Glossary of Distressed Real Estate – D
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 reoccurring debt, versus their gross monthly income [i.e. before deduction for tax withholding, social security, etc.] from all sources. There are two DTIs: The amount of one’s total reoccurring monthly housing expense [i.e., for principal, interest, taxes, insurance (aka “PITI”) and HOA dues] compared to their gross monthly income from all sources, will yield a ratio called “the Front-End DTI” or “Front-End Ratio.” 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 upon closing of the transaction in the public records of the county where the property is located. 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. [See, generally ORS 93.850 – 93.870.]
Deed-in-Lieu-of-Foreclosure (“DIL”) – 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 the foreclosure process, legal advice should be obtained before giving property back in this manner, as there can be unintended legal, credit, and tax consequences. See Q-Law blog post discussing DILs, here.
Default – The failure to honor the terms of a contract. Most contracts, such as a note and trust deed, require that written notice of default be given to the borrower before the lender may institute the foreclosure 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. For example, if a lender judicially foreclosed a property and netted $300,000 after sale, but the debt due from the borrower was $400,000, the court might issue a judgment against the borrower for the deficiency, i.e. $100,000. However, Oregon has several anti-deficiency provisions protecting certain qualifying homeowners from the risk of a deficiency. If the foreclosure is “non-judicial” the foreclosing lender can obtain no deficiency, since Oregon law provides that the promissory note (which provides the basis for the deficiency) is essentially extinguished. [See, ORS 86.770.]
Depreciation – In real estate terminology, “depreciation” is the loss in value 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 of the asset over its useful life.
Desktop Underwriter (“DU”) – Fannie Mae’s automated loan underwriting system that is used by originating lenders intending to sell their loans to it. Being automated, the system avoids the risk of human subjectivity in the lending process.
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 the loan 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 or following the latest refinancing. Frequently, distressed housing is also characterized by a trust deed and/or other liens that together exceed the price the property 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 or events such as the inability to refinance a burdensome loan, a falling real estate market, lack of renters or buyers (if investment, retail or commercial property) or personal circumstances, such as job loss or divorce. 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 loan repayment terms that the borrower can no longer afford to meet.[Note: A loan modification could be regarded as a “distressed transaction” since it fits the above criteria, although the process is designed to permit the borrower to remain in the home. – PCQ]
Dodd-Frank – The Dodd-Frank Wall Street Reform and Consumer Protection Act. A 2010 federal law regulating the financial industry. Its purpose was to prevent a repeat of the 2008 financial crisis by establishing new rules designed to increase transparency and accountability within the lending industry. It also implemented rules for consumer protection and created the Consumer Financial Protection Bureau (CFPB).
Down Payment – The principal amount paid at the time of closing that represents [in addition to the earnest money deposit] the buyer’s cash contribution toward the purchase price of a property. The remaining 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 generally mean that 20% of the purchase price is represented by the buyer’s down payment.
Due on Sale Clause – The 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.