Overdraft

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"I warn you, Sir! The discourtesy of this bank is beyond all limits. One word more and I I withdraw my overdraft!" Cartoon from Punch Magazine Vol. 152, June 27, 1917 An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft limit, then interest is normally charged at the agreed rate. If the negative balance exceeds the agreed terms, then additional fees may be charged and higher interest rates may apply.

Contents
[hide]

1 Reasons for overdrafts 2 United Kingdom

2.1 Overdraft protection in the UK

2.1.1 Amount of fees

3 United States

3.1 Overdraft protection in the US

3.1.1 Ad-hoc coverage of overdrafts

3.1.2 Overdraft lines of credit 3.1.3 Linked accounts 3.1.4 Bounce protection plans

3.2 Industry statistics 3.3 Transaction processing order 3.4 Opt-in regulation

4 References

[edit] Reasons for overdrafts

Overdrafts occur for a variety of reasons. These may include:

Intentional short-term loan - The account holder finds themselves short of money and knowingly makes an insufficient-funds debit. They accept the associated fees and cover the overdraft with their next deposit. Failure to maintain an accurate account register - The account holder doesn't accurately account for activity on their account and overspends through negligence. ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient availability of funds. The account holder may or may not be aware of this fact at the time of the withdrawal. If the ATM is unable to communicate with the cardholder's bank, it may automatically authorize a withdrawal based on limits preset by the authorizing network. Temporary Deposit Hold - A deposit made to the account can be placed on hold by the bank. This may be due to Regulation CC (which governs the placement of holds on deposited checks) or due to individual bank policies. The funds may not be immediately available and lead to overdraft fees. Unexpected electronic withdrawals - At some point in the past the account holder may have authorized electronic withdrawals by a business. This could occur in good faith of both parties if the electronic withdrawal in question is made legally possible by terms of the contract, such as the initiation of a recurring service following a free trial period. The debit could also have been made as a result of a wage garnishment, an offset claim for a taxing agency or a credit account or overdraft with another account with the same bank, or a direct-deposit chargeback in order to recover an overpayment. Merchant error - A merchant may improperly debit a customer's account due to human error. For example, a customer may authorize a $5.00 purchase which may post to the account for $500.00. The customer has the option to recover these funds through chargeback to the merchant. Chargeback to merchant - A merchant account could receive a chargeback because of making an improper credit or debit card charge to a customer or a customer making an unauthorized credit or debit card charge to someone else's account in order to "pay" for goods or services from the merchant. It is possible for the chargeback and associated fee to cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or debit from the merchant's account that received the chargeback.

Authorization holds - When a customer makes a purchase using their debit card without using their PIN, the transaction is treated as a credit transaction. The funds are placed on hold in the customer's account reducing the customer's available balance. However the merchant doesn't receive the funds until they process the transaction batch for the period during which the customer's purchase was made. Banks do not hold these funds indefinitely, and so the bank may release the hold before the merchant collects the funds thus making these funds available again. If the customer spends these funds, then barring an interim deposit the account will overdraw when the merchant collects for the original purchase. Bank fees - The bank charges a fee unexpected to the account holder, leaving insufficient funds for a subsequent debit from the same account. Playing the float - The account holder makes a debit while insufficient funds are present in the account believing they will be able to deposit sufficient funds before the debit clears. While many cases of playing the float are done with honest intentions, the time involved in checks clearing and the difference in the processing of debits and credits are exploited by those committing check kiting. Returned check deposit - The account holder deposits a check or money order and the deposited item is returned due to non-sufficient funds, a closed account, or being discovered to be counterfeit, stolen, altered, or forged. As a result of the check chargeback and associated fee, an overdraft results or a subsequent debit which was reliant on such funds causes one. This could be due to a deposited item that is known to be bad, or the customer could be a victim of a bad check or a counterfeit check scam. If the resulting overdraft is too large or cannot be covered in a short period of time, the bank could sue or even press criminal charges. Intentional Fraud - An ATM deposit with misrepresented funds is made or a check or money order known to be bad is deposited (see above) by the account holder, and enough money is debited before the fraud is discovered to result in an overdraft once the chargeback is made. The fraud could be perpetrated against one's own account, another person's account, or an account set up in another person's name by an identity thief. Bank Error - A check debit may post for an improper amount due to human or computer error, so an amount much larger than the maker intended may be removed from the account. Same bank errors can work to the account holder's detriment, but others could work to their benefit. Victimization - The account may have been a target of identity theft. This could occur as the result of demand-draft, ATM-card, or debit-card fraud, skimming, check forgery, an "account takeover," or phishing. The criminal act could cause an overdraft or cause a subsequent debit to cause one. The money or checks from an ATM deposit could also have been stolen or the envelope lost or stolen, in which case the victim is often denied a remedy. Intraday overdraft - A debit occurs in the customers account resulting in an overdraft which is then covered by a credit that posts to the account during the same business day. Whether this actually results in overdraft fees depends on the deposit-account holder agreement of the particular bank.

[edit] United Kingdom

[edit] Overdraft protection in the UK

Banks in the UK often offer a basic overdraft facility, subject to a pre-arranged limit (known as an authorized overdraft limit). However, whether this is offered free of interest, subject to an average monthly balance figure or at the bank's overdraft lending rate varies from bank to bank and may differ according to the account product held. When a customer exceeds their authorized overdraft limit, they become overdrawn without authorization, which often results in the customer being charged one or more fees, together with a higher rate of lending on the amount by which they have exceeded their authorized overdraft limit. The fees charged by banks can vary. A customer may also incur a fee if they present an item which their issuing bank declines for reason of insufficient funds, that is, the bank elects not to permit the customer to go into unauthorized overdraft. Again, the level and nature of such fees varies widely between banks. Usually, the bank sends out a letter informing the customer of the charge and requesting that the account be operated within its limits from that point onwards. In a BBC Whistleblower programme on the practice, it was noted that the actual cost of an unauthorised overdraft to the bank was less than two pounds. [1] [edit] Amount of fees No major UK bank has completely dropped unauthorized overdraft fees. Some, however, offer a "buffer zone", where customers will not be charged fees if they are over their limit by less than a certain amount. Other banks tend to charge fees regardless of the amount of the level of the overdraft, which is seen by some as unfair. In response to criticism, Lloyds TSB changed its fee structure; rather than a single monthly fee for an unauthorized overdraft, they now charge per day. They also allow a 'grace period' where you can pay money in before 3.30pm (Mon - Fri) before any items are returned or any bank charges incurred (with exception from Standing Orders which debit at beginning of working day). Lloyds TSB allows their customers, if they have gone into an unplanned Overdraft on a Friday for example, to pay money in before 10am on Monday morning and the daily fees for the weekend (Saturday and Sunday) to be waivered. This, however, does need to be cleared funds. Alliance & Leicester formerly had a buffer zone facility (marketed as a "last few pounds" feature of their account), but this has been withdrawn. In general, the fee charged is between twenty-five and thirty pounds, along with an increased rate of debit interest. The charges for cheques and Direct Debits which are refused (or "bounced") due to insufficient funds are usually the same as or slightly less than the general overdraft fees, and can be charged on top of them. A situation which has provoked much controversy is the bank declining a cheque/Direct Debit, levying a fee which takes the customer overdrawn and then charging them for going overdrawn. However, some banks, like Halifax, have a "no fees on fees" policy whereby an account that goes overdrawn solely because of an unpaid item fee will not be charged an additional fee. In 2006 the Office of Fair Trading issued a statement which concluded that credit card issuers were levying penalty charges when customers exceeded their maximum spend limit and / or made late payments to their accounts. In the statement, the OFT recommended that credit card issuers set such fees at a maximum of 12 UK pounds.[1] In the statement, the OFT opined that the fees charged by credit card issuers were analogous to unauthorized overdraft fees charged by banks. Many customers who have incurred unauthorized overdraft fees have used this statement as a springboard to sue their banks in order to recover the fees. It is currently thought t

[edit] United States

[edit] Overdraft protection in the US

Overdraft protection is a financial service offered by banking institutions primarily in the United States. Overdraft or courtesy pay program protection pays items presented to a customer's account when sufficient funds are not present to cover the amount of the withdrawal. Overdraft protection can cover ATM withdrawals, purchases made with a debit card, electronic transfers, and checks. In the case of non-preauthorized items such as checks, or ACH withdrawals, overdraft protection allows for these items to be paid as opposed to being returned unpaid, or bouncing. However, ATM withdrawals and purchases made with a debit or check card are considered preauthorized and must be paid by the bank when presented, even if this causes an overdraft. [edit] Ad-hoc coverage of overdrafts Traditionally, the manager of a bank would look at the bank's list of overdrafts each day. If the manager saw that a favored customer had incurred an overdraft, they had the discretion to pay the overdraft for the customer. Banks traditionally did not charge for this ad-hoc coverage. However, it was fully discretionary, and so could not be depended on. With the advent of largescale interstate branch banking, traditional ad-hoc coverage has practically disappeared. The one exception to this is so-called "force pay" lists. At the beginning of each business day, branch managers often still get a computerized list of items that are pending rejection, only for accounts held in their specific branch, city or state. Generally, if a customer is able to come into the branch with cash or make a transfer to cover the amount of the item pending rejection, the manager can "force pay" the item. In addition, if there are extenuating circumstances or the item in question is from an account held by a regular customer, the manager may take a risk by paying the item, but this is increasingly uncommon. Banks have a cut-off time when this action must take place by, as after that time, the item automatically switches from "pending rejection" to "rejected," and no further action may be taken. [edit] Overdraft lines of credit This form of overdraft protection is a contractual relationship in which the bank promises to pay overdrafts up to a certain dollar limit. A consumer who wants an overdraft line of credit must complete and sign an application, after which the bank checks the consumer's credit and approves or denies the application. Overdraft lines of credit are loans and must comply with the Truth in Lending Act. As with linked accounts, banks typically charge a nominal fee per overdraft, and also charge interest on the outstanding balance. Some banks charge a small monthly fee regardless of whether the line of credit is used. This form of overdraft protection is available to consumers who meet the creditworthiness criteria established by the bank for such accounts. Once the line of credit is established, the available credit may be visible as part of the customer's available balance. [edit] Linked accounts Also referred to as "Overdraft Transfer Protection", a checking account can be linked to another account, such as a savings account, credit card, or line of credit. Once the link is established, when an item is presented to the checking account that would result in an overdraft, funds are transferred from the linked account to cover the overdraft. A nominal fee is usually charged for each overdraft transfer, and if the linked account is a credit card or other line of credit, the consumer may be required to pay interest under the terms of that account.

