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Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
Chapter 20
Mortgages, Security Interests, and the 21st Century Financial Crisis
I. Key Terms
Acceleration (p. 474) Home equity loan (p. 472)
Adjustable-rate mortgage Interest-only mortgage (p. 469)
(ARM) (p. 469) Inventory (p. 483)
Asset-backed security (p. 477) Junior mortgage (p. 472)
Assume the mortgage (p. 474) Liar loan (p. 478)
Attachment (p. 484) Lien (p. 468)
Balloon-payment mortgage (p. 470) Mortgage (p. 472)
Bonus-malus (p. 483) Mortgage-backed security (p. 477)
Buyer in the ordinary course Mortgagee (p. 468)
of business (p. 484) Mortgagor (p. 468)
Collateral (p. 468) NINJA loan (p 478)
Construction loan (p. 471) Participation loan (p. 471)
Consumer goods (p. 483) Perfected (p. 483)
Conventional fixed-rate Purchase money security
mortgage (p. 469) interest (p. 484)
Deed of trust (p. 471) Qualified mortgage (p. 480)
Dodd-Frank Wall Street Reform Recovery (p. 475)
and Consumer Protection Act (p. 480) Reverse mortgage (p. 471)
Equipment (p. 483) Second mortgage (p. 472)
Equity of redemption (p. 472) Secured loan (p. 468)
Farm products (p. 483) Secured party (p. 483)
Federal Housing Finance Securitization (p. 477)
Agency (FHFA) (p. 479) Security (p. 468)
Fixtures (p. 483) Security agreement (p. 483)
Flexible-rate mortgage (p. 469) Security device (p. 468)
Floating lien (p. 485) Security interest (p. 468)
Foreclosure (p. 474) Subject to the mortgage (p. 474)
Government-sponsored enterprise Troubled Asset Relief Program
(GSE) (p. 477) (TARP) (p. 480)
Graduated-payment mortgage (p. 469) Unsecured loan (p. 468)
Home Affordable Modification Variable-rate mortgage (p. 469)
Program (HAMP) (p. 479)
Home Affordable Refinance
Program (HARP) (p. 479)
II. Learning Objectives
1. Differentiate between a secured and an unsecured loan.
2. Identify the types of mortgages that are available to borrowers.
3. Explain the legal effect of recording a mortgage.
4. Describe the rights and duties of the mortgagor and those of the mortgagee.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
5. Differentiate between a financial recovery and a change in the initial conditions.
6. Identify short-term solutions to the 21st century financial crisis.
7. Explain the long-term solutions to the 21st century financial crisis.
8. Describe how a security interest is created for personal property.
9. Decide whether security interests are perfected.
10. Determine priorities when parties claim a security interest in the same property.
III. Major Concepts
20-1 A Primer on Real Property Finance and Security
Individuals and institutions that lend money need some assurance that they will have their
money returned to them. Security devices serve as this means of assurance.
20-2 The 21 st
Century Financial Crisis
A system must not recover from a crisis; it must move away from the initial conditions
that caused the crisis in the first place. This is true of the current 21st century financial
crisis just as it is true of any healthy complex adaptive system (CAS). Like the crisis of
1929, the crisis of 2008 is a global crisis that must be fixed by reengineering the initial
conditions that started the crisis. Some short-term solutions to the crisis include the
takeover of Fannie and Freddie by the Federal Housing Finance Agency, creation of
HAMP and HARP, passage of the Emergency Economic Stabilization Act, establishment
of the Troubled Asset Relief Program, and passage of the Dodd-Frank Act. Long-term
solutions to the crisis must address the underlying cracks in the foundation of the
socioeconomic system that led not just to this crisis but to a series of overlapping
disasters that have repeated themselves in a cyclical fashion over the past century.
20-3 Personal Property as Security
When personal property is purchased on credit, the seller frequently retains a security
interest in the property. Property that is subject to a security interest is called collateral. A
security interest is created by a written agreement called a security agreement, which
identifies the goods and is signed by the debtor. To be effective between debtor and
creditor, a security interest must be made legally enforceable. This legality is known as
attachment. To be effective against third parties who might also claim the secured
property, the creditor must perfect the security interest. Perfection is accomplished by
filing a financing statement, by attachment alone in certain cases, or by taking possession
of the collateral.
