development. PUDs have common areas owned by the homeowner’s association (“HOA”) which oversees their management and maintenance, as well as certain other community facilities and services that may be provided as a part of the development. The homeowners pay periodic dues to support the activities and responsibilities of the HOA. PUDs normally have recorded deed restrictions.
Plat – A recorded map of multiple parcels of property, displaying the surveyed dimensions of the lots, the location, purpose, and measurements of easements and streets, and frequently certain limitations on the use of common areas.
Points – A lender charge made to the borrower for a loan. A point is equal to one percent of the principal amount of a mortgage or trust deed. For example, one point on a $300,000 loan is $3,000. Lenders may charge points for many reasons, such as to increase the yield (that is, the return) on the loan, to cover closing costs, to charge for loan processing, to issue a loan lock beyond a fixed period of time, or other reasons. Points may be charged at the borrower’s request to “buy down” the interest rate so that the monthly payments are lower. Points are typically paid at the time of closing. Sometimes the points are shared between the seller and the buyer/borrower.
Pooling and Servicing Agreement (“PSA”) – PSAs act as the governing document when a large pool of loans is sold into the marketplace as securities. Many such pools took the form of REMICS (see definition below). The PSA acts as a trust document, defining the rights of the investors (the “beneficiaries”) and the duties of the trustee and servicer.
Portland Metropolitan Association of Realtors® (“PMAR”) – The local Realtor® organization to which all Portland-Metro Realtors® belong, excepting only those who are exclusively members of the East Metro Association of Realtors®. PMAR is headquartered in Portland, Oregon.
Power of Attorney – A legal document recognized in Oregon and most states, granting certain authority to one person to take binding legal action on behalf of another. The person receiving the power is called the “attorney-in-fact.” In Oregon, powers of attorney must be recorded if they deal with land. A limited power of attorney grants only limited powers to the attorney-in-fact. A general power of attorney gives nearly unlimited powers. The authority granted under a power of attorney ceases upon death or incapacity of the person granting it. However, a “durable power of attorney” intended to survive incapacity in order to make major end of life decisions is recognized in most states, including Oregon.
Pre-Approval Letter – A written letter from a lender, mortgage broker, or other loan originator, stating that based upon verification of certain information from the applicant, including such things as a credit check, debt to income analysis and verification of down payment, they would process the loan for the borrower. Pre-approval letters contain significant limitations such as appraisal review, and are not a lender’s binding commitment to make the loan. Final loan commitment can only be made by the loan underwriter, which normally does not occur until very late in the loan process, shortly before closing of the purchase transaction.
Pre-Qualification Letter – This document is far less reliable than a pre-approval letter. In the pre-qualification letter the loan originator is making a representation concerning the borrower’s capacity to qualify for a loan without actually reviewing any of their financial data. The originator is simply relying upon the prospective borrower’s oral representations.
Predatory Lending – A term used to describe any unscrupulous loan practices by lenders and others involved in loan origination. Most states have regulations and statutes against such tactics, especially in light of the events of 2005 – 2008 when loans were made to borrowers who did not understand the terms and were not capable of repayment under the terms of the loan documents.
Prepayment – The payment of all or a part of a loan balance prior to the end of the term. A partial prepayment does not eliminate the obligation to pay the regular monthly installments. A full prepayment satisfies the borrower’s entire obligation under the note and mortgage or trust deed. Some lenders have restrictions and limitations on full prepayment. A typical prepayment penalty fee consists of a significant charge, usually stated as a percentage of the amount being prepaid. The reason for such penalties is because the loan terms may contain a low “teaser” interest rate early in the term and prepayment would deprive the lender (or the investors who buy the loan package in the secondary market) from receiving their expected yield. (PCQ Note: If a loan has a prepayment penalty, it may also apply if the lender is forced to accelerate the loan balance due to default.)
Prepayment Penalty – See “Prepayment”.
Prime Rate – The interest rate a bank charges its preferred customers. The rates are published in the business media and are frequently used as the index for interest rate adjustments on ARMs or lines of credit. The Prime Rate is usually adjusted in correlation to the adjustments of the Federal Funds Rate.
Principal – The amount initially borrowed from a lender. As the loan is paid back, the borrower’s monthly installments are applied first toward interest and then to reduce the principal balance of the loan. On a fixed rate fully amortizing loan the principal balance is gradually reduced over the life of the loan.
Principal, Interest, Taxes, and Insurance – See “PITI.”
Private Label Market – The secondary market in 2004 – 2008 that purchased residential mortgages from conventional lenders such as Countrywide (now B of A), Washington Mutual (now JPMorgan-Chase), and others. It is called “private” because (a) it consisted primarily of investment trusts that were created to purchase these loans; and (b) to distinguish it from the two major government sponsored enterprises (“GSEs”), Fannie and Freddie. During this time, a lot of lending was virtually unregulated, and many of the loans generated for this market were poorly underwritten. Since the loans didn’t conform to Fannie’s and Freddie’s underwriting guidelines, they were sold into the private label market. After the foreclosure crisis circa 2008 – 2012 the private label market for residential loans dried up. That is changing today. See, September 2021 article here.