The main difference between linked accounts and an overdraft line of credit is that an overdraft line of credit is typically only usable for overdraft protection. Separate accounts that are linked for overdraft protection are independent accounts in their own right. [edit] Bounce protection plans A more recent product being offered by some banks is called "bounce protection." Smaller banks offer plans administered by third party companies which help the banks gain additional fee income.[2] Larger banks tend not to offer bounce protection plans, but instead process overdrafts as disclosed in their account terms and conditions. In either case, the bank may choose to cover overdrawn items at their discretion and charge an overdraft fee, the amount of which may or may not be disclosed. As opposed to traditional adhoc coverage, this decision to pay or not pay overdrawn items is automated and based on objective criteria such as the customer's average balance, the overdraft history of the account, the number of accounts the customer holds with the bank, and the length of time those accounts have been open.[3] However, the bank does not promise to pay the overdraft even if the automated criteria are met. Bounce protection plans have some superficial similarities to overdraft lines of credit and ad-hoc coverage of overdrafts, but tend to operate under different rules. Like an overdraft line of credit, the balance of the bounce protection plan may be viewable as part of the customer's available balance, yet the bank reserves the right to refuse payment of an overdrawn item, as with traditional ad-hoc coverage. Banks typically charge a one-time fee for each overdraft paid. A bank may also charge a recurring daily fee for each day during which the account has a negative balance. Critics argue that because funds are advanced to a consumer and repayment is expected, that bounce protection is a type of loan.[4] Because banks are not contractually obligated to cover the overdrafts, "bounce protection" is not regulated by the Truth in Lending Act, which prohibits certain deceptive advertisements and requires disclosure of the terms of loans. Historically, bounce protection could be added to a consumer's account without his or her permission or knowledge. In May 2005, Regulation DD of the Truth in Savings Act was amended to require that banks offering "bounce protection" plans provide certain disclosures to their customers. These amendments include requirements to disclose the types of transaction that may cause bounce protection to be triggered, the fees associated with bounce protection, separate statement categories to enumerate the number of fees charged, and restrictions on the marketing of bounce protection programs to deter misleading advertisements. These disclosures are already provided by larger banks which process overdrafts according to their terms and conditions.

[edit] Industry statistics

U.S. banks are projected to collect over $38.5 billion in overdraft fees for 2009, nearly double compared to 2000.[5]

[edit] Transaction processing order

An area of controversy with regards to overdraft fees is the order in which a bank posts transactions to a customer's account. This is controversial because largest to smallest processing tends to maximize overdraft occurrences on a customer's account. This situation can arise when the account holder makes a number of small debits for which there are sufficient funds in the account at the time of purchase. Later, the account holder makes a large debit that overdraws the

account (either accidentally or intentionally). If all of the items present for payment to the account on the same day, and the bank processes the largest transaction first, multiple overdrafts can result. The "biggest check first" policy is common among large U.S. banks.[6] Banks argue that this is done to prevent a customer's most important transactions (such as a rent or mortgage check, or utility payment) from being returned unpaid, despite some such transactions being guaranteed. Consumers have attempted to litigate to prevent this practice, arguing that banks use "biggest check first" to manipulate the order of transactions to artificially trigger more overdraft fees to collect. Banks in the United States are mostly regulated by the Office of the Comptroller of Currency, a Federal agency, which has formally approved of the practice; the practice has recently been challenged, however, under numerous individual state deceptive practice laws.[7] Bank deposit agreements usually provide that the bank may clear transactions in any order, at the bank's discretion.[8]

[edit] Opt-in regulation

In July, 2010 the Federal Reserve adopted regulations which prohibited overdraft fees unless the bank customer had opted in to overdraft protection. Research by Moebs Services released in February, 2011 showed that as many as 90% of customers had chosen overdraft protection resulting in the projection that United States banks would post record profits from overdraft fees.
[9]

[edit] References
1. ^ "Your reporter: Unauthorised overdraft fees". BBC News. May 2, 2006.

http://news.bbc.co.uk/1/hi/business/4940250.stm.
2. ^ Appendix - Bounce Protection 3. ^ http://www.house.gov/apps/list/hearing/financialsvcs_dem/htfeddis071107.pdf 4. ^ U.S. PIRG Consumer Blog: Bounce protection loans/debit cards under committee

microscope
5. ^ FT.com Banks make $38bn from overdraft fees 6. ^ USA Today: Banks' check-clearing policies could leave you with overdrafts 7. ^ [Scott J. Kreppein, Dissent of Man Law Blog, "Potential Tide Turning Victory in The

Battle Against Illegal Non-Sufficient Fund and Overdraft Fees: Bank of America Settles Closson Class Action," http://kreppein.blogspot.com/2009/02/california-class-actionagainst-bank-of.html] [See also Kreppein, Dissent of Man Law Blog, "The UK Takes Steps to Curb Illegal Overdraft Fees, But US Efforts Have Not Been So Well Received," http://kreppein.blogspot.com/2007/08/uk-takes-steps-to-curb-illegal.html]
8. ^ Bank of America Deposit Agreement 9. ^ Kapner, Suzanne (February 23 2011). "Americans choosing to pay overdraft fees". The

Financial Times. http://www.ft.com/cms/s/0/5eb4cc72-3f9b-11e0-a1ba00144feabdc0.html#ixzz1EpOTfWmT. Retrieved February 23, 2011. [show]v d eNon-sufficient

funds

Advance-fee fraud Bad check restitution program Cheque fraud Check kiting ChexSystems Nonsufficient funds Overdraft Shared Check Authorization Network [hide]v d eConsumer debt Alternative financial services Financial literacy Unsecured Credit card debt (cash advance) Overdraft Payday loan debt Personal loan / Signature loan moneylender Secured debt Mortgage loan / Home equity loan / Home equity line of credit car title loan / logbook loan tax refund anticipation loan pawnbroker

Debt Debt consolidation Credit counseling / Debt management plan / managemen Debt settlement Personal bankruptcy Foreclosure / Repossession t Key Annual Percentage Rate (APR) concepts Retrieved from "http://en.wikipedia.org/wiki/Overdraft" Categories: Banking terms and equipment
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Svenska Ting Vit This page was last modified on 27 June 2011 at 11:54. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. See Terms of use for details. Wikipedia is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization. Contact us Privacy policy About Wikipedia Disclaimers

Collateral (finance)
From Wikipedia, the free encyclopedia Jump to: navigation, search In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan.[1][2] The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral. In a typical mortgage loan transaction, for instance, the real estate being acquired with the help of the loan serves as collateral. Should the buyer fail to pay the loan under the mortgage loan agreement, the ownership of the real estate is transferred to the bank. The

bank uses a legal process called foreclosure to obtain real estate from a borrower who defaults on a mortgage loan obligation.

[edit] Concept of collateral

Collateral, especially within banking, may traditionally refer to secured lending (also known as asset-based lending). More recently, complex collateralisation arrangements are used to secure trade transactions (also known as capital market collateralization). The former often presents unilateral obligations, secured in the form of property, surety, guarantee or other as collateral (originally denoted by the term security), whereas the latter often presents bilateral obligations secured by more liquid assets such as cash or securities, often known as margin. Another example might be to ask for collateral in exchange for holding something of value until it is returned (e.g., I'll hold onto your hot daughter while you borrow my expensive car). Some forms of lending are solely based on the strength of the collateral such as gold jewelry and property. Certain non-conservative lending practices such as lending against antique items or art works are also known to exist. In many developing countries, the use of collateral is the main way to secure bank financing. [citation needed] The ease of acquiring a loan depends on the ability to use assets such as real estate as collateral.

[edit] See also

Consignment Security interest Credit risk Hypothecation Cross-collateralization

[edit] References
1. ^ Garrett, Joan F. (1995). Banks and Their Customers. Dobbs Ferry, NY: Oceana

Publications. p. 99. ISBN 0379111942. http://books.google.com/books? id=h3YFAAAACAAJ&dq.

2. ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper

Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 513. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm? locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&P MDbProgramId=12881&level=4. Retrieved from "http://en.wikipedia.org/wiki/Collateral_(finance)" Categories: Basic financial concepts | Personal finance Hidden categories: All articles with unsourced statements | Articles with unsourced statements from April 2010
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Security (finance)
From Wikipedia, the free encyclopedia Jump to: navigation, search This article is about the negotiable instrument. For the legal right given to a creditor by a borrower, see Security interest. This article has multiple issues. Please help improve it or discuss these issues on the talk page.

It needs additional references or sources for verification. Tagged since October

2008.

It may not represent a worldwide view of the subject. Tagged since August 2010. It may be too technical for most readers to understand. Please help make it understandable to non-experts. Tagged since November 2010. Securities

Securities Bond Stock Investment fund Derivative Structured finance Agency security Markets Bond market Stock market Futures market Foreign exchange market Commodity market Spot market Over-the-counter market (OTC) Bonds by coupon Fixed rate bond Floating rate note Zero-coupon bond Inflation-indexed bond Commercial paper Perpetual bond Bonds by issuer Corporate bond Government bond Municipal bond Pfandbrief Sovereign bond Equities (stocks) Stock Share Initial public offering (IPO) Short selling Investment funds Mutual fund Index fund Exchange-traded fund (ETF) Closed-end fund

Segregated fund Hedge fund Structured finance Securitization Asset-backed security Mortgage-backed security Commercial mortgage-backed security Residential mortgage-backed security Tranche Collateralized debt obligation Collateralized fund obligation Collateralized mortgage obligation Credit-linked note Unsecured debt Agency security Derivatives Option Warrant Futures Forward contract Swap Credit derivative Hybrid security vde

A security is generally a fungible, negotiable financial instrument representing financial value.[1] Securities are broadly categorized into:

debt securities (such as banknotes, bonds and debentures), equity securities, e.g., common stocks; and, derivative contracts, such as forwards, futures, options and swaps.

The company or other entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies as a security. For example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, "non-certificated", that is in electronic or "book entry" only form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible.

Contents
[hide]

1 Classification

1.1 New capital 1.2 Repackaging 1.3 By type of holder

1.3.1 Investment 1.3.2 Collateral

2 Debt and equity

2.1 Debt 2.2 Equity 2.3 Hybrid 3.1 Primary and secondary market 3.2 Public offer and private placement 3.3 Listing and OTC dealing 3.4 Market 4.1 Certificated securities

3 The securities markets

4 Physical nature of securities

4.1.1 Bearer securities 4.1.2 Registered securities 4.2.1 Non-certificated securities 4.2.2 Global certificates, book entry interests, depositories 4.2.3 Other depositories: Euroclear and Clearstream

4.2 Non-certificated securities and global certificates

4.3 Divided and undivided security 4.4 Fungible and non-fungible security

5 Regulation 6 See also 7 Notes

[edit] Classification
Securities may be classified according to many categories or classification systems: Currency of denomination Ownership rights Term to maturity Degree of liquidity

Income payments Tax treatment Credit rating Industrial sector or "industry". ("Sector" often refers to a higher level or broader category, such as Consumer Discretionary, whereas "industry" often refers to a lower level classification, such as Consumer Appliances. See Industry for a discussion of some classification systems.) Region or country (such as country of incorporation, country of principal sales/market of its products or services, or country in which the principal securities exchange where it trades is located) Market capitalization State (typically for municipal or "tax-free" bonds in the U.S.)

[edit] New capital

Commercial enterprises have traditionally used securities as a means of raising new capital. Securities may be an attractive option relative to bank loans depending on their pricing and market demand for particular characteristics. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants. Through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, the governments may raise capital through the issuance of securities (see government debt).

[edit] Repackaging
In recent decades, securities have been issued to repackage existing assets. In a traditional securitization, a financial institution may wish to remove assets from its balance sheet to achieve regulatory capital efficiencies or to accelerate its receipt of cash flow from the original assets. Alternatively, an intermediary may wish to make a profit by acquiring financial assets and repackaging them in a way more attractive to investors. In other words, a basket of assets is typically contributed or placed into a separate legal entity such as a trust or SPV, which subsequently issues shares of equity interest to investors. This allows the sponsor entity to more easily raise capital for these assets as opposed to finding buyers to purchase directly such assets.

