Primary financial market – a business firm that raises capital by selling nely issued security to the
general public or the government selling a new issue of bonds
Mortgage – An instrument or agreement used to make real estate security for a debt. It is a two party
instrument between the mortgagor and mortgagee (lender).
Reasons for refinancing:
- Increase property sale potential by making financing more attractive to buyer
- Generate tax-free cash for the owner by increasing the existing debt
- Decrease the existing debt so as to reduce the monthly debt service and increase cash flow to
Distinction between mortgage and deed of trust
- Mortgage gives lender the legal right to force foreclosure when note is not repaid
- Tied to note and specific to the particular piece of property serving as collateral
- Property rights sold at auction
- Deeds of trust involve obligation to pay for a property of ownership remaining in the hands of
the lender until the loan is paid off.
Alternative forms of mortgage:
- A blanket mortgage is a mortgage that covers several properties or a single tract of land that is
to be subdivided into individual building lots.
- An open-end mortgage is so named because the lender may advance additional funds in the
future secured by the original mortgage, which thus has an “open end.”
Variable Rate Mortgage (VRM) benefits generally include the following:
- to allow or encourage continued borrowing during high interest rate periods
- to protect lenders from interest rate risk and consequently to allow them to exclude an inflation
premium when determining the original rate associated with a VRM
- to relive VRM borrowers of prepayment penalty clauses, to change them a lower origination fee
and to start them at lower original interest rates.
Wraparound mortgage – a second mortgage that “wraps around” or includes an existing first mortgage.
The face amount of the wrap around mortgage loan is equal to the balance of the existing first mortgage
plus the amount of the new (second) mortgage.
Reverse mortgage differ from traditional mortgage in one key respect; interest and principal payments
are accrued and deffered until homeowner leaves or sells the home, at which point the mortgage
principaland all accumulated intereset is re paid. Debt Coverage Ratio- The debt coverage ratio (DCR) helps the lender to evaluate the riskiness of an
income property loan. It measures the “buffer” or “cushion” between the Net Operating Income (NOI)
and the debt service. The debt coverage ratio is calculated as follows:
Debt service ratio = net operating income/ annual mortgage debt service.
Loan-to-value ratio= loan amount/project value
Alternative Forms of Mortgage – A vendor takeback mortgage (Canada) or Purchase Money Mortgage
(U.S) is one taken by a seller from a buyer in lieu of purchase money.
Affordability Ratio is the ratio of Annual Debt Service (or mortgage payments) to gross income. It is an
expression of the safety of the principal of the loan based on the personal gross income of the
borrowers. The ratio is calculated as follows:
Affordability ratio= annual mortgage debt service/personal gross income
Important Ratios in Mortgage Lending:
-Residential – Ratio of mortgage payments to gross income, Loan to Value ratio
- Income Properties – Loan to Value Ratio, Debt Coverage Ratio
Mortgage Default Non-Legal Action
1. 2-5 days: Normally, no action is taken during the first 2 to 5 days of an account going delinquent.
2. 5-10 days : form letter sent to mortgagor requesting payment with five days
3. 20 days: second letter/telephone call to request payment and/or interview regarding status of
4. 35-45 days: registered letter advising of legal action to be taken if payment not received within 5
days (at this point mortgage is already two payments in arrears).
5. 50-55 days: documents are forwarded to start legal action.
Sub-prime lending also called b-paper lending refers to the practice of making loans to borrowers who
do not qualify for the best market interest rates because of their deficient credit history.
3 main tax principles
Equity- the basic rule of equity in taxation is the equal treatment of equals
Benefits revived- under this principle equity is interpreted as requiring that the burden of taxation be
allocated among taxpayers in relation to the benefits each derives from public service.
Ability to pay – under this principle equity requires the equal treatment of individuals possessing the
same capacity to pay taxes Reassessment mitigation – variable tax rates, phase in of value increases and decreases and capping
increases by clawing back decreases.
Reassessment Mitigation: Variable Tax Rates
- municipalities are allowed to use different rates for each tax class