Property AMP Set - Mortgages

Question 1

If a grantor transfers a deed in exchange for cash, and the grantee promises to return the land when the cash is repaid, a court will likely treat the transaction as:

A A deed of trust

B A conveyance

C An equitable mortgage

D An installment land contract

Answer 1

C

If a grantor transfers a deed in exchange for cash, and the grantee promises to return the land when the cash is repaid, a court will likely treat the transaction as an equitable mortgage and not as a conveyance of the land outright. In determining whether the parties intended the transfer only to serve as security for an obligation, the court will consider: (i) The existence of a debt or promise of payment by the grantor; (ii) The grantee’s promise to return the land if the debt is paid; (iii) Whether the amount advanced to the grantor was much lower than the value of the property; (iv) The degree of the grantor’s financial distress; and (v) The parties’ prior negotiations. If the court concludes that the deed was given as security, the grantee-creditor must foreclose it like any other mortgage. A deed of trust is a security interest in land by which the debtor (i.e., the trustor) transfers title to the land to a third party (e.g., the lender’s lawyer or a title insurance company) as trustee for the lender (i.e., the beneficiary). In the event of default, the lender instructs the trustee to foreclose the deed of trust by selling the property. An installment land contract is a security interest in land by which the debtor agrees to make regular installment payments until the full contract price (including interest) has been paid. Only then will the vendor transfer legal title to the debtor. In the event of default, the contract may contain a forfeiture clause providing that the vendor may cancel the contract, retain all money paid to date, and retake possession of the land.

Question 2

If a mortgagor conveys mortgaged property, when does the grantee become primarily liable to the lender?

A If the grantee fails to object to the mortgage

B Never

C If the grantee assumes the mortgage

D If the grantee takes subject to the mortgage

Answer 2

C

When a mortgagor conveys mortgaged property, the grantee becomes primarily liable to the lender if the grantee assumes the mortgage. A grantee who signs an assumption agreement promises to pay the mortgage loan, thus becoming personally and primarily liable to the lender. The original mortgagor becomes secondarily liable as a surety. In the absence of an assumption agreement, the grantee takes subject to the mortgage and does not become personally liable on the loan. The original mortgagor remains personally and primarily liable. However, if the mortgagor defaults on the mortgage and the grantee does not pay, the mortgage may be foreclosed, thus wiping out the grantee’s investment in the land. If the grantee fails to object to the mortgage, this does not affect his obligations. As explained above, the grantee will take subject to the mortgage and is not personally liable on the mortgage unless he assumes it.

Question 3

A due-on-sale clause:

A Permits the mortgagee to demand full payment of a mortgage debt if the mortgagor transfers her interest without the lender’s consent

BAuthorizes a trustee to advertise, give appropriate notices, and conduct the foreclosure sale for a deed of trust personally

C Permits the lender to declare the full balance of the mortgage due in the event of the mortgagor’s default

D Provides that on the mortgagor’s default, the vendor may cancel the contract, retain all money paid, and retake possession of the land

Answer 3

A

A due-on-sale clause, found in most modern mortgages, permits the mortgagee to demand full payment of a mortgage debt if the mortgagor transfers her interest without the lender’s consent. These clauses are designed to: (i) protect the lender from the mortgagor’s sale to a poor credit risk or to a person likely to commit waste; and (ii) allow the lender to raise the interest rate or charge an assumption fee when the property is sold. Federal law makes due-on-sale clauses enforceable for all types of institutional mortgage lenders on all types of real estate, but this federal preemption does not apply to isolated mortgage loans made by private parties. An acceleration clause in a mortgage permits the lender to declare the full balance of the mortgage due in the event of the mortgagor’s default. A forfeiture clause, found in an installment land contract, provides that on the mortgagor’s default, the vendor may cancel the contract, retain all money paid, and retake possession of the land. A power of sale clause, found in deeds of trust in some states, authorizes a trustee to advertise, give appropriate notices, and conduct the foreclosure sale for a deed of trust personally.

Question 4

__________ is the right of a mortgagor to recover the land by paying the foreclosure sale price after the foreclosure sale has occurred.

A Power of sale

B Statutory redemption

C Equitable redemption

Answer 4

B

Statutory redemption is the right of a mortgagor to recover the land by paying the foreclosure sale price after the foreclosure sale has occurred. 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. The amount to be paid is the foreclosure sale price, rather than the amount of the original debt. This right extends to mortgagors and, in some states, to junior lienors. Equitable redemption, in contrast, is the right of a mortgagor to recover the land by paying the amount overdue, plus interest, at any time before the foreclosure sale. If the mortgagor has defaulted and the mortgage or note contained an acceleration clause, then the full balance must be paid in order to redeem in equity. A power of sale does not refer to the mortgagor’s right to redeem the land. Rather, a “power of sale” clause authorizes the trustee in a deed of trust to advertise, give appropriate notices, and conduct a nonjudicial foreclosure sale personally. All states allow mortgages to be foreclosed by judicial sale, while about one-half also allow nonjudicial sale under a power of sale for deeds of trust.

Question 5

As between two mortgages, what is the effect on the junior mortgage when the mortgagor accepts an advance of funds from the senior mortgagee?

AThe junior mortgage is given priority over the entire senior mortgage if the senior mortgagee was contractually obligated to make it

BThe junior mortgage is given priority over the advance if the senior mortgagee was contractually obligated to make it

CThe junior mortgage is given priority over the advance if the advance was optional

DThe junior mortgage is given priority over the entire senior mortgage if the advance was optional

Answer 5

C

When the mortgagor accepts an advance of funds from the senior mortgagee, the junior mortgage is given priority over the advance if the advance was optional. Priority among mortgages on the same real estate is normally determined by chronology: The earliest (i.e., senior) mortgage is first in priority, the next (i.e., junior) mortgage is second, and so on. Generally, if the mortgage obligates the mortgagee to make further advances of funds after the mortgage is executed, such advances will have the same priority as the original mortgage. However, if a junior mortgage is placed on the property and the senior mortgagee later makes an “optional” advance (i.e., one it was not contractually bound to make) while having notice of the junior mortgage, the advance will lose priority to the junior mortgage. Numerous states have reversed this rule by statute, but it remains the majority view. Thus, the junior mortgage is NOT given priority over the advance if the senior mortgagee was contractually obligated to make it. Furthermore, an advance would not jeopardize the priority of the entire senior mortgage itself; thus, the junior mortgage is NOT given priority over the entire senior mortgage, regardless of whether the advance was optional or the senior mortgagee was contractually obligated to make it.

Question 6

Mortgages on the property that are __________ to a mortgage being foreclosed are __________ by the foreclosure if they are made parties to the foreclosure proceeding.

