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Terminology• Encumbrance—right or interest in a property held by one who is not the legal owner of the property• Lien—financial encumbrance; a charge against a specific property wherein the property is made the security for the performance of a certain act, usually the repayment of a debt – Voluntary liens and involuntary liens – General and specific liens2
Interests Secured by a Real Estate Loan• Fee simple ownership• Less than freehold interest• Title and lien theories – Equitable rights – Title theory in which lender’s rights are superior to borrower’s – Redemption right – Statutory redemption period – Lien theory recognizes the rights of lenders in collateral property being equitable rights, while borrowers retain their legal rights in the property – California has taken modified position between the title and lien theories• General requirement for a finance instrument3
Note and Deed of Trust (Trust Deed)• Deed of Trust—evolved to become the dominant security instrument for financiers of California real estate• Advantage of trust deed over mortgage is shorter foreclosure period• Judicial foreclosure; nonjudicial foreclosure; power-of-sale clause; naked title; beneficiaries4
Note Secured by Deed of Trust• Date signed• Participants’ identities• Promise to pay• Payment due dates• Amount and terms• Reference to security• Signatures and endorsements• Cosigners5
Deed of Trust• Executed by the trustor to transfer a form of legal fee ownership to the trustee to be held for the beneficiary, while the trustors maintain their equitable ownership.6
Covenants of California Deed of Trust • Preservation and maintenance • Fire insurance • Legal action • Taxes and assessments • Beneficiary and trustee expenditures • Condemnation • Late payments • Reconveyance • Extensions, subordination, and modifications • Assignment of rents7
Note and Mortgage• Note Secured by a Mortgage• Mortgage – Recording information – Participants – Pledge – Property description – Covenant of seisin – Note attachment8
Note and Mortgage• Mortgage, cont. – Mello-Roos disclosure – Property taxes – Insurance – Defeasance clause and acceleration – Maintenance of the collateral – Signatures and acknowledgement – Release of mortgage
Real Property Sales Contract (Land Contract)• Single, complete financing and sales agreement executed between buyer and seller10
Special Provision in Real Estate Finance Instruments• Late payment penalty• Prepayment privilege• Prepayment penalties• Lock-in clause• Due-on-sale clause• Assumption versus subject to• Subordination clause• Release clause• Extensions and modifications11