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This week we talked about Mortgages. There are various types of mortgages, including fixed-rate mortgages and adjustable rate mortgages.
Beginning in 2005 – 2006, the U.S. housing market began to experience a “housing bubble”. Many homeowners loss their homes during this period.
This homework assignment will cover mortgages and the “housing bubble”. The homework assignment should consist of three paragraphs. The paragraphs should be three to five sentences long, not longer.
In the first paragraph, describe the “housing bubble”. This paragraph should include the definition for “foreclosure” and how “foreclosures” were a part of the housing bubble.
In the second paragraph, define and compare fix-rate mortgages and adjustable rate mortgages.
In the third paragraph, tell me why many economic experts believes adjustable rate mortgages contributed to the “housing bubble” and how a fixed rate mortgage could have had a different impact.
Secured
Transactions
Chapter 30
Secured Transaction
A transaction in which a debtor guarantees payment
or performance by pledging collateral that she owns
or in which she has a legal interest.
Secured Transactions
Collateral: Property subject to a security
interest.
Debtor: A person who owns or has rights in
the collateral, whether or not she is an
obligor.
Obligor: A party who owes payment or
performance of the secured obligation.
Security Interest
An interest in personal property or fixtures
(improvements to real property) securing payment
or performance of an obligation.
Security Agreement
An oral or written agreement creating or memorializing a
security interest a debtor agreed to grant to a secured
party.
Secured Party: A lender, seller, or any other
person who is a beneficiary of a security interest,
including a person to whom accounts or chattel
paper has been sold.
Creating Security Interest
For a security interest to become enforceable (attach):
(1)
the debtor must have rights in the collateral; and
(2)
the secured party must give value (e.g., extend credit) in exchange for an
interest in the collateral; and
(3)
either
(a)
a written or authenticated security agreement must
(i)
describe the collateral in such a way that it can be
reasonably identified and
(ii)
(b)
bear the debtor’s signature or be otherwise authenticated
by the debtor; or
the secured party must – depending on the type of collateral –
possess, control, or take delivery of the collateral.
Perfection
The process by which a secured party protects its
security interest in the collateral against the claims of
third parties who may look to the same collateral to
satisfy the debtor’s obligations to them.
Perfection
For every type of collateral, a secured party may perfect her security interest
in one or more of the following ways:
(1) filing a financing statement (see Exhibit 29-2) to notify third
parties of its security interest in the collateral,
(2) taking possession or delivery of the collateral,
(3) exercising control over the collateral,
(4) creating an automatically perfected security interest, or
(5) in the case of collateral subject to a certificate of title
statute or other statute that preempts UCC Article 9 as to
perfection, complying with the applicable statute.
Exhibit 29-3
Exhibit 29-3 identifies various types of collateral
Article 9 recognizes and the method(s) of
perfecting security interests in each type.
Perfected vs. Unperfected Security
Interests
A perfected security interest in collateral has priority
over an unperfected security interest in the same
collateral.
Conflicting Perfected Security
Interests
When two or more secured parties have perfected
security interests in the same collateral, generally the
first to perfect (or to file and subsequently perfect)
has priority.
Conflicting Unperfected Security
Interests
When two or more secured parties have unperfected
security interests in the same collateral, generally the
first to attach has priority.
Secured vs. Unsecured Creditor
Secured creditors have priority over unsecured
creditors and judgment creditors who have not begun
legal process to collect on their judgment.
Secured Party vs. Lienholder
A perfected security interest has priority over a
lienholder’s claim that arose after perfection. On the
other hand, a lienholder generally has priority over a
later-perfected security interest.
Buyer in the Ordinary Course of [the
Seller’s] Business
A person who buys goods in good faith and without
knowledge that the sale violates a third party’s
ownership rights or security interest, from a person
who is in the business of selling goods of the kind,
will take the goods free of any security interest,
even if
(1) the security interest is perfected, and
(2) the buyer knows of its existence.
Buyer Not in the Ordinary Course
A person who buys goods other than in the ordinary
course of the seller’s business will take the goods
free of any unperfected security interest, but
subject to any perfected one.
