Chapter 9 Mortgage and Note - Tagged.pdf

Chapter 9 Mortgage and Note  Promissory Note or Real Estate Lien Two documents are involved in a standard mortgage loan—the promissory note and the mortgage. The promissory note establishes who the borrower and lender are,...

Chapter 9 Mortgage and Note  Promissory Note or Real Estate Lien Two documents are involved in a standard mortgage loan—the promissory note and the mortgage. The promissory note establishes who the borrower and lender are, the amount of the debt, the terms of repayment, and the interest rate. To be valid as evidence of debt, a note must: – be in writing; – be between a borrower and a lender who both have contractual capacity; – state the borrower’s promise to pay a certain sum of money; – show the terms of payment; – be signed by the borrower; and – be voluntarily delivered by the borrower and accepted by the lender. If not is secured by a mortgage or deed of trust, it must say so – Otherwise, it is a personal obligation When a loan carries an interest charge, the rate of interest must be stated in the note. In some states it is necessary for the borrower’s signature on the note to be acknowledged or witnessed.  Early Mortgages Mortgage: a document that makes property security for the repayment of a debt According to historians, the mortgage was in use when the pharaohs ruled Egypt and during the time of the Roman Empire. – According to Roman laws, loans could be secured by mortgages on either personal or real property. – In the early years of the Empire, nonpayment of a mortgage loan entitled the lender to make the borrower his slave. – In the year 326 B.C., Roman law was modified to allow the debtor his freedom while working off his debt. – Later, Roman law was again changed, this time to permit an unpaid debt to be satisfied by the sale of the mortgaged property.  The Mortgage Instrument Hypothecation Mortgages were also an important part of English law and, as a result of the English colonization of America, ultimately were incorporated into laws of each state. In England, the concept of pledging real estate by temporarily conveying its title to a lender as security for a debt was in regular use by the eleventh century. – The Christian church at that time did not allow its members to charge interest; the Christian lender took possession of the mortgaged property and collected the rents it produced instead of charging interest. – Jewish lenders charged interest and left the borrower in possession. It was not until the fourteenth century that charging interest, rather than taking possession, became universal. Leaving the borrower in possession of the pledged property is known as hypothecation. – The borrower conveys title to the lender, but still has the use of the property. – This conveyance of title in the mortgage agreement is conditional. – The mortgage states that if the debt it secures is paid on time, the mortgage is defeated and title returns to the borrower. This was and still is known as a defeasance clause.  Lien Theory Versus Title Theory In 1791 in South Carolina, lawmakers asked the question: “Should a mortgage actually convey title to the lender subject only to the borrower’s default? Or does the mortgage, despite its wording, simply create a lien with a right to acquire title only after proper foreclosure?” Their decision was that a mortgage is a lien rather than a conveyance, and South Carolina became the first lien theory state in regard to mortgages. Today, 33 states are lien theory states. 15 jurisdictions adhere to the older idea that a mortgage is a conveyance of title subject to defeat when the debt it secures is paid. They are classified as title theory states. 3 states are classified as intermediate theory states because they take a position midway between the lien and title theories. –In the intermediate states, title does not pass to the lender with the mortgage, but only upon default. In real estate practice, as long as default does not occur, the differences among the three theories are more technical than real.  The Instrument Figure 9.2 Key - Example Covenants – Pay Taxes – Insurance – Good Repair (Preservation and Maintenance) – Lender permission to inspect – Acceleration Clause Immediate demand for loan balance to be paid Alienation Clause (Due on Sale) Condemnation Clause  The Mortgage Mortgage Satisfaction – Partial Release Subject To Assumption  The Mortgage Novation The safest arrangement for the seller is to ask the lender to substitute the buyer’s liability for his/her liability. – This releases the seller from the personal obligation created by his/her promissory note. – The lender can require only the buyer to repay the loan. The seller is also on safe ground if the mortgage agreement or state law prohibits deficiency judgments. Deficiency judgment: a judgment against a borrower if the foreclosure sale does not bring enough to pay the balance owed An estoppel certificate (also called a mortgagee’s information letter) is prepared by the lender to show how much of the loan remains to be paid. – used when a buyer is to continue making payments on an existing loan, he/she will want to know exactly how much is still owed – used when the holder of a mortgage loan sells it to another investor – the borrower is asked to verify the amount still owed and the rate of interest Estoppel  Foreclosure The Foreclosure Process – Delinquent Loan – Foreclosure Routes – Subordination – Chattel Liens  Debt Priorities The same property can be pledged as collateral for more than one mortgage. – This presents no problems to the lenders involved as long as the borrower makes the required payments on each note secured by the property. – The difficulty arises when a default occurs on one or more of the loans, and the price the property brings at its foreclosure sale does not cover all the loans against it. A priority system dictates that the debt with the highest priority is satisfied first from the foreclosure sale proceeds, and then the next highest priority debt is satisfied, then the next, until either the foreclosure sale proceeds are exhausted or all debts secured by the property are satisfied. First Mortgage – This is normally accomplished by being the first lender to record a mortgage against a property that is otherwise free and clear of mortgage debt. – also known as the senior mortgage – Junior mortgage: any mortgage on a property that is subordinate to the first mortgage in priority – As higher priority mortgages are satisfied, the lower priority mortgages move up in priority.  Debt Priorities (continued) Subordination – voluntary acceptance of a lower mortgage priority than one would otherwise be entitled to – sometimes done by landowners to encourage developers to buy their land Chattel Liens – An interesting situation regarding priority occurs when chattels are bought on credit and then affixed to land that is already mortgaged. If the chattels are not paid for, can the chattel lienholder come onto the land and remove them? If there is default on the mortgage loan against the land, are the chattels sold as fixtures? – The solution is for the chattel lienholder to record a chattel mortgage or a financing statement. – This protects the lienholder’s interest even though the chattel becomes a fixture when it is affixed to land.  