Notes and Their Provisions - Part 2 - Chapters 65-67

Question 1

Understand how a trust deed voluntarily imposes a lien for a debt on an ownership interest in real estate

Answer 1

To secure payment of the debt buy a parcel of real estate, the security device used is a trust deed agreement. The trust deed is always the preferential method used to impose a LIEN on real estate.

The lien gives a lender or carry-back seller the right to foreclose on the real estate when the borrower defaults. The trust deed by its word purports to convey legal title to a neutral person called the trustee. In law the title is not transferred. Instead, a lien is created to encumber the owner’s title and establish the property as security for the debt.

Question 2

Identify the three parties and their roles under a trust deed

Answer 2

The trust deed agreement is the preferential method used to impose a lien on real estate. The trust deed identifies THREE PARTIES, each of whom has a distinctly separate role in the secured transaction:

• the borrower owner (TRUSTOR) who voluntarily and poses that trust deed lien on their property
• the middleman (TRUSTEE) who holds the power of sale over the property
• the lender or carry-back seller (BENEFICIARY) who benefits from the trust deed lien encumbering the property

Question 3

Take steps to have a trust deed removed from title to a property.

Answer 3

The trust deed ceases to exist when its purpose as security for a debt ends. Removing a trust deed from the title to property on ending the relationship is accomplished in one of THREE ways:

• FORECLOSURE by issuance of a trustee’s deed or Sheriff’s deed
• full repayment by RECONVEYANCE
• mutual agreement by a DEED-IN-LIEU of foreclosure

Question 4

beneficiary

Answer 4

The BENEFICIARY, such as a lender or carry-back seller, is the entity entitled to the performance of the promised activity referenced in the trust deed, such as the repayment of debt evidenced by a promissory note. The beneficiary holds an interest in the property in the form of a lien.

Question 5

deed-in-lieu of foreclosure

Answer 5

One of the ways to remove the trust deed from the title to the property is called mutual agreement by a A DEED-IN-LIEU OF FORECLOSURE. The Deed in Lieu of Foreclosure is a deed to real property accepted by a lender from a defaulting borrower to avoid the necessity of foreclosure proceedings by the lender.

Question 6

guarantee

Answer 6

A GUARANTEE is an assurance that the events and conditions will occur as presented by the agent.

Question 7

promissory note

Answer 7

A PROMISSORY NOTE is a document given as evidence of a debt owed by one person to another. For example, financing involves a borrower who signs and delivers a promissory note to a lender or seller as evidence of the debt owed for money lent or credit extend. However, the promissory note itself is only a promise to pay as agreed. It is not a guarantee or other assurance of evidence by the note will actually be repaid.

Thus, lenders who fund real estate transactions or provide refinancing require borrowers to provide the real estate involved as COLLATERAL to secure the performance of the borrowers promise to pay if they default on repayment.

To secure payment of the debt by a parcel of real estate the security device used is a trust deed agreement. Trust deed is always the preferential method used to impose a lien on real estate.

Question 8

reconveyance

Answer 8

RECONVEYANCE is a document executed by a trustee named in a trust deed to release the trustee lien from title to real estate, used when the secured debt is fully paid.

For example, FULL REPAYMENT of the debt requires the beneficiary to cause the trust deed to be reconveyed once the debt is fully repaid by the trustor. Then the beneficiary delivers the original note to the trustee, together with a request for a reconveyance of title. In turn, the trustee records a reconveyance of the trust deed.

Question 9

trustee

Answer 9

A TRUSTEE is one who holds title to real estate in trust for another. For example a trustee is the MIDDLEMAN who holds the power of sale over the property in a trust deed situation.

Question 10

Identify four procedures for a buyer to take over mortgage financing which encumbers a seller’s property

Answer 10

On the sale of real estate, the financing the seller has in place as an existing encumbrance on the property, may be taken over by a buyer when acquiring ownership under one of four procedures:

• a Formal Assumption Agreement - between the lender and the buyer
• a Subject To Assumption Agreement - between the seller and the buyer
• a Subject To Transfer of Ownership - to a buyer without an assumption agreement of any type, buyer takes over mortgage, only buyer
• a Novation Agreement - between the lender seller and buyer

Buying a property “subject-to” means a buyer essentially takes over the seller’s remaining mortgage balance, without making it official with the lender. It’s a popular strategy among real estate investors. 1 When interest rates rise, it may also be an attractive financing option for general homebuyers.

Question 11

Understand the use of a beneficiary statement to confirm the amount and terms of an existing mortgage

Answer 11

A SUBJECT TO TRANSACTION is initially structured by use of a financing provision in a purchase agreement. The provision calls for the amount of an existing mortgage to be part of the purchase price the buyer is to pay for the property. The financing provision further states the buyer is to take title to the property subject to the existing mortgage.

The sellers representation of the terms and conditions of the mortgage is confirmed by the buyer during escrow on escrows demand and receipt of the lender’s BENEFICIARY STATEMENT.

The buyer relies on the beneficiary statement for future payment schedules, interest rates and the principal balance on the mortgage they are taking over from the seller.

