Property Learning Questions - Set 8 Flashcards
Must a junior mortgagee be named as a party to a senior mortgagee’s foreclosure action?
A
No, because foreclosure does not affect interests junior to the mortgage being foreclosed
B
No, because foreclosure extinguishes interests junior to the mortgage being foreclosed
C
Yes, because it has the right to pay off the senior mortgage to avoid being wiped out by foreclosure
D
Yes, because all those with liens on the property are necessary parties to a foreclosure action
C
Yes, a junior mortgagee must be named as a party to a senior mortgagee’s foreclosure action because it has the right to pay off the senior mortgage to avoid being wiped out by foreclosure. Foreclosure destroys interests ( e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed. Thus, if a senior mortgage is in default, a junior mortgagee has the right to pay it off (i.e., redeem it) to avoid being wiped out by its foreclosure. Failure to join the junior mortgagee results in the preservation of its interest despite foreclosure and sale. In contrast, those with interests senior to that of the foreclosing party are not necessary parties because their interests are not affected by foreclosure. The buyer at the sale takes subject to senior interests, which remain on the land.
As explained above, NOT all those with liens on the property are necessary parties to a foreclosure action. Only those with interests subordinate to that of the foreclosing party must be named in the foreclosure action. Failure to name a senior interest holder does not affect that party’s interest.
Because foreclosure extinguishes interests junior to the mortgage being foreclosed, as explained above, junior mortgagees are necessary parties to a senior mortgagee’s foreclosure action.
Foreclosure DOES affect interests junior to the mortgage being foreclosed. As explained above, junior mortgages are extinguished by foreclosure so long as they are joined in the action.
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 overdue on the mortgage, plus interest
C
The foreclosure sale price
D
The amount of the original debt
C
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.
When can a mortgagor exercise her statutory right of redemption?
A
Only during the foreclosure sale.
B
Before default.
C
After the foreclosure sale.
D
Before the foreclosure sale.
C
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.
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 senior lienors in the order of their priority, and then any junior lienors in the order of their priority
C The foreclosing party, any junior lienors in the order of their priority, and then the mortgagor
D Any senior lienors in the order of their priority, the foreclosing party, and then any junior lienors in the order of their priority
C
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 then 4. 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 landowner in fee simple signed a promissory note for $10,000 to a bank, and secured the note by a mortgage of her land to the bank. The mortgage was duly recorded. The landowner then sold the property to an attorney, who assumed and agreed to pay the mortgage to the bank on the land. The attorney did not make payments on the mortgage note to the bank. The bank, following appropriate statutory procedures, foreclosed the mortgage and gave notice to both the landowner and the attorney that it intended to sue for any deficiency. At the foreclosure sale, the property sold for $6,000. The bank now sues both the landowner and the attorney for $5,000, which is the remaining amount of the unpaid principal and interest on the note plus costs of foreclosure.
Against which party will the bank be successful in obtaining a judgment?
A Only the landowner.
B Only the attorney.
C Either the landowner or the attorney.
D Both the landowner and the attorney.
D
The bank will be successful in obtaining a judgment against both the landowner and the attorney, although it may only collect once. When a grantee assumes the mortgage, the grantee expressly promises the grantor-mortgagor that he will pay the mortgage obligation as it becomes due. The mortgagee then becomes a third-party beneficiary of the grantee’s promise to pay and can sue the grantee directly if the grantee fails to pay. After the assumption, the grantor-mortgagor becomes a surety who is secondarily liable to the mortgagee on the note if the grantee fails to pay. The landowner and the attorney are jointly liable, even though the attorney is primarily liable and the landowner is secondarily liable as a surety. Therefore, (A) and (B) are incorrect. (C) is incorrect. The bank is not required to choose between the landowner and the attorney and can obtain a judgment against both, although it may only collect once. Because the attorney assumed the mortgage obligation, the bank can sue the attorney, but it can also sue the landowner in the same action as a surety. The landowner and the attorney are jointly liable, even though the attorney is primarily liable and the landowner is secondarily liable as a surety.