A Senior; satisfied

B Junior; subordinated

C Senior; redeemed

D Junior; extinguished

Answer 6

D

Mortgages on the property that are junior to a mortgage being foreclosed are extinguished by the foreclosure if they are made parties to the foreclosure proceeding. Foreclosure destroys interests (e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed, but does not affect any interest senior to the mortgage being foreclosed. The buyer at the sale takes subject to senior interests, which remain on the land. Note, however, that a junior mortgagee has a right to pay off (i.e., redeem) a senior mortgage to avoid being wiped out by its foreclosure and thus is a necessary party to the foreclosure action. Failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale. Mortgages junior to a mortgage being foreclosed are not subordinated by the foreclosure. As explained above, junior mortgages are extinguished if they are joined in the foreclosure action. Subordination refers to an agreement by which mortgagees may modify their priority (e.g., a first mortgagee agrees with a second mortgagee that the first interest will be treated as a junior lien). Mortgages senior to a mortgage being foreclosed are not satisfied by the foreclosure. As explained above, senior mortgages remain on the property after the foreclosure sale. Mortgages are not redeemed by foreclosure. Redemption is the act of paying off the mortgage debt, thus freeing the land of the mortgage and preventing a foreclosure action.

Question 7

Which correctly states the order of priority for allocating mortgage foreclosure sale proceeds, from first to last?

A The foreclosing party, any senior lienors in the order of their priority, and then the mortgagor

B The foreclosing party, any junior lienors in the order of their priority, and then the mortgagor

C Any senior lienors in the order of their priority, the foreclosing party, and then any junior lienors in the order of their priority

D The foreclosing party, any senior lienors in the order of their priority, and then any junior lienors in the order of their priority

Answer 7

B

The order of priority for allocating mortgage foreclosure sale proceeds is as follows, from first to last: 1. Expenses of the sale, including attorneys’ fees, and court costs;2. The principal and accrued interest on the foreclosing party’s loan;3. Any junior lienors in the order of their priority; and then4. The mortgagor. In many cases, no surplus remains after the principal debt is paid off. Senior lienors receive none of the proceeds. 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.

Question 8

A __________ purchase money mortgage usually has priority over a __________ purchase money mortgage.

A Vendor’s; third-party lender’s

B Subsequent third-party lender’s; prior third-party lender’s

C Third-party lender’s; vendor’s

Answer 8

A

A vendor’s purchase money mortgage usually has priority over a third-party lender’s purchase money mortgage. A purchase money mortgage (“PMM”) is a mortgage given to (i) the vendor of the property as a part of the purchase price, or (ii) a third party who lends funds to allow the buyer to purchase the property. As between a vendor PMM and a third-party PMM imposed as part of the same transaction, neither is treated as “subsequent” under the Restatement. Thus, the recording acts do not apply unless only one party has notice of the other. However, some jurisdictions that do not follow the Restatement allow the recording acts to determine priority between all PMMs. A subsequent third-party lender’s PMM usually does not have priority over a prior third-party lender’s PMM. As between two third-party lender PMMs, priority is determined by the chronological order in which the mortgages were placed on the property, subject to any subordination agreement. Although the recording acts also apply in this situation, they seldom will be of use, because two purchase money mortgagees will almost always know of each other’s existence and thus have notice.

Question 9

Which of the following generally occurs when a mortgagee transfers a promissory note without a written assignment of the mortgage?

A The mortgage is extinguished.

B The mortgage is separated from the obligation on the note.

C The mortgagee retains the rights to the mortgage.

D The mortgage follows the note.

Answer 9

D

When a mortgagee transfers a promissory note without a written assignment of the mortgage, generally the mortgage follows the note. A mortgage is a security interest in real estate that secures an obligation, usually a promise to repay a loan, which is represented by a promissory note. The debtor (i.e., the mortgagor) gives the mortgage and the note to the lender (i.e., the mortgagee). The mortgagee who transfers her interest usually does so by indorsing the note and executing a separate assignment of the mortgage. While it is possible to transfer the note without the mortgage, the mortgage automatically will follow the properly transferred note. No separate written assignment of the mortgage is necessary. The mortgagee does NOT retain the rights to the mortgage when she transfers the note without a written assignment of the mortgage unless she expressly reserves the rights, which there would rarely be any reason for her to do. Generally, the mortgage follows the note; the mortgage is NOT separated from the obligation on the note, and the mortgage is NOT extinguished.

Question 10

When may a mortgagor redeem her land in equity?

A At any time, unless waived in the mortgage itself.

B Before the foreclosure sale.

C Only during the foreclosure sale.

D After the foreclosure sale.

Answer 10

B

A mortgagor may redeem her land in equity before the foreclosure sale. At any time prior to the foreclosure sale—i.e., this right does not exist only during the foreclosure sale—the mortgagor has the right to redeem the land or free it of the mortgage by paying off the amount due, plus interest. If the mortgage or note contained an acceleration clause, which permits the mortgagee to declare the full balance due in the event of default, the full balance must be paid in order to redeem. A mortgagor may not redeem her land in equity after the foreclosure sale. However, about half the states provide a statutory right to redeem—distinct from the equitable right discussed above—for some fixed period after the foreclosure sale has occurred (e.g., six months or one year). While a mortgagor may redeem her land in equity at any time before the foreclosure sale, this right cannot be waived in the mortgage itself. Doing so is known as “clogging the equity of redemption” and is prohibited. However, the right can be waived later, for consideration.

Question 11

May the lender who is foreclosing a mortgage bid on the land during the foreclosure sale?

A Yes, but only if the parties contracted for this before default.

B No, even if the parties contracted for this before default.

C No, and the parties may not contract for this before default.

D Yes, regardless of whether the parties contracted for this before default.

Answer 11

D

The lender who is foreclosing a mortgage may bid on the land during the foreclosure sale regardless of whether the parties contracted for this before default. Foreclosure is a process by which the mortgagor’s interest in the property is terminated. The property generally is sold to satisfy the debt in whole or in part (foreclosure by sale). Foreclosure sales are conducted by auction, with the highest bidder taking the property. The lender may bid at the sale, and in many cases the lender is the sole bidder.

Question 12

For which type of security interest in land does the debtor transfer title to a third party acting on behalf of the lender?

