Dancing with Deeds, Liens, Notes, Mortgages, and the like

14 Replies

:roll:


Dancing with Deeds, Titles, Notes, Mortgages, Encumbrances & Liens.

Hi there, I'm getting familiar with those terms and need clarification in most of them.

This is a condensed post, and will demand a little bit from your time and expertise, specially
in the second part of the post: "how these documents interacts one to another'

I need to know how one document "stands" and / or "interacts" with other documents.

Below is what I think what every document is, but I need correction and clarifications in them.

DEED: The deed I think is the "document produced by the party you are buying from"
correct me if I'm wrong please. Question:.. Is the Mortgage producer that have the Deed
in their hands?.

I've heard of "Master Deeds", "Sheriff Deeds", "Warranty Deeds". "Quit Claim Deeds"
I know the "quit claim deed" is a simple statement, saying that the ex-homeowner has no intererst
in the property anymore. The "sherrif deed" is the one from the sheriff, obviuosly
I don't know what is a "Master Deed", and a "warranty deed".
I know that the "owner" of a property is the person that is on the Deed

"Deed in Lieu" is when the borrower signs a "quit claim deed?

NOTE: is called "the promisory note", this is the document the person signs at closing, and
promise to pay the debt to the mortgagor.

What it means when a "note is attached to the deed"?

The noteholder can foreclosure on a property, and according to recent developments,
some banks are having hard time when bringing foreclosure actions to properties without the note

"Assignment of notes" happens when the note is transfered to another party, even without
the knowledge of the borrower who signed it at closing.
I've heard that note transfers are out of control, sometimes reach more than 500 transfers a year!

LIENS: Are claims against the property, a free a clear title doesn't have any liens, except federal ones

TITLE: Ok, I'm blank at this point...the title is the description of the property, with your name on it?
The titles are in the counties? or are only copies of them?
A "title searcher" must access the titles in the prothonotary offices
A "clear title" (free & clear), unclouded, allows the insurance of the title.
and therefore the property can be sold.

MORTGAGE: Is the debt incurred by the borrower to buy the house. Failure to comply with the
terms of the morftgage papers, can Lead to foreclosure.

Banks generally produce mortgages, to borrowers, previous credit check.

"OWNER FINANCING" Is when a property owner acts as a mortgagor, when sells
the property to another party? and receive a monthly payment from the borrower?

ENCUMBRANCES: Have absolute, no clue...I've heard of contracts without any encumbrances...
that's it. I would like to know more of this.

INTER - RELATIONS Between documents;
** The Title must be clear in order to have a "Marketable Deed",
** The Mortgagor is the Noteholder
** The Lien (first lien), is a claim against the property, and must be
addressed in order to resolve the hypothetical debt generated by the Lien.
the lien is "on the title", and therefore the title is "clouded"
** "Tax lien sale" is when the county sells the taxes in arrears from the property
to the public, in order to mantain municipal services.

some liens, encumbrances and judgements can survive
after the tax sale, need a Title check before bid.

** "Deed Sales", is when the sheriff sells the property itself to the public, and
oversees the operation, on behalf the plaintiff.
generally, there is a "redemption period", except in the
"judicial" and "repository" sales (in deed states).

Again, this is what **I think** that are these documents, and their Inter-relationship.

I need several corrections, clarifications, and the like.

Well...this is a condensed post...any help will be greatly appreciated. Thanks in advance.

This post has been removed.

Hi, I stoped reading when I got to the Note and paying the mortgagor...everythin from that point and above is incorrect. Find a glossory of real estate terms. Asking an attorney will cost you a fortune. You'll get a better response on any site if you ask one question, and not ask for a book. Good luck, Bill

All this is confusing. But its not as complicated as it seems. Part of the confusion is that there are multiple documents that are similar and have different names. Different states use different documents for the same purpose. Some of the terms you mention are not documents at all, but just concepts.

The two main documents associated with real estate transactions are deeds and mortgages. Mortgages are called "deeds of trust" in many states.

