Glossary of Terms for Distressed Properties

Following are some of the terms used in discussing distressed properties, both foreclosures and short sales. This list is by no means all-inclusive. If you have further questions about the process or what a particular term refers to, feel free to contact me.

A-paper (or “A” loan)—a loan given to someone whose FICO score is at least 660 or above. There have been no late mortgage payments within a 12-month period.

Asset Manager—the person within a financial institution who manages REO accounts. This person is responsible for listing the property with an agent and taking the necessary steps to get it sold. This may include maintenance, security, cleaning or other actions necessary to ensure the safe, saleable condition of the property.

B-paper—see Sub-prime loan. Bankruptcy—a legal declaration of an individual’s inability to pay his or her debts. This usually leads to financial restructuring that in some cases lowers the amount required to discharge the debt, thus bankruptcy filing usually halts the foreclosure process.

BPO—Broker Price Opinion. Estimate of the value of a property prepared by a real estate broker.

Buyer’s Broker or Buyer’s Agent—the agent or company that represents the buyer in a real estate transaction.

Buyer’s Market—when the number of homes on the market exceeds a six-month supply, which causes prices of homes to decline, thus making it more favorable for buyers than sellers.

C-paper—see Sub-prime loan.

Cash for Keys—an alternative to foreclosure which works when the borrower has equity in the property and agrees to exchange cash from the lender for the keys to the property. There must be enough equity to cover the lender’s cost of selling the property. The advantage of this plan is that it is fast and avoids considerable expenses and red tape.

Credit Score—see FICO score.

Deed In Lieu of Foreclosure—an alternative to foreclosure whereby the owners of a home give the home to the lender voluntarily. The procedure for this may be outlined in the mortgage document. For the lender to accept this arrangement, generally the loan amount must be lower than the anticipated sales price. Many lenders require a 20% differential for this to work. This is also sometimes referred to as “Deed for Keys”.

Debt to Income Ratio—a comparison or ration of gross income to housing and non-housing expenses. Lenders use this figure to determine how much a borrower will qualify for, and thus it determines the price range of home that a borrower can afford.

Deficiency Judgment—a judgment lien against a debtor whose foreclosure sale did not produce sufficient funds to pay the mortgage in full. State laws vary on these amounts, and some states do not allow deficiency judgments for this purpose.

Dual Agency—when the same real estate company or agent represents both buyer and seller.

Fannie Mae—the popular name for the Federal National Mortgage Assocation (FNMA), a federally chartered enterprise owned by private stockholders that purchases residential mortgages and converts them into securities for sale to investors. Fannie Mae also supplies funds that lenders may loan to potential homebuyers.

FHA—Federal Housing Administration, a federal agency.

FICO Score—a person’s so-called “credit score” based on his or her credit history and used by lenders to decide if a person is likely to pay his or her bills. FICO stands for Fair Isaac Corporation, which devised how the credit score is determined. The credit score is evaluated using payment and other information from the 3 major credit bureaus and is usually between 300 and 850.

Forbearance—an alternative to foreclosure whereby a lender may allow the borrower to skip a payment or make a partial payment if the borrower can suggest a reasonable plan to catch up on the amount in arrears. Usually this only works once. It could be favorable for someone who has been temporarily out of work or has experienced a very unusual unavoidable expense such as sickness or emergency.

Foreclosure—the process by which a lien holder (for example, bank or other mortgage holder) takes possession of the property, which was used as collateral to get a loan to purchase the property. The process is generally triggered by the borrower’s failure to, or inability to make timely payments.

Freddie Mac—the popular name for the Federal Home Loan Mortgage Corporation (FHLM), a federally chartered corporation that purchases residential mortgages, securitzes them, and sells them to investors, thus providing lenders with funds for mortgages to new home buyers.

HUD—a cabinet-level department of the federal government dealing with housing issues and policy. Short for the Department of Housing and Urban Development.

HUD home
—a home owned by HUD which is actually a foreclosed home that had an FHA or other federally insured loan on it.