[edit] By type of holder

Investors in securities may be retail, i.e. members of the public investing other than by way of business. The greatest part in terms of volume of investment is wholesale, i.e. by financial institutions acting on their own account, or on behalf of clients. Important institutional investors include investment banks, insurance companies, pension funds and other managed funds. [edit] Investment The traditional economic function of the purchase of securities is investment, with the view to receiving income and/or achieving capital gain. Debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also offer control of the business of the issuer. Debt holdings may also offer some measure of control to the investor if the company is a fledgling start-up or an old giant undergoing 'restructuring'. In these cases, if interest payments are missed, the creditors may take control of the company and liquidate it to recover some of their investment.

[edit] Collateral The last decade has seen an enormous growth in the use of securities as collateral. Purchasing securities with borrowed money secured by other securities or cash itself is called "buying on margin". Where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A, either at inception (transfer of title) or only in default (non-transfer-oftitle institutional). For institutional loans property rights are not transferred but nevertheless enable A to satisfy its claims in the event that B fails to make good on its obligations to A or otherwise becomes insolvent. Collateral arrangements are divided into two broad categories, namely security interests and outright collateral transfers. Commonly, commercial banks, investment banks, government agencies and other institutional investors such as mutual funds are significant collateral takers as well as providers. In addition, private parties may utilize stocks or other securities as collateral for portfolio loans in securities lending scenarios. On the consumer level, loans against securities have grown into three distinct groups over the last decade: 1) Standard Institutional Loans, generally offering low loan-to-value with very strict call and coverage regimens, akin to standard margin loans; 2) Transfer-of-Title (ToT) Loans, typically provided by private parties where borrower ownership is completely extinguished save for the rights provided in the loan contract; and 3) Non-Transfer-of-Title Credit Line facilities where shares are not sold and they serve as assets in a standard lien-type line of cash credit. Of the three, transfer-of-title loans have fallen into the very high-risk category as the number of providers have dwindled as regulators have launched an industry-wide crackdown on transfer-oftitle structures where the private lender may sell or sell short the securities to fund the loan. See sell short. Institutionally managed consumer securities-based loans, on the other hand, draw loan funds from the financial resources of the lending institution, not from the sale of the securities.

[edit] Debt and equity

Securities are traditionally divided into debt securities and equities (see also derivatives).

[edit] Debt
Debt securities may be called debentures, bonds, deposits, notes or commercial paper depending on their maturity and certain other characteristics. The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities may be protected by collateral or may be unsecured, and, if they are unsecured, may be contractually "senior" to other unsecured debt meaning their holders would have a priority in a bankruptcy of the issuer. Debt that is not senior is "subordinated". Corporate bonds represent the debt of commercial or industrial entities. Debentures have a long maturity, typically at least ten years, whereas notes have a shorter maturity. Commercial paper is a simple form of debt security that essentially represents a post-dated check with a maturity of not more than 270 days. Money market instruments are short term debt instruments that may have characteristics of deposit accounts, such as certificates of deposit, and certain bills of exchange. They are highly liquid and are sometimes referred to as "near cash". Commercial paper is also often highly liquid. Euro debt securities are securities issued internationally outside their domestic market in a denomination different from that of the issuer's domicile. They include eurobonds and euronotes.

Eurobonds are characteristically underwritten, and not secured, and interest is paid gross. A euronote may take the form of euro-commercial paper (ECP) or euro-certificates of deposit. Government bonds are medium or long term debt securities issued by sovereign governments or their agencies. Typically they carry a lower rate of interest than corporate bonds, and serve as a source of finance for governments. U.S. federal government bonds are called treasuries. Because of their liquidity and perceived low risk, treasuries are used to manage the money supply in the open market operations of non-US central banks. Sub-sovereign government bonds, known in the U.S. as municipal bonds, represent the debt of state, provincial, territorial, municipal or other governmental units other than sovereign governments. Supranational bonds represent the debt of international organizations such as the World Bank, the International Monetary Fund, regional multilateral development banks and others.

[edit] Equity
An equity security is a share of equity interest in an entity such as the capital stock of a company, trust or partnership. The most common form of equity interest is common stock, although preferred equity is also a form of capital stock. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer. Unlike debt securities, which typically require regular payments (interest) to the holder, equity securities are not entitled to any payment. In bankruptcy, they share only in the residual interest of the issuer after all obligations have been paid out to creditors. However, equity generally entitles the holder to a pro rata portion of control of the company, meaning that a holder of a majority of the equity is usually entitled to control the issuer. Equity also enjoys the right to profits and capital gain, whereas holders of debt securities receive only interest and repayment of principal regardless of how well the issuer performs financially. Furthermore, debt securities do not have voting rights outside of bankruptcy. In other words, equity holders are entitled to the "upside" of the business and to control the business.

Stock

[edit] Hybrid
Hybrid securities combine some of the characteristics of both debt and equity securities. Preference shares form an intermediate class of security between equities and debt. If the issuer is liquidated, they carry the right to receive interest and/or a return of capital in priority to ordinary shareholders. However, from a legal perspective, they are capital stock and therefore may entitle holders to some degree of control depending on whether they contain voting rights. Convertibles are bonds or preferred stock that can be converted, at the election of the holder of the convertibles, into the common stock of the issuing company. The convertibility, however, may be forced if the convertible is a callable bond, and the issuer calls the bond. The bondholder has about 1 month to convert it, or the company will call the bond by giving the holder the call price, which may be less than the value of the converted stock. This is referred to as a forced conversion. Equity warrants are options issued by the company that allow the holder of the warrant to purchase a specific number of shares at a specified price within a specified time. They are often issued together with bonds or existing equities, and are, sometimes, detachable from them and separately tradable. When the holder of the warrant exercises it, he pays the money directly to the company, and the company issues new shares to the holder.

Warrants, like other convertible securities, increases the number of shares outstanding, and are always accounted for in financial reports as fully diluted earnings per share, which assumes that all warrants and convertibles will be exercised.

[edit] The securities markets

[edit] Primary and secondary market
In the U.S., the public securities markets can be divided into primary and secondary markets. The distinguishing difference between the two markets is that in the primary market, the money for the securities is received by the issuer of those securities from investors, typically in an initial public offering transaction, whereas in the secondary market, the securities are simply assets held by one investor selling them to another investor (money goes from one investor to the other). An initial public offering is when a company issues public stock newly to investors, called an "IPO" for short. A company can later issue more new shares, or issue shares that have been previously registered in a shelf registration. These later new issues are also sold in the primary market, but they are not considered to be an IPO but are often called a "secondary offering". Issuers usually retain investment banks to assist them in administering the IPO, obtaining SEC (or other regulatory body) approval of the offering filing, and selling the new issue. When the investment bank buys the entire new issue from the issuer at a discount to resell it at a markup, it is called a firm commitment underwriting. However, if the investment bank considers the risk too great for an underwriting, it may only assent to a best effort agreement, where the investment bank will simply do its best to sell the new issue. For the primary market to thrive, there must be a secondary market, or aftermarket that provides liquidity for the investment securitywhere holders of securities can sell them to other investors for cash. Otherwise, few people would purchase primary issues, and, thus, companies and governments would be restricted in raising equity capital (money) for their operations. Organized exchanges constitute the main secondary markets. Many smaller issues and most debt securities trade in the decentralized, dealer-based over-the-counter markets. In Europe, the principal trade organization for securities dealers is the International Capital Market Association. In the U.S., the principal trade organization for securities dealers is the Securities Industry and Financial Markets Association, which is the result of the merger of the Securities Industry Association and the Bond Market Association. The Financial Information Services Division of the Software and Information Industry Association (FISD/SIIA) represents a round-table of market data industry firms, referring to them as Consumers, Exchanges, and Vendors.

[edit] Public offer and private placement

In the primary markets, securities may be offered to the public in a public offer. Alternatively, they may be offered privately to a limited number of qualified persons in a private placement. Sometimes a combination of the two is used. The distinction between the two is important to securities regulation and company law. Privately placed securities are not publicly tradable and may only be bought and sold by sophisticated qualified investors. As a result, the secondary market is not nearly as liquid as it is for public (registered) securities. Another category, sovereign bonds, is generally sold by auction to a specialized class of dealers.

[edit] Listing and OTC dealing

Securities are often listed in a stock exchange, an organized and officially recognized market on which securities can be bought and sold. Issuers may seek listings for their securities to attract

investors, by ensuring there is a liquid and regulated market that investors can buy and sell securities in. Growth in informal electronic trading systems has challenged the traditional business of stock exchanges. Large volumes of securities are also bought and sold "over the counter" (OTC). OTC dealing involves buyers and sellers dealing with each other by telephone or electronically on the basis of prices that are displayed electronically, usually by commercial information vendors such as Reuters and Bloomberg. There are also eurosecurities, which are securities that are issued outside their domestic market into more than one jurisdiction. They are generally listed on the Luxembourg Stock Exchange or admitted to listing in London. The reasons for listing eurobonds include regulatory and tax considerations, as well as the investment restrictions.

[edit] Market
London is the centre of the eurosecurities markets. There was a huge rise in the eurosecurities market in London in the early 1980s. Settlement of trades in eurosecurities is currently effected through two European computerized clearing/depositories called Euroclear (in Belgium) and Clearstream (formerly Cedelbank) in Luxembourg. The main market for Eurobonds is the EuroMTS, owned by Borsa Italiana and Euronext. There are ramp up market in Emergent countries, but it is growing slowly.

[edit] Physical nature of securities

[edit] Certificated securities
Securities that are represented in paper (physical) form are called certificated securities. They may be bearer or registered. [edit] Bearer securities Bearer securities are completely negotiable and entitle the holder to the rights under the security (e.g. to payment if it is a debt security, and voting if it is an equity security). They are transferred by delivering the instrument from person to person. In some cases, transfer is by endorsement, or signing the back of the instrument, and delivery. Regulatory and fiscal authorities sometimes regard bearer securities negatively, as they may be used to facilitate the evasion of regulatory restrictions and tax. In the United Kingdom, for example, the issue of bearer securities was heavily restricted firstly by the Exchange Control Act 1947 until 1953. Bearer securities are very rare in the United States because of the negative tax implications they may have to the issuer and holder. [edit] Registered securities In the case of registered securities, certificates bearing the name of the holder are issued, but these merely represent the securities. A person does not automatically acquire legal ownership by having possession of the certificate. Instead, the issuer (or its appointed agent) maintains a register in which details of the holder of the securities are entered and updated as appropriate. A transfer of registered securities is effected by amending the register.

[edit] Non-certificated securities and global certificates

Modern practice has developed to eliminate both the need for certificates and maintenance of a complete security register by the issuer. There are two general ways this has been accomplished.

