Chapter 15Financing in the Transfer of Real

Estate

The Mortgage Relationship

1. Mortgage. “A pledge or security of a particular property for the payment of the debt or the performance of some other obligation, whatever form the transaction may take, but is not now regarded as a conveyance; a written instrument providing security for payment of a debt.

2. Mortgagee. Creditor.3. Mortgagor. Borrower.4. Recording. The mortgage must be in writing and recording is also

important. 5. Underlying Debt Instrument. To be valid a mortgage requires an

underlying debt instrument (e.g. a promissory note). 6. Satisfaction of Mortgage. Issued when debt underlying the mortgage is

paid in full.

Types of Mortgage Statutes

Title Theory. The mortgagee gets some type of legal title to the property. Lien Theory States. The mortgagee does not get a legal title to the property

and is entitled to possession and rents only upon foreclosure. Intermediate Theory. Mortgagee entitled to possession and rents upon the

default so unlike the lien theory does not have to wait. However, unlike the title theory, the mortgagee does not hold title until the foreclosure processes required by the state (could be less than full foreclosure processes).

Woodview Condominium Assn v. Shanahan (#3)917 A2d 790 (NJ App 2007)

Owned Two Condo Units. Shanahan bought two condo units.

Condo Units Subject to Monthly CAM Fee that Owner Did Not Pay.

Owner Sold to Pratts. Shanahan got current on his past due fees and sold to Pratts.

Pratts Also Failed to Pay Fees. Owner Gets Units Back. After Pratts failed

to pay on the mortgage, Shanahan assumed control of both units.

Does Shanahan Owe Condo Fees Missed by Pratts? Shanahan took possession and rented the units but did not actually foreclose on the units right away.

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U.S. Bank v. Howie (#4)613 NYS2d 989 (1994), MERS case – whether MERS is an agent – Severance of mortgage from promissory note (debt).

Promissory Note and Mortgage. James Howie signed a promissory note to U.S. Bank in the amount of $151,600. That same day James and his wife, Georgia, executed a mortgage on the property.

Parties. The Howies were listed as “borrower,” U.S. Bank was named as “lender,” and MERS was named as “mortgagee,” “acting solely as a nominee for Lender and Lender’s successors and assigns.

Default. James died and his wife defaulted. MERS Assigned Mortgage to U.S. Bank. Summary Judgment Motion. Based on the fact that MERS held the mortgage and

U.S. bank held the debt. You cannot have a mortgage without an underlying debt and MERS was not a creditor to Howie.

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In Re Lowenstein459 B.R. 227 (E.D. Pa 2011)Strict Compliance – Finance Charge v. Amount Financed

Grateful Abstract Closed on Home for Roger and Lynne Lowenstein. The amount financed was $262,400 but TILA amount was disclosed as $260,526. The difference was various charges that were treated as prepaid financing charges.

$35 Closing Letter Fee Charged Twice. A $35 fee was properly attributed to principal but the double charge is a problem. However, TILA allows for a $35 error.

$25 Fee for Notary. The document required 8 notarized signatures. The fee for that was $25. The Lowensteins argued that was excessive and 8 notarized signatures was excessive. The Lowerenstiens did not provide any evidence of industry practices that showed this was excessive and lost on this point.

Filing fee of $131.50 paid to state plus $5 electronic filing fee. The $131.50 is okay as it’s paid to the state and is not part of a finance charge. The $5; however, is not clear where it went and it could be considered a finance charge. As the $35 limit is already met with the double charge, the judge denied summary judgment to learn more about the $5 filing fee.

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Ethical for Lowenstein’s to bring this action?

Sample Promissory Note

Foreclosure Process

Filing the Petition. Notifying Required Parties. Filing a Notice of Action. Foreclosure Trial. Order of Foreclosure. Sale.

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Consider 15.3. Foreclosure Sale for Below “Value.”

Knudsen owns a 9 acre ranch adjacent to a country club worth $900,000. He defaults on the mortgage and the bank forecloses. The bank sells the land for $214,460 which is $5.66 more that it is owed. So the bank collects it’s money in full and only gives $5.66 to the seller. Is this legal?

When Mortgagors Fall Behind: Self-Help Remedies

• Walking away• Deed in lieu of foreclosure• Stripping the property• The problem of blight in neighborhoods with high rates of foreclosure• Eminent domain by cities of properties lenders have taken back but cannot sell,

rent, or repair

Real Property Financing: Foreclosure

Foreclosure– Certificate of sale/judicial procedure

Right of redemption – 6 months after sale; sheriff’s deed

Deficiency judgment – Residential exemption in some states

Consider 15.5 Foreclosure Priorities

A foreclosure sale on a parcel of property took place on September 11, 2009. the amount received from the sale is $175,000. Distribute the funds. • January 21, 2000 Mortgage $132,000. First Federal: balance of $132,000 due

on note secured by mortgage recorded January 21, 2000• Oct 16, 2001, $8,000 Mortgage. Great Western: balance of $8,000 due on note

secured by mortgage recorded October 16, 2001• Jan 5, 2001 Tax Lien. Federal tax lien: balance of $22,000 due, with notice of

lien recorded on January 5, 2001• Foreclosure Admin Costs $5,000. First Federal’s costs and expenses of

foreclosure: $5,000• Dec 23, 1997 Judgment Lien – $10,000. Judgment lien against the property

owner for $10,000 recorded December 23, 1997• Dec 1, 2001 Purchase Money Lien - $3,000. American Finance: purchase

money security interest in solar water heater, filed before attachment on December 1, 2001, in the amount of $3,000

