Day 2

Second Liens

  • Definition: any voluntary, junior/subordinate mortgage recorded behind the 1st lien.
  • 3 Primary Types
    • Home Equity Loan (HEL)
    • Home Equity Line of Credit (HELOC)
    • Open-end, revolving credit (functions like a credit card).
    • Purchase-Money Second ("Piggyback")
    • Closed simultaneously with 1st lien to avoid PMI.
    • Common structures: 80/20 or 80/10/10.
  • Usually conventional (not gov-backed) and non-conforming (do not meet Fannie/Freddie guidelines) → higher risk.

Mortgage Products & Buy-Downs

  • 2/1 Buy-Down (Graduated-Payment Mortgage, GPM)
    • Fixed 30-yr amortization, NOT an ARM.
    • Teaser structure: Year 1 = note rate − 2 %; Year 2 = note rate − 1 %; Years 3-30 = note rate.
    • Good for borrowers expecting rising income; lender may impose a pre-payment penalty.
    • Example: market 5 % ➔ Y1 3 %, Y2 4 %, Y3+ 5 %.

Reverse Mortgage (HECM)

  • Borrower ≥ 62 yrs; retains title.
  • Loan becomes due at sale or death; heirs must repay or property transfers to lender.
  • LTV determined by age (older = higher LTV); high equity required (~50-60 %).
  • Mandatory HUD-approved counseling.
  • Disbursement options
    1. Monthly tenure/term payments.
    2. Lump sum.
    3. Line of credit.
  • Borrower still pays taxes & insurance.

Bridge Loan

  • Conventional, non-conforming, temporary financing.
  • 2nd mortgage on property being sold; proceeds used as down payment on new purchase.
  • Typically interest-only/no payments for 6-12 mo; paid off when old home sells (1st + bridge lien satisfied).

SAM (Shared Appreciation Mortgage)

  • Lender trades below-market rate or mod terms for an agreed % of borrower’s future equity gain at sale/refi.
  • Popular in loan modifications.

Bi-Weekly Mortgage

  • 26 half-payments/yr ⇒ 1 extra monthly payment ➔ quicker amortization, interest savings.

Package Mortgage

  • Includes real & personal property (appliances, furniture) in one contract; non-conforming.

Adjustable-Rate Mortgages (ARMs)

  • Hybrid naming: e.g. 3/1, 7/1, 10/1 = fixed period/adjusts annually thereafter; 7/3 adjusts every 3 yrs.
  • Protective CAPS format: Initial / Periodic / Lifetime (e.g. 5/2/5).
    • If only two numbers (2/5) ➔ first "2" = initial AND periodic.
  • Rate ceiling formula: \text{Max Rate}=\text{Start Rate}+\text{Lifetime Cap}.

Index & Margin

  • Fully Indexed Rate (FIR): \text{Index}+\text{Margin}.
  • Common indices
    1. COFI (11th District Cost of Funds)
    2. LIBOR (London Interbank Offered Rate)
    3. T-Bill or CMT (Constant Maturity Treasury)
  • Margin = lender’s fixed profit component.

Option ARM (Pick-a-Pay)

  • Monthly choice: Interest-Only, Minimum (neg-am), or Fully Amortized.
  • All ARMs amortize over 30 yrs even when payment options differ.

Interest-Only (Straight Note) Math

  • Monthly IO payment: \frac{\text{Loan Amount} \times \text{Rate}}{12}.
  • Find loan amount from IO payment: \text{Loan}=\frac{\text{Annual IO}}{\text{Rate}}.

Income Calculations

  • Annual ➔ Monthly: \frac{\text{Gross Annual}}{12}.
  • Semi-Monthly (24 pays): \text{Pay}\times24\div12.
  • Bi-Weekly (26 pays): \text{Pay}\times26\div12.
  • Hourly with OT: \bigl(\text{Hr Wage}\times40 + \text{OT Rate}\times\text{OT Hrs}\bigr)\times52\div12.
  • Back-End DTI example: \text{DTI}=\frac{\text{Housing}+\text{Debt}}{\text{Monthly Income}}
    • Solve for housing if DTI, debt & income known.

