Mortages

Question 1

MORTGAGES

Answer 1

• To secure debt, borrower gives lender a mortgage (along w/ promissory note representing the loan) on the property.
• If loan isn’t paid, lender may foreclose mortgage.
• Foreclosure involves selling property to pay debt.

Question 2

MORTGAGOR AND MORTGAGEE

Answer 2

-Borrower: mortgagor
- Lender: mortgagee.

Question 3

PROMISSORY NOTE AND MORTGAGE

Answer 3

• Mortgage transaction involves 2 docs: promissory note & mortgage.
• Note is mortgagor’s personal obligation.
• If mortgagor quits paying, plus foreclosure, mortgagee has option to sue mortgagor personally for payment of note.
• Mortgage is agreement that says that if mortgagor quits paying, land can be sold to pay the mortgagee.

Question 4

PURCHASE-MONEY V. NON-PURCHASEMONEY MORTGAGE

Answer 4

• 2 primary ways to mortgage: purchase-money mortgage & non-purchase-money mortgage.
• Purchase-money mortgage is an extension of value by lender who takes as collateral a security interest in the very real estate that its loan enables debtor to acquire.

Question 5

CREATION

Answer 5

• Our model: C, a creditor, is thinking of lending O $300,000. O offers Blackacre as collateral.
• A mortgage is the union of two elements:

Writing
- Must be in writing

TRANSFER OF INTERESTS
- Both mortgagee/mortgagor may transfer interests

Question 6

Transfer by Mortgagee`

Answer 6

• Creditor-mortgagee can transfer her interest by:
  (1) Indorsing note & delivering it to transferee, or
  (2) Executing separate doc of assignment
• A mortgagee can freely transfer note, & mortgage automatically follows properly transferred note.

Question 7

Transfer by Mortgagor—Assumption or
Subject To

Answer 7

• When mortgagor transfers property, buyer either assumes mortgage/takes property subject to mortgage.
• If grantee assumes mortgage, they’re agreeing to be personally liable on mortgage note.
• If they take property subject to mortgage, they are not agreeing to personal liability; mortgagee’s only recourse is foreclosure (cannot bring suit against grantee).

Question 8

Effect of Assumption

Answer 8

• If grantee signs an assumption agreement, they become primarily liable to lender, while original mortgagor is secondarily liable as a surety.
• Mortgagee may opt to sue either grantee/original mortgagor on debt.
• If not signed, grantee is not personally liable on loan, & original mortgagor remains primarily & personally liable

Question 9

Tip

Answer 9

Once grantee has assumed mortgage, any mod of obligation by grantee & mortgagee discharges original mortgagor of all liability.

Question 10

Due-on-Sale Clauses

Answer 10

• Due-on-sale clauses, allow lender to demand full payment of loan if mortgagor transfers any interest in property w/o lender’s consent.
• If O, our debtor-mortgagor, sells Blackacre, which is now mortgaged, what happens to the mortgage? If recorded, it remains on the land.
• When mortgagor transfers title to the property, grantee automatically takes property subject to mortgage.
• Grantee will not be personally liable on mortgage unless they specifically assume mortgage.
• But, mortgage remains on land as long as mortgage instrument was properly recorded. (Remember: recording statutes protect mortgagees.)
• This means that while grantee is not personally liable on debt, if mortgagor defaults & mortgage instrument was properly recorded, mortgagee can foreclose on land.

Question 11

Effect of Recording Acts

Answer 11

• All recording statutes apply to mortgages & deeds.
• Thus, a subsequent buyer takes subject to a properly recorded lien.

Question 12

Who Is Personally Liable on the Debt If O,
Our Debtor-Mortgagor, Sells Blackacre to B?

Answer 12

• If B has “assumed the mortgage,” both O & B are personally liable.
• B is primarily liable, and O remains secondarily
  liable.
• If B takes “subject to the mortgage,” B assumes no personal liability.
• Only O is personally liable.
• But, if recorded, mortgage remains on the land.
• Thus, if O does not pay, the mortgage may be foreclosed.

