The new financial regulations will have that affect on lenders beginning in 2011 – the following article outlines some of Bank of America’s tactics in regards to principal reductions.

Among several enhancements to the NHRP announced in late March, the bank unveiled this innovative approach to employing a principal reduction as the first step toward reaching HAMP’s affordable payment target of 31 percent of household income when modifying certain NHRP-eligible mortgages — ahead of lowering the interest rate and extending the term. The reduced principal balance will be a non-interest bearing forbearance amount, and the homeowner may earn forgiveness of the forborne amount by remaining in good standing on payments.

via Bank of America Begins Mortgage Principal Reduction Program Under HAMP.

Who is eligible for principal reduction?
The revised HAMP principal reduction program is designed specifically for the approximately four million U.S. homeowners who are responsible borrowers with reasonable mortgages. It does not offer protection for people holding million-dollar mortgages, speculators, and owners of vacation homes. It is recognized that some foreclosures are inevitable for those who simply bought a more expensive house than they could afford. Homeowners who intend to apply for a HAMP loan modification must meet several qualifications:

• You must be able to demonstrate financial hardship
• You must live in the home
• The home must consist of no more than four units
• Your mortgage balance must be less than $729,750 for a one-unit home. If the home has more than one unit, this cutoff amount increases
• You must have taken out your first-lien mortgage on or before January 1, 2009
• Your monthly mortgage payments must be greater than thirty-one percent of your income
• The home must be worth at least fifteen percent less than the amount of your first mortgage

Unemployed homeowners
Unemployed homeowners may qualify to have their monthly mortgage payments reduced or eliminated for three to six months while they look for work. To qualify they must:

• Submit proof that they are receiving state unemployment insurance benefits
• Within the first ninety days of mortgage delinquency the homeowner must request temporary assistance
• Meet HAMP eligibility guidelines, including being under the loan balance maximum and the owner occupying the house.

Qualifying  for a HAMP program while on unemployment means that the homeowner may be able to get their home loan payment down to 31% of their income. Federal Unemployment maximums are around $2,000, meaning that the new loan payment could, in theory, drop to $620 per month.

When the temporary assistance period ends, homeowners whose mortgage payment is more than thirty-one percent of their monthly income and have found employment are eligible for a HAMP loan modification. The modified loan must pass a net present value test, and the homeowner must verify qualifying income and be up to date on their forbearance plan payments.

Bankruptcy
If the borrower or the borrower’s bankruptcy counsel asks for help, the new guidance requires servicers to consider a borrower in bankruptcy for HAMP principal reduction.

What should homeowners do?
If you believe that you qualify for a HAMP loan modification because your primary residence is worth less than your mortgage and you are experiencing financial hardship, contact your lender immediately. You should be aware that lender participation is voluntary; except for servicers of loans owned or guaranteed by Fannie Mae and Freddie Mac, your lender is not required to participate. If you are not sure if your loan servicer is a participant, check the federal government list at makinghomeaffordable.com/contact_servicer.html. If your lender or servicer is not part of the program, ask them about other options that may be available.

For more updated information on principal reductions, check out the latest on the mortgage relief project.

Were you aware that banks do have the option of offering principal reduction modifications as an alternative to or in addition to payment reductions? In fact, lenders and servicers have been urged to do so, but it is not happening. Wells Fargo did report that they were offering principal forgiveness to borrowers with Pay option arm loans (those loans that started with low teaser rates of 1% but saw principal balances increasing with those minimum payments from the date the loan was funded. Why is this principal forgiveness being offered to a select few? Why isn’t it an option being offered to everyone?

via HAMP modifications versus principal reduction modifications – what makes more sense?.

via Seeking a Mortgage? Don’t Get Pregnant – Yahoo! Finance.