Information Requests
A party who is considering taking a security interest
is entitled by the UCC to obtain a certificate from the
relevant filing office identifying all perfected
financing statements on file for that debtor.
Debtor’s and Creditor’s Rights
Assignment: A secured party may, at its
discretion, assign part or all of a security interest
to another party.
Release:
A secured party may, at its discretion,
release part or all of the collateral indicated in a
financing statement.
Termination
When a secured debt is fully paid, the secured party
generally must send a termination statement to the
debtor and file a copy with the appropriate filing
office.
Default
A debtor’s failure to pay a debt when due or to
otherwise perform as the security agreement requires.
Self Help
Following the debtor’s default, a secured party can
repossess its collateral and either
(1)
retain it for satisfaction of the debt or
(2)
resell it and apply the sale proceeds to
the outstanding debt.
◼ A secured creditor wishing to exercise its right
to self-help repossession must be able to do so
without a breach of the peace.
Judicial Help
A secured creditor concerned about its ability to
effect self-help repossession without breaching the
peace may sue the debtor on the outstanding debt,
obtain a judgment, record the judgment and obtain a
writ of execution, and have the sheriff levy against
the collateral.
Foreclosure By Sale
A secured party choosing to sell its collateral must
(1) sell it in a commercially reasonable
manner, and
(2) notify the debtor of the time and
place of a public sale or the time after
which a private sale will occur.
deficiency judgment
If
the debt remains unsatisfied after the collateral
has been sold, the secured party may obtain a
deficiency judgment against the debtor.
Redemption
At any time before the secured party disposes of the
collateral, enters into a contract for its disposition, or
discharges the debtor’s obligation by retaining the
collateral after notice and consent, the debtor or any other
secured creditor of the debtor may redeem the collateral
by
(1) tendering performance of all obligations secured
by the collateral, and
(2) paying any expenses reasonably incurred by the
secured party in retaking and maintaining the
collateral.
Creditors’ Rights
and Remedies
Chapter 29
Lien
A claim against a debtor’s property that must be
satisfied before other creditors may claim the
property or its proceeds to satisfy the debtor’s
obligations to them.
Mechanic’s Lien
A lien on real property to ensure payment for work
performed and materials furnished in the repair or
improvement of real property.
Foreclosure
A statutory lienholder may, after the debtor defaults
and after proper notice, sell liened property, in
accordance with state law, to satisfy the unpaid debt
(plus interest and costs).
Judicial Lien
A lien a creditor obtains by judicial order.
Judicial Lien
Writ of Attachment: A court order, issued before the
creditor obtains a judgment against the debtor, directing
the sheriff to seize and take into custody the debtor’s
nonexempt property.
Writ of Execution: A court order, issued after the
creditor obtains a judgment against the debtor, directing
the sheriff to seize and sell the debtor’s nonexempt
property to satisfy the judgment.
Garnishment: Legal process a creditor may use to
seize the debtor’s property (e.g., wages) being held by a
third-party garnishee (e.g., the debtor’s employer).
Exemptions
Federal and state law exempt a substantial part of a
debtor’s wages or salary from attachment, execution,
or garnishment. State law typically exempts other
types of property from attachment, execution, or
garnishment.
Mortgage
A written instrument that gives the creditor an interest
or lien on the debtor’s real property as security for
payment of a debt.
Mortgage
Fixed-Rate Mortgage: Has an unchanging
rate of interest, so payments remain the same
for the duration of the loan.
Adjustable-Rate Mortgage: Mortgage in
which the rate of interest changes periodically.
Creditor Protection
Creditors take a number of steps to protect their
interest in a mortgage, including:
Requiring
mortgage insurance
Recording
the mortgage with the appropriate office
in the county where the property is located
Including
contract provisions,
prepayment penalty clause
such
as
a
Foreclosure
The legal process by which the lender repossesses
and auctions off the property that has secured a loan.
Ways to Avoid Foreclosure
Forbearance: A postponement of part or all
of the payments on a loan for a limited time.
Workout Agreement: A contract that
describes the respective rights of the borrower
and the lender as they try to resolve the
default without proceeding to foreclosure.
