Mortgage Theory and Law

2. Chapter 9 Mortgage Theory and Law

3. In This Chapter You will take a brief look at mortgage theory and law.

4. Mortgage A pledge of property to secure the repayment of a debt.

5. Hypothecation • Allowing the borrower to stay in possession of the pledged property. • The borrower conveys the conditional title to the lender but retains the use of the property.

6. Texas is a lien theorystate meaning a lender’s right to acquire title occurs only after proper foreclosure. Thus a mortgage is a lien rather than a conveyance. • Title theory is a conveyance of title subject to defeat when the debt it secures is paid. • Intermediate theorysays title does not pass to lender with mortgage but only upon default.

7. Pledge Methods • Regular Mortgage • Equitable Mortgage • Deed as Security • Deed of Trust • Chattel Mortgage

8. Promissory Note • Contract between a borrower and lender • Obligor, obligee • Principal • Acceleration clause • Signature

9. Lien Note

10. Note and Mortgage Sequence • Step 1Buyer gives note to lender and receives $$ • Step 2Buyer pays $$ to seller and receives deed • Step 3Buyer has clear title and gives mortgage to lender

11. The Mortgage Instrument A separate agreement from the note that provides collateral to the lender to back up the promise made in the note by the borrower/mortgagor.

12. Comparison of a Mortgage with a Deed of Trust

13. Comparison of a Mortgage with a Deed of Trust(continued)

14. Deed of Trust • Same as a mortgage • Parties • Mortgagor - borrower • Mortgagee – lender/beneficiary • Trustee – neutral third party

15. Sample Deed of Trust

16. Clauses to Consider • Covenants of Borrower • Alienation Clause • Partial Release • “SUBJECT TO” Clause

17. Assumption • Deed of Trust to Secure Assumption

18. Novation • The safest arrangement for the seller is to ask the lender to substitute the buyer’s liability for his. • This releases the seller from the personal obligation created by his promissory note, and the lender can now require only the buyer to repay the loan.

19. Debt Priorities • First mortgage / Senior mortgage • Second mortgage / Junior mortgage • Subordination • Chattel liens

20. Foreclosure • Judicial • Non-judicial • Power of Sale • Notice 21 days prior to sale • Additional 20 days notice if borrower’s primary residence. • Public sale on the first Tuesday of the month following proper notice.

21. Deficiencies • After the foreclosure, the lender is given the right to sue under the Promissory Note for any deficiency.

22. Redemption • Some states provide an equitable or statutory right of redemption to redeem the property prior to sale. • Under Texas law once the notice to cure has been sent to the debtor, the only equity of redemption that the debtor has is to pay the full amount owing, or to buy the property at the foreclosure.

23. Mortgage Foreclosure: Simplified Overview

24. Deed of Trust Advantages • Upon default, Lender can possession of property & collect rents. • Time between default & foreclosure is short. • Power of sale provision. • No statutory redemption.

25. Deed in Lieu of Foreclosure • Borrower deeds the property to the lender. • Avoid the hassle of foreclosure proceedings. • Relieves the lender of foreclosing and waiting out any required redemption periods. • Is a voluntary act by both borrower and lender.

26. Key Terms • Acceleration clause • Beneficiary • Deed of trust • Deficiency judgment • Foreclosure • Junior mortgage • Mortgage • Mortgagee • Mortgagor • Power of sale • Subordination • Trustee • Trustor