Chapter 02 – Real Estate Financing Notes and Mortgages 2-1 Solutions to Questions - Chapter 2 Real Estate Financing: Notes and Mortgages Question 2-1 Distinguish between a mortgage and a note. A note admits the debt and generally makes the borrower personally liable for the obligation. A mortgage is usually a separate document which pledges the designated property as security for the debt. Question 2-2 What does it mean when a lender accelerates? What is meant by forbearance? The acceleration clause gives the lender the right or option to demand the loan balance owed if a default occurs. Forbearance by the lender allows the borrower time to cure a deficiency without the lender giving up the right to foreclose at a future time. Question 2-3 Can borrowers pay off, part or all, of loans anytime that they desire? No. In general, prepayment is a privilege not a right. In cases of residential/consumer loans made by federally related lenders, this option is usually provided to borrowers. In commercial real estate loans it is not. Question 2-4 What does non-recourse financing mean? The borrower is not personally liable on the note. The lender may look only to the property (security) to satisfy the loan in the event of default. Question 2-5 What does assignment mean and why would a lender want to assign a mortgage loan? Assignment gives the lender the right to sell or exchange a mortgage loan to another party without the approval of the borrower. Question 2-6 What is meant by a “purchase money“ mortgage loan? When could a loan not be a purchase money mortgage? Purchase money means funds from the loan will be used to purchase a property. It will not provide funds for other uses such as could be the case with a refinancing. Question 2-7 What does default mean? Does it occur only when borrowers fail to make scheduled loan payments? Default means that the borrower has failed to (1) make scheduled loan payments or (2) violated on a provision in the note or mortgage. Question 2-8 When might a borrower want to have another party assume his liability under mortgage loan? If the loan was made with a favorable interest rate, the seller of the property may want to include this low rate loan as an additional incentive to sell the property. Question 2-9 What does deficiency judgment mean? If default occurs and the property is sold, if the dollars from the sale is not enough to pay off the loan balance, the borrower is liable for the difference. Question 2-10 What is a land contract? An agreement between a buyer and seller to purchase and sell real estate. However, passage of title is usually deferred until some future date or deferred until some event or condition occurs (e.g. Payment of money, rent, etc.).Chapter 02 – Real Estate Financing Notes and Mortgages 2-2 Question 2-11 How can mechanics’ liens achieve priority over first mortgages that were recorded prior to the mechanics’ lien? Mechanics’ liens are permitted to be recorded after the fact. State laws generally give contractors, laborers, or suppliers of materials a certain period of time following the completion of work or delivery of materials during which to file their lien. When the lien is filed it relates back and takes priority over all liens filed after the time when materials were first delivered or work was first performed on real estate. Question 2-12 Name possible mortgageable interests in real estate and comment on their risk as collateral to lenders. Fee simple estates, life estates, estates for years, remainders, reversions, leasehold interests, and options. Fee Simple estate - represents the most complete form of ownership of real estate. The holder is free to divide, sell, lease, or borrow against them as he/she wishes. Little risk to lenders because the owner completely owns all rights to the real estate. Life estate - is a freehold estate that lasts only as long as the life of the owner of the estate or the life of some other person. Because of the uncertainty surrounding the duration of the life estate, its marketability and value as collateral are severely limited. Remainder - exists when the grantor of a present estate with less ownership rights than his/her own conveys to a third person the reversionary interest he/she or his/hers heirs would otherwise have in the property upon termination of the grantee’s estate. Reversion - exists when the holder of an estate in land (the grantor) conveys to another person (a grantee) a present estate in the property that has less ownership rights than his/her own estate and retains for himself/herself or his/her heirs the right to take back, at some time in the future, the full estate which he/she enjoyed before the conveyance. A reversionary interest can be sold or mortgaged because it is an actual interest in the property. Question 2-13 What is meant by mortgage foreclosure, and what alternatives are there to such action? Foreclosure involves the sale of property by the courts to satisfy the unpaid debt. Alternatives: 1. Restructuring the mortgage loan 2. Transfer of the mortgage to a new owner 3. Voluntary conveyance of the title to the mortgagee 4. A “friendly” foreclosure 5. A prepackaged bankruptcy Question 2-14 Explain the difference between a buyer assuming the mortgage and taking title “subject to” the mortgage. If the purchaser acquires the property “subject to” the existing debt, he does not acquire any personal liability for the debt. When a mortgage is assumed the original borrower may be released from any obligations to the lender. Question 2-15 What dangers are encountered by mortgagees and unreleased mortgagors when property is sold “subject to” a mortgage? The mortgagor will be responsible if the person acquiring the property subject to the mortgage defaults. In turn, if the original mortgagor then defaults, the bank will have to foreclose on the property which may not be worth what is left to pay on the mortgage. Question 2-16 What is the difference between the equity of redemption and statutory redemption? The equity of redemption is the right of a mortgagor to redeem his/her property from default during the period from the time of default until foreclosure proceedings are begun. Statutory redemption is the right to redeem after foreclosure.Chapter 02 – Real Estate Financing