Mortgages

Question 1

Mortgages

Answer 1

A mortgage is a security interest in land that serves as collateral for the repayment of a loan (a.k.a. “mortgage deed,” “note”)
• Writing required—must be in writing to satisfy the SoF
• Mortgagor = debtor/borrower/landowner
• Mortgagee = creditor

Question 2

Lien Theory & Title Theory

Answer 2

Lien Theory (majority) — mortgagor has title and the right to possession absent foreclosure
» Mortgage has a lien, conferring a right to take action for ownership of the land if the mortgagor defaults on the loan.

Title Theory (minority) — mortgagee has title to the property during loan term, not mortgagor-borrower.

NOTE: unless otherwise instructed, assume lien theory applies on the MBE.

Question 3

Equitable Mortgage

Answer 3

Debtor gives creditor a deed to his land as collateral for the debt (instead of executing a mortgage)

Question 4

Acceleration Clauses

Answer 4

Terms in loan agreements that require mortgagor to pay off full loan immediately if certain conditions are met, e.g., if mortgagor misses too many payments

Question 5

Transfers by Mortgage

Answer 5

• Recording statutes protect mortgages.
• If recorded, mortgage sticks with the land.
• Mortgagor remains liable to mortgagee for the loan
• Assumption—grantee promises to pay existing mortgage loan
» Grantee becomes primarily liable to mortgagee; original party is secondarily liable as surety.
» Grantee who takes subject to mortgage is not liable to mortgagee (only mortgagor is liable), but if recorded, land can be foreclosed.

Question 6

Foreclosure

Answer 6

Upon default, mortgagee can satisfy debt through foreclosure by judicial action
• Property is sold to satisfy the debt in whole or in part
• Deficiency judgment—if the debt exceeds sale proceeds, mortgagee can file suit against mortgagor for debt balance
• If proceeds exceed the debt balance, junior liens are paid in order of priority

Question 7

Redemption in Equity

Answer 7

At any time prior to a judicial foreclosure sale, mortgagor can redeem the property by paying the amount due
* Equitable mortgage—redemption rights apply to an equitable mortgage situation where creditor appears to hold legal title to the land via a deed
*Statutory right of redemption—some jurisdictions allow mortgagor, for a certain period, to buy back the property after foreclosure sale

Question 8

Deed in Lieu of Foreclosure

Answer 8

To avoid foreclosure, mortgagor can agree to give mortgagee deed to property; such transactions will be valid as long as they are fair and reasonable under the circumstances.

Question 9

Mortgagee Possession Prior to Foreclosure

Answer 9

Mortgagee’s right to possession prior to foreclosure depends on the jurisdiction:
* Lien theory—no right to possess prior to foreclosure
* Title theory—right to possess at any time upon demand

Question 10

Priority of Creditors

Answer 10

• Creditors must record.
• First-in-time, first-in-right.
• Purchase-money mortgage: first priority in parcel financed.

Question 11

Effect of Foreclosure on Interests

Answer 11

Junior Interests
* Terminated by foreclosure of a superior claim.
» Junior interest holders cann seek a deficiency judgment against debtor, but they have no interest in the subject property.
* Necessary parties – junior interests are necessary parties and must be included in a senior foreclosure aaction.
» Otherwise, the junior interest will remain on the land.

Senior Interests
* Unaffected by junior interest foreclosures
* Buyer of foreclosed property takes it subject to senior interests