Chapter 9: Financing Real Property Flashcards
Creating the obligation
Define Promissory Note
A specialized type of contract between the borrower and the lender which the borrower agrees to repay the loan on certain terms and conditions (has intrinsic value, can be resold)
Creating the obligation
Define Mortgage
Has no intrinsic value, merely provides a remedy that the lender can use. Mortgagor conveys an interest in the property to the mortgagee as security for performance.
Creating the obligation
Define Acceleration Clause
Acceleration of loan after default is the preliminary step of the foreclosure process
Creating the obligation
Define “Due on Sale” clause
Gives the lender the option to demand full payment of the loan if the borrowers sell the property or any part of it
Creating the obligation
List of common nonmonetary obligations
- Keep the property in good repair
- Avoid waste
- Maintain adequate property insurance
- Defend title in litigation
Creating the obligation
What occurs when the buyer “assumes the loan?”
The buyer is personally liable to repay the loan and the personal assets of the buyer are at risk
Creating the obligation
What occurs when the buyer “takes subject to” the loan?
The buyer is not personally liable and personal assets are not at risk
Providing the security
3 mortgage theories
- Title theory
- Intermediate theory
- Lien theory
Providing the security
Define Title Theory
Mortgage transfers title from the borrower to the lender and the lenders has right of possession
Providing the security
Define Intermediate theory
Lender holds title but does not have right of possession
Providing the security
Define Lien theory
Lender has security interest in the property but does not have right of possession until foreclosure
Providing the security
How does the “rents and profits clause” function?
If the security is rental property the lender may collect rents directly from the tenants
Deed of Trust
Define Deed of Trust
The trustor conveys property in trust to 3d party, trustee, for the benefit of the beneficiary (lender)
Closely resembles a mortgage but designed to allow lenders to circumvent laws - courts have rejected the distinction
Installment Land Contract
Define Installment Land Contract
Buyer promises to pay seller over a fixed period and seller retains title until all the payments are made (many courts view this arrangement as merely a mortgage to avoid unfair outcomes)
Equitable Mortgage
What is the rule for creating equitable mortgages?
If a transaction resolves itself into a security where it is used for the purpose of pledging real property with the intent to have the effect of a mortgage, it is a mortgage
Equitable Mortgage
What are the 8 factors for finding an equitable mortgage?
- Statements made by the homeoowner indicating that homeownership continues
- Disparity between value paid and actual value
- Existence of option to repurchase
- Homeowner’s continued possession
- Continued responsibilites for paying taxes and maintaining the property
- Disparity in bargaining power and sophisitication
- Irregularity of purchase process - listed? appraisal?
- Financial distress of homeowner
Foreclosing on the Security
What can owners do to avoid losing their home?
- Reinstatement
- Equitable Redemption
Foreclosing on the Security
Define Reinstatement
A borrower can avoid foreclosure by paying the missed payments before the lender accelerates the loan - some states allow for a limited time
Foreclosing on the Security
Define Equitable redemption
A borrower may avoid foreclosure by paying the loan in full (plus incurred costs) after default but before the sale
Judicial foreclosure
What are the steps to a judicial foreclosure?
- Complaint is filed against necessary parties
- Notice is given of the time and place of the foreclosure sale
- Judicial confirmation of the sale
- Quitclaim deed is delivered to successful bidder
Results of the Foreclosure Sale
How does foreclosure effect other interests?
A foreclosure on a senior mortgage will wipe out all junior mortgages (because lender took on the risk before additional risk was added) and buyer will take subject to any senior mortgages
Results of the Foreclosure Sale
In what order are foreclosure proceeds distributed?
- First to the foreclosing lender
- Then to junior interests in order of priority
- Any surplus proceeds go to the borrower
Special Mortgage Priority Rules
What are the 3 situations where special priority rules apply?
- Purchase money mortgage
- Future advance mortgage
- Deed in lieu of foreclosure
Special Mortgage Priority Rules
How does a purchase money mortgage effect priority rules?
A purchase money mortgage has priority over any other lien or interest that attaches to the property
Special Mortgage Priority Rules
How does a future advance mortgage effect priority rules?
If the mortgage obligates the lender to make additional loans, the new loan takes priority
Special Mortgage Priority Rules
How does a deed in lieu of foreclosure effect priority rules?
Lender accepts the deed, but it does not wipe out junior interests. Lender takes subject to the junior interests.
Exercising Rights After Foreclosure
What rights does the borrower have after foreclosure?
- Statutory right of redemption
- Setting aside the sale
Exercising Rights After Foreclosure
What is the buyer’s statutory right of redemption?
In about half of states buyer may regain title by redeeming property from successful bidder within a set period of time - borrower must pay sales price plus interest to the bidder
Exercising Rights After Foreclosure
What is the buyer’s right to set aside the sale?
If a nonjudicial sale is so inadequate as to “shock the conscience” or is “grossly inadequate” the court may set aside the sale. (eg a sale for 20% or less of market value will often meet this standard)
Protecting the Lender
How can the lender recover the remainder of the loan if the sale does not suffice?
Lender can sue the borrower for breach of contract and obtain a deficiency judgment
Protecting the Lender
How do states restrict deficiency judgments from producing unfair outcomes? (eg bank forecloses on loan for $170k, acquires house worth $200k for $50k, gets judgment for $120k, and ultimately receives $320k of total assets)
- Fair value
- Prohibition
- Other approaches
Protecting the Lender
Define fair value as a method for promoting fair outcomes in deficiency judgments
Most states restrict the size of a deficiency judgment by limiting it to the amount by which the unpaid loan balance exceeds the fair market value of the property
Protecting the Lender
Define prohibition as a method for promoting fair outcomes in deficiency judgments
Some states prohibit deficiency judgments altogether in certain situations such as nonjudicial foreclosures
Protecting the Lender
What are some other approaches for promoting fair outcomes
A number of courts will invalidate deficiency judgments based on inadequacy of the sale price
