Presentation Transcript

1. Chapter 9: Financing the Real Estate Purchase

2. Financing the Real Estate Purchase Most real estate purchasers do not write a personal check to complete the purchase. Instead, buyers often obtain financing from institutional lenders. 2
3. Federal Regulation and Residential Lending An expanding body of federal legislation regulates the business of mortgage lending – can be grouped into two categories: Fair Lending Laws Disclosure to the borrower 3
4. Definitions -Parties Borrower Debtor: One who owes a debt. Maker: One who signs a note. Mortgagor: A borrower who transfers an interest in property to the mortgage as security for the repayment of a loan. 4
5. Definitions - Parties Lender Mortgagee: A lender who receives an interest in property from the mortgagor as security for the repayment of a loan. Payee: The person to whom or to whose order a promissory note is made payable Holder/holder in due course: Party to whom the note is negotiated. Takes free of personal defenses. 5
6. Definitions - Documents The closing of the mortgage transaction usually is accomplished concurrent with the closing of the real estate transaction. Two primary documents at closing: a note and a mortgage.
7. Definitions – Documents Negotiable Promissory Note: Written/signed/unconditional/promise/ to pay a specified sum/in money/at a time therein stated or on demand/to order or bearer
8. Definitions - Documents Not all notes are negotiable, but it is especially important that those used in real estate transactions meet these requirements. Secondary market - Securitization: A process in which an asset is converted into a pool of securities that are offered to investors
9. Definitions – Documents - Mortgage “Mortgage” as it is commonly used, describes a document that secures the repayment of the debt created by the Note. It may take the form of a Mortgage, or a Deed of Trust. Seven states allow both. Tennessee uses a Deed of Trust.
10. Definitions – Documents - Mortgage Deed of Trust: Borrower places the title to property in trust to secure the repayment of a loan owed to the beneficiary of the trust. Mortgage: Borrower gives lender a lien on the property.
11. Definitions – Documents – Mortgage Deed of Trust Mortgage Parties Borrower Lender If the Borrower does not pay: Judicial foreclosure Parties Borrower Lender Trustee If the Borrower does not pay: Power of Sale
12. The Note The Note: Recourse Note: A loan in which the borrower is personally liable for payment in the event of a default. Nonrecourse Note: A loan in which the lender’s recourse is to satisfy the loan is against the collateral, not against the borrower’s personal assets. 12
13. The Note: Acceleration Clause: An acceleration provision is a term in a mortgage that empowers the mortgagee, upon default by the mortgagor, to declare the full amount of the mortgage obligation immediately due and payable; becomes effective on the date specified in a written notice by the mortgagor delivered after default. 13
14. The Note Due on Sale Clause: A special type of acceleration clause that causes the entire debt to become due upon the sale of the property. Interest Rate – Usury Limitation: Usury Laws are laws that forbid the lending of money in excess of rates prescribed by law. 14
15. The Note Prepayment and Exit Fees: Prepayment Fee: A fee that is imposed when a promissory note is paid before it is due. “On or before” – allows payment in full before due date. Exit Fee: A fee that is imposed when a promissory note is paid before it is due or when it matures. 15
16. The Mortgage/Deed of Trust Form: Because the mortgage is a grant of either a security interest in real property (in lien theory states) or a defeasible fee (in title theory states), the form of mortgage includes many of the elements found in a deed. 16
17. The Mortgage/Deed of Trust In most states, an unrecorded mortgage, like an unrecorded deed, will be subject to the rights of a later bona-fide purchaser or mortgage, such as one who had no actual notice.
