Thomson/South-Western©2008 Chapter 9 Mortgage Theory and Law _______________________________________

Thomson/South-Western©2008 Mortgage - a pledge of property to secure the repayment of a debt.

Thomson/South-Western©2008 Hypothecation Allowing the borrower to stay in possession of the pledged property. The borrower conveys the conditional title to the lender but retains the use of the property.

Thomson/South-Western©2008 Texas is a lien theory state meaning a lender’s right to acquire title occurs only after proper foreclosure. Thus a mortgage is a lien rather than a conveyance. Title theory is a conveyance of title subject to defeat when the debt it secures is paid. Intermediate theory says title does not pass to lender with mortgage but only upon default.

Thomson/South-Western©2008 Promissory Note Contract between a borrower and lender Obligor, obligee Principal Acceleration clause Signature

Thomson/South-Western©2008 Note and Mortgage Sequence Step 1 Buyer gives note to lender and receives $$ Step 2 Buyer pays $$ to seller and receives deed Step 3 Buyer has clear title and gives mortgage to lender

Thomson/South-Western©2008 The Mortgage Instrument A separate agreement from the note that provides collateral to the lender to back up the promise made in the note by the borrower/mortgagor.

Thomson/South-Western©2008 Deed of Trust Same as a mortgage Parties –Mortgagor - borrower –Mortgagee – lender/beneficiary –Trustee – neutral third party

Thomson/South-Western©2008 Comparison of a Mortgage with a Deed of Trust

Thomson/South-Western©2008 Comparison of a Mortgage with a Deed of Trust (continued)

Thomson/South-Western©2008 Promissory Note

Thomson/South-Western©2008 Sample Deed of Trust

Thomson/South-Western©2008 Assumption Deed of Trust to Secure Assumption

Thomson/South-Western©2008 Debt Priorities First mortgage / Senior mortgage Second mortgage / Junior mortgage Subordination Chattel liens

Thomson/South-Western©2008 Foreclosure / Power of Sale Judicial Nonjudicial Power of Sale –Notice 21 days prior to sale –Additional 20 days notice if borrower’s primary residence –Public sale on the first Tuesday of the month following proper notice

Thomson/South-Western©2008 REDEMPTION Some states provide an equitable or statutory right of redemption to redeem the property prior to sale Under Texas law once the notice to cure has been sent to the debtor, the only equity of redemption that the debtor has is to pay the full amount owing, or to buy the property at the foreclosure.

Thomson/South-Western©2008 Mortgage Foreclosure: Simplified Overview

Thomson/South-Western©2008 Deed of Trust Advantages Upon default, Lender can possession of property & collect rents Time between default & foreclosure is short Power of sale provision No statutory redemption

Thomson/South-Western©2008 Clauses Alienation Clause Partial Release Subject To Assumption

Thomson/South-Western©2008 Key Terms Acceleration clause Beneficiary Deed of trust Deficiency judgment Foreclosure Junior mortgage Mortgage Mortgagee Mortgagor Power of sale Subordination Trustee Trustor