Credit Instruments

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Chapter 6

• Credit Instruments

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Promissory Notes

• Agreement containing promise to pay a specified
  sum at some specific future date. In real estate
  financing, generally referred to as mortgage
  notes. Typically contain
• Amount of the debt
• Promise to pay
• Interest rate charged
• Payment terms
• References to the real estate pledged in the
  mortgage or deed or trust
• May also contain
• Acceleration clause
• Default provisions
• Waiver of legal requirement that borrower must be
  given notice when each successive payment becomes
  due
• Terms under which prepayment may be made
• Legal provisions on which parties agree

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Figure 6.1
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Figure 6.1 (cont.)
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Figure 6.1 (cont.)
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Mortgages

• Property pledged via a mortgage may be either
  realty or personalty
• Spell out the rights a lender will have in a
  borrowers estate in the event that the borrower
  defaults on his or her obligation
• Underlying obligation is spelled out in
  promissory note
• Mortgages are contracts that must involve
• Competent parties
• Offer and acceptance
• Consideration, and legality of purpose
• Because they are subject to the Statute of
  Frauds, mortgages must be in writing to be
  enforceable, and they must be signed

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Mortgages (continued)

• Common mortgage provisions are
• Names of the parties
• A clause pledging the real estate as security for
  indebtedness, along with identification of the
  debt so secured
• Property description
• A release clause wherein the lender promises to
  release the promisor from the mortgage when the
  note has been fully paid

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Mortgages (continued)

• Other common mortgage provisions are
• Covenant of seizin
• Covenant to pay taxes
• Covenant of insurance
• Covenant against removal
• Acceleration clause
• Prepayment clauses
• Assumption clauses

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Mortgages (continued)

• Right of Assignment
• Mortgages can be sold or otherwise conveyed by
  simple assignment of the lenders interest
• Delivery and Acknowledgement
• Delivery is generally considered to have been
  accomplished when the mortgagor relinquishes
  physical control over the document with the
  intent that it should become operative

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Types of Mortgages

• Purchase money mortgage
• Blanket mortgage
• Open-end mortgage
• Construction loan mortgages

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Deeds of Trust

• Deed of trust involves a third party designated
  to act as a trustee in the transaction
• A trustee takes title via a deed accompanied by a
  trust agreement which sets forth terms of the
  security arrangement and instructs the trustee in
  the event of default
• Trust agreements incorporate a wide range of
  trust and mortgage law
• Deeds of trust contain certain basic clauses
• Names or the parties
• Description of the property
• A clause placing ownership in trust as security
  for a stipulated debt
• A clause providing for a release when the debt
  has been fully paid

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Deeds of Trust (continued)

• May also contain covenant of seizin, covenant to
  pay taxes, covenant of insurance, covenant
  against removal, acceleration clause
• Deeds of trust appear to have been devised as an
  attempt to circumvent foreclosure proceedings
• Deeds of trust do have advantages that transcend
  attempts to make foreclosure easier and quicker