1. 1 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin CHAPTER 14 THE MORTGAGE The mortgage creates an interest in a property to secure the payment of a debt, or obligation. Real estate financing involves two separate obligations: –the promissory note, and –the mortgage. The borrower (mortgagor) gives the mortgage. The lender (mortgagee) receives the pledge.

2. 2 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Mortgage Markets Primary Mortgage Market –lenders and borrowers Secondary Mortgage Market –conduits, investment bankers and investors –mortgage-backed securities

3. 3 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Title and Lien Theories Title-Theory States –lenders receive title to property –power-of-sale clause Lien-Theory States –lenders do not receive title –foreclosure –recourse and nonrecourse loans Deeds of Trust

4. 4 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin REAL ESTATE DEBT AND EQUITY MARKETS

5. 5 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin THE MORTGAGE CONTRACT Must have essential elements of a valid contract. Must be in writing and describe the property. Additionally, the mortgage instrument must: –identify the property rights being pledged, –include the words of conveyance, –include the signature of the mortgagor, –be delivered to the mortgagee, and recorded, and –contain reference to the note, or obligation.

6. 6 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Common Mortgage Clauses Acceleration clause Prepayment and late payment clause Due-on-sale clause Insurance clause Interest escalation and adjustment clause

7. 7 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Typical Clauses in the Residential Note The Date of Executed The Name of Mortgagor and Mortgagee An Acceleration Clause Terms of the Loan Prepayment and Late Payment Penalties Escalation Clause on Delinquent Penalties

8. 8 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin MORTGAGE RELATIONSHIPS Primary Mortgages Junior Mortgages Wrap-Around Mortgages Purchase Money Mortgages Land Contract

9. 9 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Single-Family Residential Mortgages Permanent Financing –conventional –FHA & VA mortgages –other government-supported programs –owner financing Construction Financing –forward commitments (cover loans) –open-end loans (uncovered loans)

10. 10 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin ADJUSTMENTS IN BORROWER/LENDER RELATIONSHIPS Mortgage Satisfaction Mortgage Default and Foreclosure –delinquency and default –deeds-in-lieu of foreclosure –equity of redemption –judicial and nonjudicial foreclosure –statutory redemption

11. 11 Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin ASSUMING OR RECASTING THE MORTGAGE Mortgage Assumption and “Subject To” Transactions Recasting the Mortgage Sale of the Mortgage