Financing: Notes and Mortgages

1
Chapter 2

• Financing Notes and Mortgages

2
Overview

• Notes
• The Mortgage Instrument
• Assumption of Mortgage
• Acquiring Title Subject to a Mortgage
• Other Financing Sources
• Land Contracts
• Default
• Alternatives to Foreclosure Workouts
• Foreclosure
• Bankruptcy

3
Notes

• Evidence of debt
• Major provisions
• Financial
• Amount borrowed and interest rate
• Payment amount and maturity date
• Application of payments
• Reference to security for the loan
• Default conditions and penalties

4
Notes Continued

• Major provisions
• Prepayment provision
• Acceleration of note
• Non-recourse clause
• Assumability provisions
• Assignment
• Future advances
• Release

5
Note Example
6
The Mortgage Instrument

• Note Mortgage
• Note Obligation to pay
• Mortgage Pledges property as security
• Mortgagor Borrower
• Mortgagee Lender

7
The Mortgage Instrument Continued

• Important Clauses
• Taxes insurance fund
• Charges liens
• Hazard insurance
• Property preservation and maintenance
• Due on sale clause
• Taxes insurance fund
• Charges liens
• Hazard insurance
• Property preservation and maintenance
• Due on sale clause

8
Mortgage Example
9
Mortgage Insurance Rider and PMI Disclosure
10
Assumption of Mortgage

• Assumption A property may be sold/granted with
  the condition of new buyer/grantee taking over
  the responsibility of the loan
• Liability since the agreement is not with the
  lender original borrower is still responsible for
  the loan
• Release conditions the lender may or may not
  release the original borrower

11
Acquiring Title Subject to a Mortgage

• Subject to a mortgage
• Loan is a liability of the grantor
• Property covered by a mortgage
• Land
• Improvements
• Easements
• Fixtures
• Special case of trade fixtures
• Mineral rights
• Junior mortgages unsecured bridge loan with
  high interest rate and short-term

12
Other Financing Sources

• Seller financing Source of credit for real
  property purchaser from the seller
• It is used when
• third party mortgage is expensive
• The buyer does not qualify for a loan
• The seller wants to use installment method to
  report gain on sale for tax purposes
• The seller artificially increases the selling
  price by offering a lower than market interest
  rate and therefore create more capital gain and
  less interest or ordinary income from seller
  financing
• Purchase money mortgage in addition to another
  loan the lender may require use of
  subordination clause

13
Land Contracts

• Seller retains naked title
• Purchaser has equitable title
• Seller conveys title when purchaser completes the
  performance obligations

14
Default

• Failure to fulfill contract, agreement, or duty,
  especially obligation such as a note. The most
  common default is failure to make installment
  payment
• Beyond installment, failure to pay taxes or
  insurance premium can also result in default
• Even failure to repair the property may result in
  default called technical default

15
Alternatives to Foreclosure Workouts

• Restructure the loan
• Recasting changing mortgage terms to avoid
  default
• Extension agreement between borrower and lender
• Alternatives temporary extensions
• Transfer of mortgage to a new owner
• Subject to the existing mortgage. The buyer is
  not responsible for the original loan
• Purchase an option on property value
• What are the characteristics of this option?
• Voluntary conveyance transfer of title to
  lender with an agreement. The process is fast
  and less costly
• Deed in lieu of foreclosure
• Friendly foreclosure borrower fully cooperates
• Prepackaged bankruptcy agreement between
  creditors and a borrower to speed up the process

16
Foreclosure

• There are two forms of foreclosure
• Judicial foreclosure or property sale
• Judicial foreclosure
• Lawsuit against the property owner to execute a
  judgment to recover losses on the loan
• Redemption process of canceling a foreclosure
  sale by fulfilling debt obligations
• Equity of redemption prior to foreclosure
• Statutory right of redemption after foreclosure
• Not in every state

17
Foreclosure Continued

• Property sale
• Pricing Public auction
• Upset price sets a minimum price for a valid
  sale
• Deed of Trust Trustor (creator of trust
  borrower), Trustee (holds the title), Beneficiary
  (the lender)
• Power of sale clause court authority not
  necessary
• Used in a limited number of states
• Purchaser buys any title defects
• Parties
• Senior junior lien claimants
• Deficiency judgment
• Property price does not cover claim
• Tax issues
• Tax sales

18
State Foreclosure Laws

• Source http//www.foreclosures.com/pages/state_la
  ws.asp?ChangeStatePreftrue

19
Foreclosure Dictionary
20
Bankruptcy

• Chapter 7
• Liquidation
• Chapter 11
• Available to business owners
• Reorganization
• Cramdown reorganization plan that is not fully
  supported by all creditors but approved by the
  court
• Chapter 13
• Available to individuals
• Reorganization