[edit] Non-certificated securities In some jurisdictions, such as France, it is possible for issuers of that jurisdiction to maintain a legal record of their securities electronically. In the United States, the current "official" version of Article 8 of the Uniform Commercial Code permits non-certificated securities. However, the "official" UCC is a mere draft that must be enacted individually by each of the U.S. states. Though all 50 states (as well as the District of Columbia and the U.S. Virgin Islands) have enacted some form of Article 8, many of them still appear to use older versions of Article 8, including some that did not permit non-certificated securities.[2] In the U.S. today, most mutual funds issue only non-certificated shares to shareholders, though some may issue certificates only upon request and may charge a fee. Shareholders typically don't need certificates except for perhaps pledging such shares as collateral for a loan. [edit] Global certificates, book entry interests, depositories To facilitate the electronic transfer of interests in securities without dealing with inconsistent versions of Article 8, a system has developed whereby issuers deposit a single global certificate representing all the outstanding securities of a class or series with a universal depository. This depository is called The Depository Trust Company, or DTC. DTC's parent, Depository Trust & Clearing Corporation (DTCC), is a non-profit cooperative owned by approximately thirty of the largest Wall Street players that typically act as brokers or dealers in securities. These thirty banks are called the DTC participants. DTC, through a legal nominee, owns each of the global securities on behalf of all the DTC participants. All securities traded through DTC are in fact held, in electronic form, on the books of various intermediaries between the ultimate owner, e.g. a retail investor, and the DTC participants. For example, Mr. Smith may hold 100 shares of Coca Cola, Inc. in his brokerage account at local broker Jones & Co. brokers. In turn, Jones & Co. may hold 1000 shares of Coca Cola on behalf of Mr. Smith and nine other customers. These 1000 shares are held by Jones & Co. in an account with Goldman Sachs, a DTC participant, or in an account at another DTC participant. Goldman Sachs in turn may hold millions of Coca Cola shares on its books on behalf of hundreds of brokers similar to Jones & Co. Each day, the DTC participants settle their accounts with the other DTC participants and adjust the number of shares held on their books for the benefit of customers like Jones & Co. Ownership of securities in this fashion is called beneficial ownership. Each intermediary holds on behalf of someone beneath him in the chain. The ultimate owner is called the beneficial owner. This is also referred to as owning in "Street name". Among brokerages and mutual fund companies, a large amount of mutual fund share transactions take place among intermediaries as opposed to shares being sold and redeemed directly with the transfer agent of the fund. Most of these intermediaries such as brokerage firms clear the shares electronically through the National Securities Clearing Corp. or "NSCC", a subsidiary of DTCC. [edit] Other depositories: Euroclear and Clearstream Besides DTC, two other large securities depositories exist, both in Europe: Euroclear and Clearstream.

[edit] Divided and undivided security

The terms "divided" and "undivided" relate to the proprietary nature of a security.

Each divided security constitutes a separate asset, which is legally distinct from each other security in the same issue. Pre-electronic bearer securities were divided. Each instrument constitutes the separate covenant of the issuer and is a separate debt. With undivided securities, the entire issue makes up one single asset, with each of the securities being a fractional part of this undivided whole. Shares in the secondary markets are always undivided. The issuer owes only one set of obligations to shareholders under its memorandum, articles of association and company law. A share represents an undivided fractional part of the issuing company. Registered debt securities also have this undivided nature.

[edit] Fungible and non-fungible security

The terms "fungible" and "non-fungible" are a feature of assets. If an asset is fungible, this means that if such an asset is lent, or placed with a custodian, it is customary for the borrower or custodian to be obliged at the end of the loan or custody arrangement to return assets equivalent to the original asset, rather than the specific identical asset. In other words, the redelivery of fungibles is equivalent and not in specie[disambiguation needed]. In other words, if an owner of 100 shares of IBM transfers custody of those shares to another party to hold for a purpose, at the end of the arrangement, the holder need simply provide the owner with 100 shares of IBM identical to those received. Cash is also an example of a fungible asset. The exact currency notes received need not be segregated and returned to the owner. Undivided securities are always fungible by logical necessity. Divided securities may or may not be fungible, depending on market practice. The clear trend is towards fungible arrangements.

[edit] Regulation
In the United States, the public offer and sale of securities must be either registered pursuant to a registration statement that is filed with the U.S. Securities and Exchange Commission (SEC) or are offered and sold pursuant to an exemption therefrom. Dealing in securities is regulated by both federal authorities (SEC) and state securities departments. In addition, the brokerage industry is supposedly self policed by Self Regulatory Organizations (SROs), such as the Financial Industry Regulatory Authority (FINRA), formerly the National Association of Securities Dealers (or NASD) or the MSRB. With respect to investment schemes that do not fall within the traditional puki ayam categories of securities listed in the definition of a security (Sec. 2(a)(1) of the 33 act and Sec. 3(a)(10) of the 34 act) the US Courts have developed a broad definition for securities that must then be registered with the SEC. When determining if there a is an "investment contract" that must be registered the courts look for an investment of money, a common enterprise and expectation of profits to come primarily from the efforts of others. See SEC v. W.J. Howey Co. and SEC v. Glenn W. Turner Enterprises, Inc.

[edit] See also

Finance Financial markets Securities lending Financial regulation History of private equity and venture capital

List of finance topics Securities regulation in the United States Settlement (finance) Stock market data systems T2S Toxic security Single-stock futures

[edit] Notes
1. ^ The official definition of a security given really in the Securities Exchange Act of 1934

is: "Any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a "security"; or any certificate of interest or participation in, temporary or interim certificate for, receipt for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited."
2. ^ http://www.law.cornell.edu/uniform/ucc.html#a8

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Mortgage loan
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Bond market Stock market (equity market) Foreign exchange market Derivatives market Commodity market Money market Spot market (cash market) Over the counter Real estate Private equity Financial market participants: Investor and speculator Institutional and retail Financial instruments[show] Cash: Deposit Option (call or put) Loans Security Derivative Stock Time deposit or certificate of deposit Futures contract Exotic option Corporate finance[show] Structured finance Capital budgeting Financial risk management Mergers and acquisitions Accountancy Financial statement Audit Credit rating agency Leveraged buyout Venture capital Personal finance[show]

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Recession Stock market crash History of private equity

vde

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan. However, the word mortgage alone, in everyday usage, is most often used to mean mortgage loan. A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution, such as a bank, either directly or indirectly through intermediaries. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary considerably. In many jurisdictions, though not all (Bali, Indonesia being one exception[1]), it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property outright. In countries where the demand for home ownership is highest, strong domestic markets have developed. The word mortgage is a Law French term meaning "dead pledge," apparently meaning that the pledge ends (dies) either when the obligation is fulfilled or the property is taken through foreclosure.[2]

Contents
[hide]

1 Mortgage loan basics

1.1 Basic concepts and legal regulation 1.2 Mortgage loan types 1.3 Mortgage underwriting

1.3.1 Loan to value and downpayments 1.3.2 Value: appraised, estimated, and actual 1.3.3 Payment and debt ratios 1.3.4 Standard or conforming mortgages 1.3.5 Foreign currency mortgage

2 Repaying the mortgage

2.1 Capital and interest 2.2 Interest only 2.3 No capital or interest 2.4 Interest and partial capital 2.5 Variations

2.6 Foreclosure and non-recourse lending

3 Mortgage lending: United States 4 Mortgages in the UK 5 Mortgage lending in Continental Europe

5.1 Costs 5.2 Recent trends 5.3 History

6 Mortgage insurance 7 Islamic mortgages 8 Other terminologies 9 See also

9.1 General, or related to more than one nation 9.2 Related to the United Kingdom 9.3 Related to the United States 9.4 Other nations 9.5 Legal details

10 References 11 External links

[edit] Mortgage loan basics

[edit] Basic concepts and legal regulation
According to Anglo-American property law, a mortgage occurs when an owner (usually of a fee simple interest in realty) pledges his interest (right to the property) as security or collateral for a loan. Therefore, a mortgage is an encumbrance (limitation) on the right to the property just as an easement would be, but because most mortgages occur as a condition for new loan money, the word mortgage has become the generic term for a loan secured by such real property.[3] As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of real property can be, and usually are, secured with a mortgage and bear an interest rate that is supposed to reflect the lender's risk. Mortgage lending is the primary mechanism used in many countries to finance private ownership of residential and commercial property (see commercial mortgages). Although the terminology and precise forms will differ from country to country, the basic components tend to be similar:

Property: the physical residence being financed. The exact form of ownership will vary from country to country, and may restrict the types of lending that are possible. Mortgage: the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase home insurance and mortgage insurance, or pay off outstanding debt before selling the property.

Borrower: the person borrowing who either has or is creating an ownership interest in the property. Lender: any lender, but usually a bank or other financial institution. Lenders may also be investors who own an interest in the mortgage through a mortgage-backed security. In such a situation, the initial lender is known as the mortgage originator, which then packages and sells the loan to investors. The payments from the borrower are thereafter collected by a loan servicer.[4] Principal: the original size of the loan, which may or may not include certain other costs; as any principal is repaid, the principal will go down in size. Interest: a financial charge for use of the lender's money. Foreclosure or repossession: the possibility that the lender has to foreclose, repossess or seize the property under certain circumstances is essential to a mortgage loan; without this aspect, the loan is arguably no different from any other type of loan.

Many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly (through legal requirements, for example) or indirectly (through regulation of the participants or the financial markets, such as the banking industry), and often through state intervention (direct lending by the government, by state-owned banks, or sponsorship of various entities). Other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system. Mortgage loans are generally structured as long-term loans, the periodic payments for which are similar to an annuity and calculated according to the time value of money formulae. The most basic arrangement would require a fixed monthly payment over a period of ten to thirty years, depending on local conditions. Over this period the principal component of the loan (the original loan) would be slowly paid down through amortization. In practice, many variants are possible and common worldwide and within each country. Lenders provide funds against property to earn interest income, and generally borrow these funds themselves (for example, by taking deposits or issuing bonds). The price at which the lenders borrow money therefore affects the cost of borrowing. Lenders may also, in many countries, sell the mortgage loan to other parties who are interested in receiving the stream of cash payments from the borrower, often in the form of a security (by means of a securitization). Mortgage lending will also take into account the (perceived) riskiness of the mortgage loan, that is, the likelihood that the funds will be repaid (usually considered a function of the creditworthiness of the borrower); that if they are not repaid, the lender will be able to foreclose and recoup some or all of its original capital; and the financial, interest rate risk and time delays that may be involved in certain circumstances.

[edit] Mortgage loan types

There are many types of mortgages used worldwide, but several factors broadly define the characteristics of the mortgage. All of these may be subject to local regulation and legal requirements.

Interest: interest may be fixed for the life of the loan or variable, and change at certain pre-defined periods; the interest rate can also, of course, be higher or lower. Term: mortgage loans generally have a maximum term, that is, the number of years after which an amortizing loan will be repaid. Some mortgage loans may have no

amortization, or require full repayment of any remaining balance at a certain date, or even negative amortization. Payment amount and frequency: the amount paid per period and the frequency of payments; in some cases, the amount paid per period may change or the borrower may have the option to increase or decrease the amount paid. Prepayment: some types of mortgages may limit or restrict prepayment of all or a portion of the loan, or require payment of a penalty to the lender for prepayment.