IV. Outline
I. A Primer on Real Property Finance and Security (20-1)
A. Real Property as Security
1. Security is the assurance that a creditor will be paid back for any money loaned or for
credit extended to a debtor.
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distribution without the prior written consent of McGraw-Hill Education.
Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
2. A security device is a way for creditors to get their money back in case the borrower
or debtor does not pay.
3. A secured loan is one in which creditors have something of value, usually called
collateral, from which they can be paid if the debtor does not pay.
4. The right to use the collateral to recover a debt is called the creditor’s security
interest.
5. An unsecured loan is one in which creditors have nothing of value that they can
repossess and sell to recover the money owed to them by the debtor.
6. When real property is used as security for a loan, a device known as a mortgage is
used to establish collateral for the loan.
7. A mortgage is a transfer of an interest in property for the purpose of creating security
for a debt.
8. If sale of the mortgaged property does not satisfy a debt, the mortgagor will still owe
the balance.
B. Mortgage Costs
1. Mortgages have many costs associated with them including application fees, appraisal
fees, credit report fee, and inspection fees.
2. Sometimes a borrower pays interest in a lump sum up front, called points, to get a
lower rate of interest.
3. A point is a one-time charge equal to 1 percent of the principal amount borrowed.
C. Types of Mortgages
1. A conventional mortgage involves no government backing by either insurance or
guarantee and has interest rates that stay the same during the life of the mortgage..
2. A variable- or flexible or adjustable-rate mortgage has a rate of interest that changes
according to fluctuations in the index to which it is tied but may have a maximum rate
that cannot be exceeded.
3. In an interest-only mortgage, the borrower will agree to pay only the interest on the
loan for a set period of time.
4. A graduated-payment mortgage has a fixed interest rate during the life of the
mortgage; however, the monthly payments made by the mortgagor increase over the
term of the loan.
5. A balloon-payment mortgage has relatively low fixed payments during the life of the
mortgage followed by one large final payment.
6. A reverse mortgage is a type of loan that allows older home owners to convert some
of the equity in their home into cash with the loan being repaid when the property is
sold or on the occurrence of some other specified event.
7. In a participation loan, the borrower will transfer certain ownership (or equity) rights
to the lender; and, in exchange, the borrower will negotiate lower interest rates or a
lower down payment.
8. A construction loan involves staggered payments at various stages of the building
process.
9. In some states, a deed of trust is used instead of a mortgage.
a. Under a deed of trust, the mortgagor conveys his or her interest in the property to
a trustee.
b. If the debtor defaults the trustee can sell the property for the benefit of creditors.
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Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
10. When a borrower does not qualify for a regular mortgage, he or she might get a
subprime loan with a higher interest rate.
11. A junior mortgage, also called a second mortgage, is a mortgage subject to a prior
mortgage.
12. A home equity loan is an example of a junior mortgage.
D. Recording the Mortgage
1. A mortgage must be in writing and delivered to the recorder’s office in the county in
which the property is located.
2. Recording a mortgage notifies any third party who may be interested in purchasing
the property or in lending money to the owner that the mortgagee has an interest in
the real property covered by the mortgage.
3. Failure to record may result in a later mortgage being given priority.
E. Rights and Duties of the Mortgagor
1. The mortgagor has the right to possess the property.
2. The mortgagor has the right to income produced by the property.
3. The mortgagor has the right to use the property for a second or third mortgage.
4. The mortgagor has the equity of redemption, which is the right to pay off the
mortgage in full, including interest, and to thus discharge the debt in total.
5. The mortgagor has the duty to make payments on time.
6. Mortgagors must preserve and maintain the mortgaged property for the benefit of the
mortgagee’s interest and security.
7. The mortgagor is often required to insure the property for the benefit of the
mortgagee to the amount of the mortgaged debt.
8. The mortgagor must pay all taxes and assessments that may be levied against the
property.
