Mortgages/Security Devices Flashcards
(21 cards)
Types of Security Devices
Mortgages In General
A mortgage is any conveyance of any interest in real property intended by the parties at the time of its making to be security for the payment of a debt or the performance of some other obligation. A mortgage secures a debt or obligation and gives the mortgagee the right to foreclose and the mortgagor the right to redeem.
A mortgage is essentially the pledging of the property to the lender as security for the mortgage loan.
Types of Security Devices
Recorded Purchase Money Mortgages
A purchase money mortgage is the funds lent by the mortgagee that are used directly to purchase the property. Provided that the PMM has been properly recorded, the mortgagee that gave this money has absolute priority if the mortgagor (buyer) defaults.
Types of Security Devices
Non-Recorded Purchase Money Mortgages
A non-recorded purhcase money mortgage has priority over prior recorded mortgages and liens, but not over subsequently recorded mortgages and liens.
THING THAT WAS RECORDED LAST GETS PAID FIRST –> UNRECORDED PMM GETS PAID SECOND –> THING THAT WAS RECORDED FIRST GETS PAID LAST.
Types of Security Devices
Future Advance Mortgages
A future-advances mortgage is a mortgage given by a borrower in exchange for the right to receive money from the lender in the future. This type of mortgage is also known as a “line of credit.” It is often used for home-equity, construction, business, and commercial loans, and it can provide for obligatory advances or optional advances. Future advances made pursuant to a loan that makes advances conditioned on satisfactory progress of the project for which the loan was made are optional, not obligatory. If the disbursement of the funds is based on the bank’s good-faith discretion, the bank is not obligated to disburse the funds.
Types of Security Devices
Installment Contracts
Installment contracts are contracts for the sale of land where the buyer purchases the land by making payments in installments over time and the seller keeps title to the property until the last payment is made.
The seller does not have to convey marketable title until the last payment is made.
Types of Security Devices
Absolute Deeds as Security (Equitable Mortgage)
An absolute deed given as security refers to a situation where a borrower transfers property to a lender by way of an apparently unconditional or “absolute” deed, but the true intention of both parties is that the deed serves only as security for a loan, not a true sale of the property. In such cases, courts may recognize the transaction as an equitable mortgage, meaning that despite the appearance of an outright transfer, the borrower retains equitable ownership, and the lender holds the deed merely as collateral.
Basically, the legal version of this is a “deed of trust,” where a trusted third party holds the deed as security.
Security Relationships
Mortgage Theories (Title, Lien, and Intermediate)
The majority of states follow a lien theory, which provides that a mortgagor owns the real property. This property is subject to a lien that a mortgage imposes, irrespective of a mortgage’s operative language. Thus, the mortgagor retains the legal title until a foreclosure occurs. This would not sever a joint tenancy. In a title theory state, however, a mortgage gratned by one joint tenant severs the joint tenancy and turns it into a tenancy in common.
Security Relationships
Right to Redeem and Clogging the Equity of Redemption
Redemption in equity is a chance for borrowers to save their property from foreclosure. At any time prior to the foreclosure sale, a debtor has the right to redeem the land and save the property. This can be done by paying the missed payments + interest + costs. Some mortgages contain an acceleration clause, which is a provision in certain mortgages, which says if you default or start missing payments, you owe the full amount of the original mortgage we agreed to, not just the missing payments.
You cannot “clog the equity of redemption,” meaning you cannot give up your right of redemption.
Transfers By Mortgagor
Assumption and Transfer Subject To
Assumption occurs when the borrower takes out a mortgage on the home, records it, and then sells the home to a third party assuming the mortgage. The third party (primarily) or the originial mortgagor (secondarily) would now be personally liable to pay the mortgage no matter if they are in a notice or race-notice jursidiction.
Transfers by Mortgagor
Subject To The Mortgage
When the transferee takes title to the property but does not agree to assume personal responsibility for the mortgage debt, the transferee is subject to the mortgage. The original mortgagor remains liable for the debt. The transferee’s liability is limited to the property, meaning the lender can foreclose on the property but cannot seek payment from the transferee personally.
Transfers By Mortgagor
Applications of Subrogation and Suretyship Principles
Equitable subrogation is a principle which allows a mortgagee to acquire the rights and priority of an earlier lien or mortgage if the new mortgagee’s funds are used to pay off the prior mortgage.
Transfers By Mortgagor
Restrictions on Transfer (Including Due on Sale Clauses)
A Due on Sale Clause allows a creditor to demand full payment of the loan if the mortgagor (the buyer) transfers any interest in the property without the lender’s consent. This clause is not a restraint on alienation. The creditor can demand everything the moment you try to sell or gift the property encumbered by a mortgage.
Transfers
By Mortgagee (The Bank)
When a mortgagor wants a loan, they give the bank both a promissory note and a mortgage. Transfer by mortgagee refers to the transfer or assignment of the mortgage by the mortgagee to another party. If an investor (the other party) is assigned the promissory note by the mortgagee, he is also being assigned the mortgage and can foreclose on the mortgagor if he defaults. If the mortgage is assigned, the promissory note does not follow the mortgage.
Transfers
By Mortgagee (The Bank) - Notice of Transfer
If the bank or lender (the mortgagee) tells the borrower (the mortgagor) that they transferred the note, the borrower may not pay the original mortgagee, they must pay the third party it was transferred to. If the bank does not give notice to the borrower that it was transferred, the borrower may still pay the bank.
Discharge of the Mortgage
Payment (Including Prepayment)
Full payment of a mortgage loan discharges a mortgage. Typically pre-payment is not allowed. If the note or mortgage does not specifically allow pre-payment, a prohibition on pre-payment is implied.
Discharge of the Mortgage
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is simply when a person gives their deed to the lender (the bank) instead of going through the foreclosure process. The transaction must be fair and equitable, the deed must be effective immediately, and only the main mortgage is paid off, not any secondary mortgages or junior liens.
Foreclosures
Types
There are two types of foreclosure sales: judicial and non-judicial. Judicial foreclosure is foreclosure through the court system. Non-judicial foreclosure occurs in states where a “power of sale” clause is allowed in the mortgage. This means the lender can sell the property without the court.
Foreclosures
Proceeds of the Foreclosure Sale - Deficiency Judgment
This is also basically deficiency and surplus.
A deficiency judgment occurs when the lender sells your home in the foreclosure and the sale price is not enought to cover the mortgage balance that you did not pay. The lender can get a deficiency judgment for the rest of the money owed against you personally. Inadequacy of the sale price alone is not enough to void the foreclosure sale; there must be gross inadequancy or procedural irregularities in the sale itself (i.e. they did not advertise the foreclosure sale at all so only one person showed up to bid on it).
If there is extra money left over after the foreclosure sale, that extra money goes to you.
Foreclosures
Acceleration
An acceleration clause is a provision in mortgages which requires a person to pay the full amount of their mortgage if they default or miss a payment. These clauses are typically triggered by nonpayment of the mortgage, but can be triggered by things such as failing to pay insurance premiums on the home.
Foreclosures
Parties to the Proceeding
If a party is not on notice of the foreclosure sale, the lien stays on the home and the next buyer will be responsible to pay it. If a party is on notice of the foreclosure sale but chooses not show at the foreclosure, the money they are owed simply dissappears.
Foreclosures
Redemption After Foreclosure (Statutory Redemption)
In states that allow statutory redemption, the borrower has the right to redeem the property for a fixed period of time (typically 6-12 months) after the foreclosure sale has happened. The mortgagor can simply pay the foreclosure sale price (plus interest) and it will nullify the foreclosure sale.