A Deed of trust

B Installment land contract

C Equitable mortgage

D Absolute deed

Answer 12

A

A deed of trust is a security interest in land by which the debtor (i.e., the trustor) transfers title to the land to a third party (i.e., the trustee), such as the lender’s lawyer or a title insurance company, acting on behalf of the lender (i.e., the beneficiary). In the event of default, the lender instructs the trustee to foreclose the deed of trust by selling the property. An equitable mortgage exists if a court concludes that a grantor transferred an absolute deed to serve as security for an obligation. If the court so determines, the grantee must foreclose by judicial action, as with any other mortgage. The court will consider: (i) The existence of a debt or promise of payment by the grantor; (ii) The grantee’s promise to return the land if the debt is paid; (iii) Whether the amount advanced to the grantor was much lower than the value of the property; (iv) The degree of the grantor’s financial distress; and (v) The parties’ prior negotiations. An installment land contract is a security interest in land in which the debtor (i.e., the buyer) contracts with the seller to pay for the land in regular installments until the full contract price has been paid, plus interest. Only then will the seller transfer legal title to the buyer. The contract may contain a forfeiture clause providing that the seller may cancel the contract upon default, retain all money paid, and retake possession of the land.

Question 13

When a mortgagor conveys mortgaged property, a grantee who assumes the mortgage is __________ liable to the lender.

A Not personally

B Secondarily

C Primarily

Answer 13

C

When a mortgagor conveys mortgaged property, a grantee who assumes the mortgage is primarily liable to the lender. A grantee who signs an assumption agreement promises to pay the mortgage loan, thus becoming personally and primarily liable to the lender. The original mortgagor, then, becomes secondarily liable as a surety. In contrast, absent an assumption agreement, the grantee takes subject to the mortgage and is not personally liable on the loan. The original mortgagor remains personally and primarily liable. However, if the mortgagor defaults on the mortgage and the grantee does not pay, the mortgage may be foreclosed, thus wiping out the grantee’s investment in the land.

Question 14

Must a senior mortgagee be named as a party to a junior mortgagee’s foreclosure action?

A No, because foreclosure extinguishes interests senior to the mortgage being foreclosed

B Yes, because failure to include a necessary party results in the preservation of that party’s interest
Correct

C No, because foreclosure does not affect interests senior to the mortgage being foreclosed

D Yes, because a senior mortgagee has a right to pay off a junior mortgage

Answer 14

C

No, a senior mortgagee need not be named as a party to a junior mortgagee’s foreclosure action, because foreclosure does not affect interests senior to the mortgage being foreclosed. Foreclosure destroys interests (e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed. However, the buyer at the sale takes subject to senior interests, which remain on the land. Thus, only those with interests junior to that of the foreclosing party are necessary parties to the foreclosure action. Although failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale, senior mortgagees are not necessary parties because their interests remain on the property. Foreclosure does NOT extinguish interests senior to the mortgage being foreclosed. As explained above, senior mortgages remain on the property after the sale. Although a senior mortgagee has a right to pay off a junior mortgage, there is no reason for it to do so. The property will remain subject to the senior mortgage even if the junior mortgagee forecloses and the land is purchased by a new buyer at the foreclosure sale. In contrast, a junior mortgagee has an incentive to pay off a defaulting senior mortgage, as the foreclosure of that mortgage would wipe out the junior interest in the land.

Question 15

Is the mortgagor entitled to any proceeds of a mortgage foreclosure sale?

A Yes, but only after expenses of the sale, attorneys’ fees, court costs, the foreclosing party’s loan, and senior lienors have been paid

B No, because the mortgagor is the defaulting party

C Yes, but only after expenses of the sale, attorneys’ fees, court costs, the foreclosing party’s loan, and junior lienors have been paid

D No, because the mortgagor had the right to redeem the property in equity before foreclosure

Answer 15

C

Yes, the mortgagor is entitled to any proceeds of a mortgage foreclosure sale, but only after expenses of the sale, attorneys’ fees, court costs, the foreclosing party’s loan, and junior lienors have been paid. The priority of the proceeds from a foreclosure sale is as follows: 1. Expenses of the sale, attorneys’ fees, and court costs;2. The principal and accrued interest on the foreclosing party’s loan;3. Any junior lienors or other junior interests in the order of their priority; and then4. The mortgagor. Senior lienors receive none of the proceeds. 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. Although the mortgagor is the defaulting party, he is entitled to any surplus proceeds remaining after the junior lienors are paid. In many cases, however, no surplus remains after the principal debt is paid. The mortgagor’s right to redeem the property in equity before foreclosure does not affect his right to the surplus proceeds. Equitable redemption is the right of a mortgagor to recover the land by paying the amount overdue, plus interest, at any time before the foreclosure sale. However, if foreclosure occurs, then the mortgagor is entitled to the surplus—if any—as explained above.

Question 16

If the proceeds from a foreclosure sale are insufficient to satisfy the debt of a mortgage junior to the one being foreclosed, the result is:

A The junior mortgagee may sue the mortgagor for the deficiency

B The amount distributed to claimants with higher priority will be reduced

C The proceeds are distributed pro rata to all claimants

D The junior mortgagee will not be entitled to recover

Answer 16

A

If the proceeds from a foreclosure sale are insufficient to satisfy the debt of a mortgage junior to the one being foreclosed, the most likely result is the junior mortgagee may sue the mortgagor for the deficiency. The priority of the proceeds from a foreclosure sale is as follows: 1. Expenses of the sale, attorneys’ fees, and court costs;2. The principal and accrued interest on the foreclosing party’s loan;3. Any junior lienors or other junior interests in the order of their priority; and then4. The mortgagor. In many cases, no surplus remains after the principal debt is paid off. If the proceeds of the foreclosure sale are insufficient to satisfy the debt, the mortgagee/lender can bring a personal action against the mortgagor/debtor for the deficiency. The junior mortgagee IS entitled to recover as against the debtor. If the proceeds from a foreclosure sale are insufficient to satisfy the debt of a mortgage junior to the one being foreclosed, the proceeds are NOT distributed pro rata to all claimants, and the amount distributed to claimants with higher priority will NOT be reduced.

Question 17

May a vendor who has accepted late payments for six months on an installment land contract declare a forfeiture if payment is late the seventh month?

A Yes, if the contract provides for forfeiture in the event of default

B No, because the vendor has waived strict performance of the contract

C Yes, and the purchaser also is liable for damages

D No, because forfeiture clauses are void in all jurisdictions

Answer 17

B

No, a vendor who has accepted late payments for six months on an installment land contract may not declare a forfeiture if payment is late the seventh month, because the vendor has waived strict performance of the contract. In an installment land contract, the debtor (i.e., the purchaser) contracts with the vendor to pay for the land in regular installments until the full contract price has been paid, plus interest. Only then will the vendor transfer legal title to the purchaser. The contract may contain a forfeiture clause providing that the vendor may cancel the contract upon default, retain all money paid, and retake possession of the land (instead of foreclosing). Forfeiture clauses are NOT void in all jurisdictions, but because forfeiture is such a harsh remedy, courts have tended to resist enforcing them. One way courts have done so is by finding a waiver of strict performance when a vendor has established a pattern of accepting late payments from the purchaser. To reinstate strict performance, the vendor must notify the purchaser of her intent to do so and must allow the purchaser a reasonable time to make up any late payments. Even if the contract provides for forfeiture in the event of default, the vendor may not reclaim the land because she has waived strict performance, as explained above. If the vendor pursues forfeiture, the purchaser would not be liable for damages. It is commonly held that the vendor who elects to pursue a forfeiture cannot also bring an action for damages or for specific performance. If the vendor chooses the forfeiture remedy, she must forgo all others.

