Chapter 20 Flashcards
Security
the assurance that a creditor will be paid back for any money loaned or for credit extended to a debtor
Security Interest
The right to use collateral to recover
a debt
Unsecured loan
One in which creditors have nothing
of value that they can repossess and sell to recover the money owed to them by the debtor.
Secured loan
one in which creditors have
something of value from which they
can be paid if the debtor does not pay
Mortgage
a transfer of an interest in property
for the purpose of creating a security for a debt.
Mortgagor
the person that borrows the money and pays back the mortgage loan
Mortgagee
the lender that provides the funds for a mortgage loan
Conventional mortgage
-involves no government backing by either insurance or guarantee
-loan is made by private lenders, and the risks of loss are borne exclusively by them
Variable or flexible or adjustable rate mortgage (ARM)
- has a rate of interest that changes according to fluctuations in the index to which it is tied
- must include a maximum rate that cannot be exceeded
Balloon Payment Mortgage
- has comparatively low fixed payments during the life of the mortgage, followed by one large
final (balloon) payment. - the mortgage has a fixed interest rate, but it is written for a short time period, such as five
years
Subprime mortgage
- borrowers have been disqualified from conventional loan because of a bad credit history or because
of a low debt-to-income ratio. - these loans generally have a much higher default rate than most of the conventional loans
Interest-only mortgage
Borrower will agree to pay
only the interest on the loan
for a set period of time set by
the agreement
Reverse mortgage
type of loan that allows
home owners to convert
some of the equity in their
home into cash while
retaining ownership of their
home
Graduated-payment mortgage
-has a fixed interest rate
during the life of the
mortgage
-the monthly payments made
by the mortgagor increase
over the term of the loan
Junior Mortgage
- a mortgage subject to a prior mortgage.
- also called a second (or subsequent) mortgage
-Takes advantage of the equity that has built up in a home over a
period of time. - If all the mortgages are recorded, the holders of second and
subsequent mortgages may exercise their rights against the
property only after prior mortgages have been paid off. - Thus, if the first mortgagee causes the property to be sold and is
paid off in full, the second and subsequent mortgages are paid out
of the proceeds that remain
Home equity loan
an outright loan or a line of credit made available to homeowners based on the value of the property over and above any existing mortgages
A mortgage must be:
-in writing and
-delivered to the recorder’s office in the county where the
property is located.
-If the mortgage is not recorded and a later mortgage is given
on the same property, the new mortgage is superior to the
first.
Recording a mortgage
notifies any third party who may
be interested in purchasing the property that the mortgagee has an interest in the real property covered by the mortgage.
Rights and Duties of the Mortgagor
- Right to possess the property.
- Right to any income produced by the property.
- Right to use the property for a second or third mortgage.
- Right to pay off the mortgage in full
- Make payments on time
- Preserve and maintain the mortgaged property
- Must pay all taxes and assessments
Rights and Duties of the Mortgagee
- Unrestricted right to sell, assign, or transfer the
mortgage to a third party. - Right to receive each installment payment as it falls due.
- Right to apply to a court to have the property sold If the
mortgagor has defaulted. - Cannot lose their interest in property without due process
Collateral
The property that is subject to the security interest
Secured party
The lender or seller who holds the security interest
Security agreement
-an agreement that creates a security interest
-must be in writing, be signed by the debtor, and contain a description of the collateral that is used for security
Types of Personal Property as Security
- Consumer goods (used or brought for personal, family, or household purposes)
-Equipment - Farm products (crops or livestock or supplies used in farming operations)
- Inventory and Raw Materials
- Fixtures
Purchase money security interest
a security interest taken by a lender or a seller of an item to secure its price
Priorities of Claims
-Sometimes, two or more parties claim a security interest in the same collateral.
-Conflicting security interests rank according to priority in time of filing or perfection
- The UCC helps resolve these conflicts
Perfection
To preserve the right to first claim on the collateral, creditors
must “perfect” their interest
-A security interest can be perfected in one of three ways: by filing a financing statement in the
appropriate government office, by attachment alone, or by possession of the collateral
-Security interests in most kinds of personal property are perfected by filing a financing statement in a public office
purchase money security interest (PMSI)
in consumer goods is perfected
the moment it attaches, with the exception of motor vehicles and fixtures.
-Security interests on motor vehicles are perfected by making a note of the lien on the certificate of
title issued by the state government.
-Security interests on fixtures are perfected by filing a financing statement with the registry of deeds
where the land is located.
Possession
A security interest may be perfected when the secured party
(creditor) takes possession of the collateral.
Default
If a debtor defaults by failing to make payments when
due, the secured party may satisfy the debt by taking
possession of the collateral.
Pledge
Because of the difficulties of doing this, the perfection of a security interest by possession, as in a pledge, is better than other types of perfection
Repossession
Collateral may be repossessed without going through the court if it can be done without causing a
disturbance; otherwise, the creditor must use legal processes.