B. ALIENATION CLAUSE:

This was discussed above in item #A. Borrower no longer has an interest in the property. If a borrower alienates him or herself from a property (sells it and no longer has any interest in the property, he or she is now alien to the title) the lender can force full payment of the loan at that time. It doesn’t matter if the loan has 25 years left, the borrower alienates him or herself from a property it is now, immediately due and payable in full

C. ASSUMPTION:

If the lender allows a buyer to take over responsibility for a loan and releases the original borrower from any liability, this is considered a full assumption. Lenders have the right to qualify a buyer’s financial, credit history, and anything the lender would use to approve a buyer for financing. Lenders may also charge fees, charge loan points for this assumption. If a seller wishes to be released from all liability for a loan, the seller must make sure a Novation Agreement is prepared by the lender releasing the original borrower (seller) from liability. If there is no Novation agreement, the seller will still be secondarily liable for the loan. This means that if the lender can not get money from the new buyer the lender can sue the seller. A Novation is very, very important for a seller. Licensees must be sure that sellers understand this situation. SUBJECT TO means a buyer makes the payments on a seller’s loan. The seller is still responsible for payment. It is generally not allowed in California. Most individuals when purchasing property do not assume or take loans subject to. They obtain new financing.

D. SUBORDINATION CLAUSE: This is a clause normally used when someone purchases a vacant parcel of land. The original seller carries back financing until the buyer is ready to build on the property. At this point the buyer obtains a “construction loan” to pay for the construction. Lenders do not like to be placed in a secondary position (2nd trust deed) and require that the first loan be paid off in order for the lender to become the first trust deed. Buyers usually don’t want to invest the money needed to pay off existing loans. The buyers arrange with the seller that upon obtaining the new construction loan, the seller will allow his loan to become subordinate, or second, to the new construction, or other type of loan. This is agreed upon during the original negotiations of the purchase and a “subordination agreement, or clause,” is included as part of the original agreement. Then, when the construction loan is obtained it is an easy matter to change the order of the loans. The subordination clause allows for subordination of the existing financing and the new loan takes priority in the future.

E. PREPAYMENT PENALTIES: A prepayment penalty is a charge for paying a loan off early. Lenders generally charge six (6) months, but it can be longer, interest to pay the loan off early. Penalties are covered in detail in the text. They were very popular from 1950 to 1980 where competition forced the lenders to stop charging them or lose customers. They are making a comeback and are becoming popular with Adjustable Rate loans and starting to creep into Fixed Rate loans as well.

F. IMPOUND ACCOUNTS: An impound account is a forced savings account for property taxes and insurance. Borrowers with less than twenty (20) percent down are required to make a monthly payment of 1/12 of annual property taxes and insurance charges to a special account to insure that the taxes and insurance will be paid. This is added to the normal principal and interest payment. We refer to it as: P.I.T.I (principal, interest, taxes and insurance) payment. Lenders call these “escrow accounts.” They are collecting and holding funds to pay something at a later date. They are in escrow, a neutral account as far as the bank is concerned. They can pay up to two percent (2%) interest on an escrow/impound, but not all lenders do.

G. ASSIGNMENT OF RENTS: When a borrow defaults on a loan, the lender is not receiving any money. Within a trust deed is a paragraph stating that a lender may contact tenants and collect the rents from them and apply the income to the payment due until a foreclose takes place. This clause is strictly for the benefit of a lender.

