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What are the three main finance instruments?
- -promissory notes
- -Deeds of trust
- -written promise to pay; evidence of debt; IOU note
- -debtor, who owes, is called maker or issuer
- -creditor is called the payee
- -usually negotiable instruments
What are the basics found on a promissory note?
- -names of parties
- -the date
- -the amount of debt (principal)
- -the interest rate
- -how and when the money is to be repaid
- -maturity date; date in which the loan should be repaid by in full.
- -rights of parties
A promissory note must be signed by the maker, but the payee's signature isn't required.
Promissory notes are usually negotiable instruments. What is a negotiable instrument?
- An instrument establishing a right to payment, which is freely transferable from one person to another. It can be a check, promissory note, a bond, a draft, or stock.
- -Uniform Commercial Code (UCC) sets forth the requirements for negotiable instruments.
Real estate lenders use negotiable promissory notes so they can have the option of selling their notes (and loans) on the secondary market.
true; to obtain immediate cash
If a promissory not or other negotiable instrument is endorsed (approved) "without recourse (access to another)" it means that the issue of future payments is strictly between the maker (debtor) and the third party the instrument is being endorsed to.
If a third party buys a negotiable promissory note from the payee (creditor) for value, the third party purchaser is referred to as ____________.
a holder in due course
What are the two types of promissory notes?
- -straight note; periodic payments of interest only, principal is due in a lump sum on maturity date.
- -Installment note; periodic payment that consist of by interest and principal amount.
The promissory note is accompanied by a security instrument which is either a
mortgage or a deed of trust against the borrower's property.
The promissory note establishes the borrower's obligation to ______ the loan, the security instrument (security interest) makes the property the ________ of the loan.
A lender can enforce a promissory note without a security instrument, but if the borrower doesn't repay what must the lender do?
pledging property as collateral without giving up possession of it.
When a mortgagor has paid off the mortgage, the mortgagee releases the property from the mortgage lien by giving the mortgagor a _____________.
satisfaction of mortgage aka "satisfaction piece"
Deed of trust aka trust deed, is very similar to a mortgage. What is the difference?
- -has three parties involved instead of two; grantor (borrower), beneficiary (lender), and trustee (independent third party with power of sale).
- -Trustee's role is to arrange for the property to be released from the deed of trust when the loan is paid off, or to arrange for foreclosure if necessary.
When a deed of trust loan has been paid off, the trustee executes a ________________, releasing the property from the lien.
deed of reconveyance
How is a mortgage and a Deed of Trust foreclosed on?
- -mortgage: lender takes borrower to court; sheriff's sale is held, property sold to highest bidder, lender entitled to proceeds of the sale: Judicial foreclosure.
- -Deed of Trust: lender does not have to take borrower to court, instead the trustee arranges for the property to be sold at a trustee's sale and sells the property on the lender's behalf; Nonjudicial foreclosure.
Power of sale clause
- If mentioned in the security agreement, permits nonjudicial foreclosure proceedings if in the; is standard in Deeds of trust.
- **Authorizes the trustee to sell the property f the borrower defaults.
Some states do not allow nonjudicial foreclosures.
Deed of trust can only be nonjudicial foreclosure.
false; can be nonjudicial and judicial
What are the steps usually done in Judicial foreclosure?
- -Acceleration of debt; notice of debt
- -Lawsuit; lis pendens
- -Equitable right of redemption; mortgagor can redeem the property before sheriff's sale.
- -Order of execution; ordering sheriff to seize and sell property
- -Public notice of sale
- -Sheriff's sale
- -Statutory right of redemption; mortgagor can redeem the property after the sheriff's sale
Mortgage without power of sale clause can be
judicial foreclosure only
Mortgage with power of sale clause can be
foreclosed either judicially or nonjudicially
Deed of trust, always includes power of sale clause, can be
foreclosed either judicially or nonjudicially
Statutory right of redemption period varies from state to state, but is usually 6 months up to two years.
The purchaser of a judicial property at a sheriff's sale can take possession of the property or to collect rent from the debtor during the statutory period. In some states, if the property is a homestead, the debtor is
permitted to remain on the property without paying rent. At end of period, if the property has not been redeemed, the purchaser receives a sheriff's deed.
What are the steps usually done in a nonjudicial foreclosure?
- -notice of default; three to six months
- -public notice of sale
- -cure and reinstatement; pay only the delinquent amounts plus costs
- -trustee's sale
- -no post-sale redemption; a trustee's deed is given to the highest bidder
Lender's point of view on advantages of judicial foreclosure and nonjudicial foreclosure are:
- JF; borrower may not be able to reinstate loan or have right to deficiency judgement
- NJF: quick and inexpensieve
Borrower's point of view on advantages of judicial and nonjudicial foreclosure:
- JF: Slow process and post-sale redemption
- NJF: Right to cure and reinstate
What are the three main alternatives to foreclosures?