F. Rights and Duties of the Mortgagee
1. The mortgagee has the unrestricted right to sell, assign, or transfer the mortgage to a
third party.
2. Mortgagees have the right to receive each installment payment as it falls due.
3. Frequently, mortgagees will include a term in the mortgage agreement allowing an
acceleration of the debt if the mortgagor fails to meet an installment payment.
4. If the mortgagor has defaulted or has failed to perform some other agreement in the
mortgage, the mortgagee has the right to apply to a court to have the property sold.
5. Mortgagees cannot lose their interest in property without due process of law.
6. Both state and federal legislation prohibits lenders from discriminating against
borrowers because of race, creed, color, sex, or ethnic background.
G. Purchase by Mortgage Takeover
1. Mortgages often contain a clause providing that if the property is sold, the mortgage
becomes due and payable; but in the absence of such a clause, the property may be
sold with the mortgage remaining on it.
2. In purchasing a property already mortgaged, the buyer will either assume the
mortgage or take the property subject to the mortgage.
II. The 21st Century Financial Crisis
A. The Nature of the Crisis
1. There is an argument that tetonic shifts, such as shifts in agriculture, transportation,
health, and demographics, are caused by human activity.
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Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
2. The argument goes on to propose that tetonic shifts have given birth to another player
on the global scene, a socioeconomic, cultural system created by humans which has
taken on a life of its own and may be referred to as a biogea.
3. Politicians work to fix the system created by economists resulting in opposition to
laws passed by politicians and lawyers, and emerging within is a level of interaction
between the people and the system itself.
4. The system, which has taken on its own existence, operates in a highly reflexive
manner leading to unpredictable, unintended consequences.
B. The Economic-Political Dimension of the Crisis
1. Another argument is that the economic crisis in the United States mirrors almost
exactly the crisis that spelled the end of the Soviet Union.
2. Issues in the United States that were similar to conditions in the Soviet Union were:
a. (1) crude oil fabrication was down in the United States;
b. (2) the failure to keep abreast of technological advances threatened to intensify
the inequity in foreign trade;
c. (3) the American response to the “war on terror” caused a huge increase in
military spending;
d. (4) inflation had intensified the level of foreign debt; and
e. (5) the setbacks in Iraq and the destruction caused by Hurricane Katrina sparked
new waves of insecurity and angst at home.
3. As the above elements combined, they eroded confidence and led to reckless
speculation in real property and foolish get-rich-quick schemes typifying the 21st
century financial crisis.
4. People blamed Wall Street and Washington focusing on things like subprime
mortgages and balloon payment schemes while ignoring the big picture.
C. The Causes of the Crisis
1. Subprime mortgages were but the most obvious sign of a deeper problem.
2. Smaller problem causes that should also be examined include the creation and later
mismanagement of Fannie Mae and Freddie Mac, the development of securitization
(including both mortgage backed securities and asset backed securities), and the
increased use of faulty loans (including subprime loans, liar loans, and NINJA loans).
3. The Federal National Mortgage Association (Fannie Mae) was chartered by the
Reconstruction Finance Corporation during the Great Depression in 1938.
a. Fannie Mae does not make mortgage loans and instead purchases loans made
based on strict guidelines set up by the Federal Housing Association (FHA) and
the Veterans Administration (VA).
b. Congress had not properly anticipated the amount of debt that Fannie Mae would
accumulate.
4. To remedy the situation caused by Fannie Mae, Congress created the Government
National Mortgage Association (Ginnie Mae) which took over much of Fannie’s debt
and freeing Fannie to buy mortgages insured by the government.
5. Congress also created the Federal Home Loan Mortgage Corporation (Freddie Mac)
to help support the mortgage market.
6. The government lifted some of the restrictions on Fannie and Freddie, permitting
them to buy loans that had not fallen within FHA or VA guidelines and then
authorizing them to participate in securitization.
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Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
7. With the idea that what worked for mortgages would work for car loans, construction
loans, and other types of loans, the popularity of asset-backed securities grew.
8. Original lenders began to care less and less about whether the borrowers were
financially qualified to pay back the loans because the lenders were passing the risk
on to those who purchased the securities.