Private Mortgage Insurance (“PMI”) – This is a form of lender insurance normally required for loans where the borrower is paying less than a 20% down payment. PMI insures the lender for a portion of the loan should the borrower default. The premiums are paid by the borrower as a part of the loan repayment. A federal law, the Homeowner’s Protection Act (HPA) of 1998, requires lenders to provide certain disclosures and information to borrowers about PMI including the lender’s duty to notify the borrower when the PMI may be cancelled.
Probate – The judicial process that occurs when someone dies leaving assets. If there is a will it is said they died “testate” and if there is not a will, it is said they died “intestate.” In either case, if the decedent owned property at the time of death, especially real property, the estate must be probated to legally distribute the property to those persons designated in the will, or if there was no will, then in accordance with the statutory laws of the state. [PCQ Note: If one’s property is jointly owned by husband and wife – known as “tenants by the entirety – they both automatically have a “right of survivorship” meaning that at the time of death of the first spouse, all property jointly owned with the right of survivorship automatically transfers to the survivor at the moment of the first spouse’s death. This means that such property does not become subject to probate, since technically, it was owned by the survivor at the time of the spouse’s death.]
Promissory Note – The legal instrument that sets forth the amount of a debt due on a loan including the repayment terms such as the interest rate, monthly payments and due dates. If the promissory note is accompanied by a trust deed or mortgage recorded on the borrower’s real property, it is said to be a “secured” note.
Property Disclosure – The law in many states requiring that in one to four family residential housing, the seller must answer a series of required questions dealing with the condition of the property, the existence of any material defects from multiple sources, such as mold, mildew, dry rot, water, etc, as well as the condition of all operating systems such as heating, cooling, plumbing and electrical. In Oregon the Seller Property Disclosure Law is found at ORS 105.462 to 105.490.
Property Tax – In Oregon, the charge imposed by the county government to fund public services such as schools and law enforcement. The total amount of property tax is determined annually through a budgeting process and then assessed based upon a percentage per $1,000 (“the millage rate”) of assessed value of the property located in the county.
Public Record – Information contained in the records of all public institutions such as the courthouse, the Secretary of State, the Corporation Commissioner, the Department of Justice, etc. These records pertain to certain events such as court filings, recorded liens for loans, taxes, court judgments, bankruptcies, criminal convictions, corporate filings, etc. Under Oregon law, certain public record information (particularly that contained in the county courthouse records dealing with land) imparts what is known as “constructive knowledge” to the world as to the information contained in those records – even though one may have no actual knowledge of the event recorded. It is for that reason that title insurance is important when real property is purchased, since the title insurer checks the public records for status of the title being conveyed and informs the buyer of that information before closing of the transaction. The information provided is then listed on a policy of title insurance, essentially guaranteeing to the insured the correctness of the title information contained on the public record.
Punch List – A list of items that must be completed by a particular time. In real estate transactions – especially in new construction, buyers frequently create such a list following a final walk-through shortly before closing, in order to determine what corrections and/or repairs must be performed by the seller as a condition of closing.
Qualfied Mortgage – Also known as “QM,” it is the rule enacted by the Consumer Finance Protection Bureau (“CFPB”) to protect borrowers from unaffordable (some might say “irresponsible”) mortgage lending. It was one of the many laws triggered by the mortgage crisis, circa 2007 – 2012. These rules, which address the consumer’s ability to repay or “ATR,” requires that lender’s loan decisions follow certain reasonable good faith protocols. One was to set the ratio of the borrower’s total monthly debt to total monthly income (DTI ratio). However, QM has since been amended and replaced by a cap the loan’s pricing, i.e., the annual percentage rate (APR) must not exceed the average prime offer rate of a comparable transaction by 2.25 or more percentage points as of the date the interest rate is set. Higher thresholds are set for smaller loan transactions, e.g., manufactured housing loans, and subordinate-liens (e.g., “second mortgages”). True to form, the rules have been amended, which reflect the vagaries of the mortgage market, Covid, and various political considerations. Prior to October 1, 2022, lenders may comply with either the original, DTI-based General QM loan definition, or the revised, price-based General QM loan definition, described above. After October 1, 2022, the original DTI-based General QM definition will no longer be available. This is a summary definition only – the topic is complex and ever-changing.
Qualifying Ratios – See “Mortgage Qualifying Ratios.”
Quantitative Easing (QE) – It is an unconventional form of monetary policy in which the Federal Reserve purchases long-term securities (e.g. Treasury Bonds and mortgage-backed securities) from the open market. This increases the money supply, encourages creates bank liquidity and therefor lending, and helps lower interest rates. QE occurs when short-term interest rates are approaching zero, so the Fed’s normal efforts to control interest rates are no longer effective. Instead, it uses newly created bank notes (aka “printing money”) to fund the purchases. This also provides banks with liquidity.