- -Loan workout; repayment plan or modification of terms; ex; skip few payments, lowing rate
- -Deed in lieu; borrower deeds property to lender to satisfy debt; borrower's credit suffers; promissory note may be involved to cover shortfall of debt since property may be worth less than the debt.
- -Short sale; lender agrees to accept proceeds of sale to satisfy debt, even if proceeds are less than amount owned; promissory note may be involved to cover shortfall debt; borrower's credit suffers.
How does a defaulting borrower obtain lender consent for alternatives to foreclosure?
- -can be complex, even with financial institutions having more than one lender; each department has to independently approve alternative
- -usually a time limit before to file for alternatives
- -Lots of paperwork and proof needed
What is debt relief?
- -a reduction of debt, as in a successful short sale; usually taxable as income
- -IRS treats debt relief as taxable income; the taxpayer will have to pay income tax on the amount of debt that was forgiven.
What are two examples of the IRS not treating debt relief as taxable income tax?
- -mortgage debt forgiveness for certain homeowners between 2007-2014.
- -if the borrower was insolvent at the time of the forgiveness; his liabilities exceed his assets; suffering severe financial distress.
Depending on the transaction, the rights and responsibilities of the borrower and the lender by be affected by:
-a subordination clause
-a late charge provision
-a prepayment provision
-a partial release clause
-an acceleration clause
-an alienation (due-on-sale) clause
What do they mean?
- -a subordination clause; gives mortgage recorded earlier lower priority than another mortgage that will be recorded later; ex; new constructional development wants priority lien over bought land lien.
- -Late charge provision; state laws protecting borrowers from excessive late charges and unfair collection practices may override provision in note.
- -Prepayment provision; prepaying principal before due date; lender loses interest; a prepayment penalty compensates the lender for the lost interest.
- -Partial release clause; obligates the lender to release part of the property from the lien when part of the debt has been paid; clear title to that partial property.
- -Acceleration Clauses; upon default, lender may declare entire debt due immediately; could be after one default payment or several.
- -Alienation Clauses; allows lender to call in the loan if borrower transfers an interest in property; lender can declare full loan payment; limits the borrower's rights to transfer title to the property without the lender's permission; ex; if new owner has bad credit; lender cannot forbid a sale, but can require the borrower to pay off the loan rather than allowing new owner to assume it; if lender approve the assumption the lender can change the original interest rate and charge an assumption fee, ex 1.5% of the loan balance; ** Certificate of reduction; transfer of ownership and waive due-one-sale clause or states balance and status of loan without any change in the existing loan's terms.
Prepayment penalties are prohibited in loans that will be sold to...
- -Fannie Mae
- -Freddie Mac
- -FHA-insured loans
- -VA-insured loans
The Partial Release Clause is also known as
- -partial satisfaction clause
- -partial reconveyance clause
Blanket Loan (blanket mortgages)
- -a mortgage that encumbered more than one parcel of real estate; subdivision that is in the process of being developed and sold
- -usually goes with partial release clause
- -don't have to be contiguous or neighboring parcels.
Almost all promissory notes, mortgages, and deeds of trust contain an acceleration clause.
-true; some states affect how the acceleration clause can be laid out; borrower the right to cure the default and reinstate the loan.
The term alienation, in real estate context, refers to
transfer of ownership
What does "subject to" mean?
-When a borrower sells the security property without paying off the mortgage or deed of trust, and the purchaser takes title "subject to" the lien, but does not assume the loan.
What does "assume" or "asumption" mean?
- when a buyer takes on personal responsibility for repayment of the seller's existing mortgage loan, becoming liable to the lender. The seller remains secondarily liable unless released by the lender.
- -Lender that allows assumption may raise interest rate aka blended rate.
Alienation clauses are standard in residential security instruments.
- -used by Fannie Mae, Freddie Mac for conventional loans
- -used in security instruments used in FHA and VA loan transactions.
- -To find out if an alienation clause is required contact lender
Certificate of reduction
- -when a lender's consent to a sale is required, it should be obtained in the form of a certificate of reduction.
- -aka estoppel letter
- -acknowledges transfer and waives due-on-sale clause or states balance and status of loan without any change in the existing loan's terms
When taking a listing, a real estate agent should ask the seller about the existing financing and consider whether offering ___________ might be a good marketing tool.
- assumption; if the seller would like to offer assumption, the lender should be asked for a certificate of reduction (fee to prepare)
- -legal advice and agreement drawn up by lawyer.
