Glossary of Distressed Real Estate – L
Late Payment Charges – A lender-imposed charge assessed on a borrower whose payment is received after expiration of the grace period.
Leverage – The degree to which a person or business uses borrowed funds in the acquisition of assets or operation of their business. Since there are certain tax advantages associated with some leverage, such as 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 and refinance based upon loose underwriting policies. The process of eliminating debt that hinders one’s business operations is called “deleveraging.”
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 for calculating interest rate adjustments on adjustable rate mortgages, or “ARMs.” [Typically, the borrower’s interest rate includes a fixed margin or constant of X% that when added to the LIBOR rate equals the borrower’s adjusted rate. In January, 2006 – in the middle of the credit bubble – the 12-month LIBOR rate was 4.9412%. In October 2010, the 12-month rate was 1.2275%. This means that for those ARMs indexed to LIBOR, many borrowers’ interest rates declined significantly. This is why smart shoppers for ARMs sought adjustable rates that included lower margins, since it was this component that was fixed. A margin can never raise, just the indexed rate.]
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 Theory State – A “lien theory state” is one in which the law provides that the lender under a trust deed or mortgage holds merely a “lien” against the property, but legal title is held by the borrower. The opposite view is held in “title theory states,” i.e. that the lender holds legal title to the property until it is paid off by the borrower. Oregon is a lien theory state.
Lifetime Cap – In an adjustable rate mortgage, or “ARM,” the total maximum interest rate that may be charged at any time during the term of the loan. ARMs also have a minimum, or floor, below which the rate may not drop.
Line of Credit – The 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 – Assets that can quickly be converted into cash. Money market funds and company stock traded on a national exchange are typical examples.
Loan Fraud – The term is most frequently used to describe any intentional misstatement of material information at any stage of the lending process. Recently, it has been divided into two categories: Fraud committed in the acquisition of a home [e.g. falsifying information on the application], and fraud committed for profit [e.g. using a straw man, false appraisal or other means to obtain a loan with the intention of flipping the property for a profit shortly after closing].
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 Originator – [See, Mortgage Loan Originator (“MLO”)]
Loan Servicer – [See, “Servicer”]
Loan To Value Ratio (“LTV”) – The ratio, expressed as a percentage of the appraised value of a home, that determines 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 buyer will pay at the time of closing. [If the borrower does not have the 20% down payment, he or she will have to secure mortgage insurance covering the shortfall. For example, if the borrower pays 5% down, he or she would need mortgage insurance insuring the ultimate owner of the loan – which may or may not be the original lender – against default up to 15% of the unpaid balance of the loan.]
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, the rate will “float” with the then-current market rate. If the locked rate is lost and the market interest rate at closing is significantly higher, the buyer may wish to “buy down” the rate with a lump sum payment at closing. If interest 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 work out solutions with borrowers that avoided the need to foreclose on the property. Loss mitigation is also known as “foreclosure avoidance” and can include loan modification, short sale, or deed-in-lieu of foreclosure.