Mortgages

Question 1

Two documents involved in mortgage transactions

Answer 1

1) The promissory note
- The mortgagor’s personal obligation (i.e., they can be sued personally if they stop paying)

2) The mortgage
- the agreement that says that if the mortgagor quits paying, the land can be sold to pay the mortgagee.

Question 2

Purchase-Money Mortgage v. Non-Purchase-Money Mortgage

Answer 2

Purchase-Money Mortgage: When the lender (mortgagee) takes as collateral a security interest in the very real estate that its loan enables the debtor to acquire.

Non-Purchase-Money Mortgage: The borrower did not purchase the property using the loan that grants the lender a lien in the property.

Question 3

Non-Purchase-Money Mortgage

Answer 3

Person already owns the home (i.e., no mortgage) but take a security interest out against it

Question 4

Creation of a Mortgage

Answer 4

Debt (note) + lien in land to secure the debt (mortgage)

In writing

Question 5

Can the mortgagee (lender) transfer their interest?

Answer 5

YES

The creditor-mortgagee can transfer her interest by:

• Endorsing the note and delivering it to the transferee
  OR
• Executing a separate document of assignment

A mortgagee can freely transfer the note, and the mortgage automatically follows a properly transferred note.

Question 6

“Assuming the mortgage” or “taking the property subject to the mortage”

Answer 6

If they assume the mortgage: they are agreeing to be personally liable on the mortgage note.

If they take the property subject to the mortgage: they are not agreeing to personal liability; the mortgagee’s only recourse is foreclosure (i.e., they cannot maintain a suit against the grantee).

Question 7

Effect of an “Assumption Agreement”

FACT PATTERN: Mortgagor (borrower) transfers their property to a transferee, who signs an assumption agreement

Answer 7

If the grantee signs an assumption agreement, they become primarily liable to the lender, while the original mortgagor is secondarily liable as a surety.

BUT the lender may opt to sue either the grantee or the original mortgagor (borrower) on the debt.

If no assumption agreement is signed, the grantee is not personally liable on the loan, and the original mortgagor remains primarily and personally liable.

Question 8

What happens if a creditor records their mortgage?

Answer 8

A subsequent buyer takes subject to a properly recorded lien.

A mortgage sticks with the land

Question 9

What is a “Due-on-Sale” clause?

Answer 9

Allows the lender to demand full payment of the loan IF the mortgagor transfers any interest in the property without the lender’s consent.

Question 10

Rule: Mortgagor (borrower) transfers title the property

Answer 10

When a mortgagor transfers title to the property, the grantee automatically takes the property subject to the mortgage.
o The grantee will not be personally liable on the mortgage UNLESS they specifically assume the mortgage.
o ONLY mortgagor is personally liable

Question 10

Rule: Mortgagor (borrower) transfers title to a property w/ mortgage

Answer 10

When a mortgagor transfers title to the property, the grantee automatically takes the property subject to the mortgage.
- The grantee will not be personally liable on the mortgage UNLESS they specifically assume the mortgage.
- ONLY mortgagor is personally liable
- BUT if grantee does not pay, then foreclosure

Question 11

What is a foreclosure action?

Answer 11

A judicial proceeding where the land is sold and the sale proceeds go to satisfying the debt.

Question 12

Deeds in lieu of foreclosure

Answer 12

The borrower may tender to the lender a deed in lieu of foreclosure, which permits the mortgagee to take immediate possession without a foreclosure sale.
- NOT an actual foreclosure, it doesn’t terminate any junior liens

Question 13

What if the proceeds from the sale of Blackacre are less than the amount owed?

Answer 13

Junior liens are paid off in order of their priority. Any remaining surplus goes to the debtor.

Question 14

How to determine priority in a foreclosure action

Answer 14

The priority of a mortgage depends on when it was placed on the property (First in time, first in right)

Question 15

What does the buyer at a foreclosure sale get?

Answer 15

A buyer at a foreclosure sale takes the title as it existed when the foreclosed mortgage was placed on the property.

All interests senior to that one remain on the property, and all interests junior to that one are extinguished (i.e., junior mortgages, liens, leases, easements, and all other types of interests)

Question 16

What do junior lienholders get in a foreclosure action?

Answer 16

foreclosure terminates interests junior to the mortgage being foreclosed.

Assuming funds are left over after full satisfaction of superior claims, junior lienholders will be paid in descending order with the proceeds from the sale.

Question 17

Junior lienholders and deficiency judgements

Answer 17

Junior lienholders should be able to proceed for a deficiency judgment. But once foreclosure of a superior claim has occurred, with the proceeds distributed appropriately, junior lienholders can no longer look to Blackacre for satisfaction.

Question 18

Who are the necessary parties to the foreclosure action?

Answer 18

The debtor-mortgagor is considered a necessary party and must be joined, particularly if the creditor wishes to proceed against the debtor for a personal deficiency judgment.

Question 19

Is the buyer at a foreclosure sale liable for the mortgage?

Answer 19

No. But as a practical matter, if the senior mortgage is not paid, sooner or later the senior creditor will foreclose against the land.

Question 20

Redemption in Equity Definition

Answer 20

At any time prior to the foreclosure sale the debtor has the right to redeem the land by freeing it of the mortgage.

Once a valid foreclosure has taken place: the right to equitable redemption is cut off.

Question 21

What is an Acceleration Clause?

Answer 21

An acceleration clause permits the mortgagee to declare the full balance due in the event of default.

The validity of acceleration clauses is generally accepted.

Question 22

What are some mortgage alternatives?

Answer 22

Deed of Trust

Absolute Deed

Installment Land Contract

Equitable Vendor’s Lien

Sale Leaseback

Question 23

What is a Sale Leaseback?

Answer 23

A landowner may sell her property for cash and then lease it back from the purchaser for a long period of time.

Like an absolute deed, this may be treated as a disguised mortgage.

Question 24

What is a Deed of Trust?

Answer 24

(Alternative to a mortgage)

A deed of trust is a security interest in real estate, which may secure a loan represented by a promissory note. If the loan is not paid when due, the holder of the security interest may take title to the real estate or have it sold and use the proceeds to pay the debt.

Question 25

What is an Absolute Deed?

Answer 25

(Alternative to a Mortgage)

An absolute deed, if given for security purposes, can be treated by the court as an “equitable” mortgage to be treated as any other mortgage (that is, creditor must foreclose by judicial action).

Question 26

What is an Installment Land Contract

Answer 26

(Alternative to a mortgage)

An installment land contract states that an installment purchaser obtains legal title only when the full contract price has been paid off.

Forfeiture clauses that allow the vendor, upon default, to cancel the contract, retake possession, and retain all money paid, are common and generally enforceable.

Question 27

What is an Equitable Vendor’s Lien?

Answer 27

(Alternative to a mortgage)

An equitable vendor’s lien arises by implication of law when a seller transfers title to the buyer, and the purchase price or a portion thereof remains unpaid.