Glossary of Distressed Real Estate – M
Margin – In adjustable rate loans (“ARMs”), an interest rate, usually in the 2% to 3% range (the “margin”), is added to the indexed rate to arrive at the total applicable ARM rate. The margin component of the ARM rate does not adjust – only the indexed portion. So when shopping various ARMs, prospective borrowers should always want to know bothrates, since the margin rate will remain permanent throughout the life of the loan. In some cases, it is better to select a higher indexed rate and lower margin, since the former can drop, but the latter will never rise.
Market Value – Also expressed as “fair market value” or “FMV.” The fair market value is the price a willing, ready and able buyer would pay to a willing, ready, and able seller for a property. Market value assumes that the parties are not operating under any external influences and have adequate time to negotiate. A price paid to a seller in a short sale who is facing an impending foreclosure may not reflect the market value. However, since the current market has a disproportionate number of short sales and bank sales – both of which can be for lower prices – they drive the sale price down, even though they would not normally be regarded as “market value” sales.
Maturity – The date a loan becomes fully due and payable. The maturity date will be found in the promissory note that accompanies the mortgage or trust deed.
Median Price – A term used to refer to the price of housing that falls into the statistical middle of the total number of homes for sale, or sold, in a certain area. Thus, a “median sale price” of $300,000 means that in a given sampling over a specific period of time, there are an equal number of homes sale above $300,000 as below $300,000.
Mediation – A private and confidential dispute resolution process where the parties use a neutral third person to reach consensus on settlement. The mediator does not make a “ruling” about who is right or wrong, and cannot force the parties to settle. The fact that the parties participated in mediation or that one party refused to do so is not admissible in trial. 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 to them. The Notice of Sale identifies the foreclosure sale date and must precede the sale by at least 120 days. 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.
Merged Credit Report – One issued by a credit reporting company that contains combined information from multiple credit bureaus.
MERS – Mortgage Electronic Registration System. Electronic registration emerged as an intended solution to the problem of paper. All states require some method of tracking the successive transfers of real estate and the successive creation of interests in real estate (e.g. mortgages, liens, easements, etc.). The usual method is to require that the actual document creating or transferring the interest be recorded in the county where the property is located. The actual date and time of recording determines the priority of the transfer or interest – such as the priority between a first and second mortgage. However, with the creation of the mortgage securitization industry (see “Real Estate Mortgage Investment Conduit – REMIC”), lenders soon began to lose track of their paper – or neglect to create it in the first place. This problem was compounded by the fact that lenders frequently transferred mortgages between themselves without recording the transaction. This failure became serious when it came time to foreclose a mortgage, since the public record did not always identify the current owner of the mortgage. Enter, MERS, which was the mortgage banking industry’s attempt to address the recordation problem by using electronic commerce to eliminate paper. Although it does not cover all mortgages across the country, by some estimates it has registered 65 million of them since 1997. The concept is that MERS acts as “nominee” on the actual mortgage document that is recorded in the county land records. According to their website (http://www.mersinc.org/) a “…loan registered through the MERS® System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.” However, with the onslaught of foreclosures, and the increasing number of borrowers fighting them, some courts are now rejecting the MERS concept of “inoculation,” and instead, are insisting that if a lender is going to foreclose, the note and mortgage must actually be produced and registration with MERS alone is insufficient proof of current ownership of the paper.
Modification – A term in common usage today referring to an agreement between lender and borrower to change one or more repayment terms of a loan. Loan modifications can range from a temporary or permanent reduction in the interest rate to a deferral or reduction of the principal balance. In some cases the loan maturity date is extended and re-amortized (such as changing the principal and interest payments from a 30-year fully amortizing loan to a 40 year fully amortizing loan, thereby reducing the monthly payments). Evaluation of the benefits of loan modifications should be done by a qualified professional, as recent experience has suggested that there is a significant re-default rate on such programs.
