Chapter 12 Section 1

Question 1

title theory

Answer 1

-the borrower is required to temporarily convey ownership of the property to the lender for the duration of the loan period
-if borrower defaulted on loan, then the lender took possession of the property

Question 2

deed of trust

Answer 2

-temporarily conveys title to a property to a third party called a trustee until the mortgage loan debt is repaid or until default occurs

Question 3

lien theory

Answer 3

-allows borrower to retain ownership of the property during the load period
-lender records mortgage which creates a lien against the property

Question 4

promissory note

Answer 4

-a legal instrument that includes the borrower’s promise to repay the loan
-contains names of parties, rate of interest, amount of money borrowed, and the loan repayment terms

Question 5

mortgage

Answer 5

-the borrower’s pledge of the mortgaged property to secure the repayment of the note
-lender records mortgage on the public record which creates a lien against the property

Question 6

parties to a mortgage

Answer 6

-property owner is the mortgagor
-lender is the mortgagee
-mortgagor owns real property while mortgagee owns personal property

Question 7

mortgage requirements

Answer 7

-in writing
-signed by mortgagor
-conform to the same requirements as any valid contract
-contain legal description of the property
-be witnessed by two persons

Question 8

satisfaction of mortgage

Answer 8

-when a loan has been paid in full in a lien theory state, the mortgagor should receive a letter of satisfaction from the mortgagee within 60 days of the loan payoff
-recorded in public records

Question 9

first mortgage

Answer 9

-the primary claim on a property that takes precedence over all other subsequent (junior) mortgage claims and most other liens

Question 10

lien priority

Answer 10

-mortgage liens are given priority by the date they were received
-when a loan is used to finance a property, it is usually the first lien placed against the property, and therefore, has the highest priority over all liens with the exception of real estate taxes, and special assessments

Question 11

junior mortgage

Answer 11

-subordinate to a first or prior mortgage
-home equity loan and home equity line of credit are common types of junior mortgages

Question 12

subordination agreement

Answer 12

-a written contract in which a lender who has secured a loan by a mortgage or deed of trust agrees with the property owner to subordinate the first loan to a new loan
-must be acknowledged by a notary
-used to grant first lien status to a lienholder who would otherwise be secondary to a first lien

Question 13

acceleration clause

Answer 13

-allows the lender to declare the entire outstanding balance due and payable immediately whenever default occurs
-without having this ability, the lender would have to sue each time the borrower defaulted, month after month

Question 14

cognovit clause

Answer 14

-gives a lender the right to foreclosure at its option by requiring the borrower to admit any future default at the time a loan is obtained
-not allowed in Florida

Question 15

defeasance clause

Answer 15

-provides protection for the borrower as it requires the lender to acknowledge performance by the borrower
-only legally necessary clause in a mortgage

Question 16

due on sale clause

Answer 16

-stipulates that the full balance may be called due-on-sale upon transfer of ownership of the property used to secure the note
-prevents a borrower from transferring any interest in the mortgaged property without the permission of the lender

Question 17

escalation clause

Answer 17

-allows a lender to increase the interest rate based on the occurrence of an event such as a change in the use of the property or consistently late payments

Question 18

exculpatory clause

Answer 18

-limits the lender’s rights in a foreclosure to the amount received from the sale of the foreclosed property
-if the balance of the promissory note has not been paid in full from the proceeds of the sale, the lender cannot obtain a deficiency judgement for the unsatisfied amount

Question 19

insurance clause

Answer 19

-the borrower’s promise to maintain adequate insurance coverage
-mortgages typically require the borrower to carry fire and hazard insurance in an amount at least equal to the unpaid balance of the loan

Question 20

maintenance clause

Answer 20

-a provision that requires the borrower to maintain the property properly during the term of the loan, to protect the property’s value

Question 21

open-end clause

Answer 21

-allows a borrower to borrow additional funds based on the same mortgage after the loan balance has been repaid down

Question 22

prepayment clause

Answer 22

-allows a borrower to pay off a loan early, thereby avoiding the interest that would otherwise have to be paid
-some loans may include a prepayment penalty clause within the prepayment clause for the privilege of prepaying the debt

Question 23

receivership clause

Answer 23

-used in mortgages on income producing real estate
-if the investor should default, the lender may ask the court to appoint a trustee, referred to as a receiver, to manage the property during the foreclosure process, collect rents, and maintain the property

Question 24

release clause

Answer 24

-found in mortgages that cover more than one parcel of land, usually those given by builders and developers
-a release clause is used which releases the individual lot from the original loan upon payment to the construction lender of a specified amount of money

Question 25

right to reinstate clause

Answer 25

-a loan clause that gives a borrower the right to cure a loan that is in default by paying loan payments that are in arrears, along with accrued interest, late payment charges, and legal costs incurred by the lender before the foreclosure is finalized

Question 26

subordination clause

Answer 26

-allows a lien recorded earlier to be placed in a secondary position to a new lien -seller voluntarily agrees to allow a mortgage that they hold on the land to be placed in lower priority than another loan so that the developer can obtain a construction loan to complete the project

Question 27

tax clause

Answer 27

-consists of the borrower's promise to pay the property taxes during the period of the loan -should the borrower fail to pay the taxes as required, the property could be sold in a tax foreclosure sale, which would remove the lien created by recording the mortgage

Question 28

hypothecation