Mortgages Flashcards
What is a mortgage? How does one create a mortgage?
A mortgage is the conveyance of a security interest in land, intended by the parties to be collateral for the repayment of a debt.
A mortgage is the union of two elements: i) a debt
ii)a voluntary lien in debtor’s land to secure the debt. By way of vocabulary, debtor is: mortgagor, and creditor is: mortgagee.
The mortgage typically must be in writing to satisfy the Statute of Frauds. This is the legal mortgage. A legal mortgage is evidenced by a writing: (a) the mortgage deed; (b) a deed of trust; (c) a sale lease back; (d) a security interest in land.
All parties to a mortgage can transfer their interest.
What is an equitable mortgage?
Equitable mortgages don’t fit the criteria for a legal mortgage, but are considered mortgages under equity (in the interests of justice) because money was lent and security was promised. This could arise because of procedural or paperwork issues. Based on this definition, there are numerous situations which could lead to an equitable mortgage.
Once a mortgage has been created, what are the parties’ rights?
Unless and until foreclosure, debtor-mortgagor has title and the right to possess. Creditor-mortgagee has a lien.
How can a creditor-mortgagee transfer his interest?
(1) endorsing the note and deliver it to the transferee; OR (2) by executing a separate document of assignment. If the note is endorsed and delivered, the transferee is eligible to become a holder in due course. This means that he takes the note free of any personal defenses that could have been raised against the original mortgagee.
What are personal defenses?
Lack of consideration; fraud in the inducement; unconscionability, waiver, estoppel. Thus, the holder in due course may foreclose the mortgage despite any personal defense. By contrast, the holder in due course is still subject to “real” defenses that the maker might raise.
What are the real defenses?
MAD FIFI⁴: Material Alteration; Duress; Fraud IN the Factum; Incapacity; Illegality; Infancy; Insolvency
What is required to be a holder in due course?
To be a holder in due course of the note, the following criteria must be met:
a) the note must be NEGOTIABLE, made payable to the named mortgagee;
b) the ORIGINAL NOTE must be indorsed, signed by the named mortgagee;
c) the ORIGINAL NOTE must be DELIVERED to the transferee. A photocopy is unacceptable;
d) the transferee must take the note IN GOOD FAITH, without notice of any ILLEGALITY;
and
e) the transferee must pay VALUE for the note, meaning some amount that is more than nominal.
Briefly explain the nexus between recording statutes and mortgages.
All recording statutes apply to mortgages as well as deeds. Thus, a later buyer takes subject to a properly recorded lien. 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.
Assuming that our mortgagee-creditor must look to the land for satisfaction, how must he or she proceed?
The mortgagee must foreclose by proper judicial action. At foreclosure, the land is sold. The sale proceeds go to satisfying the debt.
Regarding foreclosures, What if the proceeds from the sale of Blackacre are less than the amount owed? By contrast, what if there is a surplus?
If the proceeds are less than the amount owed, the mortgagee brings a deficiency action against debtor. By contrast, if there is a surplus the junior liens are paid in order of there priority; remaining surplus goes to the debtor. Off the tope: (1) attorneys fees, foreclosure expenses, and any accrued interest on First Bank’s lien. We assume these items are O. (2) the foreclosing party’s loan (principal and accrued interest); Any junior liens (order of priority).
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 subordinated lienholder may take.
What is the effect of foreclosure on various interests?
i) Foreclosure will terminate interests junior to the mortgage being foreclosed but will not affect senior interests. (This means that junior lienholders will be paid in descending order with the proceeds from the sale, assuming funds are leftover 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.)
Those with interests subordinate to those of the foreclosing party are called necessary parties to the foreclosure action.
The debtor-mortgagor is also considered a: necessary party and must be joined, particularly if creditor wishes to proceed against 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,
ii) Foreclosure does not affect any interest senior to the mortgage being foreclosed. The buyer at the sale takes subject to such interest. This means that buyer is NOT personally liable on the senior debt, but, as a practical matter, if the senior mortgage is not paid, sooner or later, the senior creditor will foreclose against the land.
Foreclosure does not affect any interest senior to the mortgage being foreclosed.
How do you determine priorities under mortgages?
(1) As a creditor, you must record. Until you properly record your mortgage, you have no priority. (2) Once recorded, priority is determined by the norm of first in time, first in right.
(3) The purchase money mortgage: A mortgage given to secure a loan that
enables the debtor to acquire the encumbered land.
(4) subordination agreements are allowed (freedom of contract); a senior creditor may agree to subordinate its priority to a junior creditor.
What is redemption in equity (equitable redemption)?
Redemption in equity: Equitable redemption is universally recognized up to the date of sale. At any time prior to the foreclosure sale the debtor can try to redeem the land. Once a valid foreclosure has taken place, the right to equitable redemption is gone/ is no more.
How is the right of equitable redemption exercised?
By paying off the missed payment or payments, plus interests and costs.
What is an acceleration clause?
An acceleration clause permits the mortgagee to declare the full balance due in the event of default. If the mortgage contains an acceleration clause the full balance plus accrued interest, plus costs must be paid.