9. The use of mortgage and asset backed securities grew by 230 percent between 2000
and 2006, amounting to just about $2.7 trillion.
10. The crash occurred when the high-risk borrowers could not make their payments
resulting in the collapse of land values.
11. A push toward deregulation encouraged the banks and other lenders to issue subprime
loans as a way to bring new home owners into the market while simultaneously
helping the lenders build handsome portfolios.
12. An unintended consequence of this strategy was an increase in the number of liar
loans and NINJA loans that appeared on the scene with increased regularity.
a. A liar loan is one that deliberately misstates the qualifications of a borrower to
push a loan through the approval process.
b. A NINJA loan is one that has been negotiated by a borrower with “no income, no
job, and no assets.”
D. The Short-Term Solutions to the Crisis
1. The crisis erupted when so many of borrowers could not make mortgage payments,
and the mortgage securities market began to collapse leading to a decline in the value
of real property which accelerated the collapse.
2. The government took over Fannie Mae and Freddie Mac.
3. The government created the Federal Housing Finance Agency (FHFA).
4. The FHFA had power to regulate Fannie Mae and Freddie Mac and was charged with
reestablishing public faith in the mortgage market.
5. The two major programs operated under the FHFA are the Home Affordable
Refinance Program (HARP) and the Home Affordable Modification Program
(HAMP).
a. HAMP was established to support the efforts of homeowners who, though in
default, wished to continue to make payments on their mortgages.
b. HARP is open to homeowners whose loans are owned by Fannie or Freddie and
was designed for homeowners who are not in default on their mortgage payments
but owe more to the bank or mortgage company than the house is actually worth.
c. HARP permits qualified individuals to receive a break on out-of-pocket mortgage
expenses by introducing a lower interest rate, reducing each monthly mortgage
payment, obtaining a constant fixed-rate mortgage, or stockpiling equity at a more
rapid rate.
6. Efforts are underway at the FHFA to revitalize Fannie Mae and Freddie Mac and to
reassure private lenders that they need not be as strict in their mortgage application
requirements as they have been in the wake of the financial crisis.
7. The Emergency Economic Stabilization Act of 2008 (EESA) was a much criticized
move made by the government.
a. Under the EESA, the Federal Reserve Bank was given the authority to provide
banks with an increased interest rate on those funds that the banks place on
deposit with the Fed both as a part of a bank’s reserves and its excess reserves.
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Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
b. The Troubled Asset Reform Program (TARP) was part of EESA and was designed
to allow the government to buy many of the so-called troubled assets from the
securitization epidemic.
c. The TARP fund is managed by the secretary of the Treasury who has the duty to
make certain that any institution that receives funds under the program agrees to
permit the federal government to purchase non-voting stock in that institution.
d. Not all of the TARP assets, however, went directly to the purchase of these
troubled assets and, instead, went indirectly into the bailout of several large firms
such as General Motors and Chrysler and to financial institutions such as AIG and
Bank of America.
e. The EESA included safety valves designed to make sure bailout funds were used
properly.
(a) IN managing the TARP funds, the Secretary of the Treasury is required to
consider input from a wide variety of high-level sources.
(b) The secretary’s access to the TARP funds was doled out in stages, except for
the first step, and each required outside approval.
f. EESA limited compensation received by executives of institutions that were
granted TARP funds.
8. The most sweeping reform bill to pass Congress and to be signed into law by the
President is the Dodd-Frank Wall Street Reform and Consumer Protection Act (The
Dodd-Frank Act).
a. Title XIV of the act is also called the Mortgage Reform and Anti-Predatory
Lending Act.
b. The act places requirements on lenders in relation to determining whether
potential borrowers have the ability to repay loans.
c. The act outlaws or limits certain types of mortgages.
d. The act creates a category of mortgages called qualified mortgages which have
met the good faith requirements outlined in the act.
e. The Act outlaws certain types of lender-related compensation.
f. A new rule requires that institutions that engage in securitization keep an
economic stake in the assets that they securitize.
E. The Long-Term Solutions to the Crisis
1. Previous solutions are short-term therapy.
2. One thought is that the system must be changed and activities abandoned that caused
the initial problem.
