Lesson 2: Acquisition of title

Question 1

Hypothecation

Answer 1

Pledging a security interest in the property to a lender while retaining possession of the property is called hypothecation.

Question 2

The statutory period (or right) of redemption.

Answer 2

most states today have instituted an after foreclosure sale period of redemption called the statutory period (or right) of redemption.

Question 3

The lien theory

Answer 3

the lien theory, wherein lenders in collateralized properties have equitable rights and borrowers retain legal rights.
A borrower in default keeps possession, title, and all legal rights to the property until the lien against the property is perfected by the lender.

Question 4

Lien

Answer 4

The borrower retains the legal interest in the property while pledging the property as collateral to a lender who gets a lien, or equitable right in the property, the right to foreclose, as protection for the loan.

Question 5

Intermediate position

Answer 5

The intermediate position permits a lender to take possession of the property upon loan default, often without having to wait for foreclosure proceedings, but without getting title to the property until
! after any statutory redemption period has expired.

Question 6

The note–also called promissory note, principal note or bond, mortgage note, negotiable note, and secured note is…

Answer 6

… evidence of the debt and a promise to pay it. It is a written instrument specifying the repayment terms and conditions.
It is a promise to pay a debt and is used in combination with a mortgage or deed of trust which is a pledge of real property as collateral to secure the promise .

Question 7

When is a note canceled?

Answer 7

When the debt is payed.

Question 8

Deficiency Judgement

Answer 8

If the security is insufficient to cover the indebtedness, the note holder may obtain a deficiency judgement for the balance due and proceed against all other property and assets of the debtor.

Question 9

Unsecured note

Answer 9

A note without collateral is an unsecured note. Such notes are used for short-term personal loans.

Question 10

Secured note

Answer 10

Real estate loans are secured loans in that they always contain a security instrument.

Question 11

What do words “or order” after the lender’s name mean?

Answer 11

Lender has the right to sell the note.

Question 12

Negotiable note

Answer 12

Lender has the right to sell the note.

Question 13

What do words “or more” included in the payment section mean?

Answer 13

Borrower can pay more than the payment expected.

Question 14

Prepayment privilege

Answer 14

Borrower can pay more than the payment expected.

Question 15

Prepayment penalty

Answer 15

Borrower will be penalized if he pays more than the payment expected.

Question 16

Who is the maker of the note?

Answer 16

A note must be executed or signed by the borrower, some times called the maker of the note, to be valid.

Question 17

If two or more people sign the note, they are…

Answer 17

If two or more people sign, it is common to define them as “jointly and severally liable” for payment.

Question 18

Acceleration clause

Answer 18

Notes often contain an acceleration clause. That provision enables the lender to demand payment of the entire outstanding balance of the note–that is to call the entire balance due, if the borrower violates one of the covenants of the note.

Question 19

Holder in due course

Answer 19

If a note is negotiable–that is, freely transferable–the new holder (transferee) is called the holder in due course.

Question 20

An estoppel certificate , also called a certificate of no defense

Answer 20

When a note is sold by one investor (lender) to another, the borrower may be asked to sign an estoppel certificate , also called a certificate of no defense , in which the borrower acknowledges the balance due on the loan.
This protects the investor from the borrower being able to later claim a lower balance.

Question 21

A promissory note or bond

Answer 21

A negotiable promissory note or bond is a written instrument signed by the maker containing an unconditional promise to pay a certain sum of money, payable on demand or at a fixed or determined future time, to the order of the payee or the bearer of the instrument.

Question 22

The mortgage or trust deed

Answer 22

The mortgage or trust deed is a legal document pledging or conveying a piece of real property as security for the indebtedness created by the note.

Question 23

Defeasance clause

Answer 23

This defeasance clause defeated (cancelled) the mortgage when the debt was paid in full. Today all mortgages have defeasance clauses in them. If the borrower defaulted, the mortgagee (lender) became the absolute owner of the property.

Question 24

Strict foreclosure

Answer 24

Upon default and upon the mortgagee’s filing a petition with the court, the judge would decree that the mortgagor could have only a certain amount of time, usually six months or a year, to
redeem the property.
After the lapse of the time allotted, the mortgagor’s equity of redemption was thereby barred, and the mortgagee became the absolute owner of the property.

Question 25

Three theories as to the nature of mortgages:

Answer 25

Lien
Title
Intermediate theories

Question 26

The lien theory of mortgages

Answer 26

The mortgage is considered to create a lien and not to convey any title.
The mortgagor is entitled to possession until default and until the right of redemption has terminated.
Foreclosure is generally by court action
The mortgagor being entitled to any excess funds over and above the amount of the debt and liable personally for any deficiency.
The security interest owned by the mortgagee is classed as personal property.

Question 27

The title theory of mortgages

Answer 27

The mortgagee is considered to have the legal title, subject only to the mortgagor’s superior equitable ownership.
The mortgagee upon default and before foreclosure is entitled to possession, but must account for all rents and profits and apply them in reduction of the mortgage debt.
Foreclosure is generally by
legal action.
The mortgagor is entitled to any excess of funds and liable for any deficiency.
The mortgagee’s interest is considered real property, rather than personal property.

Question 28

A Release or Satisfaction of Mortgage

Answer 28

Upon payment of the indebtedness secured by a mortgage, the mortgage should thereupon be released by the mortgagee’s executing a Release or Satisfaction of Mortgage.

Question 29

Pledging

Answer 29

Pledging, on the other hand, means the borrower gives up possession of the property to the lender while it serves as collateral.

Question 30

Covenants

Answer 30

Mortgages contain covenants (promises) which the borrower makes to the lender. These covenants protect the security of the loan.