To buy a house, an investor secured a $10,000 mortgage from a bank. The bank promptly and properly recorded its mortgage. Subsequently, the investor financed certain improvements to the house with a $2,000 mortgage on the land from a finance company. The finance company promptly and properly recorded its mortgage. Before the investor made a payment on either mortgage, the federal government announced that it would begin storing nuclear waste products in the area. The value of property, including the investor’s house, plummeted. The investor did not pay either the bank or the finance company, and the bank brought a proper action to foreclose, notifying both the investor and the finance company. A buyer bought the house at the foreclosure sale for $6,000, which was its fair market value. There are no special statutes in the jurisdiction regarding deficiency judgments.
What does the investor owe?
A $5,000 to the bank and $1,000 to the finance company.
B $4,000 to the bank and $2,000 to the finance company.
C Nothing to the bank and $2,000 to the finance company.
D $4,000 to the bank and nothing to the finance company.
B
Absent any anti-deficiency statutes, the investor remains personally liable to pay for any shortfall arising from the foreclosure sale. Proceeds from the sale are used to satisfy the loan that was foreclosed first. Hence, all of the proceeds ($6,000) went to the bank. Thus, the investor must pay the balance still due the bank ($4,000) and the entire amount of the finance company’s mortgage ($2,000), which is terminated by the foreclosure of the senior mortgage. (A) is wrong because foreclosure sales are not allotted proportionally between senior and junior interests. (C) is wrong because foreclosure does not extinguish the underlying debt. (D) is wrong because the finance company’s mortgage does not remain on the land after foreclosure of the senior mortgage; hence, the investor is liable for that debt as well.
A buyer purchased a parcel of land from a seller for $500,000. The buyer financed the purchase by obtaining a loan from the seller for $300,000 in exchange for a mortgage on the land. The seller promptly and properly recorded his mortgage. Shortly thereafter, the buyer gave a mortgage on the land to a creditor to satisfy a preexisting debt of $100,000 owed to the creditor. The creditor also promptly and properly recorded its mortgage. Within a year, the buyer stopped making payments on both mortgages, and the seller brought an action to foreclose on his mortgage. The creditor was not included as a party to the foreclosure action. The seller purchased the property at a public foreclosure sale in satisfaction of the loan. The creditor subsequently discovered the sale and informed the seller that it was not valid.
Who has title to the land?
A The seller, because he gave a purchase money mortgage and the creditor’s mortgage was for a preexisting debt.
B The seller, because the public foreclosure sale extinguished the creditor’s interest.
C The seller, but he must redeem the creditor’s mortgage to avoid foreclosure.
D The buyer, because the seller’s foreclosure action was invalid without the inclusion of the creditor as a necessary party.
C
The seller has title to the land, but he must redeem the creditor’s mortgage to avoid foreclosure. As a general rule, the priority of a mortgage is determined by the time it was placed on the property. When a mortgage is foreclosed, the purchaser at the sale will take title as it existed when the mortgage was placed on the property. Thus, foreclosure will terminate interests junior to the mortgage being foreclosed but will not affect senior interests. However, if a lien senior to that of a mortgagee is in default, the junior mortgagee has the right to pay it off (i.e., redeem it) to avoid being wiped out by its foreclosure. Thus, those persons with interests subordinate to those of the foreclosing party are necessary parties to the foreclosure action. Failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale. Hence, the seller’s failure to include the creditor as a party to the foreclosure action preserved the creditor’s mortgage on the property. To avoid the creditor’s foreclosing (because the buyer was in default of the creditor’s mortgage as well), the seller will need to pay off the creditor’s mortgage. (A) is wrong because it is irrelevant. While a purchase money mortgage (“PMM”), given when the mortgagor buys the property, is considered to have priority over non-PMM mortgages executed at about the same time, even if the other mortgages are recorded first, that rule is not applicable here because the facts indicate that the seller’s PMM was executed and recorded before the creditor’s mortgage came into existence. (B) is wrong because the creditor was not included as a party to the foreclosure action. Thus, as discussed above, its interest is not extinguished by the seller’s foreclosure action. (D) is wrong because the failure to include the creditor in the foreclosure action does not invalidate the action, it just preserves the creditor’s junior mortgage on the property.
