BAR FLASHCARDS - P14

Question 1

Mortgage

Answer 1

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

Question 2

Mortgager

Answer 2

Debtor (person owing money to lender)

Question 3

Mortgagee

Answer 3

Creditor (lender). Gee, I hope he pays me back.

Question 4

MORTGAGOR AND MORTGAGEE

Answer 4

The borrower is called the mortgagor, and the lender is the mortgagee.

Question 5

PROMISSORY NOTE AND MORTGAGE

Answer 5

The mortgage transaction involves two documents: the promis- sory note and the mortgage.

The note is the mortgagor’s personal obligation. This means that the mortgagee is not limited to the land when seeking a remedy for default. If the mortgagor quits paying, in addition to foreclosure, the mortgagee has the option to sue the mortgagor personally for payment of the note.

The mortgage is the agreement that says that if the mortgagor quits paying, the land can be sold to pay the mortgagee.

Most typically, the debtor/notemaker is also the mortgagor; in other words, one person, the mortgagor, is giving the mortgage along with the note to the lender, the mortgagee. However, it is also possible for the debtor/notemaker and mortgagor to be different people (for example, if a mother agrees to place a mortgage on her house to secure a loan given to her daughter).

Question 6

PURCHASE-MONEY V. NON-PURCHASE-MONEY MORTGAGE

Answer 6

PURCHASE-MONEY V. NON-PURCHASE-MONEY MORTGAGE
There are two primary ways to mortgage Blackacre: the purchase- money mortgage and the non-purchase-money mortgage. The purchase-money mortgage is an extension of value by a lender who takes as collateral a security interest in the very real estate that its loan enables the debtor to acquire.

PMM: Lender’s SI in real estate that their loan enables the debtor to acquire.

Question 7

Mortgage Creation

Answer 7

• Debt (note) + lien in land to secure debt (mortgage)
• In writing (legal mortgage)
AKA: Mortgage deed, deed of trust, SI in land, sale-leaseback.

Question 8

Writing

Answer 8

The mortgage typically must be in writing to satisfy the Statute of Frauds. This is the legal mortgage

Question 9

TRANSFER OF INTERESTS

Answer 9

While both the mortgagee or the mortgagor may transfer their inter- ests, on the bar exam, you are far more likely to encounter a transfer by the mortgagor.

Question 10

Transfer by Mortgagee

Answer 10

For the bar exam, you need to know that a mortgagee may transfer their interest and how that is accomplished. The creditor-mortgagee can transfer her interest by:
• Indorsing the note and delivering it to the transferee, or
• Executing a separate document of assignment
A mortgagee can freely transfer the note, and the mortgage automat- ically follows a properly transferred note.

Question 11

Transfer by Mortgagor—Assumption or Subject To

Mortgage sticks with the land if what?

Assumed?

Takes subject to?

Answer 11

• Recording statutes protect mortgagees.
• If recorded, mortgage sticks with the land.

When a mortgagor transfers the property, the buyer either assumes the mortgage or takes the property subject to the mortgage.
What’s the difference?
Assumes Mortgage: If a grantee assumes the mortgage, they’re agreeing to be personally liable on the mortgage note.
Takes subject to Mortgage: If they take the property subject to the mortgage, they are not agreeing to personal liability; the mortgagee’s only recourse is foreclosure (they cannot maintain a suit against the grantee). Tranfee assumed NO personal liability, only mortgagor is personally liable.

Question 12

Transfer by Mortgagor—Assumption or Subject To: Effect of Assumption

Answer 12

If the grantee signs an assumption agreement, they become primarily liable to the lender, while the original mortgagor is secondarily
liable as a surety. However, the mortgagee may opt to sue either
the grantee or the original mortgagor on the debt. If no assumption agreement is signed, the grantee is not personally liable on the loan, and the original mortgagor remains primarily and personally liable.

Question 13

once a grantee has assumed a mortgage, any modification of the obligation by the grantee and mortgagee…

Answer 13

Remember that once a grantee has assumed a mortgage, any modification of the obligation by the grantee and mortgagee discharges the original mortgagor of all liability

Question 14

Due-on-Sale Clauses

Answer 14

Due-on-sale clauses, which appear in most modern mortgages, allow the lender to demand full payment of the loan if the mortgagor trans- fers any interest in the property without the lender’s consent.

Question 15

If O, our debtor-mortgagor, sells Blackacre, which is now mortgaged, what happens to the mortgage? If recorded, it remains on the land.

Answer 15

Generally, when a mortgagor transfers title to the property, the grantee automatically takes the property subject to the mortgage.
The grantee will not be personally liable on the mortgage unless they specifically assume the mortgage.
But, the mortgage remains on the land as long as the mortgage instrument was properly recorded. (Remember: recording statutes protect mortgagees.)
What this means is that while the grantee is not personally liable on the debt, if the mortgagor defaults and the mortgage instrument was properly recorded, the mortgagee can foreclose on the land.

