Glossary of Distressed Real Estate – C
Cancellation of Debt (“COD”) – This is the term used to refer to any event in which a debtor [e.g. the borrower under a note and mortgage or trust deed] is forgiven of the duty to repay the balance owed on their debt. Subject to several exceptions, the IRS treats COD as income at the debtor’s ordinary income tax rate. Foreclosures, deeds-in-lieu, short sales and even loan modifications can all potentially be taxable COD events. The primary exception to the COD tax is the Mortgage Debt Relief Act of 2007, which expires at the end of 2012, unless renewed. Subject to certain exceptions, 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.
Cap – The maximum limit placed on an adjustable rate mortgage (“ARM”). Since adjustments to the loan’s interest rate are tied to a well-recognized index, e.g. LIBOR, it is important for the borrower to know what “caps” apply. For example, the ARM may have a cap on the amount of any single interest rate increase, as well as maximum total interest rate cap over the life of the loan.
Capital Gain – The gain received by a taxpayer upon sale or other disposition of a capital asset. Gain is measured by the difference between the original purchase price [the “original basis”] and the total sale price received by the taxpayer. If capital improvements [e.g. a new roof] are made to the property, the original basis is adjusted upward by the cost of that improvement. It is this new basis, i.e. the “adjusted basis,” that is deducted from the sale proceeds, to determine the amount of the taxable capital gain, which is taxed to the taxpayer at the applicable capital gains rate.
Capital Improvement – Any material improvement [usually structural, such as a new furnace, a new addition, new garage, etc.] to a capital asset 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) when the asset is sold or disposed of. 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.
Cash-Out Refinance – The refinancing of a property where the borrower receives cash in excess of the amount necessary to pay off the underlying loan(s) being refinanced.
Casualty Insurance – Insurance covering loss from damage to property resulting from the occurrence of certain 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 to real or personal property. The chain usually starts from the federal land patent and continues by successive [or “mesne”]conveyances of record to the present day. A “clean” chain of title would indicate that there were no unbroken “links” in the successive conveyances; that is, every owner appearing on the public record properly received title from his or her predecessor before they conveyed out their interest to their successor. [See also, “Title”]
Clear Title – Usually designates that the property is “marketable,” that is it is clear of any objectionable liens or encumbrances, and therefor may be sold to a third party. If title is not “clear,” it is not marketable.
Closing – The process – sometimes known as “settlement,” especially on the East Coast – by which title is conveyed by the seller in exchange for full payment by the buyer. Closing involves the calculation and collection of all sums necessary to pay off recorded liens, including unpaid property taxes, and the recording of the deed in the public records of the county in which the real property is located. 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, including 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 [on or off the public record] that negatively affects the marketability of title to real property. Objectionable matters, such as a boundary encroachment [off record] or a tax lien [on record], would be clouds on title to real property.
Collateral – The property used as security for repayment of a debt. The security is in written form, and for land, it is usually recorded on the public record where the property is located. In Oregon, a written security interest in land is known as a “trust deed” or “deed of trust” and recording of the document gives legal notice to the world [known as “constructive notice”] that the property is subject to the lender’s secured interest. A recorded trust deed acts as a lien on the secured real property. If a borrower defaults on their loan, the lender may foreclose its trust deed, that is, the “collateral.” If something is “collateralized,” [i.e. used as a verb] it means that some or all of the property is secured, usually to a lender who loaned money against it and took back a deed of trust for security.
Collateralized Debt Obligation (“CDO”) – A generic term used to describe any security that collateralizes the cash flows generated by a pool of debt obligations, such as notes and mortgages. If the securitized pool consists only of mortgages, it is called a “Collaterized Mortgage Obligation” or “CMO.” A “Residential Mortgage Backed Security” is a “RMBS.” 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 private 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.
Combined Loan-to-Value (CLTV) Ratio – While the loan-to-value ratio [“LTV”] is the ratio of a single loan to the lower of a property’s sale price or appraised value [e.g. 80% LTV], the CLTV is the ratio of the first loan combined with all other subordinate financing [e.g. a second position loan or home-equity line of credit] to the lower of the property’s sale price or appraised value.
Commission – In real estate brokerage law, the charge made to a 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 [i.e. separate from the seller’s 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.
Comparables (“Comps”) – 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.
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(5)] Similar to BPOs (“Broker Price Opinions”), CMAs are not “appraisals” even though the process and outcome of the analysis may be similar.
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 the limited and general common elements. [See,ORS Chapter 100]
Conforming Loan – A loan that complies with the underwriting guidelines established by one of the government sponsored enterprises, or “GSEs,” e.g. 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 certain 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.
Consumer Financial Protection Bureau (“CFPB”) – Federal agency charged with regulating consumer protection laws relating to mortgages, credit cards, and other consumer financial products and services. It was created in 2010 by the Dodd–Frank Wall Street Reform and Consumer Protection Act.
Conventional Loan – A loan from a private bank or other institutional lender, as opposed to one guaranteed or insured by the federal or state government, such as the Oregon Department of Veterans Affairs [“Oregon DVA”], the Federal Housing Administration [“FHA”], or the federal Department of Veterans Affairs [“DVA”].
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. These types of loans are sometimes called “Convertible ARMs.”
Counter-Offer – An offer made in response to an earlier offer. Counter-offers are legally regarded as an implied rejection of the earlier offer even if they do not say so.
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 History – The record of one’s debt history. Credit history is used to evaluate one’s fitness for loan repayment as well as judging the risk of default. One’s credit history determines the interest rate that will be charged for a loan, or the premium that will be charged for some other service, such as auto or life insurance. The greater the perceived credit risk, the higher the rate or premium. Credit history is reflected in a report and is often accompanied by a credit “score” such as a “FICO” score (See FICO in Glossary).
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 Poor’s (“S&P”), Fitch, and Moody’s. The Securities and Exchange Commission regulates the ratings bureaus.
Credit Report – A written report containing detailed information about a consumer’s credit history. It includes such things as 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, or extension of credit, 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.