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Real Estate Finance
Wayne State University Law School
Mager, George

Real Estate Finance Law – Mager 2009

v Real Estate Finance
Ø Mortgages
§ Three types—all done promissory note
· Loan from 3rd party lender to buyer
· The taking over by the buyer of the payments on an existing loan which the seller or some former owner obtained from a third party lender—assumption
· Financing provided by the seller himself, in the form of a deferral of receipt of some portion of the purchase price
§ Mortgage is security for the real estate
· Person buying a piece of property and borrows from a third party
· Assumption
· Subject to
¨ Don’t have liability to mortgage; can’t be sued for deficiency judgment
· Seller provided financing
§ Transfer from debtor (mortgagor) to creditor (mortgagee)
· Purchase Money mortgage—where you are buying house and bank gives you money to be able to purchase house
§ Amortization-p.101-103
· Understand relationship between value, down payment, equity, mortgage amount, loan to value ratio, interest rate, term of amortization and frequency of payment
§ Various ways to buy house
· Pay all cash
· Assumption or taking subject to existing mortgage—buyer takes over mortgage
· Seller financing
¨ Buyer enters into a mortgage loan or installment contract obligation with seller for all or a large portion of the total purchase price
· Combination of subject to and assumption and seller financing
¨ Buyer takes over seller’s mortgage financing, but cannot raise enough cash to pay the entire difference between the price and the loan balance.
¨ Buyer gives seller a note secured by a second mortgage for part of this difference
· Wrap around financing
¨ Transaction between buyer and seller
¨ Seller has preexisting mortgage financing on the property, and does not pay it off at the time of the transfer
¨ Seller continues to make payments on institutional loan and buyer makes payments on new loan (the wrap around)
· Schrader v. Benton
¨ In Schrader’s action for specific performance of a real estate contract against Benton, Schrader contended that he could make full payment on the purchase price of a condominium unit and that upon such payment, Benton must cause a lien on a preexisting mortgage on the property in favor of Amfac Financial to be removed.
¨ In a real estate contract, a seller is entitled to the full benefit of the substance or essence of his bargain, and a court abuses its discretion when it deprives a seller of this right.
Ø Foreclosure
§ Judicial
· Have to go to court and ask for judgment, usually sell of property and proceeds of sell go to pay off debt
§ Power of sale/closure by advertisement
· Don’t have to go to court if have clause in mortgage (need statute too)
¨ Give notice to borrower then sell it
¨ Statutory right of redemption
· The mortgage lender provides in its note that if you default they can accelerate the debt if you miss one debt without notice at end of grace period (usually 30 days)
¨ Priority—if I lend you money and give mortgage and record it and no other mortgage known you have first priority to get debt and then go to another and get mortgage-2nd priority
¨ Any liens prior are part of condition of title
Ø If have 2 M properties, the second is 100k and the first is 70k and bidding on the 2nd, have to bid 170k to fulfill the debts
¨ Statute that permits it
¨ Need provision in statute to foreclose it by statute
§ Strict foreclosure
· The equity of redemption expires title vests to mortgagee without any other conditions
· Most states require a sale b/c if value of property is more than debt and sell it the debt is paid and the remaining balance goes to the mortgagor/borrower—closure of power, not strict
§ Statutory redemption
· Two benefits
¨ More time to come up with money to refinance what you owe
¨ Gives additional time to have possession of the property
· Sometimes it permits the mortgagor, and sometimes junior lienors or the holders of other subordinate interests, to redeem for some fixed prd after the sale
Ø Deed of trust – attorney of lender or employee of lender could be trustee
§ Similar as before, just with 3rd party—usually involves a conveyance of the realty to a third person in trust to hold as security for the payment of the debt to the lender-note holder whose role is analogous to that of the mortgagee
§ Usually set up as power of sale
§ Also judicial foreclosure option
§ Will almost alway

dependent on mortgagor default
§ Deed is escrow as a clog
· In the event of default, the mortgagee or escrow agent is authorized to record the deed as a substitute for foreclosing the mortgage.
· Deed represents an invalid clog on equity of redemption; still have to go through foreclosure
§ Anti-clogging doctrine is generally inapplicable to transactions that are subsequent to the execution of the mortgage
· Courts often uphold the deed in lieu of foreclosure, which amounts to a conveyance of the equity of redemption to the mortgagee when the mortgagor is in default and is threatened with foreclosure
· After default, Borrower can knowingly and willingly surrender equity of redemption
· Creditors may use 2 devices to create real property security without appearing to enter into a security transaction
¨ A creditor may require his debtor to grant him land by absolute deed, under oral agreement or tacit understanding that he will reconvey only if the debtor pays the debt when due
¨ A creditor may obtain from his debtor some sort of written agreement to reconvey the property to the debtor upon receiving payment of the debt
Ø May be option to repurchase
§ The use of an absolute deed to secure a debt, with or without a written collateral agreement for reconveyance upon satisfaction, is designed to eliminate the grantor’s equity of redemption & the necessity of foreclosure if the debtor defaults.
§ Other advantages through absolute deed
· Right to possession of the land prior to default
· Right to possession of chattels severed from the land w/further mortgages or judgment liens
· The possibility of enlarging the creditor’s security interest to cover future advances to the debtor w/out the execution of a new security instrument