Loans - Promissory Notes & Security Instruments

Promissory Note

• Creates personal liability for the Borrower.

• Borrower’s written promise to lender:

•to pay debt

• allows lender to foreclose in loan is not repaid

• Power of Sale Clause

• The evidence of the Debt.

Promissory Note- Essential requirements

• Must be in writing

• Legally competent parties

•Identifies borrower and lender

• Specific amount to repay

• Signed by the borrower

•Does not require description or recordation

Promissory Note (CONT.)

Sets forth obligations of borrower:

• Pay property taxes

•Hazard insurance to protect lender

• Maintain property

Sets forth the rights of the lender including:

• Foreclose if loan is not paid according to terms

Sell the loan

• Secondary lending market

Hypothecation

• pledging property as security without giving up possession.

• Maintains complete bundle of rights

Collateral

• Property pledged as security for the debt

Collateral lien document – (security instrument)

•Identifies borrower and lender

• Contains legal description

• Recorded LIEN

•in the County where property is located

•Owner retains legal ownership

• Could pledge property for another loa

Default

• Borrower fails to repay debt according to terms

Foreclosure

• Property used as security for debt

• sold to satisfy debt.

Deed of Trust

• Non – Judicial Foreclosure Process

• Primary security instrument in CA

• For over 100 years!

Security Instrument for repayment of promissory note.

• Trustor -borrower

• Beneficiary -lender

• Trustee -independent third party (Selected by the lender)

Mortgage

• Judicial Foreclosure Process

• Primary security instrument in 25 states

• Legal in California, rarely use

Deed of Trust (Non-Judicial)

Trustor-borrower

• Pledged property as security

• Maintains legal ownership (grant deed)

• Complete Bundle of Rights

Deed of Trust (Non-Judicial)

Beneficiary – lender

• Records Trust Deed as a Lien on the Property

Trustee -independent third party

• Chosen by lender to do two jobs:

• Record the deed of reconveyance

• When loan is paid off

• Begin the foreclosure procedure

• Holds bare naked legal title & power of sale

When a Trust Deed is used as the security instrument,

what party authorizes the use of the power of sale in

a deed of trust?

When a Trust Deed is used as the security instrument, what party authorizes the use of the power of sale in

a deed of trust?

A. court

B. trustee

C. beneficiary

D.trustor

Deed of Trust Foreclosure Process

1. Borrower in default

2. Lender notifies Trustee to record notice of default

3. 90 day minimum before Advertising the sale

4. Trustor reinstatement period up to 5 business days before the sale

5. Trustee’s sale (Trustee’s Deed)

When the lender uses a mortgage lien, at the foreclosure sale, the successful bidder gets a deed from the:

When the lender uses a mortgage lien, at the foreclosure sale, the successful

bidder gets a deed from the:

A. sheriff

B. mortgagee

C. mortgagor

D. no one

Mortgage Foreclosure Process

1. Loan in default

2. Acceleration Clause

3. Court Action

4. Writ of Execution

5. Sheriff’s sale

6. Certificate of sale highest bidder

7. 1 yr statutory period of redemption

8. sheriff’s deed

• Mortgagor

• Mortgagee

• Mortgagor (Borrower)

• Mortgagee (Lender)

Lien Priority

• Liens are recorded in the County where the property is located.

• Priority based on Date and Time Recorded.

• First in time has the first in right to be paid in the event of foreclosure

• Superior lien (AKA 1st loan)

• Date recorded before another lien

Lien Priority (CONT.)

•If multiple liens, superior liens paid first from sale proceeds

• Property tax and special assessment always superior

•If they become a lien

• Any lienholder can force property into foreclosur