chapter 17

Subordination Clause

A clause which permits the placing of a mortgage at a later date which takes priority over an existing mortgage.

Unsecured note

A loan for a set period of time but is not backed by any collateral or assets

List two differences between a mortgage and a deed of trust?

A mortgage is a lien on the property being given as collateral, with the legal title remaining in the name of the borrower. In a deed of trust, the borrower conveys the property to the trustee, who holds the title to the collateral on behalf of the lender until the loan terms have been satisfied. A mortgage may be discharged by a simple acknowledgement that the loan terms have been satisfied. A deed of trust is discharged using a reconveyance of title form.

How does a note differ from a mortgage?

A note is a complete contract. After it is legally signed by the borrower, it is a legally-enforceable and fully-negotiable financial instrument. A mortgage however, always needs a note to be legally valid.

Lenders in many states prefer to make residential loans using the deed of trust for several reasons.

A trustee may be given the power to sell property after default without going through the time-consuming judicial foreclosure process (as we mentioned on the previous page). The statute of limitations might bar action on a note in a mortgage transaction. However, this is not the case with a deed of trust that contains a power of sale. With power of sale, the trustee has legal title and can sell the property at any time after default to pay off the debt. A deed of trust can be used to secure more than one note. If the lender wants to remain anonymous for some reason, he or she does not have to be named in the deed of trust. Usually there is no statutory right of redemption after the sale under a power of sale

List two reasons that lenders prefer to use the deed of trust when making loans.

A trustee may be given the power to sell property after default without going through the time-consuming judicial foreclosure process. A deed of trust can be used to secure more than one note.

List and describe three provisions that are common to most notes.

Amount borrowed - This is the face amount of the note that is advanced when the note is executed. Interest rate - The rate can be either fixed or adjustable. If it's adjustable, the note should specify how the rate will change. Amount of payments - The amount of the payments will be determined by the face amount of the loan, the length of the loan and the interest rate.

The six elements required of a valid contract include:

Competent parties Consideration Mutual Agreement Lawful Objective In Writing and Signed by the Parties Legal Description

What does the trustee issue when the borrower pays off a real estate loan?

Deed of reconveyance

Mortgage covenants

Everything the borrower promises to do: make monthly payments, pay their property taxes as impounds to the bank, keep the property insured, etc.

Like a mortgage, a deed of trust document:

Identifies the parties. Describes the property that will be the collateral. Repeats the terms and conditions of the note. Has a place for the signatures and notarization.

What is it called when a mortgage has been transferred from the original lender or borrower to a third party?

Mortgage Assignment

principal

The capital amount borrowed, on which interest payments are calculated

lien theory

The deed remains in the borrowers (mortgagor) possession, and the lender (mortgagee) places a lien on the property via the more commonly known instrument called a mortgage

title theory

The lender holds the title to the property in the name of the borrower through the instrument known as a "deed of trust."

Hypothecation

The process of securing a loan by pledging a property without giving up ownership of the property

What is the purpose of an acceleration clause?

This clause outlines what will happen if the borrower fails to pay the mortgage, to maintain the property or to perform any other agreement, stipulation, or condition contained in the mortgage. Any failure on the part of the borrower can result in the lender accelerating the mortgage and taking whatever steps are needed to recover the investment.

Acceleration on Default

This clause provides that the whole of the principal sum becomes due at the option of the mortgagee when some specified default, such as a failure to pay a loan installment, occurs.

Covenant of seisin

This clause states that the mortgagors actually have title to the property and therefore have the authority to pledge it as collateral

Straight note

This is an interest-only note, whereby the borrower agrees to pay the interest periodically and to pay the entire principal when the note comes due.

Installment note

This note requires the periodic payment of both interest and principal and is the most common note.

Granting clause

This statement pledges the mortgagor's rights. The use of the words "grant, bargain, sell and convey" transfers a form of ownership to the mortgagee, which creates a lien on the property. The lien will be released when the loan is satisfied or allow action to be taken in the case of a default.

Mortgage Assignment

a document which indicates that a mortgage has been transferred from the original lender or borrower to a third party

deed of trust

a legal document which transfers title to a property to a third-party trustee as security for an obligation owed by the trustor (the borrower) to the beneficiary (the lender)

What is a deed of trust?

a legal document which transfers title to a property to a third-party trustee as security for an obligation owed by the trustor (the borrower) to the beneficiary (the lender).

Defeasance Clause

a mortgage provision indicating that the borrower will be given the title to the property once all mortgage terms are met not required in states using property liens as collateral for a mortgage

Under title theory

a non-judicial foreclosure process occurs. In a non-judicial foreclosure, the lender forecloses on a loan without the court's intervention and the lender holds the actual foreclosure sale.

mortgage

a specific type of loan that is used to buy real estate

Acceleration clauses

allow a lender to make the entire outstanding loan balance due immediately under certain conditions

Due-on-Sale

allows the existing lender to call the entire loan due and payable if the homeowner transfers title to the home without paying the loan in full.

promissory note

contract that is a promise to pay back a loan

most notes contain at least the following items:

identity of borrower and lender promise to pay amount borrowed interest rates due dates of payments amount of payments maturity date Reference to the real estate as security signatures

he primary mortgage market consists of lenders who

originate mortgage loans directly to borrowers

Statute of Frauds

prevent a creditor from fraudulently contending that a debtor be required to comply with the terms of an unwritten mortgage

The financial components of a mortgage loan include:

principal interest and interest rate points term payments

The deed of trust also has a number of covenants that pertain to the relationship between the borrower and the lender.

property maintenance fire insurance legal action payment of taxes expenditures injury to the property late payment trustee actions reconveyance assignment of rents acceleration trustee acceptance

Primary mortgage market lenders include:

savings and loans commercial banks mutual savings banks life insurance companies mortgage bankers credit unions

Non-Recourse Clause

states that if the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.

What is the purpose of a non-recourse mortgage clause?

states that if the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.

The two most common types of promissory notes are:

straight note installment note

Under lien theory

the foreclosure is through a judicial proceeding. In a judicial foreclosure, a lawsuit is filed by the lender and foreclosure is issued by the court

Parties to a Mortgage

the lender and the borrower

There are two primary ways that property ownership is held and transferred.

title theory lien theory

mortgage note

type of promissory note that is secured by a mortgage loan.