Mortgages Flashcards
(6 cards)
Mortgage v. Note
“Mortgage” = NOT the loan itself; it’s a security interest in property tied to the loan (aka. legal instument that secures the note using real property as collateral)
- Allows the lender to foreclose and recover the loan amount if borrower defaults [“securitization”]
“Note” = the loan
Foreclosure
When borrowers default, lenders foreclose, sell property, and distribute sale porceeds according to lien priority.
Trigger: Borrower fails to meet payment terms of the note
Consequence: The lender has the right to foreclose, or terminate the borrower’s right to repay and retain the property
Out come:
Property is auctioned to the highest bidder
Proceeds are distributed:
First to the foreclosing lender [to cover the debt]
Then to junior lienholders based on priority
Remaininf funds go to the borrower.
Flack
Issue: Whether a quitclaim deed was an absolute conveyance or merely security for $9,000 loan i.e. equitable mortgage
Facts:
Flack and Def. signed real estate sales contract for Flack’s property.
Defs paid $1,000 earnest money, and closing was schedules for Oct. ‘84.
Same day contract was signed - Flack asked Defs for loan to pay her son’s tuition. In return-Flack gave quitclaim deed to McClures - Flack claimed it was as security, Defs claimed it was an absolute conveyance.
After Contract
- Defs failed to secure $60,000 mortgage and thus never closed on property.
- Prop. went into foreclosue by the 1st mortgage holder.
-Dec.’84 – prop. was sold at sheiff’s sale to 3rd party for $35,000.
- Defs redeemed prop. in ‘85 by paying… and recorded quitclaim deed.
Analysis: Equitable Mortgage
- Illinos law: Even an absolute deed may be a mortgage if intented as security
- Burden; on party asserting mortgage
- 6 factor from _case to determine if deed = equitable mortgage
1. Existence of Debt
- Clearly establised: $9,000 given as loan
- Defs admitted he would have returned the deed if repaid
-Defs retained a note evidencing the debt
2. Relationship of the Parties
- Non prior relatonship existed between the parrties.
3. Legal Assistance
- Defs had legal counsel; Flack did not when giving up deed.
4. Sophistication and Circumstances
- Plaintiff was behind on mortgage, facing foreclosure, and paying tuiton
- Defs could not secure mortgage financing
- Limited record on actual sophistication of either party
5. Adequacy of Consideration
- $9,000 = far below the $80,000 agreed purchase price.
6. Possession of the Property
- Flack remained in possession for a year after giving the deed. evicted only after defendant redeemed the prop. and recorded the deed.
Concluseion
- Quitclaim deed was intended as security, not a transfer of title.
- Reconveyance of property ordered to Flack.
Takeaways
- A deed that appears absolute can be deemed an equitable mortgage if the intention was to use it as security for a loan
- The ct will consider the totality of the circumstances, including tesitmony, possession, consideration and legal rep.
- Even if the deed is facially absolute, clear, satisfactory, and convincing evidence can rebut that presumption/
Smith
Issue: Does a mortgage unilaterally granted by one joint tenant without the other’s knowledge sever the joint tenancy under NY law?
Answer: No. Mortgage given by 1 joint tenant, without the consent/knowled of the other does not sever the joint tenancy.
facts:
‘99- Smith conveyed her entire interest in property to herslef and bf as joint tenants with right of survivoship via quitclaim deed.
‘06-Bf unilaterally too $300k loan from Bank of American, secured by mortage on the property - without Smith’s knowled.
- Mortgage was recorded in Nassau County.
‘09- bf died; BOA declared loan in default.
- Smith sued for declaration that the mortgage was null and void, claiming that bf’s interest terminated at death, and she became sole owner free and clear of mortgage.
Analysis:
- Jt = an estate held jointly with equal rights, requiring 4 unities. At common law, joint tenants act as one legal entity with right of surviorship
- NY as a Lien-Theory State: Mortgages are liens, not conveyances of title. No legal or equitable interest is transfered to the lender. Thus, granting a mortgage does not disrupt any of th 4 unities[JT]
- Real Prop. Law – JT can be severed by:
1. destroying one of the 4 unities; OR
2. Executing a written instrument envincing intent to sever
– in this case: no language in mortgage showed intent to sever.– so no severance
Conclusion:
- Bf’s mortgage did not sever JT.
- Upon his death, his interest ceased, and Smith became sole owner, free of mortgage.
- Judgment affirmed.
- Costs awarded to plaintiff.
Takeaway
- NY -mortgage by one JT does not sever a JT UNLESS there is clear intent to sever.
- Unilateral acts, without proper documentation showing severance intent, preserve survivorship rights.
- Lenders must be cautious: a mortgage from one JT alone is extinguished upon that tenant’s death.
- Lien-theory jx matters significantly in how cts treat mortage and JT.
Planned Pethood
Issue: Is a prepayment penalty clause in a commercial loan unenforceable as
1. an impermissible liquidated damages provision OR
2. unconscionable?
Holding: Prepayment penalty is enforceable. Judgment for Keybank affirmed.
Facts:
- Pethood took loan from Keybank
- Loan- had fixed interest rate of 8.3% over a 10 year term. Was secured by real property owned by the clinic’s 2 vets. Included personal guarantees by both vets.
- The promissory note explicitly alloewed prepayment with a penaly, calculated using a specific formula.
- Both vets: Signed note acknowledging they read and understood it. Had experience with similar loansm including ones w/ prepayment penalities.
- Pethood prepaid the loan nearly 9 yrs early and paid a $40k penalty
- Pethood sues Keybank, seeking refund of the prepayment penalty.
Analysis
1. Liquidated Damafe Argument
- Pethppd’s claim: the prepayment penalty is a liquidated damages clause that is void bc:
a. It was not reasonable in light of Keybank’s actual/anticipated loss.
b. It was not difficult to calculate actual damages.
- Ct says- The prepayment is NOT a liquidated damages clause bc:
a. liquidated damages only apply when there is a breach
b. No breach contract – Pethood exeercised a contractual right to prepay.
Prepayment = alternative performance, not breach:
- Contact allowed prepayment subject to a fee.
- Therefore, this is a choice of performance, not a trigger for damages.
- Colorado Law on Prepayment
- Common law: No right to prepay unless contact allows it. - Distinguishing Pethood’s Authority
….
Conclusion
- No breach of contract, no basis for invoking liquidated damage doctrine.
- Prepayment penalty is enforceable under Colorado law.
- Not unconcsionable based on penalty’s size, clarity of clause and parties; experience.
- Dist. ct summ. judg, in favor of Keybank.
Takeaways
- Prepayment are valid contractual rights, not damage remedies.
- Enforceabiltiy turns on contract language, not fairness of outcome.
- Borrowers must read and understance financial instruments; prior experience matters.
- Cts distinguis voluntary performance from breach,even if it costs more.
Westmark