When one person sells a piece of real estate to another, the seller (the "grantor" of the deed) gives the buyer (the "grantee") a deed. The deed transfers ownership. The document itself can be created by anyone. Its made official when its "recorded" with the county that contains the property. Who creates the document isn't important. What matters is who gives the deed (grantor, aka seller) and who gets the deed (grantee, aka buyer). Physically having a deed document isn't typically important, either. What matters is that it gets recorded.

In a normal transaction, the deed is typically a "warranty deed" or "general warranty deed". The grantor is guaranteeing (i.e., warrantying) that they are able to give a clear and complete title for the property to the grantee.

A quit claim deed is much less powerful. It simply says "I, the grantor, give you, the grantee, whatever interest in this property I have". I can legally give you a quit claim deed for ANY property. With just a very few exceptions, that deed would be totally worthless because I have no interest. For properties I do own, it would be valuable, and would transfer my ownership. The difference between the quit claim and a warranty deed would be that I don't make any guarantees. If a lien is found later, if your problem, not mine.

When a loan is made using a property as collateral, two documents are typically used. A mortgage or deed of trust and a promissory note. Some states use mortgages, some use deeds of trust. They're the same thing. Again, the document could be created by anyone. The borrower (the "grantor") gives the mortgage to the lender (the "grantee"). It gives the lender the right to foreclose. The mortgage is recorded with the county recorder. That serves as official, public notice that the loan exists and is attached to the property.

A promissory note is also typically created when a loan is made. This is a document between the borrower and the lender outlining the terms of the loan. Payments, interest rate, what the borrower can and can't do with the property, etc. Often many pages long. This is not recorded.

A "note" is a generic term for a loan. When someone talks about "buying a note" or "transferring the note", they're not referring to the physical documents. They're referring to ownership of the loan. When a lender makes a loan, that creates the right to collect a series of payments from the borrower. That right has a value. The "par value" or "face value" of the note is the loan balance. But depending on a number of factors, the actual value may be more or less. Notes are called "bonds" when referring to loans made to big companies or governments. Loans of all sorts, including property loans, are bought and sold every day. The US financial crisis a couple of years back was largely caused by sales of property notes at higher values than they really deserved. The European financial crisis occurring right now has been caused by sales of Greek and other government bonds at prices higher than they deserved.

A real estate loan has those two documents associated it - the mortgage (or deed of trust) and the promissory note. In some areas, like here in CO, to show ownership of a note and to handle the payoff, you MUST have the ORIGINAL deed of trust document. If a loan gets sold, the original document must be physically transferred from the seller of the note to the buyer of the note. The buyer must keep track of the deed of trust and be able to put it on the table when the note is paid off.

Often, they have to do the same if they want to foreclose. That is, to foreclose on a property, you must produce (that is, find in your files and lay on the table) the original, physical deed of trust document. Sometimes this can be difficult. If the note has been sold several times, or packaged with a bunch of others into a large financial instrument, the owner of the note can lose track of the document. There's a scheme currently occurring where people being foreclosed make the lender "produce the note". That is, dig through their files and find the documents. Its just a delaying tactic in a foreclosure.

When someone owns a property, they may speak of "having the title". When buying, they might say "I got the title". Unlike a car, there is no "title" document. Its just a phrase indicating ownership.

Likewise, "encumbrance" is a generic term indicating some loan, lien, or judgment that's attached to a property. The loan with its deed of trust is one example. But there can be many others. If a contractor does work on a house and doesn't get paid, they can file a "mechanics lien" against the property for the money they're owed. If you sue someone and win, you can attach a judgment to the property they own. If taxes aren't paid, the county or the IRS can attach tax liens to the property. In my area, if you don't pay your water bill, a water lien can be attached. Etc, etc, etc.

If someone owns a property that has absolutely no encumbrances of any sort against it, they would own it "free and clear". Again, that's just a phase, not a legal term.

