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Real Estate Finance
Wayne State University Law School
Mager, George

Real Estate Financing (2011) – Prof. George Mager
 
I.                    Introduction to mortgage financing
a.       Modes of financing
                                                   i.      All cash sale
1.       Buyer pays all cash to Seller
                                                 ii.      Assumption or taking subject to existing mortgage
1.       Buyer takes over the Seller’s existing mortgage financing and pays cash equal to the difference between the sales price of the property and the balance on the existing loan
a.       May take over through Assumption Agreement
b.      May merely take “subject to” the loan without an express promise to pay it
                                                                                                                           i.      Not personally liable, but will still have powerful economic incentive to pay the mortgage loan
                                                iii.      Seller financing
1.       Buyer enters into mortgage loan or installment K with Seller
                                               iv.      Combination of assumption/subject to and seller financing
1.       Buyer takes over the Seller’s existing mortgage but must take out a loan to pay the difference between the price and loan balance
a.       Buyer gives Seller a note secured by a second mortgage for part of this difference
                                                 v.      Wrap-around financing
1.       Structured like Seller financing, but the Seller has preexisting mortgage financing on the property, and does not pay it off at the time of the transfer
a.       Instead, the Seller is required to continue making payments on the underlying loan at the same time the Buyer makes payments on the new (wrap-around) loan
b.      Mortgage foreclosures
                                                   i.      Forecloses the borrower’s ability to assert an equitable right of redemption
1.       Development of the statutory right of redemption
                                                 ii.      Deed of trust
1.       Involves the conveyance of the realty to a third person in trust to hold as security for the payment of the debt to the lender-noteholder (ME)
a.       Is essentially similar to a mortgage with a power of sale
                                                iii.      Mortgage substitutes and clogging the equity of redemption
1.       Courts do not allow clogging by the mortgage language
a.       So ME tries to resort to other documents with the same effect
                                                                                                                           i.      Installment land K is most common device
1.       Vendee goes into possession and agrees to make monthly payments of principal and interest until the principal balance is paid off
2.       Vendor retains legal title until the final payment is made, at which time he has a duty to execute a deed to the land
II.                  The use of mortgage substitutes
a.       The absolute deed and conditional sale
                                                   i.      Humble Oil & Refining Co. v. Doerr
1.       Anti-clogging rule
a.       MR’s equity of redemption cannot be clogged and that he cannot, as part of the original mortgage transaction, cut off or surrender his right to redeem
b.      The debtor/MR cannot, in the inception of the instrument, as a part of or collateral to its execution, in any manner deprive himself of his equitable right to come in after a default in paying the money at the stipulated time, and thereby to redeem the land from the lien and encumbrance of the mortgage
                                                 ii.      American Law of Property §16.59
1.       The ME is not allowed, at the time of the loan, to enter into an option or K for the purchase of the mortgaged property
                                                iii.      The policy is so strong against clogging that it is applied to hold such options absolutely void and unenforceable regardless of whether there is actual oppression
                                               iv.      Subsequent conveyances as clogs
1.       The anti-clogging doctrine is generally inapplicable to transactions that are subsequent to the execution of the mortgage
a.       i.e. deed in lieu of foreclosure
                                                 v.      Disguised real estate security transactions as mortgages in substance
1.       Court look beyond the document to see if there is actually a loan transaction
a.       Factors
                                                                                                                           i.      Relationship of the parties
                                                                                                                         ii.      Intent of using the deed to stand as security for a debt
                                                                                                                        iii.      Access to legal counsel
                                                                                                                       iv.      Sophistication and circumstances of parties
                                                                                                                         v.      Adequacy of consideration
1.       Where consideration received by grantor is much less than the value of his property, there is an inference that a security device, as opposed to outright sale, was intended
                                                                                                                       vi.      Whether Grantor retained possession of the property
1.       Where a grantor continues to occupy the premises, there is an inference that a security device was intended
                                               vi.      Perry v. Queen
1.       Φ is a low income homeowner with a high school education.  Φ had two defaulted properties.  Δ approached Φ to help cure default.  Δ required the deed to Φ’s property but would allow Φ to buy it back.
a.       Φ argued that it was a mortgage loan transaction with the property acting as security for the loan from Δ.  By determining that it is a mortgage, it would require the lender to adhere to the Truth In Lending Act.
2.       Proof that a conveyance was intended as a security must establish
a.       The GR was indebted to the GE
b.      The GR intended his conveyance to serve as a security device
3.       Parol evidence
a.       Is permitted to use extrinsic evidence to prove that a transaction is a mortgage
4.       Statute of frauds
a.       If SoF applied, it would be very difficult for a GR to admit a written document to prove that the transaction should be a mortgage
                                                                                                                           i.      Therefore, does not stand in the way of establishing that an absolute deed or conditional sale was a security transaction
5.       NOTES
a.       Restatement § 3.2 – Absolute Deed Intended As Security
                                                                                                                           i.      Parol evidence is admissible to establish that deed purporting to be an absolute conveyance was intended to serve as security for an obligation
                                                                                                                         ii.      Intent may be inferred from the totality of the circumstances, including
1.       Statements of the parties
2.       Substantial disparity between the value received by GR and FMV
3.       GR retained possession of the real estate
4.       GR continued to pay real estate taxes
5.       GR made improvements post-conveyance
6.       Nature of the parties
b.      Restatement §3.3 – Conditional Sale Intended As Security
                                                                                                                           i.      Parol evidence is admissible to establish that a deed purporting to be an absolute conveyance accompanied by a written agreement conferring on the GR a right to purchase was intended to serve as a security
1.       Same factors as §3.2
                                              vii.      Downs v. Ziegler
1.       As security for repayment of debt, Δ transferred deed to Doctors, and brought current the money due to Downs.  Δ was given the right to repurchase the property.  If Doctors were not a ME, then they would have liability to Φ.  Therefore, it is the Doctors that are trying to prove that they were ME.
2.       Parol evidence is admissible to show that a conveyance absolute on its face was intended as a mortgage
a.       Of primary importance in determining whether a transaction was intended as a security device is the presence of a subsisting obligation
3.       NOTES
a.       Dangers in using the absolute deed as security
                                                                                                                           i.      A BFP is not subject to an equitable mortgage
1.       If the GR remains in possession, there cannot normally be a BFP because purchase has a duty to know who is in possession
                                                                                                                         ii.      GE will not be able to use power of sale
1.       Will likely require judicial foreclosure if treated as a mortgage
b.      The negative covenant as a mortgage
                                                   i.      Equitable Trust Co. v. Imbesi
1.       Lender’s loan contained a negative covenant not to convey, but the son borrowed more money and gave the Bank a mortgage.  This was a breach of the covenant.  When the Bank foreclosed the mortgage, the Lender sought to invalidate th

