Real Estate Transactions

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Real Estate Transactions

• Assignment One
• Introduction to Mortgage Financing

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Mortgages - Generally

• Mortgage is really two obligations.
• Debt
• Evidenced by Promissory Note
• In personam attaches to the person
• Lien/ Security for Repayment if Debt is in
  Default
• Evidenced by a Mortgage Agreement or Deed of
  Trust
• In rem attaches to the property

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Example

• On April 1975, Britney purchased a home,
  Blingacre, for 70,000 cash.  To enable the
  purchase of Blingacre , Britney borrowed 65,000
  from Union Planters Bank, signing a promissory
  note payable over 30 years and bearing a 7 rate
  of interest.  To secure repayment of this note,
  Britney granted Union Planters Bank a first
  priority mortgage on Blingacre.

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Example

• In February 1981, Britney decided to sell this
  home.  She began negotiating with Cameron and, on
  March 1, 2001, Britney and Cameron signed a
  contract under which Cameron agreed to purchase
  the house for 95,000. 
• Under the contract, Cameron agreed to pay 10,000
  cash at closing on April 1, 1981, and Britney
  agreed to grant Cameron a purchase money mortgage
  for the balance of the purchase price, with
  monthly payments beginning on May 1, 1981. 

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Example Contd

• Monthly payments were to be made under this
  mortgage as if the balance were amortizing
  equally over 30 years, with a balloon payment of
  the outstanding balance due on April 1, 2004. 
  The interest rate stated in the purchase money
  mortgage was 11.  The sales contract also
  provided that the parties obligations are
  conditioned upon obtaining all necessary consents
  from any third parties.
• Under the contract, Britney did not plan to pay
  off the Union Planters Bank mortgage at the time
  of the transaction.  Instead, Britney would leave
  the Union Planters Bank mortgage in place and
  would continue to make payments on it each month,
  using part of the payments that Cameron made on
  the purchase money mortgage.

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Questions

• What is the amount of the monthly payment due on
  Britneys note to Union Planters Bank?

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Sale to Cameron in 1981

• By 1981, Britney has paid off her mortgage down
  to 60, 250 (approximately) and now proposes to
  sell to Cameron.
• What options does Britney have for the sale to
  Cameron?

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Typical Repayment Options

• All Cash
• Assumption of existing mortgage
• Seller financing
• Combination of assumption/ seller financing
• Wrap around financing

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Question

• What would be the amount of the monthly payment
  due under Camerons purchase money mortgage with
  Britney?
• Cameron pays 10,000 cash at closing.
• Cameron signs 85,000 note and a wrap around
  mortgage (amortized at 11 for 30 years) with a
  balloon payment at end of 3rd year.

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So

• Each month Cam pays Brit 809.47
• Brit pays the Bank 432.45.

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Wrap Around Mortgages

• Why would a transaction be structured this way?
• Explain why the example transaction, as
  structured, is beneficial to Cameron.
• Explain why the example transaction, as
  structured, might concern Cameron.

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Benefits/ Concerns to Cameron

• Benefits
• Cam may not otherwise qualify for a loan
• Interest savings if Cam could only qualify for a
  higher rate loan elshwhere
• Concerns
• Lack of control of payment on wrapped mortgage.
  If Brit defaults, Cams interest could be
  extinguished by foreclosure by Bank.

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Question

• Explain why the example transaction, as
  structured, is beneficial to Britney.
• Explain why the example transaction, as
  structured, might concern Britney.

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Benefits to Britney

• Significant Investment
• Brit invests 24,750 of equity (85,000 purchase
  price under wrap note - 60,250 UPB mortgage)
• For this investment, she gets 377.02 each month
  (Cams wrap payment minus Brits UPB mortgage
  payment)
• In three years, when balloon payment comes due,
  Brit will be returned her equity in the land
• Equity balance of wrap mortgage (83, 714)
  minus balance of UPB mortgage (57, 014) 26,
  700
• Thus, her equity in the land increased by 1,950
  over the 3 year term.

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Benefits to Britney

• Monthly return of 337.02 on 24,750 investment
  ( 16 rate of return)
• 1,950 increase of equity over 3 year term of
  wrap around note ( 2.56 rate of return)
• Total rate of Return 18.9
• total annual payments (4,044.24) / investment
  (24,750)
• 24,750 invested at 2.65 would grow to
  26,700 after 3 years

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Question

• You may ask why this strategy gives Brit a nearly
  19 rate of return when the rate on the
  wraparound mortgage was only 11?

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Answer

• The answer is volume. (joking)

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Serious Answer

• This reflects the benefit of leverage (the use
  of debt to finance investment)
• Essentially, Brit borrowed from Bank to lend to
  Cam.
• Thus, Brits rate of return derives from what she
  actually invested (her equity, 24,750) not from
  the amount of the wrap around note.

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Question

• When Britney goes to Union Planters Bank to get
  its consent to this transaction, how should Union
  Planters Bank respond?  Can Union Planters Bank
  refuse?  Should it refuse?  Why or why not? 
  Assume that the mortgage is consistent with the
  FNMA/FHLMC Single Family Deed of Trust as it
  appears beginning on page 1204 of your Casebook.

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UPBs Concerns

• If the prevailing market rate is higher than 7,
  UPB probably wants to get rid of the below market
  mortgage to Brit and then reinvest the money by
  lending it to another buyer at a higher rate of
  return.
• UPB doesnt want competition in the mortgage
  business from the likes of Britney.

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UPBs Options

• If the mortgage agreement with Brit doesnt
  preclude such transactions, UPB can do nothing
  unless Brit is in default.
• Mortgagors are generally allowed to use/ sell
  land as they deem fit unless in violation of a
  public or private restrictions
• So, UPB will draft around this problem in the
  future. How?

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UPBs Options

• Sale with Consent Clause
• Due on Sale Clause

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If Time

• Suppose UPB refused to consent to the sale could
  Cam sue Brit for specific performance? Cam Brit
  use the third party consent provision to escape
  her obligation to perform?
• See Schrader v. Benton (pg. 100)

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Mortgage Foreclosures

• Default
• Acceleration
• Power of Sale / Judicial foreclosure
• Proceeds pay off debt in order of priority (after
  costs of sale and tax obligations)
• All subordinate liens are extinguished
• Deficiency

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Example

• Usher has a condominium worth 80,000 that he
  owns free and clear of any liens. He takes out a
  loan from Bling Bank against the condo for
  60,000 to buy a diamond necklace. He grants
  Bling Bank a 30 year first mortgage to secure
  repayment of the debt. Later that week, Usher
  wants a diamond bracelet and borrows 17,000 from
  Blang Bank granting Blang a second mortgage to
  secure repayment of the debt.

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Question

• If Usher defaults and Bling Bank forecloses using
  judicial foreclosure, how much would you bid at
  the sale?
• What if the sale brings a purchase price of
  78,000?
• What if the sale brings a purchase price of
  75,000?
• What if the sale brings a purchase price of
  95,000?

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Question

• If Usher doesnt default to Bling, but defaults
  to Blang, which forecloses using judicial
  foreclosure, how much would you bid at the sale?
• Why?
• Is there any more information you need to decide
  how much to bid?
• What about the bracelet and the necklace Can
  Bling and Blang foreclose on them?

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Redemption

• Equity of Redemption
• Cannot be clogged
• Statutory Right of Redemption

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End of First Assignment!

• Please prepare next assignment Absolute
  Deed/Conditional Sale pgs. 260-283.