25. Securities Flashcards
What is required for a transfer of mortgage?
1) Mortgage
- Represents land interest
2) Note
- Represents Debtor’s debt
- Written promise to repay specified sum plus interest at specified rate and length of time to fulfill promise
3) Transferred to ‘same’ person
How can the lender transfer the mortgage without the note?
Note ‘automatically’ transfers (some states)
Note transfer is compelled by Transferee’s equitable action (some states)
- Lender must have expressly reserved his rights to the note
Note can NOT transfer (some states)
- Note is seen as ‘principal evidence’ of debt
- Transfer is VOID (both mortgage + note cannot be transferred)
How can the lender transfer the note without the mortgage?
Note can transfer with NO mortgage
Mortgage ‘automatically’ transfers
- UNLESS Lender expressly reserved his rights to the mortgage
What methods are there for transferring the note?
Separate document of assignment
NO separate document of assignment: Indorse + deliver note to Transferee => Transferee becomes Holder in Due Course (UCC Art 3)
1) Note must be in negotiable form (payable to named payee (‘bearer’) with promise to pay certain sum)
2) Original note must be indorsed (signed) by named payee
3) Original note must be delivered to Transferee
4) Transferee must accept in good faith
5) Transferee must pay value
What are the benefits/burdens of being a Holder in Due Course (UCC Art 3)?
Subject to real defences by Debtor
- Fraud/Illegality/Lack of capacity
NOT subject to personal defences by Debtor
- Waiver/Estoppel
Will the Debtor’s payment to the Lender count after Lender transferred the note to Transferee?
If Note is negotiable => Payment to Lender will NOT count
- Debtor must pay new payee
If Note is non-negotiable => Payment to Lender will count
- Until Debtor receives notice of Lender’s transfer to Transferee
Who is liable on the debt if Debtor transfers mortgage?
Transferee signs assumption agreement
1) Transferee is primarily liable
2) Debtor is secondarily liable
- Lender can sue BOTH (but collect from EITHER)
- UNLESS Lender
+ Transferee modifies their obligation => Debtor is NOT liable (discharged)
Transferee NOT sign assumption agreement
- Debtor is liable
- UNLESS Transferee fails to pay + Lender forecloses => Wipes out Transferee’s investment in land
Due-on-sale clause
- Debtor must obtain Lender’s consent
- OTHERWISE Lender can demand full payment of loan
What defences are available to make a mortgage unenforceable?
Obligation (to which mortgage is security) is unenforceable due to;
- Fraud
- Duress
- Mistake
- Failure of consideration
Consumer protection
- Residential lenders can only extend loan terms if understandable + NOT deceptive/unfair/abusive (otherwise counts as defence vs mortgage enforceability) (Dodd-Frank Act)
- If Debtor defaults => Lender must allow in good faith Debtor to apply for foreclosure alternatives
How may Debtor avoid foreclosure?
(DRR)
Deed in lieu of foreclosure
- Debtor gives deed to Lender instead of requiring foreclosure
- Must be ‘reasonable + fair’ transaction
Repayment of debt
- UNLESS agreement does NOT allow prepayment
Redemption in equity
How may Lender avoid foreclosure?
(TRAP)
‘Tenant’ duties assumption
- Take over possession if Debtor abandoned/consented
Receiver appointment
Acquire Debtor’s interest
- Lender will have legal/equitable title over mortgage (depending on whether lien/title theory is applied)
- If Lender acquires Debtor’s interest => Legal + equitable interests merger => Discharges Debtor’s obligation
Possession takeover
How may Lender take possession before foreclosure?
Lien theory (most states)
- Debtor: Holds legal title until foreclosure (possession)
- Lender: Holds lien/Can NOT demand possession
Title theory (few states)
- Lender: Holds legal title until foreclosure (possession)
- Lender: Can demand possession ANY time
Intermediate theory (few states)
- Debtor: Holds legal title until default (possession)
- Lender: Can demand possession AFTER default
What are the risks to Lender of taking possession as a tenant before foreclosure?
Duty to account for rents
Duty to manage property prudently
Potential TP tort liability
What is required for Lender to acquire a court appointed receiver to receive rent on the property before foreclosure?
1) Waste must occur
2) Property value is NOT adequate to secure debt
3) Debtor is NOT solvent
What is required for Debtor to redeem in equity?
Pay due amounts
Pay full amounts
- Note/Mortgage must contain acceleration clause
Can Debtor waive his right to redeem in equity?
NO
- ‘Clogging equity of redemption’ NOT allowed (unless for consideration later)
