Mortgages

Question 1

Mortgagor and Mortgagee

Answer 1

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

Question 2

Promissory Note and Mortgage

Answer 2

The mortgage transaction involves two documents:

1. Promissory Note
2. Mortgage

The note is the mortgagor’s personal obligation. This means that he 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.

Question 3

Purchase-Money v. Non-Purchase Money Mortgage

Answer 3

There are two primary ways to mortgage ‘X’: 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 is loan enables the debtor to acquire.

Question 4

Creation - Writing

Answer 4

The mortgage typically must be in writing to satisfy the SOF. This is the legal mortgage

Question 5

Transfer of Interests

Answer 5

both the mortgagee or the mortgagor may transfer their interest.

Question 6

Transfer by Mortgagee

Answer 6

Mortgagee may transfer their interest by:

1. Endorsing the note and delivering it to the transferee, or
2. Executing a separate document of assignment.

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

Question 7

Transfer by Mortgagor - Assumption or Subject To

Answer 7

When a mortgagor transfers the property, the buyer either assumes the mortgage or takes the property subject to the mortgage.

What’s the difference? If a grantee assumes the mortgage, they’re agreeing to be personally liable on the mortgage note. If they take the property subject to the mortgage, they are not agreeing to personal liability; the mortgagee’s only recourse is foreclosure.

Question 8

Effect of Assumption

Answer 8

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 9

Due on Sale Clauses

Answer 9

Appear in most modern mortgages, allow the lender to demand full payment of the loan if the mortgagor transfers any interest in the property without the lender’s consent.

Question 10

Effect of Recording Acts

Answer 10

All recording statues apply to mortgages as well as deeds.

Thus, a subsequent buyer takes subject to a properly recorded lien.

In a notice state, B takes subject to the lien.

In a race-notice state, B takes subject to the lien.

Question 11

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

Answer 11

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 12

Foreclosure - How to Proceed

Answer 12

The mortgagee must foreclose by proper judicial proceeding. At foreclosure, the land is sold. The sale proceeds go to satisfying the debt.

Question 13

Deed in Lieu of Foreclosure

Answer 13

The mortgagor may tender to the mortgagee a deed in lieu of foreclosure, which permits the mortgagee to take immediate possession without a foreclosure sale. Since the deed in lieu of foreclosure is not an actual foreclosure, ti doesn’t operate to terminate any junior liens that may be present on the mortgaged real estate.

Question 14

What if Sale Proceeds are less or more than amount owed?

Answer 14

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

Question 15

Effect of Foreclosure on various interests

Answer 15

Default rule is that the 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 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 16

Junior Interests

Answer 16

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 LH’s should be able to proceed with a deficiency judgment. But once foreclosure of a superior claim has occurred, with the proceeds distributed appropriately, junior LH’s can no longer look to Blackacre for satisfaction.

Question 17

Necessary Parties to the foreclosure action

Answer 17

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 18

Senior Interests

Answer 18

foreclosure does not affect any interest senior to the mortgage being foreclosed. The buyer at the sale takes subject to such interest.

The 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.

Question 19

Priorities

Answer 19

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.

Question 20

Purchase Money Mortgage - Priority

Answer 20

A mortgage given to secure a loan that enables the debtor to acquire the encumbered land has priority.

Question 21

Subordination Agreements

Answer 21

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

Question 22

Redemption in Equity

Answer 22

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.

Question 23

Statutory Right of Redemption

Answer 23

Many states give the mortgagor a statutory right to redeem for some fixed period after the foreclosure sale has occurred.

The amount to be paid is usually the foreclosure sale price, rather than the amount of the original debt owed.

Question 24

Mortgage Alternatives - Deed of Trust

Answer 24

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.

Question 25

Mortgage Alternatives - Absolute Deed

Answer 25

If given for security purposes, can be treated by the court as an equitable mortgage to be treated as any other mortgage.

Question 26

Mortgage Alternatives - Installment Land Contract

Answer 26

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.