Mortgages Flashcards
What is a mortgage?
A security interest in real property held by a lender as a security for a debt, usually a loan of money
What is a deed of trust?
Type of secured real estate transaction that some states use instead of mortgages, which gives the deed to a 3rd party trustee
What is an installment land contract?
An agreement between seller and buyer in which buyer agrees to pay to seller the purchase price of the property plus interest in installments over a set period of time
May a mortgagee transfer their interest to a third party?
YES
All parties to a mortgage can transfer their interest
Mortgage automatically follows the properly transferred note
What does a sale “subject to a mortgage” mean for the buyer?
Means that the buyer is NOT personally liable for payment of the mortgage debt
*a buyer who takes subject to a recorded mortgage may be foreclosed upon if the seller (who remains personally liable) does not pay that mortgage
What is the lien theory of property ownership?
When a mortgage is executed between a lender and a borrower, jurisdictions following the “lien theory” will consider the borrower to be the owner of the property, while the lender merely holds a security interest in the property
*distinguish from title theory of ownership
What is the title theory of ownership?
When a mortgage is executed between lender and borrower, jurisdictions following “title theory” will hold that title remains w/ the lender until the borrower has paid off the mortgage
*distinguish from the lien theory
What is a foreclosure?
the process that terminates a borrower’s interest in a mortgage
What is statutory redemption?
Statutory redemption statutes give the borrower the right to redeem their foreclosed mortgage for a fixed period of time after a foreclosure sale by paying the entire amount due on a mortgage
*the amount to be paid is usually the foreclosure sale price rather than amount of debt
How is the priority of competing mortgages determined in the event of foreclosure?
A mortgages priority is generally determined according to when the mortgage was placed on property
“first in time, first in right”
*look out for the type of mortgage and when the parties recorded, as both may change the priority of the mortgage
What is the oder in which proceeds of a mortgage foreclosure sale are distributed?
- any expenses of the sale (ie, court costs and fees) must be paid first, THEN
- the proceeds will be applied to the principal interest and accrued interest on the foreclosed mortgage; THEN
- if there are any funds left, junior mortgages will be paid; AND FINALLY
- any remaining proceeds go to the mortgagor
What is an absolute deed?
or “equitable mortgage” occurs when a buyer delivers a deed to the mortgagee rather than signing a note or mortgage deed
*this differs from a “mortgage deed” where, after the terms of the mortgage have been fulfilled, ownership is transferred back to the mortgagor
What is a “sale-leaseback”?
is a financial transaction where the seller sells an asset to a buyer and then leases it back from the buyer
*a court may find this creates an equitable mortgage
Which 2 remedies are available to a mortgagee when the mortgagor defaults?
- sue on the debt OR
- foreclose on the mortgage
What may a creditor do if the funds from a foreclosure sale are insufficient to satisfy their debt?
may sue the debtor in a deficiency action if the proceeds of the foreclosure sale are insufficient to satisfy the debt
What is an acceleration clause?
is a term in a loan agreement that allows a lender to accelerate the loan’s du date if the borrower fails to meet some obligation, typically nonpayment of the mortgage debt
What are the 2 main triggers of acceleration clauses?
- failure to make timely payments of the mortgage
- transfer of mortgage w/out lender’s consent
What happens when an acceleration clause is triggered?
the remaining balance of the mortgage will be due in order to redeem the mortgage
If a lender invokes an acceleration clause, what must the borrower pay?
Must pay the unpaid balance of the loan’s principal, PLUS any interest that accumulated before the lender invoked the acceleration clause
*the borrower does NOT have to pay the full amount of interest that would have become due had the loan been paid off normally
What are the two ways an acceleration clause may be waived?
- express agreement
- detrimental reliance
May the effect of an acceleration clause be undone?
YES
Borrowers may undo lenders’ invocation of acceleration clauses and avoid foreclosure by making up past-due payments, and by compensating for some or all of the costs associated with the borrowers default
*in most jurisdictions, the borrower must put the lender in the position it would have been in but for the borrower’s default
What is a purchase money mortgage?
is a mortgage issued to the buyer by the seller of a given proptery
AKA - seller/owner financing
What is a future advance mortgage?
-line of credit that is secured w/ a piece of property or another asset
-this loan secures property for future credit that is not fully disbursed at loan closing
*a home equity line of credit is a type of future advance mortgage
What is a mortgage deed?
after the arms of a mortgage have been fulfilled, a mortgage deed transfers ownership over the property BACK to the mortgagor
What is the effect of ASSUMING a mortgage?
if a purchaser assumes the original mortgagor’s payment of the mortgage, the purchaser is now liable for payment of the mortgage both to OG mortgagor and to the mortgagee
**seller remains secondarily liable
What is an “assignment of a mortgage”?
-transfers the mortgage from the original lender/borrower to third party
-assignments of mortgage are more commonly seen when lenders sell mortgages to other lenders
What is the equity of redemption?
