Unit 6: Instruments of Real Estate Finance

note and mortgage

, although executed separately, invariably has a copy of the note attached to it, or at least a reference to the note's conditions incorporated into the mortgage form. While a note by itself is legal evidence of a debt, a mortgage always needs a note in order to be a legally enforceable lien against the collateral.

A note generally includes all of the following provisions EXCEPT

A) date signed. B) amount and terms. C) purchase price. D) payment due dates. C

All of the following statements would be true about a contract for deed EXCEPT

A) signatures are required by buyers and sellers. B) it gives more foreclosure power to sellers. C) equal rights are provided to buyers and sellers. D) it directs buyers to take possession of the property. C

A promissory note for the purchase of real estate typically includes all of the following EXCEPT

A) the amount of the loan. B) the terms of repayment. C) a reference to a late-charge penalty. D) a list of items conveying with the property. D

To subordinate a real estate loan is to put it into a higher lien position.

False: second mortgage, or deed of trust, is a lien on real property that is second, or junior, in position behind an existing first lien.

release clause

In a deed of trust, the borrower (trustor) conveys property as collateral to a trustee that will hold title on behalf of the lender (the beneficiary) until the terms of the loan are satisfied. When the loan is paid in full, the trustee will reconvey the property to the trustor, as directed by the

defeasance clause

It "defeats" foreclosure by stating that the mortgagor will regain full, free, and clear title upon the repayment of the debt.

title theory

The lender could dispossess the borrower without notice at the first default of the loan agreement. No compensation was made for any monies already paid to the lender. This concept has evolved into the

granting clause

The portion of the mortgage that pledges the mortgagor's rights is called the

exculpatory clause

This clause stipulates that the borrower's liability under the loan is limited to the property designated in the legal description. In the event of a default, the lender is limited to the recovery of the collateral property only and cannot pursue any deficiency judgments against the borrower's remaining assets.

deed of trust

When a trust deed is used for financing real estate it is called

usury

a lender can circumvent the restriction by charging points or raising the principal amount to reach a desired effective yield. The imposition of usury limitations on real estate loans is currently obsolete.

second mortgage

a lien on real property that is second, or junior, in position behind an existing first lien.

due-on-sale clause

also known as a call clause or right-to-sell clause. This condition stipulates that a borrower "shall not sell, transfer, encumber, assign, convey, or in any other manner dispose of the collateral property or any part thereof, or turn over the management or operation of any business on the collateral property to any other person, firm, or corporation, without the express prior written consent of the lender."

Based on the doctrine of "first in time, first in right," lenders establish a priority lien position on the date their loan document is recorded, so it is MOST important to the lender that the borrower has not

borrowed money for the down payment

mortgagor

borrower

carryback loan

buyer who has insufficient cash for the entire amount of the required down payment will make an offer to purchase a property based on the condition that the seller carry back a portion of the sales price in the form of a purchase money second mortgage or deed of trust (called a

vendee

buyer/borrower

note

ccompanies a deed of trust includes the borrower's promise to pay the lender a designated sum under the terms and conditions specified. It also refers to the security of a specific deed of trust given to the trustee as collateral for the loan.

Any representations or warranties made by the seller must appear in the

deed of trust

contract for deed

does not have an accompanying note; it is a single, complete financing and sales agreement executed between a buyer and a seller. A contract for deed should not be considered a mortgage or deed of trust, even though the same basic conditions are incorporated into its form.

For the purchase of real estate, the promissory note is accompanied by

either a mortgage or a deed of trust

involuntary lien

imposed by law, such as liens for taxes or assessments, mechanic's (construction) liens, and judgment liens.

cross-defaulting clause

included in the junior mortgage provisions, a default on the first mortgage automatically triggers a default on the second mortgage.

nonrecourse clause

included in the sale's agreement, the seller of the security is not liable if the borrower defaults. The buyer of the security must take action to recover the unpaid balance of the loan from the borrower or foreclose on the collateral. However, if a real estate loan is sold with recourse, the seller of the security is obligated to reimburse the buyer if the borrower defaults.

subordination

involves placing an existing encumbrance or right in a lower-priority position to a new loan secured by the same collateral property.

encumbrance

is a right or interest in a property held by one who is not the legal owner of the property.

novation

is a technique whereby the seller of a property can end personal legal liability as the originator of a real estate loan when the loan is being assumed.

mortgagee

lender

In MOST cases, the trustee named in a deed of trust is selected by the

lender (beneficiary of the trust

power of sale

n the event of a default under a note for a deed of trust, borrowers have assigned their defenses to the automatic action of the laws governing foreclosure of the debt instrument, known as Under a deed of trust, the trustee may proceed with the sale of the collateral property after default without any court procedure as provided for in the

subject to

o format, a buyer may simply walk away from the property, forfeit any equity that has accumulated, and avoid any future responsibility in the transaction.

A borrower holds a loan in which no prepayment is allowed for a specified time from its inception. Then proportionate amounts of the loan become payable in advance according to an agreed-upon schedule, with some penalty imposed if the loan is repaid after three years but before its regularly scheduled time. This scenario is an example of all of the following EXCEPT

prepayment penalty. B) subordinate clause. C) prepayment privilege. D) lock-in clause. B

Deeds of trust, mortgages, and contracts for deed will be signed by all appropriate parties, acknowledged by a notary, and usually

recorded

When the purchaser of a real estate loan wants to be protected in the event the loan goes into default, the loan is sold with a(n)

recourse clause- Loans sold with recourse require the seller of the security to reimburse the purchaser of the security if the borrower defaults.

vendor

seller/lender

voluntary lien

such as financing instruments

lifting clause

that allows a borrower to replace an existing first mortgage without disturbing the status of the junior mortgage.

acceleration clause

that outlines the consequences of failure to pay on the part of the mortgagor. The acceleration clause usually states the following:

equitable right of redemption

the borrower's legal right to redeem property within some reasonable time after default.

assumed

the buyer, along with the original borrower and any intervening buyers who have also assumed the loan, becomes personally liable to the lender for its full repayment.

When two or more properties are pledged as collateral in one loan, a clause releasing a portion of the collateral is often included.

true-. A release agreement is needed to release part of the property without paying the entire debt at that time.

The doctrine of "first in time, first in right" generally gives the first mortgage lender a priority lien position, with the only exception being

unpaid property taxes

prepayment clause

usually allows a borrower to repay the balance of a loan at any time without any restriction or penalty.

lien theory

which recognizes the rights of lenders in collateral property as equitable rights, while borrowers retain their legal rights in their property. the lien theory allows a defaulted borrower to retain possession, title, and all legal rights in the property until the lender perfects the lien against the collateral property, according to legal foreclosure procedures that recognize the borrower's redemption rights. the lender has equitable rights and the borrower has legal rights

trustor

who grants rights to a trustee

trustee

who holds the property in trust for a beneficiary