Real Estate Finance
Objective of Foreclosure
-Foreclosing the mortgagor's equity of redemption following default and acceleration of debt; mortgagor must be given the right to redeem from the default without unduly prejudicing the rights of other parties; any system of foreclosure must adequately address and protect the interests of hte mortgagee and other entities with an economic interest in the property
Components of a mortgage
1) promissory note - instrument signed by the mortgagor identifying the borrower (mortgagor) and the lender (mortgagee), the loan and the terms of payment. This note indicates the mortgagor's promise to pay the debt to the mortgagee. 2) mortgage - the instrument signed by the mortgagor and the mortgagee that secures a debt evidenced by a promissory note between the same parties. the mortgage creates and grants the mortgagee a security interest in the borrower-mortgagor's real property. Lengthy complex document that defines the parties rights and responsibilities
Judicial Foreclosure
A civil judicial proceeding to foreclose a mortgage; it involves service of process on all persons who are necessary parties, formal pleadings and a judicial trial
Receiver
A court appointed officer prior to the foreclosure who takes possession of the mortgaged real estate for the purpose of preserving it and collecting the rents. Standard for appointing a receiver: the mortgagee must show that hte security is inadequate and the establishment of some distinct equitable ground, such as danger of loss, waste, destruction or serious impairment of the property.
Receivership
A court appointed official who takes over the possession of the property once a mortgagee has defaulted, in between the period of default and foreclosure. Receiver collects rents and maintains property. Exists in lien and intermediate theory states. When mortgagees seek to place proeprty subject to a mortgage that is in default in receivership with a receiver appointed to colelc the rents and profits to be held to benefit the mortgagee after default and before foreclosure if a recevier is appointed hte reciever, will take possesison of mortgagged proeprty, and maintain the property and collect rents.
Bona Fide Foreclosure Purchaser
A foreclosure sale purchaser will be treated as a BFP and this take free of voidable defects if value has been paid and if the purchaser: -has no actual knowledge of the defects; -is placed on reasonable notice of the defects from recorded instruments; and -the defects are not such that a person attending would not know
General Rule regarding Lender's right to enter upon mortgagor's default
A mortgagee after default by a mortgagor has the right to possession of the mortgaged premises for the purpose of applying the rent and profits to discharge the mortgage debt.
Restatement Standard for Appointing a Receiver
A mortgagee is entitled to a receiver if: -the mortgage is in default; -the security is inadequate; -the mortgagor is committing waste.
Restatement Rule on Receivership
A mortgagee is entitled to the appointment of a receiver if: the mortgagee is in default under the mortgage; the value of the real estate is inadequate to satisfy the mortgage obligation; and the mortgagor is committing waste
Proper Party
A person or entity whose interest is not junior to the mortgage being foreclosed, but whose joinder nevertheless may be important to a successful foreclosure
Statutory Right of Redemption
A statutory process that permits the mortgagor and certain other persons whose interest were cut off by foreclosure ot redeem the fee title to the land form the person who purchased at the foreclosure sale; usually the redemption amount is the foreclosure sale price (plus interest and certain expenditures form the foreclosure sale); Period of redemption varies form state to state.
Limitations on Insurance Proceeds
A title theory state will allow the mortgagee to recover the full amount of the proceeds, provided that , they do not exceed the amount of the mortgage debt. A lien theory state will limit the mortgagee's recovery to the amount that the casualty has impaired the security.
How to protect against interest rate risk?
Adjustable rate mortgage - change in the rate becomes a change in monthly payment, so eliminates risk Hedging - can take out insurance to guard against the risk Prepayment penalty - guards against losing money due ot falling rates and rising value demand loan s - loans that can be recalled at any point due to rising rates due on sale clause - loan can be adjusted by interest rate if the borrower transfers
Foreclosure
An action to recover the amount due on the mortgage of real property where the owner has failed to meet the mortgage obligations, terminating the owner's interest in the peroprty which must then be sold to satisfy the debt.
Deficiency Judgement
An order declaring that a shortfall or deficiency against the mortgagor where the mortgagor still owes money even after the time of the foreclosure sale
Why does the mortgage theory matter?
Because it controls who is entitled to rents and profits generated by the land in a commercial setting following a mortgagor's default. Minority jurisdictions --> say that assignments and rents clause is useless unless mortgagee takes additional step to foreclose Majority jurisdictions --> say an assignments and rent clause will control and entitle mortgagee to rents
Under lien theory - ways mortgagee may acquire possession
By consent of the mortgagor, in good faith after purchasing at an invalid foreclosure sale; taking possession after mortgagor abandons the premises.
