(4) Property: Mortgages Flashcards
Mortgages
Mortgages/Security Interests
A mortgage is an interest in real property that serves as security for an obligation. A mortgagee is the person with the security interest in the property (the bank) and the mortgagor is the person who conveys the interest (buyer)
Must a mortgage satisfy the Statute of Frauds?
Mortgages/Security Interests
YES, a mortgage must satisfy the SOF.
Definition & Rule:
Deed of Trust
Mortgages/Security Interests
(alternative to a mortgage)
Definition: A deed of trust is a security interest in real property which involves 3 parties (1) the borrower (purchaser of the property); (2) the lender; AND (3) a 3rd party trustee who holds title until the loan is paid off.
Rule: Once the loan is paid off the trustee must transfer title to the purchaser of the land.
Installment Land Contract
Mortgages/Security Interests
An installment land contract is a contract where the seller retains title until the buyer makes the final payment under the payment plan, but the buyer has possession.
States vary in methods when a buyer defaults, some require foreclosure to retain clear title, others the buyer has the right of redemption and others allow the buyer the right of restitution.
Pre-Foreclosure Rights
Mortgages/Security Interests
Under a lien theory a mortgagee cannot take possession prior to foreclosure because the mortgagor is considered the owner. Under a title theory the mortgagee may take possession at any time unless they are prohibited by the terms of the mortgage (which is customary) until foreclosure occurs.
Equity of Redemption
Mortgages/Security Interests - Pre-Foreclosure Rights
After default but prior to foreclosure a mortgagor may regain clear title under the doctrine of equity of redemption by paying the amount of the loan obligation currently owed. If there is an acceleration clause it can be the amount fully owed.
Overall Rule:
Foreclosure
Mortgages/Security Interests
A foreclosure occurs when the mortgage is in default after the mortgagor fails to make timely loan payments.
Foreclosure Methods
Mortgages/Security Interests
- Acceleration Clause
- Notice of Foreclosure
Acceleration Clause
Mortgages/Security Interests - Foreclosure Methods
A mortgagee is entitled to collect only the amount of the obligation that is currently owed unless there is an acceleration clause in the mortgage. The acceleration clause provides that the full amount of the mortgage becomes due upon default.
Notice of Foreclosure
Mortgages/Security Interests - Foreclosure Methods
A mortgagee must provide notice prior to foreclosure. If the property will be sold then the mortgagee must give notice to the holder of any subsequent interests in the property.
Priority of Interests
Mortgages/Security Interests
Foreclosure destroys subsequent mortgages in that any mortgage recorded after the mortgage being foreclosed on will be extinguished. However all prior recorded mortgages are not affected.
Order of Preference
Mortgages/Security Interests
Proceeds from a sale are used to pay off debts in the following order (1) attorney fees and expenses associated with the sale; (2) debts owed to mortgagee; AND (3) any amount left to the mortgagor.
Deficiency Judgements
Mortgages/Security Interests
A mortgagee may seek a deficiency judgement against a mortgagor if the proceeds of the foreclosure sale are insufficient to satisfy the mortgage.
Purchase Money Mortgage
Mortgages/Security Interests
A purchase money mortgage is used by the buyer to purchase the property and the seller is the lender who secures a mortgage on the property. The holder of the purchase money mortgage has priority over (1) all claims and mortgages against the mortgagor prior to the purchase of the property; AND (2) all subsequent claims and mortgages, unless defeated by a recording statute.
Is there a right to pre-pay a mortgage
Mortgages/Security Interests
NO, there is no common law right to prepay mortgage debt unless the terms expressly authorize. If prepayment is permitted there are usually fees invovled that courts will uphold.
Subject to Mortgage vs Assumes the Mortgage
Mortgage/Security Interests
a. Subject to Mortgage
i. Buyer has no responsibility to pay mortgagee, either before or after foreclosure
ii. If language is ambiguous the courts with assume they took it “Subject to Mortgage”
b. Assumes the Mortgage
i. Buyer becomes personally and primarily liable; original borrower is secondarily liable
c. Assumes the Mortgage plus Novation
i. Lender agrees that buyer alone is personally liable for paying the mortgage
Define Mortgagor and Mortgagee
Mortgages/Security Interests
Mortgagor: Person borrowing the money and issuing a mortgage to lender
Mortgagee: Creditor lending the money and receiving the mortgage
Rule & Majority/Minority Rule re: risk of loss:
Equitable Conversion
Land Contract
Equitable title passes to the buyer when a land of sale contract is formed. Legal title remains with the seller until the deal closes.
Majority Rule: The risk of loss is deemed to follow equitable title; therefore, the risk of loss is on the buyer
Minority Rule: Uniform Vendor and Purchaser Act: the risk of loss remains with the seller until the legal title or possession of the property passes to the buyer
Real Estate Brokerage Fiduciary Duties
- Sellers Agent owes a duty of disclosure to the seller to disclose any information that would be beneficial during negotiations.
- Buyers Agent owes a buyer the duties of loyalty and obedience. Which puts the buyers interests before their own and will follow the buyers lawful orders.
- Real Estate Broker are liable for intentional misrepresentations of facts known to the broker when they list a property for sell.
Title Insurance
Title insurance can be purchased at the time of closing by the buyer so that if there is a defect in the chain of title, an unexpected encumbrance or other similar problem, the buyer can make a claim under the insurance policy
a. Owner’s policy is the purchase price
b. Lender’s policy is the amount of the loan
c. If a claim is successfully filed and paid the title company can obtain subrogation rights and bring any necessary lawsuits to reimburse itself
What happens when a seller dies before closing but after executing the sale of land contract?
If a seller dies after executing a sales K but before closing, decedents personal representative (person carrying out the will) must complete the transaction.
The money received by a sale goes to the beneficiary who inherits personal property, not real estate, because money is personal property
