Finance Instruments Chapter 5

Learning Objectives

• Students will be able to identify the parties and basic provisions of a promissory note.
• Students will understand the difference between a straight note and an installment note.
• Students will know the purpose of a security instrument accompanying a loan.
• Students will define hypothecation and its relation to collateral.
• Students will compare mortgages and deeds of trust.
• Students will contrast judicial and nonjudicial foreclosure.
• Students will describe three alternatives to foreclosure.
• Students will list clauses found in real estate finance instruments and describe effects.
• Students will explain how an alienation clause impacts loan assumption.
• Students will name major mortgage loan types and identify their characteristics.

Suggested Lesson Plan

• Students will complete Exercise 5.1 to review the previous chapter on the Mortgage Industry.
• Students will review Chapter 5: Finance Instruments, and the learning objectives for the chapter.

Promissory Notes

• A promissory note is evidence of a borrower's legal debt to pay.
• The borrower (usually a buyer) is the maker of the note; the lender is the payee.
• The note specifies the parties, loan amount, interest rate, and repayment details.
• Promissory notes used in real estate loans are negotiable to enable secondary market resale.
• A negotiable instrument is freely transferred by the payee to a third party.
• "Without recourse" notes protect the payee from liability if the maker fails to make payments to a third party.
• A holder in due course is a third party purchaser who buys a note in good faith without knowledge of flaws.
• Straight note: interest-only payments, balloon payment at the end.
• Installment note: includes principal and interest in each payment.

Security Instruments

• A security instrument makes the borrower's property collateral for the loan.
• Lender has right to foreclose if the borrower defaults.
• Under hypothecation, the borrower transfers property title as loan security.
• Now, most jurisdictions use a mortgage which is a lien on borrower's property.
• Mortgage: a two-party agreement between borrower (mortgagor) and lender (mortgagee).
• Deed of trust: a three-party agreement — borrower (trustor), lender (beneficiary), and third party trustee.
• Trustee holds the power of sale in case of default.

Foreclosure

• Judicial foreclosure: lender files a lawsuit, the court orders property sale.
• Proceeds used to pay the mortgage, any exceeding funds go to the borrower.
• If proceeds are insufficient, a deficiency judgment is issued against the borrower.
• Statutory right of redemption allows the borrower, during a set time after the sale, to redeem the property by repaying the outstanding amount.
• Nonjudicial foreclosure: lender doesn't need court order; a trustee sells the property at a sale.
• Borrower has no redemption right in nonjudicial foreclosure.

Alternatives to Foreclosure

• Loan workouts: lender and borrower agree on alternative repayment plan.
• Deed in lieu of foreclosure: borrower agrees to give the property to the lender.
• Short sale: lender approves sale of the property for less than the amount owed.

This quiz focuses on key concepts from Chapter 5 regarding finance instruments in real estate. Students will explore topics such as promissory notes, mortgage types, and foreclosure alternatives. By the end of the quiz, participants will have a solid understanding of the essential provisions and terms associated with real estate finance.