CREATION OF MORTGAGES LEARNING OBJECTIVES Describe the ways state laws define security interests in mortgage contracts. Discuss how funds are allocated to mortgages in capital markets. Distinguish between residential and commercial property mortgages.

CREATION OF MORTGAGES LEARNING OBJECTIVES Identify the major clauses in mortgage contracts. Distinguish among valid, invalid, enforceable and unenforceable mortgage contracts. Describe the process of mortgage default and foreclosure.

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.

Mortgage Markets Primary Mortgage Market lenders and borrowers Secondary Mortgage Market conduits, investment bankers and investors mortgage-backed securities

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

REAL ESTATE DEBT AND EQUITY MARKETS PrivatePublic Equity Individuals Pension Funds Equity REITS Real Estate Corporations Mortgage Debt Banks Insurance Companies Mortgage- backed Securities Mortgage REITs

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.

Common Mortgage Clauses Acceleration clause Prepayment and late payment clause Due-on-sale clause Insurance clause Interest escalation and adjustment clause

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

MORTGAGE RELATIONSHIPS Primary Mortgages Junior Mortgages Wrap-Around Mortgages Purchase Money Mortgages Land Contract

Single-Family Residential Mortgages Permanent Financing conventional FHA & VA mortgages other government-supported programs owner financing Construction Financing forward commitments (covered loans) open-end loans (uncovered loans)

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

ASSUMING OR RECASTING THE MORTGAGE Mortgage Assumption and “Subject To” Transactions Recasting the Mortgage Sale of the Mortgage