When a property is sold, a "title search" is performed to find all the encumbrances. Typically, these all have to be cleared by the seller in order to give the buyer a "clear title" or a "marketable title". Those may get cleared as part of the closing. That is, the seller may have a loan. The buyer gets a new loan. The money from the new loan goes to pay off the old loan. The title company (or lawyer, in the eastern part of the US, which is where I think you are) handles all the paperwork.

The title company will also sell "title insurance". There are typically two title insurance policies. The seller buys a "owners title policy" for the buyer. The new borrower (typically the buyer) buys a "lender's title policy" for the new lender. These are issued by the title company, and guarantee the ownership is complete and that there are no liens. If something turns up later, the title company will sort it out. There are lots of limitations on these policies. Its the title search that looks for and (hopefully) finds all the encumberances.

When a property is foreclosed, a document is filed with some official. Here in CO, its called the "notice of election and demand" and its filed with the public trustee. In some places its called a "lis pendens" or "notice of default". There are private trustees in some states. I believe the prothonotary is a court official that gets the filing in some states.

If the foreclosure is not resolved, the property goes to the foreclosure sale, aka the "sheriff's sale", "trustee sale", or some other name. The lender who is foreclosing starts the bidding at the least they will accept. If nobody else bids, they take possession of the property and it becomes a REO (real estate owned). If someone else bids, there is another winner of the auction, and they get the property. When property is sold this way, there is typically a "special warranty deed", "trustees deed", "sheriff's deed" or some such. This sort of deed doesn't have the same guarantees as a warranty deed. However, the foreclosure process ensures MOST (but not all) other encumbrances are cleared off.

All the encumbrances against a property are in an order. The "senior" encumbrances take priority against "junior" encumbrances. A simple example is the mortgage someone gets when they buy the house (the "first" mortgage) and a HELOC the take out later (the "second" mortgage). If the first mortgage lender forecloses, the second mortgage gets wiped out (though, this process can be complex and varies widely from state to state). If the second mortgage lender forecloses, the first DOES NOT get wiped out. The winner of the sheriff's sale for a second mortgage foreclosure is now responsible for the first mortgage.

In general, the rule is "first in time, first in line". Encumbrances are ordered by the the order in which they are RECORDED. Not the order they're made, the order they're recorded. There are some exceptions. IRS liens are always very senior. Water liens can be senior. Here in CO, some portion of an HOA lien is senior to the mortgages.

Owner financing or seller financing, in its simplest form, is when the seller becomes the lender. The seller will be the grantor on the deed with the buyer being the grantee. The buyer is the grantor on the deed of trust (or mortgage) with the seller being the grantee.

However, in creative real estate investing, "seller financing" may refer to other types of transactions like subject to (buying a property WITHOUT paying off the exiting mortgage), land contracts and lease/option deals.

Jon, that's why you get the big bucks!

Just a note on a notes/mortgages, LOL, the borrower is the "mortgagor" (behind the door) and the lender is the "mortgagee" (who gets to be the payee each month).

Big bucks? Ha!

Wow...I don't know how to thank Jon Holdman!. He just took the question for himself...I have a better perspective now, and will continue in self education, thanks again Jon!

Nice description, I think the OP still needs a glossary. I would have voted for you Jon, but mine won't work!

Jon's reply is top-notch; I'll just add a few comments here.

Originally posted by Jon Holdman:
...
A promissory note is also typically created when a loan is made. This is a document between the borrower and the lender outlining the terms of the loan. Payments, interest rate, what the borrower can and can't do with the property, etc. Often many pages long. This is not recorded.

...

I'd change that last sentence FROM "This is not recorded" TO "This is not required to be recorded, but sometimes it will be found in the public records". Because I have actually seen these show up in public records with the mortgage.

Originally posted by Jon Holdman:
...
All the encumbrances against a property are in an order. The "senior" encumbrances take priority against "junior" encumbrances. A simple example is the mortgage someone gets when they buy the house (the "first" mortgage) and a HELOC the take out later (the "second" mortgage). If the first mortgage lender forecloses, the second mortgage gets wiped out (though, this process can be complex and varies widely from state to state). If the second mortgage lender forecloses, the first DOES NOT get wiped out. The winner of the sheriff's sale for a second mortgage foreclosure is now responsible for the first mortgage.

