creation of mortgages

CREATION OF MORTGAGES

LEARNING OBJECTIVESDescribe the ways state laws define security

interests in mortgage contracts.Discuss how funds are allocated to mortgages in

capital markets.Distinguish between residential and commercial

property mortgages.

CREATION OF MORTGAGES

LEARNING OBJECTIVESIdentify the major clauses in mortgage contracts.Distinguish among valid, invalid, enforceable and

unenforceable mortgage contracts.Describe the process of mortgage default and

foreclosure.

THE MORTGAGE

The mortgage creates an interest in a property to secure the payment of a debt, or obligation.

Real estate financing involves two separate obligations:the promissory note, and the mortgage.

The borrower (mortgagor) gives the mortgage. The lender (mortgagee) receives the pledge.

Mortgage Markets

Primary Mortgage Marketlenders and borrowers

Secondary Mortgage Marketconduits, investment bankers and investorsmortgage-backed securities

Title and Lien Theories

Title-Theory Stateslenders receive title to propertypower-of-sale clause

Lien-Theory Stateslenders do not receive titleforeclosurerecourse and nonrecourse loans

Deeds of Trust

REAL ESTATE DEBT AND EQUITY MARKETS

Private Public

EquityIndividualsPension Funds

Equity REITSReal Estate

Corporations

Mortgage Debt

BanksInsurance Companies

Mortgage-backed SecuritiesMortgage REITs

THE MORTGAGE CONTRACT

Must have essential elements of a valid contract.Must be in writing and describe the property.Additionally, the mortgage instrument must:

identify the property rights being pledged,include the words of conveyance,include the signature of the mortgagor,be delivered to the mortgagee, and recorded, andcontain reference to the note, or obligation.

Common Mortgage Clauses

Acceleration clausePrepayment and late payment clauseDue-on-sale clauseInsurance clauseInterest escalation and adjustment clause

Typical Clauses in the Residential Note

The Date of ExecutedThe Name of Mortgagor and MortgageeAn Acceleration ClauseTerms of the LoanPrepayment and Late Payment PenaltiesEscalation Clause on Delinquent Penalties

MORTGAGE RELATIONSHIPS

Primary MortgagesJunior MortgagesWrap-Around MortgagesPurchase Money MortgagesLand Contract

Single-Family Residential Mortgages

Permanent FinancingconventionalFHA & VA mortgagesother government-supported programsowner financing

Construction Financingforward commitments (covered loans)open-end loans (uncovered loans)

ADJUSTMENTS IN BORROWER/LENDER RELATIONSHIPS

Mortgage SatisfactionMortgage Default and Foreclosure

delinquency and defaultdeeds-in-lieu of foreclosureequity of redemptionjudicial and nonjudicial foreclosurestatutory redemption

ASSUMING OR RECASTING THE MORTGAGE

Mortgage Assumption and “Subject To” Transactions

Recasting the MortgageSale of the Mortgage