Mortgages

Question 1

how do mortgages work

Answer 1

mortgage = agreement that the bank can sell your land if you default on your debt

Because real estate is so expensive, most people can’t afford to pay cash for it. Most people go to a bank or other lending institution for a loan.

To secure the debt, the borrower gives the lender a mortgage (along with a promissory note representing the loan) on the property.

If the loan isn’t paid, the lender may foreclose the mortgage. Foreclosure involves selling the property to pay the debt.

And, if the loan isn’t paid, mortgagee/lender may sue the mortgagor personally for payment of the promissory note

Question 2

who is the mortgagor and mortgagee

Answer 2

The borrower/debtor is called the mortgagor, and the lender/creditor is the mortgagee.

Question 3

are the debtor/notemaker the same as mortgagor?

Answer 3

usually, they are the same person - that is, usually, the mortgagor is giving the mortgage to the bank along with the promissory note to the bank.

but it is also possible for the debtor/notemaker to be different from mortgagor. Ex: Mother places a mortgage on her house to secure a loan given to her daughter

Question 4

what is a purchase money mortgage (PMM)

what is a non-purchase money mortgage (NPMM)

Answer 4

PMM = extension of value by lender who takes as collateral a security interest in the very real estate that its loan enables debtor to acquire

Ex:
Jack and Rebecca borrow $100,000 from Bank to finance their purchase of a home, granting Bank a security interest in that new home to collateralize the loan. This is a purchase-money mortgage because Bank took a lien in the very realty that its loan enabled Jack and Rebecca to purchase

NPMM = collateralization in land to finance new venture that does not involve purchasing their house

Ex:
Jack and Rebecca seek to borrow $100,000 from Valley Finance to help finance their children’s education, granting Valley a security interest in their home. This is a non-purchase-money mortgage.

Question 5

what are the primary ways of financing blackacre?

Answer 5

purchase money mortgage

non purchase money mortgage

Question 6

a mortgage is made of what two things?

Answer 6

debt + voluntary transfer of lien in land to secure the debt

Question 7

how to create a mortgage?

Answer 7

debt

voluntary transfer of lien in land to secure debt

signed writing (legal mortgage) to satisfy SoF

Question 8

to what extent can a mortgagor or mortgagee transfer their interests?

Answer 8

TRANSFER BY MORTGAGOR [DEBTOR]

(1) transfer to grantee who assumes mortgage

grantee is agreeing to be personally liable on the mortgage note and original mortgagor is secondarily liable as a surety

mortgagee can sue either grantee or original mortgagor on the debt

I THINK REQUIRES SIGNED WRITING - GRANTEE MUST SIGN AN ASSUMPTION AGREEMENT
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(2) transfer to grantee who takes subject to the mortgage

grantee is not agreeing to be personally liable, original mortgagor remains primarily and personally liable

if original mortgagor does not pay, mortgagee’s only recourse is foreclosure, NOT to bring suit against grantee
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(3) transfer to grantee without consent of the lander - Due-on-sale

TRANSFER BY MORTGAGEE [LENDER]

A mortgagee may transfer her interest by:

(1) Endorsing the note and delivering it to the transferee [A mortgagee can freely transfer the note, and the mortgage automatically follows a properly transferred note]

OR

(2) executing a separate document of assignment

Question 9

other words for mortgage

Answer 9

mortgage deed

deed of trust

security in land

sale leaseback

Question 10

Mortgagor sells her interest to B, who assumes the mortgage. What happens if grantee/B and mortgagee modify the original obligation between mortgagor and mortgagee?

Answer 10

once a grantee has assumed a mortgage, any modification of the obligation by the grantee and mortgagee discharges the original mortgagor of all liability.

Question 11

If a mortgagor just transfers his land to X without more information, what can we assume?

Answer 11

generally, when mortgagor transfers title to property, grantee automatically takes subject to the mortgage and will not be liable unless they specifically assume it

mortgage remains on the land as long as it was properly recorded

Question 12

what is the effect of a recording statute on a mortgage

Answer 12

All recording statutes apply to mortgages as well as deeds. Thus, a subsequent buyer takes subject to a properly recorded lien.

if lien was not recorded, buyer does not take subject to it

Question 13

notice and race notice statutes for mortgages - effect?

