Mortgage Provisions

Chapter Four: Mortgage Provisions

After completing this chapter, you will be able to discuss the different provisions that commonly occur in a mortgage loan agreement.

Common Clauses

A look at some of the more common provisions that clients are likely to encounter in mortgage loan agreements. Understanding these clauses will enable you to address inquiries from clients effectively.

General Concept
  • Each provision has a specific objective for which it is written.
  • Phrase: "a clause and effect"—highlights the dual purpose of the clauses.
1. Mortgages Granting Clause

  • Refers to the concept of hypothecation:

    • Hypothecation: The use of property as collateral to secure a loan.

  • Common in secured loan agreements, applicable to both lien theory states and title theory states.

    • Lien Theory States:
    • The clause pledges the property as security for the loan by placing a lien on the property.
    • Title Theory States:
    • Achieves the objective through the transfer of title to the lender or trustee until the loan is satisfied.
2. Defeasance Clause / Satisfaction of Mortgage Clause
  • Both terms refer to resolution upon completion of loan terms by the borrower.
    • Defeasance Clause:
    • Used in title theory states.
    • States that the title held by lender/trustee is defeated once the loan is paid in full.
    • Title will be conveyed to the borrower with full ownership rights.
    • Satisfaction of Mortgage Clause:
    • Used in lien theory states.
    • Declares that the note has been paid in full, and the lien is removed.
    • Lender's official declaration must be recorded after the terms have been met.
3. Release Clause
  • Allows for the partial release of property from the mortgage loan agreement based on the amount paid off by the borrower.
    • Typically appears in blanket mortgages which cover multiple properties.
    • Example:
    • Neighborhood developers may include release clauses so that individual buyers can release specific properties from the developer's blanket mortgage.
4. Acceleration Clause
  • Triggers making the entire loan amount due immediately upon default. Also known as a due on default clause.
    • Typically triggered by payment default, but can apply to any default of the mortgage agreement terms.
    • Without this clause, the lender must sue for each missed payment.
    • If the borrower cannot make full payment, the lender may initiate foreclosure.
5. Right to Reinstate Clause
  • Responds to the lender-friendly acceleration clause.
  • Provides the borrower the chance to cure delinquent payments and return to regular payments under original contract terms.
  • Halts the foreclosure process that was initiated after acceleration.
  • Specific to states like Georgia that do not recognize statutory redemption.
6. Due on Sale Alienation Clause
  • Also known as the alienation clause.
  • Triggers lender's right to demand full payment upon sale or transfer of property.
    • Prohibits new buyer from assuming terms of the original loan without lender's consent.
    • Lender can approve/reject loan assumptions or modify terms (e.g., increase interest rate).
  • FHA and VA loans do not allow alienation clauses.
7. Power of Sale Clause
  • A clause allowing the borrower to preauthorize the sale of property through nonjudicial foreclosure upon default.
    • Sale proceeds apply to the unpaid loan balance.
    • As a title theory state, Georgia employs the power of sale in the security deed.
8. Escalation Clause
  • Grants the lender the ability to raise interest rates under certain conditions.
    • Commonly associated with adjustable-rate mortgages tied to market indexes.
    • Fixed-rate mortgages may also contain terms allowing for rate increases due to delinquency or property usage changes.
9. Prepayment Clause
  • Addresses borrower’s right to pay all or part of the loan early, with or without a penalty.
    • Penalty clauses are typically limited to the early years of the loan.
    • No penalty clauses allow borrowers to reduce principal early, lowering both loan term and lender's earned interest.
    • A lock-in clause may be used to prohibit prepayment, requiring fixed monthly payments.
    • Resulting in a closed mortgage (set termination date) compared to an open mortgage (no definite end).
  • FHA and VA loans prohibit prepayment penalties.
10. Condemnation Clause
  • Protects the lender if government forces the sale of property (eminent domain).
    • Funds from the sale must be applied towards satisfying the loan.
11. Exculpatory Clause
  • Protects the borrower in case of default and foreclosure.
    • States that the property is the only security for the note.
    • Prevents the lender from pursuing a deficiency judgment against the borrower.
12. Subordination Clause
  • Allows a lender to subordinate their lien's debt priority to another existing or anticipated lien.
    • Can occur to strengthen repayment likelihood or increase property value securing the loan.

Borrowers' Covenants

The following provisions relate to the responsibilities of the borrower to protect the lender's interests:

  • Covenant to Pay Indebtedness:
    • Mandates what is achieved with a promissory note (evidence of debt and promise to repay).
  • Covenant to Pay Taxes:
    • Protects lender by requiring borrower to remain current on property taxes and special assessments.
    • Often involves escrowing payments for compliance.
  • Covenant to Pay Insurance:
    • Protects lender by requiring adequate property insurance against damage/loss.
    • Often includes escrow arrangements for maintenance.
  • Covenant of Good Repair:
    • Requires borrower to maintain and repair the property to preserve market value.
    • Neglect or deterioration violates this covenant.
  • Covenant Against Removal:
    • Similar to the covenant of good repair, prohibiting the removal of fixtures to protect property value.