The two basic types of amortized loans are the fixed rate mortgage (FRM) and adjustable-rate mortgage (ARM) (also known as a floating rate or variable rate mortgage). In many countries (such as the United States), floating rate mortgages are the norm and will simply be referred to as mortgages. Combinations of fixed and floating rate are also common, whereby a mortgage loan will have a fixed rate for some period, and vary after the end of that period. In a fixed rate mortgage, the interest rate, and hence periodic payment, remains fixed for the life (or term) of the loan. Therefore the payment is fixed, although ancillary costs (such as property taxes and insurance) can and do change. For a fixed rate mortgage, payments for principal and interest should not change over the life of the loan, In an adjustable rate mortgage, the interest rate is generally fixed for a period of time, after which it will periodically (for example, annually or monthly) adjust up or down to some market index. Adjustable rates transfer part of the interest rate risk from the lender to the borrower, and thus are widely used where fixed rate funding is difficult to obtain or prohibitively expensive. Since the risk is transferred to the borrower, the initial interest rate may be from 0.5% to 2% lower than the average 30-year fixed rate; the size of the price differential will be related to debt market conditions, including the yield curve.

The charge to the borrower depends upon the credit risk in addition to the interest rate risk. The mortgage origination and underwriting process involves checking credit scores, debt-to-income, downpayments, and assets. Jumbo mortgages and subprime lending are not supported by government guarantees and face higher interest rates. Other innovations described below can affect the rates as well.

[edit] Mortgage underwriting

Main article: Mortgage underwriting [edit] Loan to value and downpayments Main article: Loan-to-value ratio Upon making a mortgage loan for the purchase of a property, lenders usually require that the borrower make a downpayment; that is, contribute a portion of the cost of the property. This downpayment may be expressed as a portion of the value of the property (see below for a definition of this term). The loan to value ratio (or LTV) is the size of the loan against the value of the property. Therefore, a mortgage loan in which the purchaser has made a downpayment of 20% has a loan to value ratio of 80%. For loans made against properties that the borrower already owns, the loan to value ratio will be imputed against the estimated value of the property. The loan to value ratio is considered an important indicator of the riskiness of a mortgage loan: the higher the LTV, the higher the risk that the value of the property (in case of foreclosure) will be insufficient to cover the remaining principal of the loan. [edit] Value: appraised, estimated, and actual

Since the value of the property is an important factor in understanding the risk of the loan, determining the value is a key factor in mortgage lending. The value may be determined in various ways, but the most common are: 1. Actual or transaction value: this is usually taken to be the purchase price of the property. If the property is not being purchased at the time of borrowing, this information may not be available. 2. Appraised or surveyed value: in most jurisdictions, some form of appraisal of the value by a licensed professional is common. There is often a requirement for the lender to obtain an official appraisal. 3. Estimated value: lenders or other parties may use their own internal estimates, particularly in jurisdictions where no official appraisal procedure exists, but also in some other circumstances. [edit] Payment and debt ratios In most countries, a number of more or less standard measures of creditworthiness may be used. Common measures include payment to income (mortgage payments as a percentage of gross or net income); debt to income (all debt payments, including mortgage payments, as a percentage of income); and various net worth measures. In many countries, credit scores are used in lieu of or to supplement these measures. There will also be requirements for documentation of the creditworthiness, such as income tax returns, pay stubs, etc; the specifics will vary from location to location. Some lenders may also require a potential borrower have one or more months of "reserve assets" available. In other words, the borrower may be required to show the availability of enough assets to pay for the housing costs (including mortgage, taxes, etc.) for a period of time in the event of the job loss or other loss of income. Many countries have lower requirements for certain borrowers, or "no-doc" / "low-doc" lending standards that may be acceptable in certain circumstances. [edit] Standard or conforming mortgages Many countries have a notion of standard or conforming mortgages that define a perceived acceptable level of risk, which may be formal or informal, and may be reinforced by laws, government intervention, or market practice. For example, a standard mortgage may be considered to be one with no more than 70-80% LTV and no more than one-third of gross income going to mortgage debt. A standard or conforming mortgage is a key concept as it often defines whether or not the mortgage can be easily sold or securitized, or, if non-standard, may affect the price at which it may be sold. In the United States, a conforming mortgage is one which meets the established rules and procedures of the two major government-sponsored entities in the housing finance market (including some legal requirements). In contrast, lenders who decide to make nonconforming loans are exercising a higher risk tolerance and do so knowing that they face more challenge in reselling the loan. Many countries have similar concepts or agencies that define what are "standard" mortgages. Regulated lenders (such as banks) may be subject to limits or higher risk weightings for non-standard mortgages. For example, banks and mortgage brokerages in Canada face restrictions on lending more than 80% of the property value; beyond this level, mortgage insurance is generally required.[5] [edit] Foreign currency mortgage

In some countries with currencies that tend to depreciate, foreign currency mortgages are common, enabling lenders to lend in a stable foreign currency, whilst the borrower takes on the currency risk that the currency will depreciate and they will therefore need to convert higher amounts of the domestic currency to repay the loan.

[edit] Repaying the mortgage

In addition to the two standard means of setting the cost of a mortgage loan (fixed at a set interest rate for the term, or variable relative to market interest rates), there are variations in how that cost is paid, and how the loan itself is repaid. Repayment depends on locality, tax laws and prevailing culture. There are also various mortgage repayment structures to suit different types of borrower.

[edit] Capital and interest

The most common way to repay a loan is to make regular payments of the capital (also called the principal) and interest over a set term. This is commonly referred to as (self) amortization in the U.S. and as a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or semi-annually; prepayment penalties may apply; and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices. Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a capital (repayment of the principal) and an interest element. The amount of capital included in each payment varies throughout the term of the mortgage. In the early years the repayments are largely interest and a small part capital. Towards the end of the mortgage the payments are mostly capital and a smaller portion interest. In this way the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date, if the interest rate does not change.

[edit] Interest only

The main alternative to a capital and interest mortgage is an interest-only mortgage, where the capital is not repaid throughout the term. This type of mortgage is common in the UK, especially when associated with a regular investment plan. With this arrangement regular contributions are made to a separate investment plan designed to build up a lump sum to repay the mortgage at maturity. This type of arrangement is called an investment-backed mortgage or is often related to the type of plan used: endowment mortgage if an endowment policy is used, similarly a Personal Equity Plan (PEP) mortgage, Individual Savings Account (ISA) mortgage or pension mortgage. Historically, investment-backed mortgages offered various tax advantages over repayment mortgages, although this is no longer the case in the UK. Investment-backed mortgages are seen as higher risk as they are dependent on the investment making sufficient return to clear the debt. Until recently it was not uncommon for interest only mortgages to be arranged without a repayment vehicle, with the borrower gambling that the property market will rise sufficiently for

the loan to be repaid by trading down at retirement (or when rent on the property and inflation combine to surpass the interest rate).

[edit] No capital or interest

For older borrowers (typically in retirement), it may be possible to arrange a mortgage where neither the capital nor interest is repaid. The interest is rolled up with the capital, increasing the debt each year. These arrangements are variously called reverse mortgages, lifetime mortgages or equity release mortgages (referring to home equity), depending on the country. The loans are typically not repaid until the borrowers die, hence the age restriction. For further details, see equity release.

[edit] Interest and partial capital

In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding capital balance is due at some point short of that term. In the UK, a part repayment mortgage is quite common, especially where the original mortgage was investment-backed and on moving house further borrowing is arranged on a capital and interest (repayment) basis.

[edit] Variations
Graduated payment mortgage loan have increasing costs over time and are geared to young borrowers who expect wage increases over time. Balloon payment mortgages have only partial amortization, meaning that amount of monthly payments due are calculated (amortized) over a certain term, but the outstanding principal balance is due at some point short of that term, and at the end of the term a balloon payment is due. When interest rates are high relative to the rate on an existing seller's loan, the buyer can consider assuming the seller's mortgage.[6] A wraparound mortgage is a form of seller financing that can make it easier to for a seller to sell a property. A biweekly mortgage has payments made every two weeks instead of monthly. Budget loans include taxes and insurance in the mortgage payment;[7] package loans add the costs of furnishings and other personal property to the mortgage. Buydown mortgages allow the seller or lender to pay something similar to mortgage points to reduce interest rate and encourage buyers.[8] Homeowners can also take out equity loans in which they receive cash for a mortgage debt on their house. Shared appreciation mortgages are a form of equity release. In the US, foreign nationals due to their unique situation face Foreign National mortgage conditions. Flexible mortgages allow for more freedom by the borrower to skip payments or prepay. Offset mortgages allow deposits to be counted against the mortgage loan. in the UK there is also the endowment mortgage where the borrowers pay interest while the principal is paid with a life insurance policy. Commercial mortgages typically have different interest rates, risks, and contracts than personal loans. Participation mortgages allow multiple investors to share in a loan. Builders may take out blanket loans which cover several properties at once. Bridge loans may be used as temporary financing pending a longer-term loan. Hard money loans provide financing in exchange for the mortgaging of real estate collateral.

[edit] Foreclosure and non-recourse lending

Main article: foreclosure In most jurisdictions, a lender may foreclose the mortgaged property if certain conditions principally, non-payment of the mortgage loan - occur. Subject to local legal requirements, the

property may then be sold. Any amounts received from the sale (net of costs) are applied to the original debt. In some jurisdictions, mortgage loans are non-recourse loans: if the funds recouped from sale of the mortgaged property are insufficient to cover the outstanding debt, the lender may not have recourse to the borrower after foreclosure. In other jurisdictions, the borrower remains responsible for any remaining debt. In virtually all jurisdictions, specific procedures for foreclosure and sale of the mortgaged property apply, and may be tightly regulated by the relevant government. There are strict or judicial foreclosures and non-judicial foreclosures, also known as power of sale foreclosures. In some jurisdictions, foreclosure and sale can occur quite rapidly, while in others, foreclosure may take many months or even years. In many countries, the ability of lenders to foreclose is extremely limited, and mortgage market development has been notably slower.

[edit] Mortgage lending: United States

Main articles: Mortgage industry of the United States and Mortgage underwriting in the United States

[edit] Mortgages in the UK

Main article: Mortgage industry of the United Kingdom

[edit] Mortgage lending in Continental Europe

Within the European Union, the Covered bonds market volume (covered bonds outstanding) amounted to about EUR 2 trillion at year-end 2007 with Germany, Denmark, Spain, and France each having outstandings above 200,000 EUR million[9]. In German language, Pfandbriefe is the term applied. Pfandbrief-like securities have been introduced in more than 25 European countries and in recent years also in the U.S. and other countries outside Europe each with their own unique law and regulations. However, the diffusion of the concept differ: In 2000, the US institutions Fannie Mae and Freddie Mac together reached one per cent of the national population. Furthermore, 87 per cent of their purchased mortgages were granted to borrowers in metropolitan areas with higher income levels. In Europe, a wider market has been achieved: In Denmark, mortgage banks reached 35 per cent of the population in 2002, while the German Bausparkassen achieved widespread regional distribution and more than 30 per cent of the German population concluded a Bauspar contract (as of 2001)[10].

[edit] Costs
A study issued by the UN Economic Commission for Europe compared German, US, and Danish mortgage systems. The German Bausparkassen have reported nominal interest rates of approximately 6 per cent per annum in the last 40 years (as of 2004). In addition, they charge administration and service fees (about 1.5 per cent of the loan amount). In the United States, the average interest rates for fixed-rate mortgages in the housing market started in the tens and twenties in the 1980s and have (as of 2004) reached about 6 per cent per annum. However, gross borrowing costs are substantially higher than the nominal interest rate and amounted for the last 30 years to 10.46 per cent. In Denmark, similar to the United States capital market, interest rates have fallen to 6 per cent per annum. A risk and administration fee amounts to 0.5 per cent of the outstanding debt. In addition, an acquisition fee is charged which amounts to one per cent of the principal[10].

