Glossary of Distressed Real Estate – R
Rate Cap – The interest rate limit on an adjustable rate mortgage [“ARM”] or trust deed, fixing much the interest rate may change upon (a) a single adjustment, or (b) over the life of the loan.
Rate Lock – A lender commitment to the borrower guaranteeing them a specific interest rate if they close the loan within a fixed period of time. If the rate is not locked it is said to “float” which, during a period of falling interest rates, gives the borrower the ability to wait and see what the market will do. Most rate locks do not give the borrower the ability to secure a lower rate if they should decline by the time of closing. Most locks are free for 30-60 days. There can be lender charges for longer locks ranging from 1/4 to 1/2 of a point, with a point being 1% of the loan amount.
Real Estate Mortgage Investment Conduit (“REMIC”) – A highly complex and sophisticated vehicle used to hold pools of mortgages on real estate. If properly created and operated, REMICs are not taxed on the income generated. This is what is meant when it is said that REMICs are not taxed at the “entity level.” Instead, only the investors are taxed when the REMIC distributes dividends. These vehicles are governed by Sections 860A through 860G of the Internal Revenue Code. The operation of the REMIC is governed by a Pooling and Service Agreement or “PSA,” which defines the roles and responsibilities of the REMIC’s Trustee and Servicer. Investors’ returns are based upon the amount of risk they are willing to accept. For this reason, REMICs are divided into “tranches” [French for “slice”], with each tranche consisting of bundles of loans rated by their risk of default [e.g. subprime, Alt-A, Alt-B, prime, etc.]. The greater the risk, the greater the return – assuming there is no default. When mortgage defaults occur within a REMIC, the investors’ rights are prioritized by the terms of the PSA, such that those with higher risk get paid only after the investors holding lower risk shares or “certificates.”
Real Estate Owned (“REO”) – This term refers to bank-owned real estate that it has recovered back from a borrower in default under their note and mortgage. Property goes into a bank’s REO department either upon completion of a foreclosure or upon execution of a voluntary “deed-in-lieu of foreclosure” by the defaulting borrower. [Note: A borrower cannot “force” the lender to accept a deed-in-lieu of foreclosure – or vice versa. It must be consented to by both sides. – PCQ]
Real Estate Settlement Procedures Act (”RESPA”) – A federal law designed to protect and inform the consuming public in residential real estate transactions and the residential lending process, by requiring the full disclosure of all settlement costs, practices, and affiliated business relationships between settlement service providers such as real estate brokers and mortgage and title companies. There are some critics who assert that RESPA actually results in higher, rather than lower, closing costs to the consumer.
Real Property – All land, regardless of whether it is improved with a structure or not. Personal property that is “affixed” to land or buildings is a “fixture” and is transferred along with title to the real property.
Recorder – A public official at the municipal, county or state level whose job it is to take documents for recording, keep records of date and time of recording, the name of the parties, identity of land affected, and make sure that the document is actually recorded with the original being returned to the person designated in the document. A recorder may be known by various names, such as a “County Clerk,” “Records Administrator,” etc.
Recording – The act of filing a document with the proper official in the appropriate state, county or municipal government recording office. In real estate, the type of documents that are necessary to be recorded include deeds, mortgages, trust deeds, documents recording the payoff of loans [e.g. satisfaction of mortgage or deed of reconveyance], easements, judgments affecting land, lis pendens, options, land sales contracts [or memoranda thereof] and virtually any other original document dealing with the conveyance of an interest in land. Recording is not necessarily required to make a document legally binding between the parties; it just establishes priority in the event of competing claims.]
Recording Fees – Charges assessed by the recording office for taking, processing and returning documents delivered for recording in the public records.