18. The Mortgage/Deed of Trust Future Advance: Money that is loaned after a mortgage has attached and that is secured by the mortgage. HELOC 18
19. Rights and Duties After Closing The mortgage instrument may (and usually does) spell out the duties of the mortgagor and mortgage with regard to the mortgaged premises. The courts have developed a number of rules, although often the contractual agreements between lender and borrower control the rights and duties of the parties. 19
20. Rights and Duties After Closing Possession: In theory, the right to possession should pass with the title to real estate. As a result, in title states, the mortgage would be entitled to possession. In lien states, the possession would remain with the mortgagor until foreclosure. 20
21. Rights and Duties After Closing Possession In practice, however, possession remains with the mortgagor in virtually every transaction, even in title states, pursuant to state statutes providing that the mortgagor is entitled to possession until default or under provisions in the mortgage instrument. 21
22. Rights and Duties After Closing Rents and Profits: Real estate, especially commercial and industrial real estate, can produce valuable rents and profits. Rents may come from a lease executed before the mortgage. 22
23. Rights and Duties After Closing Rents and Profits: May be collected for the benefit of the mortgagee The mortgagor is insolvent or that the debt is otherwise uncollectible and the mortgagee’s security in the property is insufficient to cover the debt. The mortgagor assigns the rents and profits to the mortgage as additional security. 23
24. Rights and Duties After Closing Repairs and Improvements: Mortgagor has no duty to repair mortgaged property if the property has been damaged through no fault of his own. Insurance: Escrow Taxes: Mortgagor’s duty. Tax liens. Escrow 24
25. Mortgage Terminations The relationship between the mortgagor and mortgage may terminate under one of three scenarios: When mortgage is paid in full by mortgagor; When mortgagor transfers mortgage to a buyer; When mortgager forecloses on the mortgage and the property is sold at a public or private sale. 25
26. Mortgage Terminations Terminating the Mortgage by Payment in Full: A mortgagor may discharge the mortgage through periodic payments over the life of the mortgage. Lump sum payment before the due date, may subject the mortgagor to a prepayment fee Satisfaction: The discharge of a mortgage. 26
27. Mortgage Terminations Mortgage Transfer by Seller/Mortgager to Buyer: Although not as common as it once was, mainly because of due on sale clauses, a seller/mortgagor may choose to transfer the mortgage to the buyer. Sale Subject to Mortgage: Sale in which buyer agrees to purchase property subject to the mortgage lien. 27
28. Mortgage Terminations Mortgage Transfer by Seller/Mortgager to Buyer: Mortgage Assumption: An agreement between the seller-mortgagor and a buyer in which the buyer agrees to assume the obligation for the seller’s mortgage debt. 28
29. Mortgage Terminations Mortgage Transfer by Seller/Mortgager to Buyer: Novation: The substitution by mutual agreement of one debtor for another whereby the original debtor’s obligation is extinguished. 29
30. Mortgage Terminations Transfer by Mortgagee: Method and Effect of Transfer: Mortgagees commonly sell mortgages in the secondary market to financial institutions, government agencies and private parties. Often these sales take place without the knowledge of mortgagors, who continue to make payments to the original mortgage. 30
31. Transfer by Mortgagee Mortgagee (First Bank) Note and Mortgage Mortgagor (Darcy) Note and Mortgage Purchaser (Second Bank)
32. Mortgage Terminations Transfer by Mortgagee: Method and Effect of Transfer: Holder in Due Course: A person who has purchased the note in good faith, for value, and without notice of defenses. 32
33. Mortgage Terminations Transfer by Mortgagee: Real Defenses: Defenses that are valid against all holders of negotiable notes, including holders in due course. Personal Defenses: Defenses valid against holders of negotiable notes but not against holders in due course. 33
34. Mortgage Terminations Transfer by Mortgagee: Notice of Transfer: 2009 Federal Act requires notification of transfer of a residential mortgage 34
35. Mortgage Termination by Foreclosure The final method of terminating the relationship between the mortgagor and mortgage is foreclosure. Foreclosure: Process initiated by the mortgagee to sell the collateralized real estate to satisfy the mortgagor’s debt. 35
36. Chronology of Mortgage Termination by Foreclosure Default Foreclosure Debtor’s Rights End Equity of Redemption Period *Statutory Redemption Period *Right does not exist in all states.
37. Mortgage Termination by Foreclosure Strict Foreclosure: A process by which the lender takes title to the property after obtaining a court order. Judicial Sale: A decree of court directing the sale of mortgaged property. 37
38. Mortgage Termination by Foreclosure Power of Sale Clause: A clause granting the lender or trustee the right to sell the property upon default. Nonjudicial Sale: A foreclosure conducted without a court proceeding pursuant to the rights granted under the power of sale. 38
39. Mortgage Termination by Foreclosure Deficiency Judgments After the Foreclosure Sale: If sale proceeds exceed first mortgage debt, first the junior mortgages and then the mortgagor are entitled to the excess. If proceeds of sale of collateral are less than amount of debt, mortgagee has a right to recover through a deficiency judgment. 39
40. Mortgage Termination Deed in Lieu of Foreclosure: Mortgagor deeds property to lender in exchange for the lender’s agreement to release the mortgagor from liability under the promissory note. Workouts: A mutual effort by a property owner and lender to avoid foreclosure or bankruptcy following a default. Short Sale: Lender agrees to accept proceeds from the sale. 40
41. Mortgage Termination by Foreclosure Effect of Bankruptcy on Foreclosure: Federal bankruptcy law exists to protect debtors and to give them a fresh start. Bankruptcy can be important on foreclosures because once a debtor files a bankruptcy petition, an automatic stay on a foreclosure stay is created. 41
42. Installment Contracts An alternative to mortgage financing is the installment contract, also called a land contract or contract for deed. Installment Contract: Contract for the sale of real estate in which the seller finances the sale and the buyer pays the seller the purchase price over time. 42
43. Statutory Liens A lien created by state statute that is placed on land to ensure payment of certain debts. Mechanics’ Liens: Type of statutory lien placed on real property to ensure payment to those who supply labor, services, or materials for improvement of the real property. 43