Financing Principles Chapter 14 Zaharopoulos

3 Financing Instruments 1. Mortgage 2. Deed of Trust 3. Carryback, Installment, Land Contract, Contract for Deed

MORTGAGE A mortgage is a voluntary lien on real estate, given by the Mortgagor (borrower) to secure payment of a debt or the performance of an obligation to the Mortgagee (lender). to secure payment of a debt or the performance of an obligation to the Mortgagee (lender). Please re-read the above.

HYPOTHECATE To pledge an asset as collateral for a Loan without giving up possession

Mortgage Law  Title Theory States Mortgagor gives mortgagee legal title and retains equitable title.  Lien Theory States Mortgagor (borrower) retains both legal & equitable title.

Parties Involved Mortgage 1. Mortgagor (borrower) 2. Mortgagee (lender) Deed of Trust 1. Trustor (borrower) 2. Trustee (objective 3 rd party) 3. Beneficiary (lender)

Trustee  Title Company  Attorney  Real Estate Broker  Financial Institution other than lender  Not a CPA  Trustee has Bare Legal Title or Naked Title, which gives them Power of Sale

AZ has been using Deed of Trust since documents signed by borrower : 1. PROMISSORY NOTE 2. Either MORTGAGE DOCUMENT or DEED OF TRUST

Promissory Note  The “I.O.U.”  Contains amount of debt, time & method of payment & rate of interest  Notarized (“acknowledged”) to prove identity, free will

Interest, Fees & Usury Interest= A charge for the use of money Due either in advance or arrears Usury= max rate set by state law There is no Usury in AZ There is no Usury in AZ AZ:If interest is not stated, it is 10%

Loan origination fees or Discount Points Expense paid to lender for generating loan  Discount point = 1% of the LOAN amt  1 point =adds 1/8% to total loan yield (the true interest rate)

Provisions of the Mortgage Document or Trust Deed  Repay debt in accordance with note  Pay real estate taxes  Maintain insurance  Maintain property  Lender authorization before major alterations

Key Terms –Acceleration –Alienation –Assignment –Assignment of Rents –Assumption –Estoppel Certificate –Lien Priority –Release –Foreclosure

Term differences 1.Acceleration Clause (default on a mortgage only)  In case of debt, the lender may accelerate the maturity of the debt.  When mortgage is defaulted, lender can declare entire debt due immediately 2.Alienation Clause (sale)  “due on sale” states this loan is not assumable  When property is sold, lender can declare entire debt due immediately

3.Assignment of Mortgage, Rents 4.Estoppel Certificate When lender sells ”paper”, nothing can change; promises investor that terms will remain the same.

Provisions of mortgage or deed  “Subject to”: Purchaser not personally liable for debt  “Assumption”: Purchaser is personally liable for debt

Release per the Defeasance Clause (when loan is paid off) Mortgage Satisfaction of Mortgage Deed of Trust Deed of Reconveyance (Release Deed) (Release Deed) Issued by Trustee

Foreclosure Terms  Statute of limitations  Laches

Foreclosure-Mortgage Judicial Foreclosure –Writ of execution –“Forebearance Moratorium –Equitable Period of Redemption –Statutory Period of Redemption –Sheriff’s foreclosure..

Foreclosure-Deed of Trust Non-judicial foreclosure Stated in Power of Sale clause (no acceleration) 90 day reinstatement period

Foreclosure Deed in lieu of foreclosure: -borrower deeds property to lender Strict Foreclosure: court awards legal title to lender Deficiency Judgment: becomes a judgment to debtor

Lien Priority  Priority est. at time of Recordation  Loan is generally the first lien  subordination agreements

Carryback, Land Contract, Installment, Contract for Deed  “ agreement for sale”  Buyer= vendee, equitable title  Seller= vendor, legal title

Land Contract  One document, no separate note  Forfeiture period in AZ:  0-20% equity = 30 days  20-30% = 60 days  30-50% = 120 days  Over 50% = 9 months  All plus 20 days notice

 Affidavit of Completion of Foreclosure Forfeiture of buyer’s interest in cases of default; court permits eviction and seller keeps money paid and also gets property back.