Financing:Financing:Notes and Mortgages Notes and Mortgages

ObjectivesObjectives• Define the mortgage note

• Define and explain the mortgage

• Identify the different mortgage clauses

• Identify what constitutes mortgage default and foreclosure

• Explain alternatives to foreclosure

• Define and explain bankruptcy

Essential Elements of the Mortgage Note

Amount borrowedRate of interestPayment amount, due date, and termMaturity dateReference to the mortgageDefault ClausePenalties for late payment

• Acceleration Clause

• Recourse vs. Non- Recourse

• Assumability

• Alienation Clause

• Future Advances

• Release of Lien

Essential Elements of the Essential Elements of the Mortgage Note ContinuedMortgage Note Continued

The Mortgage InstrumentThe Mortgage Instrument

• Mortgagor and Mortgagee

• Promissory Note

• Pledge of property as security

• Obligation to pay

Basic Mortgage RequirementsBasic Mortgage Requirements

• Borrower and Lender• Property Description• Covenants of Warranty• Provision between spouses• Covenants and other contractual

agreements

Mortgage ClausesMortgage Clauses

• Impound Accounts

• Taxes and Insurance

• Taxes and other assessments

• Hazard Insurance

Mortgage Clauses ContinuedMortgage Clauses Continued

• Maintenance

• Alienation

• Subordination

Mortgages- Other Mortgages- Other CharacteristicsCharacteristics

• “Subject to” a mortgage• Mortgage Assumption• Junior Mortgage• Purchase Money Mortgage• Trust deeds• Land contracts

Mortgage FinancingMortgage Financing

TWO KEY DOCUMENTS

• Promissory Note

• Deed of Trust

Advantage to having two instruments gives lender more options that they can take against the borrower.

Mortgage – Transaction between lender and borrower

Deeds of Trust – 3rd party transactions: Borrower, Lender and Trustee

• Provides greater protection for lender

• Conveys title of property to a trustee, who holds it as security for the debt

• Empowers trustee to foreclose on your house

Deed of Release – Recorded by trustee when loan is paid off, showing debt has been paid

Mortgages Cont.Mortgages Cont.

Trust DeedsTrust Deeds

• A three party instrument

• Trustor- borrower

• Trustee- third party

• Beneficiary- lender

Mortgage ControversiesMortgage Controversies

• Pre-payment Penalties

• Lender charges 2 – 5% fee if mortgage is paid off early

• Due On Sale Clauses

• In every deed of trust and mortgage

• If you sell the property you must pay the loan

PMIPMI

Private Mortgage Insurance

• If only have 5 – 10% down payment

• Started in 1920’s

• Stopped during Great Depressions due to defaults

• Until 1957 no PMI

• Mortgage Guarantee Insurers Corp started it back up in Wisconsin

Special Types of MortgagesSpecial Types of Mortgages• Home Equity Lines of Credit

• Interest Only

• Wrap Around

• Blended Rate

• Rollover Mortgage

• Graduated Payment

• Growing Equity

• Shared Appreciation (SAM)

• Adjustable Rate (ARM)

• Reverse Annuity (RAM)

• Bi-Weekly

• 15 Year

Mortgage MarketsMortgage Markets• Mortgage Banker

• Mortgage Broker

Markets

• Primary

• Secondary

Transaction Types

• Direct Sale Program

• Mortgage Backed Securities

Mortgage TerminationMortgage Termination

•Mortgage Satisfaction

• Mortgage Default

• Definition: Breach of the mortgage contract and note

•Lender Options

• Refinance

• Voluntary Sale

• Deed in Lieu

• Foreclosure

Mortgage Default and Mortgage Default and Foreclosure ContinuedForeclosure Continued

• Non- Judicial Foreclosure• Equity of Redemption• Statutory Redemption• Junior liens are extinguished• Deficiency judgment

BankruptcyBankruptcy

• Chapter 7- straight bankruptcy

• Chapter 11- business owners

• Chapter 13- plan of reorganization