Chapter 9: Mortgage Theory

Question 1

Title vs. Lien Theory

Answer 1

Title theory:
Title is held in the lender’s name until the final payment is made, when title is passed or re-conveyed to the borrower.

Lien theory:
Title to the property is held in the name of the borrower with a security interest or lien to the property being granted to the lender.

Question 2

What is a promissory note (note)?

Answer 2

A contract between the borrower (obligator) and lender (Obligee).

It is written evidence of a debt

Question 3

What is included in a promissory note?

Answer 3

1. Establishes the amount of debt
2. Terms of repayment
3. Interest rate
4. Creates an “obligation”

Question 4

What must be included for a note to be valid?

Answer 4

1. Be in writing
2. Be between borrower and seller
3. State borrower’s promise to pay
4. Show terms of payment
5. Be signed by the borrower
6. Must be delivered by borrower to lender
7. Lender accepts

Question 5

What does it mean to be jointly and severally liable?

Answer 5

It means all parties liable and are responsible each for covering the entire debt (Debt’s not split among them)

Question 6

What is an exculpatory clause?

Answer 6

A contract provision that relieves one party of liability if damages are caused during the execution of the contract.

Question 7

What is a “holder in due course”?

Answer 7

A person who in good faith and w/o notice of defect pays valuable consideration to receive a note before it is due.

Question 8

What is the acceleration clause?

Answer 8

If borrower fails to comply or make payments on time, the lender can demand the entire balance owed be immediately paid

Question 9

What is a pre-payment clause?

Answer 9

Allows a loan to be paid off early with or w/o penalty

Prepayment privilege is called “right of anticipation”

Question 10

What is hypothecation?

Answer 10

It says that a borrow has the right to use and occupy a property while it also serves as collateral upon defaulting

Question 11

What is pledging?

Answer 11

Giving up ownership of property to a seller to serve as collateral

Question 12

Who is the mortgagor and mortgagee?

Answer 12

Mortgagor: Borrower
Mortgagee: Lender

Question 13

What is a defeasance clause?

Answer 13

It provides the borrower the right to secure the title, or deed, for the property once the debt is paid in full.

Question 14

What is the alienation clause (due on sale clause)?

Answer 14

Allows the lender to demand the entire loan balance due if the property is transferred (alienated) or upon exchange of possession

Question 15

What is an escalation or escalator clause?

Answer 15

A clause that allows the lender to increase the interest rate if the borrower does not occupy the place as his primary residence.

An escalation clause states that you are willing to outbid any other offers on the home by a certain amount, up to a ceiling price. The ceiling is also referred to as a “cap price” or the most you are willing to pay.

Question 16

What is a condemnation clause?

Answer 16

States that if all or any part of the property is taken through eminent domain, any money so received is to be used to satisfy the note.

Question 17

What is a subordination clause?

Answer 17

A clause in which the holder of a mortgage permits a subsequent mortgage to take priority

Question 18

What is a subordinate agreement?

Answer 18

An agreement whereby a holder of a prior superior mortgage agrees to subordinate or give up his or her priority position to an existing or anticipated future lien

Question 19

What is a purchase-money mortgage?

Answer 19

A mortgage issued to the buyer by the seller of a given property. This type of mortgage is typically part of real estate transactions where the buyer has had difficulty getting approved for a loan with more traditional lenders

Question 20

What are the 7 covenants a buyer agrees to when signing a mortgage?

Answer 20

1. Pay indebtedness
2. Pay taxes
3. Pay insurance: Maintain adequate insur. coverage
4. Good repair: Will maintain property in good condition
5. Against removal: Won’t destroy/remove prop. improv
6. Acknowledge Indebtedness: agrees 2 estoppel cert..
7. Pay legal expenses

Question 21

What is an estoppel certificate?

Answer 21

A certificate given to acknowledge the current loan balance

Question 22

What is a satisfaction (release) of mortgage?

Answer 22

A document that states that the promissory note has been paid in full and the accompanying mortgage may be discharged from the public records

Question 23

What is marginal release?

Answer 23

When a satisfaction or (release) is recorded with the city’s public recorder.

Question 24

What is partial release?

Answer 24

Borrow requests that the lender releases a portion of the mortgaged property from the mortgage after part of the loan has been paid

Question 25

What is the purpose of a deed of trust (trust deed)?

Answer 25

Just like a mortgage, it provides “collateral” upon one defaulting on their loan

Question 26

Who is the trustor, trustee, and beneficiary?

Answer 26

1. Trustor: The borrower
2. Beneficiary: the Lender
3. Trustee: Neutral Third Party

Question 27

Where is the deed of trust recorded?

Answer 27

In the city/town where property resides

Question 28

What is naked title (bare title)?

Answer 28

1. The title a borrower grants to a trustee
2. Borrower still has owner rights to property
3. Trustee only has rights limited to what’s needed to carry out the duties as a trustee

Question 29

What is a foreclosure?

Answer 29

A legal procedure whereby the mortgaged property is either sold to a third party or transferred to the lender to satisfy a debt

Question 30

What is equity of redemption or equitable redemption?

Answer 30

At anytime before a foreclosed property goes on sale, the borrower may redeem his property by paying off the debt

Question 31

Upon the sale of foreclosure, if there are any funds left over, who they go to?

Answer 31

The borrower

Question 32

What is the Power of Sale clause?

Answer 32

The lender or trustee is authorized to sell the property and apply the proceeds to the debt provided notice of the sale is properly advertised in the local paper.

Question 33

If a lender forecloses on a home and they’re still debt remaining, they can pursue the borrower to get those funds through:

Answer 33

A deficiency judgment

Question 34

Judicial vs. non-judicial foreclosure?

Answer 34

Judicial: Must go through the courts to foreclose

Non-judicial: Sale by advertisement

Question 35

What is strict foreclosure?

Answer 35

Court agrees to allow the lender to receive the title w/o a foreclosure sale if debt isn’t paid within a given time

Question 36

What’s a friendly foreclosure (deed in lieu of foreclosure)

Answer 36

Borrower give title back to lender w/o foreclosing or going through the courts.