Non-Taxable Income Gross-Up

  • May increase by 25 %: \text{Qualifying}=\text{Non-Taxable}\times1.25.

Rental Income

  • Apply 25 % vacancy factor ➔ use 75 % of gross rents.

Documentation

  • Wage: 2 yrs same field; W-2s & paystubs.
  • Self-Employed ≥25 % ownership: 2 yrs personal + business returns.
  • Alimony/Child Support/Disability: optional; need 3-yr continuance if used.

Underwriting Verifications

  • VOE, VOM, VOD, VVOE (just before close).

Encumbrances & Appraisals

  • Financial (liens) vs. Physical (easement, encroachment, restrictions).
  • Sales Comparison (Market) Approach
    • ≥3 comps sold ≤12 mo, ideally ≤1 mile.
    • Adjustment limits: 10 % per line, 15 % net, 25 % gross.
  • Income Approach (commercial/income property).
  • Cost Approach (new construction; land + site + replacement cost).
  • URAR 1004; 1004MC market addendum.

Pricing Premiums

  • YSP (Yield Spread Premium): broker profit for selling above par.
  • SRP (Service Release Premium): lender profit when selling servicing rights.

Title vs. Lien Theory

  • Title Theory (e.g., CA)
    • Lender/Trustee holds legal title via Deed of Trust; borrower keeps equitable title.
    • Loan payoff ➔ Defeasance (title transfers to borrower).
  • Lien Theory
    • Borrower holds legal & equitable title; lender has lien via mortgage.
    • Payoff ➔ Reconveyance (lien released).
  • Conveyance: transfer of ownership (sale).

Settlement Practices

  • Wet Settlement: sign & fund same day (“ink still wet”); rescission period applies for owner-occupied refis.
  • Dry Settlement: sign; funds released after conditions cleared.
  • Table Funding (brokers): short-term warehouse line at closing, loan immediately assigned to lender; wet states only.
  • Hypothecation: pledge collateral without giving up possession (Deed of Trust structure).

Loss Mitigation

  • Loan Modification: permanent term change for long-term hardship (may extend to 40-50 yrs).
  • Forbearance: temporary reduced/paused payments; interest accrues, no late fees.
  • Servicer obligations
    • ≥45 days pre-foreclosure: acknowledge application in 5 days; specify completeness.
    • Cannot start foreclosure until ≥120 days delinquent unless due-on-sale breach or joining subordinate action.
  • Payment application order: 1) fees/late, 2) interest, 3) principal.

Key Mortgage Clauses

  • Late Payment Clause: fee after grace (≈15 days); 30-day late hits credit.
  • Prepayment Penalty
    • Hard = due on sale OR refinance; Soft = refinance only.
  • Due-on-Sale (Alienation) Clause: entire balance due at transfer.
  • Acceleration: lender may call loan due on default.

Pre-Paid Interest (Per Diem) Math

  • 30/360 convention.
  • Steps
    1. Determine days from funding to month-end.
    2. Annual Interest = \text{Loan}\times\text{Rate}.
    3. Daily = \frac{\text{Annual}}{360}.
    4. Per-Diem Due = Daily × Days.
  • Example: 200{,}000\times0.04=8{,}000 ⇒ \frac{8{,}000}{360}=22.22 ⇒ 26 days ➔ 22.22\times26=577.72.
  • Borrowers pay interest from funding date to end of prior month; first payment covers previous full month (mortgages paid in arrears).

Miscellaneous Terms

  • Option ARM negative amortization: paying less than interest grows principal.
  • Power of Sale in Deed of Trust allows borrower to sell even in default (must satisfy acceleration fees).