Querin, Phil – Oregon real estate lawyer, speaker, and writer. See www.Q-Law.com for articles, services, blog and more.
Quiet Title – The name of the legal action that can be brought by one seeking to obtain a judicial (i.e. court) resolution of a problem with the title to land. Occasionally, a quiet title suit is joined with other overlapping forms of relief, such as an adverse possession claim. It can also be used by an owner to remove a recorded encumbrance (or “cloud”) on the property that should not be there.
Quitclaim Deed – One of the four major deeds used in Oregon. A quitclaim deed contains no warranties or representations of ownership. It conveys only the interest the grantor has in the property at the moment of the conveyance. By Oregon statute, any interest that can be conveyed by a bargain and sale deed, may be conveyed by a quitclaim deed. However, to real estate experts, there are only limited circumstances in which the use of a quitclaim deed is appropriate. (See, ORS 93.865)
Radon – According to the Environmental Protection Agency, radon is a radioactive gas created by the natural decay of uranium that is found in nearly all soils. It typically moves up through the ground into the air and into homes through cracks and other holes in the foundation. Homes can trap radon gas inside, where it can build up. Radon is primarily found in soils, although it can enter a home through well water. There are relatively inexpensive kits purchased at hardware stores that can be used to detect the presence of radon. Qualified inspectors can also be used. There are many effective radon reduction techniques that are relatively inexpensive and effective. (See: http://www.epa.gov/radon/pubs/consguid.html)
Rate Cap – The interest rate limit on an adjustable rate mortgage or trust deed, fixing how much the interest rate may change upon either a single adjustment or over the life of the loan.
Rate Lock – A lender commitment to the borrower guaranteeing them a specific interest rate if they close the loan within a fixed period of time. If the rate is not locked it is said to “float” which, during a period of falling interest rates, gives the borrower the ability to wait and see what the market will do. Most rate locks do not give the borrower the ability to secure a lower rate if they should decline by the time of closing. Most locks are free for 30-60 days. There can be lender charges for longer locks ranging from 1/4 to 1/2 of a point, with a point being 1% of the loan amount.
Real Estate Agent – A licensed person whose primary job is to place sellers into contact with ready, willing and able buyers. Most agents work on a commission-based fee structure so that if the property is not sold within the agreed-upon listing period, no commission will be earned. Agents typically absorb the cost of marketing the home in traditional transactions, but with more expensive or challenging properties, the cost of marketing is subject to negotiation with the seller. The Oregon Real Estate Agency regulates the activity of licensed agents. ORS Chapter 696 is the state statutory law governing real estate agents. The regulations which add detail to the statutes can be found in Chapter 863 of the Oregon Administrative Rules.
Real Estate Mortgage Investment Conduit (“REMIC”) – A highly complex and sophisticated vehicle used to hold a pool of mortgages secured by real estate. If properly created and operated, REMICs are not taxed on the income generated. (This is what is meant when it is said that REMICs are not taxed at the “entity level.”) Instead, only the investors are taxed when the REMIC distributes dividends. These vehicles are governed by Sections 860A through 860G of the Internal Revenue Code. The operation of the REMIC is governed by a Pooling and Service Agreement (“PSA”) which defines the roles and responsibilities of the REMIC’s “Trustee” and “Servicer.” Investors’ returns are based upon the amount of risk they are willing to accept. For this reason, REMICs are divided into “tranches” (French for “slice”), with each tranche consisting of bundles of loans rated by their risk of default (e.g. subprime, Alt-A, Alt-B, prime, etc.). The greater the risk, the greater the return – assuming there is no default. When mortgage defaults occur within a REMIC, the investors’ rights of payment on their investment are prioritized by the terms of the PSA, such that those with higher risk get paid only after the investors holding the lower risk shares (or “certificates”).
Real Estate Owned (“REO”) – This term refers to bank-owned real estate that has been recovered back from a borrower in default under their note and mortgage. Property goes into the bank’s REO department either upon completion of a foreclosure, or upon execution of a “deed-in-lieu-of-foreclosure” by the defaulting borrower. [PCQ Note: A borrower cannot “force” the lender to accept a deed-in-lieu-of-foreclosure – or vice versa. It must be consented to by both sides.]
Real Estate Settlement Procedures Act (”RESPA”) – A federal law designed to protect and inform the consuming public in residential real estate transactions and the residential lending process, by requiring the full disclosure of all settlement costs, practices, and affiliated business relationships between settlement service providers such as real estate brokers and mortgage and title companies. There are some critics who assert that RESPA actually results in higher rather than lower closing costs to the consumer.
Real Property – All land, regardless of whether it is improved with a structure or not. Personal property that is “affixed” to land or buildings is included within the definition of real property.