Question 13

FORECLOSURE

Answer 13

• Mortgagee must foreclose by proper judicial
  proceeding.
• At foreclosure, land is sold.
• Sale proceeds go to satisfying debt.

Sale Proceeds Are Less/More than Amount Owed
- Junior liens: paid off in order of priority.
- Surplus goes to debtor.

Question 14

Effect of Foreclosure on Various Interests

Answer 14

• Heavily tested aspect of mortgages.
• Default rule: Priority of mortgage depends on when it was placed on property.
• First in time, first in right again.
• Buyer at foreclosure sale takes title as it existed when foreclosed mortgage was placed on property.
• All interests senior to that one remain on property, & all interests junior to that one are extinguished.
• Those interests include junior mortgages, liens,
  leases, easements, & all other types of interests.

Question 15

Junior Interests

Answer 15

• Foreclosure terminates interests junior to mortgage being foreclosed but does not affect senior interests.
• Junior lienholders will be paid in descending order w/ proceeds from sale, if funds are left over after satisfaction of superior claims.
• Junior lienholders should be able to proceed for a deficiency judgment.
• But once foreclosure of a superior claim has occurred, w/ proceeds distributed appropriately, junior lienholders can no longer look to the property for satisfaction.

Question 16

Junior Interest: Necessary Parties:

Answer 16

• Debtor-mortgagor is a necessary party & must be joined, particularly if creditor wishes to proceed against debtor for personal deficiency judgment.
• If necessary party is not joined, their mortgage will remain on land.

Question 17

Senior Interests

Answer 17

• Foreclosure does not affect any interest senior to mortgage being foreclosed.
• Buyer at sale takes subject to such interest.
• Buyer not personally liable on senior debt
• But if senior mortgage is not paid, sooner/later senior creditor will foreclose against land.

Question 18

Priorities

Answer 18

• Creditors must record. No priority until recorded
• Once recorded, priority is determined by first-in-time, first-in-right.

Purchase-Money Mortgage
- A mortgage given to secure a loan that enables debtor to acquire encumbered land.

Question 19

Subordination Agreements

Answer 19

• Senior creditor may agree to subordinate its priority to junior creditor.
• Subordination agreements are permissible.

Question 20

Redemption

Answer 20

Redemption in Equity
- Equitable redemption: recognized up to date of sale.
- At any time prior to foreclosure sale debtor has right to redeem land by freeing it of mortgage.
- Once a valid foreclosure has taken place: right to equitable redemption is cut off.

Question 21

MORTGAGE ALTERNATIVES: Deed of Trust

Answer 21

• Some states call a security interest in land a deed of trust rather than a mortgage.
• Debtor/notemaker is trustor.
• Trustor gives deed of trust to 3rd-party trustee, who is usually closely connected to lender (beneficiary).
• On default, lender tells trustee to foreclose deed of trust by sale.

Question 22

MORTGAGE ALTERNATIVES: Absolute Deed

Answer 22

• Absolute deed, if given for security purposes, can be treated by ct as any other mortgage (creditor must foreclose by judicial action).

Question 23

MORTGAGE ALTERNATIVES: Installment Land K

Answer 23

• Installment purchaser obtains legal title only when full K price is paid.
• Forfeiture clauses: allows vendor on default to cancel K, retake possession, & retain all money paid

Question 24

MORTGAGE ALTERNATIVES: Equitable Vendor’s Lien

Answer 24

• Lien does not result from an agreement but rather arises by implication when seller transfers title to buyer and buyer does not pay

Question 25

MORTGAGE ALTERNATIVES: SALE-LEASEBACK

Answer 25

- Landowner may sell her property for cash & then lease it back from purchaser for a long period of time. - Like an absolute deed, this may be treated as a disguised mortgage