Real Estate Course Level 14

Chapter 2: Promissory Notes

After completing this chapter, you will be able to: . Describe the role of a promissory note in real estate financing. . Identify the typical information contained in a promissory note. . Explain what is meant by a negotiable instrument and how that ties the promissory note back to the secondary mortgage market. Why It Matters: The promissory note is a keystone of real estate financing. Without it, a borrower would not be able to obtain a loan to purchase property. And since we have already established that most home buyers require financing to accomplish this endeavor, the importance of the promissory note is self-evident. Your responsibility, as a real estate professional, is to be familiar with this instrument of finance so that you can answer any questions your clients might have about the promissory note they will be signing and obligating themselves to for up to 15 to 30 years of their lives. (Wow, that does sound important, doesn't it?!) Key Terms: . promissory note . negotiable instrument

Strict Foreclosure: The Chart

If you thought the last foreclosure chart was simple, get a load of this one. Easy to remember, am I right? Strict Foreclosure ---> Notice of Default ---> Lender Lawsuit ---> Court-Imposed Redemption Period ---> Lender Title ---> Possible Deficiency Judgment

The Takeaway

Because it can be a costly and complicated process, a good foundational understanding of foreclosure is critical for anyone making a career of real estate. In Chapter 5, you learned: ✅ The lender's perspective on foreclosure. ✅ The causes of default and the impact of foreclosure. ✅ The statutory influence on foreclosure. ✅ The terminology of foreclosure. ✅ How debt priority is created Now that you have a solid, foundational understanding of foreclosure, in the next chapter, you'll be taking a walk down the different paths of foreclosure that exist. But don't worry, you won't get lost... not with me as your guide!

When Is a Mortgage Really a Mortgage?

Mortgage is a term that has a somewhat narrow or specific technical definition, but it is also used in casual conversation in a way that has a broader, almost generic meaning. Technically, a mortgage is a specific type of security instrument wherein the borrower retains title to the property during the life of the loan. The lender's interest is protected by the placement of a mortgage lien, which is an encumbrance that remains on the title until the loan is paid off. Casually, though, the term mortgage is used by industry professionals, the public at large, and even this course as convenient shorthand for the loan agreement a borrower and a lender enter into — a loan agreement that is comprised of both a promissory note and a security instrument, whether that security instrument is a mortgage, a deed of trust, or something else altogether. I'll do my best to make it clear from the context of our discussion whether mortgage is being used in the more narrow, technical sense or more broadly as a synonym for home loan agreement.

Case Study: Cari's Condo Can-Do

Part 1 Cari's found the perfect downtown high-rise condo with great views and a bus stop that puts her place of work just a five-minute ride away. She's ready to buy, but like many folks, she must finance the deal. Fortunately, Cari's got good credit and a willing lender, who presents her with some documents to sign. Question: One of the lender's documents that Cari was asked to sign contains all of the terms and conditions of her loan and will serve as evidence of her commitment to repay the loan. What is the name of that document? Answer: a promissory note.

Topic of Default with Matt

When you miss payments on the loan. Meaning you have violated the loan terms. Also pay attention to any special provisions in your mortgage. Most lenders will require you to have insurance on your house. Some mortgage companies will help make the insurance payment for you.

Quiz Level 14 c) entry and possession. Foreclosure by entry and possession is a nonjudicial form of foreclosure that depends on the borrower's willingness to grant the lender access and occupancy of the property subject to foreclosure.

Which nonjudicial form of foreclosure depends on the borrower's willingness to grant the lender access and occupancy of the property subject to foreclosure? a) strict foreclosure. b) possession and lis pendens. c) entry and possession. d) entry and foreclosure.

Quiz Level 14 d) whether or not they pledge the property to secure the note. A mortgage and trust deed each include a pledge of the property to secure the promissory note, provisions or remedies for default of loan by borrower, and the opportunity to record lender's interest in the property. They differ in regards to who holds title to the property during the loan, the number of parties involved, and the ease and expense of foreclosure.

Which of the following is NOT one of the differences between a mortgage and a trust deed? a) who holds title to the property during the loan. b) the number of parties involved. c) ease and expense of foreclosure. d) whether or not they pledge the property to secure the note.

Facts of a feather a) subordination clause. yes

comes into play after a foreclosure sale. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather a) subordination clause. yes

has an affect on debt priority a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather c) defeasance/satisfaction of mortgage clause.

has an affect on debt priority. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather b) acceleration clause.

is not triggered until full repayment of loan is made by the borrower. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather c) Entry and possession. yes

witnesses are required. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather a) subordination clause.

. agreed to by a lender if they feel it increases value of collateralized property . comes into play after a foreclosure sale . agreed to by a lender if they feel it increases likelihood of repayment of their loan . has an affect on debt priority a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather d) due on sale/alienation clause. yes

. if lender approves assumption, they can also raise the interest rate . not allowed in FHA and VA loans . is intended to prohibit assumption of loan without lender approval . is triggered by attempt to sell or convey the property a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather c) defeasance/satisfaction of mortgage clause. yes

. is not triggered until full repayment of loan is made by the borrower . acknowledges full ownership rights of borrower have been achieved . results in the removal of the lender's lien or the conveyance of the title to the borrower . official lender declaration that the terms of the loan agreement have been met a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather b) acceleration clause. yes

. makes entire loan due immediately. . lacking this, a lender would have to sue borrower for each missed payment individually. . if borrower cannot make full payment per this clause, the lender may initiate foreclosure. . is triggered by default of any of the terms of the agreement. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather c) Entry and possession. yes

. the lender access and occupancy of the property with permission of the borrower. . witnesses are required. . requires complete agreement by the borrower to the process. . primary path of foreclosure for just one state. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Level Assessment b) pay off the loan in full or in part prior to the due date without any penalty. A prepayment clause allows the borrower to pay off the loan in full or in part prior to the due date without any penalty.

A prepayment clause allows the borrower to: a) transfer ownership of the property subject to the loan without prepaying the loan. b) pay off the loan in full or in part prior to the due date without any penalty. c) stop foreclosure proceedings by prepayment of the balance prior to auction. d) lower interest rate of the loan by partial prepayment of the remaining balance.

Level Assessment a) the lender and the borrower. A promissory note is a contract between the lender and the borrower.

A promissory note is a contract between which two parties? a) the lender and the borrower. b) the lender and the trustee. c) the lender and the broker. d) the trustee and the borrower.

(F) Level Assessment b) debt. A promissory note is evidence of debt. It is the borrower's promise to repay the loan. It is used in conjunction with a security instrument that secures the loan documented in the promissory note.

A promissory note is evidence of: a) satisfaction. b) debt. c) collateral. d) security.

Short Sale

A short sale is similar to a deed in lieu of foreclosure in that it's a mutually agreed-upon alternative to foreclosure. With a short sale, a buyer is found who is willing to purchase the property for less than the outstanding loan balance, and the lender is willing to approve that sale. The same concerns regarding junior lien holders that were mentioned in our discussion of deed in lieu of foreclosure apply here, as well. Their cooperation will be required and addressed in order to complete a short sale. And, as is the case with deed in lieu of foreclosure, the borrower should attempt to negotiate the issue of deficiency judgment and have the lender document that in writing prior to the short sale. Although initially slow to accept the concept of a sale price less than a debt amount, lenders have eventually come to see short sales as a way to cut their losses. Fannie Mae and Freddie Mac have short sale guidelines for their loans as do most private lenders. A hardship letter indicating the borrower's inability to fulfill the loan's terms with supporting documentation is typical. Additionally, laws overseeing the process will vary from state to state. The short sale process can be disrupted in mid-course if the borrower were to declare bankruptcy or if the lender were to decide to pursue foreclosure. In other words, it's not a done deal until the deal is done. Short sales are legal in Georgia and do happen.

Chapter 6: Foreclosure Paths

After completing this chapter, you will be able to: . Describe the different paths a foreclosure can take Why It Matters: There are a handful of different types of foreclosure, each entailing specific steps along a path — actions and requirements — that the lender, the borrower, and, yes, even the real estate professional need to be aware of. Although you will certainly want to prioritize your understanding of how foreclosure works in Georgia, there is value in familiarizing yourself with the foreclosure paths that are common to other parts of the country, as well.

Chapter 3: Security Instruments

After completing this chapter, you will be able to: . Describe what the purpose of a security instrument is and its connection to a promissory note . Explain the difference between lien theory states and title theory states and how those differences influence the choice of security instruments used . Discuss the use of mortgages and deeds of trust as security instruments and identify the parties involved in their use. Why It Matters: As mentioned earlier in the level, most people who buy homes need to finance them. And those who do will typically want the lowest interest rate possible, which is exactly where security instruments come to the rescue. All things being equal, a secured promissory note is going to have a much lower interest rate than an unsecured note. So, Yoni, in your ongoing quest to become the resident expert (and expert on residences) your clients deserve, you're going to want to know your way around security instruments. Key Terms: . lien theory state . title theory state

Chapter 1: The ABCs of Mortgage Loans

After completing this chapter, you will be able to: . Discuss the use of property as security in real estate financing. . Explain what documents make up a mortgage loan. . Describe the process and importance of recording a mortgage. Why It Matters: Unless you have the good fortune of dealing only with the ultra-rich, most of your clients looking to buy a home will require some form of financing to make their American dream come true. (Even many of the "one-percenters" will use financing because of the tax benefits involved.) That being the case, you will want to familiarize yourself with the ins and outs of the instruments of financing commonly used in real estate. While you will not be drawing up loan documents — that falls exclusively to those in the lending business — you do want to be able to speak fluently on the subject, answer general questions, and point your clients in the right direction when it's called for. It's all part of becoming the well-rounded licensed real estate professional I know you want to be. Key Term: . hypothecation

Chapter 5: Foreclosure Basics

After completing this chapter, you will be able to: . Understand the lender's perspective on foreclosure. . Identify causes of default and the impact of foreclosure. . Discuss the statutory influence on foreclosure. . Understand the terminology of foreclosure . Explain how debt priority is created Why It Matters: Sure, Yoni. We all would like every story to close with a happily-ever-after line, right? But the reality is that some stories and dreams get derailed, including the American dream of homeownership. Foreclosure, a.k.a. the "f-word" of real estate vocabulary, is a real and present risk for lender and borrower alike. But the more you can learn about foreclosure, what triggers it, how it is implemented, and what rights, defenses, or avenues a borrower has when confronted with it, the better prepared you will be to help your clients understand it — or better yet — avoid it altogether.

Chapter 4: Mortgage Provisions

After completing this chapter, you will be able to: Discuss the different provisions that commonly appear in a mortgage loan agreement. Why It Matters: When I speak of mortgage provisions, I am using the term mortgage in the broadest sense, meaning the loan agreement that is made up of a promissory note and a security instrument that pledges the property as collateral for that note. And although there are a couple of different types of security instruments that can be used in conjunction with a promissory note, that's okay because many of the provisions and clauses used in mortgage loans featuring one type of security instrument are similar to what you'll find with mortgage loans employing another type of security instrument. If there are provisions discussed that are specific to a particular type of security instrument, I'll make a point of saying so at that time. You're not a lender, so you're not going to create these documents. You're not a lawyer, so you're not going to practice contract law. But as a licensed professional, you should still understand what these common provisions do and under what situations your clients can expect to see them. Key Terms: . acceleration clause . due on sale/alienation clause . defeasance

Nonjudicial Foreclosure (Power of Sale)

Also referred to as sale by advertisement, this popular form of nonjudicial foreclosure requires the presence of a power of sale clause in the security agreement at the time of signing. The clause pre-authorizes the lender to foreclose and sell the property without court oversight or having to file a lawsuit. This is the predominant path of foreclosure for over half of the states in the nation, including Georgia. The process begins with the filing of a notice of default by the lender and the advertisement of sale in a local paper. After that comes the window of opportunity for the borrower to exercise their equitable right of redemption. Next, the sale must be carried out per procedures as set forth in state statutes, which will vary from one state to another. Following the sale, the deed or a certificate of sale (if statutory redemption is available) is awarded to the purchaser. Borrower Benefits: Power of sale foreclosure offers a couple of significant benefits to the borrower: . Some states prohibit deficiency judgments in conjunction with power of sale foreclosures. Where not prohibited, the lender would need to go to court to seek one. . A borrower retains the right to file a lawsuit and seek judicial review of the process if they so desire. Borrower Disadvantages: . A fast, efficient process = losing the property sooner than with other forms of foreclosure. . If judicial review is desired, the borrower must incur the costs of filing a lawsuit. . Some states, like Georgia, eliminate statutory redemption in conjunction with power of sale foreclosures. . Some states allow the lender to get away with relatively little by way of notice regarding the default and subsequent sale. On that last point, if there are junior lien holders on the mortgage or deed of trust, they may miss notification of the sale and lose their rights and interests in the property. To guard against this, the prudent junior mortgagee will file a request for notice of default when they record their lien.

