Mortgages Flashcards
Mortgage Defined
- A mortgage is the conveyance of a security interest in land, intended by the parties to be collateral for the repayment of the debt
- TWO elements combined:
- A debt
- Voluntary lien on debtor’s land to secure that debt.
- Typically must be in writing to satisfy statute of frauds - the writing is the LEGAL mortgage (aka note, security interest in land, etc.)
Equitable Mortgage
Owner gives creditor a deed that is absolute on its face as collateral for debt - treated as a mortgage (i.e. have to go through judicial foreclosure process).
In determining if absolute deed is really a mortgage, courts will consider:
- existence of debt or promise of payment by the deed’s grantor
- grantee’s promise to return land if debt paid
- amount advanced to grantor was much lower than value of property
- degree of grantor’s financial distress
- parties’ prior negotiations
Rights of Parties to Mortgage
- Debtor/Mortgagor: has title and the right to possess
- Creditor/Mortgagee: has a lien
BOTH may transfer their interests. The mortgage automatically follows a properly transferred note.
Transfer of Interest by
Creditor/Mortgagee
- Creditor can transfer his interest by:
- endorsing the note and delivering it to transferee OR
- executing a separate document of assignment
If endorsed and delivered, transferee may become a holder in due course (takes note free of personal defenses, but still subject to “real” defenses).
Personal Defenses
- Lack of Consideration
- Fraud in the inducement
- Unconscionability
- Waiver
- Estoppel
Holder in Due Course takes mortgage FREE of such defenses.
“Real Defenses”
MAD FIFI4
- Material Alteration
- Duress
- Fraud in the Factum (a lie about the instrument)
- Incapacity
- Illegality
- Infancy
- Insolvency
These defenses are STILL VIABLE agaist a holder in due course (the mortagor/debtor may use them against holder in due course, as well as original mortgagee).
Holder In Due Course
Criteria (5)
- note must be negotiable, i.e. made payable to mortgagee (“payable to bearer” or “to the order off” the named payee with a promise to pay a sum certain, and no other promises)
- Original Note must be indorsed, signed by the named mortgagee
- Original Note must be delivered to the transferee (photocopy unacceptable)
- transferee must take the note in good faith without notice of any illegality
- transferee must pay value for the note (more than nominal amount)
Effect of Transfer by Mortgagor/Debtor
- The lien remains on the land, so long as the mortgage was properly recorded
- All recording statutes apply to mortgages as well as deeds
Liability for Mortgage if Debtor/Mortgagor Transfers Land
Who is liable for mortgage if debtor (O) conveys property to B?
- If B “assumed the mortgage”:
- O and B are both personally liable (B primarily; O secondarily)
- If B takes “subject to the mortgage”:
- B assumes no personal liability
- BUT if recorded, the mortgage remains with the land so if O defaults, mortgage may be foreclosed.
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Foreclosure - Procedure
- Mortgagee MUST foreclose by proper judicial action.
- At foreclosure, the land is sold and proceeds go to satisfying the debt.
- If foreclosure sale produces less than amount owed, creditor brings a deficiency action against the debtor.
- If there is a surplus from the sale, junior liens paid off in order of priority, and remaining surplus goes to debtor.
Order of Priority for foreclosure proceeds
- any attorney’s fees, court fees, foreclosure expenses
- Foreclosing mortgage
- Junior Liens
- Debtor
What happens to Junior Interests at Foreclosure?
- Foreclosure will terminate interests junior to the mortgage being foreclosed
- Junior lienholders MUST be made party to the foreclosure on any senior lien (necessary party)
- After foreclosure, junior lienholders can pursue deficiency judgment but can no longer look to the property for satisfaction.
Effect of Foreclosure on Senior Interests?
What should Buyer Bid?
- Foreclosure does NOT affect any interest senior to the mortgage being foreclosed (senior lienholders NOT necessary parties)
- Buyer is NOT personally liable on senior debt BUT if senior mortgage not paid, senior creditor can foreclose on the land.
- Thus, buyer should bid the property’s FMV MINUS the amount owed on senior liens, so he is able to pay it off.
Rule for Determining Priority among Creditors
Creditors MUST record.
- Rule = 1st in time (i.e. first to record), 1st in right.
- BUT Purchase Money Mortgage is SUPERIOR and has first priority over the property it was used to purchase.
Purchase Money Mortgage
- A mortgage given to secure a loan that enables the debtor to acquire the encumbered land.
- Holder of a purchase money mortgage has first priority in the parcel financed.