3. Another theory is that economic collapse is inevitable.
a. Collapse would lead to a new level of severe governmental regulation that would
do practical good.
b. Another post-collapse proposed change involves changing the nature of the
corporation from one that is driven by the need for profit to one that is driven by
the need to provide welfare and income for its employees.
4. In regard to a quantifiable, applied, practical solution, Roubini and Mihm make
several proposals.
a. They suggest that Congress make it advantageous for our largest financial
institutions to subdivide and reorganize themselves into smaller, independent units
eliminating the “too-big-to-fail” syndrome.
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distribution without the prior written consent of McGraw-Hill Education.
Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
b. They suggest a drastic reconfiguration of executive bonus packages meant to
encourage solid, long-term investment.
III. Personal Property as Security (20-3)
A. Article 9
1. Article 9 of the UCC brings all security interests together under one law.
2. Property subject to the security interest is called collateral.
3. A security agreement is a written agreement identifying the goods.
4. The lender or seller who holds the security interest is known as the secured party.
5. A security interest is said to attach when the secured party has a legally enforceable
right to take that property and sell it to satisfy a debt.
6. A security interest is said to be perfected when the secured party has done everything
that the law requires to give the secured party greater rights to the goods than others
have.
B. Security Agreement
1. A security agreement is an agreement that creates a security interest.
2. It must be in writing, signed by the debtor, and contain a description of the collateral
that is used for security.
C. Attachment of a Security Interest
1. To be effective, a security interest must be legally enforceable against the debtor, a
process known as attachment.
2. Attachment occurs when three conditions are met:
a. The debtor has some ownership or possessive rights in the collateral.
b. The secured party transfers something of value to the debtor.
c. The secured party takes possession of the collateral or signs a security agreement
that describes the collateral.
3. Through a floating lien a creditor may obtain a security interest in property acquired
by a debtor after the date of an original agreement.
D. Perfection of a Security Interest
1. To preserve the right to first claim on the collateral, creditors must perfect their
interests.
2. A security interest can be perfected by filing a financing statement in the appropriate
government office, by attachment alone, or by possession of the collateral.
3. Security interests in most kinds of personal property are perfected by filing a
financing statement in a public office.
4. A purchase money security interest in consumer goods is perfected the moment it
attaches, with the exception of motor vehicles and fixtures.
5. Security interests on motor vehicles are perfected by making a note of the lien on the
certificate of title.
6. Security interests on fixtures are perfected by filing a financing statement with the
registry of deeds where the land is located.
7. A security interest may be perfected when the secured party takes possession of the
collateral.
E. Priorities and Claims
1. Sometimes, two or more parties claim a security interest in the same collateral.
2. The UCC helps to resolve those conflicts.
F. Default of the Debtor
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Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
1. If a debtor defaults by failing to make payments when due, the secured party may
satisfy the debt by taking possession of the collateral.
2. Because of the difficulties of taking possession upon default, the perfection of a
security interest by possession is better than other types of perfection.
3. After repossessing the goods, the secured party may sell them at a public auction or
private sale.
4. If repossessed goods are consumer goods and the debtor has paid 60 percent or more
of the cash price of a purchase money security interest, the secured party cannot keep
the goods; and they must be sold.
V. Background Information
A. Cross-Cultural Notes
1. From 1991 through 2001, Japan suffered economic problems and price deflation.
This period has come to be known as “Japan’s Lost Decade.” Even in the 2000’s,
Japan has not fully recovered. One problem was that the Japanese banks had made a
number of questionable loans. Another problem was that in the mid-1990s, real estate
in Japan lost nearly two-thirds of its value.
2. Americans purchasing a vacation home in a foreign country may encounter surprises.
Most U.S. banks refuse to lend for international home purchases. Foreign banks that
lend to U.S. citizens may require a high down payment and higher interest rates.
Additionally, 30 year fixed-rate mortgages are uncommon in many countries with the
standard being an adjustable-rate with a 20 to 25 year term. In some countries
noncitizens are not allowed to buy real estate, so investigation into local restrictions is
important. For additional information, see the article “Consider Cash when Buying a
Vacation Home Overseas” from the Wall Street Journal at
http://www.wsj.com/articles/consider-cash-when-buying-a-vacation-home-overseas-1
428419990.
