Real Estate Finance Unit 11

Front 1

Security instrument

Back 1

A legal document given by the borrower to hypothecate (pledge) the property to the lender as collateral for the loan

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Hypothecation

Back 2

A legal arrangement that allows a borrower to remain in possession of a property secured by a loan

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Collateral

Back 3

Something of value given as security for a debt

Front 4

Security instrument

Back 4

At the same time the promissory note is signed, the borrower is required to execute the security instrument. A security instrument is a separate agreement from the promissory note. The promissory note can stand alone without the security instrument. It is a personal, unsecured note at that point. However, the security instrument needs the note to validate its existence. If there is a conflict between the terms of a note and the security instrument, the provisions of the note prevail

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Parties to the Security Instrument

Back 5

Borrower. Depending on the type of security instrument, the borrower is called the mortgagor, trustor, or grantor.

Lender. Depending on the type of security instrument, the lender is called the mortgagee, beneficiary, or grantee.

Trustee. Only a deed of trust has a trustee

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Periodic payment

Back 6

Regularly scheduled amount due for principal and interest under the note plus escrow amounts, if any

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Rider

Back 7

An addition or amendment separate from but attached to the original document. Typical riders to security instruments include the Adjustable Rate Rider, Balloon Rider, Condominium Rider, and Biweekly Payment Rider

Front 8

Covenant of seisin

Back 8

The borrower’s promise that he or she has the right to grant and convey the property and that the property is unencumbered except for encumbrances of record

Front 9

Escrow items

Back 9

Include fees or assessments that must be paid in addition to the periodic payment of principal and interest. These include taxes, assessments, leasehold payments, ground rents, insurance premiums, and mortgage insurance premiums, if any

Front 10

Mortgage insurance

Back 10

Insurance that protects the lender against the nonpayment of, or default on, the loan

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Property Insurance

Back 11

The borrower must provide adequate homeowner and hazard (i.e., fire, flood, and earthquake) insurance coverage for improvements on the property. The lender may require the amount (including deductible levels) of the insurance and has the right to approve the insurance carrier providing the insurance. This coverage is called force placed insurance

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Occupancy

Back 12

If the loan is for the borrower’s personal residence, the borrower must occupy the property for at least one year unless the lender agrees otherwise in writing. If the borrower states on the loan application that the property will be the principal residence but the statement is false, the borrower is in default

Front 13

Lender’s Right to Protect its Interest in the Property

Back 13

The lender may do whatever is reasonable to protect its interest in the property. The lender may secure the property and change the locks. The lender may (but is not required to) make repairs, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have the utilities turned on or off. Any money spent by the lender to protect its interest in the property will be added to the borrower’s debt that is secured by the security instrument. The borrower must repay these amounts plus interest when asked to do so by the lender

Front 14

Joint and Several Liability

Back 14

Each borrower who signs the security instrument agrees to be jointly and severally liable. However, a borrower who co-signs the security instrument but not the note only conveys his or her interest in the property under the terms of this security instrument and is not personally obligated to pay the sums in the note

Front 15

Acceleration or Due on sale clause

Back 15

Gives the lender the right to demand full payment of the loan secured by the security instrument if the borrower transfers the property without the lender’s permission

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Reinstate

Back 16

Means to bring current or to restore. Borrowers in default can avoid foreclosure by bringing the loan to a current status

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Foreclosure

Back 17

A legal procedure in which the borrower’s property is sold to satisfy the debt

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Equity of redemption

Back 18

In order to reinstate the loan the borrower must pay the lender all sums due under the note as if no acceleration occurred. In addition, the borrower must cure any default of any other covenants and pay all expenses incurred by the lender in enforcing the security instrument (i.e., attorneys’ fees, property inspection, valuation fees, etc.). Under a mortgage, the right of a mortgagor who is in default on the loan to recover the property BEFORE a foreclosure sale is called _______

Front 19

Change of Loan Servicer

Back 19

The lender may retain or sell the servicing rights to the note. Any time the loan servicer changes, the borrower must be given written notice of the change. The notice will state the name and address of the new loan servicer, the address to which payments should be made, and any other information the Real Estate Settlement Procedures Act (RESPA) requires in connection with a notice of transfer of servicing

Front 20

Hazardous substances

Back 20

Include gasoline, kerosene, other flammable or toxic petroleum products, toxic pesticides and herbicides, volatile solvents, materials containing asbestos or formaldehyde, and radioactive materials. This does not apply to small quantities of cleaning supplies, paint, and materials used to maintain residential property

Front 21

Number of parties, title, satisfaction, foreclosure, statutory redemption, deficiency judgment, and statute of limitations

