California Real Estate Practice Exam

For a "blanket encumbrance," why does the typical release clause require the debtor to pay more to the lender than each released property is worth?

1. Better lots are sold first

2. Compensates for unsold lots

3. Lender desires to increase security on overall loan

4. All of the above

The correct answer is: Better lots are sold first

The correct answer is that the release clause typically requires the debtor to pay more to the lender than each released property is worth in order to compensate for unsold lots. In a blanket encumbrance situation, a lender has claims on multiple properties as collateral for a single loan. When one property is released, the lender faces a loss of security due to the overall collateral being reduced. The financial rationale is that by requiring a payment above the value of each released property, the lender ensures that they are compensated for the risk posed by holding onto the remaining properties—especially if some of those might not sell quickly or at all. This compensation accounts for the lender's risk exposure while allowing the debtor to sell portions of the encumbered properties. This reasoning also ties into the dynamics of the marketplace where more desirable properties might sell first, which could impact the overall security for the loan. Therefore, while your answer reflected one aspect regarding the sellability of better lots first, it does not capture the complete picture provided by the other options that align with common practices in real estate financing. In summary, the requirement for a higher payment when releasing a property under a blanket encumbrance reflects the lender's need to safeguard their investment against potential unsold lots and the