Chapter 26
Credit and Security Interests in Real
Property
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Debtor and Creditor
• The United States is a credit
economy.
• Businesses and individuals use
credit to purchase many
goods and services.
• Debtor – The borrower in a
credit transaction.
• Creditor – The lender in a
credit transaction.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Unsecured Credit
• Credit that does not require
any security (collateral) to
protect the payment of the
debt.
• The creditor relies on the
debtor’s promise to repay
the principal (plus an interest)
when it is due.
• The creditor may bring legal
action if the debtor fails to
make the payments.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Secured Credit
• Credit that requires security
(collateral) that secures
payment of the loan.
• Security interests may be taken
in real, personal, intangible,
and other property.
• The collateral may be
repossessed to recover the
outstanding amount if the
debtor fails to make payment.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Security Interests in Real Property
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Mortgage
Note and Deed of Trust
Recording Statute
Foreclosure
Deficiency Judgment
Right of Redemption
Land Sales Contracts
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Mortgage
• Two party instrument
• Real property is used as
collateral
• Owner/debtor is mortgagor
• Creditor is mortgagee
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Parties to a Mortgage
Loan of Funds
Owner-Debtor
Mortgagor
(Borrower)
Creditor Mortgagee
(Lender)
Security Interest in
Real Property
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Note and Deed of Trust
• Used in place of mortgage in
some states.
• Note is instrument evidencing
borrower’s debt.
• Deed of trust gives creditor
security interest in property.
– Three party instrument.
– Legal title of property placed
with trustee until owner-debtor
(trustor) pays creditor
(beneficiary).
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Parties to a Note and Deed of Trust
Loan of Funds
Creditor
Beneficiary
(Lender)
Owner-Debtor
Trustor
(Borrower)
Legal
Title
Security Interest in
Real Property If default, can
perfect rights
Trustee
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Recording Statute
• Mortgages and deed of trust must
be recorded at the county
recorder’s office.
• Gives potential lenders and
purchasers notice as to claims
against property.
• Nonrecordation does not affect
legality of instrument.
• Improperly recorded instrument is
not effective against subsequent
purchasers or other mortgagees
or lienholders.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Foreclosure
• In case of default,
mortgagee can declare
entire amount due and
payable.
• Foreclosure sale
• Power of sale
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Foreclosure, continued
• Legal procedure by which a
secured creditor causes the
judicial sale of the secured real
estate to pay a defaulted loan.
• All states permit foreclosure sales.
– Must name party having interest in
property as defendant
– Property sold at judicial sale
– Mandated by statutes
• Most states permit foreclosure by
power of sale.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Deficiency Judgment
• Some states permit the
mortgagee to bring a separate
legal action to recover a
deficiency from the mortgagor.
• If the mortgagee is successful,
– the court will award a deficiency
judgment
– entitles the mortgagee to recover the
amount of the judgment from the
mortgagor’s property
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Right of Redemption
• State statutes that allow
mortgagor to redeem real
property after default and before
foreclosure.
• Requires the mortgagor to pay
the full amount of the debt
incurred by the mortgagee
because of the mortgagor’s
default.
• Statutory period of redemption
– Many states allow mortgagor to
redeem for full amount for a specified
period of time
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Land Sales Contract
• Arrangement where the owner of
real property agrees to sell the
property to a purchaser, who
agrees to pay the purchase price
to the owner-seller over an
agreed-upon period of time.
• Often used to sell undeveloped
property and farms.
• If the purchaser defaults, the seller
may declare a forfeiture and
retake possession of the property.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Material Person’s Lien
• A contractor’s and laborer’s
lien that makes the real
property to which
improvements are being
made become security for
the payment of the services
and materials for those
improvements.
© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman
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Obtaining a Material Person’s Lien
• Lienholder must file a notice of lien
• Notice must state amount of lien,
name of claimant, the name of
owner of the property and a
description of the real property
• Notice must be filed within a
specified time period
• Notice of the lien must be given to
owner of the real property
• Lien Release
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