Similarities and Differences Between Security Instruments

Although you may have already begun to pick up on the similarities and differences between the security instruments used in lien theory and title theory states, I wanted to pull them all together in one place for you: Similarities: A mortgage, a trust deed, and a security deed all include: . A pledge of the property to secure the promissory note. . Provisions or remedies for default of the loan by the borrower (more on this to come!). . The opportunity to record the lender's interest in the property Differences: A mortgage, a trust deed, and a security deed differ in regards to: . Who holds title to the property during the loan. . Number of parties involved. . Ease and expense of foreclosure.

Security Deeds

As you now know, Georgia is a title theory state. And, as such, it favors its own, unique, "title theory friendly" security instrument, the security deed, over that of a mortgage. (Mortgages are legal in Georgia, but are not often used. In fact, trust deeds, while legal, are fairly rare, too.) Why not just use a trust deed like most title theory states do? Three's a Crowd: The rationale you'll hear in favor of the security deed over the trust deed has to do with concerns regarding the lack of a natural third party trustee role or position in the most popular closing environment used in the state of Georgia: an attorney's office. With a trust deed (a little review here), you've got three parties: 1. The borrower (trustor) 2. The lender (beneficiary) 3. The trustee With a security deed, you have two parties: 1. The borrower (grantor) granting the deed 2. The lender (grantee) receiving the deed There is NO THIRD PARTY with a security deed. Lender Gets Title: With a security deed, while legal title is conveyed to the lender (not a naked title held by trustee!), the borrower enjoys the typical rights of ownership. The title conveyed to the lender, however, is a defeasible title, meaning that it can be defeated by the borrower when the loan is paid in full — which will result in the title being conveyed to the borrower at that time. Security Deed Provisions: Every security deed in Georgia will include provisions containing the following declarations: . That this instrument secures the specific loan . That, in the event of default, the lender is authorized to sell the property via a nonjudicial foreclosure process that conforms to state regulations . That the lender will cancel the deed upon satisfaction of the loan Other provisions common to many forms of security instruments can be found in Georgia's security deed as well. More on those in the next chapter!

Default: The Trigger for Foreclosure

Default is the failure of a borrower to perform according to one or more of the terms and conditions of their mortgage loan agreement. The default could be in relation to the promissory note or the security instrument. It could be a failure to make a payment or a failure regarding some other non-financial aspect of the agreement, like keeping the property properly insured or in good repair. Whatever the cause of default, a lender has the right to foreclose when there has been a failure to perform. In an earlier level, I gave you a quick reference list of the primary causes of default, all of which were even more thoroughly covered in our more recent discussion on mortgage provisions — particularly those collectively known as borrower's covenants. Jump back one chapter if you would like to review those.

Deed in Lieu of Foreclosure and Short Sale Comparison

Here's a quick side-by-side comparison of the two alternatives to foreclosure that involve the borrower relinquishing the property. Deed in Lieu Foreclosure --> Borrower Deeds Property to Lender --> Lender Cancels the Debt --> Deed and Cancellation Are Recorded --> Lender Takes Possession. Short Sale --> Lender Agrees to Sale Price Less Than Debt --> Lender Negotiates With Other Lienholders --> Lender Cancels Debt --> Sale is Completed.

Security Instrument Comparison Chart

Here's a snappy little chart that you can refer back to for a quick comparison of the primary security instruments used in property loan agreements, including the one unique to Georgia!

Level Assessment d) Both are foreclosure alternatives, with a short sale providing lenders sale funds while a deed in lieu of foreclosure conveys the deed to the lender.

How are a short sale and a deed in lieu of foreclosure both alike and different? a) Both are foreclosure alternatives, with a deed in lieu of foreclosure providing lenders sale funds while a short sale conveys a deed to the lender. b) While both satisfy the debt, a short sale is a foreclosure alternative while a deed in lieu of foreclosure is technically still a form of foreclosure. c) Neither is considered an alternative to foreclosure but simply a form of foreclosure, with the short sale being the one that does NOT convey the deed. d) Both are foreclosure alternatives, with a short sale providing lenders sale funds while a deed in lieu of foreclosure conveys the deed to the lender.

Getting Satisfaction

I've hinted at what happens with the different types of security instruments in the event of default, but I haven't said all that much about what happens when the borrower pays off the note. Since we'll be diving more deeply into the topic of foreclosure before too long, and this is a much more pleasant outcome, I should at least say a few words about this happy event. When a Mortgage Is Paid in Full: When a mortgage is used to secure a note and the note is paid in full, a mortgage satisfaction is issued and recorded to clear the title of the lien. When a Deed of Trust Is Paid in Full When a deed of trust is used and the note is paid in full, the lender authorizes the trustee to execute what is known as a deed of reconveyance or deed of release. As with all security instruments, this needs to be recorded to clear the title. When a Security Deed Is Paid in Full When a security deed is used and the note is paid in full, the lender executes a reconveyance or deed of release. As with all security instruments, this needs to be recorded to clear the title.

Level Assessment b) to make the loan immediately payable in full. The acceleration clause in a mortgage allows a lender to make the loan immediately payable in full in the event the borrower defaults on a single monthly payment.

If a borrower defaults on a single monthly payment, the acceleration clause allows the lender the right to do what? a) to accelerate foreclosure procedures. b) to make the loan immediately payable in full. c) to charge a late fee on the missed payment. d) to increase the interest rate on the loan balance.

Lien Theory and Title Theory States

In an earlier level, we talked about how most (not all) states fall into one of two classes: lien theory states or title theory states. A few states operate under variations of these theories or a combination of the two. Title Theory States: Title theory states are those that convey the title to the lender or, more commonly, to a third-party trustee (operating on behalf of the lender) for the life of the loan. Because the title to the property rests with the trustee, rather than with the borrower, foreclosure procedures are usually less complicated and less costly. A nonjudicial foreclosure path is available to the lender because, in signing the note and trust deed, the borrower has waived their right to a court hearing. There are three parties involved in the loan agreement of a title theory state: the borrower (trustor), the lender (beneficiary), and the trustee, who holds the title on behalf of the lender. When a title is held by a third-party trustee, it is said to be a naked title, which is a colorful way of saying that the trustee is given the "bare" essentials of rights needed to carry out the terms of the trust. Lien Theory States: Lien theory states are those that employ security instruments allowing the borrower to retain title while the lender places a lien on the property to secure the loan. Because the lender doesn't hold title during the loan in a lien theory state, in the event of default, if the lender wants to take possession of the property, it takes a little more effort, and a judicial foreclosure is required. There are two parties involved in the loan agreement (mortgage) of a lien theory state: the borrower (mortgagor) and the lender (mortgagee). The Influence of a State's Theory on Security Instruments: A state's "theory" has a direct bearing on the security instrument used. In lien theory states, the security instrument of choice is usually a mortgage that allows the borrower to hold title to the property while the lender places a lien on the property that is either removed once the loan is repaid or is used to foreclose in the event of default. In contrast, title theory states rely primarily on a trust deed (a.k.a. deed of trust) security instrument, which conveys the title to a third-party trustee to hold on behalf of the lender (beneficiary). If the loan is repaid, the lender instructs the trustee to convey the title back to the borrower. Recap: . Lien theory states tend to favor mortgages. . Title theory states tend to favor trust deeds (deed of trust). Security Instrument in Georgia Alert! 🍑 Georgia is a title theory state, but the predominantly used security instrument is NOT a trust deed but rather a security deed. Mosey on over to the next screen for more juicy insider facts about Georgia's security deeds!

Theory = Foreclosure Type

In earlier discussions about lien theory states and title theory states, I told you that a state's "theory" influenced what type of security instrument would be used. Lien theory states tend to use mortgages, while title theory states more commonly use deed trusts. (In Georgia, a security trust is the more popular title theory security instrument!) More than anything else, a state's theory and its choice of security instrument are reflective of that state's attitude about foreclosure. After all, both lien theory states and title theory states employ hypothecation — the pledging of an asset as collateral to secure a loan for the purchase of that asset. Both allow the borrower to enjoy nearly all the rights of ownership even as they work to pay off the loan. Where they differ is in their approach to foreclosure, in the balance of power of the lender vs. the borrower in the event of default, in the expense and ease of the foreclosure process, and in the degree of judicial involvement. And just how does the choice of security instrument influence the degree of judicial involvement? Well, with a deed of trust, the title is either in the hands of the lender or a trustee from the beginning. No judicial help is needed to wrest it from the borrower. But with a mortgage, the title starts off in the borrower's name, so part of the effort to protect the lender in the event of default is to take the legal action necessary to cut off the borrower from the title of the mortgaged property, and that legal action takes judicial involvement.

Foreclosure Terminology

In preparation for your walks down the paths of foreclosure, I want to share a few terms with which you'll want to be familiar. Some have already come up in our conversations about mortgage provisions, but it won't hurt to touch on those again. Lis Pendens: A lis pendens is a written notice of a pending legal action. It is generally required as a step in a judicial path to real estate foreclosure, wherein the lender provides notice that a lawsuit has been filed regarding the title and/or ownership interest of the property. This notice is typically filed and recorded in the county in which the property is located. Deficiency Judgment: When a foreclosure sale takes place, and the funds from that sale do not cover the loan amount, the resulting shortfall is known as a deficiency. A deficiency judgment, then, is the right that a foreclosing party has to pursue a personal judgment against a borrower for the amount of the deficiency. For example, if Nancy owes $400,000 on her oceanfront condo and the foreclosure sale brings $325,000, then the deficiency would be $75,000. The right to pursue a deficiency judgment will vary from state to state. If allowed, the circumstances under which it can be pursued will also vary from state to state. And even in states where it is allowed, the specific security instrument used might prohibit it. If a court confirms the sale, Georgia does allow a lender to pursue a deficiency judgment. Equitable Redemption: Equitable redemption or equity of redemption refers to a borrower's right to redeem a loan in default by paying the debt in full, including interest, fees, and expenses. The window of opportunity to do this comes after acceleration (remember that clause?) is initiated but before the foreclosure sale. This common law right is available to all borrowers in all states. Right to Reinstate: Whereas a right of equitable redemption requires that the accelerated loan be paid in full, a right to reinstate grants the borrower the opportunity to bring current the delinquent loan — including interest, fees, and expenses — in one payment in order to resume paying the loan going forward as would have been the case in the loan's pre-accelerated form. Some states provide for this, up until a certain point in time, after the default occurs. But even in those states that do not grant this right, the security instrument might contain language that does. Statutory Redemption: Statutory redemption refers to the right that some states give borrowers to redeem a property within a certain timeframe after a foreclosure sale has taken place. Again, this redemption is accomplished by paying off the loan in full, including interest, fees, and expenses. Georgia does NOT recognize statutory redemption.

The Promissory Note: A Closer Look

In the previous chapter, and in another level, we talked about promissory notes. So, yes, what we're going to cover here will be somewhat of a review. But what follows should both reinforce what you have already learned as well as amplify your understanding with new and complementary information. Promissory Note Defined: A promissory note is a negotiable finance instrument used in a typical mortgage agreement. It is evidence of a debt and a promise to pay that debt. The note, as it is sometimes called, can be secured or not. If secured, the mortgage agreement containing the promissory note will also feature a security instrument, usually a mortgage or a deed of trust that pledges the property being purchased as the collateral for the note. The promissory note doesn't simply make a blanket promise to repay the loan, but contains the specific terms and conditions of the loan, including the interest rate to be earned by the holder of the note. Negotiable Instrument Defined: A promissory note is a negotiable instrument. What exactly does negotiable mean in this context? Well, it means that the note is transferable and assignable. Which is to say that the present-day note holder is legally entitled to demand payment per the terms of the note, regardless of whether or not they were the one who had originally entered into the note with the borrower. The original lender has the right to sell the note at any point to another party, who becomes the holder in due course. Once the note has been transferred, the holder in due course has full legal title to the promissory note and can enforce — but not change — the original terms of repayment. If you have ever owned a home, it is likely that you have personal experience with this. The transfer of promissory notes is a common experience of mortgagors (borrowers). Every time a borrower is informed of a new mortgage company taking over their loan, they are being informed that the promissory note has been transferred. In fact, it's not unheard of that a borrower would receive notice of a change in mortgage companies before their first monthly payment is due. When a promissory note is transferred from one note holder to another, that sale is taking place on the secondary mortgage market. If you feel the need to brush up on that, don't hesitate to take a detour or loop back to the level that discusses the primary and secondary mortgage markets. I'll be right here, eating tacos while I patiently await your return.

