Chapter 9 Mortgage Theory and Law

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Chapter 9Mortgage Theory and Law

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• Mortgage - a pledge of property to secure the
  repayment of a debt.

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Hypothecation

• Allowing the borrower to stay in possession of
  the pledged property. The borrower conveys the
  conditional title to the lender but retains the
  use of the property.

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• Texas is a lien theory state meaning a lenders
  right to acquire title occurs only after proper
  foreclosure. Thus a mortgage is a lien rather
  than a conveyance.
• Title theory is a conveyance of title subject to
  defeat when the debt it secures is paid.
• Intermediate theory says title does not pass to
  lender with mortgage but only upon default.

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Promissory Note

• Contract between a borrower and lender
• Obligor, obligee
• Principal
• Acceleration clause
• Signature

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Note and Mortgage Sequence

• Step 1 Buyer gives note to lender
  and receives
• Step 2 Buyer pays to seller
  and receives deed
• Step 3 Buyer has clear title
  and gives mortgage to lender

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The Mortgage Instrument

• A separate agreement from the note that provides
  collateral to the lender to back up the promise
  made in the note by the borrower/mortgagor.

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Deed of Trust

• Same as a mortgage
• Parties
• Mortgagor - borrower
• Mortgagee lender/beneficiary
• Trustee neutral third party

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Comparison of a Mortgage with a Deed of Trust
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Comparison of a Mortgage with a Deed of Trust
(continued)
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Promissory Note
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Sample Deed of Trust
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Assumption

• Deed of Trust to Secure Assumption

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Debt Priorities

• First mortgage / Senior mortgage
• Second mortgage / Junior mortgage
• Subordination
• Chattel liens

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Foreclosure / Power of Sale

• Judicial
• Nonjudicial
• Power of Sale
• Notice 21 days prior to sale
• Additional 20 days notice if borrowers primary
  residence
• Public sale on the first Tuesday of the month
  following proper notice

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REDEMPTION

• Some states provide an equitable or statutory
  right of redemption to redeem the property prior
  to sale
• Under Texas law once the notice to cure has been
  sent to the debtor, the only equity of redemption
  that the debtor has is to pay the full amount
  owing, or to buy the property at the foreclosure.

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Mortgage ForeclosureSimplified Overview
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Deed of Trust Advantages

• Upon default, Lender can possession of property
  collect rents
• Time between default foreclosure is short
• Power of sale provision
• No statutory redemption

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Clauses

• Alienation Clause
• Partial Release
• Subject To
• Assumption

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Key Terms

• Acceleration clause
• Beneficiary
• Deed of trust
• Deficiency judgment
• Foreclosure
• Junior mortgage

• Mortgage
• Mortgagee
• Mortgagor
• Power of sale
• Subordination
• Trustee
• Trustor