Liens on Real Property

Transcription

1 Real Estate Finance (Law 5856) MT 12:00 noon 12:50pm, Room 109 Prof. Wilson Freyermuth Office: 215 Hulston Hall Phone: E mail: freyermuthr@missouri.edu Liens on Real Property Voluntary lien: arises when an owner grants a mortgage (or deed of trust) to secure repayment of credit Judgment lien: arises when a judgment is docketed vs. Δ (lien attaches to all land owned by Δ in the county where the judgment is docketed) Statutory lien (e.g., mechanics lien): arises by operation of law, based on creditor compliance w/a specific statute 1

2 Mortgage Loan Types: Fixed Rate, Level Amortizing Loan Equal payments of P&I (principal and interest) each month over the loan term Commonly 15 or 30 years (but now some choose your own term options are becoming available) 2

3 Mortgage Loan Types: ARMs Amortizing mortgage loan can also be adjustable rate or ARM Rate floats and can be adjusted up/down, in relation to prime rate, at scheduled intervals during term At each adjustment, monthly P&I payment changes (and amortization schedule is modified); as interest rate goes up, monthly payment goes up Loan Types: Balloons Some mortgages are structured with balloon payments E.g., Jan. 1, 2014: RWF borrows 4% interest, with P&I payments calculated as if RWF was repaying on a 30 year amortization schedule But, promissory note provides that on Jan. 1, 2019, RWF will pay the entire remaining principal balance in a lump sum (or balloon payment ) Why might RWF opt for such a loan? 3

4 Loan Types: Interest Only Loan Borrower makes monthly payments of interest only; principal does not amortize (remains constant) during term Principal balance is then due in a balloon payment at end of loan term Many commercial mortgage loans (hotels, office buildings, shopping centers) are made on an interest only basis (borrower expects to refinance loan at end of term) Loan Types: Line of Credit Loan Borrower obtains approval to borrow up to a particular amount, but does not immediately draw on that credit E.g., RWF gets line of credit from Bank to use to pay son s tuition bills May be secured by mortgage (e.g., home equity line of credit ) Once credit is drawn on, agreement imposes minimum periodic payment; interest accrues on outstanding balance Full balance is due in balloon payment at end of term 4

5 Loan Types: Construction Loan Construction loan Proceeds are to be used to build improvements to land Borrowing takes place in stages, loan proceeds are disbursed by lender in draws as construction proceeds Interest only payments until construction is completed, at which point entire balance is due in balloon payment Payoff usually comes from proceeds of a permanent take out mortgage loan (a type of refinance ) Lien Enforcement Regardless of mortgage loan type, the enforcement process (foreclosure) is the same: public auction sale of the land, with proceeds applied to mortgage debt In some states (e.g., IL, KS), foreclosure is judicial process; mortgagee must bring legal action, obtain judgment, sale conducted by sheriff (execution sale) In other states (MO), foreclosure can be nonjudicial, private sale conducted by mortgagee or by trustee (named third party) 5

6 Crouch borrows $500K from Bank, executes and delivers mortgage on his home to Bank Bank does not record the mortgage When Crouch defaults, Bank sues him to foreclose mortgage Crouch moves to dismiss: Bank didn t record the mortgage, so it isn t valid and can t be foreclosed Is Crouch correct? Valid Mortgage? Attachment and Perfection Creation of a SI in personal property is called attachment Typically evidenced by a document entitled Security Agreement Once SI attaches, it is enforceable vs. debtor To make attached SI fully effective vs. 3d parties, it must be perfected Evidenced (usually) by filing financing statement (called a UCC 1) 6

7 Common law of real property + recording act create comparable analysis for mortgage liens Common law: mortgage lien arises, between mortgagor and mortgagee, upon execution and delivery of mortgage (recording not necessary) Recording ensures mortgagee s lien is valid vs. third parties (unrecorded lien may be cut off if land is later sold to a BFP) Problem Did the Daily News really steal the Empire State Building? Why or why not? 7

8 No, the deed to Nelots passed NO title to the land A forged deed passes no title (valid transfer requires intent by grantor to pass title) What if Nelots had then gotten a mortgage loan from Bank and had granted a mortgage on the Empire State Building to the Bank? Under derivative title principle, Bank s mortgage would also be invalid (can t be a BFP of a void title) Daily News article implies that: (a) The recorder of deeds is responsible for mortgage fraud because the recorder s staff doesn t verify the information in recorded instruments (b) Victims are left with mortgage debt and ruined credit Which statement (if either) is right? 8

9 The duty of the recorder of deeds is ministerial and clerical in nature (recorder can reject only for nonpayment of recording fees and noncompliance w/mandated forms) Properly, the real victims of such mortgage fraud are mortgagees (and their shareholders) Lien couldn t legally be enforced vs. owner/victim This is not to suggest, however, that it hasn t happened (wrongly) to uninformed and uncounseled landowners 9