Duties of Mortgagee in Posesssion
Collect rents maintenance and repairs improvements compensation for services liability for Tort
Interest
Cost of money; consideration paid to the lender for the use of lender's money; monthly payments include more than just principal and interest like taxes and insurance
Deed of Trust
Created by: 1) a note - used by parties to memorialize the existence of the debt sometimes bond is used to create creditor/debtor relationship 2) deed of trust - similar to mortgage, sets forth the rights and responsibilities of the three parties (trustor, beneficiary, and trustee)
Remedies for Waste
Damages Injunction foreclosure
Failure to Cure
Failure to fix the default issue, could result in debt acceleration where payment in full may be expected or prepayment penalties might come in to play
Adjustable Rate mortgages
Financing Device in which the interest rate of the mortgage may fluctuate throughout the duration of the mortgage pursuant to the terms and conditions set forth in the mortgage. payments on ARMS fluctuate wildly during the term and may be indexed to a variety of measures like CPI or Fed Funds
Statutory Redemption
Following the foreclosure, the mortgagor or an assignee of the mortgagor is given the right to redeem the foreclosed property from the foreclosure by paying the purchaser at the foreclosure sale (during the redemption period) the amount the purchaser paid at the froeclosure sale, and not the amount of hte debt. Redemption sale price is the amount of purchase price only occurs after valid froeclosure sale
Judicial Foreclosure
Foreclosure accomplished by resort to the judicial process, with all the attendant benefits of juridical process reduces risk of defect deficiency judgement can be obtained - they are apporpiate when the court or some other officer of the court assesses the property's value rather than permitting deficiency judgements when a power of sale foreclosure is used and the property's value is established by a bidder who may or may not be an interested party
Minority Rule on Insurance Proceeds
If "restoration of the loss or damage is reasonably feasible within the remaining term of the mortgage with the funds received by the mortgagee, together with any additional funds made available by the mortgagor, and if after restoration the real estate's value will equal or exceed its value at the time the mortgage was made, the mortgagee holds the funds received subject to a duty to apply them, at the mortgagor's request and upon reasonable conditions, toward restoration.
Why do many mortgages prohibit junior liens on the property?
If the borrower has less equity in the building, he has less interest in maintaining the building recourse / non recourse loans recourse - lender can foreclose or go after borrower on debt if default (personal liability) non-recourse - can foreclose but cant go after the borrower (foreclosure only) second loan is more risky, so more likley to be done on a recourse basis they create more risk of complication regarding senioritty of the liens
Remedies available to Lender if Default begins
Immediately attempt to work out a deal mortgagee in possession provision assignment of rents provision receivership involuntary bankruptcy foreclosure
Due On Clauses
Includes due on encumbrance and due on sale clauses devices sed in real property security transactions to provide at the option of hte lender, for acceleration of the maturity of the loan upon the sale, alienation, or further encumbrance of the property
Adjustable Rate Mortgage
Interest rates are tied to an index. This index is sensitive to inflation rates. Types of Indexes: Treasury index - most common office of Thrift supervision costs of funds index regulates federally chartered thrifts
Title Theory
Legal title is in the mortgagee until the mortgage has either been satisfied or foreclosed. The mortgagee has the right to take possession of the property. Title remains with mortgagee unless and until the mortgagor pays off the debt secured by the mortgage. The payment of debt is divesting condition that causes title to shift back from the mortgagee to the mortgagor
Limitations on Recovering under Waste
Loan Balance - never more than balance owed on the mortgage debt Amount of Waste - reduction in market value impairment security -
Installment Land contract
Make payments toward the property as you go, rent to own essentially, high risk because if you default once you lose everything. Contract between the vendor and vendee pursuant to which the vendee agrees to pay a total amount of money over period of time to purchase property, and the vendor agrees to deliver a specified quality of title as defined in the contract.
Assuming The mortgage
Makes the transferee promise or covenant to pay off the preexisting mortgage pursuant to its terms and conditions, and his failure to do so results in a breach of that promise for which transferee is personally liable to the mortgagor to who promise was made places the mortgagor in the shoes of the mortgagee after paying the mortgage debt, and can allow the mortgagor to foreclose if not reimbursed.
Default
Many ways to be in default, the simplest is by nonp yament of the mortgage, or violating a term or condition of the mortgage
Intermediate Theory
Mix of both where lien theory exists, until default occurs than title theory takes over where mortgagee has the right to possession and to collect rents and profits at time of default. Valid in Ohio.
Reverse Mortgage
Mortgage designed for the elderly to use equity in their principal residence. Elderly withdraw from equity like a loan for living expenses, and pass on the loan to intestate takers. if the loan is not paid off, bank/mortgagee has the right to foreclose. If the loan reaches the max amount of the mortgage before the death of survivor, the loan will have to immediately be repaid, forcing mortgagor to sell the property.