Debt Priorities (continued) Subordination – voluntary acceptance of a lower mortgage priority than one would otherwise be entitled to – sometimes done by landowners to encourage developers to buy their land Chattel Liens – An interesting situation regarding priority occurs when chattels are bought on credit and then affixed to land that is already mortgaged. If the chattels are not paid for, can the chattel lienholder come onto the land and remove them? If there is default on the mortgage loan against the land, are the chattels sold as fixtures? – The solution is for the chattel lienholder to record a chattel mortgage or a financing statement. – This protects the lienholder’s interest even though the chattel becomes a fixture when it is affixed to land.  The Foreclosure Process Foreclosure: the procedure by which a person’s property can be taken and sold to satisfy an unpaid debt Noncompliance with any part of the mortgage agreement by the borrower can result in the lender calling the entire balance immediately due. In most cases foreclosure occurs because the note is not being repaid on time. When a borrower is behind in payments, the loan is said to be delinquent or nonperforming. Today’s lender considers foreclosure to be the last resort. – The foreclosure process is time-consuming, expensive, and unprofitable. – The lender would much rather have the borrower make regular payments. If a borrower realizes that stretching out payments is not going to solve the financial problem, the borrower can seek a buyer for the property. It is only when the borrower cannot find a buyer and when the lender sees no further sense in stretching the payments that the acceleration clause is invoked and the path toward foreclosure is taken. Delinquent Loan  The Foreclosure Process (continued) Foreclosure Routes – There are two foreclosure routes: judicial and nonjudicial. Judicial foreclosure means taking the matter to a court of law in the form of a lawsuit that asks the judge to foreclose (cut off) the borrower. A nonjudicial foreclosure does not go to court and is not heard by a judge. It is conducted by the lender (or by a trustee) in accordance with provisions in the mortgage and in accordance with state law pertaining to nonjudicial foreclosures. – A judicial foreclosure is more costly and more time-consuming, but it does carry the approval of a court of law and it may give the lender rights to collect the full amount of the loan if the property sells for less than the amount owed. Judicial foreclosure is preferred when the foreclosure case is complicated and involves many parties and interests. – The nonjudicial route is usually faster, simpler, and cheaper, and lenders prefer it when the case is simple and straightforward. Except for home equity loans, which require a judicial hearing, almost all loans in most states are foreclosed nonjudicially because of most state’s wide use of the deed of trust as a mortgage.  Foreclosure Judicial Foreclosure – Surplus Money Action – Notice of Lis Pendens – Public Auction – Equity of Redemption  The Foreclosure Process (continued) – Deficiency Judgement After the foreclosure, the lender is given the right to sue for any deficiency. Most states have adopted an antideficiency statute that allows the homeowner, upon being sued by the lender, to produce evidence of the fair market value of the house. – applies to judicial foreclosures and to anyone who may have guaranteed the note – does not apply to private mortgage insurance The Consumer Financial Protection Bureau legislation, includes federal rules that a lender or servicer cannot make the first notice for nonjudicial foreclosure unless: – the borrower’s mortgage loan is more than 120 days delinquent; – the foreclosure is based on a borrower’s violation of a due-on-sale clause; or – the servicer is joining the foreclosure action of a subordinate lienholder. – Statutory Redemption Some states provide an equitable or statutory right of redemption to redeem the property prior to sale and reinstate the borrower’s right to continue to make payments. Under most state’s law, once the notice to cure has been sent to the debtor, the only equity of redemption that the debtor has is to pay the full amount owing, or to buy the property at the foreclosure. There is no statutory right of redemption in most states to reinstate the deed of trust after the foreclosure sale has taken place.  Foreclosure Strict Foreclosure Power of Sale Entry and Possession Deed in Lieu of Foreclosure Installment Contract Foreclosure  The Foreclosure Process (continued) Nonjudicial Foreclosure – 42 states permit the use of a power of sale as a means of simplifying and shortening the foreclosure – Most state’s law states that upon default, sale of real estate under the power conferred by the deed of trust shall be made in the county of the real estate. – The mortgagee generally gives the trustee a request to exercise the right to foreclose. – The trustee gives the required notice to cure, a notice of intent to accelerate, and a notice of acceleration – The notice of trustee’s sale is posted on the courthouse door 21 days prior to the first Tuesday of the following month in which the sale is to take place.  The Foreclosure Process (continued) Notice of Trustee’s Sale  Pledge Methods A person can pledge real estate as collateral for a loan by using any of four methods: – the regular mortgage; – the deed of trust; – the equitable mortgage; and – the deed as security Regular Mortgage – borrower conveys the title to the lender as security for the debt – contains a statement that it will become void if the debt it secures is paid in full and on time – In title theory states, the conveyance feature of the mortgage stands. – In lien theory states, such a mortgage is considered to be only a lien against the borrower’s property, despite its wording. Deed of Trust – a document that conveys title to a neutral third-party trustee as security for a debt – Trustor: one who creates a trust; the borrower in a deed of trusts arrangement – Trustee: one who holds property in trust for another  Pledge Methods (continued) Equitable Mortgage – A written agreement that, although it does not follow the form of a regular mortgage, is considered by the courts to be one. – Equity imposes the mortgage obligation (and right to foreclose). Deed as Security – borrower gives a deed as security for a loan – If the borrower can prove that the deed was security for a loan, the lender must foreclose as with a regular mortgage if the borrower fails to repay. – If the loan is repaid in full and on time, the borrower can force the lender to convey the land back to him.