Level 14: Instruments of Finance

In this level, we'll be discussing the finance instruments used in the purchase of real estate. Objectives: By the end of this level, you will be able to: . Describe the various legal documents used in financing property, and explain their common provisions. . Describe the foreclosure process, the different ways it is handled, and the alternatives to foreclosure. . Describe the duties of a mortgagor. Overview: This level is approximately two hours long, which is the amount of time it takes to change 40 dirty baby diapers. But you know what they say, "Time flies when you're having fun!" There are seven chapters: Chapter 1: The ABCs of Mortgage Loans. Chapter 2: Promissory Notes Chapter 3: Security Instruments Chapter 4: Mortgage Provisions Chapter 5: Foreclosure Basics Chapter 6: Foreclosure Paths Chapter 7: Alternatives to Foreclosure

No Joy in Foreclosure

It's a human tendency to look at events in terms of winners and losers. But sometimes, there are no real winners, as is the case with foreclosure. The Foreclosing Lender: Villain or Victim? As tempting as it might be to paint the lender as the villain in a foreclosure story, it's usually inaccurate. Lenders want to lend to make money from earned interest on loans that go full term, not to own real estate. When a piece of collateralized property lands in their lap, it's not good news. Chances are, the lender is going to lose a sizable amount of money on the deal as they go through the hassle of unloading the foreclosed real estate. Some estimates put lender losses on a single foreclosure at $50,000 or more. For lenders, foreclosure is the last resort. They will usually only initiate foreclosure proceedings after all other efforts to work through the issues with the borrower have failed. Foreclosure: The At-Risk Homeowner Profile: Foreclosure can be triggered by default of any of the terms of the mortgage contract, but it is almost exclusively a result of default due to delinquency of payment. And, according to one homeownership foundation's analysis of 60,000 homeowners, there are some life experiences and/or characteristics common to borrowers who make up the at-risk homeowner demographic. Among other factors, the foundation's study revealed the following about these homeowners: . 32% suffered a loss of income. . 25% experienced a major medical event. . Most have no financial reserves, no available credit, and no familial financial safety net. . 85% have missed one mortgage payment. . 50% have missed two mortgage payments. In looking at this set of statistics, you can see that many borrowers facing foreclosure are often victims of circumstances — an unforeseen medical expense or a job loss — rather than personal negligence. Foreclosure: A Community Cost: The adverse impact of foreclosure is not limited to the lender and borrower, either. The homes in close proximity to the foreclosed property suffer a collective deterioration of property value estimated to be as much as $220,000. Local governments also bear the financial burden of carrying out inspections, executing court actions, allocating police and fire department resources, and underwriting unpaid utility expenses and garbage collection. Bottom line: There are lots of losers and very few winners in foreclosure. But, as stated earlier, it's a fact of life. And because of that, there will always be a place and a need for the real estate professional who is able to navigate the waters of foreclosure in a delicate and thoughtful way. In fact, some brokers and agents make this niche their area of expertise.

The Takeaway

It's not enough to understand the general purpose of a mortgage loan agreement. A licensee and their clients should have a good understanding of each of the provisions contained in their specific contract. While I can't predict every clause or provision you'll encounter in your career, what you've learned in this chapter has given you a great foundation and understanding of the more common clauses found in mortgage loan agreements. Nice job, Yoni! In Chapter 4, you learned: ✅ The different provisions that commonly appear in a mortgage loan agreement. In the next few chapters, we're going to shift gears a bit and talk about foreclosure.

Quiz Level 14 d) property taxes, some mechanic liens, and subordination agreements. Liens that are or can be exempt from debt priority include property taxes, some mechanic liens, and subordination agreements.

Liens that are or can be exempt from debt priority include: a) property taxes, commercial loans, and subordination agreements. b) personal loans, some mechanic liens, and subordination agreements c) property taxes, some mechanic liens, and junior mortgages. d) property taxes, some mechanic liens, and subordination agreements.

Case Study: Frank's Fallout

Part 1 Frank bought a ranch from Herman without the benefit of representation by a real estate professional or legal guidance. He had known Herman since they were in high school back in the day, so Frank trusted that the two of them could make this happen without all that "unnecessary expense." A few weeks later, when Frank finally got around to recording his purchase of the ranch with the county clerk, he became aware of a pre-existing mechanic's lien on the property. It seems that the contractor that built the air-conditioned chicken coop out by the barn never got paid the full amount she said she was owed. When confronted about it, Herman said he told the contractor she wouldn't see a dime over what he had paid her already. As far as he was concerned, it wasn't his fault she went over budget. "Besides," Herman insisted. "I didn't even know she placed a lien on the property, so I sold the ranch in good faith." Frank was miffed and said a few choice words to Herman before wheeling around on his heels and heading to the courthouse. Question: It would appear that Frank made a few bad choices when he entered into an agreement to buy Herman's ranch. What are some concerns you see with Frank's decisions? Answer: The decision to enter into a sales contract without the assistance of licensed professionals or legal representation is a risky one, unless the parties involved are very experienced and knowledgeable about such matters. Additionally, you can assume from the story that Frank didn't have a title search done before he bought the ranch. Otherwise, he would have known about the mechanic's lien prior to purchase. Finally, although it might not have caused any additional problems in this story, Frank took too much time getting his purchase of the property recorded. This happens sometimes when properties are bought and sold in very informal fashion, and it can cause real headaches. Part 2: No longer concerned about maintaining a friendship, Frank went to court to try to force Herman to assume liability for the mechanic's lien. Much to his dismay, however, when Frank complained to the judge that he knew nothing about the lien when he bought the property from Herman, the judge was less than sympathetic in his response. Question: Why do you think the judge was less than sympathetic? Do you think Frank had legal grounds to force Herman to assume liability for clearing the mechanic's lien? Answer: The court's stance on this case was, since the mechanic's lien had been recorded prior to the sale, Frank had constructive notice. If he didn't know about the lien, it was his own fault. That response may not be sympathetic, but it is legally sound. Constructive notice, in this instance, barred Frank from claiming any relief from Herman with respect to the mechanic's lien.

Case Study: Leave, Laugh, Liver

Part 1 When Jeremy decided it was time to tour the world, he determined to fund that journey by selling his lakefront cottage — to multiple parties, if he could get away with it. Knowing that humans will sometimes make bad choices when overtaken by greed and the fear of missing out, Jeremy fabricated a story wherein he had no choice but to sell his cottage vastly under market to move it as quickly as possible. He told people he was doing this to pay for his grandmother's life-saving liver transplant. Once he had his story down and his moving trailer packed, Jeremy identified three gullible victims who had access to the cash necessary to buy the property without financing AND who were willing to take short cuts (like skipping having a title search done before making their purchase) in order to fast-track the sale — all for Grandma's sake, of course. Three separate sales transactions for the same property took place in the course of a couple of days. "Don't feel bad for buying the property for less than half its value," Jeremy assured each of his three gullible victims as they made their all-cash purchase. "You're doing my grandmother me and a great favor, AND you're getting a steal of a deal — it's the very definition of a win-win."

Case Study: Cari's Condo Can-Do

Part 2 In Cari's meeting with the lender, she also was presented with a security instrument identifying the condo as collateral. Question: Knowing that Cari was presented with a security instrument identifying the condo as collateral, what does that tell you about Cari's promissory note? Answer: A security instrument is a separate and distinct document from a promissory note, but the two documents are interconnected. Promissory notes can be either secured or unsecured. That Cari was presented a security instrument identifying her condo as collateral tells us that hers is a secured promissory note. This also tells us that Cari's promissory note will contain language pointing back to the security instrument that identifies the condo as collateral for the note.

Case Study: Leave, Laugh, Liver

Part 2 One thing needs to be said here: Jeremy was the legal owner of the cottage. He had the right to sell it to whomever he cared to at whatever price he chose. What he did not have the right to do, however, is to sell a single property to multiple buyers. Question: At what point would Jeremy's scheme probably come to light? What short cut did the buyers take to make this scheme possible? Answer: Because none of the buyers did a title search prior to their purchase, they had no idea that other buyers might also have claim on the same property. The first buyer to show up at the county clerk's office to record their deed would not realize that there was anything amiss. The recording would proceed as normal, and that buyer would become the owner of record. The other two buyers, however, would find out they had been duped once they tried to record their deeds. And they would also find out that it didn't matter what order they paid Jeremy, only that the first one of the three to officially record the sale would have a legal claim as the owner.

Case Study: Cari's Condo Can-Do

Part 3 Even though Cari is normally very responsible, she can be a tad excitable and forgetful at times. When her guppies had babies, for example, she was so elated and caught up in sending out her guppie-themed birth announcements that she forgot to make that month's mortgage payment on her condo. Oopsies! Her lender, a less excitable type, responded with a late fee notice for the missed payment, which an embarrassed Cari took care of right away. Question: When Cari sent her late installment, to what and in what order did the lender apply those funds? Answer: Cari's payment was applied to the late fee first, the earned interest second, and the remainder, if any, was applied to the principal. Presumably, Cari sent enough in to cover all three, but if there wasn't enough to go around, that is the order in which the payment would be applied.

Case Study: Leave, Laugh, Liver

Part 3 What Jeremy created was a race to the county clerk's office, with the first buyer to record their purchase winning the prize. Speaking of races, you better keep moving, Jeremy. I have a feeling that the law, karma, and two unhappy buyers are tracking you down as we speak!

Case Study: Cari's Condo Can-Do

Part 4 One day, Cari came home to find a letter in the mail. It was from a lender she had never heard of before. They instructed her to make all future payments on her mortgage loan to them as detailed in their letter. Cari wasn't quite sure what to think until, the very next day, a notice came from her original lender, informing her that they had transferred her loan to another lender: the same folks whose letter showed up the day before. Question: Based on the notices Cari received from the two lenders, what do we know about her promissory note? Answer: The notices that Cari received tell us that her promissory note was sold on the secondary mortgage market, which is a very common experience. Remember that promissory notes are negotiable instruments, meaning that they can be sold or transferred, with the new note holder having all the rights of enforcement of the original terms and conditions of the note.

Judicial Foreclosure: Phase 3

Phase 3: Sale/Statutory Redemption/Deficiency Judgment: The Sale: Foreclosure sales are carried out in the form of a public auction, which is announced via a posting at the courthouse and an advertisement in local papers. The Lender: On the day of the sale, the lender will usually make what is known as a credit bid, which is a bid in or close to the amount of the outstanding debt. If they end up as the highest bidder, they don't have to pay anything as they are given a "credit" on the debt owed. The lender is then awarded the title and has to figure out what to do with their new REO (real estate owned). Third-Party Bidders: Anyone else bidding on the foreclosed property must do so with cash or a cash equivalent, like a cashier's check. If the high bidder is someone other than the lender, they are awarded a sheriff's deed, which conveys the title to them — unless the state where the sale is taking place has a statutory right of redemption that gives the borrower the right to redeem the property for a designated time period after the sale. In that case, the high bidder would receive a certificate of sale in lieu of a sheriff's deed. The title would transfer to the high bidder at a later date, after the expiration of the statutory right of redemption. The Borrower: Although unlikely, if the borrower manages to take advantage of the statutory right of redemption, they only need to pay what the property sold for in the foreclosure sale in order to take title to the property. Regardless of who buys the property, if the proceeds from the foreclosure sale are sufficient to cover all outstanding debts, any surplus would go to the borrower. Deficiency Judgment: If, as is more often the case, there were not enough proceeds to satisfy the debts, a lender might have the option of initiating a deficiency judgment against the borrower for the amount not recouped. A couple of things have to be in place for a lender to be able to pursue a deficiency judgment against the borrower: 1. State law has to allow for its use. 2. The mortgage agreement cannot contain an exculpatory clause that forbids it. 3. A judge has to review, approve, and award it. On that last item, one of the things a judge is often looking for in the confirmation of sale hearing is that the property sold at a reasonable price. If the court were to determine that the property sold well under what they consider a fair market price, a judge could rule that the deficiency judgment figure has to be based on what the property should have sold for. The deficiency would be ruled to be the difference between the fair market value of the property and the outstanding debt. Some feel that the very existence of a statutory right of redemption — that can last from a month up to a year or more — creates enough uncertainty that it can work to suppress the perceived value of the property at the time of the foreclosure sale. In that sense, even though its creation was meant to be a benefit to the borrower, statutory redemption can hurt the borrower by lowering property value and increasing the likelihood of a deficiency judgment against the borrower.

Strict Foreclosure (Expedited Judicial?)

Remember at the beginning of the chapter when I told you there was some disagreement regarding whether there are two or three primary categories of foreclosure? A form of foreclosure known as Strict foreclose is the troublemaker in that regard. Some folks think that it represents a distinct, third category of foreclosure (with judicial and nonjudicial being the other two). I, and many others, believe strict foreclosure is a type of judicial foreclosure, albeit a much less complicated one. I base my opinion on the fact that the court is clearly involved in the process, with a lawsuit being filed by the lender. I don't know about you, but all that sounds pretty judicial to me! No Sale: One of the biggest differences between judicial foreclosure and strict foreclosure is that strict foreclosure does NOT involve a foreclosure sale. Instead, the lender files suit, asking the court to set a timeframe in which the borrower has to satisfy the debt through the exercise of their equitable right of redemption. (Remember that to get to this point, the lender has already activated the acceleration clause due to borrower default.) If the borrower fails to make payment and satisfy the loan in the prescribed time, the title is conveyed to the lender. While this might sound harsh (or should I say strict?), realize that a strict foreclosure typically comes into play when the debt far exceeds the property value, making a foreclosure sale an unnecessary expense. Why do I say this? Because if the property were to go to sale, the lender would likely place a credit bid for the loan amount which exceeds the property value, which, in turn, would result in them winning the auction and ending up with the title... which is exactly where they'd end up in a strict foreclosure without the cost and hassle of a sale. Deficiency Judgment and Statutory Redemption: The use of strict foreclosure does NOT preclude the use of deficiency judgment by the lender. On the other hand, statutory redemption and equitable right of redemption are typically NOT available to the borrower once the timeframe allotted by the court to redeem the property has expired. Rarely Used: As of this writing, strict foreclosure is the most popular form of foreclosure in only two states and is used on occasion in a handful of others.

