Chapter 9
Georgia Real Estate
An Introduction to the Profession
Eighth Edition
Chapter 9
Notes and Security Documents
Key Terms
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acceleration clause
• mortgagor
alienation clause
• naked title
beneficiary
• power of sale
deed of trust
• promissory note
deficiency judgment
• reconveyance deed
defeasance clause
• second mortgage
first mortgage
• security deed
foreclosure
• subordination
junior mortgage
• trustee
mortgagee
• trustor
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Overview
There are two documents used in a typical real
estate loan. The first is the promissory note
and the second is the security document. Most
states use a mortgage as the security
document, some use a deed of trust.
Georgia uses a security deed.
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Promissory Note
The promissory note is a contract between a
borrower and a lender.
If there is no note, there is no debt.
A note is a negotiable instrument in that it
creates a debt. The debt created can be
conveyed to a third party.
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Promissory Note
A note must be:
• in writing
• between a borrower and a lender
• state certain sum of money
• show the terms of payment
• by signed by the borrower
• voluntarily delivered by the borrower and
accepted by the lender
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Interest Conveyance
Interest in real estate loans is almost always
computed as simple interest.
Interest is paid in arrears.
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Prepayment Rights
All VA-guaranteed and FHA-insured loans allow
prepayment.
Most conventional loans do not have a
prepayment penalty, legally they can.
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Default
In the event of a late payment, the note will
provide for a penalty.
In the event the payments are not made, there
will be a provision for acceleration.
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Security
Virtually all notes are secured, via a mortgage,
trust deed or security deed.
The note will tie defaults to the security as a
default to the note.
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The Mortgage Instrument
The mortgage is a separate agreement from
the promissory note. The mortgage provides
security that the lender can sell if the note is
not paid.
Hypothecation means the borrower retains the
right to possess and use the property while it
serves as collateral.
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The Mortgage Instrument
The mortgagor is the person giving the
mortgage. The mortgagor is the borrower.
The lender is receiving the security, so they are
the mortgagee.
A loan is given by the lender; the mortgage is
given by the borrower.
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Deed of Trust
A trust deed or deed of trust is a three-party
arrangement consisting of the borrower
(trustor), the lender (beneficiary) and a neutral
third party (trustee).
The borrower executes a deed to the trustee
instead of the lender.
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Deed of Trust
Real property is used as security for a debt. If
the debt is not repaid, the property is sold and
the proceeds are applied to the balance owed.
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Parties to a Deed of Trust
The borrower conveys title to the trustee, to be
held in trust until the note is paid in full.
The deed of trust is recorded in the county
where the property is located.
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Parties to a Deed of Trust
The title that the borrower grants to the trustee
is referred to as a naked title or bare title.
The borrower still retains the right to occupy
and use the property.
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Parties to a Deed of Trust
As long as the note is not in default, the
trustee’s title lies dormant.
The lender does not receive title, only a right
that allows the lender to request the trustee to
act.
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Reconveyance
When the note is paid in full, the lender sends
to the trustee a request for reconveyance.
The trustee cancels the note and issues the
borrower a reconveyance deed.
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Default
If a borrower defaults under a deed of trust,
the lender instructs the trustee to sell the
property and pay the balance due on the note.
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Default
The power of sale clause found in the deed of
trust is designed to give the trustee the
authority to sell the property without having to
go through a court-ordered foreclosure
proceeding.
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Trustee
The trustee is expected to be neutral and fair
to both the borrower and the lender.
Mortgages are legal in Georgia, but they are
not commonly used.
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Security Deed
A security deed provides security for the note
in Georgia.
The security deed conveys legal title to the
lender. This allows the lender to foreclose in a
non-judicial process.
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Security Deed
The borrower is giving the deed; the borrower
is the grantor.
The lender is receiving the deed; the lender is
the grantee.
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Provisions of the Security Deed
The alienation clause is also known as the due
on sale clause.
If the borrower sells or conveys any interest in
the property to another without the lender’s
prior written consent, such transfer is
considered a default.
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Provisions of the Security Deed
The lender has the right to call the entire loan
balance due and payable.
This clause keeps most conventional loans
from being assumed.
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Provisions of the Security Deed
Equitable redemption is the borrower’s right to
reinstate a defaulted loan after acceleration
but before foreclosure.
When a borrower has the right to reinstate
ownership of the property after the foreclosure
sale, the right is known as statutory
redemption.