SPECIAL PURPOSE TYPES OF LOANS:
1. Graduated Payment Mortgage. A GPM loan is a type of loan where the initial interest rate is fixed (doesn’t change) at a certain amount but the beginning payments levels are set at a lower interest rate. For example; the true rate for a loan is eight percent and the payment starts at a three percent amount for the first year, four percent for the second year, and five percent for the third year. The payment rate increases by one percent until the true rate is achieved. The payments “graduate” until the full payment covers all interest due. During the period of time when the payments are lower and increase yearly the loan is a “negative” amortized loan. The difference between the payment and the interest due is added to the principal balance. Usually, after five years the borrower owes approximately five percent more than at the start of the loan. This is a good loan for first time borrowers who know their income will be increasing and it allows them to obtain housing now and when the loan reaches the full interest the borrowers will be able to handle the full payment amount.
2. Biweekly Mortgage. Instead of making one payment a month, a borrower will pay one half of the payment every two weeks. The borrower will make twenty six payments instead of twelve. This is a loan designed for those who receive paychecks every two weeks and allows them to budget for their loan obligation. As a side benefit, the loan actually pays off sooner because a teeny, tiny extra amount of principal is paid over the course of twenty six payments.
3. Fifteen (15) year Fixed and Adjustable Rate Loans. Instead of amortizing the payments over a thirty year period (360 payments), a fifteen year loan is amortized over fifteen years (180 payments). The fifteen year payments are higher but not twice as much and the loan is completed much more quickly.
4. Reverse Annuity Loans. These have been created for those  sixty two years of age and over. It is exactly what it says; the bank makes the payments to the borrower monthly instead of in one large amount. These act like an income source for the senior who receives a monthly check. The amount of money paid to the senior is all due and payable when the senior moves, dies or somehow vacates the property. Most lenders use a special FHA program for this purpose although a few lenders are creating their own reverse annuity programs for seniors.

California State Capital

There are two federal agencies and one state agency that help make it possible for people to buy homes they would never be able to purchase without government involvement.

The two federal agencies that participate in real estate financing are the Federal Housing Administration (FHA) and the Veterans Administration (VA). The California Farm and Home Purchase Program, or CalVet loan, is a state program that helps eligible veterans.
Federal Housing Administration (FHA)

The FHA program, a part of HUD (U.S. Department of Housing and Urban Development) since 1934, has caused the greatest change in home mortgage lending in the history of real estate finance. The FHA was established to improve the construction and financing of housing. The main purpose of the FHA program has been to promote home ownership. Secondary results include setting minimum property requirements and systemizing appraisals. An appraiser would be reprimanded if he or she did not use FHA guidelines when preparing appraisals for FHA loans. Additionally, an appraiser who intentionally misrepresents the value on FHA loan appraisals, which subsequently cause a loss, could be fined and face legal action.

The FHA does not make loans; rather, it insures lenders against loss. Loans are made by authorized lending institutions such as banks, savings banks, and independent mortgage companies. As long as FHA guidelines are used in funding the loan, the FHA, upon default by the borrower, insures the lender against loss. If the borrower does default, the lender may foreclose and the FHA will pay cash up to the established limit of the insurance.

The lender is protected, in case of foreclosure, by charging the borrower a fee for an insurance policy called Mutual Mortgage Insurance (MMI). This insurance requirement is how the FHA finances its program. The premium may be financed as part of the loan or paid in cash at the close of escrow.

The borrower applies directly to the FHA-approved lender (mortgagee), not the FHA, for a loan. FHA does not make loans, build homes, or insure the property. A buyer who would like to purchase a home with FHA financing would apply to an FHA-approved mortgagee (lender) who would then request a conditional commitment from FHA. The conditional commitment is good for six months. A firm commitment is requested when the FHA approves the borrower (mortgagor).

The FHA guidelines encourage home ownership by allowing 100% of the down payment to be a gift from family or friends and by allowing closing costs to be financed to reduce the up-front cost of buying a home. The down payment on FHA loans varies with the amount of the loan.

Popular FHA Loan Programs

Section 203(b)

The FHA 203(b) loan offers financing on the purchase or construction of owner-occupied residences of one-to-four units. This program offers 30-year, fixed-rate, fully amortized, mortgages with a down payment requirement as low as 3%, allowing financing of up to 97% of the value of the home. FHA has mortgage limits that vary from county to county.

Their website, https://entp.hud.gov/idapp/html/hicostlook.cfm, provides the current FHA mortgage limits for several areas.

Section 203(k)

A purchase rehabilitation loan (purchase rehab) is a great option for buyers who are looking to improve their property immediately upon purchase. This mortgage loan provides the funds to purchase your home and the funds to complete your improvement project all in one loan, one application, one set of fees, one closing, and one convenient monthly payment.

A purchase rehab loan could be used for a variety of improvements such as adding a family room or bedroom, remodeling a kitchen or bathroom, making general upgrades to an older property, or even completing a total teardown and rebuild.