The Takeaway

Security instruments work in tandem with promissory notes in the financing of real estate. By pledging the property as collateral for the note, the security instrument allows the lender to make financing more affordable. For that reason, most of your clients are going to require both promissory notes and security instruments, and they will look to you for understanding and guidance regarding the roles these instruments of finance play. And, with what you've learned, I'm sure you'll be quite "instrumental" in helping your clients "secure" the right financing for their situation. (Sorry. I couldn't help myself.) In Chapter 3, you learned: ✅ The purpose of a security instrument and its connection to a promissory note ✅ The difference between lien theory states and title theory states and how those differences influence the choice of security instruments used ✅ The use of mortgages, deeds of trust, and security deeds as security instruments and to identify the parties involved in their use. Now that you've learned all about security instruments, in the next chapter, we'll take a little peek under the hood, so to speak, and see what kinds of clauses and provisions you'll find inside them.

Categories of Foreclosure

Some folks teach that there are two major categories of foreclosure. Others teach that there are three. I side with the "two" camp, and would suggest to you that all four of the foreclosure paths we will look at in this chapter fall under one of two larger categories: judicial and nonjudicial. Judge Not Lest Ye Need a Judge: The deciding factors influencing the choice between judicial and nonjudicial foreclosure are a combination of the state's theory (lien or title), the security instrument used, and state law. The judicial path is generally more expensive, more complex, and more drawn out. But it has the benefit of being "blessed" by the courts and will sometimes also grant the lender the right to pursue a deficiency judgment against the borrower if the foreclosure sale does not cover the outstanding debt. The nonjudicial path is usually less expensive, less complex, and faster. It is suitable for situations where there are not many competing interests and the facts of the case are pretty straightforward and not likely to be contested. Georgia, being a title theory state, employs a nonjudicial path. Note: If a nonjudicial foreclosure is contested, you'll see it quickly morph into a judicial path with at least one of the parties seeking court intervention. Ok, Yoni, enough judicial-vs.-nonjudicial chitchat, am I right? Time to get walking down path number one.

Quiz Level 14 d) borrower's covenants. The collection of common clauses in a mortgage agreement having to do with the responsibility of a mortgagor to protect the interest of the lender by caring for the collateralized property and addressing the obligations attached to it are collectively referred to as "borrower's covenants."

The collection of common clauses in a mortgage agreement having to do with the responsibility of a mortgagor to protect the interests of the lender by caring for the collateralized property and addressing the obligations attached to it are collectively referred to as: a) mortgagor's clauses. b) lender's covenants. c) borrower's clauses. d) borrower's covenants.

Foreclosure by Entry and Possession

The more I think it, the more I am convinced that entry and possession is the Pluto of foreclosure paths: So small, you wonder if it even deserves recognition. (That astrological analogy was 100% spontaneous. I can assure you that I didn't "planet" in advance.) It is (or was) the primary path of foreclosure for just one state and is used with some variation and to a lesser degree in a couple of other states. The foreclosure by entry and possession path looks something like this: . Lender: "Hey, you're in default. Whaddaya say I take over the property?" . Borrower: "Okay." . Borrower moves out. Lender moves in. . Public: "What just happened?" . Witnesses: "That just happened!" . Lender records/publishes the event and sits tight until the expiration of the statutory timeframe. If the above happens peacefully and is witnessed, recorded, and publicized per state requirements, at the end of the waiting period, the borrower loses redemption rights, and the property goes to the lender. Foreclosure by entry and possession starts off as a form of nonjudicial foreclosure. But, if at any point prior to the end of the waiting period, the borrower contests it, the lender will need to switch to a judicial process of foreclosure.

Quiz Level 14 a) FALSE False: Default of any of the terms or conditions of the mortgage agreement can led to foreclosure. It can be financial or non-financial in nature.

The only type of default that leads to foreclosure is payment default. a) FALSE b) TRUE

Quiz Level 14 b) the lender's interest. The recording of the lien protects the lender's interest, requiring that the lien be satisfied in any future sale of the property before the homeowner could expect to see any funds.

The recording of a lien protects: a) the borrower's interest. b) the lender's interest. c) the broker's interest. d) the title company's interest.

Borrower's Covenants

The remaining provisions that I want to share with you all have to do with the responsibility a mortgagor has to protect the interests of the lender by caring for the collateralized property and addressing the obligations attached to it. Oftentimes, they are collectively referred to as borrower's covenants. Covenant to Pay Indebtedness: This clause simply stipulates what is achieved with a promissory note, which is the evidence of debt and a promise to repay that debt. Covenant to Pay Taxes: This clause protects the lender by mandating that the borrower stay current in the payment of property taxes and special assessments, both of which rank higher than the lender's lien in terms of debt priority. The lender will typically escrow for payment of property taxes in an attempt to ensure compliance with this covenant. Covenant to Pay Insurance: This clause protects the lender by mandating that the borrower keep the collateralized property sufficiently insured against damage or total loss. The lender will escrow for payment of hazard insurance in an attempt to ensure compliance with this covenant. Covenant of Good Repair: This clause protects the lender by mandating that the borrower properly maintain and repair the collateralized property as needed. The idea here is that the property's market value be preserved through proper care. Allowing the property to deteriorate or abandoning the property would be a violation of this covenant. Covenant Against Removal: Similar to the covenant of good repair, the intention of this clause is to protect the lender by preserving the market value of the property. It prohibits the removal of fixtures like garage door openers, lighting, fans, a/c units, or water heaters.

Quiz Level 14 b) lien theory and title theory. The two "theories" that most states fall under are lien theory and title theory.

The two "theories" that most states fall under are: a) title theory and deed theory. b) lien theory and title theory. c) title theory and mortgage theory. d) lien theory and mortgage theory.

Four Paths to Foreclosure: The Chart

This chart will give you a quick-'n-dirty comparison of the different paths to foreclosure we've just discussed. And if you're inspired to get a tattoo of it, well, I won't stop you. (in file)

The Purpose of a Security Instrument

To fully understand the purpose of a security instrument as a real estate instrument of finance, it helps to look at loan financing from both the borrower's and the lender's perspectives. The borrower wants to accomplish something that is beyond their own immediate financial capacity. It's not that they can't eventually cover the cost of the purchase; they just can't do it in one payment. So, they hope, instead, to find a way to pay for the big-ticket item over time. And they generally understand that there will be a cost associated with doing that. The lender, who has chosen to get into the business of loan origination, has a profit imperative. As hard as it may be to believe, they don't do this out of the goodness of their hearts. Nor should they, really, because there is a risk involved. The lender has to evaluate the risk associated with each request for a loan and set their interest rates accordingly. And one of the larger factors in risk determination is whether or not the loan will be secured by collateral, which, for real estate, would be the property itself. The promissory note will reflect the interest rate set and will refer back to the security note if there is one. In the real world, it would be the rare individual who could qualify for an unsecured mortgage loan, which is what a promissory note without a companion security instrument would be. And if someone were to qualify for an unsecured mortgage loan, they should be ready to pay a high interest rate. Recap: A security instrument that pledges the property as collateral allows lenders to lower interest rates, making mortgage loans more affordable.

Recording Scenarios

To illustrate the importance of recording liens and creating constructive notice, let's take a peek at a couple of pretend-but-possible scenarios. Case studies, as I like to call them. Be ready to answer some questions about these case studies, and see if you can spot the red-flag areas of concern as they come up!

Quiz Level 14 c) judicial and nonjudicial. The two primary categories of foreclosure are judicial and nonjudicial.

What are the two primary categories of foreclosure? a) foreclosure and aftclosure. b) nonjudicial and legal. c) judicial and nonjudicial. d) judicial and administrative.

Quiz Level 14 b) power of sale clause. A power of sale clause pre-authorizes the lender to foreclose and sell the property without court oversight or having to file a lawsuit.

What clause in a nonjudicial foreclosure pre-authorizes the lender to foreclose and sell the property without court oversight or having to file a lawsuit? a) pre-authorization clause. b) power of sale clause. c) statutory redemption clause. d) acceleration clause.

Quiz Level 14 d) A trustee executes a deed of reconveyance or deed of release, which is recorded. When a deed of trust is used and the note is paid in full, the lender authorizes the trustee to execute what is known as a deed of reconveyance or deed of release. As with a mortgage satisfaction, this also needs to be recorded to clear the title.

What happens with a deed of trust when the borrower pays the note in full? a) A mortgage satisfaction is issued and recorded. b) A mortgage satisfaction is issued but NOT recorded. c) A trustee executes a deed of reconveyance or deed of release, which is NOT recorded. d) A trustee executes a deed of reconveyance or deed of release, which is recorded.

Level Assessment a) It means that it can be transferred. When a promissory note is described as a negotiable instrument it means that it can be transferred, which is a common experience in real estate, as homeowners who have seen their mortgage companies change on the same loan multiple times can attest.

What is meant when a promissory note is described as a negotiable instrument? a) It means that it can be transferred. b) It means that its use as an instrument can be revoked. c) It means that the terms are subject to negotiation between the borrower and lender. d) It means that it is a form of currency.

Quiz Level 14 c) It means that the promissory note is transferable and assignable. It means that the promissory note is transferable and assignable. The present-day note holder is legally entitled to demand payment per the terms of the note, regardless of whether or not they were the one who had originally entered into the note with the borrower. This is because the original lender has the right to sell the note at any point to another party, who becomes the holder in due course.

What is meant when it is said that a promissory note is a negotiable instrument? a) It means that a promissory note is not mandatory, but can be negotiated into existence as a condition of the loan. b) It means that a promissory note is a living document subject to change, rather than being fixed in nature. c) It means that the promissory note is transferable and assignable. d) It means that the terms contained in the promissory note are not fixed, but can be negotiated whenever the note is transferred.

Quiz Level 14 c) Strict foreclosure does NOT involve a sale. One of the biggest differences between judicial foreclosure and strict foreclosure is that strict foreclosure does NOT involve a foreclosure sale.

What is one of the biggest differences between judicial foreclosure and strict foreclosure? a) Judicial foreclosure does NOT involve a sale. b) Strict foreclosure does NOT involve a lawsuit. c) Strict foreclosure does NOT involve a sale. d) Judicial foreclosure does NOT involve a lawsuit.

Quiz Level 14 a) whether or not the loan will be secured by collateral. The lender has to evaluate the risk associated with each request for a loan and set their interest rates accordingly. And one of the larger factors in risk determination is whether or not the loan will be secured by collateral, which, for real estate, is the property itself.

What is one of the larger factors for lenders in determining the risk of a loan request? a) whether or not the loan will be secured by collateral. b) the level of education of the applicant. c) the intended use of the property purchased with the. loan. d) the marital status of the applicant.

Quiz Level 14 d) the personal liability limits to be carried on the homeowner's insurance policy. Combined, the promissory note and the security instrument address the borrower's acknowledgment of debt and promise to pay that debt (both the loan amount and earned interest); the designation of the property as collateral to secure the debt; the terms of repayment and the consequences of failure to meet those terms; and the obligations of the borrower to protect the lender's interest in the property during the life of the loan.

What most people think of as a mortgage loan is made up of two documents: a promissory note and a security instrument. Which of the following is not addressed by either of those documents? a) the borrower's acknowledgment of debt and promise to pay that debt. b) the terms of repayment and the consequences of failure to meet those terms. c) the designation of the property as collateral to secure the debt. d) the personal liability limits to be carried on the homeowner's insurance policy.