In general, the rule is "first in time, first in line". Encumbrances are ordered by the the order in which they are RECORDED. Not the order they're made, the order they're recorded. There are some exceptions. IRS liens are always very senior. Water liens can be senior. Here in CO, some portion of an HOA lien is senior to the mortgages.

...


The "first in time, first in line" rule is golden in most locations, except when there is a subordination agreement put into place that changes the priority of a senior lien to become more junior than a later lien. I probably point out this one more than anybody else here on the BP forums. Saw a property at my last sheriff sale where the original first subordinated their position even though the borrowers had already been delinquent with that first loan; the second then became the first by a subordination, and then the second in time (but now first in line) ended up foreclosing - first in time (but now second in line) got wiped or had to pay off the other loan!

In the quoted phrases below, how an investor can spot this kind of "second", that can become "first"?????

"The "first in time, first in line" rule is golden in most locations, except when there is a subordination agreement put into place that changes the priority of a senior lien to become more junior than a later lien. I probably point out this one more than anybody else here on the BP forums. Saw a property at my last sheriff sale where the original first subordinated their position even though the borrowers had already been delinquent with that first loan; the second then became the first by a subordination, and then the second in time (but now first in line) ended up foreclosing - first in time (but now second in line) got wiped or had to pay off the other loan!"

In my area, they are recorded as "mortgage agreement" or "subordination agreement". When they are called "mortgage agreement", I look at the parties involved; if there is more than one bank ... you can guess the rest :wink:

But then I get a hold of the complete document and check it to be sure.

Updated almost 9 years ago

The reason you have to check the document is that sometimes a "mortgage assignment" gets recorded as a "mortgage agreement"; in a "mortgage assignment" there are supposed to be two banks as the parties.

There is one more loophole that you might encounter when you follow "first in time, first in line". The state of PA follows the "first in time, first in line" rule, but there is also a "10 day recording rule" that is used in PA; in short, that rule says that if a document is recorded within 10 days of the date of execution of that document (date it was signed), then the statutory date of recording then becomes the date of execution - otherwise, the date of recording is when the recorder placed it into the public records.

So, it is possible to have some recordable document happen on day 1 (but get recorded on day 10), then another recordable document happen on day 9 (and get recorded on day 9). With that series of events, in PA both of those documents would have effective recording dates that are the same as their execution dates; the second document would have entered the public records first, but it would have a junior priority as a consequence of this "10 day rule" in PA.

So you will need to determine if the location of the property has some similar type of rule that could confound the order of things.

What does it mean for a 2nd mortgage to get "wiped out" because the first foreclosed? Just thrown away? Or paid off? If they're just discarded  I don't see how anyone buys them? 

@Jon Holdman thank you so much for that post including the explanation of all those terms. I mostly lurk here but that was a densely informative.

@Steve Babiak appreciate you putting the "foreclosure auction" post together with all the threads. I am in the process of reading through all of them and theyre very helpful in educating myself on these foreclosure auctions. 

Yeah I know I am a few years late :-)

Originally posted by @Benjamin Cowles :

What does it mean for a 2nd mortgage to get "wiped out" because the first foreclosed? Just thrown away? Or paid off? If they're just discarded  I don't see how anyone buys them? 

The term "wiped out" in the context given by the quoted post means that the second mortgage is no longer attached to the property and hence the second mortgagee  cannot foreclose on that property - but any unpaid debt owed by the borrower still is owed to the mortgagee; in such a situation, that second loan on the property becomes an unsecured debt - the property served as the security before the senior lender foreclosed, but now the second loan no longer attached to the property. 

The seconds are bought and sold while they are still attached to the property usually; when they are bought after the senior lender has foreclosed, the purchaser of that basically has bought something like credit card debt in that it is unsecured but still can be collected upon.

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