2-1 Copyright ©2008 by The McGraw-Hill Companies, Inc. All Rights Reserved Chapter 02: Real Estate Financing: Notes and Mortgages McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

2-2 Notes  Evidence of Debt  Major Provisions –Amount borrowed –Rate of interest –Dollar amount, due dates, # of payments –Maturity date –Reference to security for the loan –Application of payments

2-3 Notes  Major Provisions –Default –Penalties for late payment and forbearance provisions –Provisions for unscheduled payments –Notification of default and acceleration clause –Nonrecourse clause  Note that even if there is a nonrecourse clause, loans are generally with “recourse” if the “bad boy” provisions are violated. For example, if the borrower willfully damages the asset, the borrower will generally be held personally responsible for the damage.

2-4 Notes –Loan assumability –Assignment clause –Future advances –Release of lien by lender

2-5 Mortgage Instrument  Note & Mortgage –Note: Obligation to pay –Mortgage: Pledges property as security  The mortgagor is the borrower. The mortgagee is the lender. Try to keep this straight.

2-6 Mortgage Instrument  Appropriate identification of mortgagor and mortgagee  Proper description of the property serving as security for the loan  Covenants of seisin and warranty  Provision for release of dower rights  Any other desired covenants and contractual agreements

2-7 Mortgage Instrument  Important Clauses –Funds for Taxes & Insurance –Charges & Liens –Hazard Insurance –Preservation and Maintenance of the property –Transfer of property or a beneficial interest in borrower (“Due on sale clause”)

2-8 Mortgage Instrument  Important Clauses –Borrower’s Rights to Reinstate –Right of Entry: Lender in Possession –Future Advances –Subordination Clause

2-9 Additional Mortgage Concepts  Assumption –Liability –Release of grantor from assumed debt  “Subject to” a Mortgage –Liability

2-10 Additional Mortgage Concepts  Property Covered –Land –Improvements –Easements –Fixtures  Special case of trade fixtures –Mineral Rights –After-acquired property

2-11 Additional Mortgage Concepts  Senior & Junior Mortgages  Recording Mortgages –Protect Lien Priority  Seller Financing –Purchase Money Mortgage –Use of Subordination Clause

2-12 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

2-13 Workouts  Restructure the loan –Recasting –Extension Agreement –Alternatives  Transfer –Subject to  Purchase an Option on Property Value

2-14 Workouts  Voluntary Conveyance –Deed in Lieu of Foreclosure  This can be tricky. For example, the presence of a 2 nd mortgage will make it problematic for the borrower to simply give a deed in lieu of foreclosure to the 1 st mortgage holder. In that case, the 2 nd mortgage would remain in effect and would not be extinguished by a deed in lieu of foreclosure.  Friendly Foreclosure  Prepackaged Bankruptcy  Short Sale

2-15 Foreclosure  Judicial Foreclosure –Judgment Lien  Redemption –Equity of Redemption  Prior to foreclosure –Statutory Right of Redemption  After foreclosure  Not in every state

2-16 Foreclosure  Property Sale –Fixing a Price by 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

2-17 Foreclosure  Parties –Senior & Junior Lien Claimants  Deficiency Judgment –Property price does not cover claim –Several states limit the applicability of deficiency judgments  Tax in Default –Tax sales

2-18 Bankruptcy  Chapter 7 –Liquidation  Chapter 11 –Available to business owners –Reorganization –Cramdown  Chapter 13 –Reorganization