Two Categories of Alternatives

When discussing the alternatives to foreclosure, it makes sense to split them out between those that allow the borrower to maintain possession of the property and those that involve relinquishing the property. For reasons outlined in an earlier chapter, be assured that lenders would prefer to try to work things out with borrowers rather than travel down the various paths to foreclosure. Before any steps towards foreclosure are taken, a lender will exhaust all viable alternatives for the continuation of the loan, where possible. Alternatives with Borrower Retaining Possession: Here's a list of some of the ways lenders find to help the borrower maintain possession of the property and stave off foreclosure: . Special Forbearance: This involves a temporary suspension of scheduled payments with the hopes that the borrower can use the time to make up the delinquency. An assessment of what caused the default in the first place as well as the present and future prospects of loan payment will be considered before a lender would consider this option. . Repayment Plan: The lender works with the borrower by spreading out the past due amount over several future payments until the loan is brought current. . Loan Modification: The current lender modifies or extends the existing term of the loan in order to offer a more achievable monthly payment. The downside to this for the borrower is that it increases the life of the loan and, consequently, raises the ultimate cost of the loan. . Refinance of Loan: In some instances, particularly if equity exists in the property, a refinance of the loan makes sense and is an option for the borrower. When this occurs, the delinquent payments are simply figured into the new loan balance and spread out over the life of the refinance loan. . Partial Claim: For borrowers in an FHA loan who meet the eligibility requirements, a one-time, interest-free loan to cover the delinquent amount and reinstate the original mortgage loan is available. This would be a completely separate loan and would need to be paid off once the mortgage loan is satisfied and/or the property is sold. To be eligible for this loan from the FHA Insurance Fund, the borrower would need to able to resume full monthly payments of the mortgage loan once reinstated. . Payment Forgiveness: A lender, on rare occasions, might forgive a missed payment if the borrower commits to making full scheduled payments on the existing loan going forward. Alternatives with Borrower Relinquishing Possession: If the lender and borrower are unable to find an acceptable alternative that allows the borrower to retain possession of the property, there are still a couple of alternatives to foreclosure to be considered: . Deed in lieu of foreclose . Short sale Even though the borrower has to give up the property, as they would with foreclosure, they and the lender might still find one of these alternatives to be preferable. We'll look at both of these alternatives now.

Quiz Level 14 c) alienation clause/due-on-sale clause. An alienation clause/due-on-sale clause refers to a provision in the mortgage contract that triggers the right of the lender to demand payment in full of the loan upon the sale or conveyance of the property.

Whereas an acceleration clause demands payment in full of the loan due to payment default, another clause demands payment in full of the loan upon the sale or conveyance of the property. What clause is that? a) subordination clause. b) exculpatory clause. c) alienation clause/due-on-sale clause. d) prepayment clause.

Quiz Level 14 b) Unlike equitable redemption, which requires payment in full, the right to reinstate requires only payment of the amount past due. Whereas a right of equitable redemption requires that the accelerated loan be paid in full, a right to reinstate grants the borrower the opportunity to bring current the delinquent loan in one payment in order to resume paying on the loan going forward, as would have been the case in the loan's pre-accelerated form.

Which of the following describes one way the right of equitable redemption and the right to reinstate differ? a) Equitable redemption requires statutory approval, whereas right to reinstate does not. b) Unlike equitable redemption, which requires payment in full, the right to reinstate requires only payment of the amount past due. c) Right to reinstate requires payment in full, whereas equitable redemption requires only payment of the amount past due. d) There are no differences between the two; these are two names for the same thing.

Quiz Level 14 b) The proceeds from the sale must exceed the outstanding debt. A couple things have to be in place for a lender to be able to pursue a deficiency judgment against the borrower: State law has to allow for its use; the mortgage agreement cannot contain an exculpatory clause that forbids it; and a judge has to review, approve, and award it. There would be no need for a deficiency judgment if the proceeds from the sale exceed the outstanding debt.

Which of the following does NOT have to be in place in order to pursue a deficiency judgment? a) State law has to allow for its use. b) The proceeds from the sale must exceed the outstanding debt. c) The mortgage agreement cannot contain an exculpatory clause. d) A judge has to review, approve, and award it.

Quiz Level 14 d) 87% purchased a boat or other recreational vehicle in the past year. According to one homeownership foundation's analysis of 60,000 homeowners, 32% suffered a loss of income; 25% experienced a major medical event; most have no financial reserves, no available credit, and no familial financial safety net; 85% have missed one mortgage payment; and 50% have missed two mortgage payments.

Which of the following is NOT one of the statistics given in the study of homeowners at risk of foreclosure? a) Most have no familial financial safety net. b) 25% experienced a major medical event. c) 32% suffered a loss of income. d) 87% purchased a boat or other recreational vehicle in the past year.

Level Assessment b) Georgia, as a title theory state, employs the power of sale in the security deed. Georgia, as a title theory state, employs the power of sale in the security deed, so a power of sale clause will appear in that security instrument.

Which of the following is true regarding Georgia and the presence of a power of sale clause in the security instrument? a) Georgia, as a lien theory state, does NOT employ the power of sale in the security deed. b) Georgia, as a title theory state, employs the power of sale in the security deed. c) Georgia, as a lien theory state, employs the power of sale in the security deed. d) Georgia, as a title theory state, does NOT employ the power of sale in the security deed.

(F) Level Assessment a) mortgage - borrower / trust deed - trustee / security deed - lender. The title is held by the following individuals for these security instruments: mortgage - borrower, trust deed - trustee, and security deed - lender.

Which of the following is true regarding who holds the title for a mortgage, a trust deed, and a Georgia security deed? a) mortgage - borrower / trust deed - trustee / security deed - lender. b) mortgage - trustee / trust deed - lender / security deed - borrower. c) mortgage - lender / trust deed - trustee / security deed - borrower. d) mortgage - lender / trust deed - borrower / security deed - trustee.

(F) Level Assessment d) It's the right a borrower has to redeem a property in foreclosure by paying the debt at any time prior to the sale of the property. Equity of redemption refers to the right a borrower has to redeem a property in foreclosure by paying the debt at any time prior to the sale of the property.

Which of the following provides the BEST explanation of the right known as "equity of redemption" or "equitable redemption"? a) It's the borrower's right to redeem a property by paying the debt before or after the sale of the property. b) It's the right a borrower has to redeem a property by paying the debt within a proscribed timeframe after the sale of the property. c) It's the borrower's right to be treated in an equitable fashion in a redemption review during foreclosure. d) It's the right a borrower has to redeem a property in foreclosure by paying the debt at any time prior to the sale of the property.

(F) Level Assessment c) the pledging of an asset as collateral to secure a loan without delivery of title, possession, or other ownership rights. Hypothecation is the pledging of an asset as collateral to secure a loan without delivery of title, possession, or other ownership rights.

Which of the following provides the best definition of hypothecation? a) the pledging of an asset as collateral to secure a mortgage. b) the act of securing a loan collateralized loan. c) the pledging of an asset as collateral to secure a loan without delivery of title, possession, or other ownership rights. d) the delivery of the title or possession of an asset in order to secure a loan.

(F) Level Assessment b) Statutory redemption is not typically available in states that employ strict foreclosure. Statutory redemption is not typically available in states that employ strict foreclosure. With strict foreclosure, the court sets a timeframe in which the borrower can exercise their equitable right of redemption or lose all rights to the property.

Which of the following statements is true about statutory redemption and the form of judicial foreclosure known as strict foreclosure? a) Strict foreclosure is only used in conjunction with statutory redemption. b) Statutory redemption is not typically available in states that employ strict foreclosure. c) Strict foreclosure is just another term for statutory redemption. d) Strict foreclosure is the term used to describe a court's limitations on the use of statutory redemption.

Level Assessment a) The nonjudicial foreclosure path known as "power of sale" is the predominant form of foreclosure for over half of the states in the nation, including Georgia. The nonjudicial foreclosure path known as "power of sale" is the predominant form of foreclosure for over half of the states in the nation, including Georgia.

Which of the following statements is true? a) The nonjudicial foreclosure path known as "power of sale" is the predominant form of foreclosure for over half of the states in the nation, including Georgia. b) While the nonjudicial foreclosure path known as "power of sale" is not common in other states of the nation, it is the predominant form of foreclosure in Georgia. c) The judicial foreclosure path known as "power of sale" is the predominant form of foreclosure for over half of the states in the nation, including Georgia. d) The nonjudicial foreclosure path known as "strict foreclosure" is the predominant form of foreclosure for over half of the states in the nation, including Georgia.

Quiz Level 14 a) right to reinstate clause. As kind of a response to or defense against the lender-friendly acceleration clause, the right to reinstate clause provides the borrower a way to get back on track by bringing current any delinquent payments so that they can proceed forward in a pre-acceleration environment, making regular monthly payments under the original terms of the contract.

While an acceleration clause demands immediate payment in full of a loan due to payment default, another clause provides the borrower with a way of addressing those consequences and returning to a pre-acceleration environment. What clause is that? a) right to reinstate clause. b) alienation clause. c) prepayment clause. d) subordination clause.

Judicial Foreclosure: The Chart

While that was a lot to get through, Yoni, the judicial path can actually be broken down into some fairly simple steps as shown here Judicial Foreclosure ---> Lis Pendens ---> Title Search ---> Advertise sale ---> Redemption & Reinstate Right ---> Sale ---> Statutory Redemption & Possible Deficiency Judgment

Level Assessment d) because unpaid taxes take first priority in debt repayment. A lender is particularly interested in having the borrower stay current on their payment of property taxes because unpaid taxes take first priority in debt repayment in the event of foreclosure—even over the debt owed to the lender.

Why is a borrower's obligation to pay property taxes of particular importance to the lender? a) because a lender can be penalized for holding a mortgage on a property for which taxes are not paid. b) because the likelihood of a borrower staying current on their home loan is adversely affected if they are incarcerated for tax evasion. c) because the lender is considered secondarily legally liable for the the taxes. d) because unpaid taxes take first priority in debt repayment.

Quiz Level 14 d) to identify all parties that might have a lien or other interest in the property. A title search is undertaken as an early step in judicial foreclosure in order to identify all parties that might have a lien or other interest in the property subject to foreclosure.

Why is a title search undertaken as an early step in judicial foreclosure? a) to find out if a title exists for the property subject to foreclosure. b) to verify the legal address of the property subject to foreclosure. c) to avoid having to file a lawsuit in order to sell the property. d) to identify all parties that might have a lien or other interest in the property.

Entry and Possession: The Chart

Wow, the foreclosure by entry and possession path looks a little more legit when placed in a chart like this! Entry & Possession --> Notice of Default --> Borrower Asked to Vacate --> Lender Takes Possession --> Witnessed, recorded, published --> Waiting period --> Statutory redemption

Hypothecation

You may recall that, in an earlier level, I introduced you to a funny-sounding term called "hypothecation." It involves the pledging of an asset as collateral to secure a loan for the purchase of that asset, even while allowing the purchaser of the asset to enjoy all the benefits of ownership as they work to pay for the asset over the timeframe of the loan. If the borrower were to fail in their obligations as outlined in the loan agreement, however, the lender would have the right to seize the asset. Home and auto loans are typically secured in this fashion. It is precisely because the asset itself serves as collateral for the loan that the lender can offer an affordable interest rate — or at least one that is lower than that of an unsecured loan. Yay for hypothecation!

Facts of a feather a) subordination clause. yes

agreed to by a lender if they feel it increases likelihood of repayment of their loan. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather a) subordination clause. yes

agreed to by a lender if they feel it increases value of collateralized property. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather

has an affect on debt priority. a) subordination clause. b) acceleration clause. no c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather b) acceleration clause. yes

if borrower cannot make full payment per this clause, the lender may initiate foreclosure. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather d) due on sale/alienation clause. yes

if lender approves assumption, they can also raise the interest rate. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather d) due on sale/alienation clause. yes

is intended to prohibit assumption of loan without lender approval. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather c) defeasance/satisfaction of mortgage clause. yes

is not triggered until full repayment of loan is made by the borrower. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather d) due on sale/alienation clause.

is triggered by attempt to sell or convey the property. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather b) acceleration clause. yes

is triggered by default of any of the terms of the agreement. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather b) acceleration clause. yes

lacking this, a lender would have to sue borrower for each missed payment individually. a) subordination clause. no b) acceleration clause. c) defeasance/satisfaction of mortgage clause. no d) due on sale/alienation clause. no

Facts of a feather b) acceleration clause.

makes entire loan due immediately. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather d) due on sale/alienation clause.

not allowed in FHA and VA loans: a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather c) defeasance/satisfaction of mortgage clause. yes

official lender declaration that the terms of the loan agreement have been met. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather c) Entry and possession. yes

primary path of foreclosure for just one state. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather c) entry and possession. no

requires complete agreement by the borrower to the process. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather c) defeasance/satisfaction of mortgage clause. yes

results in the removal of the lender's lien or the conveyance of the title to the borrower. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather b) Power of sale. yes

the clause pre-authorizing the sale without court oversight must be in the security agreement from the beginning. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather c) Entry and possession. yes

the lender access and occupancy of the property with permission of the borrower. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather a) Judicial foreclosure. yes

the more complex form of foreclosure involving the courts. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Recording a Mortgage

