Chapter 9 - Mortgage and Note Flashcards
Promissory Note
- Contract between borrower and lender
- Establishes the amount of debt, terms of payment and interest rate
- Written promise to repay a debt
- Interest is not required to make it valid
What makes a promissory note valid?
1) Must be in writing
2) Must be between a borrower and lender
3) It mist state the borrower’s promise to pay a certain sum of money
4) Show terms of payment
5) Be signed by the borrower
6) be voluntarily delivered by the borrower and accepted by the lender
7) If there is interest, it must be stated
Principal
Amount of the obligation
Acceleration Clause
Allows the lender to demand immediate payment of the entire loan if the borrower defaults
Mortgage Loan
A promissory note that is tied to the mortgage that it secures it
- If not tied it is a personal loan
Mortgage
- A document that makes property security for the repayment of a debt
- Security that the lender can sell if the not is not repaid
Hypothecation
Borrower retains the rights to possess and use the property while it serves as collateral
- A pledge for something as a security for a loan, without the actual delivery of the pledged item (Think of a car loan)
Pledging
To give up possession of the property to the lender while it serves as collateral (Think of a pawn shop loan)
Mortgager
The party giving the mortgage (Borrower)
- The party who hypothecates
Mortgagee
The party receiving the mortgage (Lender)
Title Theory
The legal position that a mortgage conveys title to the lender
Lein Theory
The legal position that a mortgage creates a charge against the property rather than conveying it to the lender
Intermediate Theory
A mortgage is a lien unless the borrower defaults, at which time it conveys title to the lender
Covenants
Promises
Covenant to Pay Taxes
Borrower agrees to pay the taxes on the mortgaged property
- If taxes are not paid, they become a lien that is superior to the lenders mortgage
Escrow Clause
Used as an additional convenant
Covenant of Insurance
Requires the borrower to carry adequate insurance against damage/destruction of the property
- Protects the value of the collateral for the loan
Covenant of Good Repair
(Covenant of Preservation & Maintenance)
Requires the borrower to keep the property in good repair
Alienation Clause
(Due-on-Sale Clause)
Gives the lender the right to call the entire loan balance due if the property is sold or otherwise conveyed (alienated) by the borrower
Condemnation Clause
If all or part of the property is taken by eminent domain, any money received is used to reduce the balance owning on the note
Are mortgages recorded?
Yes, because it deals with rights and interests
Are promissory notes recorded?
No, because it represents a personal obligation
Satisfaction of Mortgage
Mortgage is paid in full
Marginal Release
A notation on the recorded mortgage that shows the books an page location on the mortgage release
Partial Release
Borrower asks lender to release a portion of mortgaged property from the mortgage after part of the loan has been repaid
- Used for land development
Novation
- Releases seller from personal obligation created on promissory note
- Lender can now require only the buyer to repay the loan
- Safest for the seller
“Subject to”
If buyer stops making mortgage payments, the seller is responsible
Assumption
The buyer promises in writing that he will pay loan.
- This personally obligates buyer and seller
Certificate of Reduction
Shows how much is still owed on existing loan
Estoppel Certificate
- Borrower is asked to verify amount still owed and rate of interest
- Normally requested when holder of loan sells to another
First Mortgage
- Senior mortgage
- The mortgage loan with highest priority for repayment in the even of foreclosure
Junior Mortgage
- 2nd, 3rd… mortgage
- Any mortgage on a property that is subordinate to the first in priority
Subordination
Voluntary acceptance of a lower mortgage priority that one would otherwise be entitled to
Chattel Mortgage
- Financing Statement used to establish lien priority
- A mortgage secured by personal property
Delinquent Loan
A loan wherein the borrower is behind on his payments
Judicial Foreclosure
- More expensive
- Time consuming
- May give lender rights to collect the fill amount of a loan if property sells for less than the amount owed
- Preferred when case is complicated and involves many parties
Nonjudicial Foreclosure
- Cheaper
- Faster
- Simpler
- Preferred by lenders
- When cases are simple and straight forward
Surplus Money Action
A claim for payment filed by a junior mortgage holder at a foreclosure sale
Notice of Lis Pendens
A notice that informs the public that legal action is pending against the property
Equity of Redemption
Privilege to redeem the property at any time between the first sign of delinquency and moment of foreclosure sale
Does foreclosure cut off property tax liens against the property
No
Deficiency Judgement
- A judgement against a borrower if the foreclosure sale does not bring enough money to pay the balance owed
- Borrower may have to sell other assets
- Only a judge can award a lender a deficiency judgement
Statutory Redemption
The foreclosed borrower has appox. 1 month to 1 year or more after foreclosure sale to pay in full the judgement and retake title (Depends on state)
Certificate of Sale
Highest bidder gets certificate entitling them to the deed if no redemption is made
Receiver
- Judge appointment
- Takes charge of property during the redemption period
Strict Foreclosure
Judicial foreclosure without judicial sale and usually without statutory redemption period
- Debt exceeds the property value
Power of Sale
- Sale by advertisement
- Must be placed in mortgage before it is signed
- Lender is allowed to conduct a foreclosure sale without first going to court
Entry and Possesion
- Borrower moved out & lender moves in
- Recorded and witnessed in public records
- If borrower refuses, lender takes it to court
Deed in Lieu of Foreclosure
Voluntary act by both borrower and lender
- Friendly foreclosure
Installment Contract Foreclosure
- If buyer stops making payments, seller rescinds the contract
- Like a strict foreclosure without the protection of the courts
Equitable Mortgage
A written agreement that is considered to be a mortgage in its intent even though it may not follow the usual mortgage wording
Deed as security
Deed is given to secure a loan and treated as a mortgage
A promissory note which fails to state that is it to be secured by a mortgage or deed of trust is
A personal obligation of the borrowe
The words “or order” in a promissory note make it
A negotiable instrument
- Gives the lender the rights to transfer collection rights to another party
A borrower’s real property serves as collateral while the borrower retains the rights of possession and use of it by the process of
Hypothecation
The mortgagee under the terms of a mortgage is the
Lender.
- They are both the mortgagee under the terms of the mortgage and the obligee under the terms of the promissory note
A mortgage becomes null and void when the note is paid in full under the terms of the
Defeasance clasue
When purchasing a house, what is hypothecated with the mortgage?
Lot and house
Ed sold his home to Jean, subject to an existing mortgage loan. Jean later defaulted on the loan. Who is responsible
The mortgagee can look to Ed for the loan balance
The lien property of mortgages is determined by the
Date of recordation
Martin is preparing an offer to buy a lot on which the seller will carry back a mortgage. Martin wants to build a house on the lot and has applied for a construction loan, but the lender will only make the loan is it can be secured by a first mortgage. What is needed to make this happen?
The mortgage holder agrees to a subordination agreement to take a lower lien priority
In a foreclosure action, the lender asks the court for a judgment directing that the
- mortgagor’s interest in the property be cut off
- property be sold at public auction
- lender’s claim be paid from the sale proceeds
When a real estate mortgage is foreclosed, unpaid real estate tax liens against the property
Remain in force against the property
The deed given to the purchaser at foreclosure by the sheriff or other officer of the court usually takes the form of a
Special warranty deed
Bidders pay more at a foreclosure sale is the property is located in a state which
gives title and possession to the highest bidder immediately following the foreclosure auction