Ways to Avoid Foreclosure
Short Sale: The sale of the property for less
than the balance due on the mortgage loan.
Typically the borrower has to show some
hardship such as the loss of a job.
Right of Redemption: The right by which a
defaulting borrower can redeem the property
before the foreclosure sale by paying the full
amount of the debt.
Suretyship
An express promise by a third party (the surety) to a
creditor to be primarily responsible for the debtor’s
obligation to the creditor.
Guaranty
An express promise by a third party (the guarantor)
to a creditor to be secondarily responsible for the
debtor’s obligation to the creditor – that is, to pay the
debt if, but only if, the debtor defaults.
The statute of frauds requires a guarantor to sign
a writing evidencing the guaranty agreement.
Material Modification
Any material modification to the terms of the
underlying agreement between the principal and its
creditor not authorized by the surety or guarantor will
discharge a guarantor or surety in part or in whole.
Subrogation
The right of a guarantor or surety to stand in the
shoes of or be substituted for another party, typically
the creditor, and assume all of that party’s rights with
respect to a particular transaction or series of
transactions.
Reimbursement
The right of a guarantor or surety to be restored,
repaid, or indemnified for costs, expenses, or losses
expended or incurred on behalf of the debtor.
Homestead Exemption
Each state’s law permits a debtor to retain his family
home, either in its entirety or up to a specified dollar
amount, free from claims of unsecured creditors and
trustees in bankruptcy.
Personal Property Exemptions
In addition to the homestead, state statutes typically protect
(1) household furniture up to a specified dollar value,
(2) clothing and certain personal possessions, such as
family heirlooms,
(3) one or more vehicle(s) for transportation (at least up to
a certain dollar value),
(4) certain classified animals, including pets, and
(5) business or trade equipment used by the debtor (up to
a certain dollar value).
Bankruptcy
Law
Chapter 31
Liquidation
The sale of all nonexempt assets of a debtor and
distribution of the proceeds to the debtor’s creditors,
pursuant to Chapter 7 of the Bankruptcy Code.
The Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005
(BAPCPA), which took effect October 17,
2005, has sharply curtailed the availability of
liquidation bankruptcy to consumer debtors.
Reorganization
A form of bankruptcy, under Chapter 11 of the
Bankruptcy Code, whereby a debtor and its creditors
formulate a plan under which the debtor repays a
portion of its debts and is discharged from the
remainder.
Repayment
A form of bankruptcy, under Chapter 13 of the Bankruptcy
Code, whereby an individual debtor and his or her
creditors formulate a new payment schedule under which
the debtor pays all secured debts (and at least as much of
his or her unsecured debts as would be paid under Chapter
7) and is discharged from the remainder upon completion
of the repayment plan. Individuals with regular income
who owe fixed unsecured debts of less than $360,475 or
fixed secured debts of less than $1,081,400 may
voluntarily petition the bankruptcy court for relief under
Chapter 13.
Voluntary Bankruptcy
A debtor who finds himself unable to pay debts as
they become due may voluntarily petition for
bankruptcy relief.
Voluntary Bankruptcy
The petition must contain
(1)
a list of all secured and unsecured creditors, their addresses, and the amount owed to each;
(2)
a statement of the debtor’s finances;
(3)
a list of all property (real and personal) owned by the debtor, including property the debtor
claims as exempt;
(4)
a list of current income and expenses, including
(5)
an itemization of monthly income and
(6)
proof of payments received from employers within 60 days of filing;
(7)
proof of pre-petition credit counseling; and
(8)
a copy of the debtor’s federal income tax return for the most recent pre-petition tax year.
“Means Testing”
BAPCPA restricts the availability of Chapter 7
liquidation to debtors whose family income exceeds
the median family income for their state.
Involuntary Bankruptcy
A debtor’s creditors may file a bankruptcy petition
against the debtor.
Involuntary Bankruptcy
If the debtor has twelve or more creditors, three or more creditors having
unsecured claims totaling at least $14,425 must jointly file the petition.
If the debtor has fewer than twelve creditors, one or more creditors
having unsecured claims totaling at least $14,425 may file the petition.
