© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Chapter 26 Credit and Security Interests in Real Property

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Debtor and Creditor The United States is a credit economy. Businesses and individuals use credit to purchase many goods and services. Debtor – The borrower in a credit transaction. Creditor – The lender in a credit transaction.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Unsecured Credit Credit that does not require any security (collateral) to protect the payment of the debt. The creditor relies on the debtor’s promise to repay the principal (plus an interest) when it is due. The creditor may bring legal action if the debtor fails to make the payments.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Secured Credit Credit that requires security (collateral) that secures payment of the loan. Security interests may be taken in real, personal, intangible, and other property. The collateral may be repossessed to recover the outstanding amount if the debtor fails to make payment.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Security Interests in Real Property Mortgage Note and Deed of Trust Recording Statute Foreclosure Deficiency Judgment Right of Redemption Land Sales Contracts

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Mortgage Two party instrument Real property is used as collateral Owner/debtor is mortgagor Creditor is mortgagee

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Parties to a Mortgage Loan of Funds Security Interest in Real Property Owner-Debtor Mortgagor (Borrower) Creditor Mortgagee (Lender)

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Note and Deed of Trust Used in place of mortgage in some states. Note is instrument evidencing borrower’s debt. Deed of trust gives creditor security interest in property. –Three party instrument. –Legal title of property placed with trustee until owner-debtor (trustor) pays creditor (beneficiary).

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Parties to a Note and Deed of Trust Loan of Funds Security Interest in Real Property Owner-Debtor Trustor (Borrower) Creditor Beneficiary (Lender) Trustee Legal Title If default, can perfect rights

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Recording Statute Mortgages and deed of trust must be recorded at the county recorder’s office. Gives potential lenders and purchasers notice as to claims against property. Nonrecordation does not affect legality of instrument. Improperly recorded instrument is not effective against subsequent purchasers or other mortgagees or lienholders.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Foreclosure In case of default, mortgagee can declare entire amount due and payable. Foreclosure sale Power of sale

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Foreclosure, continued Legal procedure by which a secured creditor causes the judicial sale of the secured real estate to pay a defaulted loan. All states permit foreclosure sales. –Must name party having interest in property as defendant –Property sold at judicial sale –Mandated by statutes Most states permit foreclosure by power of sale.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Deficiency Judgment Some states permit the mortgagee to bring a separate legal action to recover a deficiency from the mortgagor. If the mortgagee is successful, –the court will award a deficiency judgment –entitles the mortgagee to recover the amount of the judgment from the mortgagor’s property

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Right of Redemption State statutes that allow mortgagor to redeem real property after default and before foreclosure. Requires the mortgagor to pay the full amount of the debt incurred by the mortgagee because of the mortgagor’s default. Statutory period of redemption –Many states allow mortgagor to redeem for full amount for a specified period of time

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Land Sales Contract Arrangement where the owner of real property agrees to sell the property to a purchaser, who agrees to pay the purchase price to the owner-seller over an agreed-upon period of time. Often used to sell undeveloped property and farms. If the purchaser defaults, the seller may declare a forfeiture and retake possession of the property.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Material Person’s Lien A contractor’s and laborer’s lien that makes the real property to which improvements are being made become security for the payment of the services and materials for those improvements.

© 2007 Prentice Hall, Business Law, sixth edition, Henry R. Cheeseman Obtaining a Material Person’s Lien Lienholder must file a notice of lien Notice must state amount of lien, name of claimant, the name of owner of the property and a description of the real property Notice must be filed within a specified time period Notice of the lien must be given to owner of the real property Lien Release