Glossary of Distressed Real Estate – P
PITI – Stands for “Principal, Interest, Taxes, and Insurance” which make up the bulk of most borrowers’ monthly installments to the lender for repayment of the residential purchase loan. The taxes and insurance are often held by the lender in an “impound account” and paid on an annual basis.
Partial Payment – The payment of less than the total amount owed. Partial payments normally do not have to be accepted by lenders where the loan documents specify a minimum monthly installment.
Payment Cap – A limit or ceiling on the amount of any single increase, in terms of dollars, on an adjustable rate mortgage (“ARM”) due to an increase in the index to which the interest rate is tied. The term also refers to the size of any installment payment due upon adjustment in the interest rate. A payment cap [referring to dollars] is not the same as an interest rate cap [referring to the percentage interest rate charged for the loan at any given time].
Payment Change Date – The date when monthly installments on an adjustable rate mortgage, or “ARM,” or a graduated-payment mortgage, or “GPM,” will change. Generally, the payment change date occurs in the month immediately following the interest rate adjustment date.
Payment Due Date – The date in the promissory note and mortgage, or trust deed, when periodic payments, usually monthly, are due. Most loan agreements have a payment due date, followed by a grace period of a few days, and a date after which a late charge is assessed to the borrower.
Plaintiff – One who brings a claim in court seeking some remedy or relief. If the claim is brought in arbitration, the plaintiff is called the “claimant.”
Points – A lender charge made to the borrower for a loan. A point is equal to one percent of the principal amount of a mortgage or trust deed. For example, one point on a $300,000 loan is $3,000. Lenders may charge points for many reasons, such as to increase the yield, i.e., the return, on the loan, to cover closing costs, to charge for loan processing, to issue a loan lock beyond a fixed period of time, or other reasons. Points may be charged at the borrower’s request to “buy down” the interest rate so that the monthly payments are lower. Points are typically paid at the time of closing. Sometimes the points are shared between the seller and the buyer/borrower.
Pooling and Servicing Agreements (“PSAs”) – PSAs act as the governing document when a large pool of loans is sold into the market as securities. Many such pools took the form of REMICS which acted as a trust document, defining the rights of the investors and the duties of the trustee and servicer.
Power of Attorney – A legal document recognized in Oregon and most states, granting certain authority to one person to take binding legal action on behalf of another. The person receiving the power is called the “attorney-in-fact.” In Oregon, powers of attorney should be recorded if they deal with land. A limited power of attorney grants only limited powers to the attorney-in-fact. A general power of attorney gives nearly unlimited powers. The authority granted under a power of attorney ceases upon death or incapacity of the person granting it. However, a “durable power of attorney” is intended to survive incapacity in order that a selected third party is allowed to make major end of life decisions. Durable powers of attorney are recognized in most states, including Oregon.
Pre-Approval Letter – A written letter from a lender, mortgage broker, or other loan originator, stating that based upon verification of certain financial information from the applicant, including such things as a credit check, debt to income analysis, and verification of down payment, they would process a certain size loan for the borrower. Pre-approval letters contain significant limitations such as appraisal review, and are not a binding commitment to make the loan. Final loan commitment can only be made by the loan underwriter, which normally does not occur until very late in the loan process, shortly before closing of the purchase transaction.
Preliminary Title Report – When a policy of title insurance is ordered, the title insurance company first issues a “preliminary” title report, informing their prospective insured of the status of the title. If a defect appears on the public record, it should be disclosed in the preliminary report, and the prospective insured can decide whether to complete the transaction[e.g. a property purchase, a bank refinancing, or a bank loan], perhaps by first requiring removal of the objectionable defect on title.
Pre-Qualification Letter – This document is far less reliable than a pre-approval letter. In the pre-qualification letter the loan originator or mortgage broker is making a representation concerning the borrower’s capacity to qualify for a loan without actually reviewing any of their financial data. The originator is simply relying upon the prospective borrower’s oral representations.
Predatory Lending – A term used to describe any unscrupulous loan practice by lenders and others involved in loan origination. Most states have regulations and statutes against such tactics, especially in light of the events of 2005 – 2008 when loans were made to borrowers who did not understand the terms and were frequently incapable of repayment.
Prepayment – The payment of all or a part of a loan balance prior to the end of the term. A partial prepayment does not eliminate the obligation to pay the regular monthly installments. A full prepayment satisfies the borrower’s entire obligation under the note and mortgage or trust deed. Some lenders have restrictions and limitations on full prepayment. A typical prepayment penalty fee consists of a significant charge, usually stated as a percentage of the amount being prepaid. The reason for such penalties is because the loan terms may contain a low “teaser” interest rate early in the term and prepayment would deprive the lender, or the investors who buy the loan package in the secondary market, from receiving their expected yield.
Prepayment Penalty – [See, “Prepayment”.]
Prime Borrower – One who, due to his or her excellent credit, credit rating, and other lending criteria, is able to receive the best interest rate and terms from a lender. Those at the other end of the credit spectrum became known as “sub-prime” borrowers, and were charged higher fees and interest rates. [See, sub-prime loans]
Prime Rate – The interest rate a bank charges its preferred customers. The rates are published in the business media and are frequently used as the index for interest rate adjustments on ARMs or lines of credit. The Prime Rate is usually adjusted in correlation to the adjustments of the Federal Funds Rate.
Principal – The amount initially borrowed from a lender. As the loan is paid back, the borrower’s monthly installments are applied first toward interest and then to reduce the principal balance of the loan. On a fixed rate fully amortizing loan the principal balance is gradually reduced over the life of the loan.
Principal, Interest, Taxes, and Insurance – See “PITI”.
Private Label Secondary Mortgage Market – The market that exists to purchase loans from banks. It works that same as Fannie Mae and Freddie Mac, in that it bought loans, packaged them into pools and sold these as securities to investors. However, while Fannie and Freddie only bought loans that “conformed” to their underwriting standards, the private label market bought riskier, non-conforming and sub-prime loans. During 2005 – 2007, the ratings agencies were giving investment grade ratings to these pools of subprime loans, which encouraged investors to purchase them. Then in the third quarter of 2007, the agencies made mass downgrades in these securities, which resulted in the collapse of the credit markets. Once housing loans became tight there were fewer buyers and values plummeted. Today there is no viable secondary mortgage market.
Private Mortgage Insurance (“PMI”) – See, “Mortgage Insurance”.
Promissory Note – The legal instrument that sets forth the amount of a debt due on a loan, including the repayment terms such as the interest rate, monthly payments and due dates. If the promissory note is accompanied by a trust deed or mortgage recorded on the borrower’s real property, it is said to be a “secured” note.
Property Tax – In Oregon, the charge imposed by the county government to fund public services such as schools and law enforcement. The total amount of property tax is determined annually through a budgeting process and then assessed based upon a percentage per $1,000, known as “the millage rate,” of assessed value of the property located in the county.
Public Record – Information contained in the records of all public institutions such as the courthouse, the Secretary of State, the Corporation Commissioner, the Department of Justice, etc. These records pertain to certain events such as court filings, recorded liens for loans, taxes, court judgments, bankruptcies, criminal convictions, corporate filings, etc. Under Oregon law, certain public record information [particularly that contained in the county courthouse records dealing with land] imparts what is known as “constructive knowledge” to the world as to the information contained in those records – even though one may have no “actual knowledge” of the event recorded. It is for that reason that title insurance is important when real property is purchased, since the title insurer checks the public records to determine the status of the title being conveyed, and then informs the buyer of that information before closing of the transaction. The information provided is then listed on a policy of title insurance, essentially guaranteeing to the insured the correctness of the title information contained on the public record.