REALTOR® – A state licensed real estate agent or appraiser who is a member of the NATIONAL ASSOCIATION OF REALTORS® (“NAR”). Membership is structured on three-tiers; the local association, the state association and the national association. Membership in the local association such as the Portland Metropolitan Association of Realtors® (“PMAR”) or Central Oregon Association of Realtors® (“COAR”) automatically carries with it membership in the state and national association. Not all licensed real estate agents are Realtors®, but all Realtors® are licensed real estate agents or licensed appraisers. Realtors® are held to a Code of Ethics which establishes standards of conduct that go beyond real estate licensing laws.
Recorder – A public official at the municipal, county or state level whose job it is to take documents for recording, keep records of date and time of recording and the name of the parties, identity of land affected, and make sure that the document is actually recorded with the original being returned to the person designated in the document. A recorder may be known by various names, such as a “County Clerk,” “Records Administrator,” etc.
Recording – The act of filing a document with the proper official in the appropriate state, county or municipal government recording office. In real estate, the type of documents that are necessary to be recorded include deeds, mortgages, trust deeds, documents recording the payoff of mortgages and trust deeds (known as a satisfaction of mortgage and deed of reconveyance, respectively), easements, judgments affecting land, lis pendens, options, land sales contracts (or memoranda thereof) and virtually any other original document dealing with the conveyance of an interest in land. Although recording is not necessarily required to make the document legally binding between the parties, the recording process protects parties involved (such as grantees in deeds, buyers under land sale contracts, easement holders, etc) against the risk of a subsequent transaction affecting the same property that, by recording first, could secure a legal priority.
Recording Fees – Charges assessed by the recording office for taking, processing and returning documents delivered for recording in the public records.
Refinance – The pay-off of an existing promissory note by using funds secured by the same or another lender. Some refinancings merely pay-off the existing note, while others may do so permitting the borrower to take money out of the transaction for a different purpose. Many refinancings are intended to take advantage of falling interest rates, thereby reducing the borrower’s monthly payments. Some banks strictly limit the loan-to-value ratio for refinancing, such that if the borrower has little equity they would be unable to refinance. This was the problem confronted by many borrowers who sought to get out of their adjustable rate mortgages, but were unable to do so because the market value had fallen to the point where they had little or no equity.
Rehabilitation Mortgage – A mortgage or trust deed covering the cost to repair and improve a property. One common type of rehabilitation mortgage is FHA’s 203(k) which permits the borrower to roll the rehabilitation cost into the amount loaned for the home purchase. (See: http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm)
Reinstatement Period – Also known as the “cure” period, which is the time frame during the foreclosure of a trust deed which allows the borrower to repay the amount of the arrears plus certain statutory costs and fees. Other types of debt obligations have cure periods, but for Oregon trust deed foreclosures, it is governed by statute.
Repayment Plan – An agreement during the loan modification process where the lender and borrower agree upon a repayment schedule that applies a portion of their installment payment toward reduction of the accumulated arrears.
Rescission – A legal remedy that permits the “status quo” to be restored as it was before a transaction commenced. In real estate law, a buyer of property may seek rescission of the transaction from their seller based upon the seller’s concealment of material defects or a defect that neither party was aware of. If successful, the buyer would receive back the entire purchase price (less reasonable rent for their period of occupancy or use) and the property would be returned to the seller – thus restoring the status quo as it was immediately before the sale. Oregon statutory law permits recovery of attorney fees for certain rescission claims.
Reverse Mortgage – A mortgage product for homeowners age 62+ allowing them to use their home equity as a source of funds to draw upon before they move out of the home or pass away. The mortgage may be for a lump sum, monthly or periodic payments, or as a line of credit. FHA’s reverse mortgage program is known as “HECM” or “Home Equity Conversion Mortgage.” (See: http://www.hud.gov/offices/hsg/sfh/hecm/hecmabou.cfm)
Right of First Refusal – A contractual agreement wherein a property owner agrees to give a third party the first right to purchase a property before it is offered for sale on the open market.
Risk Based Scoring – A computerized statistical analysis using models and formulas to estimate the future performance of prospective borrowers. Scores, such as FICO (see definition) apply risk based scoring through the evaluation of one’s credit history, income and other financial information.
Robo-Signers – A term of recent origin used to describe personnel inside certain lending institutions and their third-party default processors, whose job it was to sign the thousands of documents necessary to complete a foreclosure. Although not fully understood at this time (October 2010), anecdotal reports indicate that the practice was widespread among the major lenders and processors, and included the signing of bogus foreclosure-related documents, the use of questionable or non-existent powers-of-attorney, and the improper or illegal notarization of signatures. The practice now appears to place in jeopardy the legality of prior and existing foreclosures and the resulting quality of title to foreclosed properties. For these reasons, several large lenders have temporarily suspended all foreclosures throughout some or all of the country.
Sale Leaseback – A transaction in which an owner of property sells it to a buyer under a sale agreement that calls for the seller to simultaneously lease it back.