Question 16

Effect of Recording Acts

Answer 16

All recording statutes apply to mortgages as well as deeds. Thus, a subsequent buyer takes subject to a properly recorded lien. Does it matter which recording statute the jurisdiction in the above hypo has enacted?
In a notice state, Buyer takes subject to the lien because: Bank was first to record.
In a race-notice state, Buyer takes subject to the lien because: Buyer had constructive notice.

Question 17

In a notice state, a subsequent BFP prevails over a prior grantee or mortgagee….

Answer 17

In a notice state, a subsequent BFP prevails over a prior grantee or mortgagee who has not yet recorded properly at the time the BFP takes.

Question 18

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

Answer 18

If B has “assumed the mortgage,” both O and 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, the mortgage remains on the land.
Thus, if O does not pay, the mortgage may be foreclosed.

Question 19

FORECLOSURE - How to Proceed…

WB Deed in Lieu of Foreclosure?

Answer 19

Suppose that our debtor-mortgagor has defaulted on the loan and our mortgagee-creditor must look to the land for satisfaction. How must the mortgagee proceed? Foreclosure through proper judicial action.
The mortgagee must foreclose by proper judicial proceeding. At foreclosure, the land is sold. The sale proceeds go to satisfying the debt.
a. Deed in Lieu of Foreclosure: The mortgagor may tender to the mortgagee a deed in lieu of foreclo- sure, which permits the mortgagee to take immediate possession without a foreclosure sale. Since the deed in lieu of foreclosure is not an actual foreclosure, it doesn’t operate to terminate any junior liens that may be present on the mortgaged real estate.

Question 20

FORECLOSURE - Sale Proceeds Are Less or More than Amount Owed

Answer 20

What if the proceeds from the sale of Blackacre are less than the amount owed? Mortgagee brings a deficiency action against debtor.
By contrast, what if there is a surplus? Junior liens are paid off in order of their priority. Any remaining surplus goes to the debtor.

Question 21

Foreclosure on land with 3 mrotgages. How will the funds be distributed?

Answer 21

Off the top: Attorneys’ fees and expenses of the foreclosure and then any accrued interest on First Bank’s mortgage. (Assume for purposes of this hypothetical that these items are zero.)

The sale proceeds are then used to pay off the mortgages in the order of their priority. Each claimant is entitled to satisfaction in full before a junior lienholder may take.

Bank that COMES UP SHORT should be able to proceed for a deficiency judgment.

If SURPLUS, surplus goes to debtor.

Question 22

Effect of Foreclosure on Various Interests

Answer 22

Priority among interests in foreclosure is the most heavily tested aspect of mortgages.
- Junioir interests terminated (paid in descending order from sale proceeds)
- Necessary parties: All juniior lienholders + debtor
- Senior interests unaffected (buyer takes subject to them).

The default rule is that the priority of a mortgage depends on when it was placed on the property.
First in time, first in right again.

A buyer at a foreclosure sale takes the title as it existed when the foreclosed mortgage was placed on the property.

All interests senior to that one remain on the property, and all interests junior to that one are extinguished.

Those interests include junior mortgages, liens, leases, easements, and all other types of interests.

Question 23

Junior Interests

Answer 23

• Junioir interests terminated (paid in descending order from sale proceeds)

As noted, foreclosure terminates interests junior to the mortgage being foreclosed but does not affect senior interests.

This means that junior lienholders will be paid in descending order with the proceeds from the sale, assuming funds are left over after full satisfaction of superior claims.

Junior lienholders should be able to proceed for a deficiency judgment.

But once foreclosure of a superior claim has occurred, with the proceeds distributed appropriately, junior lienholders can no longer look to Blackacre for satisfaction.

Question 24

Necessary Parties to the mortgage:

who?

Failure to include a necessary party

Answer 24

Who are the necessary parties to the foreclosure action?
Is the debtor-mortgagor also a necessary party to the foreclosure action? YES.
The debtor-mortgagor is considered a necessary party and must be joined, particularly if the creditor wishes to proceed against the debtor for a personal deficiency judgment.

Failure to include a necessary party results in the preservation of that party’s claim, despite the foreclosure and sale.
Thus, if a necessary party is not joined, their mortgage will remain on the land.

Question 25

Senior Interests

Answer 25

Foreclosure does not affect any interest senior to the mortgage being foreclosed.
The buyer at the sale takes subject to such interest.
Is the buyer personally liable on the senior debt? No. But as a practical matter, if the senior mortgage is not paid, sooner or later the senior creditor will foreclose against the land.

