McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved CHAPTER2CHAPTER2 CHAPTER2CHAPTER2 Financing: Notes and Mortgages

2-2 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Notes Evidence of Debt Major Provisions  Financial Amount Borrowed and Interest Rate Payment Amount and Maturity Date Application of Payments  Reference to security for the loan  Default Conditions and Penalties

2-3 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Notes Major Provisions  Prepayment Provision  Acceleration of Note  Nonrecourse Clause  Assumability Provisions  Assignment  Future Advances  Release

2-4 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Mortgage Instrument Note & Mortgage  Note: Obligation to pay  Mortgage: Pledges property as security (hypothecate) Mortgagor: Borrower Mortgagee: Lender

2-5 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Mortgage Instrument In writing and expressing intent of parties Identification of the Parties Legal Property Description Covenants of seisin and warranty Provision for release of dower rights

2-6 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Mortgage Instrument Important Clauses  Taxes & Insurance Fund  Charges & Liens  Hazard Insurance  Property Preservation and Maintenance  Due on sale clause

2-7 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Mortgage Instrument Important Clauses  Right to Reinstate  Lender in Possession  Future Advances  Subordination

2-8 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Additional Mortgage Concepts Assumption  Liability  Release Conditions “Subject to” a Mortgage  Liability

2-9 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Additional Mortgage Concepts Property Covered  Land  Improvements  Easements  Fixtures Special case of trade fixtures  Mineral Rights  After-acquired property

2-10 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Additional Mortgage Concepts Senior & Junior Mortgages Recording Mortgages  Protect Lien Priority Seller Financing  Purchase Money Mortgage  Use of Subordination Clause

2-11 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Additional Mortgage Concepts Land Contract  Seller retains naked title  Purchaser has equitable title  Seller conveys title when purchaser completes the performance obligations Default  Breach of mortgage contract Technical default

2-12 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Workouts Restructure the loan  Recasting  Extension Agreement  Alternatives Transfer  Subject to Purchase an Option on Property Value

2-13 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Workouts Voluntary Conveyance  Deed in Lieu of Foreclosure Friendly Foreclosure Prepackaged Bankruptcy

2-14 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Foreclosure Judicial Foreclosure & Sale  Judgment Lien Redemption  Equity of Redemption Prior to foreclosure  Statutory Right of Redemption After foreclosure Not in every state

2-15 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Foreclosure Property Sale  Pricing: Public Auction Upset price  Trust Deed: Trustor, Trustee, Beneficiary Power of Sale Clause  Court authority not necessary Used in a Limited Number of States  Purchaser Buys Any Title Defects

2-16 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Foreclosure Parties  Senior & Junior Lien Claimants Deficiency Judgment  Property price does not cover claim Tax Issues  Tax sales

2-17 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Bankruptcy Chapter 7  Liquidation Chapter 11  Available to business owners  Reorganization  Cramdown Chapter 13  Reorganization