Glossary of Distressed Real Estate – F
Fair Credit Reporting Act – The federal law enforced by the Federal Trade Commission [“FTC”] that is designed to promote accuracy and 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[i.e. families with children], sex, and disability. Some Oregon cities have identified gender-related and other classes for protection.
FICO or FICO Score – Fair, Isaac & Company (“FICO”) – Through a complicated, secret, and proprietary set of algorithms, this company has developed a “FICO score” which is heavily relied upon by lending institutions in evaluating a person’s credit and their ability to timely repay a loan. The lower the score, the greater the perceived risk of default. The scores are based upon information from the three major credit bureaus; Experian, TransUnion and Equifax. Scores range between 300 to 850. [See, myfico.com]
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; the cumulative effect of multiple short sales, foreclosures, and bank sales in a neighborhood can have a negative impact on fair market value.
Fannie Mae (“FNMA”) – The government sponsored enterprise [“GSE”] known by its full name, the Federal National Mortgage Association. It is similar to Freddie Mac [the “Federal Home Loan Mortgage Association”], which, until both were taken over by the federal government in 2008, were privately held, shareholder-controlled corporations. They have the same purpose today, i.e. purchasing residential loans from banks so they can re-lend their funds to more home purchasers. This model of purchasing loans from originating lenders is known as the “secondary mortgage market.” Together, Fannie and Freddie acquired over 50% of the loans sold into the secondary mortgage market. The remainder of the secondary market consisted of private investors and similar entities, sometimes known as the “private label market”. Following the credit and lending crisis of 2008 and thereafter, the private label secondary mortgage market has dried up, leaving Fannie and Freddie as the two major players.
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.
Fee Title – This term, derived from old English Common Law, refers to the full legal “bundle of rights” that the owner has in the 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 is usually verified by the issuance of a policy of title insurance to the buyer or new owner. [Note: Having fee title is not the same as having “marketable title”. One can have “fee title” that is encumbered by objectionable liens, encumbrances, or other claims, such that it is not marketable, and therefore, is not saleable. – PCQ]
First Mortgage or Trust Deed – A “first” mortgage or trust deed is one that 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 recording. Being “first” in time of recording generally gives the holder of the mortgage or trust deed priority over junior, or “subordinate”, loans that were subsequently recorded. This priority means that the foreclosure sale proceeds will be applied toward reduction of its indebtedness due the first lender, before 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. [The date of execution, i.e. signing, of the mortgage or trust deed does not determine its priority. Rather, priority is determined by the date of recording of the document 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, the interest rate does not “adjust” at given intervals, such as an adjustable rate mortgage (“ARM”).
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. For example, a bank might grant a forbearance to the borrower from making the next three months’ payments.
Force-Placed Insurance – Insurance that is placed on a property by the lender. It is usually triggered when the borrower has failed to keep the insurance current. Since lenders are named as additional insureds on their borrowers’ policies of casualty insurance [e.g. fire or other risks], if that borrower-placed policy expires or is not renewed, the lender will secure its own insurance. Force-placed insurance is exorbitantly expensive, due in part to the fact that the premiums include fee-sharing arrangements between the force placed insurance company and the lenders ordering it. In 2012, bank force placed insurance programs came under fire, and the industry will almost assuredly be watched closer by regulators.
Foreclosure – The legal process whereby a lender 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. In Oregon they may occur judicially or non-judicially. [See, ORS Chapter 86 and ORS Chapter 88.] 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 foreclosure auction, that amount, known as a “deficiency,” may become a personal repayment obligation of the borrower to the lender – or the assignee of the lender, such as a collection agency.
Foreclosure Avoidance Measure – Commencing on July 11, 2012, Oregon law will require that qualifying banks must first offer mediation to borrowers before the Notice of Sale is sent notifying them of a non-judicial foreclosure of their residential trust deed. The purpose of the mediation is to find a “foreclosure avoidance measure” such as a short sale, loan modification, refinance, forbearance, deed-in-lieu of foreclosure, or other solution that avoids the foreclosure event.
Freddie Mac – See “Fannie Mae” above.