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Chapter
15
Mortgage Theory and Law
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In This Chapter
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You will take a brief look at
mortgage theory and law.
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Mortgage
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A pledge of property to secure the
repayment of a debt.
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Hypothecation
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Allowing the borrower to stay in possession
of the pledged property.
The borrower conveys the conditional title to
the lender but retains the use of the property.
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Texas is a lien theory state meaning a
lender’s right to acquire title occurs only after
proper foreclosure. Thus a mortgage is a lien
rather than a conveyance.
Title theory is a conveyance of title subject to
defeat when the debt it secures is paid.
Intermediate theory says title does not pass
to lender with mortgage but only upon
default.
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Pledge Methods
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Regular Mortgage
Equitable Mortgage
Deed as Security
Deed of Trust
Chattel Mortgage
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Promissory Note
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Contract between a borrower and lender
Obligor, obligee
Principal
Acceleration clause
Signature
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Lien Note
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Note and Mortgage Sequence
• Step 1 Buyer gives note to lender
and receives $$
• Step 2 Buyer pays $$ to seller
and receives deed
• Step 3 Buyer has clear title
and gives mortgage to lender
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The Mortgage Instrument
A separate agreement from the note
that provides collateral to the lender to
back up the promise made in the note
by the borrower/mortgagor.
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Comparison of a Mortgage
with a Deed of Trust
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Comparison of a Mortgage
with a Deed of Trust (continued)
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Deed of Trust
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Mortgage
Parties
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Mortgagor - borrower
Mortgagee – lender/beneficiary
Trustee – neutral third party
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Sample Deed of Trust
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Clauses to Consider
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Covenants of Borrower
Alienation Clause
Partial Release
“Subject to” Clause
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Assumption
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Deed of Trust to Secure Assumption
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Novation
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The safest arrangement for the seller is to
ask the lender to substitute the buyer’s
liability for his.
This releases the seller from the personal
obligation created by his promissory note,
and the lender can now require only the
buyer to repay the loan.
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Debt Priorities
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First mortgage / Senior mortgage
Second mortgage / Junior mortgage
Subordination
Chattel liens
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Foreclosure
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Judicial
Non-judicial
Power of Sale
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Notice 21 days prior to sale
Additional 20 days notice if borrower’s primary
residence.
Public sale on the first Tuesday of the month
following proper notice.
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Deficiencies
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After the foreclosure, the lender is given the
right to sue under the Promissory Note for
any deficiency.
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Redemption
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Some states provide an equitable or
statutory right of redemption to redeem the
property prior to sale.
Under Texas law once the notice to cure has
been sent to the debtor, the only equity of
redemption that the debtor has is to pay the
full amount owing, or to buy the property at
the foreclosure.
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Mortgage Foreclosure: Simplified Overview
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Deed of Trust Advantages
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Upon default, Lender can possession of property
& collect rents.
Time between default & foreclosure is short.
Power of sale provision.
No statutory redemption.
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Deed in Lieu of Foreclosure
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Borrower deeds the property to the lender.
Avoid the hassle of foreclosure proceedings.
Relieves the lender of foreclosing and waiting
out any required redemption periods.
Is a voluntary act by both borrower and
lender.
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Key Terms
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Acceleration clause
Beneficiary
Deed of trust
Deficiency judgment
Foreclosure
Junior mortgage
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Mortgage
Mortgagee
Mortgagor
Power of sale
Subordination
Trustee
Trustor
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