1. Financing: Notes and Mortgages
Chapter 2
Financing: Notes and Mortgages

2. Overview Notes The Mortgage Instrument Assumption of Mortgage
Acquiring Title “Subject to” a Mortgage
Other Financing Sources
Land Contracts
Default
Alternatives to Foreclosure: Workouts
Foreclosure
Bankruptcy

3. 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

4. Notes – Continued Major provisions Prepayment provision
Acceleration of note
Non-recourse clause
Assumability provisions
Assignment
Future advances
Release

5. Note Example

6. The Mortgage Instrument
Note & Mortgage
Note: Obligation to pay
Mortgage: Pledges property as security
Mortgagor: Borrower
Mortgagee: Lender

7. The Mortgage Instrument – Continued
Important Clauses
Taxes & insurance fund
Charges & liens
Hazard insurance
Property preservation and maintenance
Due on sale clause

8. Mortgage Example

9. Mortgage Insurance Rider and PMI Disclosure

10. Assumption of Mortgage
Assumption – A property may be sold/granted with the condition of new buyer/grantee taking over the responsibility of the loan
Liability – since the agreement is not with the lender original borrower is still responsible for the loan
Release conditions – the lender may or may not release the original borrower

11. Acquiring Title “Subject to” a Mortgage
Loan is a liability of the grantor
Property covered by a mortgage
Land
Improvements
Easements
Fixtures
Special case of trade fixtures
Mineral rights
Junior mortgages – unsecured bridge loan with high interest rate and short-term

12. Other Financing Sources
Seller financing: Source of credit for real property purchaser from the seller
It is used when
third party mortgage is expensive
The buyer does not qualify for a loan
The seller wants to use installment method to report gain on sale for tax purposes
The seller artificially increases the selling price by offering a lower than market interest rate and therefore create more capital gain and less interest or ordinary income from seller financing
Purchase money mortgage in addition to another loan – the lender may require use of subordination clause

13. Land Contracts Seller retains naked title
Purchaser has equitable title
Seller conveys title when purchaser completes the performance obligations

14. Default
Failure to fulfill contract, agreement, or duty, especially obligation such as a note. The most common default is failure to make installment payment
Beyond installment, failure to pay taxes or insurance premium can also result in default
Even failure to repair the property may result in default called technical default

15. Alternatives to Foreclosure: Workouts
Restructure the loan
Recasting – changing mortgage terms to avoid default
Extension agreement between borrower and lender
Alternatives – temporary extensions
Transfer of mortgage to a new owner
“Subject to” the existing mortgage. The buyer is not responsible for the original loan
Purchase an option on property value
What are the characteristics of this option?
Voluntary conveyance – transfer of title to lender with an agreement. The process is fast and less costly
Deed in lieu of foreclosure
Friendly foreclosure – borrower fully cooperates
Prepackaged bankruptcy – agreement between creditors and a borrower to speed up the process

16. Foreclosure There are two forms of foreclosure: Judicial foreclosure:
Judicial foreclosure or property sale
Judicial foreclosure:
Lawsuit against the property owner to execute a judgment to recover losses on the loan
Redemption – process of canceling a foreclosure sale by fulfilling debt obligations
Equity of redemption – prior to foreclosure
Statutory right of redemption – after foreclosure
Not in every state

17. Foreclosure – Continued
Property sale
Pricing: Public auction
Upset price – sets a minimum price for a valid sale
Deed of Trust: Trustor (creator of trust – borrower), Trustee (holds the title), Beneficiary (the lender)
Power of sale clause – court authority not necessary
Used in a limited number of states
Purchaser buys any title defects
Parties
Senior & junior lien claimants
Deficiency judgment
Property price does not cover claim
Tax issues
Tax sales

18. State Foreclosure Laws
Source:

19. Foreclosure Dictionary

20. Bankruptcy Chapter 7 Chapter 11 Chapter 13 Liquidation
Available to business owners
Reorganization
Cramdown – reorganization plan that is not fully supported by all creditors but approved by the court
Chapter 13
Available to individuals