chapter 9. georgia real estate an introduction to the profession eighth edition chapter 9 notes and...

Chapter 9

Georgia Real Estate An Introduction to the Profession

Eighth Edition

Chapter 9

Notes and Security Documents

Key Terms• acceleration clause• alienation clause• beneficiary• deed of trust• deficiency

judgment• defeasance clause• first mortgage• foreclosure• junior mortgage• mortgagee © 2015 OnCourse Learning

• mortgagor• naked title• power of sale• promissory note• reconveyance deed• second mortgage• security deed• subordination• trustee• trustor

Overview

There are two documents used in a typical real estate loan. The first is the promissory note and the second is the security document. Most states use a mortgage as the security document, some use a deed of trust.

Georgia uses a security deed.

© 2015 OnCourse Learning

Promissory NoteThe promissory note is a contract between a borrower and a lender.

If there is no note, there is no debt.

A note is a negotiable instrument in that it creates a debt. The debt created can be conveyed to a third party.


Promissory Note

A note must be:• in writing• between a borrower and a lender• state certain sum of money• show the terms of payment• by signed by the borrower• voluntarily delivered by the borrower

and accepted by the lender© 2015 OnCourse Learning

Interest Conveyance

Interest in real estate loans is almost always computed as simple interest.

Interest is paid in arrears.


Prepayment Rights

All VA-guaranteed and FHA-insured loans allow prepayment.

Most conventional loans do not have a prepayment penalty, legally they can.


Default

In the event of a late payment, the note will provide for a penalty.

In the event the payments are not made, there will be a provision for acceleration.


Security

Virtually all notes are secured, via a mortgage, trust deed or security deed.

The note will tie defaults to the security as a default to the note.


The Mortgage Instrument

The mortgage is a separate agreement from the promissory note. The mortgage provides security that the lender can sell if the note is not paid.

Hypothecation means the borrower retains the right to possess and use the property while it serves as collateral.


The Mortgage Instrument

The mortgagor is the person giving the mortgage. The mortgagor is the borrower.

The lender is receiving the security, so they are the mortgagee.

A loan is given by the lender; the mortgage is given by the borrower.


Deed of Trust

A trust deed or deed of trust is a three-party arrangement consisting of the borrower (trustor), the lender (beneficiary) and a neutral third party (trustee).

The borrower executes a deed to the trustee instead of the lender.


Deed of Trust

Real property is used as security for a debt. If the debt is not repaid, the property is sold and the proceeds are applied to the balance owed.


Parties to a Deed of Trust

The borrower conveys title to the trustee, to be held in trust until the note is paid in full.

The deed of trust is recorded in the county where the property is located.



The title that the borrower grants to the trustee is referred to as a naked title or bare title.

The borrower still retains the right to occupy and use the property.



As long as the note is not in default, the trustee’s title lies dormant.

The lender does not receive title, only a right that allows the lender to request the trustee to act.


Reconveyance

When the note is paid in full, the lender sends to the trustee a request for reconveyance.

The trustee cancels the note and issues the borrower a reconveyance deed.


Default

If a borrower defaults under a deed of trust, the lender instructs the trustee to sell the property and pay the balance due on the note.


Default

The power of sale clause found in the deed of trust is designed to give the trustee the authority to sell the property without having to go through a court-ordered foreclosure proceeding.


Trustee

The trustee is expected to be neutral and fair to both the borrower and the lender.

Mortgages are legal in Georgia, but they are not commonly used.


Security Deed

A security deed provides security for the note in Georgia.

The security deed conveys legal title to the lender. This allows the lender to foreclose in a non-judicial process.


Security Deed

The borrower is giving the deed; the borrower is the grantor.

The lender is receiving the deed; the lender is the grantee.


Provisions of the Security DeedThe alienation clause is also known as the due on sale clause.

If the borrower sells or conveys any interest in the property to another without the lender’s prior written consent, such transfer is considered a default.


Provisions of the Security Deed

The lender has the right to call the entire loan balance due and payable.

This clause keeps most conventional loans from being assumed.


Provisions of the Security DeedEquitable redemption is the borrower’s right to reinstate a defaulted loan after acceleration but before foreclosure.

