Chapter 20

Question 1

Security

Answer 1

the assurance that a creditor will be paid back for any money loaned or for credit extended to a debtor

Question 2

Security Interest

Answer 2

The right to use collateral to recover
a debt

Question 3

Unsecured loan

Answer 3

One in which creditors have nothing
of value that they can repossess and sell to recover the money owed to them by the debtor.

Question 4

Secured loan

Answer 4

one in which creditors have
something of value from which they
can be paid if the debtor does not pay

Question 5

Mortgage

Answer 5

a transfer of an interest in property
for the purpose of creating a security for a debt.

Question 6

Mortgagor

Answer 6

the person that borrows the money and pays back the mortgage loan

Question 7

Mortgagee

Answer 7

the lender that provides the funds for a mortgage loan

Question 8

Conventional mortgage

Answer 8

-involves no government backing by either insurance or guarantee
-loan is made by private lenders, and the risks of loss are borne exclusively by them

Question 9

Variable or flexible or adjustable rate mortgage (ARM)

Answer 9

• has a rate of interest that changes according to fluctuations in the index to which it is tied
• must include a maximum rate that cannot be exceeded

Question 10

Balloon Payment Mortgage

Answer 10

• has comparatively low fixed payments during the life of the mortgage, followed by one large
  final (balloon) payment.
• the mortgage has a fixed interest rate, but it is written for a short time period, such as five
  years

Question 11

Subprime mortgage

Answer 11

• borrowers have been disqualified from conventional loan because of a bad credit history or because
  of a low debt-to-income ratio.
• these loans generally have a much higher default rate than most of the conventional loans

Question 12

Interest-only mortgage

Answer 12

Borrower will agree to pay
only the interest on the loan
for a set period of time set by
the agreement

Question 13

Reverse mortgage

Answer 13

type of loan that allows
home owners to convert
some of the equity in their
home into cash while
retaining ownership of their
home

Question 14

Graduated-payment mortgage

Answer 14

-has a fixed interest rate
during the life of the
mortgage
-the monthly payments made
by the mortgagor increase
over the term of the loan

Question 15

Junior Mortgage

Answer 15

• a mortgage subject to a prior mortgage.
• also called a second (or subsequent) mortgage
  -Takes advantage of the equity that has built up in a home over a
  period of time.
• If all the mortgages are recorded, the holders of second and
  subsequent mortgages may exercise their rights against the
  property only after prior mortgages have been paid off.
• Thus, if the first mortgagee causes the property to be sold and is
  paid off in full, the second and subsequent mortgages are paid out
  of the proceeds that remain

Question 16

Home equity loan

Answer 16

an outright loan or a line of credit made available to homeowners based on the value of the property over and above any existing mortgages

Question 17

A mortgage must be:

Answer 17

-in writing and
-delivered to the recorder’s office in the county where the
property is located.
-If the mortgage is not recorded and a later mortgage is given
on the same property, the new mortgage is superior to the
first.

Question 18

Recording a mortgage

Answer 18

notifies any third party who may
be interested in purchasing the property that the mortgagee has an interest in the real property covered by the mortgage.

Question 19

Rights and Duties of the Mortgagor

Answer 19

1. Right to possess the property.
2. Right to any income produced by the property.
3. Right to use the property for a second or third mortgage.
4. Right to pay off the mortgage in full
5. Make payments on time
6. Preserve and maintain the mortgaged property
7. Must pay all taxes and assessments

Question 20

Rights and Duties of the Mortgagee

Answer 20

1. Unrestricted right to sell, assign, or transfer the
   mortgage to a third party.
2. Right to receive each installment payment as it falls due.
3. Right to apply to a court to have the property sold If the
   mortgagor has defaulted.
4. Cannot lose their interest in property without due process

Question 21

Collateral

Answer 21

The property that is subject to the security interest

Question 22

Secured party

Answer 22

The lender or seller who holds the security interest

Question 23

Security agreement

Answer 23

-an agreement that creates a security interest
-must be in writing, be signed by the debtor, and contain a description of the collateral that is used for security

Question 24

Types of Personal Property as Security

Answer 24

• Consumer goods (used or brought for personal, family, or household purposes)
  -Equipment
• Farm products (crops or livestock or supplies used in farming operations)
• Inventory and Raw Materials
• Fixtures

Question 25

Purchase money security interest

Answer 25

a security interest taken by a lender or a seller of an item to secure its price

Question 26

Priorities of Claims

Answer 26

-Sometimes, two or more parties claim a security interest in the same collateral. -Conflicting security interests rank according to priority in time of filing or perfection - The UCC helps resolve these conflicts

Question 27

Perfection

Answer 27

To preserve the right to first claim on the collateral, creditors must “perfect” their interest -A security interest can be perfected in one of three ways: by filing a financing statement in the appropriate government office, by attachment alone, or by possession of the collateral -Security interests in most kinds of personal property are perfected by filing a financing statement in a public office

Question 28

purchase money security interest (PMSI)

Answer 28

in consumer goods is perfected the moment it attaches, with the exception of motor vehicles and fixtures. -Security interests on motor vehicles are perfected by making a note of the lien on the certificate of title issued by the state government. -Security interests on fixtures are perfected by filing a financing statement with the registry of deeds where the land is located.

Question 29

Possession

Answer 29

A security interest may be perfected when the secured party (creditor) takes possession of the collateral.

Question 30

Default

Answer 30

If a debtor defaults by failing to make payments when due, the secured party may satisfy the debt by taking possession of the collateral.

Question 31

Pledge

Answer 31

Because of the difficulties of doing this, the perfection of a security interest by possession, as in a pledge, is better than other types of perfection

Question 32

Repossession

Answer 32

Collateral may be repossessed without going through the court if it can be done without causing a disturbance; otherwise, the creditor must use legal processes.