Second Mortgage – A mortgage (or trust deed) that has been recorded second in time behind an earlier recorded mortgage or trust deed. Second mortgages can be risky to the lender because if the borrower defaults to the holder of the first mortgage and a foreclosure occurs, the second mortgage holder will also be foreclosed out. The only way for the holder of the second mortgage to preserve its security in the property is to pay off the first mortgage so that no one is ahead of them on the public record.
Secondary Mortgage Market – The financial market that consists of investors and institutions engaged in the purchase of loans from banks and other lenders. Fannie Mae and Freddie Mac (see definitions above) are the primary players today as there is little private money available in the secondary market – however that is changing. See Sept. 2021 article here.
Securitization – The process whereby assets or debt instruments are “pooled” or “packaged” together and sold to investors. Since the investors do not directly control these pools, the products are regarded as “securities” and regulated by the federal Securities and Exchange Commission (“SEC”) and their state counterparts. Debt, such as notes and mortgages in real estate are packaged and sold to investors. Once securitized, the principal and interest generated from the debt is paid to the investors.
Security –Refers to an asset, such as one’s home, that is used to “secure” the homeowner’s prompt payment of a loan. The debt, represented by a promissory note, is then said to be “securitized” by another instrument such as a trust deed or mortgage which is recorded in the county where the property is located. The security document gives the lender a right to force the sale of property to satisfy the outstanding indebtedness.
Seller-Carried Financing – An arrangement where the seller of property “takes back” a note and trust deed or mortgage from his or her buyer to cover an unpaid portion of the purchase price. These arrangements most frequently occur when the buyer does not have sufficient down payment to bridge the gap between the sale price of the property and the amount of the bank financing. Seller-carried financing can be risky for sellers since their security (being recorded second, behind the bank) is subordinate to the bank’s mortgage or trust deed (being recorded first). This means that if the buyer defaults to the bank, it will foreclose both the buyer’s ownership interest and the seller’s subordinate lien. While the foreclosure of the seller’s lien does not erase the buyer’s indebtedness due under the promissory note, it does render the note “unsecured,” which means that the buyer could discharge it in bankruptcy.
Servicer – The entity that takes over the responsibility of collecting payments on a loan, impounding and paying taxes and insurance, and generally being responsible to monitor the borrower’s performance under the loan. Some banks service their own loans, and others delegate that responsibility to third party companies.
Setback – The legal distance between a property line and the building structure located on it. Each jurisdiction can vary. There are setback limits on the side, front and back of a property. Setbacks are used for a variety of reasons such as fire safety, utility easement and drainage.
Settlement – Another term used for closing. In Oregon, the term “closing” is more common. Closing can either be a specified date after which the transaction is deemed “dead” due to nonperformance of the seller or buyer; or it can refer to the process occurring in a real estate transaction where money and loan funds are deposited along with transactional and loan documents, calculations are made for the parties, and documents are recorded. Unless agreed otherwise by the parties under an early possession agreement, it is after closing that the buyer has the right of possession. [PCQ Note: In the context of a dispute, a “settlement” is the act of compromising the matter between the parties so as to resolve all contested issues once and for all].
Settlement Statement – The HUD-1, which is the document required under RESPA and given to seller and buyer, itemizing all of the settlement or closing charges associated with the financing and purchase of the property. Effective January 1, 2010 HUD significantly changed the HUD-1 settlement statement and imposed penalties if estimated closing costs set forth on the Good Faith Estimate (“GFE”) exceeded certain legal “tolerances,” or limits, expressed by a percentage of the GFE.
Short Sale – The sale of any property, commercial or residential, where the sale proceeds are insufficient to pay off all liens, encumbrances, commissions and other charges that must be paid at the time of sale. In short sales, the creditors must reach agreement to remove their lien(s) for a price that is less than the face amount due. Short sales can result in potential tax (debt forgiveness) and deficiency (promissory note) liability, and should be reviewed by experts before closing.
Small Claims Court –A court with limited jurisdiction that permits plaintiffs and defendants to file, present and argue their own cases before a judge. Attorneys are normally not permitted without permission of the court. There are no juries. Jurisdiction is limited to claims for money below a certain cap. In Oregon, the maximum amount that may be sought in small claims court is $7,500. While defendants have a limited right to remove the case to circuit court, if he or she does not timely do so, the ruling of the small claims court judge is final and may not be appealed. A judgment from small claims court has the same effect as a judgment in any other court.
Special Warranty Deed – One of the four major deeds used in Oregon. A special warranty deed contains certain warranties or guarantees by the grantor (that is, the transferor of the property) concerning the quality of the title. Although they are the same as the ones found in the general warranty deed, they are limited to the period of the grantor’s ownership and make no warranties as to events affecting the title prior to the time the grantor acquired it. (See, ORS 93.855)
Specific Performance – In real property law, specific performance is a contractual remedy permitting a party in a transaction to compel the other side to specifically perform in accordance with the terms of the contract. It is most commonly sought by buyers whose seller has failed or refused to transfer property to them.
