Term Paper on "Real Estate Funding Chapter"

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[EXCERPT] . . . .

Real Estate Funding Chapter

HOW TO FUND REAL ESTATE INVESTMENTS

CHAPTER ____ HOW TO FIND A MORTGAGE FOR RESIDENTIAL PROPERTY

So you want to buy a residential property and you aren't sure how to go about it. Don't worry - you are not alone. People all over the world want to own their own home and this desire has manifested itself in some interesting ways in the historical record. In Anglo-American law, for example, it was possible to claim a certain amount of land for one's family by simply erecting a simple structure that had a door and to have a fire burning in some type of fireplace by dawn just a few hundred years ago. For more than a hundred years, citizens of the United States also enjoyed the ability to claim a section of land by building a house on designated property and living there for a minimum of 5 years. Alaska was the last state to eliminate this opportunity, and people today are generally required to secure a mortgage in order to buy a piece of residential real estate.

This chapter will help you understand the basics of buying a house or commercial property today, including what a mortgage is and where to find them. First of all, we'll discuss buying residential properties. People typically don't pay cash when they buy a residential property. If this was required, it would be unlikely that anyone could afford to buy a house. Instead of paying for the whole thing at once, people make a small down payment (usually 3 to 20% of the sale price) and obtain a loan from a commercial bank or savings and loan (or savings bank) (the mortgagors) to cover the rest. This type of loan is known as a mortgage. Mortgage holders (the mortgagees) make payments on this loan every month for 15 to 30 years.

According to Black's Law Dictionary (1990), a mortgage is "an interest in land created by a written instrument providing security for the performance of a duty or the payment of a debt. At common law, an estate created by a conveyance absolute in the form of, but intended to secure the performance of some act, such as the payment of money, and the like, by the grantor or some other person, and to become void if the act is performed agreeably to the terms prescribed at the time of making such conveyance" (p. 1009). The median price for a home in 2003 was $140,000 according to the U.S. Census Bureau. The old saying in real estate, though, comes into play here: The most important thing about real estate is location, location, location. Certainly, prices vary according to the part of town, and even the state you live in. For example, homes in California cost much more than homes in rural parts of New Mexico or Oklahoma. Furthermore, if the median (middle) price is $140,000, there will clearly be houses available for much less.

HISTORY OF MORTGAGES IN COMMON LAW.

In the Anglo-American law, a mortgage refers to any of a number of related devices in which a debtor (mortgagor) conveys an interest in property to a creditor (mortgagee) as security for the payment of a money debt. The Anglo-American mortgage roughly corresponds to the hypothec in civil-law systems. The modern Anglo-American mortgage is the direct descendant of a form of transaction that emerged in England in the later Middle Ages. The mortgagor (debtor) conveyed the ownership of land to the mortgagee subject to the condition that, if the mortgagor repaid a debt he owed the mortgagee by a certain time, the mortgagee would reconvey the land to the mortgagor. If the mortgagor failed to repay the debt by the time that was specified in the mortgage, the land became the mortgagee's absolutely. This form of transaction was known, under different names, throughout the ancient world and throughout medieval Europe. It is to be distinguished from types of security devices (also known both anciently and today) in which the debtor gives the creditor possession but not ownership of the property (the pledge in civil-law systems and the gage of land in the early English common law) or in which the debtor does not even give the creditor possession of the property but simply a right to satisfy the debt out of the property if the debtor fails to pay (the lien or hypothec).

The common-law mortgage of the late Middle Ages was thus a strong form of security. The history of its development is one of progressive loosening in favour of the mortgagor. Already at the end of the Middle Ages, it had become the practice for the mortgagee to allow the mortgagor to remain in possession of the land, and this practice developed into a right in the mortgagor to remain in possession of the land so long as he was not in default on the debt.

Originally, the terms of mortgages were strictly interpreted by common-law courts; however, by the 16th and 17th centuries, English equity courts began to step in and introduced advocacy for mortgagors. At this time, equity first gave the mortgagor a right to redeem the land by paying the amount that was owing, even after he had defaulted on the debt, so long as he did so within a "reasonable time." In order to clear their title to the land after the mortgagor had defaulted, mortgagees brought actions in equity to foreclose the mortgagor's "equity of redemption." As a condition of granting the foreclosure, equity gave the mortgagor a right to the proceeds of the sale of the land to the extent that the sale realized more than the outstanding amount of the debt. In most Anglo-American jurisdictions, legislation in the 19th century extended the mortgagor's right to redeem to a fixed period after the mortgagee had foreclosed. Finally, in many Anglo-American jurisdictions, legislation required that the mortgagee sell the land at public sale after he had foreclosed, and in some of these jurisdictions the sale had to be conducted by a public official.

In the early modern period, security devices similar to mortgages of land were used with personal property, particularly by merchants, and in the 19th century use of this so-called "chattel mortgage" was common throughout the Anglo-American world. The development of the law of chattel mortgages has followed a course different from that of mortgages of land, but in most jurisdictions the end result today is similar. The creditor's rights normally do not come into play unless and until the debtor defaults. Because the chattel mortgage was typically a device used by merchants, rather than ordinary citizens, there were, until quite recently, fewer protections for the debtor in such transactions (typically, for example, there was no statutory right to redeem). Recently, however, the extensive use of chattel mortgage and similar security devices in consumer credit transactions has led to an extensive body of regulatory law protecting the consumer's interest.

Today, the mortgage is still the most widely used form of security device in transactions that involve land in these Anglo-American jurisdictions; however, there are alternative devices, such as the deed of trust (whereby a trustee holds title to the property and conveys it to the debtor if he pays the debt or sells the property and divides the proceeds if the debtor defaults) or the long-term land contract (whereby the seller of the land retains title to the land until the purchaser has paid off the amount owed), which are used in some jurisdictions, but they are increasingly subject to regulations that make them operate more like traditional mortgages.

The mortgage serves as a means of promoting the best use of society's finite resources: people and land. In this regard, mortgages provide a method that manages the transferability of land and for the improvement or working of that land by those unable to buy the property with their current resources. For example, an elderly farmer wanting to retire can sell the farm to a younger farmer; the latter can then mortgage the property in order to pay the seller full value and obtain sufficient monies to carry out personal plans for the farm. (mortgage, 2006)

Mortgages play an even more important role in maintaining the market in residential housing, since they permit individuals with relatively little personal credit to purchase a house by offering the house itself as security for the loan. In the United States, the federal government has supported this type of transaction by developing a secondary market in mortgages. Banks that have placed residential mortgages can sell them in the secondary market in order to raise capital to make further loans. The operations of the secondary market have tended to make the law and practice of the various U.S. states more uniform, since the secondary market operates more efficiently if it is dealing with a standardized product. (mortgage, 2006).

TRADITIONAL MORTGAGE FUNDING.

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