Because learning changes everything. ® Chapter 2 Real Estate Financing: Notes and Mortgages Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Notes Promissory note – a document that serves as evidence that debt exists between a borrower and a lender. • Unless stated otherwise, the borrower is personally liable for payment of all amounts due under the terms of the note. • Loans are said to be made “with recourse” to the borrower. Notes usually contain several loan provisions. © McGraw Hill 2 Loan Provisions • Amount borrowed. • Rate of interest. • Dollar amount, due date, and number of payments. • Maturity date. • Reference to the real estate serving as security for the loan. • Application of payments. • Default. • Penalties. • Provisions for unscheduled payments or the full or partial prepayment of outstanding balances. • Notification of default and the acceleration clause. • Nonrecourse clause. • Loan assumability clause. • Assignment clause. • Future advances. • Release of lien by lender. © McGraw Hill 3 The Mortgage Instrument Mortgage document – created in a transaction whereby one party pledges real property to another party as security for an obligation owed to that party. Relationship of Note to Mortgage. • The underlying obligation secured by a mortgage is evidenced by a separate promissory note. • The mortgage is usually a separate document that pledges the designated property as security for the debt. Interests That Can be Mortgaged. • Any interest in real estate that is subject to sale, grant or assignment can be mortgaged. © McGraw Hill 4 Mortgage Requirements Minimum Mortgage Requirements. • Wording that appropriately expresses the intent of the parties to create a security interest in real property for the benefit of the mortgage. • Other items required by state law. Additional Elements. • Appropriate identification of mortgagor and mortgagee. • Proper description of the property serving as security for the loan. • Covenants of seisin and warranty. • Provision for release of dower rights. • Any other desired covenants and contractual agreements. © McGraw Hill 5 Important Mortgage Covenants • Funds for Taxes and Private Mortgage Insurance. • Charges and Liens. • Hazard Insurance. • Preservation and Maintenance of the Property. • Breach of Covenants. • Transfer of Property or a Beneficial Interest in Borrower. • Borrower’s Right to Reinstate. • Right of Entry: Lender in Possession. • Future Advances. • Subordination Clause. © McGraw Hill 6 Assumption of Mortgage • Grantee (buyer) agrees to become liable for payment of the mortgage debt and relieve the mortgagor (seller) of his or her personal obligation. • Assumption agreement binds only the grantor and the grantee and not the mortgagee. • The lender may or may not release the grantor from personal liability for the mortgage debt. © McGraw Hill 7 Acquiring Title “Subject to” a Mortgage Property Covered by a Mortgage – includes not only the land and any existing buildings on the land but also easements and fixtures and may also include rights to natural resources and after-acquired property. • Fixture – an item of tangible personal property that has become affixed to or is intended to be used with the real estate so as to be considered part of the property. • After-acquired property – includes additional improvements erected on the property or fixtures that become part of the property at any time in the future for as long as the debt remains outstanding. Junior Mortgages – all mortgages other than the senior mortgage. Recording of Mortgages – gives others notice of the existence and effect of the mortgage. © McGraw Hill 8 Other Financing Sources Seller financing is used when: • Third-party mortgage financing is too expensive or unavailable. • The buyer does not qualify for long-term mortgage credit because of a low down payment or difficulty meeting monthly payments. • The seller desires to take advantage of the installment method of reporting the gain from the sale. • The seller desires to artificially raise the price of the property by offering a lower-than-market interest rate on the mortgage, thereby creating more capital gains and less interest or ordinary income. Purchase-money mortgage – any mortgage given by a buyer to the seller to secure payment of all or part of the purchase price of a property. © McGraw Hill 9 Land Contracts • The land contract seller promises to convey title at such time as the purchaser completes the performance of the obligation called for in the contract. • Land contracts generally are considered instruments affecting title and are consequently admissible to record. © McGraw Hill 10 Default Default – a failure to fulfill a contract, agreement, or duty, especially a financial obligation such as a note. • Mortgage default – can result from any breach of the mortgage contract. • Technical default – breach of contract that can usually be cured by a borrower © McGraw Hill 11 Alternatives to Foreclosure: Workouts Restructuring the Mortgage Loan. • Recasting of Mortgages – changing the mortgage terms. • Extension Agreements – extends the mortgage terms temporarily. • Alternative to Extension Agreements – informal agreement. Transfer of Mortgage to a New Owner – assumption of mortgage. Voluntary Conveyance – borrower sells the equity to the lender. Friendly Foreclosure – the borrower agrees to cooperate with the lender in the litigation. Prepackaged Bankruptcy – before filing the bankruptcy petition, borrowers agree with all creditors to the terms on which they will turn their assets over in exchange for a discharge of liabilities. Short Sale – a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. © McGraw Hill 12 Foreclosure Two remedies in case of default: • Judicial Foreclosure – the lender sues on the debt, obtains judgment, and executes the judgment against property of the borrower. • Foreclosure suit – lender obtains a decree of foreclosure and sale. Redemption – the process of canceling or annulling a title conveyed by a foreclosure sale by paying the debt or fulfilling the other conditions in the mortgage. © McGraw Hill 13 Sales of Property in Foreclosure • Fixing a Price. • Deed of Trust. • Deed of Trust and Mortgage Compared. • Nature of Title at Foreclosure Sale. • Parties to Foreclosure Suit. © McGraw Hill 14 Other Foreclosure Concepts • Effect of Foreclosure on Junior Lienors. • Deficiency Judgment – any deficit remaining after a foreclosure and sale of the property. • Taxes in Default. © McGraw Hill 15 Bankruptcy • Chapter 7 Liquidation – gives debtors a fresh start by discharging all their debts and liquidating their nonexempt assets. • Chapter 11 – available to owners of a business. • Chapter 13 – wage earner proceeding designed for the rehabilitation of the debtor through a repayment plan funded with the future wages and earnings of the debtor. © McGraw Hill 16 Because learning changes everything. ® www.mheducation.com Copyright 2022 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
