Flashcards in Unit 14 - part 2 Deck (11):
A mortgage is a lien on the real property of a debtor.
lien theory state
In a mortgage or lien theory state, the mortgagor retains both legal and equitable title to property that serves as security for a debt. The mortgagee has a lien on the property but the mortgage is nothing more than collateral for the loan.
If the mortgagor defaults, the mortgagee must go through a formal foreclosure proceeding in court to obtain legal title. If the foreclosure is approved by the court, the property is offered for sale at public auction.
In some states, a defaulting mortgagor may redeem (buy back) the property during a certain period after the sale, the statutory right of redemption. A borrower who fails to redeem the property during that time loses the property irrevocably.
title theory state
In a deed of trust or title theory state, the mortgagor actually conveys legal title to the mortgagee and retains equitable title and the right of possession.
Legal title is returned to the mortgagor only when the debt is paid in full.
In effect, because the lender holds legal title, the lender has the right to immediate possession of the real estate and rents from the mortgaged property if the mortgagor defaults.
In states where deeds of trust are generally preferred, foreclosure procedures for default, are usually simpler and faster than for mortgage loans.
An acceleration clause means that, if certain conditions are met, the borrower will have to pay back the entire loan at once – including the interest that accrued since the clause was invoked. The borrower doesn’t have to pay the interest that would have accrued over the life of the loan, however.
When a mortgage is written, the client agrees to pay off the loan after a certain period of time, say 30 years, by paying a certain amount each month. If the borrower misses even one payment, then they have broken their promise, and the lender has the right to use the acceleration clause and begin the foreclosure process.
Sometimes the lender can invoke the acceleration clause for other things like failing to pay or canceling your homeowners insurance, not paying property taxes (and having a tax lien placed on your property) or not properly maintaining the property, but these don’t happen very often.
satisfaction of mortgage
When the loan is paid in full, the mortgagee issues a document called a satisfaction of mortgage, which can be filed in the public record as evidence of the removal of the security interest.
A defeasance clause is a statement in a mortgage contract indicating that once the borrower has met all the obligations for the loan, the lender is required to surrender the title. Defeasance clauses are used in regions where mortgages are not offered on a lien basis.
By the provisions of the defeasance clause in the financing instrument, the lender is required to execute a satisfaction of mortgage (also known as are lease or discharge) when the note has been fully paid.
Buying "Subject to" or Assuming a Seller's Mortgage or Deed of Trust
When a person purchases real estate that has an outstanding mortgage or deed of trust, the buyer may take the property in one of two ways:
1. "subject to" the mortgage or deed of trust, or
2. by assumption of mortgage
property is sold subject to the mortgage
When the property is sold subject to the mortgage, the buyer is not personally obligated to pay the debt in full.
The buyer takes title to the real estate knowing that she must make payments on the existing loan. Upon default, the lender forecloses and the property is sold by court order to pay the debt. If the sale does not pay off the entire debt, the purchaser is not liable for the difference.
In some circumstances, however, the original seller might continue to be liable.
assumption of mortgage
a buyer who purchases a property and assumes the seller's debt becomes personally obligated for the payment of the entire debt.
If a seller wants to be completely free of the original mortgage loan, the seller(s), buyer(s), and lender must execute a novation agreement in writing. The novation makes the buyer solely responsible for any default on the loan. The original borrower (seller) is freed of any liability for the loan.
The lender may want to prevent a future purchaser of the property from being able to assume the loan, particularly if the original interest rate is low.
For this reason, most lenders include an alienation clause in the note. An alienation clause provides that when the property is sold, the lender may either declare the entire debt due immediately or permit the buyer to assume the loan at an interest rate acceptable to the lender.