Redemption, Right of – The right, provided by state statute, which a borrower may have to repurchase from the bank the property taken in foreclosure. The cost to repurchase would be the amount that the bank is owed upon completion of the foreclosure, plus the costs and fees of foreclosure. In Oregon today, homeowners have a six month right of redemption following a judicial foreclosure; but no right of redemption, following a non-judicial foreclosure. Note that today, most rights of redemption are illusory, since the market value of the property is less than the indebtedness owed against it. In other words, most foreclosed borrowers would not want – even if they had the funds – to repurchase their foreclosed home, since the cost to do so would exceed the value of the home.
Refinance – The pay-off of an existing promissory note by using funds obtained from the same or another lender. Some refinancings merely pay-off the existing note, while others may permit the borrower to take money out of the transaction for a different purpose. This is called a “cash-out” refinancing. Many refinancings occur in order to take advantage of falling interest rates, thereby reducing the borrower’s monthly payments. Some banks strictly limit the loan-to-value ratio for refinancing [e.g. 60% of the appraised value], such that if the borrower has little equity they would be unable to refinance. This was the problem confronted by many borrowers who sought to get out of their adjustable rate mortgages, but were unable to do so because the market value had fallen to the point where they had little or no equity. HAFA, is the federal Making Homes Affordable program that permits some borrowers to refinance their current loans, even though they are more than the appraised value of the property.
Reinstatement Period – Also known as the “cure” period, which is the time frame during the non-judicial foreclosure process that a borrower may repay the amount of the arrears plus statutory costs and fees. It commences from the Notice of Default, and continues up to five days before the scheduled sale. Within the five day period, the only way the borrower may prevent the foreclosure, is to pay the entire accelerated principal balance, plus accrued interest, penalties, costs and fees.
Repayment Plan – An agreement during the loan modification process where the lender and borrower agree upon a repayment schedule that applies a portion of their installment payments toward reduction of the accumulated arrears.
Residential Trust Deed – Oregon law provides that this is trust deed on property upon which are situated four or fewer residential units, one of which is occupied by the grantor, the grantor’s spouse or the grantor’s minor or dependent child that occupies it as a principal residence at the time a trust deed foreclosure is commenced. As of July 11, 2012, the underscored language will read as follows: “at the time a default that results in an action to foreclose the obligation secured by the trust deed first occurs.” The reason the underscored language is important is that Oregon law prohibits a lender from recovering a judgment against a borrower following the foreclosure of a residential trust deed. Thus, after July 11, 2012, so long as the borrower is in the primary residence at the time of his/her default under the note and trust deed, no personal deficiency liability can result if the property is foreclosed so long as that default led to the ultimate foreclosure. Under certain circumstances, if the first position lender forecloses a residential trust deed where there is also a second mortgage, that second lender may not obtain recovery for any deficiency either.
Reverse Mortgage – A mortgage product for homeowners age 62+ allowing them to use their home equity as a source of funds to draw upon before they move out of the home or pass away. The mortgage may be for a lump sum, or withdrawn on a monthly or periodic basis, similar to a line of credit. FHA’s reverse mortgage program is known as “HECM” or “Home Equity Conversion Mortgage.”
Risk-Based Scoring – A computerized statistical analysis using models and formulas to estimate the future performance of prospective borrowers. Scores, such as FICO, apply risk-based scoring through the evaluation of one’s credit history, income and other financial information.
Robo-Signers – A term of recent origin used to describe low level personnel inside certain banks, servicers, and default servicing companies, whose job it was to sign the documents necessary to complete a foreclosure. These people routinely placed their signatures on hundreds of legal documents a day, which they did not read or understand. However, they were given false titles that created an impression they had reviewed the records and understood what they were signing. Anecdotal reports indicate that the practice was widespread among the major lenders, servicers and processors, and included the signing of foreclosure-related documents, the use of questionable or non-existent powers-of-attorney, and the improper or illegal notarization of signatures. The practice placed in jeopardy the legality of non-judicial foreclosures and the resulting title to the foreclosed properties. For these reasons, in 2011 many lenders temporarily suspended all non-judicial foreclosure throughout Oregon and the rest of the country for a period of time, in order to review their procedures.