3. The cost of owning a home in Taiwan nearly doubled from 2005 to 2014. Additional
information regarding the high cost of homeownership is available at
http://www.brookings.edu/research/topics/housing-and-mortgage-markets.
B. Historical Notes
1. In the fourteenth and fifteenth centuries, under British common law, if the mortgagor
did not make the final payment on the law day, all rights to the property were
forfeited, even if the mortgagor tried to make the payment but could not locate the
mortgagee to do so. By the seventeenth century, the courts had begun allowing the
mortgagor to redeem the property within a reasonable time after law day, a practice
that became known as the mortgagor’s “equity of redemption.”
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Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
2. In the seventeenth century, British courts began to make provisions for upholding the
rights of both mortgagees and mortgagors. Mortgagors were granted the right to a
reasonable time in which to redeem their property after defaulting. However, if a
mortgagor did not pay the loan on a specific day and did not bring a suit to redeem
the property, a mortgagee could present a bill to the courts that included the details of
the mortgagor and default. The court would then order the mortgagor to pay the debt
within a fixed period of time. Failure to comply with a court order meant that the
mortgagor’s right to redeem was barred forever, a practice known as strict
foreclosure.
C. State Variations
1. Connecticut, Minnesota, Massachusetts and Washington still follow the English
Common Law rule that grants the mortgagee legal “title” to the property until the
mortgage has been satisfied or foreclosed.
2. South Dakota statute specifically requires that the sheriff’s mortgage foreclosure sale
take place on the front steps of the courthouse.
3. Security interests in certain collateral may not be perfected by the filing of a UCC
financing statement. For example, a security interest in a motor vehicle may only be
perfected by noting the lien on the certificate of title.
4. Foreclosure is much slower in states that require a judge’s approval for a foreclosure.
VI. Terms
1. Debt is a modification of the French dette, derived from the Latin debitum, meaning
“to owe.” Oddly, debt, which first appeared in the fifteenth century, was later
promoted by language reformers as the correct spelling of dette.
2. Mort means death and gage means pledge. Originally, a mortgage was a “dead
pledge,” meaning that the mortgagor could not use the property during the term of the
mortgage and would lose it altogether on default. Today, a mortgagor can use the
property during the term of the mortgage.
3. A conventional mortgage is often referred to as a fixed-rate mortgage. A flexible-rate
mortgage is the same as an adjustable-rate mortgage (ARM).
4. The management of money is commonly called finance. The word finance dates to
the medieval period when kingdoms collected monetary tributes. Any method of
ending such an obligation was called finance, from the Old French finer, meaning “to
end.”
VII. Related Cases
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Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
1. Laber took out a mortgage on property that included a gas station and other buildings.
The mortgage had a clause that stated that the buildings could not be destroyed
without the consent of the mortgagee, and it contained an acceleration clause in the
event of default. Laber, however, razed the buildings and the mortgagee sued to
foreclose and accelerate. The court ruled that even though the vacant lot was worth
more than the amount due on the mortgage, once the mortgage’s terms were
breached, the mortgagee was entitled to foreclosure. Laber v. Minassian, 511
N.Y.S.2d 516 (N.Y. App. Div. 1987).
2. An individual purchased jewelry from a Wisconsin retailer with a bad check and then
pawned the jewelry in Minnesota, where it was seized by police. Dispute arose as to
who had priority to the jewelry: the Wisconsin retailer or the Minnesota pawn shop.
The court ruled that the pawnshop did perfect its interest under Minnesota law by
retaining possession. Therefore, the pawn shop had priority over the jeweler’s later
filed security interest. National Pawn Brokers Unlimited v. Osterman, Inc., 500 N.W.
2d 407 (Wis. Ct. App. 1993).
3. In the case of In re Millivision, Inc., 474 F.3d 4 (1st Cir. 2007), a bankruptcy trustee
prevailed against debtors who failed to file a financing statement prior to the
bankruptcy filing. The court noted that the debtors could have prevailed had the
financing statement been filed prior to the institution of the bankruptcy proceeding.
