Chapter 12 Real Estate Finance

Borrower's covenants and agreements

A mortgage is a contract between mortgagor and mortgagee and therefore, must contain the essential elements of a contract to be valid. Mortgage lenders in Florida commonly use the Fannie Mae Freddie Mac Single Family Uniform Mortgage Instrument. This standard mortgage instrument contains certain uniform warranties.

Receivership clause

Allows a receiver to be appointed to collect income from the property and appoint the income to make mortgage payments in the event of default.

Repayment clause

Allows the borrower to payoff part or all of the debt, without penalty or other fees, before maturity.

Due on sale clause

Allows the mortgagee to call due the outstanding loan balance plus accrued interest. When the property is sold or transferred without written consent, the lender may require immediate payment in full. In effect, this clause prevents another party from assuming the mortgage.

Equity of Redemption

Allows the mortgagor to prevent foreclosure from occurring by paying the mortgage, the principal, and interest due. Plus any expenses the mortgagee has incurred in attempting to collect the debt and initiating foreclosure proceedings.

Statutory redemption period

Allows the mortgagor to redeem a foreclosed property for a specified period of time after the foreclosure sale.

Mortgage

An instrument that pledges the property as securities or collateral for a debt. For the lender, the property becomes security, legally sufficient to ensure recovery of the loan.

Acceleration clause

Authorizes the mortgagee to advance the due date of the entire unpaid balance if the mortgagor fails to fulfill any promises stated in the mortgage instrument. The borrower is given 30 days from the date of the notice to pay all the sums secured by the mortgage instrument.

Tax; liens

Borrower agrees to pay all taxes, assessments, and fines that could create a lien with superior priority over the mortgage, security instrument. This clause also stipulates that the mortgagor will pay association dues, if applicable.

Satisfaction of mortgage

Chapter 701, Florida Statue requires that lenders provide the mortgagor with payoff information. The mortgage must provide an estoppel certificate stating that the unpaid principle balance, interest due, and the per diem rate. When the mortgage is paid in full Florida Statue requires that the mortgagee cancel the mortgage and send the recorded release of mortgage within 60 days.

Defeasance clause

Clause that defeats the prior action when the borrower or mortgagor has made the final payments on the loan. It returns legal title to the borrower and defeats the mortgage lien. The property at this point is no longer pledged as collateral.

Escalator clause

Clause that permits the lender to increase the interest rate.

Partial release clause

Commonly used in blanket mortgages, provides the release of individual parcels from the blanket mortgage upon payment of a specified amount. Also, stipulates the conditions under which the mortgagee will grant a release of lots, free and clear of the mortgage.

Land development loans

Developers commonly purchase land for development by securing seller financing. The developer usually requests that the seller agree to a subordination clause. This allows the developer to secure a loan from a lending institution.

Caveat Emptor

Doctrine that applies in foreclosure sales; that is the purchaser is presumed to know that the purchase is subject to any prior liens of record or interests for which there is constructive notice. The mortgage may undertake foreclosure procedures and a suit based on the note as two separate actions. However, they are usually undertaken simultaneously.

Foreclosure

Enforcement of the mortgage lien, caused by the mortgagor's failure to pay the mortgage payments. Also, the mortgagor's failure to perform any requirements stipulated in the mortgage such as failure to pay the property taxes.

Lien theory

In most states the borrower retains title to the property. The lender is protected with a lien the payment of the mortgage debt. If the borrower defaults ole n the mortgage debt, the lender will foreclose to recover the money owed.

Title theory

In some states, title to the mortgaged property is conveyed to the lender through a mortgage deed, or to a trustee through a deed of trust. If the borrower defaults, the lender may take possession of the property. The borrower retains equitable title to the property. Once the debt is paid in full, the lender conveys legal title to the borrower.

Subordination clause

Lender agrees to step down in priority of a lien. This clause provides the lender or seller voluntarily will permit a subsequent mortgage to take priority over the lender's otherwise superior mortgage, the act of yielding priority.

Mortgagee

Lender such as a bank, savings association, or credit union that provides money to the borrower, owns the mortgage.

Estoppel certificate

Letter to an individual or company purchasing a mortgage to verify the amount of the unpaid balance, the rate of interest, and the date to which the interest has been paid prior to the assignment. The purpose of the letter is to stop a claim that the amount owed is different from the actual unpaid balance, or that the interest rate is an amount other than contracted rate.

Blanket mortgage

Mortgage that cover a number of parcels, building lots. The developer uses proceeds from the sale of individual lots to pay off the mortgage.

Deed in lieu of foreclosure

Process sometimes called a friendly foreclosure because it is a nonjudicial procedure and it does not involve a lawsuit. The defaulting borrower gives title and the deed to the lender to avoid judicial foreclosure. The lender takes title to the property subject to existing liens.

Assignment of mortgage

Process that is accomplished by using a legal instrument stating that the mortgagee transfers the mortgage and promissory note to the purchaser. Signed by the mortgagee and is delivered to the investor. The assignee becomes the new owner of the debt and security instrument.

Mortgagor

Prospective owner who needs to borrow money o complete a property purchase or existing owner who needs to borrow money. Gives mortgage as security along with a note as a promise to repay the lender.

Occupancy

The borrower agree to use the property as their principal residence for at least one year, unless the lender otherwise agrees in writing.

Promise to repay

The borrower promises to pay principal and interest according to the terms of the note. The mortgagor also agrees to pay escrow items, prepayment charges, and late fees, if applicable.

Promissory note

The legal instrument that represents the evidence of a debt. A promise to repay that makes the borrower personally liable for the obligation. It represents the borrower's promise to pay the lender according to the agreed upon terms of the loan.

Prepayment penalty clause

The lender may choose to charge a penalty for early payment, if provided for in the mortgage instrument.

Initiate a suit on the promissory note

The mortgagee may choose to sue on the note, obtain judgement, then execute the judgement against any real or personal property of the mortgagor.

Initiate a foreclosure proceeding

The mortgagee may foreclose on the property that is subject to the mortgage lien. The foreclosure process begins with the mortgage accelerating the due date of all remaining payments and then filing a lawsuit to foreclose. On receiving final judgement, the sale is advertised to the public and is sold at public auction to the highest bidder.

Maintenance and covenant of good repair

The mortgagor promises to keep the property in good condition, maintain the property, and prevent waste. The lender is authorized to make reasonable inspections of the property.

Property insurance

The mortgagor promises to keep the property insured against loss by fire and hazards included in an extended coverage policy.

Parties to a mortgage

The mortgagor, or borrower and mortgagee, or lender. The mortgagor owns the property and the mortgagee owns the mortgage.

Hypothecation

The pledging of property as security for payment of a loan without surrendering possession of the property.

Loan instruments

The promissory note, which is the actual promise to repay, and the mortgage, which creates the lien interest.

Open end clause

This allows the borrower to increase the loan amount as long as the total debt does not exceed the original amount of the loan. The lender often reserves the right to adjust the interest rate to current market rates.

Right to reinstate

This clause is based on the equity of redemption. It deals with the mortgagor's right to keep the original repayments in the note after the mortgagee has initiated the acceleration clause. It gives the mortgagor the right to have foreclosure proceedings stopped before the foreclosure sale.

Exculpatory clause

This clause requires that the lender waive the right to a deficiency judgement against the borrower. It relieves the borrower of personal liability to repay the loan.

Assignment

When ownership of a mortgage is transferred from one company or individual to another.

Deficiency judgement

When the proceeds are not sufficient to satisfy the outstanding debt, the mortgagee may request a judgement against the person who signed the note.