HUD-1—the form used for settlement or closing statements, stating all of the costs and net proceeds of the sale of real property.

Judicial Foreclosure—the foreclosure process that results from a lawsuit and is carried out in a court of law. It may take months to resolve and is usually more costly than a Trustee Sale. In this type of foreclosure if a judgment is granted to the plaintiff, a public auction of the property is conducted by the Sheriff or other officer of the court (Sheriff’s sale).

Listing Broker or Listing Agent—the real estate agent or company that has a real estate property on the market.

Loan Modification Plan—an alternative to foreclosure whereby the lender may agree to one of the following: modify a mortgage by either lowering the interest rate or extending the years of the mortgage to reduce monthly payments, giving more years to pay off the mortgage and adding the missed payments to the balance of the mortgage, or forgiving part of the loan amount to make the payments affordable.

Mortgage—a type of loan used to purchase a piece of real property. This document is generally registered with the county along with the deed, when the purchase is made. It is considered to be a lien on the property.

Mortgage Insurance
—an insurance policy which the buyer purchases on behalf of the lender, which protects the lender against some or most of the losses that can occur when a borrower defaults on a mortgage loan. It is required generally for borrowers with a down payment of less than 20% of the purchase price. The cost is generally added to the borrower’s monthly payment and is maintained until the outstanding loan amount is less than 80% of the value of the home.

Non-Judicial Foreclosure—the foreclosure process whereby the lender is granted the authority to foreclose using the Trustee method—commonly referred to as a “Trust Deed” or a “Deed of Trust”. Also called a Trustee’s Sale.

Notice of Default (NOD)—a notice sent from a financial institution to a borrower when their mortgage payment is past due and that the mortgage is in default. The notice states the date at which the foreclosure proceedings will being if the mortgage is not brought up to date.

PMI—Private Mortgage Insurance. See also Mortgage Insurance. Pre-foreclosure—the period prior to when the bank or other lender actually takes possession of the property, during which the borrower generally has missed one or more mortgage payments and the lender contacts the buyer to determine the cause of the missed payment in an effort to bring the borrower up to date.

REO Property—A property which is “Real Estate Owned” by a financial institution as a result of the foreclosure process. The property becomes part of the liabilities of the financial institution balance sheet.

Redemption—the borrower’s right to buy back the property after it has been foreclosed upon, or to bring the mortgage up to date while the property is being foreclosed upon. The borrower is required to pay all charges or collection costs and to make up all payments that are due. The time period that a borrower has to redeem the property varies from state to state.

Reinstatement—an alternative to foreclosure similar to Forbearance. In this scenario the borrower agrees to make one lump sum payment in the future to bring the mortgage up to date, instead of a payment plan.

Repayment plan
—an alternative to foreclosure. If the borrower cannot meet the requirements of Reinstatement or Forbearance, the lender mayn allow the borrow to catch up on what is owed by increasing the monthly payments until the missed payments are brought current.

Seller’s Market
—when the number of homes on the market is less than a six-month supply, which causes prices to rise. Often in a seller’s market, the shortage of homes causes multiple offers when a new listing comes on the market.

Short Sale—an alternative to foreclosure where a property is sold for less than the amount owed on the mortgage and the lender agrees to accept that amount as satisfaction of the mortgage still owed. This cannot be set up ahead of time normally, since the home must be under contract and the lender must accept the discounted payoff amount. Normally the seller must have a bonafied hardship for the lender to accept the discounted payoff amount. It often takes a long time to complete a short sale.

Sub-prime loan—a loan given to someone whose FICO score is 659 or less. This type of loan is further divided between B-paper (FICO score 620-659, 2 late mortgage payments and 2 or 3 late installment loan payments in the last 12 months) and C-paper (FICO score 580-619, 3-4 late mortgage payments, 4-6 late installment loan payments).

Trustee’s Sale—see Non-Judicial Foreclosure. Upside-down Properties—properties where the mortgage is greater than the value of the property.