At the closing of a home purchase or refinance, the borrower signs a number of documents, including the two we just talked about — a promissory note stating the terms of the loan and a security instrument that designates the property as collateral on the loan. The lien created by the security instrument is then promptly recorded by the mortgage company. (Prior to closing, the title company would have already completed a title search to verify that any prior liens were satisfied, ensuring that there were no other outstanding claims on the property.) Protecting the Lender's Interest: The recording of the security interest protects the lender's interest, establishing the lien as the senior mortgage and requiring that it be satisfied first in any future sale of the property before the homeowner or any subsequent liens, a.k.a. junior mortgages, could expect to see any funds. Debt Priority: While we'll get into debt priority in more detail a little later in this level, just know for now that the order of recordation is the primary way that priority of debt repayment is established. This is particularly critical when the sale of a home occurs as the result of a foreclosure since the sale price in those instances is often for an amount less than what is owed to the lien-holder first in the debt priority line, meaning any junior mortgages may be hard-pressed to see any funds from the foreclosure at all. EXAMPLE: Molly has fallen woefully behind on her payments of a $20,000 home improvement loan. Because that loan was recorded after Molly's original mortgage loan, the home improvement loan is considered a junior mortgage to Molly's first mortgage. If the lender of the home improvement loan were to force a foreclosure sale of Molly's home, any proceeds coming out of that sale would go first to satisfying the outstanding balance on the first mortgage before the lender of the home improvement loan saw a dime. The junior mortgage lien-holder understands this and has to weigh the pros and cons of taking any action. Constructive Notice: Constructive notice is a legal term that says that information placed in the public record is assumed to have been accessed by those who have desire, motivation, or need to know it. It is often referred to as legal fiction because the courts will treat the individuals involved as though they have knowledge they might not, in reality, have. It doesn't matter, though. Once that knowledge is a matter of public record, the onus is on the public to access it if it is of importance to them. So, in real estate, when a mortgage is placed in the public record through recordation, constructive notice is said to have been given. Anyone wanting to know about it has the opportunity to find the record — and that is enough to place responsibility on the public to be accountable for what is contained therein. Constructive notice via recordation shouldn't just happen at the conveyance of a property when its purchase is financed by a new owner, but needs to happen any time with any subsequent loan made thereafter (that also uses the property as collateral). In other words, junior mortgages also need to be recorded to give constructive notice of their existence and to secure their place in debt priority. Actual Notice: By way of contrast, actual notice is the literal notice that is given directly to an individual. When someone is served notice that they are a defendant in a lawsuit, they are considered to have received actual notice. Oftentimes, this type of notice is delivered as a legal document by a third party who is prepared to testify, if needed, that the notice was given to the individual served. State laws will typically designate what situations call for constructive vs. actual notice and what actions fulfill the requirements of each type.

Nonjudicial Foreclosure (Power of Sale): The Chart

Don't let the six steps in this foreclosure path fool you. Compared to judicial foreclosure, it's fairly uncomplicated! Power of sale ---> Notice of Default ---> Advertisement of sale ---> Redemption & Reinstate Rights ---> Sale ---> Statutory Redemption & Possible Deficiency Judgment

Judicial Foreclosure: Phases 1-2

In states where nonjudicial foreclosures are prohibited or in states that allow them but the particular security instrument used lacks a power of sale clause, a judicial foreclosure may be required. If so, this is what that path will look like: Phase 1: Lis Pendens/Title Search/Lawsuit/Notice of Sale: The lender gets the ball rolling by filing a lis pendens, informing the public of a pending legal action. At the same time, a title search is undertaken to identify all parties with a recorded interest in the property. Once identified, those parties — the borrower and any junior mortgage holders — are named as defendants in the lawsuit and are given notice by the court of the legal action against their interests. That legal action, of course, is the intended foreclosure sale of the property with the expectation that the lender's senior mortgage (debt) can be partially or wholly paid from the proceeds. The first phase of the judicial foreclosure path wraps up with the publication of a notice of sale. Phase 2: Equity of Redemption/Surplus Money Action: In the window of time between the announcement of the foreclosure sale and the completion of the sale, the defendants — both the borrower and any junior mortgage lien holders — have the opportunity to take some actions that could change the course of events entirely. The Borrower: The borrower could take advantage of their right, known as equity of redemption, to pay in full the balance on the loan, plus any fees and interest. This would redeem the property and satisfy the first mortgage on the property, putting an end to the foreclosure proceedings. While technically possible, a borrower in the midst of a foreclosure might have trouble finding the cash or new financing to pull off a late-stage equity of redemption play. If the borrower's mortgage loan agreement contained a right to reinstate clause, they would not need to scrounge up the full outstanding debt, only that part of the loan that was past due. By paying the past-due amount (including fees and interest) and, thereby, bringing the loan current, the borrower could essentially put an end to the foreclosure effort and move forward, paying off the loan according to its pre-acceleration terms and conditions. The Other Defendants: Each of the other defendants (the junior mortgage lien holders) have a couple of options open to them, as well. The first is to let the foreclosure sale proceed and file a surplus money action, hoping that the sale will not only be sufficient to pay off the senior mortgage (and any junior liens ahead of them in debt priority), but also have enough funds left over satisfy their lien, too. Their other option is to step in and make the necessary payment on behalf of the borrower to halt the foreclosure process. Whether that means paying off the loan in full or only paying the delinquent amount depends on whether or not the borrower has a right to reinstate clause in their first mortgage. A junior lien holder would only consider making such payments on the borrower's behalf if that amount could be added to the loan the junior lien holder already has in place with the borrower. And they would have to be pretty confident that there was reason to believe that the borrower would make good on their loan in spite of the borrower's current troubles.

Quiz Level 14 d) foreclosure. More than anything else, a state's theory and its choice of security instrument are reflective of that state's attitude about foreclosure.

More than anything else, a state's theory and its choice of security instrument are reflective of that state's attitude about: a) hypothecation. b) lawyers. c) debt priority. d) foreclosure.

Promissory Note Tour

To better familiarize yourself with the specific terms and conditions that you can expect to see in a typical promissory note, let's take a tour of a sample document. We'll review the note section by section, then afterward we'll take a look at the whole form intact. You should know that there can be some variance of both content and order from one note to the next, but they are more alike than different. Although this tour comes without opportunities to buy touristy trinkets or overpriced souvenirs, I hope you find it memorable, nonetheless. The first thing you'll find on this promissory note are places for the names of the parties entering into the agreement, the date the contract was entered into, and the date upon which the loan comes due. Again, as an important reminder, please realize that the lender shown here is the original note holder, but in as much as promissory notes are negotiable instruments, this note can be legally transferred to another payee multiple times during the course of the loan. Paragraph 1 provides the terms of the note, documenting the principal sum borrowed, the agreed-upon interest rate, a schedule of installment payments of principal and interest (or interest only), and a reference back to the previously provided payment-in-full due date. Paragraph 2 describes the fee/penalty associated with default of the loan in its entirety or default of an installment payment. The fee/penalty, in this note, comes in the form of the application of a higher interest rate of the unpaid balance of the loan that will remain in place until the default is cured. Paragraph 3 defines what constitutes a late payment, and it describes the late fee associated with that. Note that it also references the higher interest rate imposed in the previous paragraph for default payments. Both the late fee AND the higher interest rate (triggered by the default) will be required with the installment payment before the loan is considered current. Paragraph 4 is short but important in that it clarifies the priority of fund distribution with the receipt of any payment. Late fees get first priority, followed by interest due (including any higher rate imposed by default), with any remaining funds being applied to the principal. Paragraph 5 is even shorter, documenting that the borrower can prepay the note without penalty. This is not always the case with promissory notes, so if this paragraph is missing, it will be replaced with another that outlines the penalties or costs of prepayment. The reason a lender might want a note to contain a prepayment penalty is that prepayment reduces the amount of interest earned, which is a large part of the profit that comes to a lender from loan creation. Paragraph 6 points to the security instrument — usually a mortgage or deed of trust — that identifies the collateral securing the note. The note will indicate that the collateral identified in the security instrument cannot be sold or transferred without the lender's (current note holder's) consent. Promissory notes can be secured or not. If the borrower were to attempt to sell or transfer the collateral securing the note, the note holder could declare the note to be immediately due in full. The language describing the right of enforcement of this action would be found in an alienation or due on sale clause in the security instrument. Paragraph 7 outlines the consequences of default of this note and/or of the provisions contained in the security instrument securing this note. It lays out a deadline for curing the default and, failing that, makes known the right of the lender to declare all outstanding sums owed as immediately due in full. It also makes known the lender's right to pursue other remedies as outlined in the security instrument or state and federal law. While it doesn't mention it outright, foreclosure is the remedy most often implemented when negotiations with the borrower fail to produce a satisfactory resolution. As with every contract, signatures of the parties identified at the top of the note are captured here.

Quiz Level 14 c) The lender has to file with the court prior to initiating a foreclosure action to sell the property. Every security deed in Georgia will include provisions containing the following three declarations: 1. This instrument secures the specific loan. 2. In the event of default, the lender is authorized to sell the property via a nonjudicial foreclosure process that conforms to state regulations. 3. The lender will cancel the deed upon satisfaction of the loan.

Which of the following is NOT one of the provisions you'll find in a Georgia security deed? a) This instrument secures the specific loan. b) In the event of default, the lender is authorized to sell the property via a nonjudicial foreclosure process. c) The lender has to file with the court prior to initiating a foreclosure action to sell the property. d) The lender will cancel the deed upon satisfaction of the loan.

Facts of a feather c) defeasance/satisfaction of mortgage clause. yes

acknowledges full ownership rights of borrower have been achieved. a) subordination clause. b) acceleration clause. c) defeasance/satisfaction of mortgage clause. d) due on sale/alienation clause.

Facts of a feather a) Judicial foreclosure. yes

involves both a lawsuit and a sale. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather a) Judicial foreclosure. yes

. involves both a lawsuit and a sale. . starts with a lis pendens. . the more complex form of foreclosure involving the courts. . a surplus money action may be filed by junior lien holders. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather b) Power of sale. yes

. junior lien holders sometimes miss the notice of sale and lose their rights. . nonjudicial form of foreclosure predominantly used in more than half of the states in the nation. . the clause pre-authorizing the sale without court oversight must be in the security agreement from the beginning. . also known as "sale by advertisement". a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather d) Strict foreclosure. yes

. some controversy regarding whether this should be categorized as a judicial foreclosure. . less commonly used form of judicial foreclosure. . often used when the debt far exceeds the value of the property. . no sale with this form of judicial foreclosure. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Chapter 7: Alternatives to Foreclosure

After completing this chapter, you will be able to: . Discuss the alternatives to foreclosure, including identifying the benefits and disadvantages of each choice to the borrower and lender. Why It Matters: Foreclosure can be expensive, embarrassing, and painfully drawn out — particularly given the waiting periods involved with equitable and statutory redemption periods. Understandably, then, there might be times when one or both parties to the mortgage loan agreement would be amenable to considering other avenues of resolution other than foreclosure. You can be of real help to your clients facing foreclosure if you know enough about these alternatives to understand when they might be a viable option for them to consider.

Level Assessment c) due-on-sale clause. An alienation clause is also known as a due-on-sale clause.

An alienation clause is also known as a(n): a) due-on-default clause. b) acceleration clause. c) due-on-sale clause. d) escalation clause.

Common Clauses

Let's take a look at some of the more common provisions that your clients are likely to encounter in the mortgage loan agreements they enter into. While you won't be crafting these documents or the provisions they contain, you may very well be asked about them by your clients, so you want to be prepared. Each provision has a specific objective for which it is written. Or, as I like to say, "You can expect a clause and effect!" (A pun AND a rhyme — I'm on a roll today!) Mortgaging/Granting Clause: This clause refers to the concept of hypothecation — the use of a property as collateral to secure the loan created to purchase the property — which is common to secured loan agreements, whether they use mortgages (in lien theory states) or deed trusts (in title theory states). The name this clause goes by in a given contract, then, is reflective of the "theory" of that contract's state. In the lien theory states, the clause pledges the property as security for the loan by placing a lien on the property. In title theory states, the clause accomplishes the same objective via the transfer of title to the lender or a trustee until the satisfaction of the loan. Defeasance/Satisfaction of Mortgage Clause: As with the mortgaging/granting clause, the two names used here — defeasance clause or satisfaction of mortgage clause — both address the same issue but are differentiated by name in response to the "theory" of the state in which the loan agreement was originated. In both instances, these clauses address what is done when the terms of the loan agreement are met in full by the borrower. The defeasance clause is used in title theory states and stipulates that the title held by the lender or trustee is "defeated" once the loan is paid in full and that the title will be conveyed to the borrower with full ownership rights. The satisfaction of mortgage clause accomplishes the same thing in lien theory states by declaring that the note has been paid in full and that the lien on the title is removed. Once issued, the lender's official declaration that the terms of the mortgage have been met should be recorded. Release Clause: This clause allows for the partial release of the property from the mortgage loan agreement in proportion to the amount paid off by the borrower. This clause typically shows up in a blanket mortgage (a mortgage that covers multiple properties). Neighborhood developers often have a release clause included in the mortgage contract. Individual buyers would pay a certain amount of money to have the property they are purchasing released from the developer's blanket mortgage. Acceleration Clause: An acceleration clause makes the entire loan amount due immediately upon default — which might explain why it's also known as a due-on-default clause. 😉 While typically triggered by payment default, the acceleration clause can actually be used in response to default of any of the terms of the mortgage agreement. Lacking this clause, a lender would have to sue the borrower for each individual installment payment missed. If the borrower is unable to make full payment of the loan as stipulated by this clause, the lender can choose to initiate foreclosure. Right to Reinstate Clause: As kind of a response to or defense against the lender-friendly acceleration clause, the right to reinstate clause provides the borrower a way to get back on track by bringing current any delinquent payments so that they can proceed forward in a pre-acceleration environment, making regular monthly payments under the original terms of the contract. This clause, when implemented, has the effect of halting the foreclosure process that was initiated after acceleration. It's worth noting that Georgia does NOT recognize statutory redemption, so this right to reinstate is only available in the state prior to the foreclosure sale. (More information about the use and limitations of equitable and statutory redemption is provided in our treatment of foreclosure later in this level.)

