Mortgage Defined
- A mortgage is the conveyance of a security interest in land, intended by the parties to be collateral for the repayment of the debt
- TWO elements combined:
- A debt
- Voluntary lien on debtor’s land to secure that debt.
- Typically must be in writing to satisfy statute of frauds - the writing is the LEGAL mortgage (aka note, security interest in land, etc.)
Equitable Mortgage
Owner gives creditor a deed that is absolute on its face as collateral for debt - treated as a mortgage (i.e. have to go through judicial foreclosure process).
In determining if absolute deed is really a mortgage, courts will consider:
- existence of debt or promise of payment by the deed’s grantor
- grantee’s promise to return land if debt paid
- amount advanced to grantor was much lower than value of property
- degree of grantor’s financial distress
- parties’ prior negotiations
Rights of Parties to Mortgage
- Debtor/Mortgagor: has title and the right to possess
- Creditor/Mortgagee: has a lien
BOTH may transfer their interests. The mortgage automatically follows a properly transferred note.
Transfer of Interest by
Creditor/Mortgagee
- Creditor can transfer his interest by:
- endorsing the note and delivering it to transferee OR
- executing a separate document of assignment
If endorsed and delivered, transferee may become a holder in due course (takes note free of personal defenses, but still subject to “real” defenses).
Personal Defenses
- Lack of Consideration
- Fraud in the inducement
- Unconscionability
- Waiver
- Estoppel
Holder in Due Course takes mortgage FREE of such defenses.
“Real Defenses”
MAD FIFI4
- Material Alteration
- Duress
- Fraud in the Factum (a lie about the instrument)
- Incapacity
- Illegality
- Infancy
- Insolvency
These defenses are STILL VIABLE agaist a holder in due course (the mortagor/debtor may use them against holder in due course, as well as original mortgagee).
Holder In Due Course
Criteria (5)
- note must be negotiable, i.e. made payable to mortgagee (“payable to bearer” or “to the order off” the named payee with a promise to pay a sum certain, and no other promises)
- Original Note must be indorsed, signed by the named mortgagee
- Original Note must be delivered to the transferee (photocopy unacceptable)
- transferee must take the note in good faith without notice of any illegality
- transferee must pay value for the note (more than nominal amount)
Effect of Transfer by Mortgagor/Debtor
- The lien remains on the land, so long as the mortgage was properly recorded
- All recording statutes apply to mortgages as well as deeds
Liability for Mortgage if Debtor/Mortgagor Transfers Land
Who is liable for mortgage if debtor (O) conveys property to B?
- If B “assumed the mortgage”:
- O and B are both personally liable (B primarily; O secondarily)
- If B takes “subject to the mortgage”:
- B assumes no personal liability
- BUT if recorded, the mortgage remains with the land so if O defaults, mortgage may be foreclosed.
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Foreclosure - Procedure
- Mortgagee MUST foreclose by proper judicial action.
- At foreclosure, the land is sold and proceeds go to satisfying the debt.
- If foreclosure sale produces less than amount owed, creditor brings a deficiency action against the debtor.
- If there is a surplus from the sale, junior liens paid off in order of priority, and remaining surplus goes to debtor.
Order of Priority for foreclosure proceeds
- any attorney’s fees, court fees, foreclosure expenses
- Foreclosing mortgage
- Junior Liens
- Debtor
What happens to Junior Interests at Foreclosure?
- Foreclosure will terminate interests junior to the mortgage being foreclosed
- Junior lienholders MUST be made party to the foreclosure on any senior lien (necessary party)
- After foreclosure, junior lienholders can pursue deficiency judgment but can no longer look to the property for satisfaction.
Effect of Foreclosure on Senior Interests?
What should Buyer Bid?
- Foreclosure does NOT affect any interest senior to the mortgage being foreclosed (senior lienholders NOT necessary parties)
- Buyer is NOT personally liable on senior debt BUT if senior mortgage not paid, senior creditor can foreclose on the land.
- Thus, buyer should bid the property’s FMV MINUS the amount owed on senior liens, so he is able to pay it off.
Rule for Determining Priority among Creditors
Creditors MUST record.
- Rule = 1st in time (i.e. first to record), 1st in right.
- BUT Purchase Money Mortgage is SUPERIOR and has first priority over the property it was used to purchase.
Purchase Money Mortgage
- A mortgage given to secure a loan that enables the debtor to acquire the encumbered land.
- Holder of a purchase money mortgage has first priority in the parcel financed.
Subordination Agreements
A permissible method by which a senior creditor may agree to subordinate its priority to a junior creditor.
Redemption in Equity
Equitable redemption is universally recognized up to the date of sale. At any time prior to the foreclosure sale the debtor can redeem the land by paying of missed payments, plus interest, plus costs (unless there is an acceleration clause, in which case full balance, plus accrued interest, pluss costs).
Right to equitable redemption extinguished once valid foreclosure has take place.
Acceleration Clause
Declares full balance of mortgage due in the event of default.
Waiver of Right of Redemption
Mortgagor/Debtor may NOT waive right to redeem in the mortgage itself - “clogging” the equity of redemption is PROHIBITED.
Statutory Redemption
- recognized in 1/2 the states
- gives debtor/mortgagor right to redeem for some fixed period after the foreclosure sale.
- Amount to be paid: foreclosure sale price (NOT amount of original debt)
- Usually debtor has the right to possess property during the statutory period for redemption