[edit] Recent trends

Mortgage Rates Historical Trends 1986 to 2010 On July 28, 2008, US Treasury Secretary Henry Paulson announced that, along with four large U.S. banks, the Treasury would attempt to kick start a market for these securities in the United States, primarily to provide an alternative form of mortgage-backed securities.[11] Similarly, in the UK "the Government is inviting views on options for a UK framework to deliver more affordable long-term fixed-rate mortgages, including the lessons to be learned from international markets and institutions".[12] George Soros's October 10, 2008 Wall Street Journal editorial promoted the Danish mortgage market model.[13] A survey of European Pfandbrief-like products was issued in 2005 by the Bank for International Settlements;[14] the International Monetary Fund in 2007 issued a study of the covered bond markets in Germany and Spain,[15] while the European Central Bank in 2003 issued a study of housing markets, addressing also mortgage markets and providing a two page overview of current mortgage systems in the EU countries.[16]

[edit] History
While the idea originated in Prussia in 1769[17], a Danish act on mortgage credit associations of 1850 enabled the issuing of bonds (Danish: Realkreditobligationer) as a means to refinance mortgage loans [18]. With the German mortgage banks law of 1900, the whole German Empire was given a standardized legal foundation for the emission of Pfandbriefe. An account from the perspective of development economics is available.[19]

[edit] Mortgage insurance

Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in loans with a loan-to-value ratio over 80%, and employed in the event of foreclosure and repossession. This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized component of monthly mortgage payment. In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down, or any combination of both to relegate the loan-to-value under 80%. In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to dispose of hard assets (such as real estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing authority recover less than full and fair market value for any hard asset.

[edit] Islamic mortgages

Main article: Islamic economic jurisprudence

The Sharia law of Islam prohibits the payment or receipt of interest, which means that Muslims cannot use conventional mortgages. However, real estate is far too expensive for most people to buy outright using cash: Islamic mortgages solve this problem by having the property change hands twice. In one variation, the bank will buy the house outright and then act as a landlord. The homebuyer, in addition to paying rent, will pay a contribution towards the purchase of the property. When the last payment is made, the property changes hands.[citation needed] Typically, this may lead to a higher final price for the buyers. This is because in some countries (such as the United Kingdom and India) there is a Stamp Duty which is a tax charged by the government on a change of ownership. Because ownership changes twice in an Islamic mortgage, a stamp tax may be charged twice. Many other jurisdictions have similar transaction taxes on change of ownership which may be levied. In the United Kingdom, the dual application of Stamp Duty in such transactions was removed in the Finance Act 2003 in order to facilitate Islamic mortgages.[20] An alternative scheme involves the bank reselling the property according to an installment plan, at a price higher than the original price. Both of these methods compensate the lender as if they were charging interest, but the loans are structured in a way that in name they are not, and the lender shares the financial risks involved in the transaction with the homebuyer.[citation needed]

[edit] Other terminologies

Like any other legal system, the mortgage business sometimes uses confusing jargon. Below are some terms explained in brief. If a term is not explained here it may be related to the legal mortgage rather than to the loan. Advance This is the money you have borrowed plus all the additional fees. Base rate In UK, this is the base interest rate set by the Bank of England. In the United States, this value is set by the Federal Reserve and is known as the Discount Rate. Bridging loan This is a temporary loan that enables the borrower to purchase a new property before the borrower is able to sell another current property. Disbursements These are all the fees of the solicitors and governments, such as stamp duty, land registry, search fees, etc. Early redemption charge / Pre-payment penalty / Redemption penalty This is the amount of money due if the mortgage is paid in full before the time finished. equity This is the market value of the property minus all loans outstanding on it. First time buyer This is the term given to a person buying property who has not owned property within the last three years. Loan origination fee A charge levied by a creditor for underwriting a loan. The fee often is expressed in points. A point is 1 percent of the loan amount. Sealing fee This is a fee made when the lender releases the legal charge over the property. Subject to contract This is an agreement between seller and buyer before the actual contract is made.

[edit] See also

[hide]v d eMortgage loan Financial literacy Interest rate type fixed rate mortgage variable-rate mortgage / adjustable-rate / floating rate

Continuous: Repayment mortgage / self-amortized Repayment at term: interestRepayment only mortgage (endowment mortgage) No repayment: reverse mortgage Hybrid: type balloon payment mortgage equity release (shared appreciation mortgage) Variable payment flexible mortgage (offset mortgage, mortgage accelerator) graduated payment mortgage loan

Other buy to let mortgage foreign currency mortgage foreign national mortgage variations wraparound mortgage Key concepts Annual Percentage Rate (APR) Foreclosure / Repossession

[edit] General, or related to more than one nation

Commercial mortgage Nonrecourse debt Refinancing No Income No Asset (NINA) Annual percentage rate Buy to let Remortgage UK mortgage terminology Commercial lender (US) - a term for a lender collateralizing non-residential properties. Fixed rate mortgage calculations (USA) pre-qualification - U.S. mortgage terminology pre-approval - U.S. mortgage terminology FHA loan - Relating to the U.S. Federal Housing Administration VA loan - Relating to the U.S. Veterans Administration. eMortgages Location Efficient Mortgage - a type of mortgage for urban areas

[edit] Related to the United Kingdom

[edit] Related to the United States

Predatory mortgage lending Danish mortgage market Mortgage Investment Corporation Deed - legal aspects Mechanics lien - a legal concept Perfection - applicable legal filing requirements

[edit] Other nations

[edit] Legal details

[edit] References
1. ^ Sonia Kolesnikov-Jessop (January 29, 2009). "Bali's cash property market keeps prices

up". International Herald-Tribune. http://www.iht.com/articles/2009/01/29/properties/rebali.1-395765.php. Retrieved 200901-30. "'In Bali, there are no mortgages available, so everyone who owns a house here has paid cash for it,' said Nils Wetterlind, managing director of Tropical Homes, a real estate developer and brokerage based on the island."
2. ^ Coke, Edward. Commentaries on the Laws of England. "[I]f he doth not pay, then the

Land which is put in pledge upon condition for the payment of the money, is taken from him for ever, and so dead to him upon condition, &c. And if he doth pay the money, then the pledge is dead as to the Tenant"
3. ^ "Personal finance glossary". http://www.mortgageloan.com/finance-

glossary/mortgage_loan. Retrieved 18 January 2011.

4. ^ FTC. Mortgage Servicing: Making Sure Your Payments Count. 5. ^ "Who Needs Mortgage Loan Insurance?". Canadian Mortgage and Housing

Corporation. http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_002.cfm. Retrieved 2009-01-30.

6. ^ Are Mortgage Assumptions a Good Deal?. Mortgage Professor. 7. ^ Cortesi GR. (2003). Mastering Real Estate Principles. p. 371 8. ^ Homes: Slow-market savings - the 'buy-down'. CNN Money. 9. ^ Covered Bond Outstanding 2007 10. ^ a b Housing Finance Systems for countries in Transition - Principles and Examples.

United Nations, New York and Geneva, 2005, p. 45

11. ^ FDIC Policy Statement on Covered Bonds 12. ^ Housing Finance Review: analysis and proposals. HM Treasury, March 2008 13. ^ "Denmark offers a model mortgage market" 14. ^ Mastroeni, O (2005) Pfandbrief-style products in Europe. Bank for International

Settlements (BIS): BIS Papers No 5, 22 Jan 2008

15. ^ The Use of Mortgage Covered Bonds, Renzo G. Avesani, Antonio Garca Pascual,and

Elina Ribakova. 2007 International Monetary Fund, IMF Working Paper, WP/07/20, January 2007. 23 p.

16. ^ European Central Bank: Structural factors in the EU housing markets, March 2003 17. ^ Pfandbrief#History 18. ^ Danish mortgage market 19. ^ Guinnane TW, Ghatak M (1999) The Economics of Lending with Joint Liability:

Theory and Practice. Journal of Development Economics, Vol 60, 195-228, jfr. University of Copenhagen, Department of Economics, Discussion Papers, No 98-16: The Economics of Lending with Joint Liability: Theory and Practice, by Maitreesh Ghatak & Timothy W. Guinnane[dead link]
20. ^ Reliefs: Alternative property finance

[edit] External links

Wikimedia Commons has media related to: Mortgages

Mortgages at the Open Directory Project FHA loans (Department of Housing and Urban Development) Mortgages: For Home Buyers and Homeowners at USA.gov Financial Consumer Agency of Canada [hide]v d eConsumer debt

Alternative financial services Financial literacy Unsecured Credit card debt (cash advance) Overdraft Payday loan debt Personal loan / Signature loan moneylender Secured debt Mortgage loan / Home equity loan / Home equity line of credit car title loan / logbook loan tax refund anticipation loan pawnbroker

Debt Debt consolidation Credit counseling / Debt management plan / managemen Debt settlement Personal bankruptcy Foreclosure / Repossession t Key Annual Percentage Rate (APR) concepts Retrieved from "http://en.wikipedia.org/wiki/Mortgage_loan" Categories: Mortgage | United States housing bubble Hidden categories: All articles with dead external links | Articles with dead external links from January 2011 | All articles with unsourced statements | Articles with unsourced statements from February 2008
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Deed
From Wikipedia, the free encyclopedia Jump to: navigation, search For the British cargo ship, see SS Deed.

Property law
Part of the common law series

Acquisition Gift Adverse possession Deed Conquest Discovery Accession Lost, mislaid, and abandoned property Treasure trove Bailment License Alienation

Estates in land Allodial title Fee simple Fee tail Life estate Defeasible estate

Future interest Concurrent estate Leasehold estate Condominiums

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Future use control Restraint on alienation Rule against perpetuities Rule in Shelley's Case Doctrine of worthier title

Nonpossessory interest Easement Profit Covenant Equitable servitude

Related topics Fixtures Waste Partition Riparian water rights Prior-appropriation water rights Lateral and subjacent support Assignment Nemo dat Property and conflict of laws

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Wills, trusts and estates Criminal law Evidence

vde

A deed is any legal instrument in writing which passes, or affirms or confirms something which passes, an interest, right, or property and that is signed, attested, delivered, and in some jurisdictions sealed. A deed, also known as an instrument in solemn form, is the most formal type of private instrument requiring not only an executing party to the deed (grantor/grantee, transferor/transferee) but also attesting witnesses as signatories. A deed has therefore a greater presumption of validity and is less rebuttable than an instrument under hand, i.e., signed by the party to the deed only, or an instrument under seal. A deed can be unilateral or bilateral. Deeds include conveyances, commissions, licenses, patents, diplomas, and conditionally powers of attorney if executed as deeds. The deed is the modern descendant of the medieval charter, and delivery is thought to symbolically replace the ancient ceremony of livery of seisin.[1] The use of attesting witnesses has replaced to a large extent the former use of seals to create a higher degree of formalism; this explains the traditional formula signed, sealed and delivered and why agreements under seal are also called contracts by deed. Where the use of seals continues, deeds are nothing more than a special type of instrument under seal, hence the name specialty for a contract under seal. Specialties differ from a simple contract, i.e., a contract under hand, in that they are enforceable without consideration (i.e. gratuitous), in some jurisdictions have a liability limitation period of double that of a simple contract, and allow for a third party beneficiary to enforce an undertaking in the deed, thereby overcoming the doctrine of privity.[2] Specialties, as a form of contract, are bilateral and can therefore be distinguished from covenants, which, being also under seal, are unilateral promises. In the U.S. and similar jurisdictions, the use of seals was abandoned, thereby making specialties obsolete, and legal instruments can no longer be executed as deeds, having been replaced by notarization. Therefore, the word deed has narrowed in meaning to become synonymous with deed of title (title-deed), that is, any formal document that confirms or transfers an interest or right of ownership (title) to an asset from one person to another, often using a description of its metes and bounds, e.g., conveyances, transfers, mortgages, charges, or leases. At common law, to be valid and enforceable, a deed must fulfill several requirements:

It must state on its face it is a deed, using wording like "This Deed..." or "executed as a deed". It must indicate that the instrument itself conveys some privilege or thing to someone. This is indicated by using the word hereby or the phrase by these presents in the clause indicating the gift. The grantor must have the legal ability to grant the thing or privilege, and the grantee must have the legal capacity to receive it. It must be executed by the grantor in presence of the prescribed number of witnesses, known as instrumentary witnesses (this is known as being in solemn form).