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Provisions of the Security Deed
Georgia does not recognize statutory
redemption on a loan foreclosure.
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Provisions of the Security Deed
If the borrower defaults, the acceleration
clause allows the lender to demand an
immediate payment of the debt and invoke the
power of sale.
The sale is publicly advertised, then sold on
the courthouse steps.
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Provisions of the Security Deed
The defeasance clause requires the lender to
cancel the security instrument upon full
payment.
The lender must provide recorded proof that
the debt has been paid.
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Satisfaction of the Security Deed
When a borrower creates a debt against a
property, the security deed is recorded.
Upon payoff of the note, the lender has the
obligation to record a “Cancellation of Deed to
Secure Debt” showing that the debt is paid.
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Foreclosure on a Security Deed
The primary reason that a security deed is
used in Georgia rather than a mortgage is the
foreclosure process.
By using a security deed, the foreclosure
process becomes non-judicial. The security
deed transfer title to the lender.
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Foreclosure on a Security Deed
The security deed contains an acceleration
clause which allows the lender to call the debt
due upon the occurrence of an event,
commonly a default on the payments.
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Foreclosure on a Security Deed
The property would be advertised for four
consecutive weeks and then put up at public
auction on the county courthouse steps on the
first Tuesday of each month.
Any party wishing to bid must come with cash
(typically a letter of credit from a financial
institution).
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Foreclosure on a Security Deed
The lender will typically bid the amount of the
debt and costs.
They are essentially bidding on the note.
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Foreclosure on a Security Deed
On a loan foreclosure in Georgia, the borrower
has the legal right to pay off the loan any time
before the sale and reclaim the property.
This is known as equitable redemption.
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Foreclosure on a Security Deed
Once the sale is final, some states allow the
borrower to reimburse the investor from the
sale. This is known as statutory redemption.
Georgia does not recognize statutory
redemption. The foreclosure against debt is
final.
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“Subject To”
If an existing mortgage on a property does not
contain a due-on-sale clause, the seller can
pass the benefits of that financing along to the
buyer.
The buyer can purchase the property subject
to the existing loan.
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“Subject To”
The buyer takes no personal responsibility for
the loan and the mortgage.
The buyer pays the remaining loan payments
as they come due, but the seller is still
personally liable to the lender for the loan.
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“Subject To”
If the buyer stops making payments before the
loan is fully paid, the seller is totally liable.
Properties are seldom sold “subject to debt.”
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Assumption
Under an assumption, the buyer promises in
writing to the seller to pay the loan, becoming
personally obligated to the seller.
The seller’s name is still on the original
promissory note, but the seller has recourse
against the buyer.
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Assumption with a release of liability
The safest arrangement for the seller is to ask
the lender to substitute the buyer’s liability for
his. This is an assumption with a release of
liability through novation.
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Assumption with a release of liability
Novation releases the seller from the personal
obligation created by the promissory note.
The lender will require the buyer to prove
financial capability to repay.
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Estoppel
An estoppel certificate is used when the holder
of a loan sells the loan to another investor.
The borrower is asked to verify the amount still
owed and the rate of interest.
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Debt Priorities
When a default occurs and the price the
property brings at its foreclosure sales does
not cover all the loans against it, the debt with
the highest priority is satisfied first, then the
next highest debt is satisfied, until the sale
proceeds are exhausted or all debts are
satisfied.
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First and Second Mortgages
A lender will want to be in the most senior
position possible. The first lender to record
holds the first mortgage.
If the same property is used to secure another
note before the first is fully satisfied, the new
mortgage is a second mortgage.
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First and Second Mortgages
Any mortgage with a lower priority is known as
a junior mortgage.
This can only be determined by searching the
public records for mortgages recorded against
the property.
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Subordination
Subordination allows a junior loan to move up
in priority.
Many homeowners have home equity loans
that are seconds. If they wish to refinance the
first to reduce the interest rate, this would
push the equity loan into first position.
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Subordination
Refinancing lenders would never allow
themselves to be second to a home equity
loan. Home equity lenders are asked to
subordinate to the new loan.
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Chattel Liens
A chattel mortgage is a mortgage secured by
personal property.
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The Foreclosure Process
To foreclose means to cut
off.
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Delinquent Loan
Foreclosure occurs because the note is not
being repaid on time. When a borrower runs
behind in payments, the loan is said to be a
delinquent loan.