Question 18

Which of the following is not a security interest in land?

AI nstallment contract

B Equitable mortgage

C Deed of trust

D Right of entry

Answer 18

D

A right of entry is not a security interest in land. A security interest in land secures an obligation, such as a promise to repay a loan. If the debtor does not pay the loan when it is due, the creditor can either take title to the land or have it sold (i.e., foreclose it) and use the proceeds to pay the debt. In contrast, a right of entry is the future interest retained by a grantor who conveys an estate subject to a condition subsequent. If the condition occurs, the grantor has the right to terminate the grantee’s estate by entering the land or bringing suit. An equitable mortgage is a security interest in land. If a court concludes that a grantor transferred a deed as security for an obligation, the grant will be treated as a mortgage. The grantee thus may be required to foreclose it by judicial action, as with any other mortgage. To determine this, the court will consider (i) the existence of a debt or promise of payment by the grantor; (ii) the grantee’s promise to return the land if the debt is paid; (iii) whether the amount advanced to the grantor was much lower than the value of the property; (iv) the degree of the grantor’s financial distress; and (v) the parties’ prior negotiations. A deed of trust is a security interest in land. The debtor (i.e., the trustor) gives a deed of trust to a third-party trustee such as the lender’s lawyer or a title insurance company. In the event of default, the lender (i.e., the beneficiary) instructs the trustee to foreclose the deed of trust by selling the property. An installment contract is a security interest in land. The debtor (i.e., the buyer) contracts with the seller to pay for the land in regular installments until the full contract price has been paid, plus interest. Only then will the seller transfer legal title to the buyer. The contract usually contains a forfeiture clause providing that the seller may cancel the contract upon default, retain all money paid, and retake possession of the land.

Question 19

If a debtor deeds land to her creditor, when is a court least likely to treat the transaction as a security interest in land?

A The creditor promises to reconvey the land when the debt is paid in full.

B The creditor agrees to accept the land as payment in full for the loan.

C The creditor leases the land back to the debtor for 20 years with rent payable monthly and an option to repurchase.

D The creditor agrees to accept regular installment payments until the debt is paid in full, at which time he will transfer title to the debtor.

Answer 19

B

If a debtor deeds land to her creditor, a court is least likely to treat the transaction as a security interest in land if the creditor agrees to accept the land as payment in full for the loan. A security interest in land secures an obligation such as a promise to repay a loan. If the debtor does not pay the loan when it is due, the creditor can take title to the land or have it sold to cover the debt. Courts recognize certain transfers as mortgages in disguise, as is explained below. However, if the arrangement does not allow the seller (here, the debtor) to reclaim the property, a court is likely to regard the sale as a legitimate conveyance rather than as the landowner using her property as security for a debt. A court is likely to treat the transaction as a security interest in land if the creditor promises to reconvey the land when the debt is paid in full. A landowner needing to raise money may “sell” her land to another for cash or in satisfaction of a debt and give the “buyer” an absolute deed. However, if the court concludes that the deed was really given for security purposes, it will treat the transaction as a security interest—an equitable mortgage. An equitable mortgage may be evidenced by: (i) the grantor’s debt; (ii) the grantee’s promise to return the land if the debt is paid; (iii) the amount advanced to the grantor being much lower than the property value; (iv) the degree of the grantor’s financial distress; and (v) the parties’ prior negotiations. If the creditor leases the land back to the debtor for 20 years, with rent payable monthly and an option to repurchase, a court is likely to treat the transaction as a security interest in land. As with the absolute deed above, if a landowner “sells” her land to another for cash or in satisfaction of a debt and leases the land back for a long period of time, the grantor/lessee may later attack the transaction as a disguised mortgage. If the court agrees, the transaction will be treated as a security interest—a sale-leaseback. A sale-leaseback may be evidenced by: (i) similarity between the lease payments and payments that would be due on a mortgage loan; (ii) the grantor/lessee’s option to repurchase; and (iii) the repurchase option being far below the property value, thus making repurchase very likely to occur. A court is likely to treat the transaction as a security interest in land if the creditor agrees to accept regular installment payments until the debt is paid in full, at which time he will transfer title to the debtor. In an installment land contract, a type of security interest, the debtor/purchaser agrees to make regular installment payments until the full contract price has been paid. Only then will the vendor transfer title to the purchaser. When a creditor accepts the deed to the land but lets the debtor “repurchase” it by making regular installment payments until the debt is paid in full, a court will likely treat the transaction as an installment land contract (or as an equitable mortgage, explained above).

Question 20

Mortgages junior to the one being foreclosed are __________ by foreclosure, and thus a junior mortgagee __________.

A redeemed; is entitled to all proceeds from the sale

B extinguished; is a necessary party to the foreclosure action

C not affected; maintains its lien on the property after the sale

D satisfied; may not seek a deficiency judgment if there is no surplus

Answer 20

B

Mortgages junior to the one being foreclosed are extinguished by foreclosure, and thus a junior mortgagee is a necessary party to the foreclosure action. Foreclosure destroys all interests (e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed. Thus, if a lien senior to a mortgagee’s is in default, that mortgagee has the right to pay it off (i.e., redeem it) to avoid being wiped out by its foreclosure. Failure to include the junior mortgagee as a necessary party results in the preservation of that party’s interest despite foreclosure and sale. In contrast, mortgages senior to the one being foreclosed are not affected by foreclosure, and thus a senior mortgagee always maintains its lien on the property after the sale. Mortgages junior to the one being foreclosed are not satisfied by foreclosure. As is explained above, junior mortgages will be extinguished. For this reason, a mortgagee with an interest junior to the one being foreclosed is entitled to any remaining surplus once the proceeds have covered (i) expenses of the sale, attorneys’ fees, and court costs; and (ii) the principal debt and interest on the loan that was foreclosed. However, in many cases, no surplus remains after the principal debt is paid off. The junior mortgagee may sue the mortgagor and may seek a deficiency judgment if there is no surplus unless anti-deficiency statutes prohibit this. Mortgages are not redeemed by foreclosure. Redemption is the act of paying off the mortgage debt, thus freeing the land of the mortgage and preventing a foreclosure action. A mortgagor may redeem the land in equity prior to the foreclosure sale. About half the states afford the mortgagor a statutory redemption period after foreclosure, and some extend this to junior lienors. Moreover, a mortgagee with an interest junior to the one being foreclosed is not entitled to all proceeds from the sale. Rather, it is entitled to any remaining surplus once the proceeds have covered (i) expenses of the sale, attorneys’ fees, and court costs; and (ii) the principal debt and interest on the loan that was foreclosed. Any proceeds remaining after all junior liens are paid off are distributed to other, more subordinate mortgagees or, if there are none, to the mortgagor.