Assignment of Rents Clause
Mortgage provision on a separate agreement that assigns to the mortgagee the rents and profits to the mortgaged premises as additional security for the mortgage obligation. American Common Law suggest s the assignment of rents creates only an inchoate security interest or pledge that is neither effective nor perfected until the mortgagee takes some affirmative steps such as obtaining the possession of the property, impounding the rent or securing the appointment of a receiver Majority View, The security of assignment of rents is: -effective against hte mortgagor upon execution; - it is perfected against third parties by recording; but the enforcement requires some affirmative steps such as having a receiver appointed, taking possession of hte property, mailed a notice to the mortgagor.
Beneficiary
Mortgagee. Obligations and identity of the beneficiary and the mortgagee are identical. Receives the payment from mrotgagor every month by way of the trustee.
Trustor
Mortgagor, trustor has the obligation to make the payment to the trustee for the benefit of the beneficiary (mortgagee) . Trustor agrees to transfer title to the real property to the trustee as security for the trustor's obligation to pay off the debt evidenced by the note.
Trustee
New party, that is supposed to be an independent third party bound by the provisions of the trust to act in a fiduciary duty to both the trustor and the beneficiary Role: collect and forward payments to the beneficiary; upon default to conduct the foreclosure sale to maximize interest of the beneficiary; interest lies in serving the beneficiary trustee must attempt to be impartial
Foreclosure Process
Notice of foreclosure to mortgagor; Equity of redemption in play here on part of mortgagor; Foreclosure sale; SOLD; statutory right of redemption in play now; if no redemption, purchaser er is entitled to title free and clear of all mortgages or other junior liens on the land.
The Purpose of Uniform Assignment of Rents Act
Provide a comprehensive framework to govern the creation, perfection, and enforcement of security interests in rents arising from mortgaged property.
Mortgagee in Possession Provision
Provision in mortgage that says upon default, lender is entitled ot take possession of the property; borrower could agree or court order to enforce mortgagee in possession provision; borrower continues to hold equity of redemption; mortgagee in possession is treated as quasi fiduciary and they have to account for all costs and expenses
Strict Foreclosure
Rarely used method of foreclosure by which a court orders the mortgagor to pay the mortgage debt within a judicially determined reasonable time; if the mortgagor fails to pay, the title vests in the mortgagee without a public sale
Strict Foreclosure
Similar to judicial foreclosure, except no sale is held. court just grants the mortgagor a period of time to pay off mortgagor; failure to do so within stated tiem period results in termination fo the mortgagor's equity of redemption and the transfer of the property's titled to the mortgagee primarily used to remedy an omitted junior lien holder rarely used method
Test used to determine Absolute Deed's validity or if equitable
Six Factors: Whether a debt exists; the relationship of the parties; whether the parties had access to lawyers; the sophistication of the parties; the adequacy of consideration; who was in possession of the property following execution of the deed; burden of proof belongs to party trying to defeat the meaning of side oral or written agreement to establish by clear and convincing evidence that the transaction was not what it appears to be and isntead should be treated legally as a mortgage
Mortgagee in Possession
Status conferred to a mortgagor who takes possession of a property post mortgagee default in a title theory state this occurs after default when the question becomes what is the mortgagee's liability to tenants and others in possession or using the property that is subject to the mortgage when the mortgagee takes possession of the premise prior to foreclosure
Equity Of Redemption
The equity of redemption is a right, according to this right a mortgagor who has been late with making his payments can satisfy his debt at any time until there is a valid foreclosure; right to repay debt even after default there is a policy concern about unequitable windfall to lender;
Treatment of Junior Lienholders in Foreclosure
The junior lienholders must be notified and given chance to bid at foreclosure sale. Junior's can protect their interest by bidding at the foreclsoure sale, up to the amount of the encumbrance they have on the property at time of foreclosuer
Lien Theory
The mortgagee acquires only a lien on the mortgaged premises and the mortgagor holds title on the property and equitable title until a valid foreclosure has taken place. A lien is created against the secured property upon the execution of the mortgage, and in the absence of a contrary provision, only the mortgagor is entitled to possession and rents generated from the property until a foreclosure sale is held and the mortgagor's equity of redemption and statutory redemption rights have foreclosed.
