The Mortgage

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%) PMI Total Payment = $1,022 = $ 78 = $1,100 Option 2: $160K mortgage w/$20K second Mortgage P&I (5.5%) Second trust (15 yr/8%) Total Payment = $ 908 = $ 191 = $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?