Deficiency Judgments

• Difference between the amount due and the amount the sale brought• Not available in non-recourse states• In an upside down market (underwater mortgages), there are deficiencies in

almost every foreclosure• Deficiency means you must have sold the property• Second mortgage lenders – Nothing!

End-of-Chapter Q1, p,. 446 Deficiency judgment.• A purchased B’s home through a cash-to-mortgage arrangement assuming a

$140,000 FHA loan.• A defaults three months later.• The mortgagee tried to collect against A and B. Both refuse to pay.• The mortgagee forecloses and sells the property for $125,000.• The mortgagee seeks a $15,000 deficiency judgment.• Who wins?

Start here tues

Hull v. North Adams Hoosac Savings Bank (#x)730 NE2d 910 (Mass App 2000), p. 434

Husband and Wife Owned Three Properties Together. The husband started the property business so he had the primary mortgages on the properties. Over time her name ended up on two of the mortgages but not the third one – Yale Street. Only her husband signed this mortgage.

Default on Properties. Husband defaulted on all the properties in 1989. 1989 Divorce – Wife Gets Properties. She borrowed $15,000 from her parents

to get current on all loans. Wife agreed to assume the payments for all the loans. Wife Falls Behind on Payments. She fell behind and asked the bank to

separate out the properties so she could keep the Yale Street property where she never gave a mortgage.

Three properties owned by same person and foreclosed. Does bank have an obligation to explain different levels of liability based on how notes were secured?

Wife Claims Bank Duty to Explain She Was Not Liable on Yale Street. The jury found for the wife in the amount of $300,000 for failing to act in “good faith” in explaining how the properties were mortgaged. Judgment NOV. All the loans were already cross collateralized and she owned all for 5 years before default. 13

Federal Mortgage Laws/Programs

Soldiers and Sailors Relief Act (another slide) Community Reinvestment Act (CRA) (another slide) Usury (another slide) Truth-in-Lending Act - Reg Z (another slide) ARRA – HOPE (another slide) TARP (another slide) Federal Consumer Credit Transaction Act Home Mortgage Disclosure Act Fair Housing Act Equal Credit Opportunity Act Mortgage Disclosure Improvement Act

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Federal Assistance Program:

• March 2009 (American Recovery and Reinvestment Act (ARRA)Hope For Homeowners Act Loan modification

– Have payments that total 31% or more of monthly income– Single-family home– Primary residence– Loan amount is $729,750 or less– Mortgage originated on or before Jan. 1, 2009

• Emergency Economic Stabilization ActTroubled Asset Relief Program (TARP) Loan Refinancing

– Have Fannie or Freddie loans– Current on mortgage payments– Can afford new mortgage payments– Mortgage balance no more than 105% of current value

Soldiers and Sailors Relief Act

• No foreclosure during active duty• Limits on interest rates• Protections on leases as well• Other credit protections• Service members Civil Relief Act of 2003 increased protections following the

wars in Afghanistan and Iraq

Community Reinvestment Act

Low-to-Moderate Income Loans. Mandate to make loans to low-to-moderate income individuals.

3% Down. Fannie and Freddie allowed these loans with only 3% down to encourage home ownership amount low-to-moderate individuals.

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Usury Laws

MN. Mortgage loans not subject to state usury rules if issued by a regulated bank. Even if not a bank, the rules applies to fees not the interest rate. (6% for personal loans – goes up to 8% if in writing).

Interest generally includes:– Charges for Costs.– Commissions.– Standby Commitment Charges.– Late Charges – generally not included.– Government Charges – generally not included.– Construction Loan Charges – not included.– Life Insurance Premiums – not included.– Pre-Payment Penalties – varies state to stat

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Subprime Market

Home Ownership and Equity Protection Act (HOEPA). Applies to:

– Loans where the rate exceeds the T-bill rate by more than 8%.– Total fees payable by the consumer of $561 or 8% of the total loan amount.

Rules– No balloon payment for loans with less than a five-year term.– No monthly payments that do not fully pay off the loan (i.e. the loan

balance cannot increase)– No default interest rate that increase– … and more comparable type rules.

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The Ethical Issues in Mortgages

• Would you accept an approved mortgage loan that you knew was stretching your budget?

