Kaplan Pgs 574-584 Mortgages

Question 1

What is a mortgage?

Answer 1

The conveyance of an interest in real property made to secure performance of an obligation. The obligation usually comes from a loan made to facilitate the purchase of real property. A mortgage has two documents: a mortgage deed and a promissory/mortgagee note

Question 2

What is a mortgage deed?

Answer 2

A document that conveys an interest in real property (meant to secure performance of the debt). Mortgages are transfers of an interest in realty, so they have to be in a writing that is properly executed and delivered.

Mortgage deed must:
– identify the parties
– describe the property with sufficient detail to put a subsequent BFP on notice
– include intent to create a security interest in the mortgagee

Question 3

What is a mortgage note?

Answer 3

This represents the mortgage obligation and is essentially an IOU that creates personal liability in the mortgage drawer.

It includes:
– the loan amount
– the interest rate which can be fixed/set for the term, or adjustable/vary over the term
– the loan term in months or years
– a clause permitting pre-payment with a penalty
– a clause (acceleration clause) that allows the mortgagee to declare the entire amount due and payable if the mortgagor defaults
– A “due on sale“ clause that requires the entire balance remaining on the note to be paid before the property can be transferred

Question 4

Once a mortgagor satisfies or pays the mortgage note, what happens?

Answer 4

The mortgagee executes a document that releases the mortgage. This release document should be recorded

Question 5

What is a PMM or purchase money mortgage?

Answer 5

A mortgage given to secure a loan that allows the mortgagor to acquire title to the property at issue or to make improvements to that property

Whether these are recorded or not, they have priority over other liens on the property, even if those other liens are recorded earlier than the PMM, but only if they were executed prior to the acquisition of title.

The rationale is that the PMM allows the mortgagor to acquire title to the property so it should have a superior right.

A mortgage given the day after the buyer acquired the property through PMM, if recorded before the PMM is recorded, would have priority over the PMM.

If the instrument is silent, a PMM given to the seller of the property will have priority over one given to a third-party lender (bank). Ie: if you get land by giving a PMM to the seller and to the bank, and you default on both, the seller has priority over the bank

Question 6

What are future advance mortgages?

Answer 6

These include things like a line of credit and home equity loans and are usually used to fund construction. Generally the point that the mortgage attaches to the property is the date that the future advance mortgage arrangement is made, not the date that the funds are actually accessed.

Two types:
– obligatory: the lender has a duty to advance the funds. The lender commits to make future advances without any discretionary conditions
– optional: the lender has discretion whether to make future advances
Ie: if there is a clause that says the bank can withhold funds if any difficulties arise in the construction making satisfactory progress, that makes the advance optional

Question 7

What is a mechanic’s lien?

Answer 7

Many states have statutes that allow a lien to be created against real property if materials have been supplied or labour has been performed to improve the property. The lien is not filed until after money is owed to the lienholder, but it relates back to the time that the work or construction began, and this gives the lienholder priority over an intervening lienholder.

Ie: a homeowner wants to build a new guest house and hires a contractor to work for $50,000 starting June 1. To finance this he takes out a $75,000 mortgage with the bank on June 15, secured by a lien on the property. The bank records on June 15. The homeowner pays $20,000 to the contractor and makes no other payments, and makes no payments on the mortgage with the bank. The contractor finishes August 1 and files a mechanic’s lien August 15 for $30,000. September 1 the bank forecloses and joins the contractor in the action. After the foreclosure sale, the contractor will have priority over the bank and be paid first even though it recorded its interest after the bank because its interest relates back to the date that construction began

Question 8

What are the three different mortgage theories in the US?

Answer 8

– title theory (CL minority)
– lien theory (majority)
– intermediate theory

Question 9

What is involved in the title theory to mortgages?

Answer 9

This is the minority common law view that says that the mortgagee receives legal title to the property and has a right to take possession of and to collect rents and profits from the property. This title is subject to a condition subsequent that divests title from the mortgagee if the mortgagor repays the loan by the due date. Until he repays, the mortgagor has only an equitable interest in the property. Generally it is held that the mortgagee holds title for security purposes only and that the mortgagor is viewed as the owner of the land

Question 10

What is involved in a lien theory of mortgages?

Answer 10

This is the majority view that says that the mortgagee gets a lien, and the mortgagor retains legal and equitable title and possession to the property unless and until foreclosure happens

Question 11

What is involved in the intermediate theory of mortgages?

Answer 11

This is only adhered to by a few states, but it says that the mortgagor keeps legal title until a default occurs. After default, title and possession pass to the mortgagee, who can then begin to collect rents and profits

Question 12

What are ways that a mortgagor or a life tenant of mortgaged property can commit waste?

Answer 12

• failing to make timely payments of property taxes or government assessments
  – making physical changes to the property that reduce its value
  – failing to maintain and repair the property in a reasonable manner
  – failing to comply materially with mortgage covenants regarding physical care, maintenance, construction, insurance
• keeping rent that the mortgagee has a right of possession to

Question 13

What is the mnemonic to help remember mortgage related waste?

