Chapter 02:
Real Estate Financing: Notes and
Mortgages
McGraw-Hill/Irwin
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Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved
Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
Notes
 Evidence of Debt
 Major Provisions
– Amount borrowed
– Rate of interest
– Dollar amount, due dates, # of payments
– Maturity date
– Reference to security for the loan
– Application of payments
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Notes
 Major Provisions
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Default
Penalties for late payment and forbearance provisions
Provisions for unscheduled payments
Notification of default and acceleration clause
Nonrecourse clause
 Note that even if there is a nonrecourse clause, loans are
generally with “recourse” if the “bad boy” provisions are
violated. For example, if the borrower willfully damages the
asset, the borrower will generally be held personally
responsible for the damage.
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Notes
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Loan assumability
Assignment clause
Future advances
Release of lien by lender
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Mortgage Instrument
 Note & Mortgage
– Note: Obligation to pay
– Mortgage: Pledges property as security
 The mortgagor is the borrower. The
mortgagee is the lender. Try to keep this
straight.
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Mortgage Instrument
 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
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Mortgage Instrument
 Important Clauses
– Funds for Taxes & Insurance
– Charges & Liens
– Hazard Insurance
– Preservation and Maintenance of the property
– Transfer of property or a beneficial interest in
borrower (“Due on sale clause”)
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Mortgage Instrument
 Important Clauses
– Borrower’s Rights to Reinstate
– Right of Entry: Lender in Possession
– Future Advances
– Subordination Clause
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Additional Mortgage Concepts
 Assumption
– Liability
– Release of grantor from assumed debt
 “Subject to” a Mortgage
– Liability
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Additional Mortgage Concepts
 Property Covered
– Land
– Improvements
– Easements
– Fixtures
 Special case of trade fixtures
– Mineral Rights
– After-acquired property
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Additional Mortgage Concepts
 Senior & Junior Mortgages
 Recording Mortgages
– Protect Lien Priority
 Seller Financing
– Purchase Money Mortgage
– Use of Subordination Clause
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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
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Workouts
 Restructure the loan
– Recasting
– Extension Agreement
– Alternatives
 Transfer
– Subject to
 Purchase an Option on Property Value
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Workouts
 Voluntary Conveyance
– Deed in Lieu of Foreclosure
 This can be tricky. For example, the presence of a 2nd
mortgage will make it problematic for the borrower to simply
give a deed in lieu of foreclosure to the 1st mortgage holder.
In that case, the 2nd mortgage would remain in effect and
would not be extinguished by a deed in lieu of foreclosure.
 Friendly Foreclosure
 Prepackaged Bankruptcy
 Short Sale
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Foreclosure
 Judicial Foreclosure
– Judgment Lien
 Redemption
– Equity of Redemption
 Prior to foreclosure
– Statutory Right of Redemption
 After foreclosure
 Not in every state
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Foreclosure
 Property Sale
– Fixing a Price by 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
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Foreclosure
 Parties
– Senior & Junior Lien Claimants
 Deficiency Judgment
– Property price does not cover claim
– Several states limit the applicability of
deficiency judgments
 Tax in Default
– Tax sales
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Bankruptcy
 Chapter 7
– Liquidation
 Chapter 11
– Available to business owners
– Reorganization
– Cramdown
 Chapter 13
– Reorganization
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