• What are the moral hazards of mortgage bail-outs? Re-default rates are 55% six months after restructuring

• What are the risks of bankruptcy court restructuring?• Review the notion of consideration on all of these restructures.• What is the difference between a refinancing and a loan modification?• What are the risks in highly leveraged personal finance?• Who are the stakeholders in mortgages?

Hamm v. Ameriquest Mortg (#X)506 F3d 525 (CA7 22007) (#?)

TILA. The Truth-in-Lending Act requires the Disclosure Statement to clearly state either the due dates or the period of payments scheduled. In this case, the borrow must infer the due date or the payment period because the lender failed to include the word “monthly.” The lender did include the following chart.

Correct Assumptions Immaterial. It does not matter if the borrower assumed correctly the information – the question is whether the documents comply.

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Number of Payments

Amount of Payments

Payments are Due Beginning

359 $541.92 03/01/2002

1 $536.01 02/01/2032

Regulation Z Disclosure Requirements

1. Regulation Z Applies to:A. Residential MortgagesB. Consumer LoansC. NOT Business loans

2. Regulation Z RequiresA. Identity of creditorB. Cash priceC. Annual percentage rate (APR)D. Finance charge including any prepaid finance chargesE. Amount financed and itemizationF. Total payment amountG. Number of paymentsH. Amount per paymentI. Due date for paymentsJ. Late payment charges

3. Rescission Period1. Three Day Rescission Period for Security Interests and Second Mortgages2. No Three Day Period for Residential Mortgages

Regulation Z for Home Equity Loans

Disclosures must include– That the line creates a security interest in the person’s home.– The they need to consult a tax advisor regarding the deductibility of the

interest.– The full cost of the loan or line of credit.– All the standard Reg Z disclosures.– The three-day right of rescission.

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Triggering Language in Credit AdsThis is language used in an ad that automatically requires additional disclosures.

Amount or percentage of any down payment Number of payments or period of repayment Amount of any payment Amount of any finance charge Amount or percentage of down payment Terms of repayment Annual percentage rate Disclosures of any increases in payments or rates that may occur

Consider 15.2: Add 15.2

Know Your Clauses

Prepayment penalty clause Acceleration clauses Interest acceleration clause Balloon payment clause Due-on-sale clauses Late payment clauses

Know Your Mortgages

Purchase money mortgages Second mortgage Home-equity mortgage Master mortgage Conventional mortgages FHA and VA mortgages

(guaranteed by Fannie and Freddie)

Fixed-rate mortgages: 40, 30, and 15 years

ARMs Balloons Jumbo loans – mortgages above

a certain amount carried higher interest rates

Subordinate mortgage Wrap-around mortgage Piggyback mortgage Adjustable rate mortgage (ARM) Variable rate mortgage Reverse mortgage Shared appreciation mortgage

Know Your Charges

Charges for actual costs Charges for commissions by loan brokers Standby commitment charges Late charges Government loan charges Construction loan charges Life insurance premiums Prepayment penalties

Fannie Mae and Freddie Mac

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• Fannie and Freddie became insolvent and required congressional rescue funding

• Housing Economic Recovery Act of 2008• Federal Finance Housing Agency• Fannie and Freddie now in the hands of a conservator• $188 Billion Bailout So Far.

Real Property Financing: Deed of Trust

PartiesParties

AdvantagesAdvantages

Power of salePower of sale

Lender’s involvement is secret Lender’s involvement is secret

Trustee: third partyTrustee: third party

Beneficiaries: lender + borrower

Beneficiaries: lender + borrower

Trustor: borrowerTrustor: borrower

Facilitates large sums Facilitates large sums

Deed of Trust

Trustee Used. A written instrument that transfers title to real property to a trustee as security for a debt owed by the borrower to the lender, who is a beneficiary of the trust.

Trustee Holds Title.– Mortgage title remains with buyer (most states).– Trustee holds title for benefit of both buyer and seller.

Trustee Can Sell Property– No need to go through formal foreclosure– No need to follow state foreclosure sale rules

Lender Identity Secret. The use of a trustee allows the lenders identity to remain secret.

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Deed of Trust

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End-of-Chapter Q6, p,. 447 Deed of Trust Default.• $195,000 Home. Crabtrees purchased home for $195,000 with a deed of trust by

Western Mortgage. • $10,000 Swimming Pool. Crabtrees added a $10,000 deed of trust to put in a

swimming pool with Valley National Bank.• Crabtrees sold home to Gardners. Gardners assumed mortgage on house and

the Crabtrees agreed to carry the Valley mortgage for the pool. Valley was not notified of the sale.

• Default. The Gardners stopped paying and the property is worth $214,000. • $7,000 Back Payments. The Gardners owe $7,000 in missed payments, • $189,000 on the mortgage. • $10,000 pool balance • $7,000 cost to sell the house • $212,000 sale price. • Who gets the money?

Selling Price $212,000Selling Expense -$7,000First Mortgage -$189,000

Pool -$10,000

To Crabtrees $6,000