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Real Estate Finance
St. Johns University School of Law
Roach, Peter T.

The Recording Act
I.              Blank
Mortgagee’s Title Insurance
I.              Mortgage
a.    Interest in the Property
                                          i.    “If I don’t pay you back, you can sell my property”
b.    Lender (Mortgagee) makes Loan; Borrower (Mortgagor) ‘gives’ the Mortgage
II.            GUARANTY
a.    Guarantor
                                          i.    “A Schmuck with a pen.” – Professor Roach
                                        ii.    LIABLE => When signed a Guaranty
                                       iii.    TWO (2) TYPES
1.    Guarantee of Payment
a.    Liable for Debt UPON DEFAULT of Primary Obligor
2.    Guarantee of Collection
a.    Becomes Liable ONLY Upon:
                                                                                          i.    Default of Primary Obligor;
                                                                                        ii.    Commencement of Action against Obligor;
                                                                                       iii.    Entry of Judgment against Obligor;
                                                                                       iv.    Attempt to Enforce Judgment; and
                                                                                        v.    Return by Sheriff or Marshall of Wholly or Partially Unsatisfied Settlement
                                       iv.    Conditional Guarantee
1.    Occurrence beyond control of Primary Obligor or Guarantor
                                        v.    Effect of Modification
1.    When Primary Obligor and Lender MODIFY Contract TO DETRIMENT of Guarantor => Guarantor is RELEASED from Liability
a.    EX// Reduction of Payment is to detriment of Guarantor w/o Consent
                                                                                          i.    Why Detrimental?
1.    Lengthens Time of Indebtedness => Increases Length of Obligation
2.    Law Presumes Performance will be made by Primary Obligor
a.    Basile v. Erhal
                                          i.    Facts
1.    Lender Structured Transaction so as to Avoid Foreclosure Process
a.    Required Deed; Gave Borrower Lease w/ Option to Purchase
2.    Borrower Defaults; Argues that Arrangement btwn Lender was “Intentded to be a Mortgage”
                                        ii.    Reasoning
1.    Mortgage is a Conveyance of Real Property to Secure Payment of a Debt
                                       iii.    Holding
1.    Where a Deed is Given couples w/ a Lease and Option to Purchase = MORTGAGE
a.    NY RPL § 320
b.    Home Owners Equity Theft Prevention Act
                                          i.    Prevents “Stealing” of Deeds and Returning a Lease w/ Option to Purchase
1.    Prof. Roach:  Unnecessary and Redundant:  NY RPL § 320
IV.          LOANS
a.    Self-Liquidating Loans
                                          i.    Repaid by making Regular Monthly Payments
b.    Partially Liquidating Loans
c.    Interest Only Loans
                                          i.    Borrower ONLY Pays Interest
                                        ii.    More common in COMMERCIAL
d.    Negative Amortization Loan
                                          i.    Borrower pays LESS than Interest Rate
                                        ii.    Payments Increase b/c Principle Increases
e.    Credit-Line Mortgage
                                          i.    Closed Credit (how one typically thinks of Mortgage)
1.    “One Shot” Deal
2.    Borrow Once, Repay Over Time
                                        ii.    Open-Ended Mortgage
1.    “Like a Credit Card” – Professor Roach
2.    Borrow Every Month; Pay back Every Month
V.           NOTE v. MORTGAGE
a.    NOTE
                                          i.     Describes the Terms
1.    Interest Rate
2.    Payment Schedule
                                          i.    Much Longer Document
1.    Provides
a.    Pay Taxes
b.    Pay Insurances
2.    Consumer Protection Clauses
a.    Banks can NOT Sell Mortgages UNLESS these Clause are Included
a.    General Rule:  “First in Time is First in Right.”
                                          i.    Liens attach to Property until Released by Lender
                                        ii.    Judgments:  Once filed in Clerk’s Office, automatically become lien on ANY Property of the Judgment Debtor in that County
b.    Recording Act – NY RPL 291
                                          i.    New York is a “RACE NOTICE” Jurisdiction
1.    Whoever records interest in Clerk’s Office FIRST has PRIORITY
2.    Protects bona fide purchasers for value
a.    NO Actual Knowledge of Other Interest
b.    Get PRIORITY IF Record FIRST
                                        ii.    REQUIREMENTS for NY RPL 291
1.    bona fide purchaser for value:  NO ACTUAL NOTICE of Competing Interest
2.    Policy
a.    Protect People who “Take Money Out of their Pocket” to Buy Property
b.    IF “Purchaser” receives house for FREE => NO Risk for “Purchaser” => NO Need for Law
3.    Judgment Creditors
a.    NOT bona fide purchaser for value
                                                                                          i.    NO Protection of NY RPL 291
                                                                                        ii.    Priority based on Acquisition of the Lien (the Day the Judgment Creditor filed Judgment at Clerk’s Office)
                                          i.    Real Estate Property Tax
                                        ii.    Certain Environmental Liens
a.    Indemnification Contract
                                          i.    NOT Guarantee that you will have Good Title
                                        ii.    IF you do NOT have Good Title (Invalidity of Lien or Bad Priority of Lien) => INDEMNIFIED
                                          i.    Issues on Title Report that Title Insurance will NOT Insure Against
1.    In order to get COVERED => Clear Up Title to Satisfaction of the Title

           i.    From the Borrower
1.    States that the Borrower “really owes” the Money and that he is Estopped from Arguing Otherwise
2.    “It’s a Valid Loan and I have NO Defenses”
f.     REGULATION § 418
                                          i.    In order to Foreclose:  MUST be Licensed as SERVICER
1.    “Must be Licensed to Collect 1 Payment on 1 Loan.”
2.    BUT May Apply for Waiver
                                        ii.    Servicer is the ONLY Person that has Contact w/ Borrower
g.    “Hello/Goodbye” Letters
                                          i.    When Servicers in Transferred
1.    Old Servicer:  “Goodbye”
2.    New Servicer:  “Hello”
I.              USURY
a.    Gen. Ob. Law § 5-501
                                          i.    USERY:  Rates in Excess of 16%
b.    Gen. Ob. Law § 5-511
                                          i.    Corporation can NOT use Defense of Usury
1.    Civil Usury
                                        ii.    Therefore, can charge a Corporation up to 25%
1.    Criminal Usury
a.    Class C Felony for Interest > 25%
c.    Gen. Ob. Law § 5-521
                                          i.    EXCEPTION to § 5-511
                                        ii.    § 5-511 does NOT Apply IF
1.    Principal Asset of Corporation is 1 or 2-Family House; AND
2.    Was Acquired w/in Last 6 Months
                                       iii.    POLICY RATIONALE
1.    Prevents Predatory Lender from requiring Borrower to Incorporate and Transfer Title into Corporation to get Around § 5-501, thereby permitting Interest up to 25%
d.    Schneider v. Phelps
                                          i.    Facts
1.    Predatory Lender attempted to sidestep § 5-521 by Incorporating Borrower BUT Instead of Transferring Title to Corporation, Required Borrower to Personally Guarantee the Obligation of the Corporation w/ a Mortgage
                                        ii.    Holding
1.    SUBSTANCE Over Form
2.    Court Ruled that in Substance, this was a Loan Protected under § 5-501
                                          i.    ((Points/Term) + Annual Interest Paid)/(Loans – Points)
                                        ii.    HYPO
1.    Terms
a.    $100k Loan
b.    $5k Points
c.    6% Annually (therefore, $6,000 paid in interest annually)
d.    5 Year Term
2.    Calculation
a.    (($5,000/5 years) + $6,000) / ($100,000 – $5,000)
b.    $7,000 / $95,000