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Mortgage Theory and LawChapter 9

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In This Chapter

You will take a brief look at mortgage theory and law.

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Mortgage

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

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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.

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Texas is a lien theory state 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 theory says title does not pass to lender with mortgage but only upon default.

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Pledge Methods Regular Mortgage Equitable Mortgage Deed as Security Deed of Trust Chattel Mortgage

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

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Lien Note

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Note and Mortgage Sequence

• Step 1 Buyer gives note to lender and receives $$

• Step 2 Buyer pays $$ to seller and receives deed

• Step 3 Buyer has clear title and gives mortgage to lender

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The Mortgage InstrumentA separate agreement from the note

that provides collateral to the lender to back up the promise made in the note by the borrower/mortgagor.

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Comparison of a Mortgagewith a Deed of Trust

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Comparison of a Mortgagewith a Deed of Trust (continued)

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Deed of Trust Same as a mortgage Parties

Mortgagor - borrower Mortgagee – lender/beneficiary Trustee – neutral third party

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Sample Deed of Trust

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Clauses to Consider

Covenants of Borrower Alienation Clause Partial Release “SUBJECT TO” Clause

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Assumption

Deed of Trust to Secure Assumption

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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.

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Debt Priorities First mortgage / Senior mortgage Second mortgage / Junior mortgage Subordination Chattel liens

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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.

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Deficiencies

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

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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.

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Mortgage Foreclosure: Simplified Overview

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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.

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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.

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Key Terms Acceleration clause Beneficiary Deed of trust Deficiency judgment Foreclosure Junior mortgage

Mortgage Mortgagee Mortgagor Power of sale Subordination Trustee Trustor