Glossary of Real Estate Terms (Oregon) – M
Margin – The interest rate, usually in the 2% to 3% range, that is added to the indexed rate to arrive at the total applicable interest rate on an adjustable rate mortgage or “ARM.” 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 both rates, since the high fixed margin rate will remain high throughout the life of the loan.
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 who is facing an impending foreclosure may not reflect the market value.
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.
Mechanics Lien – A somewhat misleading name for a construction lien which entitles licensed contractors the right to record a lien upon real property to which they have provided labor, services or materials. Mechanics liens have a “super priority” under Oregon law, and subject to certain limitations, can take precedence even over lenders who have recorded their trust deed before the lien claimant has done so.
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 a 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. [PCQ Note: For purposes of establishing attorney fees, especially in contractually required mediation and arbitration under the OREF Sale Agreement form, this rule is substantially relaxed.] However, if the parties sign a written settlement agreement at the end of the mediation, it can become a legally enforceable document. Everything said in the mediation is confidential unless the parties agree otherwise, and the mediator cannot be brought into court to testify what one of the parties said in confidence during a mediation session.
Merged Credit Report – One issued by a credit reporting company that contains combined information from multiple credit bureaus.
Metes and Bounds Legal Description – A legal description usually written from a survey which contains directions and distances starting at a point of beginning and coming back to the same point, thus creating an enclosure. An example of a metes and bounds description is the following: “Beginning at a point on the Southerly line of said Lot 7 distant thereon North 45° East 150.00 feet from the most Southerly corner thereof *** thence tangent to said curve South 65° 30¢ West 70.00 feet; thence South 12° 30¢ East 190.00 feet; thence Southeasterly 78.00 feet to the point of beginning.” (PCQ Note: The identification of the parcel, by itself, is inadequate as a formal legal description, and should identify the governmental jurisdictions, such as the city, county and state.
Mezzanine Financing – Financing that gives the lender the right, upon default, to convert its interest into equity or ownership of the company to whom the loan is made. Because of the limited due diligence by the lender and the speed with which it is closed, such loans are aggressively priced in the marketplace. Companies eligible for such financing usually have a solid reputation and track record.
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 based upon the theory 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. A more contemporary example is the use of credit default swaps (“CDSs” defined above), which acted as a loose and unregulated form of insurance (which ultimately took on the appearance of “bets”) that paid the insured if a particular obligation, such as a mortgage backed security (“MBS”) defaulted. (See, definitions of “Securitization” and “REMICs,” below.) Not only did the issuers of these MBS instruments purchase CDSs, but strangers to the underlying transactions bought them. Ultimately the volume of activity created a separate CDS market, which created an appearance that CDS purchasers were betting that certain investments would fail. American International Group (“AIG”), the giant international insurance company, was a primary issuer of CDSs, and became so top-heavily invested, that when the credit crisis hit, it was unable to pay the investors who purchased the swaps. The result, a $182 billion bailout that resulted, in part, because risk could be quantified, sold, and traded for profit.
Mortgage – The name of the instrument used by some lenders to secure the promissory note given by the borrower for repayment of a loan. The mortgage, once recorded in the public records, acts 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 exactly the same purpose; they differ only in the terminology and the methods of foreclosure. Many people use the term “mortgage” interchangeably with “trust deed”.
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 (for example, shares of stock) to investors. The collective mortgage payments of principal and interest made by the borrowers 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.
Mortgage Banker – An entity or person that not only acts as an originator of loans, such as a mortgage broker, but also makes direct loans which are then usually resold into the secondary mortgage market. Some mortgage bankers also act as servicers of the loans they originate and sell.
Mortgage Broker – A person or institution that originates and processes loans using a number of different lending sources. In Oregon, mortgage banking, lending, and brokering are regulated by the Division of Finance and Corporate Securities (“DFCS”).
Mortgage Electronic Registration System (“MERS”) – 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” defined below), 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 MERS has registered 65 million mortgages since 1997. The concept is that MERS acts as “nominee” on the actual mortgage document that is recorded in the county land records. Alternatively it assigns a number on that document. According to their website 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 over the last few years, 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 original note and mortgage (together with evidence of successive transfers) must be produced – i.e. registration with MERS alone is insufficient legal proof of current ownership of the paper for purposes of foreclosure.
Mortgage Life and Disability Insurance – Life insurance purchased by borrowers to pay off a loan in the event of their death or disability. As the mortgage debt declines so does the amount of coverage.
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”).
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 a 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. (See, http://www.irs.gov/publications/p936/ar02.html)
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)
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.”
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.”
Multifamily Housing – Any residential structure containing multiple housing units, usually five or more.
Multiple Listing Service (MLS) – A database for participating real estate agents to collectively share all of their listing information. Under most MLS rules, the pooled information is available to all participating agents and an “offer of compensation” is made by the listing agent to share a designated portion of their gross commission with the agent who brings the seller a ready, willing and able buyer that purchases the property for the listing price, or such other price and terms as the seller and buyer agree.