Glossary of Real Estate Terms (Oregon) – S
Sale Leaseback – A transaction in which an owner of property sells it to a buyer under a sale agreement that calls for the seller to simultaneously lease it back.
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 to the holder of the first mortgage and a foreclosure occurs, the second mortgage holder will also be foreclosed out. The only way for the holder of the second mortgage to preserve its security in the property 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 (see definitions above) are the primary players today as there is little private money available in the secondary market.
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 (“SEC”) and their state counterparts. Debt, such as notes and mortgages in real estate are packaged and sold to investors. Once securitized, the principal and interest generated from the debt is paid to the investors.
Security –Refers to an asset, such as one’s home, that is used to “secure” the homeowner’s prompt payment 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 which is recorded in the county where the property is located. The security document gives the lender a right to force the sale of property to satisfy the outstanding indebtedness.
Seller-Carried Financing – An arrangement where the seller of property “takes back” a note and trust deed or mortgage from his or her buyer to cover an unpaid portion of the purchase price. These arrangements most frequently occur when the buyer does not have sufficient down payment to bridge the gap between the sale price of the property and the amount of the bank financing. Seller-carried financing can be risky for sellers since their security (being recorded second, behind the bank) is subordinate to the bank’s mortgage or trust deed (being recorded first). This means that if the buyer defaults to the bank, it will foreclose both the buyer’s ownership interest and the seller’s subordinate lien. While the foreclosure of the seller’s lien does not erase the buyer’s indebtedness due under the promissory note, it does render the note “unsecured,” which means that the buyer could discharge it in bankruptcy.
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 the borrower’s performance under the loan. Some banks service their own loans, and others delegate that responsibility to third party companies.
Setback – The legal distance between a property line and the building structure located on it. Each jurisdiction can vary. There are setback limits on the side, front and back of a property. Setbacks are used for a variety of reasons such as fire safety, utility easement and drainage.
Settlement – Another term used for closing. In Oregon, the term “closing” is more common. Closing can either be a specified date after which the transaction is deemed “dead” due to nonperformance of the seller or buyer; or it can refer to the process occurring in a real estate transaction where money and loan funds are deposited along with transactional and loan documents, calculations are made for the parties, and documents are recorded. Unless agreed otherwise by the parties under an early possession agreement, it is after closing that the buyer has the right of possession. [PCQ Note: In the context of a dispute, a “settlement” is the act of compromising the matter between the parties so as to resolve all contested issues once and for all].
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 purchase of the property. Effective January 1, 2010 HUD significantly changed the HUD-1 settlement statement and imposed penalties if estimated closing costs set forth on the Good Faith Estimate (“GFE”) exceeded certain legal “tolerances,” or limits, expressed by a percentage of the GFE.
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 charges that must be paid at the time of sale. In short sales, the creditors must reach agreement to remove their lien(s) for a price that is less than the face amount due. Short sales can result in potential tax (debt forgiveness) and deficiency (promissory note) liability, and should be reviewed by experts before closing.
Small Claims Court –A court with limited jurisdiction that permits plaintiffs and defendants to file, present and argue their own cases before a judge. Attorneys are normally not permitted without permission of the court. There are no juries. Jurisdiction is limited to claims for money below a certain cap. In Oregon, the maximum amount that may be sought in small claims court is $7,500. While defendants have a limited right to remove the case to circuit court, if he or she does not timely do so, the ruling of the small claims court judge is final and may not be appealed. A judgment from small claims court has the same effect as a judgment in any other court.
Special Warranty Deed – One of the four major deeds used in Oregon. A special warranty deed contains certain warranties or guarantees by the grantor (that is, the transferor of the property) concerning the quality of the title. Although they are the same as the ones found in the general warranty deed, they are limited to the period of the grantor’s ownership and make no warranties as to events affecting the title prior to the time the grantor acquired it. (See, ORS 93.855)
Specific Performance – In real property law, specific performance is a contractual remedy permitting a party in a transaction to compel the other side to specifically perform in accordance with the terms of the contract. It is most commonly sought by buyers whose seller has failed or refused to transfer property to them.
Statutory Deeds – In Oregon there are statutory “short form” versions of the four major deeds described in this Glossary. 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. (See, ORS 93.870)
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 and may be renewed if timely done. 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 (see “Government Service Entities,” defined above), 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 dollars involved are much greater than a home loan – many large and well respected companies have routinely engaged in “strategic defaults” (using Fannie’s term) with little governmental outcry.
Structured Investment Vehicle (“SIV”) – A pool of assets that are usually highly leveraged (i.e. their earnings are based upon the spread between their earnings on asset-backed securities “ABS” and the commercial paper they issue) and sold to investors. SIVs were usually kept off the balance sheet of the parent institution, such as a lending institutions and investment banks. Their leverage ratios were usually much higher than those permitted for the parent organization. Since there was little regulation or oversight of them during the housing and credit boom, their make-up and operation were little known and little understood by the public. But due to their highly leveraged nature, when the credit markets collapsed in 2007-2008, SIVs were a major casualty, as were their investors.
Sub-Prime Loan – An industry term used to refer to loans made to borrowers with very low FICO scores or were otherwise credit-challenged. In earlier times, when underwriting guidelines were less stringent, a higher rate of interest was charged to compensate the lender for the increased risk. Because subprime loans provided greater yields due to the higher interest rates, they were sought after by investors during the 2004-2007 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 one of the first signs of the 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 (2010) the credit and mortgage crisis has affected prime loans as well. Today, due to unemployment, tight credit, and the languishing real estate market, there is little money or opportunity for owners to extricate themselves from their distressed housing problems.
Subordinate – The term refers to one’s ranking which is behind, or “subordinate” to an earlier recorded interest. Subordination can be voluntary or involuntary. In Oregon, the time of recording a legal interest in land determines whether one’s interest is superior or inferior to another’s. This priority issue is especially significant when there are competing liens or mortgages 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.
Successor Trustee – In most cases, the original Trustee appointed by the Beneficiary (i.e. the lender) in the Trust Deed, is substituted by another trustee, known as the “Successor Trustee” to actually commence, handle and complete the foreclosure. The foreclosure is sometimes referred to a “Trustee’s Sale.” When the foreclosure auction is completed, the high bidder (frequently the lender itself when there are no bids in excess of the lender’s bid) receives a Trustee’s Deed.
Survey – A map drawn by a licensed surveyor showing the legal boundaries of a property based upon the legal description appearing in the current owner’s deed. Surveys also show the location of other recorded events affecting the property, such as easements, lot line adjustments, improvements, etc. If a structure or fence crosses into or across a boundary line (known as an “encroachment”) it is also noted on the survey. Surveys are fairly expensive and rare in standard residential transactions (unless a boundary line question exists) especially if the property is located in a platted subdivision. However, they are recommended prior to closing should there be any issues such as the proper location of a fence, building, shrubbery, etc. since encroachments are not covered by the standard owner’s policy of title insurance.
Sweat Equity – The use of one’s labor, such as construction of improvements to a home, to increase its value and ultimately the owner’s “equity” (that is, the difference between the remaining principal balance from all existing recorded liens, and the fair market value of the property.)