Limitations on Recovery of Damages for waste
The mortgagee's recovery may not exceed the least of: - the actual harm caused by the waste, which normally is either the cost of repair or the diminution in the property's vlaue; - the mortgage debt amount or, if foreclosure has already occurred, the amount of any unpaid deficiency. the mortgagee must apply all waste damages it recovers against the mortgage debt. Also, if the mortgagee entered a full credit bid and bought the property at the foreclosure sale, it cannot recover anything for waste, because its debt is consdidered to have been fully paid; -the amount by which the mortgagee's security has been impaired
Majority Rule on Insurance Proceeds
The mortgagor has no right to insist that insurance proceed best used for restoration of the property. the mortgagor will be permitted to apply the proceeds either toward restoration or the prepayment of the mortgage debt at the mortgagee's option
Power of Sale
The right to conduct a private power of sale foreclosure must be given to the foreclosure process without using the courts or any governmental body mortgagee is given power to carry out foreclosure process
Equity of Redemption
The right to cure the default of the mortgage and redeem the property in the hands of the mortgagee; until mortgagor's equity of redemption is foreclosed the mortgaogr has the right to cure the default by paying off the mortgage, plus interest and costs therein; If used it will cure defualt and extinguish the mortgage
What happens to preexisting mortgage when trasnferred?
The sale can generate enough money to enable the original mortgagor to pay the balance due to the mortgagee, thus paying off the mortgage the mortgagor may attempt to transfer her equity n the premises to the transferee without paying off the existing mortgage, thus, leaving the mortgage as a valid encumbrance against the property
Common law and Majority Rule regarding prepayment
There is no right to prepay a mortgage debt before it is due, unless the terms of the obligation expressly authorize prepayment.
Foreclosure Defects
Time of Sale notice requirement - must be given inadequacy of sale price - when the winning bid for property is well below fair market value of the property time of sale place of sale sale by parcel or bulk chilled bidding mortgagee purchases under a ppower of sale
ARM Loan Provisions
Times per year interest rates can change margin/spread amount annual cap - limits how much a rate can go up or down per year with respect to fully indexed rates Overall cap - interest rate will never go above a certain rate Catch up clause - if interest rates rise above an annual cap, mortgagee can catch up by increasing the rate agian next year even if the indexed rate has actually gone down or stayed the same prepayment clause - absolute righ to do it with FNMA/FHLMC loans Due on sale clause - protects security of loan aginast bad credit risks and protects interest rate yield.
Due on sale clause
Triggered at the time of transfer of property to third party, requires payment of entirety of the amount of the debt if the property is sold or transferred.
Restatement View on Assignment of Rents
Under this approach; a mortgage on rents becomes: effective against the mortgagor upon its execution and delivery to the mortgagee; and is perfected against third parties when it is recorded or when the latter receives actual notice of it.
Teaser Rates
Used by mortgagees to lure mortgagors into loans very low interest rate for first year then goes up substantially typically the full rate of the loan is one of the three above rates plus the spread. start rate is usually random. ways to pay the increase in rate: increase monthly payment stretch out maturity of loan negative amortization problem with this is that it allows mortgagors to be qualified for loan at teaser rate but unable to actually pay (predatory lending)
Absolute deed
Used to avoid mortgagor's right ot redeem from default. Where parties structure the transaction as a sale with the putative mortgagor transferring the title to the subject property to the putative mrotgagee by deed upon the recepit of debt. however, trough oral or written agreement the mortgagor gives the title back to the mortgagee who says they will give title back only once mortgagor pays off debt, although the deed is recorded as the mortgagees
Loan to Value Ratio
Used to determine whether the property securing the mortgage is worth enough to support the loan requested by the potential mortgagor. Formula --> compare amount of loan to value of property --> express the ratio as a percentage the higher the L2V ratio, the higher the risk of foreclosure helps protect the lender
Risk of Loss
WSho bears the risk if something happens between contract of sale and closing? Common Law of Equitable Conversion - Buyer is entitled to specific performance in sale of real property, so same for seller Massachusetts rule - creates implied condition that if the property is not as it was supposed to be at time of contract buyer is excused
Waste Doctrine
Waste is a tort - doctrine of waste is intended to protect the value of the real estate security from harm due to the mortgagor's acts or failures to act Examples: physical damage to the real estate security failure of the mortgagor to make reasonably necessary repairs on the property failure of the mortgagor to pay taxes failure of the mortgagor to comply with valid mortgage covenants detailing with the physical condition of the premises; failure of the mortgagor to remit rents to the mortgagee, when a valid mortgage on the rent has been enforced
Restatement on Waste
Waste occurs when, without the mortgagee's consent, the mortgagor: - physically changes the real estate, whether negligently or intentionally, in a manner that reduces its value; -fails to maintain and repair the real estate in a reasonable manner, except for repair of casualty damages, or acts of third parties not the fault of the mortgagor; -fails to pay before delinquency property taxes or governmental assessments secured by a lien having priority over the mortgage; -materially fails to comply with covenants in the mortgage respecting the physical care, maintenance, construction demolition, or insurance against casualty of real estate or improvements on it; or -retains possession of rents to which the mortgagee has the right of possession.
