Mortgages

Question 1

In a mortgage, who is the mortgagor? Who is the mortgagee?

Answer 1

The BORROWER (debtor) is the mortgagor.

The LENDER (creditor) is the mortgagee.

Question 2

In a mortgage transaction, what is the promissory note? What legal effect?

Answer 2

The mortgagor’s personal obligation

This means the mortgagee is not limited to the land when seeking a remedy for default. If the mortgagor defaults, in addition to foreclosure, the mortgagee has the option to sue the mortgagor personally for payment of the note.

Question 3

In a mortgage transaction, what is the mortgage?

Answer 3

The agreement that says that if the mortgagor defaults, the land can be sold to pay the mortgagee.

Question 4

What is a purchase-money mortgage?

Answer 4

An extension of value by the lender who takes as collateral a security interest in the real estate that its loan enables the debtor to acquire.

In English, a loan by a creditor for the value of the property the debtor is trying to buy, in exchange for a security interest in the property itself.

Question 5

What is a non-purchase-money mortgage?

Answer 5

A mortgage, secured by property, that is not used to purchase the property itself.

Question 6

A mortgage is the union of two elements:

Answer 6

(1) A debt

(2) A voluntary transfer of a lien in the debtor’s land to secure the debt

Question 7

Must a mortgage be in writing? Why?

Answer 7

Yes, to satisfy the Statute of Frauds (legal mortgage)

Question 8

Each of the following terms is indicative of what?

(1) Mortgage deed
(2) Deed of trust
(3) Sale-leaseback
(4) Security interest in land

Answer 8

legal mortgage (i.e., a signed writing conveying an interest in land to secure a debt)

Question 9

The creditor-mortgagee can transfer her interest by:

Answer 9

(1) Indorsing the note and delivering it to the transferee, OR
(2) Executing a separate document of assignment

A mortgagee can freely transfer the note, and the mortgage automatically follows a properly transferred note.

Question 10

When a mortgagor transfers the property, the buyer either _______ or _______.

Answer 10

(1) assumes the mortgage

(2) takes the property subject to the mortgage

Question 11

What is the legal effect of assumption of a mortgage? What happens if a grantee takes without assuming the mortgage?

Answer 11

The grantee becomes primarily liable to the lender, while the original debtor-mortgagor is secondarily liable as a surety.

However, the creditor-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 12

What is the legal effect of a grantee taking a transfer of property from a mortgagor subject to the mortgage?

Answer 12

The grantee will not be personally liable on the mortgage. The mortgagee’s only recourse is foreclosure (they cannot maintain a suit against the grantee).

Question 13

What is a due-on-sale clause?

Answer 13

A due-on-sale clause allows the lender to demand full payment of the load if the mortgagor transfers any interest in the property without the lender’s consent.

These appear in most modern mortgages.

Question 14

Do recording statutes protect mortgages? Explain.

Answer 14

Yes. Recording statutes protect mortgages, so the mortgage remains on the land as long as the mortgage instrument was properly recorded. 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 15

On January 10, Madge took out a $50,000 mortgage on Blackacre with First Bank. First Bank promptly and properly recorded its interest on January 10. Thereafter, on January 15, Madge sold Blackacre to Buyer. Buyer had no actual knowledge of the lien. Buyer promptly and properly recorded its deed.

(1) Does Buyer hold subject to First Bank’s mortgage?
(2) Does it matter which recording statute the jurisdiction has enacted?
(3) In a notice state, Buyer takes subject to the lien because:
(4) In a race-notice state, Buyer takes subject to the lien because:

Answer 15

(1) Yes
(2) No
(3) Buyer has constructive (record) notice of the mortgage because it was properly recorded.
(4) Same as (3), and First Bank recorded first.

Question 16

On January 10, Madge took out a $50,000 mortgage on Blackacre with First Bank. First Bank promptly and properly recorded its interest on January 10. Thereafter, on January 15, Madge sold Blackacre to Buyer. Buyer had no knowledge of the lien. On January 20, First Bank recorded its mortgage in Blackacre. On January 30, Buyer recorded its deed to Blackacre.

(1) Does Buyer hold subject to First Bank’s mortgage?
(2) In a race-notice jurisdiction:
(3) In a notice jurisdiction:

Answer 16

(1) It depends on which recording statute is applicable
(2) Buyer holds subject to the mortgage because First Bank is a BFP and recorded first.
(3) Buyer is not subject to the mortgage as long as he is a BFP, because he is the last BFP to take.

Question 17

Who is personally liable on the debt if O, the debtor-mortgagor, sells Blackacre to B?