l Value
a.       Consider the loss of rental value during the time the defaulting purchaser was in possession
3.       Costs of repossession, refinancing and resale
4.       Miscellaneous damages
                                               vi.      Sebastian v Floyd
1.       FACTS – Sebastian defaulted on land K with Floyd.  K had a forfeiture clase that was enforced by the circuit court and appeals court.
2.       RULE – A rule treating the seller’s interest as a lien will protect the interest of both buyer and seller
a.       Ordinarily the seller will receive the balance due on the K plus expenses
b.      In addition, the buyer’s equity in the property will be protected
                                                                                                                           i.      Legal title remains with the seller in land K until the entire K price has been fulfilled.  Equitable title passes to the buyer when the K is entered into.
3.       NOTES
a.       Treating land K as a mortgage
                                                                                                                           i.      Restatement §3.4(b)
1.       An installment land K creates a mortgage and will be governed procedurally and substantively by the law of mortgages
                                                                                                                         ii.      Determining whether more than minimal payments have been made looks at BOTH principal and interest
1.       Also considers the length of time and number of payments made in determining whether a vendee had made minimal payment
                                                                                                                        iii.      Even if only a minimal amount has been paid on the K price, forfeiture is not appropriate unless the vendor’s security is jeopardized by the vendee’s acts or omissions
1.       EXCEPTIONS THAT ALLOW FORFEITURE
a.       Vendee has abandoned the premises
b.      Vendee has paid minimal amount AND the security has been jeopardized
b.      Waiver or estoppel as a defense against forfeiture
                                                                                                                           i.      If a vendor accepts late payments w/o declaring default, many court say that it is the vendor’s waiver of the forfeiture
1.       Creates in the vendee a right analogous to an equity of redemption
                                                                                                                         ii.      Danelson v Robinson
1.       Defaulting vendee asserted that the vendor said “he was not worried about the payment,” but later initiated forfeiture
a.       Vendor was estopped to assert forfeiture
4.       The Case for the Restatement Approach
a.       Other Vendor remedies
                                                                                                                           i.      Where forfeiture is available, it may be undesirable for the vendor
1.       Vendor could opt to foreclose and if the foreclosure sale yields less than what was owing, a deficiency judgment would be available
2.       Vendor could sue on K obligation, obtain a judgment for that amount and collect out of vendee’s assets
                                                                                                                         ii.      Allows a vendor to achieve indirectly what is usually available as a matter of course in mortgage law
1.       Is able to have his cake and eat it too
a.       Specific performance
b.      Action for damages
                                                                                                                                                                                                  i.      Where forfeiture is necessary to regain property, an action for damages could be barred by election of remedies doctrine