Answer 13

My rubbish makes the castle ruined

- mortgage
– reduced value
– maintain
- taxes
– covenants
– rents

Question 14

What are different remedies that a mortgagee has if a mortgagor or life tenant commits waste?

Answer 14

– Foreclosure under the mortgage for default
– injunction prohibiting future waste or requiring correction of waste already committed, to the extent that waste has impaired or threatens to impair the mortgage and security
– damages limited to the amount of waste

Question 15

What is the name for the mortgagor’s interest in the mortgaged property?

Answer 15

Equity

Question 16

If after there has been an assumption of a mortgage, the debt falls into default, what can the grantor get?

Answer 16

He can get an exoneration, which is a court order that compels the grantee to pay the debt. If after that assumption the grantor has made any payments on the mortgage, he can sue the grantee for reimbursement

Question 17

Is there an absolute right to pre-pay a mortgage debt early?

Answer 17

No, if a mortgage does allow for this, it usually includes a pre-payment fee, which is valid because it compensates the creditor for loss of interest income

Question 18

Is it possible for a mortgagee to accept a deed to the property instead of foreclosure?

Answer 18

Yes, but he will take the land with all mortgages still attached because he steps into the shoes of the mortgagor

Question 19

What are two different ways that foreclosure can happen?

Answer 19

• a power of sale foreclosure: occurs without judicial action according to a power of sale clause in the mortgage documents
  – judicial foreclosure: this requires
  • must be public
  • properly noticed
  • conducted in a reasonable manner
  • result in a fair sale price: doesn’t mean the fair market price, it just means the sale price must be arrived at as a result of the mortgagee’s due diligence in conducting the sale. Sales are only set aside for inadequacy if they are so gross as to shock the conscience

Question 20

What is an acceleration clause?

Answer 20

A clause that makes the entire debt become due if some specified event happens, such as default/encumbrance/sale. These are usually upheld

Question 21

How does modification work with regard to priority for mortgages?

Answer 21

If a senior mortgage is modified/has its terms changed, a junior mortgage prevails over that modification if it prejudices the junior mortgage by increasing the amount of principle or increasing the interest rate.

Ie: first bank has a senior mortgage on land for $100,000. Second bank has a junior mortgage for $20,000. If first bank and the homeowner negotiate an increase in the interest rate for the mortgage that results in them getting an extra $5000, that is a modification that materially prejudices second bank. If the homeowner defaults, and first bank forecloses, joining second bank, first bank will get the first $100,000, then second bank will get the next $20,000, and then first bank will get their additional $5000 (because the junior mortgage has priority over the modification)

Question 22

What are examples of modifications to a senior mortgage that don’t usually materially prejudice the junior mortgage holder?

Answer 22

Extension of the mortgage maturity date, or rescheduling installment payments

Question 23

What does marshaling mean?

Answer 23

This is an equitable doctrine meant to stop a senior creditor that has access to more than one source of funds from the debtor from prejudicing a junior creditor who can only get recourse from one source of funds.

The idea is that it stops the senior creditor from foreclosing on a common source of funds first and compels that creditor with more options to exhaust other assets first, so it doesn’t defeat another creditor. This is often raised by a junior lien creditor as an affirmative defense to a foreclosure taken by a senior lienholder

Question 24

What are the two different techniques to marshal assets?

Answer 24

– Two funds doctrine

– inverse order of alienation doctrine

Question 25

How does the two funds doctrine of marshaling work?

Answer 25

It can be applied when the junior creditor and the senior creditor are dealing with a common debtor that has two or more properties, and the senior creditor has a lien on two or more of those properties while the junior creditor has a lien on fewer.

Ie: if homeowner takes out a mortgage with bank 1 to finance the purchase of Blackacre and Whiteacre, then later takes out a mortgage with bank 2 and uses Blackacre as collateral. If the homeowner defaults on his loan to bank 1, and bank 1 starts a foreclosure action and joins bank 2 as a junior lien holder, but the value of Blackacre is very small, bank 2 can raise the doctrine of marshaling as an affirmative defense and ask the court to compel bank 1 to foreclose first on Whiteaker to avoid prejudicing bank 2 whose only source of recovery is Blackacre

Question 26

What is involved in the inverse order of alienation approach to marshaling?

Answer 26

If land is subject to a lien and then gets divided into separate parcels and sold to different grantees successively without a release from the mortgagee, the mortgagee must first satisfy its lien out of the land remaining in the grantor. If that is not enough, the mortgagee must resort to the separate parcels in inverse order of their alienation. This means the most recently conveyed parcel first, then working backwards to the first parcel conveyed.

I.e.: if you mortgage property to bank for $500,000 and record it, then years later you break up the property into 10 plots of land and keep the first two lots for yourself, and convey lots 3 through 10 to other people in numerical order and they all take subject to the mortgage, then later you default, the bank would foreclose on your lots one and two first, then on lot 10, 9, 8, etc. in descending order of alienation until the mortgage obligation is satisfied