The Takeaway

As you have learned, there are multiple paths to foreclosure. Which one is used in a given situation will depend on such things as the specific circumstances involved, state law, the mortgage provisions contained in the note and security instrument, or a combination of all of these things. You should be familiar with the possible paths to foreclosure in your state in order to be the resource and guide your clients facing this challenge will need. In Chapter 6, you learned: ✅ The different paths a foreclosure can take. Now that you have learned how foreclosure works, in the next chapter, you'll learn about the alternatives to foreclosure!

Dissecting a Mortgage Loan

As already mentioned, most home buyers require financing to make that purchase. And most people refer to that financing instrument as a mortgage loan. While not totally incorrect, that is a layperson's usage of the term that is incomplete at best. One Mortgage Loan = Two Documents: In actuality, a single mortgage loan or mortgage agreement hangs on two important documents: the promissory note and the security instrument. (We've talked about these two documents in past levels, and we're going to take an even deeper look at them again shortly — They're just that important!) Combined, the promissory note and the security instrument address: . The borrower's acknowledgment of debt and promise to pay that debt (both the loan amount and earned interest). . The designation of the property as collateral to secure the debt. . The terms of repayment and the consequences of failure to meet those terms. . The obligations of the borrower to protect the lender's interest in the property during the life of the loan.

The Takeaway

As important as it is to understand the documents that make up a mortgage loan, it's just as critical to understand the need to get those documents promptly recorded. It helps lenders establish debt priority, and it helps sellers and buyers know whether or not a property is encumbered with any outstanding liens as they look to buy and sell. In Chapter 1, you learned: ✅ How the use of property as security in real estate financing is handled and what benefits it provides. ✅ What documents make up a mortgage loan. ✅ The process and importance of recording a mortgage. In Chapter 2, we'll be discussing one of the two primary documents that make up a mortgage agreement. I can't say more about it now, but I "promissory" that it will be well worth your while!

The Takeaway

As most of your clients will need to sign a promissory note in order to get the financing they need to purchase a home, your familiarity with its purpose and contents is key to your being a valuable resource to them. You may not be responsible for originating their loans, but you can help them feel more confident and educated about what they are signing and obligating themselves to. In Chapter 2, you learned: ✅ The role of a promissory note in real estate financing. ✅ The typical information contained in a promissory note. ✅ What is meant by a negotiable instrument and how that ties the promissory note back to the secondary mortgage market. Now that you know your way around the promissory note, it's only logical that, in the next chapter, I would teach you a little more about its companion document: the security instrument!

Level Assessment a) public auction.

How are foreclosure sales typically handled? a) public auction. b) public open house. c) private auction. d) specialized MLS listing.

Quiz Level 14 b) They are both mutually agreed-upon alternatives to foreclosure. A short sale is similar to a deed in lieu of foreclosure in that it's a mutually agreed-upon alternative to foreclosure.

How is a short sale similar to a deed in lieu of foreclosure? a) They are both court-ordered alternatives to foreclosure. b) They are both mutually agreed-upon alternatives to foreclosure. c) They both result in the borrower retaining the deed. d) They are both more expensive than most paths of foreclosure.

(F) Level Assessment a) by recording the mortgage according to state and local law. Constructive notice is best accomplished by recording the mortgage according to state and local requirements. Usually this will be with the county clerk's office where the property subject to the mortgage is located.

How is constructive notice best accomplished with respect to a mortgage? a) by recording the mortgage according to state and local law. b) by informing the lender of date of possession. c) by sending signed copies of the mortgage to all parties to the contract. d) by signing the security note for which the mortgage was created.

(F) Level Assessment a) defeat or cancel the mortgage by paying off the loan. In a title theory state, a defeasance clause provides the borrower with the ability to defeat or cancel the mortgage upon payment in full, wherein full ownership rights are bestowed upon the borrower.

In a title theory state, a defeasance clause provides the borrower with the ability to: a) defeat or cancel the mortgage by paying off the loan. b) defeat foreclosure efforts by the lender by bringing current any delinquent payments. c) defeat or cancel a foreclosure through statutory redemption. d) defeat or block a lender's efforts to bring a deficiency judgment.

More Clauses You Should Know

Meet some more common clauses! Due on Sale/Alienation Clause: An alienation clause or due-on-sale clause refers to a provision in the mortgage contract that triggers the right of the lender to demand payment in full of the loan upon the sale or conveyance of the property. The primary purpose of this clause is to prohibit a new buyer from being able to assume the terms of the original loan without the lender's approval and involvement. Under this clause, the lender can approve or reject someone from assuming the current loan, prohibit the loan altogether, or increase the interest rate upon assumption. It should be noted that FHA and VA loans do not allow alienation clauses in their loan contracts, but someone wanting to assume one of their loans must be deemed creditworthy. Power of Sale Clause: This is a clause in which the borrower pre-authorizes the sale of the property via a nonjudicial foreclosure in the event of a default. Funds from the sale would be applied to the unpaid balance on the loan. Georgia, as a title theory state, employs the power of sale in the security deed. Escalation Clause: This clause gives the lender the right to raise interest rates under certain circumstances. While the escalation clause is probably best associated with adjustable-rate mortgages that tie interest rates to market indexes, even some fixed-rate mortgage loans allow for interest rate hikes in the event of delinquent payments or change in the usage of the property. Prepayment Clause: Many mortgage loans contain a prepayment clause, which addresses the right of the borrower to pay all or part of the loan early with or without penalty. Those clauses that include a penalty might do so only for a limited period — often only for the earliest years of the loan. Prepayment clauses that carry no penalty allow borrowers to pay down their principal early, reducing the term of the loan and the amount of earned interest the lender will receive. You can see why this is great for borrowers, but not ideal for lenders. Because a prepayment penalty cannot be enforced unless it appears in the contract, a prepayment without penalty environment is the default and does not really need a clause to give the borrower that right. Nevertheless, you'll usually see a clause addressing this issue one way or the other. If a lender is intent on prohibiting prepayment altogether, they will include a lock-in clause that stipulates that the borrower pay exactly what is due each month without variance. Whereas a prepayment clause that allows prepayment without penalty creates, in effect, an open mortgage (with no definite end date), a lock-in mortgage can be said to create a closed mortgage (with a set termination date). FHA and VA loans do not allow prepayment penalties. Condemnation Clause: This clause protects the lender by stipulating that if the government were to force a sale of the property via its power of eminent domain, the borrower would be required to apply the funds from that sale towards the satisfaction of the loan. Exculpatory Clause: This clause protects the borrower in the event of default and foreclosure, stipulating that the property serving as collateral for the loan is, in fact, the only security on the note. The effect of this clause is the barring of the lender's ability to pursue a deficiency judgment against the borrower. Subordination Clause: In our earlier discussion on debt priority, we talked about subordination. You learned that, after a foreclosure sale, liens are typically paid off in order of their recordation. You also learned that there might be times when a lender would be willing to subordinate their lien's debt priority to another existing or anticipated lien — particularly when it serves to strengthen the likelihood of repayment of their loan or increases the value of the property securing their loan. This clause will appear in a mortgage loan agreement when the lender is amenable to subordination.

Deed in Lieu of Foreclosure

Often referred to as a friendly foreclosure, this alternative to foreclosure requires the agreement and cooperation of both lender and borrower. These are the typical steps in a deed in lieu of foreclosure process: . Borrower deeds the property to the lender. . Lender cancels borrower's debt. . Deed is conveyed and lien satisfaction is recorded. . Lender takes possession. Pretty straightforward. Not too complicated. But there are some things for each party to think about. Let's look at those now. What the Borrower Needs to Think About: Spared both the personal embarrassment and the degree of credit hit that actual foreclosure can entail, the borrower may embrace deed in lieu of foreclosure as a way to make the best of a bad situation. If the value of the property is less than the outstanding debt, the prudent borrower should attempt to have the lender waive the right to a deficiency judgment (if the contract and/or state doesn't already prohibit it) or negotiate it down to an amount the borrower can live with and get that commitment in writing. On the other hand, if the property value exceeds the loan debt, the borrower might be better served to sell the property, satisfy the loan with the proceeds, and pocket any profit. One more thing the borrower needs to be aware of: This process could be a tax event. If the debt forgiven is more than $600, the lender is required to report it to the IRS, who will be looking to see it reported as income by the borrower, unless certain exclusions apply. Even if the borrower does not qualify for the IRS exclusions, they may still be rescued by the Mortgage Forgiveness Debt Relief Act if they meet its requirements. I say may because this act was signed into law in 2007 and has been extended every year since for more than a decade. So, if a borrower finds themselves in the position of receiving debt forgiveness on a mortgage loan, they need to make sure this act is still in effect and that they are eligible for it. What the Lender Needs to Think About: While the lender benefits from this alternate to foreclosure by avoiding the costs and delays associated with foreclosure, they might also have to deal with any junior liens that come with conveyance of the title. Depending on the number and severity of those junior loans, a lender might balk at deed in lieu of foreclosure all together, insist that they are resolved prior to implementing this alternative, or initiate an agreement or incentive with the junior lien holders to get them to release their liens on the property. The truth of the matter is that the presence of junior lien holders will often derail any conversation about a deed in lieu of foreclosure — especially in states like Georgia where lenders employ a relatively inexpensive, uncomplicated, nonjudicial foreclosure process. Additionally, the lender should be aware that the courts tend to look out for the interests of the borrower if complaints about this process are ever raised. Given the financial and emotional distress the borrower is under, the courts will look closely for any evidence that the lender is taking advantage of the borrower. To combat this, most lenders will get an up-to-date appraisal on the property before even considering a deed in lieu of foreclosure agreement.

Quiz Level 14 c) whether or not they allow the borrower to hold onto the property. Alternatives to foreclosure can be split out between those that allow the borrower to maintain possession of the property and those that involve relinquishing the property.

On what basis can alternatives to foreclosure be split into two categories? a) borrower-initiated and lender-initiated. b) judicial and nonjudicial. c) whether or not they allow the borrower to hold onto the property. d) whether or not a deficiency judgment is waived by the lender.

Level Assessment d) whether the borrower retains title during the life of the loan. One of the key differences between a lien theory state and a title theory state centers around whether the borrower retains title during the life of the loan.

One of the key differences between a lien theory state and a title theory state centers around: a) the degree of regulation and oversight of mortgage lenders. b) the costs associated with loan creation c) the average term of the mortgage loan d) whether the borrower retains title during the life of the loan.

Case Study: A Place to Call Home

Part 1 Just two years after Leslie moved into her new place, she was let go by the company she had spent most of her career helping to build. And, like a lot of people her age, she was unable to find a new job that paid anywhere close to what she was making previously. As responsible as she had always been, Leslie's current financial reality put her in a position she never thought possible: Leslie missed a mortgage payment. And what was worse, it became apparent to Leslie that her scheduled monthly mortgage payments would be more than what she could afford for the foreseeable future. Rather than travel down the long and painful path to foreclosure, Leslie decided to meet with her lender to discuss her options, including finding out what, if anything, she could do to keep her home. Question: Given what you know about Leslie's situation, what alternatives to foreclosure should she consider if her desire is to keep her home? Which alternatives would probably not work for her? Answer: Since the cause for Leslie's missed payment is not temporary in nature, certain options that would permit her to keep her home need to be ruled out: Special forbearance, repayment plans, FHA's Partial Claim program, and debt forgiveness are all typically extended with the assumption that the cause for the default is temporary and that the borrower would be able to resume making full monthly payment obligations. Leslie and her lender, however, could talk about loan modification which could be used to lower her future monthly payments. She could also discuss refinancing her loan with another lender with the same objective in mind. Both loan modification and refinancing would likely result in extending the loan period and increasing the overall cost of the loan, so Leslie would have to be open to that.

Case Study: A Place to Call Home

Part 2 Although her lender explained that loan modification and refinance were two alternatives to foreclosure that might allow Leslie to keep her home, Leslie ultimately decided that getting out from under her home would be the best course of action. That being the objective, Leslie wondered what alternatives to foreclosure she should consider now. Question: What alternatives to foreclosure that result in giving up ownership interest in a property can Leslie now consider? What possible issues does she need to be aware of? Answer: Leslie has a couple of alternatives to foreclosure available to her that involve giving up ownership interest in a property. The first is to sell her home for more than the outstanding mortgage debt, satisfying the loan, and pocketing any profit. If the value of the home does not exceed the outstanding debt, however, she has two remaining options, both of which require mutual agreement with her lender: deed in lieu of foreclosure or a short sale. With either of these two options, Leslie should attempt to get the lender to waive the right to a deficiency judgment and Leslie would need to investigate whether or not the debt forgiveness would become a taxable event for her. Additionally, she and the lender would need to negotiate with any junior lien holders that might have an interest in the property.