Question 12

Determine the nonrecourse nature of a purchase-money mortgage

Answer 12

A seller has NO LIABILITY for the lender’s losses on a PURCHASE MONEY MORTGAGE taken over by a buyer under any procedure. A lender as the holder of a Purchase Money Mortgage has NO RECOURSE to the borrower on a default, and is limited to foreclosing and selling the secured property as the sole source of recovery for any amount remaining unpaid on the mortgage.

PURCHASE MONEY MORTGAGE=NON-RECOURSE

On the takeover of a purchase money mortgage by a buyer, the mortgage retains its original NON-RECOURSE purchase money characteristic, regardless of whether the buyer takes title subject to or assumes the mortgage.

A seller is not liable for a deficiency in property value to satisfy the mortgage on foreclosure of a non-recourse purchase money debt taken over under any procedure by the buyer.

Question 13

Advise a seller on the steps to be taken to reduce their risk of loss on a buyer’s takeover of a recourse mortgage

Answer 13

On a RECOURSE mortgage, the seller can reduce their risk of loss on a buyer’s takeover of the mortgage by negotiating for the buyer to enter into an ASSUMPTION AGREEMENT with a seller. The buyer-seller Assumption agreement is a promise given by the buyer to the seller to perform all the terms of the mortgage taken over by the buyer on the sale. It is agreed to in the purchase agreement and prepared in escrow.

A buyer-seller assumption does not alter the lenders right to enforce it’s due on clause on discovery, but does give the seller the right to recover from the buyer any losses they may have incurred due to the lenders losses on a default and foreclosure.

Question 14

assumption agreement

Answer 14

An ASSUMPTION AGREEMENT is a promise given by a buyer to the seller or an existing mortgage holder to perform all the terms of the mortgage taken over by the buyer on the sale.

An assumable mortgage allows a buyer to take over the seller’s mortgage. Once the assumption is complete, you take over the payments on a monthly basis, and the person you assume the loan from is released from further liability. If you assume someone’s mortgage, you’re agreeing to take on their debt

Question 15

beneficiary statement

Answer 15

A BENEFICIARY STATEMENT is a document issued by a mortgage holder/lender on request noting future payment schedules, interest rates and balances on a mortgage assumed by an equity purchase investor. Used in ‘Subject To’ transactions.

Buying a property “subject-to” means a buyer essentially takes over the seller’s remaining mortgage balance, without making it official with the lender. It’s a popular strategy among real estate investors. 1 When interest rates rise, it may also be an attractive financing option for general homebuyers.

Question 16

due-on cluause

Answer 16

A DUE-ON CLAUSE is a trustee provision used by lenders to call the loan immediately due and payable, a right triggered by the owners transfer of any interest in the real estate, with the exceptions for intra-family transfers of their home.

Question 17

nonrecourse

Answer 17

The concern of a seller on either a subject to or an assumption of the seller’s mortgage is whether personal liability exists on the mortgage. Mortgage liability depends on whether the mortgage is:

**A RECOURSE MORTGAGE, meaning the lender May pursue the seller for a loss due to a deficiency in the value of the secured property, but only if the lender forecloses judicially

**A NON-RECOURSE MORTGAGE meaning the lender may not pursue the seller for a loss on the mortgage when the property has insufficient value to satisfy the outstanding debt.

NON-RECOURSE is a type of debt secured by real estate, the creditor’s source of recovery on default limited solely to the value of their security interest in the secured property. All purchase money mortgages are NON-RECOURSE mortgages.

Question 18

novation

Answer 18

A lender can enter into an agreement with both the buyer and seller for the buyers assumption of the mortgage and a release of the seller’s liability on the mortgage called a NOVATION agree. In exchange, the lender charges a fee together with a demand for a modification of mortgage interest rate and terms of repayment. This agreement is called a Novation or substitution of liability.

A NOVATION agreement is comparable to the existing lender originating a new mortgage with the buyer, except the trust deed executed by the seller remains of record and the note remains unpaid. Novation is the act of replacing a legitimate existing contract with a new contract, where the transfer is mutually agreed by both parties concerned.

Novation in real estate occurs when a party, term, or obligation in a contract is replaced with another. When this happens – and it happens quite often in both residential and commercial real estate transactions – the original contract is voided and replaced with the new agreement.

Question 19

purchase-money mortgage

Answer 19

A PURCHASE MONEY MORTGAGE is NON-RECOURSE mortgage financing provided by a lender as purchase assist funding for the purchase of a 1-4 unit residential property the buyer is going to occupy, or a seller carry-back note and trust deed as an extension of credit to a buyer of any type of real estate which is secured solely by the property sold - also known as an anti deficiency mortgage. A seller has no liability for the lender’s losses on a purchase money mortgage taken over by a buyer under any procedure.

Purchase money mortgages include:

• seller carry-back financing on the sale of any type of real estate which becomes the sole security for the carryback note
• a mortgage which funded the purchase of an owner-occupied 1 to 4 unit residential property and
• a mortgage made for the construction of an owner-occupied, single-family residence.