Question 26

Hypo: Blackacre has a fair market value of $50k and is subject to 3 mortgages executed by its owner. B1, with first priority, is owed $30k. B2, with second priority, is owed $15k, and B3, with third priority, is owed $10k. Now, it is B2’s mortgage that is being foreclosed. (First Bank’s mortgage exists, but it is either not in default or its holder has not yet taken action to foreclose it.)

Will the foreclosure affect First Bank’s mortgage?

Answer 26

Will the foreclosure affect First Bank’s mortgage? NO. it will not affect B1’s mortgage. Foreclosure does not affect any interest senior to the mortgage being foreclosed. Foreclosure does not affect SENIOR interest.

Is the foreclosure sale buyer personally liable to First Bank? No. Only the debtor, Madge, is personally liable to First Bank. But, if she cannot repay the debt, First Bank (whose lien was properly recorded) is entitled to foreclose on Blackacre. What this means is that because First Bank’s mortgage was properly recorded, it sticks with the land. Thus, if debtor Madge cannot pay back First Bank, First Bank can foreclose on the land. With that in mind, the foreclosure sale buyer, albeit buying at Second Bank’s foreclosure sale, nonetheless has a strong incentive to pay off First Bank’s lien. Otherwise, Blackacre is subject to a later foreclosure action brought by First Bank if and when debtor Madge is unable to pay off First Bank’s lien.

Only debtor is still personally liable.
BUT, Blackacre is still subject to B’1s mortgage - B1 is still entitled to foreclose on Blackacre bc it was properly recorded.

Foreclosure buyer has strong incentive to pay off outstanding senior lien, else it could be foreclosed upon.

Question 27

what should buyer bid for foreclosure sale?

Answer 27

Buyer should bid up to $20,000, which represents Blackacre’s fair market value of $50,000 minus the $30,000 buyer needs to discharge First Bank’s mortgage.

Question 28

Priorities of creditors

Answer 28

• Creditor must record
• First-in-time, first-in-right
• Purchase-money mortgage who records properly: First priority in parcel financed.

As a creditor, you must record. Until you record, you have no priority. Once recorded, priority is determined by the norm of first-in-time, first-in-right. What does that mean? Creditor that is First to record gets priority, EXCEPT for purchase-money mortgagee.

Question 29

Purchase-Money Mortgage

Answer 29

Remember the purchase-money mortgage? A mortgage given to secure a loan that enables the debtor to acquire the encumbered land.

Gets priority if properly records.

Question 30

FLoating lien

Answer 30

taking a security interest in all of O’s real estate holdings, “whether now owned or hereafter acquired.

That IS PERMISSIBLE.

Question 31

Subordination Agreements

Answer 31

By private agreement, a senior creditor may agree to subordinate its priority to a junior creditor. Subordination agreements are permis- sible.

Question 32

Redemption
a. Redemption in Equity

Answer 32

Equitable redemption is universally recognized up to the date of sale. What that means is that at any time prior to the foreclosure sale the debtor has the right to redeem the land by freeing it of the mortgage.

Once a valid foreclosure has taken place: the right to equitable redemption is cut off.

How is the right of equitable redemption exercised when the note does not contain an acceleration clause and the debtor has defaulted? (An acceleration clause permits the mortgagee to declare the full balance due in the event of default.). Paying off missed payments PLUS accrued interest and costs.

What if the mortgage or note contained an acceleration clause and the debtor has defaulted? Debtor must pay off the ENTIRE BALANCE owed plus accured interest plus costs.

The validity of acceleration clauses is generally accepted. Such clauses may permit acceleration for failure to pay the mortgage debt as well as for defaults in mortgage covenants such as an obligation to pay taxes, maintain insurance, or avoid the commission of waste.
May a debtor/mortgagor waive the right to redeem in the mortgage itself? NO, DEBTOR CANNOT waive right to redeem in mortgage itself. NO CLOGGING EQUITY OF REDEMPTION!

Question 33

MORTGAGE ALTERNATIVES

Answer 33

Deed of Trust
Some states call a security interest in land a deed of trust rather than a mortgage. The debtor/notemaker is the trustor. The trustor gives a deed of trust to a third-party trustee, who is usually closely connected to the lender (the beneficiary). On default, the lender instructs the trustee to foreclose the deed of trust by sale.

Absolute Deed: An absolute deed, if given for security purposes, can be treated by the court as an “equitable” mortgage to be treated as any other mortgage (that is, creditor must foreclose by judicial action).

Installment Land Contract: An installment purchaser obtains legal title only when the full contract price has been paid off. Forfeiture clauses, allowing the vendor
upon default to cancel the contract, retake possession, and retain all money paid, are common and generally enforceable.

Equitable Vendor’s Lien: This lien does not result from an agreement but rather arises by implication of law when a seller transfers title to the buyer, and the purchase price or a portion thereof remains unpaid.

Question 34

SALE-LEASEBACK

Answer 34

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