Case Study: A Place to Call Home

Part 3 Good news, Yoni! This pretend scenario has a happy ending. Even though Leslie avoided foreclosure, she still did not enjoy losing her home. But, instead of sulking, Leslie decided, then and there, that she would take control of her own destiny and never work for anyone else again. She enrolled in an online real estate course taught by a handsome and witty robot, found a supportive sponsoring broker, and in under a year's time, more than replaced her previous income — all while enjoying the freedoms that come with being your own boss. And, best of all, she used her newfound skills to negotiate the purchase of a home that she grew to love even more than the one she had given up. Way to go, pretend Leslie! Way to go!

Facts of a feather a) Judicial foreclosure. yes

Starts with a Lis Pendens. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Level Assessment d) property taxes. Property taxes owed would take first priority in the event of foreclosure. After that, some variation in order is possible, depending on subordination clauses or other considerations.

Which type of lien would take first priority in the event of foreclosure? a) mechanic liens. b) first lien. c) junior liens in the order they are recorded. d) property taxes.

(F) Level Assessment d) initiating a foreclosure. Timmy's lender can decide whether to prohibit a loan assumption altogether, approve or disapprove a buyer interested in assuming the loan, or increase the interest rate when the loan is assumed. Initiating foreclosure on Timmy simply for attempting to sell the home, however, is not a lender option.

Timmy decided that he would sell his lakefront home to Carl. Timmy's mortgage contains an alienation clause, which means his lender has all of the following options EXCEPT: a) increasing the interest rate when the loan is assumed. b) approving or disapproving a buyer interested in assuming the loan. c) prohibiting a loan assumption. d) initiating a foreclosure.

Level Assessment a) by penalization of delinquent tax payment with an increase in interest rate.

What do lenders commonly do to ensure property taxes are paid by the borrower? a) by penalization of delinquent tax payment with an increase in interest rate. b) by paying for the taxes and building that expense into the loan. c) by sending out quarterly reminders. d) by collecting tax payments in advance through escrow.

(F) Level Assessment b) the title held by a trustee in a trust deed security instrument. A naked title is the title held by a trustee in a trust deed security instrument. The naked title gives the trustee limited rights specific to what is necessary for them to carry out the terms of the trust while the borrower retains the traditional rights of ownership, including possession.

What is a naked title and who holds it? a) the title held by a lender with limited rights until the note is satisfied. b) the title held by a trustee in a trust deed security instrument. c) the title held by the owner that remains limited until full payment is made. d) a title in its bare essence without respect to any limitations placed on it regardless who holds it.

Level Assessment a) to secure the loan that is documented in the promissory note. A security instrument's purpose is to secure the loan that is documented in the promissory note.

What is the purpose of a security instrument in finance? a) to secure the loan that is documented in the promissory note. b) to serve as the borrower's promise to repay. c) to document the value of the property subject to the loan. d) to replace the promissory note.

(F) Level Assessment c) to allow a loan recorded after the first recorded loan to take priority position of repayment. A subordination clause allows a holder of the first recorded loan to allow a loan recorded after it to take priority position of repayment in event of foreclosure. This is sometimes done to facilitate loans created to improve the property that is the subject of the first recorded loan.

What is the purpose of a subordination clause? a) to establish the subordination of the borrower's rights or interests to those of the lender in the event of default. b) to establish priority of the borrower's interest over that of the lenders in areas of dispute. c) to allow a loan recorded after the first recorded loan to take priority position of repayment. d) to establish that the first recorded loan will never enjoy priority position if another lien is recorded for any reason.

(F) Level Assessment c) a promissory note and a security instrument. A mortgage loan is made up of a promissory note and a security instrument, such as a mortgage or trust deed.

What two documents make up what is commonly referred to as a mortgage loan? a) a lender's note and borrower's promise. b) a trust and a note. c) a promissory note and a security instrument. d) a mortgage and a deed.

(F) Level Assessment c) security deed. A security deed is the security instrument most predominantly used in Georgia.

What type of security instrument is predominantly used in Georgia? a) mortgage. b) mechanic lien. c) security deed. d) deed of trust.

Level Assessment a) Georgia does NOT recognize statutory redemption. Georgia does NOT recognize statutory redemption.

Which of the following is true regarding Georgia and statutory redemption? a) Georgia does NOT recognize statutory redemption. b) Georgia recognizes statutory redemption for nonjudicial foreclosures but NOT judicial foreclosures. c) Georgia recognizes statutory redemption. d) Georgia recognizes statutory redemption for judicial foreclosures but NOT nonjudicial foreclosures.

(F) Level Assessment a) a lock-in clause. Whereas a prepayment clause creates an open mortgage, a lock-in clause creates a closed mortgage and prohibits prepayment of the loan.

Whereas a prepayment clause creates an open mortgage, this creates a closed mortgage: a) a lock-in clause. b) an acceleration clause. c) an escalation clause. d) a lock-out clause.

Level Assessment a) escalation clause. An escalation clause allows a lender to raise the interest rate on a loan under certain conditions, such as if a property is no longer the primary residence of the borrower.

Which clause allows a lender to raise the interest rate on a loan under certain conditions, such as if a property is no longer the primary residence of the borrower? a) escalation clause. b) acceleration clause. c) exculpatory clause. d) variable interest clause.

Level Assessment a) strict foreclosure. Strict foreclosure is a form of judicial foreclosure that does NOT include a judicial sale. Instead, the lender asks the court to give the delinquent borrower a fixed time to exercise their equitable right of redemption (payment in full) or have the title awarded to the lender.

Which form of judicial foreclosure does NOT include a judicial sale? a) strict foreclosure. b) fixed equitable foreclosure. c) equitable judicial foreclosure. d) constructive judicial foreclosure.

Quiz Level 14 a) Borrower files for bankruptcy. The typical steps in a deed in lieu of foreclosure process include: 1. Borrower deeds the property to the lender, 2. Lender cancels borrower's debt, 3. Deed is conveyed and lien satisfaction is recorded, and 4. Lender takes possession.

Which of the following is NOT a typical step in the deed in lieu of foreclosure process? a) Borrower files for bankruptcy. b) Borrower deeds the property to the lender. c) Deed is conveyed and lien satisfaction is recorded. d) Lender cancels borrower's debt.

Level Assessment d) It is the most common foreclosure process used in the U.S. today.

Which of the following is NOT true about the foreclosure process known as "entry and possession"? a) It is a foreclosure process used by very few states. b) It involves the lender taking possession from borrower and holding it until all opportunities for redemption run out. c) If the borrower is resistant to this process, the lender will need to pursue a judicial foreclosure. d) It is the most common foreclosure process used in the U.S. today.

Level Assessment a) There are usually three parties involved in the mortgage: the borrower, the lender, and the trustee.

Which of the following is TRUE about lien theory states? a) There are usually three parties involved in the mortgage: the borrower, the lender, and the trustee. b) A mortgage, rather than a deed trust, is the security instrument that is typically used. c) A lender holds title until repayment of the loan. d) A trustee holds title until repayment of the loan.

(F) Level Assessment b) no third-party trustee involved. There is no third-party trustee involved in a security deed as used in Georgia. Instead of their being a naked title held by a trustee, you have a defeasible title being held by the lender.

Which of the following is the primary way in which Georgia's security deed differs from a trust deed? a) it's a security instrument for title theory states. b) no third-party trustee involved. c) it's a security instrument for lien theory states. d) it is a naked title.

Level Assessment c) It's allowed if a court confirms the sale. The right to pursue a deficiency judgment will vary from state to state. If allowed, the circumstances under which it can be pursued will also vary from state to state. If a court confirms the sale, Georgia does allows a lender to pursue a deficiency judgment.

Which of the following is true about Georgia and the use of a deficiency judgment in the foreclosure process? a) It's allowed under any circumstances. b) It's allowed as long as the court remains silent about the sale. c) It's allowed if a court confirms the sale. d) It's not allowed under any circumstances.

The Takeaway

While the alternatives to foreclosure are not usually what you call best-case scenarios, they often provide a better solution than the traditional paths to foreclosure. The foundational knowledge you have gained from this chapter will assist you in helping clients faced with these kinds of decisions. Many real estate agents find foreclosure sales and short sales to be a rewarding niche in which to work. If you make that choice, just commit yourself to getting all the additional training needed to excel in this area. In Chapter 7, you learned: ✅ The alternatives to foreclosure, including identifying the benefits and disadvantages of each choice to the borrower and lender. That's it for this level, Yoni!

(F) Level Assessment b) the borrower (grantor) and the lender (grantee). There are two parties involved in a Georgia security deed: The borrower (grantor) and the lender (grantee).

Who are the parties involved in a Georgia security deed? a) the borrower (grantee) and the lender (grantor). b) the borrower (grantor) and the lender (grantee). c) the borrower (grantor) and the trustee (beneficiary). d) the borrower (trustee) and the lender (beneficiary).

(F) Level Assessment a) sale by advertisement. With respect to foreclosure, "power of sale" is also known as "sale by advertisement." It is a non-judicial foreclosure process lenders can use as long as a clause providing its use is included in the security document.

With respect to foreclosure, "power of sale" is also known as: a) sale by advertisement. b) entry and possession. c) judicial foreclosure. d) short sale.

Debt Priority

You know how some people go by a number of names? Like your friend, Bob, for example. His dad calls him Robert, his mom calls him Robbie, and his bros call him... well, I'd better not say. Anyway, the point is that sometimes the same person or thing can have several names — as is the case with debt priority. Earlier in this course, I taught it as lien priority, which is completely correct. But many in the industry refer to the concept by this name, so we'll go with it for now, ok? In the end, I want you to understand that a lien is simply a claim of debt, so it makes perfectly good sense that the terms would be used interchangeably. How It Comes About: The reason debt priority is a thing is because the same property can serve as collateral for multiple loans (mortgages). That might sound strange, but in fact, it is a very common experience. Think about how many people get home improvement loans to add a mother-in-law apartment, pave a driveway, put in a pool, etc. It happens all the time. And when it does, it's not a problem — as long as the borrower stays current on all loans, that is. If the borrower should default on any one of the mortgages, that's when debt priority becomes important. Because if foreclosure is initiated, the lien holders will line up to get paid. What It Is: As its name suggests, debt priority refers to the order or priority of repayment of debt from the proceeds of a foreclosure sale. Generally, priority is determined by order of recordation of the loan (as was discussed in Chapter 1). Senior and Junior Mortgages: In almost every instance, the first loan to be recorded against the property is the original mortgage loan. This lender is then considered to be the holder of the senior mortgage (a.k.a. first mortgage) with respect to debt priority. All subsequent mortgages recorded are considered junior mortgages whose debt priority also falls in order of their recording. Exceptions to Debt Priority: Debts that are or can be exempt from recordation debt priority include: Property Taxes: Knowing that unpaid property taxes (and special assessments) always get top billing in debt priority, a lender will require contributions towards that obligation to be a part of the borrower's monthly payment. The lender holds in escrow the collected amount and pays the taxes as they come due. Mechanic Liens: In some states, the lien of an unpaid contractor, subcontractor, or material provider will not be held to debt priority based on recordation order but will, instead, take on an effective date back to the time the service and/or materials were supplied to the borrower. The rationale for this favored treatment is that the labor and/or supplies of those seeking repayment served to enhance the value of the collateralized property. Subordination Agreements: While lien holders typically want the highest debt priority they can get, there are occasions where it serves their own best interests to allow another lien holder that came after them in recordation to move ahead of their own loan, nonetheless. One of the more common examples of this is where the lender of a first mortgage on an undeveloped piece of land will subordinate their lien to that of a construction loan because the improvement made with the construction loan raises the value of the collateralized property, thereby increasing the security of the first mortgage. A lender willing to do this will indicate as much with the inclusion of a subordination clause in the mortgage agreement.

Facts of a feather a) Judicial foreclosure. yes

a surplus money action may be filed by junior lien holders. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. no d) Strict foreclosure.

Facts of a feather b) Power of sale. yes

also known as "sale by advertisement". a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather b) Power of sale. yes

junior lien holders sometimes miss the notice of sale and lose their rights. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather d) Strict foreclosure. yes

less commonly used form of judicial foreclosure. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather d) Strict foreclosure.

no sale with this form of judicial foreclosure. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather b) Power of sale. yes

nonjudicial form of foreclosure predominantly used in more than half of the states in the nation. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather d) Strict foreclosure. yes

often used when the debt far exceeds the value of the property. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.

Facts of a feather d) Strict foreclosure. yes

some controversy regarding whether this should be categorized as a judicial foreclosure. a) Judicial foreclosure. b) Power of sale. c) Entry and possession. d) Strict foreclosure.