real estate finance module 2

7. What does it mean to say that a loan is "due on sale?"

A due-on-sale clause is a clause in a loan or promissory note that specifies that the full balance of the loan may be called due upon sale or transfer ship of ownership of the property used to secure the note. The lender has the right, but not the obligation, to call the note due in such a circumstance.

4. What document creates a debt: a promissory note or a mortgage?

A mortgage DOES NOT create debt. A mortgage creates a security interest in a property that is pledge as collateral for a debt. The debt is created in the promissory note.

A "short sale" of real estate is:

A sale in which the proceeds from the sale are less than the balance owed on the loan secured by the property sold

5. Why is an acceleration provision in a promissory note important to a lender?

An acceleration clause is very important to a lender, because it gives them the power to demand and "accelerate" all remaining amounts owed under the loan agreement to be paid by the borrower. This typically happens when the borrower fails to make the required payments on the loan. The acceleration provision secures the idea that the lender will always get their invest money returned. This acceleration provision is very important if the lender is trying to seek legal action or foreclosure. Lenders must be careful how they word the acceleration provision. This may help or harm them in the future, if they needed to use the clause in legal matters. If the lender did not put an acceleration clause, then they could only sue for the missing payments and not get paid for the entire remaining balance. If acceleration provision is not included, the lender would then have to wait to be paid based on seniority.

9. All other things equal, would you prefer to borrow money using a recourse or non-recourse loan? Why?

As a borrower, I would definitely prefer a non-recourse loan, because in the case of default, the lender would only be able to take legal action regarding the property involved in the loan as compensation. A recourse loan would give the lender access to any and all of my personal assets to recover the debt, even assets that had no involvement in the loan. From a lender's point of view, I would probably prefer issuing a recourse loan, as it would provide some security or guarantee for compensation in the event that the borrower defaults on the loan. Sometimes, the collateral in a non-recourse loan does not always fully compensate for the amount lost or defaulted, so having another outlet of repayment to fully compensate would provide security.

3. As a lender, under what conditions would you be amenable to negotiate with a mortgagor who is requesting a short sale?

As a lender, I would be amenable to negotiate with a mortgagor who is requesting a short sale under the condition that I would likely receive less money in the event of a foreclosure as opposed to agreeing to a short sale.

8. Is loan "prepayment" a right or a privilege? Why?

I rarely ask "opinion" questions. Prepayment is a right if it is not prohibited in the language of the loan documents.

2. If you are risk-averse, would you ever consider being a second mortgage lender? Why or why not?

I think a better answer here would involve a discussion of risk and return. As long as the lender is compensated for the risk, the loan would be a good investment. Right?

10. Based on the discussion of lien priority, what does the idiom "first in time is first in line" mean if there are multiple mortgages in place on a parcel of real estate?

Like the idiom, the concept of seniority is enforced to prioritize secured interest of a given piece of real estate that has more than one current mortgage in place. Upon default, the initial, senior mortgagee is entitled to priority restitution of the mortgage loan's remaining debt. The secondary lender can then collect the remaining balance to satisfy the mortgagor's debt if the parcel was sold at a surplus of the senior loan. If further junior lenders are in line for collection, any remaining amounts will be distributed by seniority. An exception to this seniority is when property tax liens are established as they take priority over all other liens. Additionally, tax liens, if unpaid, have the potential to erase any other existing liens on the property if the tax authority proceeds to foreclosure.

A mortgage is BEST defined as a legal document that:

Names real estate as the security or collateral for the repayment of a loan

A senior mortgage holder is owed a mortgage balance of $140,000 and brings a foreclosure suit which includes all junior claimants in the suit. If the senior mortgage holder purchases the property for $140,000 at the foreclosure sale, what happens to the claims of the junior claimants?

