Property AMP Set - Mortgages Flashcards
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
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.
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
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.
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
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.
__________ 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
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.
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
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.
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
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.
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
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.
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
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.
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.
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.
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.
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.
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.
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.
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
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.
When a mortgagor conveys mortgaged property, a grantee who assumes the mortgage is __________ liable to the lender.
A Not personally
B Secondarily
C Primarily
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.
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
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.
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
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.
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
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.
