Property: Mortgages Flashcards
Mortgages generally
A mortgage is a security interest in real property or fixtures that secures repayment of a debt. It is a two-party transaction; the borrower/landowner is the mortgagor and the lender is the mortgagee. The same person or entity is usually both the mortgagor and borrower, but this is not required. In other words, a person (e.g., a parent) may grant a mortgage on her property to secure a loan to another person (e.g., a child).
Mortgages are used in all states. In a majority of states, mortgages are the exclusive means (other than installment land sale contracts) of securing a loan on real property.
Some jurisdictions use “deeds of trust” as substitutes for mortgages. For purposes of the UBE, treat deeds of trust the same as mortgages.
In the event the mortgagor defaults on the mortgage
most states require a judicial foreclosure sale,
but some states allow a non-judicial sale if the mortgage contract contains a “power of sale” clause or the loan was secured by a deed of trust.
There are two theories regarding the mortgagee’s interest in the property that secures the loan.
The majority follows a lien theory in which the mortgagee merely has a security interest in the property. In lien theory states, a mortgage by one joint tenant with right of survivorship does not sever the joint tenancy.
In title theory states (minority), a mortgage by one joint tenant severs that tenant’s portion of the joint tenancy.
A “mortgage” is actually two different legal documents:
a promissory note and a mortgage (i.e., security interest). A mortgage is a conveyance of land and, as such, is subject to the
Statute of Frauds
Both the promissory note and the mortgage are generally assignable by the mortgagee.
If a mortgagee transfers its interest in the promissory note, the mortgage automatically follows the note.
When a mortgagor transfers the mortgaged property, he or she is in effect transferring only the “equity of redemption” or the right to redeem the property by paying off the debt.
If the transferee takes the property subject to the mortgage, the transferee is not personally liable for the mortgage payments. Upon default, the mortgagee may foreclose on the property but may not obtain a deficiency judgment against the transferee (but may obtain such a judgment against the original mortgagor because he or she is still in privity of contract with the mortgagee).
If the transferee assumes the mortgage as part of the transfer (or takes the property subject to and assumes the mortgage), the transferee is personally liable to pay the mortgage. The mortgagee may sue the transferee as a third party beneficiary of the “assumption agreement.”
A due-on-sale clause is a provision in a mortgage contract that requires that the mortgage be paid in full upon a sale or other conveyance of the property that secures the mortgage. Due-on-sale clauses are legal under
State and Federal Law
In addition, the following mortgage provisions are valid (absent a conflicting statute)
a clause prohibiting prepayment of a mortgage
a clause requiring the mortgagor to pay a fee as a condition to prepaying a mortgage
Upon default, the mortgagee has the following remedies:
Foreclosure by out-of-court sale under a power of sale in a deed of trust or mortgage (minority of states)
Foreclosure by judicial action (all states)
Contract action to recover on note
Deed in lieu of foreclosure: the mortgagor conveys full title to the mortgagee and in return the mortgagee agrees not to pursue a deficiency judgment against the mortgagor
legal protection for mortgagors
Equity of Redemption: Permits mortgagor to end foreclosure proceedings by paying off entire loan amount (assuming there is an acceleration clause) plus foreclosure expenses; the equity of redemption may NOT be waived in the mortgage contract, but may be waived after default. If there is no acceleration clause, the failure of a debtor to pay one or more installments is a breach only as to those installments and the mortgagor can redeem the property by paying those installments (plus foreclosure expenses).
Acceleration clauses are terms found in nearly all mortgages that require the borrower to immediately pay the entire loan balance (plus any interest accumulated prior to acceleration) if the borrower defaults (e.g., misses too many payments). Upon default, the lender must give notice of acceleration to the borrower.
Notice of Foreclosure Proceedings and Sale—to mortgagor and junior lienholders
Judicial hearing (except for non-judicial sales)
Public notice of the foreclosure sale (to increase the number of bidders)
Mortgagor (and junior lienholders) may purchase property at sale
Statutory Redemption: Approximately 50% of states recognize statutory redemption. In Tennessee, for example, the mortgagor may redeem the property for two years after the foreclosure sale by paying the foreclosure sale price (plus interest), unless the mortgagor waived such right in the mortgage contract.
The foreclosure sale proceeds are distributed in the following order:
- Foreclosure expenses, including attorney’s fees and court costs
- Principal and accrued interest on the loan that was foreclosed
- Principal and accrued interest on junior mortgages and liens in order of priority
- Any remaining proceeds are known as “surplus” and are paid to the mortgagor. If the sale proceeds are not sufficient to pay off the loan that was foreclosed or any junior mortgages, those not paid in full may generally seek a deficiency judgment against the mortgagor
The foreclosed loan and all junior interests (e.g., junior mortgages, liens, easements) are eliminated by the foreclosure sale.
However, senior interests (e.g., mortgages, liens, etc.) are not affected by the foreclosure sale. In other words, the buyer at the foreclosure sale takes the property subject to senior interests, but the buyer would not be personally liable for the payments on any senior mortgages or liens.
If the proceeds are deficient to cover the entire loan amount and reasonable foreclosure expenses, the mortgagee is entitled to a deficiency judgment against the mortgagor, unless:
The statute of limitations has expired on the contract action (i.e., action to enforce the promissory note)
The mortgagee failed to give notice of the foreclosure sale to the mortgagor
The mortgagee purchased the property at a non-judicial sale and failed to pay reasonable value (i.e., the purchase price “shocks the conscience”)
Minority view: The state does not allow deficiency judgments on purchase money mortgages
Minority view: The state limits the amount of a deficiency judgment to the difference between the debt and the judicially determined FMV of the property at the time of foreclosure
If the mortgagee takes possession before the foreclosure sale
the mortgagee is considered a mortgagee-in-possession and, as such, is treated like an owner/occupier for purposes of tort liability and thus may be sued by business invitees, licensees, and discovered trespassers.
A recorded mortgage is subordinate to prior perfected (recorded) buyers, mortgagees, lien claimants, and easements. A properly recorded mortgage has priority over subsequent perfected and unperfected buyers, mortgagees, lessees, and lien claimants, except:
- Where the mortgagee enters into an agreement to subordinate its interest in favor of another lien.
- A subsequent purchase money mortgage (PMM) has priority over an earlier judgment lien or an earlier mortgage with an after-acquired property clause. A PMM is a loan that facilitates the purchase of property.
Equitable Mortgages
A deed absolute on its face cannot be varied by extrinsic evidence unless there is clear and convincing proof that a reconveyance clause was omitted because of (i) ignorance, (ii) mutual mistake, (iii) fraud by the grantee, or (iv) duress by the grantee. To determine whether there is an equitable mortgage, courts ask:
- Did a relationship of debtor and creditor continue after the conveyance?
- Was the grantor in distress at the time of the conveyance?
- Was the grantor entitled to remain in possession without separate payments for rent?
- Was the price for the conveyance significantly below the market value of the property?