When a borrower has the right to reinstate ownership of the property after the foreclosure sale, the right is known as statutory redemption.



Georgia does not recognize statutory redemption on a loan foreclosure.


Provisions of the Security DeedIf the borrower defaults, the acceleration clause allows the lender to demand an immediate payment of the debt and invoke the power of sale.

The sale is publicly advertised, then sold on the courthouse steps.



The defeasance clause requires the lender to cancel the security instrument upon full payment.

The lender must provide recorded proof that the debt has been paid.


Satisfaction of the Security DeedWhen a borrower creates a debt against a property, the security deed is recorded.

Upon payoff of the note, the lender has the obligation to record a “Cancellation of Deed to Secure Debt” showing that the debt is paid.


Foreclosure on a Security DeedThe primary reason that a security deed is used in Georgia rather than a mortgage is the foreclosure process.

By using a security deed, the foreclosure process becomes non-judicial. The security deed transfer title to the lender.


Foreclosure on a Security Deed

The security deed contains an acceleration clause which allows the lender to call the debt due upon the occurrence of an event, commonly a default on the payments.


Foreclosure on a Security DeedThe property would be advertised for four consecutive weeks and then put up at public auction on the county courthouse steps on the first Tuesday of each month.

Any party wishing to bid must come with cash (typically a letter of credit from a financial institution).



The lender will typically bid the amount of the debt and costs.

They are essentially bidding on the note.



On a loan foreclosure in Georgia, the borrower has the legal right to pay off the loan any time before the sale and reclaim the property.

This is known as equitable redemption.


Foreclosure on a Security DeedOnce the sale is final, some states allow the borrower to reimburse the investor from the sale. This is known as statutory redemption.

Georgia does not recognize statutory redemption. The foreclosure against debt is final.


“Subject To”

If an existing mortgage on a property does not contain a due-on-sale clause, the seller can pass the benefits of that financing along to the buyer.

The buyer can purchase the property subject to the existing loan.


“Subject To”

The buyer takes no personal responsibility for the loan and the mortgage.

The buyer pays the remaining loan payments as they come due, but the seller is still personally liable to the lender for the loan.


“Subject To”

If the buyer stops making payments before the loan is fully paid, the seller is totally liable.

Properties are seldom sold “subject to debt.”


Assumption

Under an assumption, the buyer promises in writing to the seller to pay the loan, becoming personally obligated to the seller.

The seller’s name is still on the original promissory note, but the seller has recourse against the buyer.


Assumption with a release of liability

The safest arrangement for the seller is to ask the lender to substitute the buyer’s liability for his. This is an assumption with a release of liability through novation.


Assumption with a release of liability

Novation releases the seller from the personal obligation created by the promissory note.

The lender will require the buyer to prove financial capability to repay.


Estoppel

An estoppel certificate is used when the holder of a loan sells the loan to another investor.

The borrower is asked to verify the amount still owed and the rate of interest.


Debt Priorities

When a default occurs and the price the property brings at its foreclosure sales does not cover all the loans against it, the debt with the highest priority is satisfied first, then the next highest debt is satisfied, until the sale proceeds are exhausted or all debts are satisfied.


First and Second Mortgages

A lender will want to be in the most senior position possible. The first lender to record holds the first mortgage.

If the same property is used to secure another note before the first is fully satisfied, the new mortgage is a second mortgage.


First and Second Mortgages

Any mortgage with a lower priority is known as a junior mortgage.

This can only be determined by searching the public records for mortgages recorded against the property.


Subordination

Subordination allows a junior loan to move up in priority.

Many homeowners have home equity loans that are seconds. If they wish to refinance the first to reduce the interest rate, this would push the equity loan into first position.


Subordination

Refinancing lenders would never allow themselves to be second to a home equity loan. Home equity lenders are asked to subordinate to the new loan.


Chattel Liens

A chattel mortgage is a mortgage secured by personal property.


The Foreclosure Process

To foreclose means to cut off.


Delinquent Loan

Foreclosure occurs because the note is not being repaid on time. When a borrower runs behind in payments, the loan is said to be a delinquent loan.

A lender considers foreclosure to be a last resort.


Delinquent Loan

The lender would much rather have the borrower make regular payments.

