Glossary of Distressed Real Estate – A
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.
Acceleration – The process of calling the entire unpaid 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.
Addendum – A document added to an agreement either at the time of execution (i.e. 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. [Typically, the borrower’s interest rate includes a fixed margin or constant of X% that when added to the indexed rate equals the borrower’s adjusted rate. Smart shoppers for ARMs sought adjustable rates that included lower margins, since it was this component that was fixed. A margin could never change, just the indexed rate.]
Affidavit – A written statement of facts sworn to be true by the person making it. That person is called the “Affiant.”
Agent – A designated 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.]
Allonge – A document attached to a promissory note in order to enable it to be endorsed [“indorsed” per the Uniform Commercial Code, or “UCC”] when there is no space on the back of the note itself. Allonges were subject to much abuse, such as forgery, in the early years of the foreclosure crisis in judicial foreclosure states, such as Florida.
Alt-A Loan – 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 loans that are based upon the risk of borrower default. In terms of risk, they are somewhere between subprime [i.e. the highest potential for borrower] and prime loans [i.e. those given to the most qualified borrowers]. The interest rate, which is the primary indicator of a lender’s perceived risk of borrower default, is generally higher on Alt-A loans, but lower than on sub-prime loans.
Amortization – The gradual reduction of the principal balance of a loan that results from periodic payments by the borrower. Once the last payment is made, it is said that the loan has been “fully amortized.”
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; it includes other costs, such as points paid and other fees and charges. 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 sales of similar [i.e. “comparable”] 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 [Hereafter, this company will be referred to as “OREF”] contains a buyer contingency providing that if the property does not appraise for at least the sale price, the buyer may withdraw from the transaction and recover back the earnest money deposit. In Oregon, an “appraisal” may only be made by a licensed appraiser. A “Broker Price Opinion” will not qualify as an appraisal for lending purposes.
Appraised Value – The opinion of value of a property issued by a state-licensed appraiser. For lending purposes, banks will loan up to a percentage of the appraised value, with the remainder coming from the borrower in the form of the down payment. When the sale price of a 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 fails.
Appreciation – The increase in market value of a property. Appreciation may be the result of market forces, i.e. supply and demand, or by physical improvements making the property more desirable. It is the opposite of “depreciation,” which is the loss in value.
Arms-Length Transaction – A transaction between two or more parties in which there are no undisclosed relationships or motivations. The sale and purchase of real estate between two strangers whose sole motivation is to sell and buy, is said to be “arms-length.” One between a seller and the seller’s relative or close friend, designed to relieve the seller of the financial obligation of a recorded mortgage on the property, may not be arms-length.
Assessed Value – The value placed on real property by an assessor, such as the tax assessor. The tax “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 to make future assessments – usually appear on the public record, and are thus disclosed on title reports issued by title companies.
Assessor: A governmental official 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.
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 will have the right to 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 permit assignment, the assumable rate was readjusted to reflect the current [i.e. higher] 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. An attorney-in-fact form may either be “general,” i.e. virtually unlimited, or “special” or “limited,” i.e. restricted to certain acts, such as signing certain legal documents.
Automated Underwriting – [See also, “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.