Mortgages: Financing Property Flashcards
Mortgages: Four Key Parts of a Real Property Finance Transaction
{Obligation, Security, Foreclosure, Rights Afterwards}
- Obligation: The borrower’s duty to repay a loan evidenced by a written promissory note or to perform other duties is called the obligation.
- Security: The borrower will provide security to the lender through a mortgage, a deed of trust, or a similar encumbrance on the property.
- Foreclosure: If the borrower defaults on the obligation, the lender will have the property sold at a judicial foreclosure sale or a nonjudicial foreclosure sale and use the sales proceeds to satisfy the loan.
- Rights after foreclosure: The borrower and the lender may have additional rights after the foreclosure sale occurs.
Mortgage defined
A conveyance of an interest in real
property as security for performance
of an obligation
- Conveys interest in land, therefore SOF and recording applies
- One of multiple means for a secured transaction
Mortgages: Assuming a loan defined vs. “Taking subject to”
Buyer “assumes” the loan: Buyer is
personally liable to repay the loan with her
own assets.
Buyer takes “subject to” the loan:
Buyer is not personally liable to repay the
loan, but will lose the property at
foreclosure unless someone makes the payments.
Mortgages: The Three Jurisdictional Theories
- Title theory: Some states
- Title transferred to the lender when mortgage is issued
- but borrower retains possession until the mortgage is repaid
- Intermediate theory: In a few states, the lender holds title, but does not hold the right to possession until the borrower defaults.
- Lien theory: In most states, the mortgage is seen as a creating a lien or security interest, not conveying title.
- No lender right to possession until foreclosure occurs.
Mortgages: Four methods of providing security for a mortgage
(1)Mortgage: the traditional security instrument. The borrower (“mortgagor”) conveys an interest in land to the lender (“mortgagee”). It is still used in many states.
(2) Deed of trust: the most common substitute for a mortgage. In form, the borrower (“trustor”) conveys an interest in land to a “trustee” for the benefit of the lender (“beneficiary”). Most states treat the deed of trust as a mortgage with a power of sale.
(3) Installment land contract: another mortgage substitute. The buyer (“vendee”) promises to pay the purchase price to the seller (“vendor”) in installments over a period of years.
(4) Equitable mortgage: Where a transaction is a sale in form, but the parties intend it to be a mortgage, the court will treat it as a mortgage as a matter of equity.
Mortgages: Multiple mortgages; priority of payment
The first mortgage in general has priority
UNLESS…
(1) there is a bona fide encumbrancer without notice of the prior mortgage.
(2) Also whichever lender forecloses first gets priority to be paid in full.
Mortgages: Deed of trust security
three party relationship
(1) borrower (trustor) conveys real property to a
(2) third party (trustee) for the benefit of
(3) the lender (the beneficiary).
Express power of sale.
Mortgages: Mortgage security
- Need not be recorded to be valid but usually is to avoid BFP claims
- When multiple mortgages exist, the first recorded BFP mortgager wins for payment
Mortgages: Installment land contract security Slone
No bank, seller holds title until last payment,
- if buyer defaults they forfeit BOTH all payments and property
Slone - legal title to the property remains in the seller until the buyer has paid the entire contract price or some agreed-upon portion thereof, at which time the seller tenders a deed to the buyer. However,
- equitable title passes to the buyer when the contract is entered.
- The seller holds nothing but the bare legal title, as security for the payment of the purchase price.
Mortgages: Equitable Mortgage + 8 factor O’Brien test
Does it look and act like a homeowner (mortgage) or a lease?
SDRPRPPD
(statements; disparity; repurchase; possession; responsibilities; power; process; distress)
The following factors indicate an equitable mortgage: O’Brien Test 8 factors of an equitable mortgage:
(1) Statements by homeowner or representations by purchaser; indicating intent
(2) Substantial disparity between value received by the homeowner and the actual value of the property;
(3) Existence of an option to repurchase;
(4) Homeowner’s continued possession of the property;
(5) Homeowner’s continuing duty to bear ownership responsibilities, like taxes and maintenance;
(6) Disparity in bargaining power and sophistication;
(7) Evidence showing an irregular purchase process,
- property not listed for sale
- did not conduct an appraisal or investigate title;
(8) Financial distress of the homeowner
Foreclosing: Borrower 2 options for missed payment?
(Reinstatement; Equitable redemption)
- Reinstatement: Borrower can avoid foreclosure by paying the missed payments before the lender accelerates the loan. Some states also allow the borrower to reinstate for a limited period after acceleration occurs.
- Equitable redemption: All states allow the borrower to avoid foreclosure by paying the loan in full (plus any incurred costs) after default but before the sale occurs.
Foreclosing: 2 Principles of a Foreclosure
1: Foreclosure “wipes out” the mortgage being foreclosed and all junior interests, but not senior interests
2: Foreclosure sales distributed first to the foreclosing lender, and then to junior interests in order of priority; any surplus proceeds go to the borrower.
1. Forecloser
2. Junior interests
3. Original borrower
Foreclosing: 3 Special Priority Rules
- Purchase money mortgage: has priority over other interests on the property purchased by the buyer
- Future advance mortgage: Mortgage can serve as a security against future loans, lender has the option.
- Deed in lieu of foreclosure: Conveying title directly to lender instead of a foreclosure; does not wipe junior interests.
Foreclosing: Two Foreclosure methods
(1) Judicial foreclosure: foreclosure sale following litigation. The lender files a lawsuit against the borrower and any junior interest holders seeking a judgment that foreclosure is justified. If successful, the lender or its agent gives notice of the sale; the sale is conducted by an auctioneer; and the property is sold to the highest bidder. The court must confirm the sale before it is final.
(2) Nonjudicial foreclosure: foreclosure sale with no judicial involvement. The lender or its agent gives notice of the sale; the sale is conducted by an auctioneer; and the property is sold to the highest bidder.
Foreclosing: Borrower’s 2 rights after foreclosure
(1) Statutory right of redemption: In about half of the
states, the borrower may regain title by redeeming the
property from the successful bidder within a set period
of time, such as a year.
(2) Setting aside the sale: The borrower may be able to
have a court set aside the foreclosure sale if:
- The sales price was so low as to “shock the conscience” of the court or was “grossly inadequate”; or (20% FMV often)
- There was a serious procedural irregularity in the sale; or
- The sales price was substantially below fair market value and there was a procedural
irregularity in the sale.