VIII. Teaching Tips and Additional Resources
1. Discuss with students problems faced by senior citizens. Additional information
regarding reverse mortgages used at times by senior citizens can be found on the
website of the Federal Trade Commission at
http://www.consumer.ftc.gov/articles/0192-reverse-mortgages.
2. FHA mortgage guidelines are available at
http://www.fha.com/fha_loan_requirements.cfm.
3. Information regarding eligibility for VA loans is available from the Department of
Veterans Affairs at http://benefits.va.gov/homeloans/.
4. The Internet site for the Federal Home Loan Mortgage Corporation, along with
articles regarding the company, can be found at http://www.freddiemac.com/.
5. General information about the Fannie Mae enterprise is available at
http://knowyouroptions.com/about-fannie-mae. Information on options when faced
with home foreclosure are available from Fannie Mae at
http://knowyouroptions.com/.
6. States generally provide information regarding filing financing statements. For
example, information from the Tennessee Secretary of State is available at
https://tnbear.tn.gov/UCC/Ecommerce/UCCFilingInstr.aspx. Forms for the state of
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Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
New York are available at http://www.dos.ny.gov/corps/uccforms.html. Consider
having students locate forms and instructions for their home states.
7. Information on vehicle repossession is available from the Federal Trade Commission
at http://www.ftc.gov/bcp/edu/pubs/consumer/autos/aut14.shtm.
8. Additional resources for information on the financial crisis are available at
http://www.huffingtonpost.com/news/wall-street.
9. Information on the economic crisis and market upheavals is available from the New
York Times at
http://topics.nytimes.com/top/reference/timestopics/subjects/c/credit_crisis/index.htm
l.
10. Invite a real estate agent to class to discuss the local real estate market. Direct the
discussion toward the closing of a real estate transaction, including the various
mortgage costs.
11. Discuss the value of shopping carefully for the best interest rates when taking on a
mortgage. One lending firm reported that in any given week across the United States,
the spread between the highest and lowest thirty-year fixed-rate mortgage is about
two percentage points.
12. Until the 1930s, most U.S. mortgages were the balloon-payment type. Typically they
were short-term mortgages of three or five years and borrowers only made interest
payments until the loan came due. If the principal could not be paid at the due date,
the loan would be renewed or refinanced with another lender. With the economic
crisis of the Great Depression, lenders were forced to demand full payment and
foreclose on properties. The Federal Housing Administration helped develop today’s
mortgage loan system in which mortgagors are permitted to make regular payments
with interest over many years.
13. When interest rates on loans drop, people often take out home equity loans, which are
junior mortgages. Have students research local financial institutions to see how
competitive the equity loan rates are. What is the great tax advantage of a home
equity loan as opposed to an unsecured loan?
14. Inform students that one of the questions that should be asked when shopping for a
mortgage is whether the lending institution intends to service the loan. “Servicing the
loan” means that the institution lends the money and keeps the loan, takes payments,
and then returns the note when paid in full. When mortgages are sold to the secondary
market, problems may arise.
15. Ask students to create lists of everything they own that might be considered collateral
by a lending institution. Then have students form small groups to discuss whether
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distribution without the prior written consent of McGraw-Hill Education.
Chapter 20 – Mortgages, Security Interests, and the 21st Century Financial Crisis
each of their items would or would not be regarded by banks as collateral, based on
each item’s assumed value according to general society.
16. Auto mechanics can perfect a lien on a car they fixed by retaining possession of the
car. This is technically called a mechanic’s lien, and it applies to any type of item
fixed. The party that fixed the item may keep it until the debt is paid in full. Often it is
the only leverage available to the shop.
17. Students may mistakenly believe that as long as they make some type of payment on
a loan, even if it is much smaller than their fixed installment, their creditor cannot
force them to pay in court or turn over their accounts to a collection bureau. Remind
students that a loan is a contract and that the terms of the contract regarding periodic
payments cannot be altered without the consent of all involved parties.
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or
distribution without the prior written consent of McGraw-Hill Education.