Question 21

When allocating proceeds from a mortgage foreclosure sale, which of the following receives payment last?

A Expenses of the sale

B Senior liens

C Junior liens

D The mortgagor

Answer 21

D

When allocating proceeds from a mortgage foreclosure sale, the mortgagor receives payment last. The priority of the proceeds from a foreclosure sale is as follows: Expenses of the sale, attorneys’ fees, and court costs;The principal and accrued interest on the loan that was foreclosed;Any junior liens or other junior interests in the order of their priority; and thenThe mortgagor. In many cases, no surplus remains after the principal debt is paid off. When allocating proceeds from a mortgage foreclosure sale, senior liens receive none of the proceeds. Because a senior lien remains on the land (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.

Question 22

What is a result of a mortgagor conveying land on which a mortgage was properly recorded?

A The transfer is void

B The mortgage remains on the land

C The land passes separately from the mortgage

D Unless the grantee assumes the mortgage, the mortgage is extinguished

Answer 22

B

The result of a mortgagor conveying land on which a mortgage was properly recorded is that the mortgage remains on the land. Both mortgagors and mortgagees have the right to transfer their interests; such a transfer is NOT void. Mortgagors ordinarily transfer their interests by deeding the property. The grantee takes subject to the recorded mortgage (he is charged with notice of it), which remains on the land, and the original mortgagor remains personally and primarily liable on the loan. The land does NOT pass separately from the mortgage. Regardless of whether the grantee assumes the mortgage, the mortgage is NOT extinguished. Rather, the grantee’s assumption affects the grantee’s liability for payment on the mortgage. A grantee who signs an assumption agreement promises to pay the mortgage loan, thus becoming personally and primarily liable to the lender. The original mortgagor becomes secondarily liable as a surety. Absent an assumption agreement, the grantee takes subject to the mortgage and is not personally liable on the loan.

Question 23

For an institutional lender, what is the effect of a due-on-sale clause when a mortgagor transfers her interest without the lender’s consent?

A The lender must institute foreclosure proceedings

B The sale is void

C The lender may demand that the debtor pay the remaining debt in full

D The mortgage is extinguished

Answer 23

C

For an institutional lender, the effect of a due-on-sale clause when a mortgagor transfers her interest without the lender’s consent is that the lender may demand that the debtor pay the remaining debt in full. Federal law makes such due-on-sale clauses enforceable for all types of institutional mortgage lenders on all types of real estate, but this federal preemption does not apply to isolated mortgage loans made by private parties. Due-on-sale clauses are designed to: (i) protect the lender from the mortgagor’s sale to a poor credit risk or to a person likely to commit waste; and (ii) allow the lender to raise the interest rate or charge an assumption fee when the property is sold. Their effect is not to make the lender institute foreclosure proceedings, or to make the sale void, or to extinguish the mortgage.

Question 24

__________ is the right of a mortgagor to free the land of the mortgage by paying the amount due, plus interest, at any time before the foreclosure sale.

A Statutory redemption

B Power of sale

C Equitable redemption

Answer 24

C

Equitable redemption is the right of a mortgagor to free the land of the mortgage by paying the amount due, plus interest, at any time before the foreclosure sale. (If the mortgage so requires, the mortgagor may have to pay a prepayment charge as well.) If the mortgagor defaulted and the mortgage or note contained an acceleration clause, then the full balance must be paid in order to redeem in equity. This right cannot be waived in the mortgage itself; doing so is known as “clogging the equity of redemption.” However, the right can be waived later for consideration. Statutory redemption, in contrast, is the right of a mortgagor to free the land of the mortgage by paying the foreclosure sale price after the sale has occurred. 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. The amount to be paid usually is the foreclosure sale price, rather than the amount of the original debt. This right extends to mortgagors and, in some states, to junior lienors. A power of sale does not refer to the mortgagor’s right to redeem the land. Rather, a “power of sale” clause authorizes the trustee in a deed of trust to advertise, give appropriate notices, and conduct a nonjudicial foreclosure sale personally. All states allow mortgages to be foreclosed by judicial sale, while about one-half also allow nonjudicial sale under a power of sale for deeds of trust.

Question 25

Equitable redemption is the right of a mortgagor to recover the land at any time before the foreclosure sale, by paying __________. A The amount of the original debt B The difference between the foreclosure sale price and the balance due on the mortgage C The amount due on the mortgage, plus interest

Answer 25

C Equitable redemption is the right of a mortgagor to recover the land by paying the amount due on the mortgage, plus interest, at any time before the foreclosure sale. (If the mortgage so requires, the mortgagor may have to pay a prepayment charge as well.) Note that if the mortgagor has defaulted and the mortgage or note contained an acceleration clause, which permits the mortgagee to declare the full balance due in the event of default, then the full balance of the mortgage must be paid in order to redeem in equity. The right of redemption cannot be waived in the mortgage itself; doing so is known as "clogging the equity of redemption." However, the right can be waived later for consideration. Statutory redemption, in contrast, is the right of a mortgagor to recover the land after the foreclosure sale has occurred, usually by paying the foreclosure sale price, rather than the amount of the original debt. 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. This right extends to mortgagors and, in some states, to junior lienors. Neither redemption right requires the mortgagor to pay the difference between the foreclosure sale price and the balance due on the mortgage. Note, however, that if the foreclosure sale price is greater than the balance due on the mortgage, the mortgagor is entitled to receive any surplus remaining after the proceeds cover expenses of the sale, attorneys' fees, court costs, the principal and accrued interest on the foreclosed loan, and junior liens. Frequently, no such surplus remains.