Section 245 Graduated Payment Mortgage

A graduated payment mortgage (GPM) has a monthly payment that starts out at the lowest level and increases at a specific rate. Payments for the first five years are low, and cover only part of the interest due, with the unpaid amount added to the principal balance. After that time, the loan is recalculated with the new payments staying the same from that point on. In this loan, the interest rate is not adjustable and does not change during the term of the loan. What actually changes is the amount of the monthly mortgage payment.

A GPM is offered by the FHA to borrowers who might have trouble qualifying for regular loan payments, but who expect their income to increase. This loan is for the buyer who expects to be earning more after a few years and can make a higher payment at that time. GPMs are available in 30-year and 15-year amortization and for both conforming and jumbo loans. The interest rate for a GPM is traditionally .5% to .75% higher than the interest rate for a straight fixed-rate mortgage. The higher note rate and scheduled negative amortization of the GPM makes the cost of the mortgage more expensive to the borrower.

Energy Efficient Mortgage

The Energy Efficient Mortgages Program (EEM) helps homebuyers or homeowners save money on utility bills by enabling them to finance the cost of adding energy-efficiency features to new or existing housing. The program provides mortgage insurance for the purchase or refinance of a principal residence that incorporates the cost of energy efficient improvements into the loan.

Section 255 Reverse Annuity Mortgages

Reverse Annuity Mortgages are also called Home Equity Conversion Mortgages (HECM). It is a program for homeowners (62 years and older), who have paid off their mortgages or have only small mortgage balances remaining. The program has three options for homeowners: (1) borrow against the equity in their homes in a lump sum, (2) borrow on a monthly basis for a fixed term or for as long as they live in the home, or (3) borrow as a line of credit.

The borrower is not required to make payments as long as the borrower lives in the home. The loan is paid off when the property is sold. FHA collects an insurance premium from all borrowers to provide mortgage coverage that will cover any shortfall if the proceeds from the sale of the property are not sufficient to cover the loan amount. Senior citizens are charged 2% of the home’s value as an up-front payment plus 1/2% on the loan balance each year. These amounts are usually paid by the mortgage company and charged to the borrower’s principal balance. FHA’s reverse mortgage insurance makes this program less expensive to borrowers than the smaller reverse mortgage programs run by private companies without FHA insurance.

1. TRUST DEEDS AND MORTGAGES (Loans WHICH ARE CALLED LIENS).
2. MECHANIC’S LIENS are recorded documents placed by someone who did physical work on a property. This individual or company is called a mechanic. This can be as simple as a housekeeper or as involved as a builder/contractor hired to remodel or build a structure. The “mechanic” is attempting to get paid through the court system.
3. JUDGMENTS AND ATTACHMENTS. A judgment is a court decision requiring payment. An attachment is where the court “attaches” a property through a legal process which keeps a property from being sold or transferred in any way until the lawsuit has been decided.
4. TAX LIENS AND SPECIAL ASSESSMENTS. A tax lien is a lien placed against a property for any legal taxable reason. Property taxes that are not paid will automatically become a lien and at some point the property can be sold to pay the taxes. Other taxes can be attached as well. Unpaid income taxes can become a lien, special assessments are a lien. Any legal governmental agency that has the authority to tax has the ability to place a lien against the property.

A LIEN IS a document that uses property to secure a debt. It is usually recorded at the local House of Records or Recorder’s Office.

C. “Trust Deeds”. These are not really a deed in the normal sense. It is a document that is used to create collateral for a loan. It gives a party the right to foreclose and sell the property if the borrower doesn’t pay for the loan in full. The trust deed is recorded to tell “constructive notice” others that the current owner has a lien on the property that must be paid before the ownership (title) can be transferred unless the buyer assumes responsibility for the loan with permission from the lender. Along with a trust deed is a note (I.O.U.) that is the evidence of a debt. The trust deed is evidence that a note exists. The note has the full terms of the debt. The trust deed is the instrument that allows the bank to foreclose if the debt has not been paid.