The liens of the junior claimants are extinguished, but the debt owed to the junior claimants is unaffected

6. To whom is a release of lien provision in a promissory note most important: mortgagee or mortgagor? Why?

The release of lien provision in a promissory note is most important to the mortgagor. The mortgagee provides a promissory note that details the debt that exists between the mortgagor (borrower) and mortgagee (lender), usually using real estate as collateral. A release of lien allows the mortgagor to eliminate its security interest in the property once the debt is paid in full. A release of lien is most important for a mortgagor because it is an agreement that outlines that they no longer have to pay a debt to the mortgagee.

is a contract provision that allows a lender to require a borrower to repay all of an outstanding loan if certain requirements are not met

acceleration clause

clause giving the lender the right to sell the note to another party without approval from the borrower

assignment provision

conditions under which the lender will allow the borrower to transfer the property to another owner and let the new owner become responsible for remaining loan payments

assumability provision

arrangement where a mortgagee and mortgagor may negotiate and agree to voluntary conveyance of ownership whereby the mortgagor grants title to the property to the mortgagee in exchange for forgiveness of the debt

deed in lieu of foreclosure

borrower's failure to perform one or more covenants under the terms of the note

default

Which of the following is not an alternative to foreclosure in the event of a loan default by a borrower?

due diligence

is an investigation, audit, or review performed to confirm the facts of a matter under consideration

due diligence

property owner who has pledged the property as a security for a debt must repay that debt before transferring title to a new owner

due on sale

A clause which specifies that the mortgagee will obtain and maintain property insurance is typically included in a mortgage.

false

A mortgage is the same thing as a note.

false

A non-recourse loan is one in which the borrower is personally liable for payment of all amounts due under the terms of the note.

false

It is a federal law that a mortgage must be recorded to be valid.

false

Junior liens are eliminated by a voluntary conveyance of a property to the senior mortgagee.

false

Prepayment of a loan without penalty is a right of all borrowers.

false

when a lender pursues legal action against the borrower to recover its funds if the borrower does not honor the promises in the promissory note

foreclosure

a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation

lien

the date on which all remaining amounts are due

maturity date

one party (mortgagor) pledges real estate to another party (mortgagee) as security for a debt owed by the first party to the second party; document that creates a security interest in the pledged property for the lender

mortgage

used to refer to a situation in which a property owner (borrower/mortgagor) receives a lone of money from a lender/mortgagee in exchange for a promise to repay that money over time and pledges the property as collateral for the debt

mortgage loan

a form of secured financing; allows the lender to seize the collateral and any other assets the borrower has if they default

non-recourse loan

explanation of how payments received from borrower will be applied (first to any late charges/fees/penalties, then to interest, then to principle reduction

payment application provision

What is usually executed at the same time as a mortgage and creates the obligation to repay the loan in accordance with its terms?

promissory note

document that serves as evidence that a debt exists between a borrower and a lender

promissory note

most homeowner mortgage loans allow the borrower to prepay all or part of the loan amount earlier than specified in item, but most other mortgage loans prohibit prepayment or require the borrower pay a penalty

provision for or against payment

to mold again; to set down or present in a new or different arrangement

recasting

a form of secured financing; allows the lender to seize the collateral and any other assets the borrower has if they default

recourse loan

agreement by lender to release or extinguish its security interest in the party when the loan is fully repaid

release of lien provision

aka a release of lien, a document filed when the loan has been paid in full

release of mortgage

gives creditor rights in property of the protection of a debt from the borrower (may include a security agreement for personal property, or a mortgage or a deed of trust on real property)

security instrument

the owner sells the property to a buyer for less than the amount owed to the lender and the lender releases its mortgage and accepts a lesser amount than is actually owed on the loan

short sale

A clause which specifies that the mortgagor will pay all property taxes and other charges assessed against the property, even if theses charges have priority over the mortgage is typically included in a mortgage.

true

A due on sale clause which specifies that the mortgage can accelerate the debt if the property is sold without the mortgagee's permissions is a typical clause in a mortgage document.

true

A second mortgage is a junior lien mortgage that might be used to bridge the gap between the price of a property and the sum of the first mortgage and down payment.

true

Unless stated otherwise, the borrower is personally liable for payment of all amounts due under the terms of the note.

true

When a deed is given in lieu of foreclosure of the mortgage, the mortgagor no longer has an obligation to pay the mortgage note.

true

the lender and borrower renegotiate terms of the loan in a way that will allow the borrower to retain ownership of the property, keep the modified loan in place and continue making payments

workout