Mortgages

Question 1

What is a mortgage?

Answer 1

A mortgage is the conveyance of a security interest in land, intended by the parties to be COLLATERAL for the repayment of a debt

Mortgagor = one who has title and right to possession (the debtor)

Mortgagee = one who has a lien (the creditor)

Question 2

What arethe types of mortgage?

Answer 2

1) Legal (traditional) mortgage: in writing/signed (SOF) using property interest in land as collateral for loan
2) Equitable mortgage: physical handover of deed to creditor instead of a note to secure loan; IF creditor sells to BFP, debtor can ONLY sue creditor for damages (BFP owns land)

** NOTE: parol evidence FREELY admissible in dispute to show intent

Question 3

Once a mortgage has been created, what are the parties’ rights?

Answer 3

Debtor mortgagor = UNLESS and UNTIL foreclosure, the debtor mortgagor has TITLE and RIGHT to possession

Creditor mortgagee = has a LIEN and the right to look to blackacre if there is a default

Question 4

How can a creditor-mortgagee can transfer his interest in the mortgage?

Answer 4

The creditor-mortgagee can transfer his interest by…

1) ENDORSING the note and DELIVERING to the transferee;
OR
2) EXECUTING a separate document of assignment

**If the note is endorsed/delivered, the transferee is eligible to become a holder in due course

Question 5

What is a holder in due course?

Answer 5

A transferee that takes the transferred note FREE of any personal defenses that could have been asserted against the ORGINAL creditor

Thus, a HDC may foreclose the mortgage DESPITE the presence of any such personal defenses against original creditor, like…

- Lack of consideration
- Fraud in inducement
- Unconscionability
- Waiver
- Estoppel

A HDC is STILL subject to “real” defenses (M-A-D F-I-F-I4)

- Material Alteration
- Duress
- Fraud In the Factum
- Incapacity
- Illegality
- Infancy
- Insolvency

Question 6

What are the requirements to becoming aholder in due course?

Answer 6

1) A note must be NEGOTIABLE, made payable to the named mortgagee;
2) The original note must be ENDORSED and SIGNED by the named mortgagee;
3) The original note must be DELIVERED to the transferee (NO photocopies!);
4) The transferee must take in GOOD FAITH(without notice of any illegality); AND
5) The transferee must pay VALUE for the note (more than nominal $)

Question 7

What happens when a mortgagor sells land with a valid mortgage in place?

Answer 7

The lien remains on the land SO LONG AS the mortgage was properly recorded pursuant to the rule of the recording statue

** Recording statutes protect both BFPs and mortgagees

BOTH buyer and seller/debtor are personally liable to the creditor/mortgagee if buyer”assumed the mortgage”

ONLY seller/debtor (not buyer) is personally liable to the creditor/mortgagee if buyer took “subject to the mortgage” [BUT if seller/debtor doesn’t pay, creditor will foreclose on land]

Question 8

What are key features of the foreclosure process?

Answer 8

1) Mortgagee looks to land for debt satisfaction; judicial proceeding yields sale of land; proceeds go to (in order)…
- attorney fees, costs;
- each interest in priority;
- surplus back to debtor

2) When sale does NOT cover amount of loan, mortgagee can bring a deficiency action against debtor for the shortfall
3) Once mortgage is foreclosed, all junior interests to the foreclosing interest are TERMINATED

** BUT if a junior forecloses, senior lienholders can STILL look to the land; land sold by junior lienholder at foreclosure sale taken subject to senior lienholders (buyer not liable, but land still has lien)

Necessary parties (creditors with interests junior to the foreclosing party; the debtor/mortgagor) MUST be joined in the action OR they preserve their claim despite the foreclosure sale

Question 9

How is mortgage priority determined?

Answer 9

Creditors MUST properly record interest to get priority Standard: First in time, first in right

EXCEPTION: Purchase money mortgage (loan for land acquisition): has super priority against existing loans

NOTE: PMMs do not have superpriority vs. loans made SUBSEQUENTLY(i.e. the regular priority rules apply)

** Subordination agreements are permissible

Question 10

What is equitable redemption?

Answer 10

PRIOR to foreclosure…

1) Mortgagor/debtor can redeem land and free from mortgage (but pre-payment penalty ok)

• • Once foreclosed, the right to equitable redemption is GONE
• • Redemption requires: missed payments+ interest+ costs
• • Acceleration clauses are VALID→full balance due immediately if default
• • NO WAIVER (clogging the equity of redemption)

2) Junior lienholders: can step into the shoes of the primary mortgagee (i.e. buyout the interest) through “subrogation,”If the borrower does not redeem

** This PRESERVES their interest, which WOULD have been wiped out in a foreclosure action

Question 11

What is statutory redemption?

NOTE: NY Distinction

Answer 11

Statutory redemption allows redemption AFTER foreclosure

NOTE: mortgagor ALWAYS retains right to possession within statutory period
** Mortgagor pays foreclosure sale price to redeem

** NY DISTINCTION: NO statutory right of redemption in NY