2-1 copyright ©2008 by the mcgraw-hill companies, inc. all rights reserved chapter 02: real estate...

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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.

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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

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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.

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NotesNotes

– Loan assumability– Assignment clause– Future advances– Release of lien by lender

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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.

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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

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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”)

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Mortgage InstrumentMortgage Instrument

Important Clauses– Borrower’s Rights to Reinstate– Right of Entry: Lender in Possession– Future Advances– Subordination Clause

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Additional Mortgage ConceptsAdditional Mortgage Concepts

Assumption– Liability– Release of grantor from assumed debt

“Subject to” a Mortgage– Liability

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Additional Mortgage ConceptsAdditional Mortgage Concepts

Property Covered– Land– Improvements– Easements– Fixtures

Special case of trade fixtures

– Mineral Rights– After-acquired property

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Additional Mortgage ConceptsAdditional Mortgage Concepts

Senior & Junior Mortgages Recording Mortgages

– Protect Lien Priority

Seller Financing– Purchase Money Mortgage– Use of Subordination Clause

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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

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WorkoutsWorkouts

Restructure the loan– Recasting– Extension Agreement– Alternatives

Transfer– Subject to

Purchase an Option on Property Value

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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

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ForeclosureForeclosure

Judicial Foreclosure– Judgment Lien

Redemption– Equity of Redemption

Prior to foreclosure

– Statutory Right of RedemptionAfter foreclosureNot in every state

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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

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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

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BankruptcyBankruptcy

Chapter 7– Liquidation

Chapter 11– Available to business owners– Reorganization– Cramdown

Chapter 13– Reorganization