Glossary of Distressed Real Estate – S
Second Mortgage – A mortgage or trust deed that has been recorded second in time behind an earlier recorded mortgage or trust deed. Second mortgages can be risky to the lender because if the borrower defaults on the first mortgage and a foreclosure occurs, the second mortgage holder will also be foreclosed, and thus lose their security interest in the property. The only way for the holder of the second mortgage to preserve its security in the event of a foreclosure by the first holder is to pay off the first mortgage so that no one is ahead of them on the public record.
Secondary Mortgage Market – The financial market that consists of investors and institutions engaged in the purchase of loans from banks and other lenders. Fannie Mae and Freddie Mac, the two “government sponsored enterprises” or “GSEs,” are the primary players today, as there is little private money available in the secondary market. The non-GSE secondary market consisted of private investors and similar entities, and was 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.
Securitization – The process whereby assets or debt instruments are “pooled” or “packaged” together and sold to investors. Since the investors do not directly control these pools, the products are regarded as “securities” and regulated by the federal Securities and Exchange Commission or “SEC,” and their state counterparts. Debt, such as mortgages, and their accompanying promissory notes, in real estate, are packaged and sold to investors, who acquire the right to receive the cash flow. [See, “Real Estate Mortgage Investment Conduit,” or “REMIC”.]
Security – Refers to an asset, such as one’s home, that is used to “secure” the homeowner’s repayment of a loan. The debt, represented by a promissory note, is then said to be “securitized” by another instrument, such as a trust deed or mortgage that is recorded in the county where the property is located. The security document gives the lender a right, upon borrower default, to force the sale of the property to satisfy the outstanding indebtedness. [See “Foreclosure”]
Seller-Carried Financing – An arrangement where the seller of property “takes back” a note and trust deed, or mortgage, or land sale contract, from his or her buyer to cover the unpaid portion of the purchase price. Seller-carried financing that is behind a first mortgage, can be risky for sellers since, if the buyer defaults to the bank, it will foreclose both the buyer’s ownership interest and the seller’s subordinate lien. It can also be risky to buyers, who may make their payments to a seller who does not remit payment to the lender. All seller-carried financing should be reviewed by separate legal counsel for sellers and buyers.
Servicer – The entity that takes over the responsibility of collecting payments on a loan, impounding and paying taxes and insurance, and generally being responsible to monitor a borrower’s performance under the loan. Some banks service their own loans, but most delegate that responsibility to third party servicing companies. Most servicing agreements give the servicer broad authority to engage in foreclosure and foreclosure avoidance [e.g. modification, short sale, deed in lieu] decisions. Many big banks also act as servicers for third parties, such as Fannie Mae, Freddie Mac and private securitized loan pools in the private label secondary market. Many borrower complaints during the foreclosure crisis were based upon servicer abuses in the loan modification process.
Settlement – Can be used as a verb, describing a process, or noun, describing an event. In Oregon, the term “closing” is more commonly used than “settlement.” Closing can describe a specified date after which the transaction is deemed “dead” due to nonperformance of the seller or buyer; or it can describe the process occurring in a real estate sale transaction where money and loan funds are deposited along with transactional and loan documents, calculations are made for the parties, and documents are recorded. Typically, the right of possession occurs on or shortly after closing. The term “settlement” can also refer to the process whereby a dispute is resolved by agreement of the parties.
Settlement Statement – The HUD-1, which is the document required under RESPA and given to seller and buyer, itemizing all of the settlement or closing charges associated with the financing and/or purchase of a property. Effective January 1, 2010, HUD significantly changed the HUD-1 settlement statement and imposed penalties if certain estimated closing costs set forth on the Good Faith Estimate exceeded certain legal “tolerances” or limits expressed by a percentage of the estimated amount. The term “closing statement” is the same as the “settlement statement.”
Short Sale – The sale of any property, commercial or residential, where the sale proceeds are insufficient to pay off all liens, encumbrances, commissions and other closing charges that must be paid at the time of sale. Holders of the recorded liens [e.g. lenders] must reach agreement with the seller before a short sale will be approved. Short sales can result in potential tax liabilities for debt forgiveness and unpaid liability under the promissory note [see “Deficiency”], and should be reviewed by experts before closing.
Statutory Deed – In Oregon there are statutory “short form” versions of the four major deeds used in Oregon [General Warranty, Special Warranty, Bargain and Sale, and Quitclaim]. By referencing the statute in the deed itself, the conveyance carries the same legal effect as if the more formal and lengthy form was used.
Statute of Frauds – The statute setting forth what type of agreements must be in writing and signed in order to be enforceable. In Oregon the list is found in ORS 41.580. It includes conveyances of an interest in real estate; leases exceeding one year; and compensation agreements hiring an agent for the sale or purchase of real estate.
Statute of Limitations – The period of time the law allows one to bring a legal claim in court. The claim expires after the statute of limitations has run. As to claims regarding title to land, the statute of limitations is ten years. The statute commences from the date that the aggrieved party knew or should have known of their claim and it runs for ten years. The statute of limitations may be suspended (or “tolled”) for various reasons, such as minority [under age 18] and incompetency.
Strategic Defaults – A term currently used by Fannie Mae and some lenders to refer to homeowners who default on their loans – that is, stop paying – even though Fannie believes they actually could afford to pay the loan. Fannie has threatened retribution by making these borrowers wait longer to get another home loan. Since Fannie buys most bank originated residential loans – and is, along with other GSEs [“Government Sponsored Enterprises”], the only player in the secondary market today – it can seemingly make its own rules. Several Congressmen and others have openly criticized Fannie for this pronouncement, and have sought to dissuade it from enacting any retaliatory policies. It should be noted that in the commercial real estate industry – where the loan dollars are much greater than in the residential industry – many large and well respected companies have routinely engaged in “strategic defaults” with little governmental or lender outcry.
Sub-Prime Loans – A finance industry term used to refer to loans made to borrowers with very low FICO scores or those who are otherwise credit-challenged. Between 2004-2007, when loan underwriting guidelines were less stringent, a higher rate of interest was charged to compensate the lender for the borrower’s increased risk. Because subprime loans provided greater yields [i.e. return on investment] due to the higher interest rates, they were sought after by investors during this period. Moreover, a little understood additional charge known as the “yield spread premium” was being paid by borrowers at closing that awarded mortgage brokers a significant extra payment above and beyond their loan fees for placing borrowers into sub-prime loans. When the credit markets tightened and real estate values collapsed, many subprime borrowers defaulted, thus resulting in a crisis in the financial markets and secondary mortgage market which had invested heavily in these risky loan products. Although sub-prime loans were the first to fail, today the credit and mortgage crisis has affected even prime loans [those made by banks to their best borrowers]. Due to unemployment, tight credit, and stagnant or falling real estate values, there is little opportunity for many homeowners to extricate themselves from their distressed housing problems through resale or refinancing.
Subordinate Loan or Lender – In Oregon, the time of recording a legal interest in land, such as a trust deed securing a loan, determines whether a lender’s interest is superior or inferior to another lender. This priority is especially significant when there are competing liens recorded on the same property and the equity in that property is insufficient to pay them all off at the time of closing of a sale or foreclosure. The subordinate lender only gets a share of the remaining proceeds after the superior lender has been paid in full.
Surrogate-Signers – The term “surrogate” means substitute. As if “robo-signers’ weren’t bad enough – signing thousands of bank foreclosure documents with no authority or knowledge of what they were attesting to or signing – “surrogate signers” were robo-signers who signed each other’s signatures, rather than their own.