Redemption Agreement Closing Books by uhq35415

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									Chapter 10

Problem Loans and Foreclosures
Actions Short of
Foreclosure

 After loan closing, borrower
  contact with lender is limited
  to:
   Audit report asking for
    verification of data on service
    company’s books
   Escrow analysis to determine
    adequacy of balances held by
    the service company for
    insurance and taxes
   Personal contact (collections) if
    payments are not received
    within the established grace
    period
Actions Short of
Foreclosure—Progressive
Pain

 Lenders insert provisions into loan
  documents that will empower them
  to exert selective and progressive
  pain when borrowers fail to honor
  their obligations:
    Late charges
    Additional penalty (add-on
     payments)
    Seize control of property
    Acceleration clause (that the
     unpaid balance is to become due
     and payable if specified events of
     default should occur) is an option
     for the mortgagee
Alternatives to
Foreclosure

 Lenders do not want to
  foreclose on a mortgage if
  they can salvage the situation

 Foreclosed property held by
  the lender, known as Other
  Real Estate Owned (OREO)
  or Real Estate Owned (REO),
  on the lender’s balance sheet
  is a threat to operations
Voluntary Conveyance

 If salvage efforts fail, lenders strip
  mortgagors of their ownership
  interest. Depending on nature of
  the lien interest and provisions of
  state statutes, this is typically done
  by public sale pursuant to a
  foreclosure proceeding or by a
  trustee’s sale of the mortgaged
  property
    Transfer (or deed) in lieu of foreclosure,
     or friendly foreclosure
    Voluntary conveyance enables
     defaulting mortgagors to avoid
     foreclosure suit and negative marks on
     credit ratings (and possibility of residual
     liability for loan balance not satisfied by
     proceeds of foreclosure sale)
    Voluntary conveyance can be attractive
     to mortgagees because the immediately
     acquire title for quick resale
Foreclosure: A Lender’s
Last Resort

 Mortgages and deeds of trust
  typically contain words of
  conveyance, followed by a
  defeasance clause intended
  to render nominal conveyance
  void on satisfaction of the
  debtor’s obligation
Equity of Redemption

 By the early seventeenth
  century, the opportunity to
  redeem property after default
  had been converted from a
  privilege granted under
  unique circumstances to a
  vested right
Foreclosure Suits

 In modern foreclosure suit, the
  court enters a decree specifying an
  exact time period during which the
  equity of redemption will exist
    Actual foreclosure may be
     accomplished by transferring title
     directly to the mortgagee (strict
     foreclosure), or by public sale
     (foreclosure by sale)
    Foreclosure by sale prevents
     mortgagees from profiting by a
     mortgagor’s misfortune; sales
     proceeds are applied in specific
     order
Application of Funds from
Foreclosure Sale

 First to cover disposal costs and
  expenses incurred to secure
  possession

 To maintain the property, and
  prepare it for sale

 Then to satisfy balances due
  mortgagees

 Any remaining funds are remitted
  to the mortgagor

 If same proceeds are insufficient to
  cover amounts due, mortgagees
  may seek a deficiency judgment,
  which leads to attachment and sale
  of the mortgagor’s other assets
Statutory Right of
Redemption

 Equitable rights of redemption are
  extinguished by a foreclosure sale;
  27 states have enacted laws that
  give a defaulting mortgagor one
  last opportunity to redeem —
  statutory right of redemption:
    Generally permit a mortgagor, for a
     period of time fixed by the statute, to
     reclaim property by remitting the
     foreclosure sale price (plus expenditures
     incurred for maintenance,
     improvements, and interest) to the
     successful bidder
    Redemption periods start with the
     foreclosure sale and run for a period of
     time (generally 6 to 12 months)
     specified in enabling legislation
    In states having statutory right of
     redemption, successful bidders receive
     certificates of sale instead of deeds
Priority of Creditors’
Claims

 Any mortgage that results in a
  foreclosure sale and extinguishes
  all other mortgage interests is
  called a senior mortgage; interests
  subordinate to the senior mortgage
  are called junior liens
 Lien property becomes important if
  a lienholder wishes to sell the
  security interest in mortgages
  property or to otherwise employ it
  in a financial transaction
 Market value of a credit interest is
  determined in part by the level of
  risk that the underlying credit
  obligation will not be honored
Priority of Creditors’
Claims (continued)
Lien Priority and Mortgage Default:
 In most states a defaulting
   mortgagor’s interest is foreclosed
   by public sale of mortgaged
   property; sales proceeds are
   applied first to cover administrative
   costs, then to satisfy mortgage
   indebtedness
 Lien property becomes critical
   when sales proceeds are
   insufficient to satisfy all remaining
   liens
    Senior lienholders’ entire claims are
     satisfied before any funds are allocated
     to junior lienholders
    Junior lienholders’ claims are then met
     in the order of priority of their liens, until
     the funds are exhausted
Priority of Creditors’
Claims (continued)
Lien Priority Governed by Recording
   Statutes:
 Recording laws in most states
   provide that the priority of
   mortgage liens on single parcels of
   real estate is established by the
   order in which they are recorded,
   rather than that in which they are
   executed
    Time of recording does not establish
     priority where mortgagees have actual
     knowledge of previously executed
     mortgage or if they are parties to a
     written agreement to the contrary; called
     a subordination agreement; it may be
     executed between mortgagee and
     mortgagor or between two mortgagees
    Actual notice or knowledge when
     mortgagees have direct information
     about a lien; constructive notice is the
     presumption that parties have the
     responsibility to examine the public
     records
Priority of Creditors’
Claims (continued)

Seniority of Purchase Money
  Mortgages:
 Properly recorded purchase-
  money mortgages generally have
  priority over all other liens created
  by a purchaser’s actions
    Generally a purchase-money mortgage
     must be recorded simultaneously with
     the deed involved in the conveyance
    Where parties so desire, the priority of
     the purchase-money mortgage may be
     reduced by appropriate wording in the
     mortgage
Priority of Creditors’
Claims (continued)

Priority of Mechanics’ and
  Materialmen’s Liens:

 Exception to the general rule that
  lien priorities are established by
  the order in which they are
  recorded relates to claims arising
  from having provided building
  materials (materialmen’s liens) or
  services (mechanics’ liens) in
  connection with construction or
  property improvements
Priority of Creditors’
Claims (continued)

Priority of Tax Liens:

 Most state statutes give property
  tax liens priority over all other liens
  on a property, without regard to the
  time the obligation was created or
  recorded

								
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