A lender considers foreclosure to be a last
resort.
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Delinquent Loan
The lender would much rather have the
borrower make regular payments.
If a borrower cannot make payments, cannot
find a buyer for the property, and the lender
sees no further sense in stretching the
payment schedule, the acceleration clause will
be invoked and foreclosure will begin.
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Foreclosure Routes
Judicial foreclosure means taking the matter
to court in the form of a lawsuit. It is costly and
time-consuming.
Non-judicial foreclosure is conducted by the
lender in accordance with the mortgage and
the state law. It is faster, simpler and cheaper.
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Foreclosure Routes
Non-judicial foreclosure is preferred by the
lender when the case is simple and
straightforward.
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Judicial Foreclosure
Judicial foreclosure process begins with a title
search. The lender files a lawsuit naming the
borrower as the defendants.
The lender identifies the debt and the
mortgage securing it.
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Judicial Foreclosure
The lender asks the court
for a judgment directing
that the defendant’s
interests in the property be
cut off, the property sold at
public auction and the
lender’s claim be paid from
the proceeds of the sale.
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Surplus Money Action
A junior mortgage holder will file a surplus
money action in the hopes that the property
will sell at foreclosure for enough money to
satisfy all senior claims as well as their own
claim against the borrower.
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Notice of Lis Pendens
A notice of lis pendens informs the public that
a legal action is pending against the borrower.
If the borrower attempts to sell the property at
this time, a prospective buyer will learn of the
pending litigation from a title search.
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Public Auction
The foreclosure sale is
usually a public auction to
obtain the best possible
price for the property by
inviting competitive bids.
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Equity of Redemption
The sale is conducted by the county sheriff.
The lender is usually present and is able to bid
the loan. The lender can bid up to the amount
of owed without having to pay cash.
All other bidders must pay cash.
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Equity of Redemption
The foreclosure does not cut off property tax
liens against the property.
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Deficiency Judgment
If the property sells for more than the claims
against it, the borrower receives the excess.
Georgia allows the lender to pursue a
deficiency judgment against the borrower’s
other unsecured assets.
This may require the borrower to sell those
assets.
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Deficiency Judgment
The purchaser at the foreclosure sale receives
a sheriff’s deed. These are usually special
warranty deeds.
The purchaser may take immediate
possession. The court will assist in removing
anyone in possession who was cut off in the
foreclosure proceedings.
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Statutory Redemption
In states with statutory redemption laws, the
foreclosed borrower has from one month to
one year after the sale to pay in full the
judgment and retake title.
The high bidder receives a certificate of sale
entitling the bidder to a sheriff’s deed if no
redemption is made.
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Statutory Redemption
The purchaser may or may not get possession
until then.
Bidders tend to offer less that what the
property would be worth if title and possession
could be delivered immediately after the
foreclosure sale.
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Statutory Redemption
Georgia does not allow for a statutory
redemption on a security deed foreclosure.
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Strict Foreclosure
Strict foreclosure is a judicial foreclosure
without a judicial sale. The lender files a
lawsuit requesting the borrower be given a
period of time to exercise the equitable right of
redemption or lose all rights to the property,
with title transferring irrevocably to the lender.
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Non-judicial Foreclosure
The power of sale clause in the mortgage gives
the lender the power to conduct the
foreclosure and sell the property without
taking the issue to court.
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Non-judicial Foreclosure
Lenders foreclosing under power of sale
cannot award themselves a deficiency
judgment. If there is a deficiency as a result of
the sale, the lenders must go to court for it.
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Non-judicial Foreclosure
A junior mortgage holder will file a request for
notice of default when the mortgage is
originally recorded. This requires anyone
holding a senior lien to notify the junior
mortgagee if a default notice has been filed.
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Entry and Possession
Entry and possession is based on the lender
giving notice to the borrower that the lender
wants possession of the property. The
borrower moves out and the lender takes
possession. This would be witnessed and
recorded in the public records.
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Deed in Lieu of Foreclosure
A borrower may want to voluntarily deed the
mortgaged property to the lender.
This relieves the lender of foreclosing and
waiting for any redemption period.
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Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is a voluntary act
sometimes called a “friendly foreclosure.”
This may not cut off the rights of junior
mortgage holders. The lender may have to
make those payments or be foreclosed by the
junior mortgage holder.
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Overview of Mortgage Foreclosure
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