Back 21

Although mortgages and deeds of trust share many of the same covenants, they differ in

Front 22

Mortgage

Back 22

A security instrument that secures the payment of a promissory note. A mortgage is a two-party security instrument and is, in fact, a contract for a loan. This loan contract (mortgage) is commonly recorded to secure real property. A mortgage is held by the lender for the life of a loan or until the borrower pays it off

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Mortgagor (borrower) and mortgagee (lender). The mortgagor (borrower) receives a loan from the mortgagee (lender) and signs a promissory note and mortgage

Back 23

The two parties in a mortgage are

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Mortgagor

Back 24

Borrower

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Mortgagee

Back 25

Lender

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Lien theory and title theory

Back 26

There are two theories of how title follows a mortgaged property

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Lien theory state

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Title to real property is vested in the borrower. The borrower gives only a lien right to the lender during the term of the loan

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Title theory state

Back 28

title to real property is vested in the lender. In a title theory state, the mortgage states that title reverts to the borrower once the loan is paid. Whether the state is a lien theory or title theory state, possession of the property remains with the borrower

Front 29

Modified lien theory state

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One in which the mortgage is a lien unless the borrower defaults. In this case, the title is automatically transferred to the lender. In any case, the borrower enjoys possession of the property during the full term of the mortgage no matter who holds title

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Defeasance clause

Back 30

Cancels the mortgage upon repayment of the debt in full. The title to the property transfers back to the mortgagor and the lender’s interest in the property terminates

Front 31

Satisfaction of a mortgage, or payment in full

Back 31

Requires that the lender deliver the original note and mortgage to the party making the request. This release should be recorded to give public notice that the mortgage encumbrance has been paid in full

Front 32

Power of sale clause

Back 32

A clause in a mortgage or deed of trust that gives the holder the right to sell the property in the event of default by the borrower

Front 33

Statutory Redemption

Back 33

Some mortgages allow statutory redemption, which is the statutory right of a mortgagor to recover the property AFTER a foreclosure sale

Front 34

Deficiency judgment

Back 34

A personal judgment against a borrower for the balance of a debt owed when the security for the loan is insufficient to repay the debt. If the proceeds of the foreclosure sale are insufficient to satisfy the debt, the lender may get a deficiency judgment against the borrower that will be effective for 10 years

Front 35

Statute of limitations

Back 35

Limits the period of time during which legal action may be taken on a certain issue

Front 36

Deed of trust (trust deed)

Back 36

A security instrument that secures a loan on real property

Front 37

The borrower (trustor), the lender (beneficiary), and a neutral third party (trustee)

Back 37

When a promissory note is secured by a deed of trust, three parties are involved:

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Trustor

Back 38

Borrower (deed of trust)

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Beneficiary

Back 39

Lender (deed of trust)

Front 40

Trustee

Back 40

Neutral third party (deed of trust)

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Lien

Back 41

A claim on the property of another for the payment of a debt

After being signed by the trustor, the deed of trust (not the note) is recorded in the county where the property is located. The recorded deed of trust and the note are sent to the lender to hold for the life of the loan. Recording creates a lien against the property and gives public notice of the existence of a debt owed on the property

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Parties

Back 42

The parties in a deed of trust are the borrower (trustor), the lender (beneficiary), and a neutral third party (trustee). The beneficiary (lender) holds the note and deed of trust until reconveyance or until the debt is paid in full. In most states, a title or trust company, escrow holder, or the trust department of a bank perform the duties of a trustee

Front 43

Equitable title

Back 43

The right to obtain absolute ownership to property when legal title is held in another’s name. As equitable owner, the borrower has all the usual rights that go with ownership, such as the right to possess, will, encumber, and transfer

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Bare legal title

Back 44

Title that lacks the usual rights and privileges of ownership. The bare legal title held by the trustee allows the trustee to do only two things: reconvey the property to the borrower upon final payment of the debt or foreclose if the borrower defaults on the loan

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Deed of reconveyance

Back 45

Conveys title to the property from the trustee to the borrower (trustor)

Front 46

Trustee’s sale or judicial foreclosure

Back 46

Under a deed of trust, the lender has a choice of two types of foreclosure

Front 47

Power of sale clause

Back 47

Gives the trustee the right to foreclose, sell, and convey ownership to a purchaser of the property if the borrower defaults on the loan. The trustee can start the sale without a court foreclosure order because the borrower has already given bare legal title to the trustee in the deed of trust. Additionally, the power of sale clause in the deed of trust gives the trustee the authority to sell the property