The origin of the word mortgage is intriguing.
It’s a French word generally believed to be derived from two Latin words — mort (meaning
“death”) and gage (meaning “pledge,” or some- thing of value that’s forfeited if the debt is not repaid). Mortgages just give Americans one more thing to blame on the French.
Although you may feel as though you’re signing your life away when you take out a mortgage, that’s not really what the word means. The part of the word dealing with death applies to the passing away of the agreement. When the homeowner eventually pays off the loan, the lender’s claim to the property is dead. If the
homeowner fails to make payments in accor- dance with the mortgage, the homeowner’s rights to the property cease to exist (or die).
A mortgage is a contract that enables people to purchase property without paying the full value upfront. In essence, a mortgage pledges the property to the lender (the mortgagee) in the event that the borrower (the mortgagor) fails to repay the debt according to the conditions stip- ulated in the note. In other words, in the note, you promise to repay the debt, whereas the mortgage secures the loan by offering the home as collateral.
to foreclose and notify you (or at least try to notify you) prior to the sale (auction). The number of days or weeks the advertisement must be posted prior to sale varies by state. (For the differences between judicial and nonju- dicial foreclosure, check out Chapter 2.)
One of the first items you should look for in your mortgage is a power-of-sale clause. In the following sections, we show you where to find it, what it says, and how it can affect the foreclosure process.
If you’re dealing with a contract for deed or lease-option agreement instead of a mortgage, check to see if your jurisdiction allows a power-of-sale provision with those contracts. Some jurisdictions require judicial foreclosure on land contracts (meaning the person must file a lawsuit against you). If the person tries to take your home without filing a lawsuit, you can take her to court and win. Know your rights. (See “Picking Apart Other Contracts,” later in this chapter, for additional details.)
Where to find it
The power-of-sale provision is usually in the mortgage, but if your jurisdiction uses a deed of trust, then it will be in the deed of trust. Skim through the doc- ument looking for the words power of sale.It’s easy to miss, as shown in the following section. (For more about the deed of trust, check out “Deconstructing Your Deed of Trust,” later in this chapter.)
What it says
The power of saleis a diminutive phrase that packs a wallop. It’s very easy to overlook, even upon close reading. Some lenders include the language in bold or as a separate paragraph to call attention to it, but don’t count on it. Here’s one example (we italicized power of saleto make it stand out):
This security instrument secures to the lender: (1) the repayment of the Loan, and all renewals, extensions and modifications of the Note; and (2) the performance of Borrower’s covenants and agreements under this security instrument and the Note. For this purpose, borrower does hereby mortgage, warrant, grant, and convey to KRAYNAK MORTGAGE CORPO- RATION and to the successors and assigns of KMC, with power of sale, the following described property, located in the County of Who, City of Whoville. . . .
Did you miss it? The three words power of saleeffectively grant power of sale to the lender. Instead of filing a claim against you in court, the lender simply has to post a notice for a few weeks and notify you.
Take a look at another example. This one is at least located in a section that talks about remedies:
KRAYNAK MORTGAGE CORPORATION has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the property under power of sale;and to take any action required of Lender, but not limited to, releasing or canceling this security instrument.
This time the clause was a little more obvious, but not much more. You have to pay close attention when reading your mortgage.
Don’t expect your mortgage to contain a clear presentation of the power of sale — some do, some don’t. If you’re in a jurisdiction that allows foreclosure by advertisement via power of sale, and you don’t see the language in your document, ask your lender, your attorney, or someone else who’s more accustomed to reading these documents whether your mortgage contains a power of sale. If the answer is yes, have him point out where it is. If the answer is no, you know that the only foreclosure remedy the bank has is a judicial foreclosure.
How a power of sale can affect the foreclosure process
Banks love power of sale, because it generally shaves six to eight months off the foreclosure process and saves them a ton of money in attorney fees. With a judicial foreclosure, the bank has to file a lawsuit, wait for the judge to enter an order allowing the bank to sell the property at auction, and then wait even longer before it can advertise and sell the property. With foreclosure by advertisement, the bank advertises the sale, notifies you, and within a matter of weeks can have the property up on the auction block.
In a nonjudicial foreclosure, you have to take the initiative to file a lawsuit to stop the foreclosure and bring the case to the attention of a judge. In judicial foreclosure, the lender files a lawsuit against you. Be sure to file your answer to any lawsuit promptly; otherwise, the court is likely to grant a default judg- ment in favor of your lender, and you’ll have a tough time stopping the fore- closure after that’s done. Always respond to requests from the court, including any requests for you to appear in court; otherwise, you’re at the mercy of the court.
Deconstructing the acceleration clause
Almost every mortgage on the planet has an acceleration clause — wording that makes you pay off the loan in full under certain conditions, like missed or chronically late payments. Without an acceleration clause, the bank can only collect on missed payments. If you miss three payments of $1,000 each, for example, the bank cannot file a claim to collect the entire mortgage balance;
it must file a claim for each of the three missed payments. With an accelera- tion clause, the bank can declare a default after you miss one or two payments and call in the entire balance of the loan.
Where to find it
Like the power-of-sale provision, the acceleration clause is usually in the mort- gage, but if your jurisdiction uses a deed of trust, then it will be in the deed of trust. Skim through the document looking for the words acceleration, balance immediately due,or payable in full.Anything that suggests repayment of the balance immediately and in full indicates the presence of an acceleration clause. We can almost guarantee that your mortgage or deed of trust has an acceleration clause.
The best place to look is under any heading that deals with remediesor default, but it doesn’t have to be under either of these headings.
What it says
The acceleration clause basically says that if you default on the mortgage loan, the entire balance of the loan becomes due immediately. Here’s one example of how the acceleration clause may be worded:
Remedies.On the occurrence of any default, Mortgagee may, at its sole option, declare the entire Indebtedness immediately due and payable.On the occurrence of any such event of default and Mortgagee’s election to accelerate the Indebtedness,Mortgagee shall be authorized and empow- ered to sell or cause to be sold the Premises and to convey them to a purchaser.
This is an example of an acceleration clause that’s triggered at the lender’s discretion. When default conditions exist, the lender has the right, but not the obligation, to accelerate repayment and make the full balance due. When you have an acceleration clause that is enforceable at the lender’s discretion, you’re usually permitted to cure any default prior to enforcement of the acceleration clause and avoid the full balance becoming due. In cases such as these, the bank usually must notify you that it’s accelerating repayment.
An acceleration clause can also be triggered automatically, in which case whenever default conditions exist, the full balance is due immediately. You have no ability at this point to cure the default and avoid the acceleration of the balance. When an acceleration clause is triggered automatically, the bank is under no obligation to notify you.
We can come up with dozens of examples of acceleration clauses from both traditional mortgages and contracts for deed. Some go into great detail, defin- ing exactly what a default condition is, others explain what the borrower can do to cure the default, and some are very basic and open to interpretation.
Adefaultcan be whatever the mortgage document says it is. An obvious default is failure to make payments, but default isn’t limited to that. Default can also occur for failure to pay property taxes or insurance premiums, death or insol- vency of a cosigner, violation of a deed restriction or covenant, and even the failure of the borrower to maintain the premises (jeopardizing the mortgage collateral). These non-monetary defaultsusually give the borrower a chance to cure the default, but not always.
How an acceleration clause can affect the foreclosure process
An acceleration clause makes foreclosure possible. It calls the entire balance due, so the lender can proceed with foreclosure and sell the collateral described in the mortgage at auction to satisfy the debt.
If you’re in an area that allows for judicial foreclosure exclusively, be aware that some jurisdictions frown upon acceleration clauses. You’re likely to encounter differing schools of thought on this topic, ranging from “always enforceable” to “almost never enforceable.” Most courts consider the answers to the following three questions to determine whether acceleration is enforceable:
Is the potential hardship to the borrower great?
Was the default minimal or accidental in nature?
Was the borrower at all times attempting to act in good faith?
If the court examines the case and sees that you’ve acted in good faith, fell into this predicament by no fault of your own, and stand to suffer greatly if the repayment is accelerated, then the court may decide that the accelera- tion clause is unenforceable at this time. You could then reinstate the mort- gage without having to come up with the full balance all at once.
Checking out the due-on-sale and due-on- encumbrance clauses . . . just in case
The bank can’t control what you do with your house, but it can control what happens to the money it loaned you to purchase that house. This is what the due-on-sale clause and its kissing cousin, the due-on encumbrance clause, are all about.
Watch out for foreclosure rescue scams that ask you to sign over your prop- erty to them, so they can catch up on your missed payments and save you from foreclosure. Many of these scams are possible because homeowners believe their mortgages are assumable — that someone else can take over
the mortgage and make the payments. The fact is that most mortgages after about 1989 are not assumable. (Any loans closed before 1989 through the Federal Housing Authority [FHA] and any closed before 1988 through Veterans Affairs [VA] are assumable.) In any event, check with your bank and your attorney to ensure that any foreclosure rescue arrangement is legitimate and that it will release you completely from any liability.
Due-on-sale clause
The due-on-sale clause essentially states that as soon as you sell the home, you have to pay the balance of the mortgage loan. The idea behind this clause is to shut down assumable mortgages(letting someone take over your mortgage) and prevent homeowners from profiting off low-interest loans.
For example, say you have a mortgage at 5.5 percent interest, and the current interest rate is 7.5 percent. The bank doesn’t want you to be able to finance the purchase of the property at 7 percent and keep the extra 1.5 percent interest for yourself, or simply let the buyer assume your mortgage at 5.5 percent. The bank wants to write a new mortgage, so it can raise the rate to 7.5 percent and keep it all for itself.
Following is an example of a due-on-sale clause:
Due on sale.Lender, in making the loan secured by this Mortgage, is rely- ing on the integrity of Borrower and its undertaking to maintain the Property. If Borrower should (a) sell, transfer, convey, or assign the Property or any right, title, or interest in it, whether legal or equitable; voluntarily or involuntarily; by outright sale, deed, installment sale contract, land contract, contract for deed, leasehold interest (other than leases to tenants) with a term greater than three years, lease-option contract, or any other method of conveyance of real property interests; (b) cause, permit, or suffer any change in the current ownership . . . as of the date of this Mortgage, then the Lender shall have the right at its sole option to declare all sums secured and then unpaid to be immediately due and payable even if the period for the payment has not then expired.If the ownership of the Property becomes vested in a person other than Borrower (with or without Lender’s consent), Lender may deal with the successor or successors in interest with reference to this Mortgage and the Obligations in the same manner as with Borrower.
This due-on-sale clause is not automatically enforced. The lender is free to waive the enforcement and may choose to do so in a slow or declining market or in exchange for some upfront interest in the form of points. The lender may also waive the due-on-sale clause if it accepts payments knowing that the clause has been violated. In other words, this is an area that may offer technicalities you can exploit or negotiate.
The due-on-sale clause may or may not become relevant during foreclosure, but if you choose to sell your home, be aware of this clause. You may not be able to sell the home on contract, for example, and then use payments you receive from the buyer to make your mortgage payments. After you sell the home, the entire loan balance becomes due.
Certain types of transfers are exempt by federal law, such as transfers due to divorce, death, certain living gifts to relatives, and long-term leases that do not contain an option to purchase. Another important exception is that the foreclosure of a junior mortgage may not trigger the due-on-sale clause. This means that if a lender forecloses on a second mortgage and you manage to keep making payments on the first mortgage, you may have time during the redemption period (if your area has a redemption period) to redeem the second mortgage without fear of foreclosure on the first mortgage.