Question 26

Are junior lienors entitled to any proceeds of a mortgage foreclosure sale? A No, because junior interests are extinguished by foreclosure B No, because junior interests remain on the property after the sale C Yes, but only after expenses of the sale, attorneys' fees, court costs, and the foreclosing party's loan have been paid D Yes, but only after expenses of the sale, attorneys' fees, court costs, and the mortgagor have been paid

Answer 26

C Yes, junior lienors are entitled to proceeds of a mortgage foreclosure sale, but only after expenses of the sale, attorneys' fees, court costs, and the foreclosing party's loan have been paid. The priority of the proceeds from a foreclosure sale is as follows: 1. Expenses of the sale, attorneys' fees, and court costs;2. The principal and accrued interest on the foreclosing party's loan;3. Any junior lienors or other junior interests in the order of their priority; and then4. The mortgagor. Although junior interests are extinguished by foreclosure, junior lienors are entitled to any surplus—i.e., proceeds remaining after the principal debt is paid. In many cases, however, no surplus remains after the principal debt is paid. Junior interests do NOT remain on the property after the sale; they are extinguished by foreclosure if they are properly made parties to the foreclosure proceeding. In contrast, foreclosure does not affect any interest senior to the mortgage being foreclosed, which remains on the property.

Question 27

What does it mean for a grantee to assume a mortgage? A The grantee institutes foreclosure proceedings. B The grantee becomes primarily liable to the lender. C The grantee takes out an additional mortgage on the property. D The grantee becomes a surety for the original mortgagor.

Answer 27

B For a grantee to assume a mortgage means the grantee becomes primarily liable to the lender. When a mortgagor conveys mortgaged property, the grantee takes the land subject to the mortgage. A grantee who signs an assumption agreement promises to pay the mortgage loan, thus becoming personally and primarily liable to the lender. The original mortgagor becomes secondarily liable as a surety. Assumption of a mortgage does not mean the grantee becomes a surety for the original mortgagor. The assuming grantee becomes primarily liable to the lender, and the original mortgagor becomes secondarily liable as a surety. Assumption of a mortgage does not mean the grantee institutes foreclosure proceedings. Foreclosure is a process that terminates the mortgagor's interest in the property. Generally, the property is sold in a foreclosure sale to satisfy the mortgage debt. The grantee who assumes a mortgage promises to pay the mortgage loan; thus, if the grantee defaults, foreclosure proceedings may be brought against him. Assumption of a mortgage does not mean the grantee takes out an additional mortgage on the property. As explained above, a grantee who signs an assumption agreement promises to pay the original mortgage loan, thus becoming primarily liable to the lender.

Question 28

In mortgage transactions, __________ may transfer their interests to third parties. A both mortgagors and mortgagees B neither mortgagors nor mortgagees C only mortgagors D only mortgagees

Answer 28

A In mortgage transactions, both mortgagors and mortgagees may transfer their interests to third parties. All parties to a mortgage can transfer their interests. Ordinarily, mortgagors transfer their interests by deeding the property. The mortgage remains on the land, and unless the parties have otherwise agreed, a mortgagee will have no power to object to the transfer. Mortgagees usually transfer their interests by indorsing the note and executing a separate assignment of the mortgage. The note and mortgage must pass to the same person for a mortgagee's transfer to be complete.

Question 29

How is the priority of a mortgage generally determined? A By the sheriff during the foreclosure sale. B By the order in which it was placed on the property. C By the dollar amount of the debt secured. D By agreement between the mortgagor and first-in-time mortgagee.

Answer 29

B The priority of a mortgage generally is determined by the order in which it was placed on the property. Foreclosure will terminate interests junior to the mortgage being foreclosed but will not affect senior interests. Priority between mortgages on the same real estate is normally determined by chronology: The earliest (i.e., senior) mortgage is first in priority, the next (i.e., junior) mortgage is second, and so on. However, priority may be modified in several ways, such as by operation of the recording acts if a mortgagee fails to record its mortgage, or through subordination agreements between mortgagees. It is not determined by the dollar amount of the debt secured or by the sheriff during the foreclosure sale. Nor is the priority of a mortgage generally determined merely by agreement between the mortgagor and first-in-time mortgagee. Priority usually is determined by chronology, with the earliest mortgage being first in line. This may be modified by agreement between mortgagees (e.g., a senior mortgagee may agree with a junior mortgagee to subordinate its priority) or agreement between a mortgagor and a mortgagee (e.g., a junior mortgagee will have priority over the modification of a senior mortgage). However, the mortgagor and first-in-time mortgagee cannot agree to arbitrarily fix the priority of all mortgages. Moreover, a mortgagee's vague or broad promise to subordinate to any mortgage that may be placed on the property in the future may be considered too inequitable to enforce.

Question 30

Mortgages senior to the one being foreclosed are __________ by the foreclosure, and thus a senior mortgagee __________. A not affected; maintains its lien on the property after the sale B redeemed; may pay off the junior mortgage after default C extinguished; is a necessary party to the foreclosure action D satisfied; is entitled to the proceeds of sale

Answer 30

A Mortgages senior to the one being foreclosed are not affected by the foreclosure, and thus a senior mortgagee maintains its lien on the property after the sale. Foreclosure destroys all interests (e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed. Thus, if a lien senior to a mortgagee's is in default, that mortgagee has the right to pay it off (i.e., redeem it) to avoid being wiped out by its foreclosure. Because interests junior to the mortgage being foreclosed are extinguished by foreclosure, a junior mortgagee is a necessary party to the foreclosure action. Failure to include a necessary party results in the preservation of that party's interest despite foreclosure and sale. Mortgages senior to the one being foreclosed are not satisfied by the foreclosure; as is explained above, the senior mortgage remains on the property after the sale. Because its lien remains on the land (i.e., may itself be foreclosed in the future), the senior mortgagee is not entitled to the proceeds of sale, even if there is a surplus. Mortgages are not redeemed by foreclosure. Redemption is the act of paying off the mortgage debt, thus freeing the land of the mortgage and preventing a foreclosure action. A mortgagor may redeem the land in equity prior to the foreclosure sale. While a senior mortgagee may pay off the junior mortgage after default, there is no reason for it to do so. The property will remain subject to the senior mortgage even if the junior mortgagee forecloses and the land is purchased by a new buyer at the foreclosure sale. By contrast, a junior mortgagee has an incentive to pay off a defaulting senior mortgage, as the foreclosure of that mortgage would wipe out the junior interest in the land.

Question 31

When is a lender entitled to a deficiency judgment? A Only if the lender foreclosed a deed of trust by power of sale. B Before foreclosure, if the contract contained a deficiency provision. C When the proceeds of a foreclosure sale do not satisfy the mortgage debt. D In lieu of foreclosure, at the lender's option.

