C H A P T E R 2 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 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 • • • • • 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 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 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 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