Junior Mortgage (subordinate mortgage), and Senior Mortgage
-one that has lower lien priority than another mortgage against the same property. The mortgage with higher lien priority is called a senior mortgage. A senior mortgage with first lien position is called first mortgage; a junior mortgage may be referred to as a second mortgage or third mortgage
Foreclosure on the junior mortgage does not extinguish the senior mortgage.
Purchase Money Mortgage is used in two ways:
- -any mortgage loan used to purchase the security property
- -seller financing
Home Equity Loan
- -a loan secured by a mortgage against the borrower's equity in a home he already owns
- -usually used for improvements on property or can be used for expenses unrelated to the property (pay off credit cards)
- -interest rate is lower than the rate on credit cards but higher than mortgage rate and the interest on the loan is tax deductible
A property owner's equity is the difference between the property's current market value and the liens against it. It is the portion of the property's value that the owner owns free and clear---the portion that is available to serve as collateral for another loan usually called what
-equity loan or home equity loan
Instead of having to apply for a home equity loan, some homeowners have a Home Equity Line of Credit (HELOC). What is this
-basically works like a credit card. There is a credit limit and minimum monthly payment depending on the balance. Used when needed.
- -borrowers who refinance their mortgage loan are actually obtaining an entirely new loan to replace the existing loan; used to pay off an existing mortgage against the same property; arranged with same lender or different lender; when market interest rates drop; loan fee, appraisal fee, other expenses may be connected to refinancing.
- -also used in balloon payments; when existing due date of mortgage is approaching.
- -Cash-Out Refinance loan; the loan amount is more than the existing mortgage; way for homeowners to tap into their equity; cash from lender
- is secured by equity in the property that is for sale, and it will be paid off when that sale closes; provides cash for purchase of a new home pending sale of the old home
- -aka swing loan or gap loan
- monthly payments of mortgage including property taxes and hazard insurance
- -lender puts the portion of each payment into an impound account (aka reserve or escrow account) and pays the taxes and other expenses with it
- ***MOST residential loans are secured by budget mortgages; safest way lenders make sure the property expenses are paid on time.
- -When personal property and real property are financed with a single mortgage loan; restaurant.
- -security agreement for financing personal property
- -financing statement; a brief instrument that is recorded to establish and give public notice of a creditor's security interest in an item of personal property
A key advantage of using a package mortgage, instead of financing the personal property separately, is that
the mortgage term is usually much longer than the term of an ordinary loan for personal property; pay for personal property over a longer period of time. PLUS lower interest rate than for separate loans
- -aka interim loan
- -a short-term loan used to finance the construction of improvements on land already owned by the borrower; creates a lien against both the land and the improvements
- -lenders most likely charge higher interest rates and supervise construction; if borrower does not finish, lender is stuck with partial construction
- -to keep borrowers from over-spending, lender may have a fixed disbursement plan, which gives predetermined disbursements called obligatory advances, at various stages of construction
- -***When construction is completed, the construction loan is replaced by permanent financing called a take-out loan.
- -lender can't sue borrower
- -foreclosure is lender's only remedy
- -entitles lender to share of the property's earnings
- -sometimes lender becomes part-owner in property; large commercial projects
Shared Appreciation Mortgage
- -entitles lender to share of increases in property's value
- -ex; government provides direct financial aid to troubled homeowners
-a form of seller financing
- -provides elderly homeowners with a source of income, without requiring them to sell their home
- -aka reverse annuity mortgage or a reverse equity mortgage
- -homeowner borrowers against the home's equity in order to receive a lump sum payment, a line of credit, or monthly payments from the lender
- -required to be over a certain age
- -***The home usually must be sold when the last owner dies in order to pay back the mortgage.
The amount of the payment on a reverse mortgage depends on what?
- -appraised value of the home,
- -the age of the homeowner
- -the interest charged
- -the terms of repayment
The equitable right of redemption usually lasts until the sheriff's sale is held.
To redeem property after a sheriff's sale, the borrower is generally required to pay...
the amount paid for the property at the sheriff's sale, plus interest accrued from the time of the sale.
The key difference between a mortgage and a deed of trust is...
the deed of trust contains a power of sale clause
In a state where all the following types of instruments are used, a lender who wants to be able to foreclose quickly and inexpensively probably should choose a...
deed of trust
A buyer can assume a seller's existing loan without the lender's permission only if the mortgage or deed of trust does not contain...
an alienation clause
In a Certificate of Reduction the lender acknowledges the transfer and waives the right to exercise the due-on-sale clause.
Texas is a nonjudicial state.
true; giving up right to be heard in a judicial hearing.