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© 2012 Cengage Learning
Residential Mortgage Lending: Principles and Practices, 6e Chapter 2 Real Estate Law and Security Instruments
© 2012 Cengage Learning Objectives After completing this chapter, you should be able to: – Define real property, personal property and fixture. – Distinguish between freehold and leasehold estates and identify four types of freehold estates. – Describe three classifications of limited rights to real estate. – Explain five forms of joint or concurrent ownership. – Describe eight methods of voluntary and involuntary transfer of land. – Distinguish between actual notice and constructive notice of recording. – List the components of a valid mortgage instrument. – Distinguish between a mortgage and a deed of trust. – Explain how to change a mortgage and note.
© 2012 Cengage Learning State laws affecting mortgage lending vary greatly from state to state, but can include: ● Licensing of different types of lenders ● Advertising practices ● Application and rate lock-in requirements ● Mortgage servicing and escrows ● State housing agency mortgage program and servicing requirements
© 2012 Cengage Learning ENGLISH COMMON LAW Feudal System of Land Tenure – the king exclusively owned all land Allodial System – recognizes individual ownership
© 2012 Cengage Learning PRINCIPLES OF REAL ESTATE LAW Real Property Estate Fee Simple Absolute Defeasible or Conditional Fee Fee Tail
© 2012 Cengage Learning PRINCIPLES OF REAL ESTATE LAW Life Estates Legal Life Estates Leasehold Estates Easements Covenants
© 2012 Cengage Learning TYPES OF OWNERSHIP Joint Tenancy Tenancy by the Entirety Tenants in Common Community Property Tenancy in Partnership
© 2012 Cengage Learning TRANSFER OF LAND Voluntary Transfers – when a grantor intends to transfer title to land to a grantee by the use of a deed. Involuntary Transfers – conveyance occurs when a legal owner of real estate loses title contrary to the owner’s intention.
© 2012 Cengage Learning Deed A legal instrument that transfers a grantor’s interest.
© 2012 Cengage Learning Elements of Deed ● Grantor’s name ● Grantee’s name ● Description of real estate to be conveyed ● Consideration ● Words of conveyance ● Signature of grantor ● Delivery and acceptances ● Proper execution
© 2012 Cengage Learning Types of Deeds General Warranty Deed Special Warranty Deed
© 2012 Cengage Learning Recording Transactions that create, transfer, or encumber an interest in real estate should be recorded. To protect a buyer’s interest, recording statutes require purchasers of real estate to record in the public land records the instrument by which they acquire the interest.
© 2012 Cengage Learning MORTGAGE LAW Historical Development Equity of Redemption Lien Theory vs. Title Theory Mortgage Debt: the Note
© 2012 Cengage Learning Provisions of the Note ● Original signatures of the borrowers ● All blanks are filled in and any corrections are initialed (no whiteouts) ● Clearly stated interest rate, payment schedule, and due dates ● Dates of note and mortgage match ● Appropriate uniform note used for each loan type (fixed rate, ARM, balloon, etc.)
© 2012 Cengage Learning The Security Interest By obtaining a security interest in the real estate used for collateral, the lender has the right to use that collateral to recover losses from the note should the borrower not repay.
© 2012 Cengage Learning Mortgage Requirements ● Names of the mortgagor and mortgagee ● Words of conveyance or a mortgaging clause ● Amount of the debt ● Interest rate and terms of payment ● A repeat of the provisions of the promissory note ● Detailed legal description of the real estate securing the debt ● Clauses to protect the rights of the parties ● Date (same date as note) ● Signature of the mortgagor (and notarized, if required) ● Any requirements particular to that jurisdiction
© 2012 Cengage Learning Deed of Trust A borrower conveys title to a trustee who holds it until the obligation is satisfied, at which time title conveys back to the borrower. The title is held for the benefit of the lender.
© 2012 Cengage Learning Clauses Payment Clause Prepayment Clause Acceleration Clause Default
© 2012 Cengage Learning FORECLOSURE Equitable Right of Redemption Methods of Foreclosure – Judicial proceeding – Power of sale – Strict foreclosure – Entry and possession Statutory Right of Redemption Deficiency Judgments
© 2012 Cengage Learning TRANSFERS OF MORTGAGED REAL ESTATE Free and Clear Subject to the Mortgage Assumption of the Mortgage
© 2012 Cengage Learning Release of Mortgage When the entire debt is paid (satisfied), the note and the mortgage, which secures the debt, lose their effectiveness and no longer create a valid lien. Called a notice of satisfaction or release of mortgage, is recorded when the debt is paid. The recording clears the cloud on the title created by the mortgage.
© 2012 Cengage Learning What Do You Think? What is the term that is used in law to describe “the greatest interest a person can have in real estate”? Why is this interest not an absolute interest? What is a conditional fee? Give an example of how this transaction could occur. What is a legal life estate? Do these types of estates exist today?
© 2012 Cengage Learning What Do You Think? What is the most common form of joint ownership today in the United States? What are the essential elements of a deed that will allow for a valid transfer of real estate? Identify the various means of mortgage foreclosure. Which exists in your state?
© 2012 Cengage Learning Check Your Understanding Real estate law in the U.S. is based upon the Constitution of the U.S. The Feudal System of Land Tenure never had any application in this country. The allodial system recognizes that an owner of real estate has title irrespective of the sovereign and thus owns no duty to the sovereign. When people talk about their ownership of land, they are legally talking about the type of estate they have in real estate. Fee Simple Absolute is the greatest interest a person can have in real estate and it excludes any other interest.
© 2012 Cengage Learning Check Your Understanding A life estate is a freehold estate like the fee simple absolute but it is not inheritable. The most common type of joint ownership of real estate is tenants in common. Community property is the law in all 50 states. An involuntary conveyance occurs when a legal owner of real state loses title contrary to the owner’s intention. All state have a “race statute” that dictates that first of two innocent parties to record will be protected.
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