Mortgages & Foreclosure Flashcards
(18 cards)
What is a mortgage?
A mortgage is a loan used to purchase or maintain a home, land, or other type of real estate, secured by the property itself.
A mortgage is an interest in real property that serves as security for an obligation. The obligation may be owed by the person who conveys the interest or a third party.
Promissory Note
A promissory note is a legal document that sets out the terms of the mortgage transaction.
ELEMENTS:
1. Security agreement in writing, signed by the party to be charged;
2. Clear identification of the parties and who holds the mortgage
3. Sufficient description of the real property being encumbered with the mortgage.
Rights to Possession: Lien Theory Jurisdiction
In a lien theory jurisdiction (majority rule), the mortgagor (borrower) is treated as the owner of the real property interest, and the mortgagee (lender) is treated as the holder of a lien on that interest.
Rights to Possession: Title Theory Judisction
In a title theory jurisdiction (minority rule), the mortgagee (lender) is treated as the owner of the real property interest, and the mortgagor (borrower) possesses the right to regain ownership of the real property upon satisfaction of the obligation.
Purchasing Land with an Existing Mortgage
A grantee (purchaser) who “assumes” a mortgage is personally liable.
* Purchaser promises to pay off the mortgage debt
* Bank can go after both the initial borrower (unless there is a novation releasing the initial borrower from liability) and the new owner, or the land if the mortgage is not paid.
A grantee (purchaser) who takes “subject to” the mortgage is not personally liable.
* Purchaser takes the property with the notice that a mortgage exists on the property, but does not assume any personal liability for the mortgage debt.
* Bank can still foreclose on the property
NOTE: “Subject to” operates as the default if the land sale contract is silent as to an existing mortgage.
Equitable Mortgages
Absent documentation evidencing a mortgage, a court can find an equitable mortgage where the intent is to create a mortgage but the form is lacking.
Examples:
* Deed of Trust
* Installment Land Contract
* Conditional Sale and Repurchase
Deed of Trust
Equitable mortgage
Landowner delivers title to real property to a third-party trustee as security for the payment of a note to the beneficiary with the condition that the trustee reconveys the title to the borrower upon payment of the notice.
If the borrower defaults, then the beneficiary instructs the trustee to sell the land and repay the note.
Installment Land Contract
Equitable Mortgage
Contract whereby the seller retains title until the buyer makes the final payment under an installment payment plan
Conditional Sale and Repurchase
Equitable Mortgage
When real property is sold and then leased back to the seller, usually for a long period of time with the option to repurchase the property
Recording Statutes and Mortgages
Recording statutes provide a universal system of notifying subsequent BFPs of all the encumbrances affecting title to real property. Recording gives constructive notice.
A BFP who acquires property without notice that the property is encumbered by a mortgage takes that property free and clear of that encumbrance.
If a lender does not record the instrument, he may lose the ability to foreclose on the property against BFPs who acquire the property without notice of the debt.
Foreclosure
If the debt is not paid,, the lender will foreclose on the mortgage.
Foreclosure = the property will be sold and the lender will be paid the debt amount from the proceeds; anything remaining will be given to the borrower
Deficiency Judgment
If, on foreclosure sale, the land does not bring enough to pay the debt, the lender can sue the borrower on the note for the remainder.
A judgment for this deficiency, collectible out of the general assets of the borrower, is a deficiency judgment.
Acceleration Clause
An acceleration clause provides that the full amount of the mortgage obligation becomes due upon default.
A mortgagor’s failure to satisfy conditions in the mortgage may validly trigger acceleration
Foreclosure & Notice Requirements
In a judicial foreclosure action, notice of sale must be provided to several parties, including the homeowner, any tenants, and anyone with a lien or interest in the property.
In a judicial foreclosure action involving junior liens, the owner of the property and any other parties with a lien or interest in the property junior to the lien being foreclosed must be made a party to the action. (Failure to do so can prevent the foreclosure from extinguishing those junior interests).
Effect of Foreclosure on Parties
- Mortgagor: eliminates the mortgagor’s interest in the property; may have a statutory right of redemption
- Purchaser of Property: takes free and clear of any junior mortgage and subject to any senior mortgage
- Senior Interests: not affected by foreclosure
- Junior Interests: destroyed, unless the junior interest holder is not given notice and made a party to the foreclosure.
Distribution of Proceeds after Foreclosure
- Expenses, including court costs and fees
- Loan that was foreclosed;
- Junior liens, in order of priority;
- Any leftover funds go to the mortgagor.
Mortgages senior to the foreclosing party remain liens on the property.
Purchase Money Mortgage (PMM)
A mortgage given to secure the purchase price of the land itself is called a purchase money mortgage.
A PMM has **priority over all other liens against the property. **
Estoppel By Deed
When a person purports to transfer real property that he does not own subsequently becomes the owner of the property, the after-acquired title doctrine provides that title to the property automatically vests in the transferee.
A related doctrine, estoppel by deed, prevents the grantor from asserting ownership of the after-acquired property.
