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Financing:
Notes and Mortgages
©2008 The McGraw-Hill Companies,
All Rights Reserved
McGraw-Hill/Irwin
Notes
• Evidence of Debt
• Major Provisions
 Financial
• Amount Borrowed and Interest Rate
• Payment Amount and Maturity Date
• Application of Payments
 Reference to security for the loan
 Default Conditions and Penalties
2-2
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Notes
• Major Provisions
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Prepayment Provision
Acceleration of Note
Nonrecourse Clause
Assumability Provisions
Assignment
Future Advances
Release
2-3
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Mortgage Instrument
• Note & Mortgage
 Note: Obligation to pay
 Mortgage: Pledges property as security
(hypothecate)
• Mortgagor: Borrower
• Mortgagee: Lender
2-4
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Mortgage Instrument
•
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In writing and expressing intent of parties
Identification of the Parties
Legal Property Description
Covenants of seisin and warranty
Provision for release of dower rights
2-5
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Mortgage Instrument
• Important Clauses
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Taxes & Insurance Fund
Charges & Liens
Hazard Insurance
Property Preservation and Maintenance
Due on sale clause
2-6
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Mortgage Instrument
• Important Clauses
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Right to Reinstate
Lender in Possession
Future Advances
Subordination
2-7
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Additional Mortgage Concepts
• Assumption
 Liability
 Release Conditions
• “Subject to” a Mortgage
 Liability
2-8
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Additional Mortgage Concepts
• Property Covered
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Land
Improvements
Easements
Fixtures
• Special case of trade fixtures
 Mineral Rights
 After-acquired property
2-9
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Additional Mortgage Concepts
• Senior & Junior Mortgages
• Recording Mortgages
 Protect Lien Priority
• Seller Financing
 Purchase Money Mortgage
 Use of Subordination Clause
2-10
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Additional Mortgage Concepts
• Land Contract
 Seller retains naked title
 Purchaser has equitable title
 Seller conveys title when purchaser
completes the performance obligations
• Default
 Breach of mortgage contract
• Technical default
2-11
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Workouts
• Restructure the loan
 Recasting
 Extension Agreement
 Alternatives
• Transfer
 Subject to
• Purchase an Option on Property Value
2-12
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Workouts
• Voluntary Conveyance
 Deed in Lieu of Foreclosure
• Friendly Foreclosure
• Prepackaged Bankruptcy
2-13
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Foreclosure
• Judicial Foreclosure & Sale
 Judgment Lien
• Redemption
 Equity of Redemption
• Prior to foreclosure
 Statutory Right of Redemption
• After foreclosure
• Not in every state
2-14
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Foreclosure
• Property Sale
 Pricing: Public Auction
• Upset price
 Trust Deed: Trustor, Trustee, Beneficiary
• Power of Sale Clause

Court authority not necessary
• Used in a Limited Number of States
 Purchaser Buys Any Title Defects
2-15
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Foreclosure
• Parties
 Senior & Junior Lien Claimants
• Deficiency Judgment
 Property price does not cover claim
• Tax Issues
 Tax sales
2-16
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Bankruptcy
• Chapter 7
 Liquidation
• Chapter 11
 Available to business owners
 Reorganization
 Cramdown
• Chapter 13
 Reorganization
2-17
Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved