The most common forms of security over real estate are:
A mortgage is the most common means of effectuating real estate financing. It is a transfer of an interest in real estate to a lender as security for repayment of a loan or other obligation.
The deed of trust is a particular kind of mortgage pursuant to which a borrower transfers an interest in real property to a trustee designated to hold title to the property for the benefit of the lender pending repayment of a loan or other obligation. In a deed of trust scenario, if the borrower defaults on its obligation, the trustee may be compelled to sell the property and pay any outstanding obligations to the lender from the sale proceeds or foreclose and transfer title to the lender.
The mortgage or deed of trust is customarily recorded with the applicable county recorder where the property is located. The main difference between the mortgage and the deed of trust is the manner of enforcement following the borrower’s failure to repay its obligations. The use of a mortgage versus of deed of trust varies by state, as a mortgage is the custom in certain states while a deed of trust is the custom in other states.
Another form of security that is common in real estate development projects is a pledge of ownership interests in the entity that owns the underlying real estate rather than a mortgage or deed of trust on the real estate itself. Such a loan is referred to as a mezzanine loan. If the borrower defaults on its loan obligations, the lender may exercise its rights under pledge of ownership interests and take ownership and control of the entity owning the underlying real estate and thereby take ownership of and control of the real estate itself.
Last modified 22 Mar 2024
Real estate includes the land, the buildings affixed to it, and fixtures which form part of those buildings. A fixture is an item of tangible personal property that is permanently attached to a building or land so that it becomes part of the real estate.
Last modified 22 Mar 2024
The laws of each state within the United States generally recognize the concept of fiduciary ownership, whereby legal ownership and beneficial interest are separated. The trustee (fiduciary owner) becomes the owner of the property as far as third parties are concerned, and the beneficiary can expect the trustee to manage the trust property for the benefit of the beneficiary.
Last modified 22 Mar 2024
In the United States, debt can be, and frequently is, traded between lenders. A mortgage can be transferred by assignment (which is frequently made of record in the same manner as the mortgage being assigned) and a note can be transferred by negotiation (which is effectuated by way of an allonge or endorsement attached to the note). Large loans in the United States may be syndicated so that one lender acts as agent for a group of lenders such that the mortgage would be in the name of the lead lender in its capacity as agent for the others. In such a case, a lender would be able to trade its interest in the loan to another lender by an assignment that would not need to be recorded.
Last modified 22 Mar 2024
Depending on the state in which any mortgaged property is located and whether any portion of the mortgaged property is designated for residential use, a foreign lender may need to obtain a license in order to lend in such state. While lending activity is generally not implicated, in certain circumstances a federal statutory requirement to file a national security clearance process overseen by the US federal government body known as the Committee on Foreign Investment in the United States (CFIUS) may be required.
Last modified 22 Mar 2024
Mortgage instruments as well as all documents intended to be recorded in the public records require the acknowledgment/notarization of the parties executing such document. The nominal amount charged by notaries, in each case licensed by the applicable states, may vary.
The amount of mortgage fees and taxes also vary from state to state (and local jurisdictions within each state). Unlike notarial fees, mortgage recording taxes may amount to substantial sums. For instance, under New York state law, for loans of a certain size, a mortgage recording tax of nearly 3% of the principal balance secured must be paid when a new mortgage is created and recorded against a property.
Last modified 22 Mar 2024
As with all corporate transactions, the granting of a security interest in property requires the officers of such entity to comply with its applicable articles of incorporation and by-laws, the laws or regulations of the state governing such transaction and those of the federal government, and any contract that the corporation has with another party. The debtor should also obtain a copy of a resolution of the board of directors authorizing the corporation to grant the security over its real estate assets.
Last modified 22 Mar 2024
Depending on the state in which any mortgaged property is located and whether any portion of the mortgaged property is designated for residential use, a foreign lender may need to obtain a license in order to lend and receive repayment due under the loan documents. While lending activity is generally not implicated, in certain circumstances a federal statutory requirement to file a national security clearance process overseen by the US federal government body known as the Committee on Foreign Investment in the United States (CFIUS) may be required.
Last modified 22 Mar 2024
A creditor can agree to subordinate its security interest to that of another creditor by agreement. The applicable agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement as between the two contracting parties.
Liens resulting from a property owner’s failure to pay real estate taxes levied by local authorities or common area charges due under a condominium regime may have ‘super-priority’ over liens for mortgage debt, notwithstanding the fact that such mortgage lien may have been granted prior in time to the filing of such tax or condominium lien. In addition, local laws vary as to the priority given to a ‘mechanic’s lien’ filed as a result of an owner’s failure to pay contractors making improvements to a property.
Last modified 22 Mar 2024
Each state has its own rules regarding conflicts of laws. In many instances, the validity of a provision stating that a foreign law should govern an agreement will be ascertainable only in light of the facts and circumstances of the individual case indicating the strength of the nexus to the foreign jurisdiction.
Last modified 22 Mar 2024
Recordation of a mortgage is generally a prerequisite to a validly perfected mortgage lien in real estate. However, failure to perfect the lien does not in fact make such lien invalid. The lien could be perfected at a later date subject to arguments that upon a bankruptcy filing of the mortgagor, the granting of such mortgage constituted a fraudulent conveyance.
Last modified 22 Mar 2024
A lender holding security over real estate does not normally incur environmental liability relating to the making of a mortgage loan, provided the lender does not itself cause or knowingly permit environmental damage to the subject property. The lender also may be exempt from liability because the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) exempts from liability anyone ‘who, without participating in the management of a … facility, holds indicia of ownership primarily to protect his security interest in the … facility.’
Notwithstanding this exemption, the lender may face potential liability for clean-up costs as an owner or operator under CERCLA if it takes possession of a contaminated site upon default of the owner’s underlying loan obligation or subsequently acquires title to such a site through foreclosure or deed in lieu of foreclosure.
In 1996, Congress restricted the meaning of ‘participating in the management of a … facility’ to limit the risk of liability for foreclosing lenders. Even with these measures in place, it is common for commercial mortgage lenders to receive an indemnity from the principal of the property owner or arrange for environmental insurance coverage to mitigate any potential liability.
Last modified 22 Mar 2024
Each state and local jurisdiction imposes different procedural hurdles before a security interest in real estate can be enforced. Some states require judicial intervention while others permit non-judicial remedies.
In most cases, the borrower must be given notice of default and prescribed notice periods must be complied with before a lender can enforce a security interest in real estate. Statutory notice periods vary in each jurisdiction but generally 30 days' notice will be required before a lender can enforce its remedies over such real estate security (such as exercising its power of sale).
Loan agreements and security documents will typically describe the events of default that trigger a lender’s right to enforce its remedies. Events of default will usually include failure to repay the loan or any periodic payment due on time, and breaches of warranties or covenants.
Last modified 22 Mar 2024
Lenders to troubled real estate owners may, to the extent the mortgage agreement provides, appoint a receiver or agent to collect rents and manage the property so as to protect the relevant collateral. The receiver, though not actually an agent of the lender, will serve to preserve the asset while foreclosure proceedings may be pursued.
Last modified 22 Mar 2024
Generally, the onset of a borrower’s insolvency does not affect the validity of a mortgage granted to secure an obligation. However, the filing of any form of bankruptcy petition automatically stays foreclosure proceedings against the borrower. Nonetheless, courts may grant the lender relief from the automatic stay and the lender’s security may be enforced pursuant to the general enforcement rules.
Last modified 22 Mar 2024
Following the commencement of insolvency proceedings, creditors of the bankrupt debtor will be paid-off in the order of their lien priority. The principle of ‘prior in time, prior in right’ determines the order of priority, unless a subsequent creditor fits within the protection of the local recording statute or the creditors have otherwise agreed pursuant to a separate agreement. In a ‘notice’ jurisdiction, a subsequent creditor has priority if it does not have notice of the prior interest. In a ‘race’ jurisdiction, a subsequent creditor has priority if its lien has been recorded first. In a ‘race-notice’ jurisdiction, a subsequent creditor has priority if its lien has been recorded first and such creditor has no notice of any prior interest.
Last modified 22 Mar 2024
Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?
In the United States, debt can be, and frequently is, traded between lenders. A mortgage can be transferred by assignment (which is frequently made of record in the same manner as the mortgage being assigned) and a note can be transferred by negotiation (which is effectuated by way of an allonge or endorsement attached to the note). Large loans in the United States may be syndicated so that one lender acts as agent for a group of lenders such that the mortgage would be in the name of the lead lender in its capacity as agent for the others. In such a case, a lender would be able to trade its interest in the loan to another lender by an assignment that would not need to be recorded.
Last modified 22 Mar 2024