Deficiency Judgement Remedy
When a foreclosure sale yields less than the mortgage debt, the mortgagee may recover a judgement for the deficiency against anyone who is personally liable on the mortgage obligation.
Taking Subject to A mortgage
When a transfer is made subject to an existing mortgage, the grantee does not personally become liable to either the mortgagee or the mortgagor just taking subject to a mortgage does not make the transferee bound to pay, the y have made no promise to pay and the mortgagor seller is still on the hook to pay
Junior Mortgages
When borrower takes 2nd loan on a property to get full $; should say that it is subordiante to the first mortgage in the case of default by buyer and subsequent sale, 2nd lender can: -sit and do nothing - bid against 1st mortgagee; theyd have to pay off hte senior liens but then could use debt to credit towards the rest; - buy the senior mortgage - cut a deal with the other side
Omitted Junior Lienholder Problem
When junior lineholders are not notified of a foreclosure sale which is a problem because the junior lienholders interests could be detrimentally wiped out by the foreclosure sale. RULE - Omitted lienholder still holds a mortgage on the property and that since the other mortgages have been properly foreclosed, the omitted junior lienholder is now the holder of the sole and now senior mortgages on the property
Discharge
When the mortgage is extinguished by either being fully paid off or foreclosed upon
Lien
a claim against the property of another to secure the payment of a debt
Balloon payment
a final loan payment which is typically much larger than the preceding regular payments and which fully discharges the principal balance of the loan.
Subprime mortgages
a mortgage a lender would not normally make pursuant to most terms and conditions due to some deficiency on part of the mortgagor. hig risk, led to 2008 crisis.
Real Estate Financing Options
a mortgage, a deed of trust, land installment contract, absolute deed, adjustable Rate mortgage (ARM), junior/secondary mortgages, wrap around mortgage, reverse mortgage, subprime mortgage
interest
essential to any loan and financing, it is what you are paying the lender for allowing you to borrow the loan money. Payment plan of amortized mortgage will reflect this in the early payments where the majority of payment is going to paying off the mortgage. higher interest rate --> lower consumer purchasing power lower interest rate --> higher consumer purchasing power
amortization
financing device like a fully amortized mortgage will create a level monthly payment debt that fully amortizes the mortgage over a period of time, pursuant to which the mortgagor purchasing the house and making the monthly payments, will pay the same amount each month of the mortgage to the mortgagee.
Benefits of AoR clause
it imporves the mortgagee's security position by allowing the mortgagee to access the rents and profits without assuming the responsibilities that accompany mortgagee in possession status; the assignment of rents clause may help the mortgagee have a receiver appointed; the clause may give the mortgagee a stronger claim to rents in compairson to the mrotgagor's subsequent creditors or trustee in bankruptcy
Transfer
occurs when one party transfers her interest in the property to a subsequent party
Curing Default
period of time, usually thirty days, in which the mortgagor can cure the default and reinstate the mortgage
Goals of Foreclosure
protecting the equity of hte mortgage in the property; liquidating the mortgagee's security by the sale; and by competitive bidding creating the conditions for the propety to be obtained by the highest possible price for the mortgagor's benefit
Necessary Party
someone who must be joined in order to accomplish the purpose of foreclosure
goals of foreclosure - necessary and proper parties
terminate the rights of all itnersted parties who are subject to the mortgage being foreclsoed. give the foreclosure sale purchaser the title to the land as it stood at the time of the execution of the mortgagor
Power of Sale Foreclosure
the foreclosure sale is conduct by the prosper holding the power of sale; that person is most often a trustee under a deed of trust, but may also be a sheriff or public trustee in some states.
amortization factors
the frequency of payments; the term or period of repayments; the interest rate; the amount borrowed
insurance
the mortgagee is not only insured, the policy also provides that hte coverage "shall not be invalidated by an act or neglect of the mortgagor or owner of the within described property, nor by any change in title or ownership of hte property nor by occupation of the premises for purposes more hazardous than are permitted by this policy
Purpose of Foreclosure
to put the mortgagee back into its original shoes before the mortgagor had taken over the possession of the property.
Due on Encumbrance Clause
where the mortgagee has the right to accelerate the amount of the debt if the property is further encumbered without mortgagee's permission. Designed to insure that mortgagor does not further encumber the property which could and most likely would increase the risk of default and foreclosure.