Due-on-encumbrance clause
The due-on-encumbrance clause is designed to keep homeowners from bor- rowing their way into a default situation. The clause essentially states that if you take out another loan on your property, you have to pay off the balance of the first mortgage in full. This clause may be sandwiched inside of the due-on- sale clause, or it may be a stand-alone provision, as in the following example:
Secondary financing. Borrower will not, without the prior written consent of Lender, mortgage or pledge the Property as security for any other loan or obligation of Borrower.If any such mortgage or pledge is entered into with- out the prior written consent of Lender, the entire Obligations may, at Lender’s option, be declared immediately due and payable without notice.
Against further encumbrances. Borrower shall not,without Lender’s prior written consent, permit any lien, security interest, encumbrance, or charge of any kind to accrue and remain outstanding against the Property, any part, or any improvements, irrespective of whetherthe lien, security interest, encumbrance, or charge is junior to the lien of this Mortgage.If any such encumbrance is created without the prior written consent of Lender, the entire Obligations may, at Lender’s option, be declared imme- diately dueand payable.
The problem with an encumbrance clause in foreclosure is that it can prevent you from taking out another loan against your property to reinstate your first mortgage. This clause, however, is not set in stone. A bank may be willing to waive it. If your mortgage includes an encumbrance clause, be sure to ask your bank about it and whether it would enforce the encumbrance clause if you took out another loan against the property.
Some mortgages include a provision that calls the loan due in the event of
“waste” being committed on the property. In plain English, this means that if you’re trashing the joint, the bank may be able to declare you in default and initiate foreclosure proceedings, so it doesn’t get in even worse shape by the time the bank tries to sell it.
Investigating your right to reinstate
Whether your bank wants to allow you to reinstate your mortgage may not be up to your bank to decide. If your mortgage contains a Borrower’s Right to Reinstate clause, you have the right to reinstate no matter what your bank has to say about it. Reinstating consists of making up all missed and late pay- ments and paying any interest, fees, and penalties that have accrued as a result of those late or missed payments (see Chapter 7 of this book).
Examine your mortgage for a Borrower’s Right to Reinstate clause, as shown in the following example:
Borrower’s Right to Reinstate.If Borrower meets certain conditions, Borrower shall have the right to have enforcement of this Security Instrument discontinued at any time prior to the earlier of: (a) 5 days (or such other period as applicable law may specify for reinstatement) before sale of the Property pursuant to any power of sale contained in this Security Instrument; or (b) entry of a judgment enforcing this Security Instrument. Those conditions are that Borrower: (a) pays Lender all sums which then would be due under this Security Instrument and the Note as if no acceleration had occurred; (b) cures any default of any other covenants or agreements; (c) pays all expenses incurred in enforcing this Security Instrument, including, but not limited to, reasonable attorneys’
fees; and (d) takes such action as Lender may reasonably require to assure that the lien of this Security Instrument, Lender’s rights in the Property and Borrower’s obligation to pay the sums secured by this Security Instrument shall continue unchanged. Upon reinstatement by Borrower, this Security Instrument and the obligations secured hereby shall remain fully effective as if no acceleration had occurred.
Deconstructing Your Deed of Trust
In some jurisdictions, you’re more likely to find a deed of trustthan a mortgage, but both documents essentially serve the same purpose: They name the property as collateral for the loan and provide the lender with some security for repayment.
What’s different about a deed of trust is that it enables an unbiased third party (the trustee) to act as an intermediary. The trustee holds the deed until the mortgage is paid in full. If you default on the mortgage, then the trustee has the power to sell the property and disperse the proceeds of the sale to the lien holder(s). Initially, banks loved the deed-of-trust arrangement, because it allowed for a faster recovery of the property in the event of a default, but the power-of-sale clause in most mortgages has the same effect.