Real Estate Financing

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RE3095
Real Estate Financing: Notes & Mortgages

2-1
McGraw-Hill/Irwin

Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

RE3095 – Spring Semester 2015

Notes
 Evidence of Debt
 Major Provisions
– Amount borrowed
– Rate of interest
– Dollar amount, due dates, # of payments
– Maturity date
– Reference to security for the loan
– Application of payments
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RE3095 – Spring Semester 2015

Notes
 Major Provisions
–
–
–
–
–

Default
Penalties for late payment and forbearance provisions
Provisions for unscheduled payments
Notification of default and acceleration clause
Nonrecourse clause
 Note that even if there is a nonrecourse clause, loans are generally with “recourse” if the “bad boy” provisions are violated. For example, if the borrower willfully damages the asset, the borrower will generally be held personally responsible for the damage.
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RE3095 – Spring Semester 2015

Notes
–
–
–
–

Loan assumability
Assignment clause
Future advances
Release of lien by lender

2-4

RE3095 – Spring Semester 2015

Mortgage Instrument
 Note & Mortgage
– Note: Obligation to pay
– Mortgage: Pledges property as security

 The mortgagor is the borrower. The mortgagee is the lender. Try to keep this straight. 2-5

RE3095 – Spring Semester 2015

Mortgage Instrument
 Appropriate identification of mortgagor and mortgagee  Proper description of the property serving as security for the loan
 Covenants of seisin and warranty
 Provision for release of dower rights
 Any other desired covenants and contractual agreements
2-6

RE3095 – Spring Semester 2015

Mortgage Instrument
 Important Clauses
– Funds for Taxes & Insurance
– Charges & Liens
– Hazard Insurance
– Preservation and Maintenance of the property
– Transfer of property or a beneficial interest in borrower (“Due on sale clause”)

2-7

RE3095 – Spring Semester 2015

Mortgage Instrument
 Important Clauses
– Borrower’s Rights to Reinstate
– Right of Entry: Lender in Possession
– Future Advances
– Subordination Clause

2-8

RE3095 – Spring Semester 2015

Additional Mortgage Concepts
 Assumption
– Liability
– Release of grantor from assumed debt

 “Subject to” a Mortgage
– Liability

2-9

RE3095 – Spring Semester 2015

Additional Mortgage Concepts
 Property Covered
– Land
– Improvements
– Easements
– Fixtures
 Special case of trade fixtures

– Mineral Rights
– After-acquired property
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RE3095 – Spring Semester 2015

Additional Mortgage Concepts
 Senior & Junior Mortgages
 Recording Mortgages
– Protect Lien Priority

 Seller Financing
– Purchase Money Mortgage
– Use of Subordination Clause

2-11

RE3095 – Spring Semester 2015

Additional Mortgage Concepts
 Land Contract
– Seller retains naked title
– Purchaser has equitable title
– Seller conveys title when purchaser completes the performance obligations

 Default
– Breach of mortgage contract
 Technical default

2-12

RE3095 –
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