Section 5, Unit 2: Deed of Trust and Mortgage Instruments

Subordination

A subordination clause allows the security instrument's lien position to be placed in a lower priority to a new loan using the same property as collateral. For example, a developer purchasing a vacant lot may need a construction loan as well as the loan for purchasing the land. The subordination clause in the mortgage makes it possible to obtain the construction loan. Without it, the developer is unlikely to find a lender willing to finance the development of the lot.

What's the name of the clause included in a finance instrument that requires the lender to release a portion of the property from the lien when a part of the debt has been paid?

Partial release

Power of Sale

- Standard in the deed of trust, but may also be included in a mortgage. - This clause allows the trustee (or the mortgagee, in the case of a mortgage) to sell the property in order to recover losses from borrower default using a non-judicial foreclosure process.

Acceleration Clause

Also known as the due-on-sale clause, this 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.

Andrea's lender has notified her of its intent to foreclose. Her loan is secured with a deed of trust. What rights does she have to redeem her property?

Andrea can cure the default and reinstate the loan.

Non-recourse clause

Because a note and mortgage or note and deed of trust are negotiable instruments, this clause can be included to protect the original mortgagee/beneficiary if the security instrument is sold and the borrower subsequently defaults. If the security instrument doesn't include this clause, 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. (In actual practice, the borrower interacts with a loan servicer to make payments, and that loan servicer will take action against the appropriate party if the borrower defaults.)

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 assures the tenant that his or her rental agreement will be honored.

What type of provision is standard with either the mortgage or the deed of trust, but is included in the promissory note rather than the security instrument?

Late charge

What's the name of the clause in a promissory note where this language appears: "If the Note Holder has not received the full amount of any monthly payment by the end of ______ calendar days after the date it is due, I will pay a late charge to the Note Holder"?

Late charge provision

The ______ clause allows the borrower to pre-pay principal on the loan at any time without penalty.

Pre-payment

When a borrower has paid off the loan, how is the release handled if the security instrument is a mortgage?

The lender executes and records a satisfaction of mortgage and returns the note to the borrower.

When a borrower has paid off the loan, how is the release handled if the security instrument is a deed of trust?

The trustee executes and records a deed of reconveyance and the lender returns the note to the borrower.

Late Charge Provisions

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

The contract Jack is signing has a clause that protects his assets from a deficiency judgment in case of foreclosure. What is this called?

Exculpatory

Which clause is standard in a deed of trust and affects the foreclosure process that can be used if the borrower defaults?

Power of sale

Which clause refers to the order of liens on a property?

Subordination

Cross-default

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

Partial release clause

This clause is usually seen in an instrument used for a new subdivision. It requires the lender 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.

Exculpatory

This clause protects the borrower's other assets in case of foreclosure. In a judicial foreclosure, a lender can choose to ask for a deficiency judgment, which would allow the lender to include a request for money over and above the proceeds from the foreclosure sale. The exculpatory clause protects the borrower from that possibility.

Defeasance Clause or Reconveyance Clause

This clause states that the borrower will regain full title once the debt is fully repaid. - Mortgages use the defeasance clause. The lender is required to execute a satisfaction of mortgage. - Deeds of trust use a reconveyance clause. The trustee is required to execute a deed of reconveyance to give full title to the trustor.

Lock-in clause

This is a form of pre-payment penalty. The borrower isn't allowed to pay the loan in full prior to a specific date, allowing the lender to continue making money from the interest on the loan. Prepayment penalties of any sort have largely been outlawed and are not allowed on most government loans. The lock-in clause is something that is only likely to be included on very high-yield mortgages where the lender wants to ensure earnings for a specific time period.

Pre-payment clause

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