Statutory Deeds – In Oregon there are statutory “short form” versions of the four major deeds described in this Glossary. By referencing the statute in the deed itself, the conveyance carries the same legal effect as if the more formal and lengthy form was used. (See, ORS 93.870)
Statute of Frauds – The statute setting forth what type of agreements must be in writing and signed in order to be enforceable. In Oregon the list is found in ORS 41.580. It includes conveyances of an interest in real estate; leases exceeding one year; and compensation agreements hiring an agent for the sale or purchase of real estate.
Statute of Limitations – The period of time the law allows one to bring a legal claim in court. The claim expires after the statute of limitations has run. As to claims regarding title to land, the statute of limitations is ten years. The statute commences from the date that the aggrieved party knew or should have known of their claim and it runs for ten years and may be renewed if timely done. The statute of limitations may be suspended (or “tolled”) for various reasons, such as minority (under age 18) and incompetency.
Strategic Defaults – A term currently used by Fannie Mae and some lenders to refer to homeowners who default on their loans – that is, stop paying – even though Fannie believes they actually could afford to pay the loan. Fannie has threatened retribution by making these borrowers wait longer to get another home loan. Since Fannie buys most bank-originated residential loans – and is, along with other GSEs (see “Government Service Entities,” defined above), the only player in the secondary market today – it can seemingly make its own rules. Several Congressmen and others have openly criticized Fannie for this pronouncement, and have sought to dissuade it from enacting any retaliatory policies. It should be noted that in the commercial real estate industry – where the dollars involved are much greater than a home loan – many large and well respected companies have routinely engaged in “strategic defaults” (using Fannie’s term) with little governmental outcry.
Structured Investment Vehicle (“SIV”) – A pool of assets that are usually highly leveraged (i.e. their earnings are based upon the spread between their earnings on asset-backed securities “ABS” and the commercial paper they issue) and sold to investors. SIVs were usually kept off the balance sheet of the parent institution, such as a lending institutions and investment banks. Their leverage ratios were usually much higher than those permitted for the parent organization. Since there was little regulation or oversight of them during the housing and credit boom, their make-up and operation were little known and little understood by the public. But due to their highly leveraged nature, when the credit markets collapsed in 2007-2008, SIVs were a major casualty, as were their investors.
Sub-Prime Loan – An industry term used to refer to loans made to borrowers with very low FICO scores or were otherwise credit-challenged. In earlier times, when underwriting guidelines were less stringent, a higher rate of interest was charged to compensate the lender for the increased risk. Because subprime loans provided greater yields due to the higher interest rates, they were sought after by investors during the 2004-2007 period. Moreover, a little understood additional charge known as the “yield spread premium” was being paid by borrowers at closing that awarded mortgage brokers a significant extra payment above and beyond their loan fees for placing borrowers into sub-prime loans. When the credit markets tightened and real estate values collapsed, many subprime borrowers defaulted, thus resulting in one of the first signs of the crisis in the financial markets and secondary mortgage market which had invested heavily in these risky loan products. Although sub-prime loans were the first to fail, today (2010) the credit and mortgage crisis has affected prime loans as well. Today, due to unemployment, tight credit, and the languishing real estate market, there is little money or opportunity for owners to extricate themselves from their distressed housing problems.
Subordinate – The term refers to one’s ranking which is behind, or “subordinate” to an earlier recorded interest. Subordination can be voluntary or involuntary. In Oregon, the time of recording a legal interest in land determines whether one’s interest is superior or inferior to another’s. This priority issue is especially significant when there are competing liens or mortgages recorded on the same property and the equity in that property is insufficient to pay them all off at the time of closing of a sale.
Successor Trustee – In most cases, the original Trustee appointed by the Beneficiary (i.e. the lender) in the Trust Deed, is substituted by another trustee, known as the “Successor Trustee” to actually commence, handle and complete the foreclosure. The foreclosure is sometimes referred to a “Trustee’s Sale.” When the foreclosure auction is completed, the high bidder (frequently the lender itself when there are no bids in excess of the lender’s bid) receives a Trustee’s Deed.
Survey – A map drawn by a licensed surveyor showing the legal boundaries of a property based upon the legal description appearing in the current owner’s deed. Surveys also show the location of other recorded events affecting the property, such as easements, lot line adjustments, improvements, etc. If a structure or fence crosses into or across a boundary line (known as an “encroachment”) it is also noted on the survey. Surveys are fairly expensive and rare in standard residential transactions (unless a boundary line question exists) especially if the property is located in a platted subdivision. However, they are recommended prior to closing should there be any issues such as the proper location of a fence, building, shrubbery, etc. since encroachments are not covered by the standard owner’s policy of title insurance.
Sweat Equity – The use of one’s labor, such as construction of improvements to a home, to increase its value and ultimately the owner’s “equity” (that is, the difference between the remaining principal balance from all existing recorded liens, and the fair market value of the property.)