Is the mortgagor’s right, for a certain period of time, to redeem the mortgage and keep the property by refinancing and paying off the original mortgage
What is the right to redemption?
is a legal process that allows a delinquent mortgagor to reclaim property subject to foreclosure if they are able to repay their obligations in time
*every state has some type of redemption statute
Which party may redeem under the “equity of redemption”?
Any party w/ an interest in the property has the right to pay off the mortgage and redeem the property
What is a mortgagee in possession
is a mortgagee who has taken possession of the property before the mortgage has been paid off or the property has been foreclosed upon, usually because the mortgagor has abandoned the property and stopped making mortgage payments
What are the 2 duties of a mortgagee in possession?
- maintain the property in a reasonable condition AND
- credit any rents (minus the expenses of keeping the property in a reasonable condition) towards the mortgage debt
What is a due-on-sale clause?
provision in a mortgage contract that requires the mortgage to be repaid in full upon a sale OR conveyance of partial or full interest in the property that secures the mortgage
*this type of clause is also sometimes refereed to as an alienation or acceleration clause
What is a “deed in lieu of foreclosure”?
transfers the title of a property from the property owner to their lender in exchange for being relieved of the mortgage debt
What is a “mortgage prepayment penalty”?
Fee that lenders may charge when the mortgage term is paid off early
What is a “private foreclosure sale”?
is foreclosure sale w/out a lawsuit or judicial supervision
*not ALL jurisdictions allow private foreclosure sales
What is a “judicial foreclosure sale”?
-foreclosure done under judicial supervision and is usually handled by the sheriff
-judicial foreclosure sales require a lawsuit by the mortgagee
What is a “judgment lien”?
A court ruling that gives a creditor the right to take possession of a debtor’s property if the debtor fails to fulfill their contractual obligations
When does the priority of a judgment lien attach?
FROM DAY LIEN IS FILED
What is a future advance clause?
the lender and borrower agree that the lender may make additional loans, and that these further loans will be covered by the mortgage
*common in construction contracts
What is equitable subrogation?
a person other than the mortgagor who pays off the mortgage may step into the shoes of the now-paid-off mortgagee
*this allows new lender to assume the “place in line” of prior mortgage holders and place themselves in a. senior position for a mortgage on the property
May a property be redeemed after a foreclosure?
YES
In some states, there are statutory redemption periods that permit redemption (after paying the full foreclosure sale price and full amount to the bank) after a foreclosure sale has already happened
Define foreclosure
Process by which the mortgagor’s interest is terminated
The property is then generally sold to satisfy the debt, in whole or part
What is the effect of foreclosure on the priority of loans?
Foreclosure will terminate interests junior to the mortgage being foreclosed but will NOT impact senior interests
This means that junior lien holders will be paid in descending order w/ the proceeds from the sale, assuming funds are leftover after full satisfaction or superior claims
*junior lien holders are likely to come up short and may be able to proceed for a deficiency judgment
What is a deficiency judgment?
Occurs when the property is worth less than the amount owed on the outstanding loan
A lender can sue debtor for the difference if there was a judicial foreclosure AND the interest is not a purchase money mortgage
What happens to any additional surplus after all the liens are paid off in a foreclosure?
any surplus goes back to debtor
How is mortgage priority of a purchase-money mortgage determined?
Traditionally, once recorded, priority is determined by first in time, first in right
HOWEVER, a purchase-money mortgage (PMM) will have priority over non-PMM
Who are the essential parties to a mortgage?
- debtor - mortgagor
- creditor - mortgagee
What methods may a creditor-mortgagee use to transfer their interest?
- indorsing the note and delivery it to the transferee OR
- executing a separate document of assignment
*if the note is indorsed and delivered, the transferee is eligible to become a holder in due course (HDC)
When does an express mortgage assumption occur?
occurs if there is an express agreement to take the real property and continue making mortgage payments
When may an implied assumption of the mortgage occur?
Some jurisdictions allow for a grantee who did not expressly assume a mortgage to do so through implication when the grantee paid the seller the difference between the value of the house and the outstanding balance on the mortgage
What is a “future advance mortgage” and what determine whether it is obligatory or optional?
A future advance mortgage is one where a lender advances funds to a borrower over a fixed period of time
Future advance loans are either obligatory or optional
-if a lender has a duty to advance the funds - loan is obligatory
-if the lender has discretion whether to make a future advance - the loan is optional
Define mortgage
the conveyance of a security interest in land, intended by the parties to be collateral for the repayment of a monetary obligation
What is the priority of a future advance mortgage?
When the future advance is obligatory, as opposed to optional, any future advances will have the same priority as the OG mortgage
WHEN ADVANCE IS OPTIONAL - and a senior lender has notice of a junior lien, the advance will lose priority to the junior lien
What must a mortgage be to satisfy Stat of Frauds?
IN WRITING
What factors does the court consider in determining if an “absolute deed” or “equitable mortgage” was given for security purposes?
- the existence of debt or promise of payment by the deed’s grantor
- grantee’s promise to return the land after their debt is paid
- the amount advanced is lower than value of property
- the degree of grantor’s financial distress
- the parties’ prior negotiations
