Financing Instruments Flashcards
Types of financing instruments (3)
1) Mortgage
2) Deed of trust
3) Real estate installment contract
Mortgage - Gral
- Form of conveying property deed encumbering the land as security for debt.
- Usually comes with promissory note
Equitable Mortgage
If failure of formalities but owner with clear intention to pledge land as security for debt
Mortgage - Promissory Note Relation (in relation to negotiation)
- Gral Rule: “mortgage follows note”
- When note was negotiated to holder-in-course (HTC), mortgagee has to pay HDC once there is notice of reception
Mortgage- Types (2)
1) Lien Theory: owner has the title, and lender has lien
2) Title Theory: lender holds title, transfers property upon payment of the debt
(in practice not much difference bc of similar possession and similar rights to foreclose for lender)
Mortgage - Due on Sale Clause/ when, effect - acceleration clause
- Unless prohibited in instrument, mortgagor has the right to assign debt to a buyer of the property.
- Effects: accelerates remains of ppal debt if property is sold
- Seller has to make payment of the balance at sale or renegotiate interest rates
Mortgage - Transfer of encumbered property - Has the new buyer direct liability to previous mortgagee - Types of contractual provisions (3)
1) Express Assumption: by new buyer/grantee
2) “Subject to”
3) Novation
Mortgage - Transfer of encumbered property - Express Assumption
- new buyer/grantee - enters into promise with assignor to pay debt
- buyer and grantor both liable for direct deficiency judgment if debt exceeds the property exceeds
- Bank/lender is a 3rd party beneficiary of this new promise
Mortgage - Transfer of encumbered property - “Subject to”
- Contract provision
- Buyer can not be suit from mortgagee for deficiency judgment against them
- i.e.: grantee of a quitclaim deed where there w/o any notice of new promise or buyer takes property w/o knowledge of a prior mortgage
Mortgage - Transfer of encumbered property - Novation
- Release or novation required for original grantee to not be potentially liable to mortgagee/bank
Property - Financing - Deed of Trust - Gral
- Legal title held by 3rd party until payment of debt
- Usually by Trust
- Allows for private foreclosure
Property - Financing - Real Estate Installment Contract - Gral
- aka “seller financing”
- Buyer/seller contractually agree to direct sale of property using purchase money mortgage to secure balance
- Title transfer to seller upon full payment
Real Estate Installment Contract - Forfeiture Rules
- When Buyer defaults payment seller can declare contract forfeited
- Gral rule: Seller keeps payment to that date
- Some states require judicial foreclosure on contract default if substantial payment.
Financing instruments - Formal Requirements
1) Deed: SADD - for SOF
2) Record - Gral Rule “Race Notice”: record provides constructive notice to any subsequent lender, that there is prior superior position against the property + Subsequent BF mortgagee who files first has priority (assumes there is previous record)
Financing instruments - Remedies (4)
1) Foreclosure
2) Second Mortgage
3) Redemption
4) Estoppel by deed
Financing instruments - Remedies - Foreclosure - gral
- Legal process for creditor to “reach to the land” and satisfy debt
- All parties with interest in property are necessary parties
Financing instruments - Remedies - Foreclosure - Types (2)
1) Judicial
2) Private
Property - Financing -Judicial Foreclosure
- Action and sale ordered by court
- Requires all owners in record to receive notice
Property - Financing - Private Foreclosure
- Applies only for deeds of trust/”seller financing”.
- Sale commercially reasonable terms
- States have additional limitations: i.e. debtor has to accept price as full satisfaction (avoid any possible deficiency judgment), or wait 120 days from default
Property - Financing - Deficiency Judgment
- Deficiency is the difference btwn what the mortgage debtor owed the foreclosing creditor and net proceeds from foreclosure sale.
- Judgment by obtaining foreclosure decree against mortgage debtor - NOT FOR PRIVATE FORECLOSE
- 1 year redemption
Homestead Exemption
- From federal bankruptcy laws
- Exception to foreclosure for dwelling + land
- Amount protected: is the higher btwn federal/state dollar amount and is protected against judgment attachment or forced sale
Financing instruments - Remedies -Second Mortgage
- Second debt is secured with same property
- Similar formalities/records
- Issue of priority.
Second Mortgage - Priority Rule
Gral rule: Second mortgage subordinated to first
- if 1st forecloses + sale: 1st mortagee must be fully paid before second mortgagee. Second mortgagee has to join as party. if not interest is eliminated
- if 2nd forecloses + sale: 1st mortgagee has priority. If no balance, 2nd interest remains
Financing instruments - Remedies -Redemption
- Remedy to recover before foreclosure
- States take different positions whether property can be recovered after foreclosure began
- depends on reason of equity vs state statute
Financing instruments - Remedies -Redemption on Equity
- Defaulting debtor can pay of all mortgages in full recover property
- Up to foreclosure sale
Financing instruments - Remedies -Redemption on State Statute
- Defaulting debtor can pay of all mortgages in full recover property
- Even after foreclosure sale (i.e. 6 months, 1 year)
Financing instruments - Remedies - Estoppel by deed
- When debtor reacquires property by deed
- Previously he granted a mortgage to 3rd party whose interest was extinguished by foreclosure sale
- 3rd party interest might be restablished in equity
