The Mortgage by arnold2

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									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?

								
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