In some jurisdictions, a seal must be affixed to it. Originally, affixing seals made persons parties to the deed and signatures were optional, but most jurisdictions made seals outdated, and now the signatures of the grantor and witnesses are primary. It must be delivered to (delivery) and accepted by the grantee (acceptance). It should be, but not necessarily, properly acknowledged before a competent officer, most often a registrar (deeds office, deeds registry) or notary public.[3]

Conditions attached to the acceptance of a deed are known as covenants. A deed indented or indenture is one executed in two or more parts according to the number of parties, which were formerly separated by cutting in a curved or indented line known as the chirograph.[4] A deed poll is one executed in one part, by one party, having the edge polled or cut even, and includes simple grants and appointments.

Contents
[hide]

1 Deeds of conveyance

1.1 General and special warranty 1.2 Bargain and sale deed 1.3 Quitclaim deed 1.4 Deed of trust 1.5 Deeds as alternatives to bankruptcy

2 Structure 3 Recording

3.1 Joint ownership 3.2 Joint tenants with rights of survivorship vs. joints tenants in common 3.3 Pardon as deed 3.4 Title deed 3.5 Difference between deed and an agreement 3.6 Wild deeds

4 See also 5 References

[edit] Deeds of conveyance

[edit] General and special warranty
Main article Warranty deed

The original 1636 Indian deed creating the State of Rhode Island signed by Native American Chief Canonicus to Roger Williams In the transfer of real estate, a deed conveys ownership from the old owner (the grantor) to the new owner (the grantee), and can include various warranties. The precise name and nature of these warranties differ by jurisdiction. Often, however, the basic differences between them is the degree to which the grantor warrants the title. The grantor may give a general warranty of title against any claims, or the warranty may be limited only to claims which occurred after the grantor obtained the real estate. The latter type of deed is usually known as a special warranty deed. While a general warranty deed was normally used for residential real estate sales and transfers, special warranty deeds are becoming more common and are more commonly used in commercial transactions.

[edit] Bargain and sale deed

Main article Bargain and sale deed A third type of deed, known as a bargain and sale deed, implies that the grantor has the right to convey title but makes no warranties against encumbrances. This type of deed is most commonly used by court officials or fiduciaries that hold the property by force of law rather than title, such as properties seized for unpaid taxes and sold at sheriff's sale, or an executor.

[edit] Quitclaim deed

Main article Quitclaim deed A so-called quitclaim deed is (in most states) actually not a deed at allit is actually an estoppel disclaiming rights of the person signing it to property.

[edit] Deed of trust

In some jurisdictions, a deed of trust is used as an alternative to a mortgage. A deed of trust is not used to transfer property directly. It is commonly used in some states, California, for example, to transfer title to land to a trustee, usually a trust or title company, which holds the title as security ("in escrow") for a loan. When the loan is paid off, title is transferred to the borrower by recording a release of the obligation, and the trustee's contingent ownership is extinguished.

Otherwise, upon default, the trustee will liquidate the property with a new deed and offset the lender's loss with the proceeds.

[edit] Deeds as alternatives to bankruptcy

Deed of arrangement - document setting out an arrangement for a debtor to pay part or all outstanding debts, as an alternative to bankruptcy; (Australian law).[5] Deed of assignment - document in which a debtor appoints a trustee to take charge of property to pay debts, partly or wholly, as an alternative to bankruptcy; (Australian law).
[6]

[edit] Structure
The main clauses of a deed of conveyance are: Premises Parties clause - sets out the names, addresses, and descriptions (vendor/purchaser, grantor/grantee, transferor/transferee) of parties Recitals - narrates in chronological order the previous ownership of the property being conveyed, starting with the earliest deed of title down to the contract of sale the conveyance gives effect to Testatum - a command to witness which acknowledges the payment and receipt of the consideration and signals the beginning of the operative part; usually begins with "Now this Deed witnesseth" Operative part Operative clause - vendor gives effect to the contract of sale by conveying his interest in land to the purchaser Parcels clause - clause detailing the location and description of the property being conveyed

Habendum - clause indicating the estate (freehold, etc.) or interest to be taken by the grantee[7]

Tenendum - "to have and to hold", formerly referring to the tenure by which the estate granted was to be held, though now completely symbolic Redendum - reserves something to grantor out of thing granted, such as a rent, under the formula "yielding and paying". Conditions Warranty - grantor warrants the title to the grantee general: when the warrant is against all persons special: when it is only against the grantor, his heirs and those claiming under him Covenants - binding limitations or promises Conclusion - execution and date

Testimonium (Scotland: testing clause) - attests to the due execution of a deed or instrument. Examples:

England & Wales: In Witness Whereof, the parties to these presents have hereunto set their hands and seals. Ireland: In Witness Whereof the parties hereto have hereunto set their hands and affixed their seals [the day and year first herein written]. Scotland: IN WITNESS WHEREOF these presents, consisting of this and the preceding pages, are subscribed by [me] at [place] on the [day] day of [month] Two thousand and [year] in the presence of [name] of [address].

[edit] Recording
Main article Recording (real estate) Usually the transfer of ownership of real estate is registered at a cadastre in the United Kingdom. In most parts of the United States, deeds must be submitted to the Recorder of deeds, who acts as a cadastre, to be registered. An unrecorded deed may be valid proof of ownership between the parties, but may have no effect upon third-party claims until disclosed or recorded. A local statute may prescribe a period beyond which unrecorded deeds become void as to third-parties, at least as to intervening acts.

[edit] Joint ownership

Ownership transfer may also be crafted within deeds to pass by demise, as where a property is held in concurrent estate such as "joint tenants with right of survivorship" (JTWROS) or "tenants by the entirety". In each case, the title to the property immediately and automatically vests in the named survivor(s) upon the death of the other tenant(s). In most states joint tenancy with the right of survivorship require all owners to have equal interests in the property, meaning upon sale or partition of the property all owners would receive an equal distribution of the proceeds. Joint ownership may also be by tenants in common (TIC). In some states, joint ownership is presumed to be as tenants in common unless the parties are married and the deed so states or the deed sets for joint tenants with right of survivorship. Upon death, the decedent's share passes to his or her estate. A life estate is the right to use, possess and enjoy the property for a period of time measured by the natural life of a person or persons. When all life tenants are dead, the remainderman holds full title.

[edit] Joint tenants with rights of survivorship vs. joints tenants in common
When deeds are taken as joint tenants with rights of survivorship (JTWROS) or joint tenants in common (TIC), any co-owner can file a petition for partition to dissolve the tenancy relationship. JTWROS deed holders always take the property in equal shares; therefore, if the partnership is dissolved through partition, the proceeds must be equally distributed between all of the coowners without regard to how much each co-owner contributed to the purchase price of the property. No credits would be allowed for any excess contributions to the purchase price. For

example, if A and B co-own property as JTWROS and A contributed 80% of the purchase price, A and B would still receive equal distributions upon partition. On the other hand, TIC deed holders may be granted at partition a credit for unequal contributions to purchase price. During either partition, credits may be awarded to any co-owner who may have contributed in excess of his share to the property expenses after taking deed to the property. Credits may be allowed for utilities and maintenance; however, credits for improvements may not be allowed unless the improvements actually added substantial value to the property.

[edit] Pardon as deed

In the United States, a pardon of the President was once considered to be a deed and thus needed to be accepted by the recipient. This made it impossible to grant a pardon posthumously. However, in the case of Henry Ossian Flipper, this view was altered when President Bill Clinton pardoned him in 1999.

[edit] Title deed

In the United Kingdom, England and Wales operate a 'property register'. Title deeds are documents showing ownership, as well as rights, obligations, or mortgages on the property. Since around 2000, compulsory registration has been required for all properties mortgaged or transferred. The details of rights, obligations, and covenants referred to in deeds will be transferred to the register, a contract describing the property ownership.

[edit] Difference between deed and an agreement

The main difference between Deed and an agreement is that the deed is generally signed by only one person / party. Examples of the Deed are Deed of Hypothecation for creating charge on movable properties in favour of the banks / financial institutions etc. Agreement by it names suggests that there should be at least two parties signing / approving the same. Examples of the agreement are Agreement to sale, Loan Agreement etc. At common law, ownership was proven via an unbroken chain of title deeds. The Torrens title system is an alternative way of proving ownership. First introduced in South Australia in 1858 by Sir Robert Torrens and adopted later by the other Australian states and other countries, ownership under Torrens title is proven by possession of a certificate of title and the corresponding entry in the property register. This system removes risks associated with unregistered deeds and fraudulent or otherwise incorrect transactions. It is much easier and cheaper to administer, lowering transaction costs. Some Australian properties are still conveyed using a chain of title deeds - usually properties that have been owned by the same family since the nineteenth century - and these are often referred to as 'Old System' deeds.

[edit] Wild deeds

A deed that is recorded, but is not connected to the chain of title of the property, is called a wild deed. A wild deed does not provide constructive notice to later purchasers of the property, because subsequent bona fide purchasers can not reasonably be expected to locate the deed while investigating the chain of title to the property.

[edit] See also

Wikiquote has a collection of quotations related to: Deed

Wikimedia Commons has media related to: Deeds

Look up deed in Wiktionary, the free dictionary.

