Property
The Mortgage
Prof. David Glazier
Jan 25, 2007
Today’s Class
Home financing considerations
Foreclosure
- Historical evolution
- Definitions and current law
- Borrower’s equity issues
Installment land contracts
Reading for Tuesday
Real Property Financing Issues
Real estate prices typically exceed buyers’ assets
Third-party financing essential to market viability
Law must create stability/ascertainable risk, but
Equitable issues arise from taking people’s homes
State courts/legislatures rebalance periodically
Federal policy favors uniform geographic treatment
- opportunities for large number of buyers
Buyer/Borrower Incentives ***
Lender Incentives ***
Home Loan Factors ***
Impact on Interest Rate
Amount financed
Down payment (%)
Loan term
Purpose (residence v. investment)
Borrower’s income/credit rating
Points paid
Home Loans in Practice ***
Lenders want no more than 80% loan to value
Options: > 20% down payment
Private mortgage insurance (PMI)
Second mortgage
FHA financing (3% down)
VA financing (0% down)
PMI v. Second Mortgage ***
Scenario: Buyer of $200,000 home has only $20,000
(10%) available for down payment
Option 1: $180K mortgage w/PMI
Mortgage P&I (5.5%) = $1,022
PMI = $ 78
Total Payment = $1,100
Option 2: $160K mortgage w/$20K second
Mortgage P&I (5.5%) = $ 908
Second trust (15 yr/8%) = $ 191
Total Payment = $1,099
PMI can be cancelled when LTV < 80%
Second trust interest tax deductable
Major Historical Developments ***
Balance
B L
Originally loans must be paid when due or property forfeited
Courts of equity responded with right of redemption
- allowed borrower to redeem from mortgagee
Strict foreclosure then terminated right of redemption
Foreclosure sale softened impact on borrower
Lender protection restored via deficiency judgment
Statutory right of redemption legislatively created
- allowed borrower to redeem from purchaser
Anti-deficiency statutes may now limit judgments
Lenders’ lawyers developed deed of trust/power of sale
Modern Foreclosure Options
Strict foreclosure
Lien holder gets title to property upon default. Can sue debtor for
deficiency, but no obligation to refund surplus (CT and VT)
Judicial foreclosure
Lien holder files suit and court orders sale if claim established.
(Available in all states, only method permitted in ≈½)
Power of sale
Loan agreement grants lender private right of sale. Lender can conduct
sale w/o judicial involvement. (Available in ≈½ of states)
Deed of trust
Borrower conveys title to third party as security for payment. Trustee
can then sell property if payments not made (Available in ≈½ of states)
Foreclosure Problem #1
Barry Buyer bought home taking out $100K first loan
and $20K second. If he defaults on first mortgage
and lender forecloses, how much does each party get
if home sells for:
First Second Barry
a.) $95K?
b.) $110K?
c.) $150K?
Foreclosure Problem #2
Barry Buyer purchased a home taking out $100K first loan and
$20K second. He then had a new room added and the builder
recorded a $20K mechanic’s lien. The county reassessed the
home after the new addition but Barry has not paid the additional
tax due. What is the priority for disbursing any sale proceeds?
Foreclosure Problem #3
Barry Buyer purchases a home taking out $100K first loan and
$20K second. He has faithfully made his payments on the first
note but due to hard times has fallen behind on the second. Can
the second note holder foreclose and have property sold?
Murphy v. Fin. Dev. Corp.
When did Murphys buy the house?
When did they refinance? Why?
How does Colonial Deposit Co. get involved?
Murphy v. Fin. Dev. Corp.
What steps did lender take in foreclosure process?
Murphy v. Fin. Dev. Corp.
Why did court award damages when lender followed law?
Murphy is a “leading edge case”
Majority view still requires only compliance w/legal notice rules
Sales unfair only if price “shocks the conscience” of court
- “mere inadequacy” insufficient to disturb sale
Installment Land Sale Contract
Legal construct to avoid foreclosure issues
Essentially seller (vice third party) financing
- Seller holds title until all payments made
- Buyer has no equity if they default
Sellers justify as essentially “rent to own”
- allows purchase by less credit worthy
Courts often see as “strict foreclosure”
- typically find equitable title in possessor
Reading for Next Week: Title Assuarance
Tuesday Jan 30
Read Title Assurance pp. 559-71
- Luthi v. Evans
Thursday Feb 1
Read Types of Recording Acts pp. 580-589
- Messersmith v. Smith
Questions?