Answer 13

In a notice state, a subsequent BFP prevails over a prior grantee or mortgagee who has not yet recorded properly at the time the BFP takes. Does not matter if Bank later records, BFP has already won. BFP does NOT take subject to the mortgage.

in a race-notice statute, a BFP who takes without notice and who records first wins. If bank records before BFP, bank wins and BFP takes subject to the mortgage.

Question 14

Who Is Personally Liable on Debt If O, Our Debtor- Mortgagor, Sells Blackacre to B?

Answer 14

If B has “assumed the mortgage,” both O and B are personally liable. B is primarily liable, and O remains secondarily liable.

If B takes “subject to the mortgage,” B assumes no personal liability. Only O is personally liable. But, if recorded, the mortgage remains on the land. Thus, if O does not pay, the mortgage may be foreclosed.

Question 15

when is it time for foreclosure?

Answer 15

debtor/mortgagor has defaulted on the loan
or
whoever is responsible for the debt of the loan has defaulted

Question 16

how does mortgagee proceed when it is time for foreclosure / when debtor defaults?

Answer 16

(1) proper judicial proceeding - land is sold at the proceeding and sale proceeds satisfy the debt

or

(2) don’t have a foreclosure, have a deed in lieu of foreclosure

The mortgagor may tender to the mortgagee a deed in lieu of foreclosure, which permits the mortgagee to take immediate possession without a foreclosure sale. Since the deed in lieu of foreclosure is not an actual foreclosure, it doesn’t operate to terminate any junior liens that may be present on the mortgaged real estate.

Question 17

what happens when sale proceeds are less than amount owed?

what happens when sale proceeds are more than the amount owed?

Answer 17

LESS – mortgage brings a deficiency action against debtor for the rest

MORE – mortgagee pays off his lien, then, junior liens are paid off in order of their priority, surplus goes to debtor

each claimant is entitled to satisfaction in full before a junior lien holder takes

Question 18

how to determine priority of a mortgage?

what does priority mean?

what is the effect of foreclosure on (a) junior interests and (b) senior interests

who are necessary parties in a foreclosure action and what happens if they are not joined?

Answer 18

HOW TO DETERMINE PRIORITY

general rule:
“first in time, first in right” – creditor who records first is senior creditor, creditors who record after that are junior creditors, etc. senior creditors get priority.

Exceptions:
(1) purchase-money mortgages get first priority if they record properly

(2) senior creditor can sign a subordination agreement that subordinates its priority to a junior creditor

WHAT PRIORITY MEANS/ EFFECT

mortgagees that have priority will be paid off first

a buyer at a foreclosure sale takes the title as it existed when the foreclosed mortgage was placed on the market = all interests senior to the one that was just foreclosed remain on the property and all the junior interests are extinguished
[junior mortgages, liens, leases, easements, and all other types of interests]
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EFFECT OF FORECLOSURE ON JUNIOR INTERESTS

(1) termination of junior interests
foreclosure terminates interests junior to the mortgage being foreclosed

(2) payment of junior lien holders in descending order
junior lienholders will be paid in descending order with the proceeds from the sale, assuming funds are left over after full satis- faction of superior claims.

(3) junior lien holders who are unable to get paid off by sale price [bc sale was for too little] get to proceed against debtor for a deficiency judgment

EFFECT OF FORECLOSURE ON SENIOR INTERESTS

foreclosure does not affect interests senior to the mortgage being foreclosed, so buyer at the sale takes subject to that interest

buyer not personally liable on the senior debt, but if it is not paid off, senior mortgagee can proceed against black acre for satisfaction and foreclose upon buyer [assuming senior mortgagee has properly recorded his mortgage]

NECESSARY PARTIES TO FORECLOSURE ACTION

necessary parties to foreclosure action = junior lien holders and the debtor-mortgagor

If necessary party is not joined, their claim is preserved, despite the fact that they were junior claims and that there was a foreclosure and sale.

TLDR: if a necessary party is not joined, their mortgage will remain on the land.

Question 19

considering that a buyer of a title at foreclosure sale of a junior mortgagee takes subject to a properly recorded senior mortgage, what should the bidding process be like at the foreclosure sale of the junior mortgage?