Deed poll Grant deed Quitclaim deed Warranty deed Covenant (law)

[edit] References
Constructs such as ibid., loc. cit. and idem are discouraged by Wikipedia's style guide for footnotes, as they are easily broken. Please improve this article by replacing them with named references (quick guide), or an abbreviated title. (July 2010)
1. ^ E. Rory O'Connor, The Irish Notary (Dublin: Professional Books, 1987), 83:12n. 2. ^ Andrew Griffiths, Contracting With Companies, (London: Hart Publishing, 2005), 7. 3. ^ Lectlaw, s.v. "deed", retrieved 19 May 2009. [1]. 4. ^ Frederic Jesup Stimpson, Glossary of Technical Terms, Phrases, and Maxims of the

Common Law, s.v. "Deed" (Boston: Little, Brown and Co., 1881), 108.
5. ^ "Glossary", The Law Handbook Online, retrieved on 11 June 2009 6. ^ Ibid. 7. ^ Stewart Rapalje and Robert L. Lawrence, eds., A Dictionary of American and English

Law, s.v. "Habendum" (Jersey City, N.J.: F.D. Linn, 1888), 589. Retrieved from "http://en.wikipedia.org/wiki/Deed" Categories: Legal documents | Real property law
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Hypothecation
From Wikipedia, the free encyclopedia Jump to: navigation, search This article is about debt financing. For the ring-fencing of a tax, see Hypothecation (taxation). See also: hypothec Hypothecation is the practice where a borrower pledges collateral to secure a debt. The borrower retains ownership of the collateral, but it is "hypothetically" controlled by the creditor in that he has the right to seize possession if the borrower defaults. A common example occurs when a consumer enters into a mortgage agreement, where the consumer's house becomes collateral until the mortgage loan is paid off. The detailed practice and rules regulating hypothecation vary depending on context and on the jurisdiction where it takes place. In the US, the legal right for the creditor to take ownership of the collateral if the debtor defaults is classed as a lien.

Rehypothecation is a practice that occurs principally in the financial markets, where a bank or other broker-dealer reuses the collateral pledged by its clients as collateral for its own borrowing.

Contents
[hide]

1 Hypothecation in consumer and business finance 2 No creditor's duty of care in India 3 Hypothecation in the investment markets 4 Rehypothecation

4.1 Rehypothecation in repo agreements

5 See also 6 Notes and references 7 External links

[edit] Hypothecation in consumer and business finance

Hypothecation is a common feature of consumer contracts involving mortgages the borrower legally owns the house, but until the mortgage is paid off the creditor has the right to take possession in the hypothetical case that the borrower fails to keep up with repayments.[1] If a consumer takes out an additional loan secured against the value of his mortgage (approximately the current value of the house minus outstanding repayments) the consumer is then hypothecating the mortgage itself the creditor can still seize the house but in this case the creditor then becomes responsible for the outstanding mortgage debt. Sometimes consumer goods and business equipment can be bought on credit agreements involving hypothecation the goods are legally owned by the borrower, but once again the creditor can seize them if required.

[edit] No creditor's duty of care in India

Since under a strict hypothecation, goods remain in the custody of the borrower or third party, who also enjoys the right to deal with them in the ordinary course of business, the hypothecation itself does not normally impose upon the creditor a duty of care over the hypothecated property. Accordingly, a judgment of the Kerala High Court of India[2] held that where hypothecated property was lost and the banker was not aware of the loss otherwise than in the ordinary course of business, the surety was not discharged.

[edit] Hypothecation in the investment markets

When an investor asks a broker to purchase securities on margin, hypothecation can occur in two senses. The purchased assets can be hypothecated, so that if the investor fails to keep up credit repayments the broker can sell some of the securities.[1] The broker can also sell the securities if they drop in value and the investor fails to respond to a Margin call. The second sense is that the original deposit the investor puts down for the margin account can itself be in the form of securities rather than a cash deposit, and again the securities belong to the investor but can be sold by the creditor in the case of a default. In both cases, unlike with consumer or business finance, the borrower does not typically have possession of the securities as they will be in accounts controlled by the broker, however the borrower does still retain legal ownership.

[edit] Rehypothecation

Goldman Sachs Tower banks that provide Prime brokerage services are able to expand their trading operations by re-using collateral belonging to their counter-parties. Re-hypothecation occurs when banks or broker-dealers re-use the collateral posted by clients such as hedge funds to back the broker's own trades and borrowings. In the UK, there is no limit on the amount of a clients assets that can be rehypothecated,[3] except if the client has negotiated an agreement with their broker that includes a limit or prohibition. In the US, re-hypothecation is capped at 140% of a client's debit balance.[4][5][6] In 2007, rehypothecation accounted for half the activity in the Shadow banking system. Because the collateral is not cash it does not show up on conventional balance sheet accounting. Prior to the Lehman collapse, the IMF calculated that US banks were receiving over $4 trillion worth of funding by rehypothecation, much of it sourced from the UK where there are no statuary limits governing the reuse of a client's collateral. It is estimated that only $1 trillion of original collateral was being used, meaning that collateral was being rehypothecated several times over, with an estimated churn factor of 4.[5] Following the Lehman collapse, large hedge funds in particular became more wary of allowing their collateral to be rehypothecated and even in the UK they would insist on contracts that limit the amount of their assets than can be reposted, or even prohibit rehypothecation completely. In 2009 the IMF estimated that the funds available to US banks due to rehypothecated had declined by more than half to 2trillion - due to both less original collateral being available for rehypothecation in the first place, and due to a lower churn factor.[5][6] The possible role of rehypothecation in the Financial crisis of 20072010 and in the shadow banking system was largely overlooked by the mainstream financial press , until Dr. Gillian Tett of the Financial Times drew attention in August 2010 [6] to a paper from Manmohan Singh and James Aitken of the International Monetary Fund which examined the issue.[5]

[edit] Rehypothecation in repo agreements

Rehypothecation can be involved in repurchase agreements , commonly called repos. In a twoparty repurchase agreement, one party sells to the other a security at a price with a commitment to buy the security back at a later date for another price. Overnight repurchase agreements, the most commonly used form of this arrangement, comprise a sale which takes place the first day and a repurchase that reverses the transaction the next day. Term repurchase agreements, less commonly used, extend for a fixed period of time that may be as long as three months. Openended term repurchase agreements are also possible. A so-called reverse repo is not actually different than a repo; it merely describes the opposite side of the transaction. The seller of the security who later repurchases it is entering into a repurchase agreement; the purchaser who later resells the security enters into a reverse repurchase agreement. Notwithstanding its nominal form as a sale and subsequent repurchase of a security, the economic effect of a repurchase agreement is that of a secured loan.

[edit] See also

Security interest - hypothecation

[edit] Notes and references

1. ^ a b "Hypothecation explained at the financial dictionary". http://financial-

dictionary.thefreedictionary.com/Hypothecation. Retrieved 2010-08-31.

2. ^ Union Bank of India v. M.P. Sreedharan AIR 1993 Ker. 285 3. ^ Though of course a bank can only rehypothecate the assets the client has posted as

collateral
4. ^ Hedge funds often have a considerably higher amount of securities pledged as

collateral than their current borrowings they continue to receive the normal income stream from the securities and it gives them the flexibility to quickly execute trades if an opportunity arises the 140% limit does in many cases considerably reduce their exposure to rehypothecation.
5. ^ a b c d Manmohan Singh and James Aitken (2010-07-01). "The (sizable) Role of

Rehypothecation in the Shadow Banking System". IMF. http://www.imf.org/external/pubs/ft/wp/2010/wp10172.pdf. Retrieved 2010-08-31.

6. ^ a b c Gillian Tett (2010-08-12). "Web of shadow banking must be unravelled". The

Financial Times. http://www.ft.com/cms/s/0/112ff210-a62b-11df-9cb900144feabdc0.html. Retrieved 2010-08-31. California Civil Code Section;2920. (a) A mortgage is a contract by which specific property,including an estate for years in real property, is hypothecated for the performance of an act, without the necessity of a change of possession.(above article is hearsay)

[edit] External links

Look up hypothecation in Wiktionary, the free dictionary.

Collateral Management article on Financial-edu.com

Retrieved from "http://en.wikipedia.org/wiki/Hypothecation" Categories: Mortgage | Financial services | Financial markets

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Loan covenant
From Wikipedia, the free encyclopedia Jump to: navigation, search This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed.
(January 2008)

A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.[1] Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called. Covenants may also be waived, either temporarily or permanently, usually at the sole discretion of the lender. A good example for understanding Loan Covenants would be syndicate loans, where several banks act as party to loans and borrower may be one or several.

[edit] The Function of Loan Covenants

Covenants are undertakings given by a borrower as part of a term loan agreement. Their purpose is to help the lender ensure that the risk attached to the loan does not unexpectedly deteriorate prior to maturity. From the borrower's point of view covenants often appear to be an obstacle at the time of negotiating a loan and burdensome restriction during its term. Proponents of the use of covenants, emphasizing the early warning function of covenants, take the case further by arguing that well-designed covenants provide not only timely performance indicators but also open up lines of communication between borrower and lender. Typical covenants for real estate related loans are the Loan to Value Ratio (LTV), the debt service coverage ratio (DSCR) and Interest Service Coverage Ratio (ISCR). Covenants can potentially have negative consequences as well. As the debtor is imposing restrictions on how the creditor should conduct business, the creditor's economic freedom is restricted. This may lead to decreased efficiency. When a covenant is broken and additional equity should be contributed, the creditor might not be able to provide it or at least not adequately. This results in making the whole loan due; a resulting fire sale may lead to high write offs on the debtor's books.

[edit] References
1. ^ Covenants | Abinomics.com

This economic term article is a stub. You can help Wikipedia by expanding it.v d e Retrieved from "http://en.wikipedia.org/wiki/Loan_covenant" Categories: Credit | Economic term stubs Hidden categories: Articles lacking sources from January 2008 | All articles lacking sources
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Loan covenant
From Wikipedia, the free encyclopedia Jump to: navigation, search This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed.
(January 2008)

A loan covenant is a condition in a commercial loan or bond issue that requires the borrower to fulfill certain conditions or which forbids the borrower from undertaking certain actions, or which possibly restricts certain activities to circumstances when other conditions are met.[1] Typically, violation of a covenant may result in a default on the loan being declared, penalties being applied, or the loan being called. Covenants may also be waived, either temporarily or permanently, usually at the sole discretion of the lender. A good example for understanding Loan Covenants would be syndicate loans, where several banks act as party to loans and borrower may be one or several.

[edit] The Function of Loan Covenants

Covenants are undertakings given by a borrower as part of a term loan agreement. Their purpose is to help the lender ensure that the risk attached to the loan does not unexpectedly deteriorate prior to maturity. From the borrower's point of view covenants often appear to be an obstacle at the time of negotiating a loan and burdensome restriction during its term. Proponents of the use of covenants, emphasizing the early warning function of covenants, take the case further by arguing that well-designed covenants provide not only timely performance indicators but also open up lines of communication between borrower and lender. Typical covenants for real estate related loans are the Loan to Value Ratio (LTV), the debt service coverage ratio (DSCR) and Interest Service Coverage Ratio (ISCR). Covenants can potentially have negative consequences as well. As the debtor is imposing restrictions on how the creditor should conduct business, the creditor's economic freedom is restricted. This may lead to decreased efficiency. When a covenant is broken and additional equity should be contributed, the creditor might not be able to provide it or at least not adequately. This results in making the whole loan due; a resulting fire sale may lead to high write offs on the debtor's books.

[edit] References
1. ^ Covenants | Abinomics.com

This economic term article is a stub. You can help Wikipedia by expanding it.v d e Retrieved from "http://en.wikipedia.org/wiki/Loan_covenant" Categories: Credit | Economic term stubs Hidden categories: Articles lacking sources from January 2008 | All articles lacking sources
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Svenska This page was last modified on 21 June 2011 at 15:57. Text is available under the Creative Commons Attribution-ShareAlike License; additional terms may apply. See Terms of use for details. Wikipedia is a registered trademark of the Wikimedia Foundation, Inc., a non-profit organization. Contact us Privacy policy About Wikipedia Disclaimers