Mortgages Flashcards
(6 cards)
Statutory Redemption
What is it? Statutory redemption is the right of a mortgagor to recover the land after the foreclosure sale has occurred, usually by paying usually by paying the foreclosure sale price. The amount to be paid is generally the foreclosure sale price, rather than the amount of the original debt.
Who Can Exercise? This right extends to mortgagors and, in some states, to junior lienors.
When? Statutory Redemption is available for a fixed period AFTER THE FORECLOSURE SALE.
What Jurisdiction? About HALF the states provide a statutory right to redeem for some fixed period after the foreclosure sale has occurred, usually six months or one year.
Equitable Redemption
What is it? Equitable redemption is the right of a mortgagor to recover the land by paying the amount overdue on the mortgage, plus interest, at any time before the foreclosure sale.
When? Exercise of Equitable Redemption happens AFTER DEFAULT and BEFORE THE FORECLOSURE SALE. If mortgagor does not equitably redeem on time, about half of the states have a statutory redemption period after foreclosure.
What Jx? Available in all states.
Note: If the mortgagor has defaulted and the mortgage or note contained an acceleration clause, then the full balance of the mortgage must be paid in order to redeem in equity.
Allocating Mortgage Foreclosure Proceeds
The order of priority for allocating mortgage foreclosure sale proceeds is as follows, from first to last:
- Expenses of the sale, including attorneys’ fees, and court costs;
- The principal and accrued interest on the foreclosing party’s loan;
- Any junior lienors in the order of their priority; and then
- The mortgagor.
Because a senior lien remains on the property (i.e., may itself be foreclosed in the future), a senior lienor is not entitled to any of the money from the sale, even if there is a surplus.
Note: Foreclosure does not extinguish the underlying debt. If the foreclosing party is still owed money, they may sue the debtor for the balance.
Note on Modifications: First, if the landowner enters into a modification agreement with the senior mortgagee, raising its interest rate or otherwise making the agreement more burdensome, the junior mortgage will be given priority over the modification. Thus, if the first mortgage debt is larger because of the modification, the second mortgage gains priority over the increase in the debt. Second, when a mortgagee and an assuming grantee subsequently modify the original obligation, the original mortgagor is completely discharged of liability.
Assuming a Mortgage
When a grantee assumes the mortgage, the grantee expressly promises the grantor-mortgagor that he will pay the mortgage obligation as it becomes due.
The mortgagee then becomes a third-party beneficiary of the grantee’s promise to pay and can sue the grantee directly if the grantee fails to pay. After the assumption, the grantor-mortgagor becomes a surety who is secondarily liable to the mortgagee on the note if the grantee fails to pay.
The mortgagor-grantor and grantee are jointly liable and can be sued in the same action, although it can only collect once.
Foreclosure Mechanics
When a mortgage is foreclosed, the purchaser at the sale will take title as it existed when the mortgage was placed on the property. Thus, foreclosure will terminate interests junior to the mortgage being foreclosed but will not affect senior interests.
However, if a lien senior to that of a mortgagee is in default, the junior mortgagee has the right to pay it off (i.e., redeem it) to avoid being wiped out by its foreclosure. Thus, those persons with interests subordinate to those of the foreclosing party are necessary parties to the foreclosure action.
Failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale.
Purchase Money Mortgage
A purchase money mortgage (“PMM”), given by the seller-mortgagee when the buyer-mortgagor buys the property, is considered to have priority over non-PMM mortgages EXECUTED at about the same time, EVEN IF the other mortgages are recorded first.
