Ch 27: Financing Instruments Flashcards
List and describe three provisions that are common to most notes.
Amount borrowed. This is the face amount of the note that is advanced when the note is executed.
Interest rate. The rate can be either fixed or adjustable. If it’s adjustable, the note should specify how the rate will change.
Amount of payments. The amount of the payments will be determined by the face amount of the loan, the length of the loan and the interest rate.
What is a mortgage?
A mortgage is a financing instrument that pledges the real property described in the mortgage document as collateral for the debt described in the note.
How does a note differ from a mortgage?
A note is a complete contract. After it is legally signed by the borrower, it is a legally enforceable and fully negotiable financial instrument. A mortgage, however, always needs a note to be legally valid.
What is the purpose of an acceleration clause?
This clause outlines what will happen if the borrower fails to pay the mortgage, to maintain the property or to perform any other agreement, stipulation, or condition contained in the mortgage. Any failure on the part of the borrower can result in the lender accelerating the mortgage and taking whatever steps are needed to recover the investment.
What is a deed of trust?
A deed of trust is a legal document which transfers title to a property to a third-party trustee as security for an obligation owed by the trustor (the borrower) to the beneficiary (the lender).
List two reasons that lenders prefer to use the deed of trust when making loans. (See other correct answers on previous pages.)
A trustee may be given the power to sell property after default without going through the time-consuming judicial foreclosure process.
A deed of trust can be used to secure more than one note.
List two differences between a mortgage and a deed of trust? (See other correct answers on previous pages.)
A mortgage is a lien on the property being given as collateral, with the legal title remaining in the name of the borrower. In a deed of trust, the borrower conveys the property to the trustee, who holds the title to the collateral on behalf of the lender until the loan terms have been satisfied.
A mortgage may be discharged by a simple acknowledgement that the loan terms have been satisfied. A deed of trust is discharged using a reconveyance of title form.
What is the primary difference between a title theory foreclosure and a lien theory foreclosure?
Under title theory, a non-judicial foreclosure process occurs. Under lien theory, the foreclosure is through a judicial proceeding.
What is it called when a mortgage has been transferred from the original lender or borrower to a third party?
Mortgage Assignment
What is the purpose of a non-recourse mortgage clause?
A non-recourse mortgage clause states that if the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount.
What is the function of a defeasance clause in a mortgage?
A defeasance clause in a mortgage indicates that the borrower will be given the title to the property once all mortgage terms are met.
What mortgage provision allows the existing lender to call the entire loan due and payable if the homeowner transfers title to the home without paying the loan in full?
Due-on-sale clause
What describes a contract that is a promise to pay back a loan?
A promissory note
What allows a lender to prevent the assumption of a mortgage by a buyer if the borrower sells the property?
An alienation clause
What theory, in which property ownership is held and transferred, does the lender hold the title to the property in the name of the borrower through the instrument known as “deed of trust?”
Title theory
