2-1 copyright ©2008 by the mcgraw-hill companies, inc. all rights reserved chapter 02: real estate...
TRANSCRIPT
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
NotesNotes
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
NotesNotes
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
NotesNotes
– Loan assumability– Assignment clause– Future advances– Release of lien by lender
2-5
Mortgage InstrumentMortgage 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 InstrumentMortgage 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 InstrumentMortgage 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 InstrumentMortgage Instrument
Important Clauses– Borrower’s Rights to Reinstate– Right of Entry: Lender in Possession– Future Advances– Subordination Clause
2-9
Additional Mortgage ConceptsAdditional Mortgage Concepts
Assumption– Liability– Release of grantor from assumed debt
“Subject to” a Mortgage– Liability
2-10
Additional Mortgage ConceptsAdditional Mortgage Concepts
Property Covered– Land– Improvements– Easements– Fixtures
Special case of trade fixtures
– Mineral Rights– After-acquired property
2-11
Additional Mortgage ConceptsAdditional Mortgage Concepts
Senior & Junior Mortgages Recording Mortgages
– Protect Lien Priority
Seller Financing– Purchase Money Mortgage– Use of Subordination Clause
2-12
Additional Mortgage ConceptsAdditional 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
WorkoutsWorkouts
Restructure the loan– Recasting– Extension Agreement– Alternatives
Transfer– Subject to
Purchase an Option on Property Value
2-14
WorkoutsWorkouts
Voluntary Conveyance– Deed in Lieu of Foreclosure
This can be tricky. For example, the presence of a 2nd mortgage will make it problematic for the borrower to simply give a deed in lieu of foreclosure to the 1st mortgage holder. In that case, the 2nd 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
ForeclosureForeclosure
Judicial Foreclosure– Judgment Lien
Redemption– Equity of Redemption
Prior to foreclosure
– Statutory Right of RedemptionAfter foreclosureNot in every state
2-16
ForeclosureForeclosure
Property Sale– Fixing a Price by public auction
Upset price
– Trust Deed: Trustor, Trustee, BeneficiaryPower of Sale Clause
∙ Court authority not necessary
Used in a Limited Number of States
– Purchaser Buys Any Title Defects
2-17
ForeclosureForeclosure
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
BankruptcyBankruptcy
Chapter 7– Liquidation
Chapter 11– Available to business owners– Reorganization– Cramdown
Chapter 13– Reorganization