Moral Hazard – A term used during the real estate and credit crisis to explain risk-taking behavior. The concept is that where downside risk is limited or insured against, it will encourage more risk-taking activity. The insurance industry is often used as an example, where the financial consequences of a certain activity are insured against (to a point), such as risky driving. Moral Hazard has also been used to refer to risk-taking activity of borrowers who took out loans they could not afford, believing that if they could no longer afford the payments, they could re-sell or re-finance out of the problem. On the lending side, the concept of Moral Hazard relates to the “Too Big to Fail” attitude of large lenders, who made risky proprietary wagers [i.e. investments made on their own behalf and using their own capital], believing that the federal government would bail them out if they got into trouble.
Mortgage – The name of the instrument used by some lenders to secure the promissory note given by a borrower for repayment of their loan. The mortgage, once recorded on the public record, serves as notification to the world that the lender holds a secured position on certain real property for repayment of a debt. The mortgage sets forth the lender’s legal rights of foreclosure should the borrower default in repayment of the note. Although mortgages are legal in Oregon, they are rarely used as the security document of choice. Most Oregon lenders prefer to use trust deeds. [See, ORS Chapter 86] Mortgages and trust deeds serve the same purpose; they differ only in the terminology and the methods of foreclosure. Many people use the term “mortgage” interchangeably with “trust deed,” and Oregon law provides that they are essentially the same, except with regard to the method of foreclosure.
Mortgage-Backed Securities (“MBS”) – The name of the security document used by institutions such as Fannie Mae who purchase loans from banks in the secondary mortgage market so that the banks will have sufficient funds to continue lending. These mortgages are packaged and sold as securities [e.g., shares of stock] to investors. The collective mortgage payments of principal and interest made by the borrowers [i.e., “the stream of income”] are used to pay the investors who bought the securities. [There are many different types of mortgage-backed securities with varying degrees of risk and each with their own name and set of abbreviations: RMBS = Residential Mortgage Backed Securities; CMBS = Commercial Mortgage Back Securities; CMO = Collateralized Mortgage Obligations; CDO = Collateralized Debt Obligations.]
Mortgagee – The term used in a mortgage document to identify the lender. In Oregon, under trust deed law, the mortgagee is known as the “Beneficiary.”
Mortgage Forgiveness Debt Relief Act of 2007 – This Act forgives income tax imposed on homeowners who have had their mortgage debt cancelled under Internal Revenue Code Section 108. To qualify, the debt must have been used to build, buy, or substantially improve a primary residence owned and occupied by the owner for two out of the last five years.
Mortgage Insurance – Insurance that is required of borrowers from conventional lenders [as opposed to government insured or guaranteed programs, such as FHA and VA]. Typically, such insurance is required when the borrower is unable to pay a minimum 20% down payment on their residential loan. The policy protects the lender against a portion of the loss that may occur if the borrower defaults on a loan. The premium is calculated into the monthly mortgage payment and continues until the unpaid principal falls below either 80% of the original loan, or [usually following appraisal] 80% of the then-current market value of the property. Mortgage insurance also is available through certain government agencies, such as the Federal Housing Administration (FHA) or private companies, such as Private Mortgage Insurance (“PMI”). During the years of rampant securitization of loans, circa2004-2007, some banks placed their own mortgage insurance, or “MI,” on loans, without the knowledge or consent of the borrowers. This creditor-placed MI was done as a form of “credit enhancement” of the paper, i.e. so it would receive a higher rating by the credit agencies, and thus be more attractive to investors.
Mortgage Insurance Premium (MIP) – The premium charged to a borrower for mortgage insurance. MIP is currently tax deductible under certain circumstances.
Mortgage Interest Deduction – The deduction one may take against gross income for interest payments made on primary and secondary residence. There are many exceptions and stipulations, the main one being that the total mortgage debt may not exceed $1,000,000.
Mortgage Qualifying Ratios – The ratios or guidelines used by many lenders to calculate a borrower’s capacity to afford a certain mortgage and set of monthly mortgage payments. These ratios compare the borrower’s monthly income to their mortgage expenses. [See, Debt-To-Income Ratio]
Mortgagor – The term used in a mortgage document to identify the borrower. In Oregon, under trust deed law, the mortgagor is known as the “Trustor” or “Grantor.”