Financing PrinciplesFinancing PrinciplesChapter 14Chapter 14

ZaharopoulosZaharopoulos

3 Financing Instruments3 Financing Instruments

1.1. MortgageMortgage

2.2. Deed of TrustDeed of Trust

3.3. Carryback, Installment, Land Carryback, Installment, Land

Contract, Contract for DeedContract, Contract for Deed

MORTGAGEMORTGAGE

A mortgage is a A mortgage is a voluntary lienvoluntary lien on real on real estate, estate, given bygiven by the the

MortgagorMortgagor (borrower)(borrower)

to secure payment of a debt or the to secure payment of a debt or the performance of an obligation to the performance of an obligation to the

MortgageeMortgagee (lender). (lender).

Please re-read the above.Please re-read the above.

HYPOTHECATEHYPOTHECATE

To pledge an asset as collateral for aTo pledge an asset as collateral for a

Loan without giving up possessionLoan without giving up possession

Mortgage LawMortgage LawTitle Theory StatesTitle Theory StatesMortgagorMortgagor gives gives mortgageemortgagee legal title legal title

and retains equitable title . and retains equitable title .

Lien Theory StatesLien Theory StatesMortgagor (borrower)Mortgagor (borrower) retains both retains both

legal & equitable title. legal & equitable title.

Parties InvolvedParties Involved

MortgageMortgage

1.1. Mortgagor Mortgagor (borrower)(borrower)

2.2. MortgageeMortgagee (lender) (lender)

Deed of TrustDeed of Trust

1.1. Trustor (borrower)Trustor (borrower)

2.2. Trustee (objective Trustee (objective 33rdrd party) party)

3.3. Beneficiary Beneficiary (lender)(lender)

TrusteeTrustee

Title CompanyTitle Company AttorneyAttorney Real Estate BrokerReal Estate Broker Financial Institution other than lenderFinancial Institution other than lender NotNot a CPA a CPA

Trustee has Trustee has Bare Legal TitleBare Legal Title or or Naked Title,Naked Title,which gives themwhich gives them Power of Sale Power of Sale

AZ has been using Deed of Trust since 1972.AZ has been using Deed of Trust since 1972.

2 documents signed by borrower :2 documents signed by borrower :

1.1. PROMISSORY NOTEPROMISSORY NOTE

2.2. EitherEither MORTGAGE DOCUMENT MORTGAGE DOCUMENT

or DEED OF TRUSTor DEED OF TRUST

Promissory NotePromissory Note

The The “I.O.U.”“I.O.U.”

Contains amount of debt, time & method Contains amount of debt, time & method

of payment & rate of interestof payment & rate of interest

Notarized (“acknowledged”) to prove Notarized (“acknowledged”) to prove

identity, free willidentity, free will

Interest, Fees & UsuryInterest, Fees & Usury

InterestInterest= A charge for the use of money= A charge for the use of money

Due either in Due either in advance or arrearsadvance or arrears

UsuryUsury= max rate set by state law= max rate set by state law

There is There is no Usury in AZno Usury in AZ

AZ:If interest is not stated, it is 10%AZ:If interest is not stated, it is 10%

Loan origination feesLoan origination fees or or Discount PointsDiscount Points

Expense paid to lender for generating loanExpense paid to lender for generating loan

Discount pointDiscount point = 1% of the LOAN amt = 1% of the LOAN amt

1 point1 point =adds 1/8% to total loan yield =adds 1/8% to total loan yield (the true interest rate)(the true interest rate)

Provisions of the Mortgage Provisions of the Mortgage Document or Trust DeedDocument or Trust Deed

Repay debt in accordance with noteRepay debt in accordance with note Pay real estate taxesPay real estate taxes Maintain insuranceMaintain insurance Maintain propertyMaintain property Lender authorization before major Lender authorization before major

alterationsalterations

Key TermsKey Terms–AccelerationAcceleration–AlienationAlienation–AssignmentAssignment–Assignment of RentsAssignment of Rents–AssumptionAssumption–Estoppel CertificateEstoppel Certificate–Lien PriorityLien Priority–ReleaseRelease–ForeclosureForeclosure

Term differencesTerm differences1.Acceleration Clause1.Acceleration Clause

(default on a mortgage (default on a mortgage only)only)

In case of debt, the lender In case of debt, the lender

may accelerate the maturity may accelerate the maturity of the debt.of the debt.

