Real
Estate Finance Notes
There
was a land price boom and land price crash at the same time as the big stock
market crash 75 years ago today in 1929.
There were a tremendous amount of foreclosures, which hurt both mortgagors
and mortgagees. Farm real estate went
down by an amount comparable to the fall of the stock market. People felt at the time that it was
temporary, that is, that the pre-1929 levels of real estate prices represented
their “real” market value, and that the stock market crash was just a temporary
downturn from which there would be a quick recovery. A lot of the regulation that we study in this
course is a result of the bank failures and decline of the real estate market
in 1929. There was also a move towards title
insurance, which was a precursor of the secondary mortgage market.
The
Restatement of Mortgages says that the doctrine of merger doesn’t apply to mortgages. If the same lender has two mortgages, you have
two choices. If you want to preserve
your right to a deficiency judgment in the even that there is a deficiency,
either (1) you foreclose on the first mortgage first, or (2) if the local rules
of civil procedure allow it, you foreclose on both simultaneously. But what you don’t do is foreclose on the second mortgage first, because that
would extinguish both the first mortgage and
the first mortgage debt.
Deed in lieu of foreclosure
This
is fast and cheap. If the mortgagor can’t
go forward, the mortgagor might say: “Let’s get it over with. I’ll just give you the property back.” The lender might want to avoid the publicity
of a foreclosure. Also, the lender might
get a windfall. For the borrower, it
doesn’t look as bad for your credit to have negotiated a settlement instead of
being foreclosed upon. The lender will
also usually waive any deficiency judgment.
There are lots of problems with these, though.