Tenancy – A right of possession or occupancy of real property. A tenancy can be “periodic,” that is, week-to-week or month-to-month, or for a fixed terms (i.e. a “lease”) such as a one, two, three or more year lease.
Tenant – One who has a right of occupancy under a tenancy agreement. A tenant may also known as a “Lessee.”
Title – One’s right of ownership to real or personal property. A deed is the physical document evidencing one’s title to real property and a bill of sale is evidence of one’s title to personal property. Upon each successive conveyance of title a new deed is given from the then-owner to the new buyer.
Title Company – In Oregon, title companies specialize in the examination and insuring of title to real estate. Attorneys are not usually involved in the process as they are in some states. Most title companies in Oregon also have an escrow department that provides closing (“settlement”) services to the parties.
Title Defect – Anything affecting the marketability of title to real estate, such as a gap in the chain of title where there is no evidence in the deed records showing that one transferring title ever received the same title from someone else. Sometimes title defects occur because an owner died and the estate was never probated, so it is unclear whether any of the heirs still have an interest in the property. A title defect is also referred to as a “cloud” on the title.
Title Insurance – A policy of insurance that that is typically issued to buyers and lenders effective as of the date of closing. The buyer’s policy is called an “owner’s policy” and it guarantees the marketability of the title subject to two sets of exceptions. The first set are called “standard exceptions” as they are found in all owner policies, and they generally include potential title defects that do not appear on the public record, such as boundary encroachments, unrecorded mechanics liens and persons (other than the seller) in possession of the property. The second set of exceptions are called “special exceptions” because they are unique to the specific land being sold. Banks require that their borrowers pay for a “lender’s policy” of title insurance to insure them against certain risks up to the face amount of the loan. Lender policies provide extended coverage beyond that found in owners’ policies.
Title Search – An investigation of the public records, in the county where the property is located, to determine whether title is marketable and can be transferred to a buyer free and clear of objectionable liens and encumbrances. In Oregon, such searches are provided by title companies, not lawyers. The results of the search are first disclosed in a “preliminary title report” that is distributed to the parties, the lender and the real estate agents. The standard statewide OREF Sale Agreement form contains a contingency period for buyers to review the preliminary title report and indicate whether they have any objections to the matters disclosed in the report and for sellers to try to cure any title defects.
Townhome – Generally used to refer to a residential design of side-by-side multiple units sharing a common wall, common roof line, and two-story construction. Each owner has deeded title to their property which is usually the size of the foundation footprint. It may include a strip in front and/or back. Maintenance of the owner’s land, if any, is usually governed by the CC&Rs. However, some townhome developments are actually condominiums, in which the owners merely own the interior of their units, and the rest of the property consists of either limited and/or general common elements. In either case, there is a homeowner association or unit owner association to maintain the common areas.
Tranche – In Real Estate Mortgage Investment Conduits (“REMICs”) (defined above) investors’ returns are based upon the amount of “risk” they are willing to accept. For this reason, REMICs are divided into “tranches” (French for “slice”), with each tranche consisting of bundles of loans rated by risk of default (e.g. subprime, Alt-A, Alt-B, prime, etc.). The higher the risk, the higher the return. However, upon default, the investors in higher risk tranches will find themselves in line behind (i.e. “subordinated to”) the investors in lower risk tranches.
Transfer Tax – A tax levied at the time of each recorded transfer of real estate within the county. Of Oregon’s 36 counties, only Washington County has a transfer tax, which is $1.00 per $1,000 of stated consideration. There are many exceptions to the tax, such as conveyances to clear title, adjust boundary lines, transfers between related companies, etc. In Oregon, it is customary that buyer and seller equally split the cost of the tax for transfers in Washington County.
Trespass – The act of coming upon the land of another without their consent. Trespass can be intentional, reckless, or negligent. It can technically occur when a structure encroaches upon the land of another or when particulate matter is spread upon other’s land. Under certain circumstances no proof of actual damages to the land is necessary for recovery against the trespasser.
Truth-in-Lending Act (“TILA”) – A federal law enacted to promote the informed use of consumer credit by requiring disclosures about loan costs and terms. TILA gives consumers the right to cancel certain credit transactions, regulates certain credit card practices, and provides a method for the resolution of credit billing disputes. The Act prohibits certain practices in connection with credit secured by a consumer’s principal residence.