If the debtor challenges the bankruptcy, the court will hold a hearing and
enter an order against the debtor if
(1)
the debtor is generally not paying debts as they become
due, or
(2)
a receiver, custodian, or assignee took possession of, or
was appointed to take charge of, substantially all of the
debtor’s property within 120 days before the involuntary
petition was filed.
Automatic Stay
Filing a bankruptcy petition suspends virtually all
other litigation and other actions by creditors or
potential creditors against the debtor or the debtor’s
property until the bankruptcy is resolved and the stay
is lifted.
Exempt Assets
The automatic stay does not affect domestic support
obligations or proceedings related to divorce, child
custody, visitation, or domestic violence.
Bankruptcy Estate
Once a bankruptcy proceeding begins, the following legal and equitable
interests in property, subject to certain exemptions, become property of the
bankruptcy estate:
(1) property currently held by the debtor,
(2) jointly-held property,
(3) certain property the debtor transferred to a third party shortly
before the bankruptcy filing,
(4) proceeds and profits from the use or sale of property of the
estate, and
(5) certain interests in property to which the debtor will become
entitled within 180 days after the filing.
Proof of Claim
To receive a portion of the debtor’s estate, a creditor
must typically file with the bankruptcy court clerk its
name and address and the amount the creditor claims
the debtor owes it. A creditor failing to timely file a
proof of claim may lose its right to share in
distributions from the bankruptcy estate.
Exempt Property
Unless superseded by an individual state’s exemptions, an individual debtor
is entitled to exempt from her bankruptcy estate limited dollar amounts of
the following:
(1) equity in the debtor’s homestead, burial plot, and other real
property;
(2) an interest in a motor vehicle;
(3) household goods and furnishings, apparel, appliances,
books, animals, crops, and musical instruments;
(4) jewelry;
Exempt Property
(5) tools of the debtor’s trade;
(6) certain life insurance contracts, and interests in
accrued dividends or interests therein;
(7) prescription health aids;
(8) Social Security and certain welfare benefits,
alimony and support payments, and certain
pension benefits; and
(9) rights in certain personal injury awards.
Means Testing
The trustee must promptly review the debtor’s
petition and accompanying materials and file a
statement with the court, copied to all creditors,
opining whether the debtor’s Chapter 7 filing is
presumptively abusive.
Domestic-Support Obligations
If the debtor owes a domestic-support obligation, the
trustee must notify the person entitled to receive the
support about the debtor’s bankruptcy filing.
Trustee’s Powers
Power to Possess: The trustee may require
persons holding the debtor’s property when the
debtor files her bankruptcy petition to deliver the
debtor’s property to the trustee.
Voidable Rights: Because the trustee “stands in
the debtor’s shoes,” any reason the debtor could
use to reclaim her property is equally valid for
the trustee.
Trustee’s Powers
Preferences: A debtor may not transfer property or make a
payment favoring one creditor over others.
giving any creditor, in the last 90 days before the
debtor filed her petition, more than it would have
received as a result of the bankruptcy proceedings or
to or for the benefit of an insider made in the last 365
days before the debtor filed her petition.
Fraudulent Transfers: The trustee may avoid transfers the
debtor made or obligations she incurred within two years
of filing her petition if she made or with the intent to
hinder, delay, or defraud a creditor.
Property Distribution
Secured creditors have priority over unsecured
creditors to the proceeds from the disposition of
secured collateral.
After
paying all administrative expenses
associated with the bankruptcy – including court
costs, trustee fees, and attorneys’ fees – proceeds
from the remainder of the estate are distributed
among unsecured creditors according to a strict
categorization of claims.
Discharge
With certain exceptions, any debts not satisfied by
the liquidation proceeds are discharged –
meaning that the debtor is no longer obligated to
repay them.
Discharge
A number of debts are nondischargeable, including back taxes,
alimony and child support, student
loans, and consumer debts incurred to
purchase “luxury” items or in exchange
for a large cash advance. (See pp. 59293)
Revocation of Discharge
The bankruptcy court may revoke a discharge within
one year if it discovers that the debtor was fraudulent
or dishonest during the bankruptcy proceedings.