A lender as the holder of a purchase money mortgage has no recourse to the borrower on a default, and is limited to foreclosing and selling the secured property as the sole source of recovery for any amount remaining unpaid on the mortgage.

Question 20

recourse mortgage

Answer 20

The concern of a seller on either a subject to or an assumption of the seller’s mortgage is whether personal liability exists on the mortgage. Mortgage liability depends on whether the mortgage is:

**A RECOURSE MORTGAGE, meaning the lender May pursue the seller for a loss due to a deficiency in the value of the secured property, but only if the lender forecloses judicially

**A NON-RECOURSE MORTGAGE meaning the lender may not pursue the seller for a loss on the mortgage when the property has insufficient value to satisfy the outstanding debt.

A RECOURSE MORTGAGE is a mortgage debt in which a lender may pursue collection from a property owner for a loss due to a deficiency in the value of the secured property to fully satisfy the debt if the lender forecloses judicially. Recourse mortgages are all mortgages not classified as purchase money mortgages.

Question 21

subject-to-transaction

Answer 21

A SUBJECT TO TRANSACTION is a sale of a mortgage property calling for the buyer to take title subject to the mortgage, the principal balance being credited toward the purchase price paid. This is comparable with formal assumption.

A subject to transaction is initially structured by use of a financing provision in a purchase agreement. The provision calls for the amount of an existing mortgage to be part of the purchase price the buyer is to pay for the property. The financing provision further States the buyer is to take title to the property subject to the existing mortgage.

Question 22

Understand the nature of a due-on clause in trust deed as a restriction on the mobility of an owner’s title and pricing in times of rising interest rates

Answer 22

Lenders and carryback sellers are allowed to enforce due on sales clauses in trust deeds on most transfers of any interest in any type of real estate. The occurrence of an event with triggers DUE-ON enforcement automatically allows the mortgage holder to call or recast the mortgage. In times of rising rates, mortgage holders seize any event triggering the due on clause to increase the interest yield on their portfolio.

Question 23

Explain ownership activities which trigger due-on enforcement by mortgage holders

Answer 23

The Due-On clause IS TRIGGERED by any conveyance of legal or equitable ownership of real estate, such as a sale. A Due-On clause is also triggered by:

• a lease with a term over 3 years
• a lease for any term when coupled with an option to purchase
• further encumbrance of a NON-OWNER OCCUPIED, 1-4 unit residential property
• on completion of the Foreclosure sale by a junior mortgage holder or carry-back seller on any type of Real Estate.

Further, transfers of real estate resulting from the death of a vested owner also triggers Due-On enforcement, with some narrow exceptions based on occupancy of residential property.

Question 24

Apply the exemptions barring mortgage holders from due-on enforcement

Answer 24

Exceptions to Due-On enforcement exist. Transfers NOT TRIGGERING THE Due-On enforcement of an owner-occupied, 1-4 unit residential property:

• creation of a junior lien (further encumbrance) where owner occupies the property
• transfers to spouse or child who occupies
• transfer into inter vivos trust (owner obtains mortgage holder’s consent and continues to occupy
• death of a joint tenant, however at least one joint tenants, whether deceased or surviving joint tenant, need to have occupied the property when the mortgage was originated.
• transfer on death to a relative who occupies

However, NOTE any transfer from a child to a parent does in fact trigger the Due-On enforcement.

Question 25

Negotiate a limitation of waiver of a mortgage holder’s due on rights.

Answer 25

An owner wishing to sell, lease or further encumber their real estate without mortgage holder interference needs to first NEGOTIATE A LIMITATION OR WAIVER of the mortgage holders Due-On rights.

Waiver arrangements however, are trade-offs. In return for waiving or agreeing to limit the exercise of a Due-On right in the future, the mortgage holder demands consideration such as:

• additional points if an origination
• additional security
• principal reduction
• increase interest
• shorter due date
• an assumption fee

Question 26

acceleration

Answer 26

ACCELERATION is a demand for immediate payment of all amounts remaining unpaid on a loan or extension of credit by a mortgage lender or carry-back seller. This is also knows as ‘CALLING THE MORTGAGE.’

Question 27

due-on clause

Answer 27

A DUE-ON CLAUSE is a trustee provision used by lenders to call the loan immediately due and payable, a right triggered by the owners transfer of any interest in the real estate, with exceptions for intra-family transfers of their home.

The occurrence of an event triggering the Due-On enforcement automatically allows the mortgage holder to:

• CALL THE MORTGAGE, demanding the full amount remaining due to be paid immediately, also known as ACCELERATION
• RECAST a mortgage, requiring a modification of the mortgage terms as a condition for the mortgage holders consent to a transfer, called a WAIVER BY CONSENT

Question 28

waiver agreement

Answer 28

A WAIVER AGREEMENT is an agreement in which a mortgage holder consents to the owners present or future transfer of an interest in the mortgage property as a waiver of the mortgage holders due on rights. Also known as an ASSUMPTION AGREEMENT.