Trust Deed – The name of the instrument used by most Oregon lenders to secure the promissory note given by the borrower for repayment of a loan. The trust deed, once recorded in the public records, acts as notification to the world that the lender holds a secured position on certain real property for repayment of a debt. The trust deed sets forth the lender’s legal rights of foreclosure should the borrower default under the terms of the note. Mortgages and trust deeds serve exactly the same purpose; they differ only in the terminology and the methods of foreclosure. Many people use the term “mortgage” generically, even though the security document is actually a trust deed. (See, ORS Chapter 86)
Trustee – A person who is appointed by a court or designated in a written document, such as a will or trust, to take control of property for the benefit of another. Under Oregon trust deed law, the trustee is the third party named in the trust deed who is designated to hold the property in trust pending the default or payoff of the promissory note. If the borrower (called the “Trustor” or “Grantor”) pays off the note, the lender (called the “Beneficiary”) instructs to Trustee to issue a Deed of Reconveyance which is the same as a satisfaction of mortgage under mortgage law. If the borrower defaults in the repayment of the note, the lender instructs the Trustee to commence the foreclosure process. In most cases, the original Trustee appointed by the Beneficiary (i.e. the lender) in the Trust Deed, is substituted by another trustee, known as the “Successor Trustee” to actually commence, handle, and complete the foreclosure. The foreclosure sale is sometimes referred to a “Trustee’s Sale.” When the foreclosure auction is completed, the high bidder (frequently the lender itself when there are no bids in excess of the lender’s bid) receives a Trustee’s Deed.
Trustee’s Deed – See “Trustee,” above.
Underwriting – The process of analyzing a prospective borrower’s loan application to determine their ability to honor the terms of a loan for a specific amount of money upon certain repayment terms. It includes a review of the applicant’s credit history, employment, net worth, and a determination of the property’s market value compared to the amount sought for the loan. The final lending decision is made at underwriting. It does not usually occur until late in the real estate transaction which is why in the OREF Residential Sale Agreement, the financing contingency is not waived until the buyer-borrower receives either loan approval or loan rejection.
Up Front Charges – The bank fees charged to a borrower at the time of closing. This includes points, broker’s fees, pre-paid insurance premiums, and other charges.
VA (Department of Veterans Affairs) – A federal agency that guarantees third party bank loans made to veterans and protects lenders against loss that may result from a borrower default.
VA Mortgage – A mortgage guaranteed by the Department of Veterans Affairs (VA).
Variable Expenses– Costs or payments that may vary monthly, such as food and gasoline.
Variance – A term used in zoning law to designate a formal exception (which must be applied for through the local zoning authority) allowing a use on the property that is not included in the permissible uses under the current zoning designation. Usually, entitlement to a variance includes a showing of need, such as hardship or practical difficulty.
Walk-Away – A current term to describe a situation where owners abandon their homes due to being significantly “underwater” – meaning that the value of the home is less than the total indebtedness due and there is no reasonable prospect of selling or refinancing in the foreseeable future. Walk-aways can also result from the inability of owners to pay their adjustable rate mortgage, which may be at a level they can no longer afford.
Walk-Through – A final buyer inspection of a property before closing, with or without accompanying experts. It is frequently performed to confirm that certain contingencies have been met, such as repairs called for in a prior professional inspection which the seller agreed to perform.
Warranty Deed – One of the four major deeds used in Oregon. Of the four, a warranty deed contains the maximum title protection to a buyer. It is the standard deed called for in the OREF statewide Sale Agreement form u. However, even though the seller commits to conveying title at closing with a warranty deed, buyers should still secure a title insurance policy from a reputable company. In Oregon, the seller customarily pays for the buyer’s homeowner’s policy of title insurance and this commitment is contained in the OREF statewide Sale Agreement form. The parties are free to negotiate otherwise, although such a change should be inserted into an addendum or added to the standard printed form. (See, ORS 93.850)
Waste – A legal action filed in court usually by the holder of a security interest such as the seller under a land sale contract, or a holder of a mortgage or trust deed, against the owner-occupant for damaging the property and thereby jeopardizing the holder’s security interest should a foreclosure become necessary.
Yield Spread Premium (“YSP”) – The payment mortgage brokers receive from lenders when they sell consumers a mortgage carrying an interest rate that is higher than what a borrower might otherwise qualify for (“the spread”). The higher the rate, the larger the spread, and the more money the broker can make. Some critics have charged that YSPs are nothing more than a “kickback” by the lender to the mortgage broker for steering consumers – many of whom are already credit challenged – into high-cost loans they cannot ultimately afford. Some studies have confirmed that a large percentage of all subprime loans included YSPs paid to the mortgage broker. Although YSPs are disclosed on the HUD-1, they were not clearly described nor pointed out, and accordingly were either ignored or misunderstood by many borrowers. On the other side of the coin, many mortgage brokers argue that some of the YSP is used toward borrowers’ loan costs thus enabling them to obtain a loan with less up-front money. However, some might say – in retrospect – that the inability to pay these up-front costs is an indicator that perhaps the borrower should never have qualified for the loan in the first place.
Zoning – Laws mainly established at the local (that is, city and county) level affecting the uses of land within its jurisdiction. These laws are used to determine permissible areas for residential use, non-residential use, agricultural, farming, industrial and business use, etc. Local zoning ordinances may also govern other things such as structural type, lot and building size, height restrictions, setbacks, and many other aspects of how land is to be used and how growth is to be controlled.