Answer 31

C A lender is entitled to a deficiency judgment when the proceeds of a foreclosure sale do not satisfy the mortgage debt. Foreclosure is a process by which a mortgagor's interest in property is terminated, generally by selling the property to satisfy the debt. If the proceeds of the sale are insufficient to satisfy the debt, the mortgagee/lender can bring a personal action against the mortgagor/debtor for the deficiency. However, when the fair market value is higher than the foreclosure price, a number of states limit the deficiency that can be recovered to the difference between the debt and the property's fair market value. A lender is not entitled to a deficiency judgment in lieu of foreclosure, at the lender's option. Indeed, the concept of a deficiency judgment is meaningless until a foreclosure has occurred. When a mortgagor defaults on his debt, the lender can sue on the debt or foreclose the mortgage. However, the option to pursue a deficiency judgment arises after foreclosure if the proceeds from the sale of the property have proven insufficient to satisfy the debt. Thus, a lender is not entitled to a deficiency judgment before foreclosure, if the contract contained a deficiency provision, nor does its availability after foreclosure depend on whether the parties contracted for it. A lender's right to a deficiency judgment is not limited to cases where the lender foreclosed a deed of trust by power of sale. A deed of trust is a security interest in land that generally is foreclosed on default by a nonjudicial sale through a third-party trustee. The same foreclosure principles that apply to parties to a mortgage apply to parties to a deed of trust, except that some states prohibit deficiency judgments entirely on deeds of trust foreclosed by power of sale but allow them after a judicial foreclosure. However, all of the states that allow deficiency judgments after nonjudicial foreclosure of deeds of trust allow them after judicial foreclosure of mortgages as well.

Question 32

May a mortgagee validly transfer its mortgage interest? A Yes, if the mortgagee gives the mortgagor proper notice of the transfer B Yes, if the right to enforce the promissory note passes to the transferee C No; mortgages are nontransferable D No; only the mortgagor's interest is transferable

Answer 32

B Yes, a mortgagee may validly transfer its mortgage interest if the right to enforce the promissory note passes to the transferee. Mortgagees usually transfer their interests by indorsing and delivering the promissory note and executing a separate assignment of the mortgage. The note and mortgage must pass to the same person for a mortgagee's transfer to be complete, but under the common law, still in effect in the great majority of states, a transfer of the note will automatically transfer the mortgage along with it, so a separate assignment of the mortgage is not technically necessary. If the mortgage is transferred without the note, some states hold that the note automatically will follow it, and other states hold that the transfer is void. Whether the mortgagee gives the mortgagor proper notice of the transfer does not affect the validity of the transfer, but it may dictate whom the mortgagor is obligated to pay. If the original mortgagee transfers possession of a nonnegotiable note (many notes secured by mortgages are not negotiable), the mortgagor's payment to the original mortgagee is effective against the transferee if made before the mortgagor receives notice of the transfer. NOT only the mortgagor's interest is transferable. Both mortgagees and mortgagors have the right to transfer their interests. Mortgagees may transfer their interests as described above. Mortgagors ordinarily do so by deeding the property; the grantee takes subject to the mortgage, which remains on the land. Thus, both parties' interests in the mortgage ARE transferable.

Question 33

May a mortgagee validly transfer the note without the mortgage? A Yes, but the mortgage will automatically follow the note B Yes, but only with the mortgagor's consent C No; a transfer of the note without the mortgage is void D No, unless the mortgagee gives the mortgagor proper notice of the transfer

Answer 33

A Yes, a mortgagee may validly transfer the note without the mortgage, but the mortgage will automatically follow the note unless the mortgagee expresses a contrary intent. An exception exists where the mortgagee reserves the right to the mortgage, but this would rarely occur. No separate written assignment of the mortgage is necessary, although the transferee customarily will obtain and record an assignment of the mortgage. The transfer does not require the mortgagor's consent. Whether the mortgagee gives the mortgagor proper notice of the transfer does not affect the validity of the transfer, but it may dictate whom the mortgagor is obligated to pay. If the original mortgagee transfers possession of a nonnegotiable note (many notes secured by mortgages are not negotiable), the mortgagor's payment to the original mortgagee is effective against the transferee if made before the mortgagor receives notice of the transfer. A transfer of the note without the mortgage is NOT void. As explained above, the note can be transferred without the mortgage, but the mortgage will automatically follow the properly transferred note unless the mortgagee expressly reserves the right to the mortgage. In contrast, a transfer of the mortgage without the note is void in some states.

Question 34

If a mortgagee purports to transfer the mortgage without the note, which of the following is not a possible result? AThe transfer would be void B Payment of the mortgage debt would become due in full C The note would automatically follow the mortgage

Answer 34

B If a mortgagee purports to transfer the mortgage without the note, payment of the mortgage debt would NOT become due in full. Rather, that would be the effect if the mortgagor transferred land subject to a mortgage containing a due-on-sale clause. Such clauses benefit the mortgagee, protecting it from the mortgagor's sale to a poor credit risk or to a person likely to commit waste. Mortgagees usually transfer their interests by indorsing and delivering the promissory note and executing a separate assignment of the mortgage. The note and mortgage must pass to the same person for a mortgagee's transfer to be complete. If a mortgagee purports to transfer the mortgage without the note, some states hold that the note would automatically follow the mortgage. Other states hold that, because the note is the principal evidence of the debt, the transfer would be void.

Question 35

Statutory redemption is the right of a mortgagor to recover the land after the foreclosure sale has occurred, usually by paying __________. A The full balance of the mortgage B The amount of the original debt C The amount overdue on the mortgage, plus interest D The foreclosure sale price

Answer 35

D Statutory redemption is the right of a mortgagor to recover the land after the foreclosure sale has occurred, usually by paying the foreclosure sale price. 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. The amount to be paid is generally the foreclosure sale price, rather than the amount of the original debt. This right extends to mortgagors and, in some states, to junior lienors. In contrast, 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. 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.

Question 36

As between two mortgages, what is the effect on the junior mortgage when the mortgagor agrees to an increased interest rate on the senior mortgage? A No effect B The junior mortgage is given priority over any increase in the senior mortgage debt C The junior mortgage is destroyed D The junior mortgage is given priority over the entire senior mortgage

Answer 36

B As between two mortgages, when the mortgagor agrees to an increased interest rate on the senior mortgage, the junior mortgage is given priority over any increase in the senior mortgage debt. Priority among mortgages on the same real estate is normally determined by chronology: The earliest (i.e., senior) mortgage is first in priority, the next (i.e., junior) mortgage is second, and so on. However, priority may be modified in several ways, such as by agreement between a mortgagor and a mortgagee. If a mortgagor enters into a modification agreement with the senior mortgagee making its mortgage more burdensome, the junior mortgage will be given priority over the additional debt balance resulting from the modification. When a mortgagor and mortgagee agree to modify the mortgage, the mortgagee loses its priority as to the modification but maintains its priority as to the original debt. Thus, the junior mortgage is NOT given priority over the entire senior mortgage. Although foreclosure will terminate interests junior to the mortgage being foreclosed, modification of a senior mortgage will not. Thus, the junior mortgage is NOT destroyed.

