Mortgages

Question 1

What is the basic definition of a mortgage?

Answer 1

A conveyance of a security interest in land - intended by the parties to be collateral for the repayment of a debt.

Question 2

What are the two elements of a mortgage?

Answer 2

1. a debt

2. a voluntary transfer of a security interest in the debtor’s land to secure the debt.

Question 3

Does a mortgage have to be in writing?

Answer 3

Yes - to satisfy the statute of frauds because it is a security interest in land.

Question 4

What is an equitable mortgage?

Answer 4

When O gives creditor a deed to Blackacre that is absolute on its face, but both parties understand it to be collateral for a debt - though they don’t execute a note or mortgage deed.

Question 5

Is parol evidence admissible to prove an equitable mortgage?

Answer 5

Yes - communications between O and creditor that reveal their intent regarding the transfer of Blackacre will be admissible.

Question 6

What are the debtor’s and creditor’s rights when they have a valid mortgage on Blackacre?

Answer 6

Debtor: has title and right to possession of Blackacre.

Creditor: has a lien - the right to look to Blackacre if debtor defaults on the loan.

Question 7

Can the creditor or debtor transfer their interest in a mortgage?

Answer 7

Yes - the mortgage will follow a properly transferred note.

Question 8

How does a creditor-mortgagee transfer his interest?

Answer 8

1. by indorsing a note and delivering it to the transferee,

2. by executing a separate document of assignment.

Question 9

How can a transferee of a creditor’s interest in a mortgage become a Holder in Due Course?

Answer 9

If the note is indorsed and delivered.

1. Note is negotiable
2. Original note is indorsed
3. Original note is delivered to transferee
4. Transferee takes in good faith
5. Transferee pays value for the note

Question 10

What are the rights of a HDC?

Answer 10

HDCs take free from any personal defenses but subject to real defenses.

(Personal defenses: as to formation - lack of consideration, fraud in inducement, unconscionability, etc.)

Question 11

What real defenses is a HDC still subject to?

Answer 11

MAD FIFI4
Materal alteration
Duress
Fraud in the factum (lie about the instrument)
Infancy
Illegality
Incapacity
Insolvency

Question 12

O takes out a mortgage on Blackacre with creditor. Creditor records its lien. O sells Blackacre to B. What is the status of the mortgage?

Answer 12

NOTICE: B takes Blackacre subject to the mortgage because he had record notice of creditor’s mortgage.

RACE NOTICE: B takes Blackacre subject to the mortgage because he was on record notice, and anyway, creditor won the race to record.

Question 13

O takes out a mortgage on Blackacre with creditor. Before creditor records, O sells Blackacre to B. Creditor records, then B records.

Answer 13

NOTICE: B takes Blackacre free and clear. (O is still personally liable on the mortgage - but creditor cannot look to Blackacre to satisfy the debt).

RACE NOTICE: B takes Blackacre subject to the mortgage. Even though B was a BFP, he lost the race to record.

Question 14

What does it mean to take property “subject to” a mortgage/lien?

Answer 14

The buyer is not personally liable. But - if the mortgager defaults on the loan, the creditor can look to Blackacre to satisfy the debt. Blackacre is subject to foreclosure.

Question 15

Who is personally liable if B bought Blackacre and “assumed the mortgage”?

Answer 15

O is primarily liable, B is secondarily liable on the mortgage, and creditor can still look to Blackacre if they default.

Question 16

Can a mortgagee foreclose without judicial action?

Answer 16

No - before foreclosing on a property, the mortgagee must seek proper judicial action.

Question 17

What is the purpose of foreclosure?

Answer 17

To sell the property and have the proceeds go towards satisfying the debt.

Question 18

What happens if the land sold in a foreclosure sells for less than the amount owed?

Answer 18

Mortgagee will take the sale amount and bring a deficiency action against the debtor.

Question 19

What happens if there is a surplus from the foreclosure sale?

Answer 19

The junior lien-holders are paid in order of priority. Once all juniors are paid, surplus will go to the debtor.

Question 20

What is the priority scheme for payment in a foreclosure sale?

Answer 20

1. Take attorneys fees, foreclosure expenses, and accrued interest on the bank’s mortgage off the top.
2. Pay foreclosing creditor in FULL before paying subordinate lien holders.
3. Junior lien holders paid in descending order.
4. Surplus to debtor

Question 21

What happens if junior liens are not satisfied by the foreclosure?

Answer 21

They will no longer be able to look to Blackacre for satisfaction.

Question 22

What happens if a creditor forecloses on Blackacre but does not join junior lien holders?

Answer 22

Junior lien-holders are considered necessary parties. If not joined, he buyer in the foreclosure sale will take subject to the junior lien holders’ mortgages.

Question 23

What if the creditor brings a foreclosure action, but there is a senior creditor in the picture?

Answer 23

The senior creditor will not be part of the distribution from the sale.

But the buyer at the foreclosure sale will take subject to the senior creditor’s mortgage.

Question 24

How is seniority of creditors determined?

Answer 24

Seniority of creditors is determined by the order in which they record.

Question 25

What is a Purchase Money Mortgage (PMM)?

Answer 25

The creditor’s money allows the debtor to acquire the property. The creditor will have a PMM over that property.

Question 26

What are a PMM’s rights regarding the property they financed?

Answer 26

A PMM who records has first priority in a parcel they financed.

Question 27

What are a PMM’s rights vis a vis a floating lien holder (after-acquired clause)?

Answer 27

The PMM who records has first priority in the property they financed, even if that property is supposed to be part of the floating lien holder’s collateral.

Question 28

Can creditors privately agree to switch places in line for collection?

Answer 28

Yes.

Question 29

Define equitable redemption.

Answer 29

A universally recognized concept that the person being foreclosed on has the right to redeem (free the land from the mortgage) up until the date of the foreclosure sale.

Question 30

What must a debtor do to redeem?

Answer 30

Pay all past-due payments plus interest and costs.

If there was an acceleration clause, must pay the balance of the mortgage plus interests and costs.

Question 31

Until when can an debtor redeem?

Answer 31

Until the date of foreclosure sale. After the sale takes place, the right disappears unless there is statutory redemption.

Question 32

Can a debtor ever waive the right to redeem?

Answer 32

No. This is called clogging the equity of redemption, and it is prohibited.

Question 33

What is statutory redemption?

Note: NOT recognized in NY

Answer 33

This is a 6 month grace-period after the foreclosure sale, where the debtor can still redeem. Typically they must pay the foreclosure sale price rather than the amount owed.

Usually in these states, the debtor will retain possession of the property until the end of the grace period.

If redeemed, he can take back ownership and the sale is nullified.