An owner obtained a loan of $60,000 from a bank in exchange for a promissory note secured by a mortgage on his land, which the bank promptly and properly recorded. A few months later, the owner obtained another loan of $60,000 from a lender, in exchange for a promissory note secured by a mortgage on the land, which the lender promptly and properly recorded. Subsequently, the owner sold the land to a buyer for $150,000 and conveyed a warranty deed. The buyer expressly agreed with the owner to assume both mortgages, with the consent of the bank and the lender. A few years later, the bank loaned the buyer an additional $50,000 in exchange for an increase in the interest rate and principal amount of its mortgage on the land. At that time, the balance on the original loan from the bank was $50,000. Shortly thereafter, the buyer stopped making payments on both mortgages and disappeared. After proper notice to all appropriate parties, the bank instituted a foreclosure action on its mortgage, and purchased the property at the foreclosure sale. At that time the principal balance on the lender’s mortgage loan was $50,000. After fees and expenses, the proceeds from the foreclosure sale totaled $80,000.
Assuming that the jurisdiction permits deficiency judgments, which of the following statements is most accurate?
A The bank keeps the entire $80,000 and can proceed personally against the owner for its deficiency, while the lender’s mortgage remains on the land.
B The bank keeps the entire $80,000, the lender’s mortgage on the land is extinguished, and both the bank and the lender can proceed personally against the owner for their deficiencies.
C The bank keeps $50,000, the lender is entitled to $30,000, and only the lender can proceed personally against the owner for its deficiency.
D The bank keeps $50,000, the lender is entitled to $30,000, and neither the bank nor the lender can proceed personally against the owner for their deficiencies.
C
The bank’s original mortgage has priority in the proceeds, followed by the lender’s mortgage, and only the lender can proceed against the owner because the bank modified its mortgage after the owner had transferred to the buyer. Generally, the priority of a mortgage is determined by the time it was placed on the property, and the proceeds of a foreclosure sale will be used to pay off the mortgages in the order of their priority. However, if the landowner enters into a modification agreement with the senior mortgagee, raising its interest rate or otherwise making the agreement more burdensome, the junior mortgage will be given priority over the modification. Thus, if the first mortgage debt is larger because of the modification, the second mortgage gains priority over the increase in the debt. Here, the bank and the buyer modified the original mortgage by increasing the principal amount and the interest rate. This modification is not given priority over the lender’s mortgage, and foreclosure proceeds will not be applied against it because the senior lender’s mortgage was not fully satisfied from the proceeds. With regard to the deficiency, the owner is liable to the lender because when a grantee signs an assumption agreement, becoming primarily liable to the lender, the original mortgagor remains secondarily liable on the promissory note as a surety. Here, the buyer assumed the lender’s mortgage and became primarily liable; however, the owner remained secondarily liable as surety and can be required to pay off the rest of the lender’s mortgage loan. On the other hand, the owner will not be liable to pay off the balance of the bank’s loan, because when a mortgagee and an assuming grantee subsequently modify the original obligation, the original mortgagor is completely discharged of liability. The owner had nothing to do with the modification agreed to by the bank and the buyer that increased the amount of the mortgage debt, and will not be even secondarily liable for that amount. (A) and (B) are incorrect because the bank is not entitled to the entire $80,000 in proceeds from the sale and because the owner is not liable to the bank for more than the original loan amount. (D) is incorrect because, as discussed above, the owner is secondarily liable to the lender for the $20,000 deficiency on its mortgage.