Answer 19

Buyer should bid up to:

FMV of the land - the amount needed to discharge senior mortgages

ex:

Blackacre has a fair market value of $50,000 and is subject to three mortgages executed by its owner, Madge. First Bank, with first priority, is owed $30,000. Second Bank, with second priority, is owed $15,000, and Third Bank, with third priority, is owed $10,000. Now, suppose that it is Second Bank’s mortgage that is being foreclosed.

how should bidding proceed at the foreclosure sale brought by Second Bank?

Buyer sets aside the 30k to pay off first bank [i.e. not factor it into purchase price]

Buyer should bid up to $20,000, which represents Blackacre’s fair market value of $50,000 minus the $30,000 buyer needs to discharge First Bank’s mortgage.

once buyer pays the $20,000, 15k will go to second bank, 5k will go to third bank, which will have to proceed against Madge for deficiency judgment for the rest.

Question 20

what is a floating lien and why would a creditor grant a debtor one?

Answer 20

floating lien = lien on other real estate holdings?

granted when the loan on the front end is undercollateralized

ex: debtor says hey I want a loan and you can take X as collateral but creditor says no, X is not valuable enough [i.e. is undercollateralized] so debtor says hey I will give you a lien on my other real estate and future holdings

Question 21

what is a subordination agreement

Answer 21

By private agreement, a senior creditor may agree to subordinate its priority to a junior creditor. Subordination agreements are permis- sible.

Question 22

what is equitable redemption and when is it recognized

What is an acceleration clause and its effect?

Effect of not having an acceleration clause?

Answer 22

WHAT IT IS: any time prior to the foreclosure sale the debtor has the right to redeem the land by freeing it of the mortgage

WHEN RECOGNIZED: universally recognized up to the date of sale. Once a valid foreclosure has taken place: the right to equitable redemption is cut off.

ACCELERATION CLAUSE: permits the mortgagee to declare the full balance due in the event of default

EFFECT OF ACCELERATION CLAUSE: debtor must pay off entire balance + accrued interest and cost

NO ACCELERATION CLAUSE: debtor in default can equitably redeem by paying off missed payments plus accrued interest and cost

Question 23

when can you use acceleration clauses?

Answer 23

The validity of acceleration clauses is generally accepted.

Such clauses may permit acceleration for failure to pay the mortgage debt as well as for defaults in mortgage covenants such as an obligation to pay taxes, maintain insurance, or avoid the commission of waste.

Question 24

can debtor-mortgagor waive right to redeem in mortgage itself?

Answer 24

No
no clogging equity of redemption

Question 25

what is statutory redemption

Answer 25

right of a mortgagor to recover the land after the foreclosure sale has occurred, usually by paying the foreclosure sale price

half of states allow this, usually for 6 months to a year after sale

amount is usually sale price and not original debt

extends to mortgagors and in some states, junior lienors

Question 26

what are alternatives to mortgage

Answer 26

(1) deed of trust

Some states call a security interest in land a deed of trust rather than a mortgage. The debtor/notemaker is the trustor. The trustor gives a deed of trust to a third-party trustee, who is usually closely connected to the lender (the beneficiary). On default, the lender instructs the trustee to foreclose the deed of trust by sale.

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(2) absolute deed

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).

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(3) installment land contract

An installment purchaser obtains legal title only when the full contract price has been paid off. Forfeiture clauses, allowing the vendor
upon default to cancel the contract, retake possession, and retain all money paid, are common and generally enforceable.

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(4) equitable vendor’s lien

This lien does not result from an agreement but rather arises by implication of law when a seller transfers title to the buyer, and the purchase price or a portion thereof remains unpaid.

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(5) sale-leaseback

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 27

statutory right to redemption

Answer 27

statutory power to redeem property after foreclosure sale

[equitable right to redeem is the borrower’s right to redeem he land or free it of th mortgage by paying off the amount due or paying the full balance BEFORE the foreclosure sale]

Question 28

A bank gives a homeowner a purchase money mortgage in his home, but fails to immediately record its mortgage. A creditor then gives the homeowner a mortgage as well. Than the bank records.

in a notice statute state, what happens? who has priority?

what happens if the bank forecloses on the buyer when buyer fails to pay the bank?

Answer 28

the creditor took without notice of the bank’s mortgage, so, it has priority. thus, despite the fact that the bank has a PMM, the creditor’s mortgage will be senior to the banks.

when the bank forecloses, the new buyer will take subject to the creditor’s mortgage