Question 31

Covenant to Pay Taxes

Answer 31

With the covenant to pay taxes, the mortgagor promises to pay taxes on the property even though title may technically vest with the lender.

Question 32

Covenant against Removal

Answer 32

With the covenant against removal, the mortgagor promises not to remove or demolish any building or other improvement on the land if doing so might reduce the value of the land below that required to provide adequate security for the lender.

Question 33

Covenant of Insurance

Answer 33

With the covenant of insurance, the mortgagor promises to keep the property adequately insured against damage or destruction.

Question 34

Covenant of Good Repair

Answer 34

With the covenant of good repair, also often called the covenant of preservation and maintenance, the mortgagor promises to keep the property in good condition.

Question 35

Alienation clause

Answer 35

An alienation clause, also called a due-on-sale clause, permits the lender to call the entire loan balance due if the mortgaged property is sold or otherwise conveyed (alienated).

Question 36

Partial release

Answer 36

A partial release is when a portion of a mortgaged property is released from the mortgage after a part of the loan has been paid. This is usually done with land being developed.

Question 37

Subject to existing loan clause

Answer 37

With this method, the purchaser acknowledges the presence of the existing loan and the mortgage that secures it, but takes no personal liability for it.
The buyer, then, presumably pays the remaining payments as they become due, but the seller remains personally liable to the lender for the loan.
Subject to clauses are usually used with commercial properties, not residential.

Question 38

Novation

Answer 38

A novation is substitution of a new contract or new party for an old one. The seller then asks the lender to substitute the buyer’s liability for his own.
the lender will require the buyer to qualify for the loan just as if the buyer were obtaining a new loan. Often, the lender will change the interest rate to the market rate.

Question 39

Certificate of Reduction

Answer 39

A certificate of reduction is provided by the lender to the buyer to verify the exact loan balance.

Question 40

Estoppel Certificate

Answer 40

An estoppel certificate is provided by the borrower to the lender. With an estoppel certificate, the lender asks the borrower to certify the amount owed and the interest rate.
Estoppel certificates are usually required when a lender wants to sell the loan to another investor.

Question 41

First or senior mortgage

Answer 41

The most senior position, called the first mortgage, is held by the first lender to record a mortgage against the property.

Question 42

Second (and on) or junior mortgage

Answer 42

If another mortgage is recorded against the property before the first is fully satisfied, the new mortgage is a second mortgage or junior mortgage.

Question 43

Subordination

Answer 43

Subordination occurs when a lender with a higher priority voluntarily takes a lower priority. It allows junior lien holders to move up in priority.
Subordinationissometimes done by landowners to encourage developers to buy their land.

Question 44

Chattel Mortgage

Answer 44

A chattel mortgage is a mortgage secured by personal property. If the borrower defaults, the lender can take possession and sell the personal property.
Filing a financing statement instead of a Chattel Mortgage is an easier way to establish lien priority for personal property.

Question 45

A deed of trust

Answer 45

A trust deed to the public trustee is a conveyance of the legal title by the borrower to a public official, the public trustee of the county in which the property is situated.
The public trustee holds the title in trust for the lender to secure the payment of the indebtedness described in the deed of trust.

Question 46

Parties to a trust deed

Answer 46

These three parties are a borrower

or trustor, a lender or beneficiary, and a neutral third party or trustee.

Question 47

Naked title

Answer 47

The title granted to the trustee by the borrower with the deed is called Naked title.
The borrower retains the normal rights of ownership, such as the right to occupy the property, the right to use it, and the right to sell it.
The lender receives no title, but only the right to request that the trustee act.

Question 48

Reconveyance

Answer 48

With a deed of trust, however, the lender sends the note, deed of trust, and a request for reconveyance to the trustee. The trustee then cancels the note and sends a release of deed of trust to the borrower. The release of deed reconveys title back to the borrower.

Question 49

Release of Deed of Trust.

Answer 49

In Colorado releasing a deed of trust requires that the lender and the trustee execute a Release of Deed of Trust.

Question 50

Power of sale clause

Answer 50

Power of sale clause in the deed of trust gives the trustee the authority to sell the property without having to go through the courts.

Question 51

Trustee

Answer 51

In most states, a title or escrow company or bank may act as a trustee. In Colorado, however, the trustee is a public official known as a public trustee.

Question 52

Trust Deed to a Private Trustee

Answer 52

A type of trust deed which is infrequently used is one to a private trustee. According to Colorado law, such a trust deed is deemed to be a mortgage and will be foreclosed only through the courts, as mortgages are.

Question 53

A major difference between a mortgage and a trust deed

Answer 53

A major difference between a mortgage and a trust deed is that the mortgage must be foreclosed through the courts, whereas the trust deed need not.

Question 54

Assignment of Rent clause

Answer 54

The lender reserves the right to take possession of the property in the event of default and to collect any rent or other income generated by the property.
The lender probably would not exercise this right unless the borrower continued to collect rent without paying on the note.

Question 55

There are three deeds of trust approved by the Commission for our use:

Answer 55

Due on Transfer–Strict
Due on Transfer– Creditworthy Restriction and
Assumable–Not Due on Sale.

Question 56

Due on Transfer–Strict deed of trust

Answer 56

Strict due on transfer clause says that in the event of transfer “All sums secured by this Deed of Trust shall become immediately due and payable (Acceleration).

Question 57

Due on Transfer– Creditworthy Restriction deed of trust

Answer 57

That clause states that at the election of the lender upon transfer the “Borrower shall….submit information required to enable Lender to evaluate the creditworthiness of the….Transferee.”
The deed makes no provision for an escalation of the interest rate.

Question 58

Assumable–Not Due on Sale deed of trust

Answer 58

No due on sale clause is fully assumable without qualification.