D. A Mortgage is another way to secure a loan. It is rarely used in California and will be discussed at a later time.

E. “Mechanic’s Liens”. A mechanic’s lien is filed against a property because a person or company was not paid for furnishing work or materials for construction or other work on a property. This is lien against the property itself giving the mechanic the right to file a lawsuit and foreclose on the property if the mechanic wins the lawsuit. Unfortunately, the owner of the property is in a difficult situation when a mechanic’s lien is filed. At times the owner hires a contractor and the contractor hires others to actually do the work. These “others” are referred to as subcontractors (subs). The contractor is paid but doesn’t pay the subs. The subcontractor(s) file a mechanic’s lien(s). They may actually go to court with a lawsuit against the owner. If the subs win they either get paid by the owner or the mechanic enforces the judgment by the court and forecloses and sells the property and keeps from the proceeds the appropriate money to get paid. This seems unfair to the owner because he or she has to pay twice but the law protects the worker and suppliers. The mechanics deserve to be paid for their work and supplies. The owner only has one method of recourse. Pay the debt twice and then find and sue the original contractor for the money.

THERE ARE VERY SPECIFIC RULES AND TIME LINES THAT MUST BE FOLLOWED BY A MECHANIC.

1. A Preliminary notice must be given within 20 days of supplying materials or commencing work. Supplying materials can be as simple as delivering any supplies to the worksite.
2. It is extremely important to determine when delivery or work starts.
3. A “Notice of Completion” is very important as it sets the day the work is completed.
i. A notice of completion should be recorded at the appropriate agency (Recorder’s office, Hall of Records).
ii. If a Notice of completion is recorded the main general contractor has 60 days from completion and subcontractors have 30 days to file a claim (start a lawsuit).
iii. If a notice of completion HAS NOT been recorded, all contractors and suppliers have

90 days to file a claim.
iv. Work is considered completed if one of these alternatives occur:
1. Occupation after stopping labor. Owner uses improvement completed by contractor
2. Acceptance of work by owner
3. Cessation (stopping) of labor for 60 continuous days
4. Cessation of labor if the owner files (records) a “Notice of Cessation” with the appropriate recording officer.

E. Mechanic’s liens do not take priority of any liens filed (recorded) prior to the mechanic’s liens. But, they do take priority over any filed after the mechanic’s lien. If the owner has an existing first trust deed and obtains a second trust deed or home improvement loan and the lender of the second trust deed (loan) or home improvement loan doesn’t record the loan before materials are delivered or work starts, the second trust deed will fall into third place and become a third trust deed behind the mechanics’ lien
That is why the timeline above is so important! It determines order of priority!
Timelines to file a lawsuit are: 30 days for subcontractors, 60 days for general contractors, 90 days if no notice of completion is filed.

If an owner of property drives by his/her property (usually a rental property) and discovers work being done, it is imperative that the owner post (place) and record a

“Notice of Non-responsibility” on the property within 10 days of discovering the work.
This notifies the mechanic that the owner is not responsible for payment of the work and the mechanic CAN NOT FILE a mechanic’s lien on the property. The tenant or whomever hired the mechanic is responsible for the debt, not the owner of the property.

It is extremely important to remember that Mechanic’s Liens are recorded against a Propery, NOT against the owner.

F. TAX LIENS:

If any governmental real estate related tax has not been paid the taxing agency will place a lien upon a property. An owner cannot transfer (sell, give away) a property without paying the lien and penalties in full. If the owner does not pay for the lien in a reasonable period of time the taxing agency could sell the property to satisfy (pay it off) the debt.

G. SPECIAL ASSESSMENTS
Assessment districts are usually created by a local governmental agency. They are assessments charged to property owners in a specific area (district) and for a specific purpose. Streets, roads, sewers, lighting are the most common reasons for property owners in a selected area to be charged. The governmental agency (cities and counties are the usual entities to do this) borrows money to do construction work and then charges the specific properties that benefit from the improvement.