(1) If B has assumed the mortgage:
(2) If B takes subject to the mortgage:

Answer 17

(1) Both O and B are personally liable. B is primarily liable, and O remains secondarily reliable.
(2) 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 18

Suppose that a debtor-mortgagor has defaulted on the loan, and the mortgagee-creditor must look to the land for satisfaction. How must the mortgage proceed?

Answer 18

The mortgagee must foreclose by proper judicial proceeding.

At foreclosure, the land is sold, and the sale proceeds go to satisfying the debt.

Question 19

What if the proceeds from a foreclosure sale are less than the amount owed?

Answer 19

The mortgagee brings a deficiency action.

Question 20

What is a deficiency action?

Answer 20

A deficiency action allows a mortgagee to sue a debtor-mortgagor for any amount still owed on the loan following foreclosure.

Question 21

What if there is a surplus from the foreclosure sale?

Answer 21

Junior liens are paid off in order of their priority. Any remaining surplus goes to the debtor.

Question 22

Explain the priority of a mortgage in the event of foreclosure. What does it mean for a lien to be “junior” or “senior”?

Answer 22

Priority of a mortgage depends on when it was placed on the property.

First in time, first in right.

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 (i.e., existing before the mortgage) remain on the property. All interest “junior” to that one (i.e., coming after the mortgage) are extinguished.

“Interests” include junior mortgages, liens, leases, easements, and all other types of interests.

Question 23

In what order are junior lienholders paid?

Answer 23

Descending order (from oldest to most recent), assuming funds are left after full satisfaction of superior claims.

Question 24

What happens to a junior lienholder if there are insufficient funds remaining after full satisfaction of superior claims?

Answer 24

Junior lienholders may 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.

In other words, they lose any legal claim to the land and may only sue the debtor for damages.

Question 25

Who are the necessary parties to a foreclosure action?

What is the consequence of failing to join a necessary party?

Answer 25

(1) The debtor-mortgagor must be joined, particularly if the creditor wishes to proceed against the debtor for a personal deficiency judgment
(2) All junior lienholders

Failure to join a necessary party will preserve that party’s claim, despite the foreclosure and sale. Thus, if they are not joined, their mortgage will remain on the land.

Question 26

When do creditors gain priority? Any exceptions to the general rule?

Answer 26

When they record. First in time, first in right.

EXCEPTION: purchase-money mortgages get first priority in the parcel that it financed. In other words, a purchase-money mortgage will always be first paid in a foreclosure if the mortgage was extended to finance the parcel being foreclosed upon, even if foreclosure occurs on a senior mortgage.

Question 27

What is a floating lien? Why would a debtor grant a creditor a floating lien?

Answer 27

When a creditor takes a security interest not only in the debtor’s present property, but also in any of the debtor’s property acquired in the future.

Debtors may grant a creditor a floating lien when the loan on the front end is undercollateralized.

Question 28

If a floating lien is senior to a payment-money mortgage, which debt takes priority?

Answer 28

The payment-money mortgage

Question 29

What is a subordination agreement?

Answer 29

By private agreement, a senior creditor may agree to subordinate its priority to a junior creditor.

Question 30

What is equitable redemption? When is it available?

Answer 30

At any time prior to the foreclosure sale, the debtor has the right to redeem the land by freeing it of the mortgage.

Equitable redemption is universally recognized up to the DATE OF SALE. Once a valid foreclosure has taken place, the right to equitable redemption is cut off.

Question 31

What is an acceleration clause?

Answer 31

An acceleration clause permits the mortgagee to declare the full balance due in the event of default.

Question 32

If a buyer has defaulted on a mortgage, how is the right of equitable redemption exercised when the note does NOT contain an acceleration clause?

Answer 32

The debtor may redeem by paying any missed payments, plus accrued interest and costs.

Question 33

If a buyer has defaulted on a mortgage, how is the right of equitable redemption exercised when the note contains an acceleration clause?

Answer 33

Debtor must pay off the full balance owed, plus accrued interests and costs.

Question 34

May a debtor waive the right to redeem in the mortgage itself?

Answer 34

No. Any waiver of equitable redemption is void as a matter of public policy.

Question 35

When does a purchaser in an installment land contract take legal title?

Answer 35

An installment purchaser obtains legal title only when the full contract price has been paid off.

Question 36

In the context of installment land contracts, what is a forfeiture clause?

Answer 36

A forfeiture clause in an installment land contract allows the vendor, upon default by the buyer, to cancel the contract, retake possession, and retain all money paid. They are common and generally enforceable.