Ass. 46 - Mortgages/ Foreclosure Flashcards
who is the mortgagor
the owner/ borrower
who is the mortgagee
the lender
ARM
adjustable rate mortgage
balloon payments
large payments generally at the end of the mortgage
what are the 2 parts of a mortgage?
- promissory note
- mortgage deed
promissory note
contract establishing the debt
mortgage deed
establishes the debt w the property as collateral
mortgage definition
the conveyance of an interest in real property as security for the performance of an obligation
- obligation is almost always a loan of money evidenced by the promissory note
lien theory
- mortgage is seen as only a lien on the property
- lender merely holds a security interest in property not title, therefore not entitled to property unless foreclosed
- 2/3 of states follow
title theory
- theory that the mortgage is the transfer of title to the mortgagee (lender) until the debt is repaid
- mortgagee has the theoretical right to take possession of the secured property - and thus obtain its rents and profits - w/o foreclosure
what does the promissory note contain?
- identifies the borrower and lender
- contains borrowers promise to repay the loan on stated terms and conditions
- recites that its repayment is secured by mortgage
- is signed by borrower
4 key components of promissory note
- the amount
- the interest rate
- the term
- the amortization schedules
component of prom note: the amount
usually limited by the applicable loan to value ratio
component of prom note: interest rate
- may be either fixed
(remains the same during the entire life of the loan) - or an adjustable rate
(ARM - varies over the life of the loan)
component of prom note: the term
- typical loan has a term of 15, 25, or 30 years
- loan and interest must be paid by the end of the loan term
component of prom note: amortization schedule
- Specifies the method by which the borrower repays the loan; sets forth the amount and due date for each loan repayment
- Most fixed-rate residential loans are fully-amortized, requiring a fixed monthly payment over the entire term
what are the 2 types of foreclosure?
- judicial foreclosure
- foreclosure by power of sale
judicial foreclosure basics
- available in ALL jurisdictions and dominant method in about half of the states
- specialized type of litigation
- provided by statute
judicial foreclosure process
- lender, as P, begins JF process by filing complaint against the borrower, junior lienholders, and other persons holding interests in the property that are subordinate to the mortgage lender
- the complaint alleges that a default has occurred and requests that the mortgage be foreclosed in a court-supervised sale
- the sale does not generate anything close to fair market value
judicial foreclosure sale
- Held in public location during normal biz hours and is usually conducted by a court-appointed officials
- Mortgagor and mortgagee and any member of the public bid at the sale
- Mortgagee (lender) enjoys an advantage: it can bid w/o case, using instead the unpaid loan balance owed to it (everyone else can only bid cash)
foreclosure by power of sale
- Predominates in the other half of states
- Purely private, w/o judicial involvement
- Creates the potential for abuse
- Arises from contract
- Permitted only when authorized by the express terms of the mortgage
ways to default on a mortgage
- Non payment
- Lack of insurance
- Fraud/ misrepresentation w regard to mortgage application
- Failure to keep the property up (waste)
equity of redemption
the right to redeem by paying the balance of the debt before foreclosure
can the equity of redemption be waived?
- borrower can never waive this as a condition to obtain a loan
- however, may be waived AFTER purchasing by handing the property back to the lender
statutory right of redemption
- Allows the mortgagor to buy back the property for the price bid at the foreclosure sale for a designated period (often a year) AFTER foreclosure.
- Generally allows the mortgagor to remain in possession of the property in the meanwhile
deed of trust
- Debtor/notemaker is the “trustor”
- Trustor gives the deed of trust to 3rd party trustee, who is usually closely connected to lender (lawyer, corp, or officer)
- In the event of default, the lender instructs the trustee to proceed with foreclosing the deed of trust by sale
installment land contract
- The debtor is the purchaser of the land who signs a K w the vendor, agreeing to make regular installment payments until the full k price has been paid
- At the time the vender gives a deed transferring legal title the purchaser
- In event of default, K usually contains a forfeiture clause providing that the vendor may cancel the k, retain all money paid to date and retake possession of the land
the use of parol evidence
- Courts will always use parol evidence in considering contentions that a purported deed is actually a mortgage
- In effect, this is an exception to the parol evidence rule
presumptions accompanying a deed absolute
there is a presumption that documents are what they purport to be
how is the priority of claims in foreclosure established?
established by the date of recording of the lien
order of priority of claims in foreclosure
- costs of foreclosure
- tax liens
- 1st mortgage (senior lienholder)
- 2nd mortgage (junior lienholder)
what does Foreclosure of senior lien do?
wipes out all junior liens secured by the property
- Debt is still there but no more security
- Does not word the other way around
will inadequacy of foreclosure sale price invalidate the sale?
- Normally will not invalidate a sale
- Will ONLY invalidate if the disparity btwn sale price and fair market value “shocks the conscious” or is “grossly inadequate
restatement view of inadequacy of foreclosure sale
will be invalidated if the sale price is less than 20% of FMV
defects in time of sale
if sale is conducted on a different day/hour than specified
defects in place of sale
normally must take place in county where property is located
chilled bidding
mortgagee is engaged in irregular conduct that suppressed the bidding (ex. kept from the public)