H. JUDGEMENTS
Judgments are decisions by a judge in a court of law. If the one who charges (plaintiff) wins a decision from another (defendant), the court allows the plaintiff to record a document that gives notice to all of the defendants future creditiors that the judgment exists. This document is called an Abstract of Judgment. This document attaches to an individual and all of the property owned this person. In order to transfer a clear title, the judgment must be paid.

I. TERMINATION OF A JUDGMENT LIEN
A judgment is considered satisfied when it is paid. A notice that the judgment has been paid should be filed with the court and then recorded in the County records.

J. ATTACHMENT
The court assumes custody (takes control) of property until a decision is made in a lawsuit. This keeps the defendant from selling the property or properties until a judgment is given. This assures that there will be property available to give the plaintiff some opportunity to possibly force a sale of it and collect the judgment.

K. LIS PENDENS
This is a Latin term meaning potential or pending lien on real property. This is usually recorded by an attorney when filing a lawsuit. It prevents real property from being sold until the lawsuit is completed. Title companies will not issue title insurance when there is a lis pendens. This creates a cloud on the title.

L. SHERIFF’S SALE
As the result of a lawsuit, the court (judge) issues a Writ of Execution. A writ is instructions to the sheriff, or other local official, to sell a parcel of real estate to pay off a judgment. This can be any judgment. A normal lawsuit, a mechanics lawsuit, anything the court deems appropriate regarding real estate.

M. INJUNCTION
The court can order someone to stop doing something. This is referred to as an injunction.

ALL OF THE ABOVE A through M, ARE FOR MONEY. THEY ARE REFERRED TO AS LIENS. THEY ENCUMBER REAL ESTATE FOR MONEY REASONS.

Liens include, but not limited to:

1. Loans (trust deeds and mortgages),
2. unpaid Taxes,
3. Special Assessments,
4. Mechanic’s liens,
5. Judgments,
6. Attachments by the court.

Looking at this list it is easy to decide if a lien is VOLUNTARY or INVOLUNTARY.

Voluntary liens are debts that an owner acquired voluntarily with the owners consent. Lenders file a lien against a property when a property owner obtains a loan and uses the property for security.

Involuntary liens are debts that are placed on a property without the owners consent. These usually are put (recorded) against a property by a governmental agency.

Liens are also Specific or General.

A. Specific liens affect only one (1) property. It is specifically placed on one property.

B. General liens are liens that affect all properties of the owner, not just one. Yes, ALL PROPERTY!

1. An Estate in Reversion. Title reverts back to the original individual when current owner dies. John deeds property to Mary while she is alive. Mary dies, ownership reverts back to John. This could also involve three or more individuals. Everything is based on Isabel. John deeds property to Mary until Isabel dies. Mary is the current owner with a clause in the deed that says when Isabel dies, the property ownership goes back (reverts)to John and at that point Mary no longer owns property.

2. An Estate in Remainder. Title goes onto a third individual when the person that the life estate is based upon dies. John deeds to Mary. When Mary dies ownership goes onto Ralph. Ralph receives full ownership of the property. Because of the future change of title the holder of the estate (when someone dies) the erstate is prohibited from willing the property to anyone. The holderof the estate, Mary in our examples can do everything else an owner is allowed to do except will it. She can sell it, but when the chosen individual in the original transfer to Mary dies, the life estate ownership changes and Mary’s buyer is left with nothing. This doesn’t happen very often as it is usually only used for family tax planning. Mary has to pay the property and any other taxes on the property while she is owner. Mary can get a loan against the property although most lenders won’t give a loan because of the unknown length of her ownership. Mary can rent it out to a tenant. But, all leases are automatically canceled when ownership changes. Everything changes when the party who is designated dies due to the reversion or remainder clause in a life estate.

5. What are the recognized legal methods of land description:
rectangular survey
meets and bounds
lot and block number
monument or occupancy

6. Another question regarding the size of land; ½ a section has how many acres, ¼ section, etc:
Since 1 section has 640 acres – 1/2 a section would be 320 acres