1. Instruments of Real Estate Finance
Chapter 9
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2. Terminology
• Encumbrance—right or interest in a property
held by one who is not the legal owner of the
property
• Lien—financial encumbrance; a charge against
a specific property wherein the property is
made the security for the performance of a
certain act, usually the repayment of a debt
– Voluntary liens and involuntary liens
– General and specific liens
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3. Interests Secured by a Real Estate
Loan
• Fee simple ownership
• Less than freehold interest
• Title and lien theories
– Equitable rights
– Title theory in which lender’s rights are superior to borrower’s
– Redemption right
– Statutory redemption period
– Lien theory recognizes the rights of lenders in collateral property being
equitable rights, while borrowers retain their legal rights in the property
– California has taken modified position between the title and lien theories
• General requirement for a finance instrument
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4. Note and Deed of Trust (Trust
Deed)
• Deed of Trust—evolved to become the
dominant security instrument for financiers of
California real estate
• Advantage of trust deed over mortgage is
shorter foreclosure period
• Judicial foreclosure; nonjudicial foreclosure;
power-of-sale clause; naked title; beneficiaries
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5. Note Secured by Deed of Trust
• Date signed
• Participants’ identities
• Promise to pay
• Payment due dates
• Amount and terms
• Reference to security
• Signatures and endorsements
• Cosigners
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6. Deed of Trust
• Executed by the trustor to transfer a
form of legal fee ownership to the
trustee to be held for the
beneficiary, while the trustors
maintain their equitable ownership.
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7. Covenants of California Deed of
Trust
• Preservation and maintenance
• Fire insurance
• Legal action
• Taxes and assessments
• Beneficiary and trustee expenditures
• Condemnation
• Late payments
• Reconveyance
• Extensions, subordination, and modifications
• Assignment of rents
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8. Note and Mortgage
• Note Secured by a Mortgage
• Mortgage
– Recording information
– Participants
– Pledge
– Property description
– Covenant of seisin
– Note attachment
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9. Note and Mortgage
• Mortgage, cont.
– Mello-Roos disclosure
– Property taxes
– Insurance
– Defeasance clause and acceleration
– Maintenance of the collateral
– Signatures and acknowledgement
– Release of mortgage

10. Real Property Sales Contract (Land
Contract)
• Single, complete financing and sales
agreement executed between buyer and seller
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11. Special Provision in Real Estate Finance Instruments
• Late payment penalty
• Prepayment privilege
• Prepayment penalties
• Lock-in clause
• Due-on-sale clause
• Assumption versus subject to
• Subordination clause
• Release clause
• Extensions and modifications
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