Section 7: Instruments of Real Estate Finance

What is the defeasance or reconveyance clause?

A clause that states that the borrower will regain full title once the debt is fully repaid.

Contract for Deed

A contract for the sale of real property in which the seller gives up possession of the property but retains title until the total of the purchase price is paid off

Contract for Deed

A contract for the sale of real property in which the seller gives up possession of the property but retains title until the total of the purchase price is paid off. There are multiple names for this including: 1. Real estate contract 2. Contract for sale 3. Agreement for deed 4. Installment sale 5. Articles of agreement

Deed of Trust

A deed to real property, which serves the same purpose as a mortgage, involving three parties instead of two. The third party holds naked title for the benefit of the lender. Beneficiary (Lender), Trustor (Borrower), Trustee (Third Party)

Would you find a defeasance or reconveyance clause in a mortgage security instrument?

A defeasance clause.

What is a mortgage

A security instrument that describes the agreement between the borrower and the lender to use the property as collateral for the loan. It's a voluntary lien against the borrower's property so that the lender can foreclose if needed.

What is an easement?

A type of encumbrance which conveys a nonpossessory right to use and/or enter onto the real property of another without possessing.

What is a lien?

A type of monetary encumbrance. At the time property is sold, the lien needs to be paid off.

Encumbrance

ANY claim or lien on real property held by another person or entity that limits the owner's use, rights, or reduces the value of the property. They impact the title to real estate, but real estate may still be transferred or conveyed with the encumbrance. May be monetary or physical

The word "mortgage" is usually used as a catch-all term to describe the loan used to pay for a property, but the mortgage is actually the security for the loan, which is described in the promissory note. When a deed of trust is used as the security instrument, there's no actual mortgage document at all.

Blah blah blah

What is a late charge provision?

Charges for loan payments that are received after their due date are usually stipulated in the promissory note attached to the security instrument.

What is the subordination clause?

Creates a hierarchy of loan priority for new loans using the same property as collateral.

What is the promissory note in a real estate transaction?

Document explaining who owes money to whom, how much, and how it will be repaid. When it is used in combination with a mortgage or deed of trust, it must also refer to that security instrument.

What is an example of a physical encumbrance?

Easement or restriction on the use of the land or an encroachment.

What are the three basic options for selling financing?

Finance the entire property, supplement a conventional first mortgage or deed of trust with a second loan if the buyer doesn't have enough case for the 20% down payment, or create a wraparound loan where the seller keeps a current mortgage but extends credit to the buyer with a separate mortgage, deed of trust, or contract for deed.

What is a lock-in clause?

Form of pre-payment penalty that specifies the borrower isn't permitted to pay the loan in full prior to a specific date, allowing the lender to continue making money from the interest on the loan.

What is the acceleration clause?

If a borrower fails to make a payment or abide by terms of the agreement, this is a clause the describes this as a default and causes the debt to become immediately due and payable.

Non-disturbance Clause

If a tenant is renting a property, and the property is sold or the lender seizes the property due to borrower default, this clause prevents the tenant from being evicted. In essence, it assured the tenant that his or her rental agreement will be honored.

Should you assign a promissory note?

No, you should assign the security instrument.

Jacob is selling his unencumbered property to Shem and is acting as lender in the transaction. Which type(s) of finance instrument can Jacob use for the loan agreement?

Note with mortgage, note with deed of trust, or contract for deed

What type of liens are paid first no matter what?

Property tax liens

What are other terms used to describe seller financing arrangements?

Purchase money loans or carryback loans?

What is the non-recourse clause?

Since mortgage, promissory notes, and deeds of trust are negotiable instruments this clause protects the original mortgagee/beneficiary if the security instrument is sold and the borrower subsequently defaults. If the security instrument doesn't include this cause, the entity that sold the security is required to reimburse the security's buyer if the borrower defaults. With the non-recourse clause, the entity that buys the security is responsible for taking action to recover the remaining balance of the loan if the borrower defaults.

Power of Sale Clause

Standard in a deed of trust, it is A clause authorizing a private foreclosure sale that does not require court action (non-judicial foreclosure)

Why would a a trustee execute the deed of reconveyance?

The debtor has satisfied their debt obligation

What type of security instrument does California typically use and what is the reasoning behind this?

The deed of trust -- because of the way that foreclosure laws work in California. If a mortgage is used, unless it has a power of sale clause in it, a lender pursuing foreclosure must use the judicial process and that borrower has up to one year after the foreclosure sale to claim a statutory right of redemption that allows the borrower to redeem the property by paying off the loan and other associated costs. In a Deed of Trust instrument, the statutory right of redemption doesn't apply when non-judicial foreclosure is used which is standard practice.

3-2-1 Buydown

The interest rate starts low but increases by 1% each year for three years until it reaches the rate stated in the note.

Is the borrower or the lender the mortgagee in a mortgage instructment?

The lender

Who are the parties to a promissory note?

The maker and the payee. The maker is the borrower, and the payee is the creditor.

What are negotiable instruments?

These are financial instruments that may be bought and sold

What is the exculpatory clause

This clause protects the borrower's other assets in case of foreclosure. In a judicial foreclosure lenders may as for a deficiency judgement which would allow the lender to include a request for money over and above the proceeds from the foreclosure sale. This clause protect the borrower from that possibility.

What is the alienation clause?

This is also known as the due-on-sale clause which allows the lender to make the entire loan due and payable immediately if the property is sold or otherwise transferred. The presence of this clause can affect the ability of a buyer to assume the loan.

What is the pre-payment clause?

This provision allows the borrower to prepay the loan at any time without penalty.

What is the cross-default clause?

This puts a borrower in default on all loans if the borrower default on any loan where the clause is included.

When the mortgagee executes satisfaction of mortgage how is that documented?

Through the mortgage

Hypothecation

To pledge property as security for an obligation or loan without giving up possession of it.

What is release of liability and novation?

Two ways in which a seller can be released from liability for a loan when allowing a buyer to assume that loan. With an assumption liability for the original borrower is released in a release of liability and in a novation, the borrower is replaced with the new borrower as the maker of the note.

What is the Partial release clause?

Usually seen in an instrument used for a new subdivision. It requires lenders to release a portion of the property from the lien when a part of the debt has been paid. This allows a developer to acquire title to one lot in the subdivision and to convey it to a buyer without having to pay off the entire loan. The clause is called the partial satisfaction clause when used in a mortgage, and a partial reconveyance clause when used in a deed of trust.

Who are the parties in a Contract for Deed?

Vendee (the buyer/borrower) and the Vendor (the seller/lender)

What are the six ways that liens are classified?

Voluntary or involuntary Specific or general Statutory or equitable

What are subordination agreements?

Ways for liens to re-establish their hierarchy.

2-1 Buydown

Wendy is buying a house from Tom. Tom helps Wendy out by paying for a 2-1 buydown. The lender has given Wendy an interest rate of 5%. Which of the following describes what the buydown will do to Wendy's interest rate?

Why would a promissory note be endorsed?

When a loan is sold, the promissory note is endorsed and assigned to the new owner of the loan.

When does a mechanic's lien commence?

When the work actually started.

What is a subject to situation?

Where the new buyer makes payments under the original mortgage.

Junior Mortgage

any mortgage on a property that is subordinate to the first mortgage in priority

Lifting clauses

in a junior instrument allow a senior loan to be refinanced without affecting its senior lien position.