Question 37

When allocating proceeds from a mortgage foreclosure sale, which of the following has priority? A Court costs B Junior lienors C The foreclosing party D The mortgagor

Answer 37

A When allocating proceeds from a mortgage foreclosure sale, court costs have priority. The priority of the proceeds from a foreclosure sale is as follows: 1. Expenses of the sale, attorneys' fees, and court costs;2. The principal and accrued interest on the foreclosing party's loan;3. Any junior lienors or other junior interests in the order of their priority; and then4. The mortgagor. In many cases, no surplus remains after the principal debt is paid off.

Question 38

May a mortgage be foreclosed by judicial sale? A No, because mortgages require nonjudicial sale under a power of sale B Yes, but only in a minority of jurisdictions C Yes, in all jurisdictions D No, because foreclosure sales must be conducted by auction

Answer 38

C Yes, a mortgage may be foreclosed by judicial sale in all jurisdictions. Foreclosure is a process by which the mortgagor's interest in the property is terminated. Almost all states require foreclosure by sale, in which the land is sold to satisfy the debt in whole or in part. All states—NOT only a minority of jurisdictions—allow judicial sale. About one-half also allow nonjudicial sale under a power of sale, but often only for deeds of trust and not for mortgages. Foreclosure sales ARE conducted by auction, with the highest bidder taking the property, even if they are judicial sales. The lender may bid at the sale, and in many cases the lender is the sole bidder.

Question 39

When a mortgagee transfers a promissory note, which of the following is not required for the transferee to become a holder in due course? A The note must be payable to bearer or to the order of the named payee. B The transferee must take the note in good faith. C The note must state that the transferee takes free of personal defenses. D The transferee must pay value for the note.

Answer 39

C When a mortgagee transfers a promissory note, the note does NOT have to state that the holder takes free of personal defenses for the transferee to become a holder in due course. Personal defenses are most defenses available in a standard contract action. The primary benefit of holder in due course status is that a holder in due course takes the note free of any personal defenses that the maker might raise—this need not be reserved in the note itself. A holder in due course is subject only to "real" defenses, such as infancy, duress, and illegality. When a mortgagee transfers a promissory note, for the transferee to become a holder in due course: The note must be negotiable in form—i.e., the note must be payable to bearer or to the order of the named payee and must contain a promise to pay a fixed amount of money and no other promises, except that it may contain an acceleration clause and an attorneys' fee clause;If there is a named payee, she must have indorsed (i.e., signed) the note;The note must be delivered to the transferee; andThe transferee must pay value for the note and take the note in good faith, without notice that the note is overdue or has been dishonored, or that the maker has any defense to the duty to pay it.

Question 40

When may a mortgagee take possession of the mortgaged property? A As soon as the mortgage is created. B On default, in a lien theory state. C Never under any circumstances. D On default, in a title theory state.

Answer 40

D A mortgagee may take possession of the mortgaged property on default, in a title theory state. When a mortgagor defaults on his debt, the mortgagee can sue on the debt or foreclose the mortgage. The mortgagee will have a right to take possession before foreclosure only in the minority of jurisdictions where she is deemed to have legal title to the property. In practice, this means the mortgagee can take possession as soon as a default occurs. A mortgagee may not take possession of the mortgaged property on default in a lien theory state. A majority of the states follow the lien theory, under which the mortgagee is deemed to hold a security interest in the land and the mortgagor is considered the owner until foreclosure. According to this theory, the mortgagee may not take possession of the land before foreclosure. A mortgagee may not take possession of the mortgaged property as soon as the mortgage is created. In both title theory and lien theory states, discussed above, the mortgagee cannot take possession until the mortgagor defaults. Thus, if the mortgagor duly pays the debt, the mortgagee will not be entitled to possession. The same is true in the few jurisdictions that follow the intermediate theory, in which legal title transfers from the mortgagor to the mortgagee on default. It is not correct that a mortgagee may never under any circumstances take possession of the mortgaged property. In all states, a mortgagee may take possession if the mortgagor consents or abandons the land.

Question 41

When can a mortgagor exercise her statutory right of redemption? A Before the foreclosure sale. B After the foreclosure sale. C Before default. D Only during the foreclosure sale.

Answer 41

B A mortgagor can exercise her statutory right of redemption after the foreclosure sale. 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. The amount to be paid is the foreclosure sale price, rather than the amount of the original debt. This right extends to mortgagors and, in some states, to junior lienors. A mortgagor cannot exercise her statutory right of redemption before default, before the foreclosure sale or only during the foreclosure sale. In the states that provide it, the statutory right to redeem exists for a fixed period after the foreclosure sale. By contrast, all jurisdictions recognize the mortgagor's right of redemption in equity, which exists until the date of sale and is cut off by foreclosure. A mortgagor may purchase the land at the foreclosure sale, but a statutory right of redemption provides a grace period after foreclosure when the mortgagor may redeem the property.

Question 42

Which of the following is not a way in which land subject to a security interest can be foreclosed? A Through the mortgagor's tender of the deed to the mortgagee. B Through a clause in a deed of trust giving the trustee the power of sale. C Through an auction. D Through a court order.

Answer 42

A Land subject to a security interest cannot be foreclosed through the mortgagor's tender of the deed to the mortgagee. The mortgagor may grant the mortgagee a deed to the property in lieu of foreclosure. The mortgagor effectively gives the mortgagee her equity of redemption (i.e., her right to free the land of the mortgage by paying it off). Acceptance of a deed in lieu of foreclosure discharges the mortgage and allows the mortgagee to take possession without a foreclosure sale. If the mortgagee accepts the tendered deed, it is not a foreclosure, since it does not cut off subordinate liens as a foreclosure does. However, a mortgagee has the right to refuse the deed and proceed to foreclosure. Land subject to a security interest can be foreclosed through a court order. In the event of default on a mortgage, most states require that the lender realize on the property to satisfy the debt only by having a court-ordered foreclosure sale, conducted by the sheriff as an auction. This is known as a judicial sale. Land subject to a security interest can be foreclosed through a clause in a deed of trust giving the trustee the power of sale. In the event of default on a deed of trust, the lender instructs the trustee to foreclose the deed of trust by sale. Many states allow the sale to be either judicial (as with a mortgage) or nonjudicial, under a "power of sale" clause in a deed of trust that authorizes the trustee to advertise, give appropriate notices, and conduct the sale personally. Nonjudicial sale is not permitted with mortgages in most states.