When mortgage is When mortgage is defaulteddefaulted, lender can , lender can declare entire debt due declare entire debt due immediatelyimmediately

2.Alienation 2.Alienation ClauseClause

(sale)(sale)

““due on sale” due on sale” states this loan is not states this loan is not assumableassumable

When property is When property is soldsold, lender can , lender can declare entire debt declare entire debt due immediatelydue immediately

3.Assignment of Mortgage, Rents3.Assignment of Mortgage, Rents

4.Estoppel Certificate4.Estoppel Certificate

When lender sells ”paper”, nothing can When lender sells ”paper”, nothing can change; promises investor that terms change; promises investor that terms will remain the same.will remain the same.

Provisions of mortgage or deedProvisions of mortgage or deed

““Subject to”:Subject to”:

Purchaser Purchaser notnot personally liable for debt personally liable for debt

““Assumption”:Assumption”:

Purchaser Purchaser isis personally liable for debt personally liable for debt

Release per the Release per the Defeasance ClauseDefeasance Clause(when loan is paid off)(when loan is paid off)

MortgageMortgage

Satisfaction of Satisfaction of MortgageMortgage

Deed of TrustDeed of Trust

Deed of ReconveyanceDeed of Reconveyance

(Release Deed)(Release Deed)

Issued by TrusteeIssued by Trustee

Foreclosure TermsForeclosure Terms

Statute of limitationsStatute of limitations

LachesLaches

Foreclosure-MortgageForeclosure-MortgageJudicial ForeclosureJudicial Foreclosure

– Writ of executionWrit of execution

– ““Forebearance MoratoriumForebearance Moratorium

– Equitable Period of RedemptionEquitable Period of Redemption

– Statutory Period of RedemptionStatutory Period of Redemption

– Sheriff’s foreclosureSheriff’s foreclosure

..

..

Foreclosure-Deed of TrustForeclosure-Deed of Trust

Non-judicial foreclosureNon-judicial foreclosure

Stated in Stated in Power of Sale clausePower of Sale clause

(no acceleration)(no acceleration)

90 day reinstatement period90 day reinstatement period

ForeclosureForeclosure

Deed in lieu of foreclosure:Deed in lieu of foreclosure:-borrower deeds property to lender-borrower deeds property to lender

Strict ForeclosureStrict Foreclosure: court awards legal : court awards legal title to lendertitle to lender

Deficiency Judgment:Deficiency Judgment: becomes a becomes a judgment to debtorjudgment to debtor

Lien PriorityLien Priority

Priority est. Priority est. at time of Recordationat time of Recordation

Loan is generally the first lienLoan is generally the first lien

subordination agreementssubordination agreements

Carryback, Land Contract, Carryback, Land Contract, Installment, Contract for DeedInstallment, Contract for Deed

““agreement for sale”agreement for sale”

Buyer= vendee, equitable titleBuyer= vendee, equitable title

Seller= vendor, legal titleSeller= vendor, legal title

Land ContractLand Contract

One document, no separate noteOne document, no separate note Forfeiture period in AZ:Forfeiture period in AZ: 0-20% equity = 30 days0-20% equity = 30 days 20-30% = 60 days20-30% = 60 days 30-50% = 120 days30-50% = 120 days Over 50% = 9 monthsOver 50% = 9 months

All plus 20 days noticeAll plus 20 days notice

Affidavit of Completion of ForeclosureAffidavit of Completion of Foreclosure

Forfeiture of buyer’s interest in cases Forfeiture of buyer’s interest in cases of default; court permits eviction and of default; court permits eviction and seller keeps money paid and also seller keeps money paid and also gets property back.gets property back.