If a borrower cannot make payments, cannot find a buyer for the property, and the lender sees no further sense in stretching the payment schedule, the acceleration clause will be invoked and foreclosure will begin.


Foreclosure Routes

Judicial foreclosure means taking the matter to court in the form of a lawsuit. It is costly and time-consuming.

Non-judicial foreclosure is conducted by the lender in accordance with the mortgage and the state law. It is faster, simpler and cheaper.


Foreclosure Routes

Non-judicial foreclosure is preferred by the lender when the case is simple and straightforward.


Judicial Foreclosure

Judicial foreclosure process begins with a title search. The lender files a lawsuit naming the borrower as the defendants.

The lender identifies the debt and the mortgage securing it.


Judicial ForeclosureThe lender asks the court for a judgment directing that the defendant’s interests in the property be cut off, the property sold at public auction and the lender’s claim be paid from the proceeds of the sale.


Surplus Money Action

A junior mortgage holder will file a surplus money action in the hopes that the property will sell at foreclosure for enough money to satisfy all senior claims as well as their own claim against the borrower.


Notice of Lis Pendens

A notice of lis pendens informs the public that a legal action is pending against the borrower.

If the borrower attempts to sell the property at this time, a prospective buyer will learn of the pending litigation from a title search.


Public Auction

The foreclosure sale is usually a public auction to obtain the best possible price for the property by inviting competitive bids.


Equity of Redemption

The sale is conducted by the county sheriff. The lender is usually present and is able to bid the loan. The lender can bid up to the amount of owed without having to pay cash.

All other bidders must pay cash.


Equity of Redemption

The foreclosure does not cut off property tax liens against the property.


Deficiency JudgmentIf the property sells for more than the claims against it, the borrower receives the excess.

Georgia allows the lender to pursue a deficiency judgment against the borrower’s other unsecured assets.

This may require the borrower to sell those assets.


Deficiency Judgment

The purchaser at the foreclosure sale receives a sheriff’s deed. These are usually special warranty deeds.

The purchaser may take immediate possession. The court will assist in removing anyone in possession who was cut off in the foreclosure proceedings.


Statutory RedemptionIn states with statutory redemption laws, the foreclosed borrower has from one month to one year after the sale to pay in full the judgment and retake title.

The high bidder receives a certificate of sale entitling the bidder to a sheriff’s deed if no redemption is made.


Statutory Redemption

The purchaser may or may not get possession until then.

Bidders tend to offer less that what the property would be worth if title and possession could be delivered immediately after the foreclosure sale.


Statutory Redemption

Georgia does not allow for a statutory redemption on a security deed foreclosure.


Strict Foreclosure

Strict foreclosure is a judicial foreclosure without a judicial sale. The lender files a lawsuit requesting the borrower be given a period of time to exercise the equitable right of redemption or lose all rights to the property, with title transferring irrevocably to the lender.


Non-judicial Foreclosure

The power of sale clause in the mortgage gives the lender the power to conduct the foreclosure and sell the property without taking the issue to court.



Lenders foreclosing under power of sale cannot award themselves a deficiency judgment. If there is a deficiency as a result of the sale, the lenders must go to court for it.



A junior mortgage holder will file a request for notice of default when the mortgage is originally recorded. This requires anyone holding a senior lien to notify the junior mortgagee if a default notice has been filed.


Entry and Possession

Entry and possession is based on the lender giving notice to the borrower that the lender wants possession of the property. The borrower moves out and the lender takes possession. This would be witnessed and recorded in the public records.


Deed in Lieu of Foreclosure

A borrower may want to voluntarily deed the mortgaged property to the lender.

This relieves the lender of foreclosing and waiting for any redemption period.


Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is a voluntary act sometimes called a “friendly foreclosure.”

This may not cut off the rights of junior mortgage holders. The lender may have to make those payments or be foreclosed by the junior mortgage holder.


Overview of Mortgage Foreclosure


chapter 9. georgia real estate an introduction to the profession eighth edition chapter 9 notes and...

Documents

oncourse learning slide

trust deed

deed of trust real property

mortgage instrument

security documents

borrower trustor

lender beneficiary

real estate loans