Mortgages

Question 1

What is a mortgage?

Answer 1

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

Question 2

A mortgage is the union of…

Answer 2

1. A debt

2. A voluntary lien in the debtor’s land to secure the debt.

Question 3

Vocabulary: debtor =

Answer 3

Mortgagor.

Question 4

Vocabulary: creditor =

Answer 4

Mortgagee.

Question 5

Legal mortgage

Answer 5

An encumbrance evidenced by an appropriate writing (e.g., “the note,” “the mortgage deed,” “a deed of trust,” “a sale lease-back,” “a security interest in land”).

Mortgages typically must be in writing to satisfy the Statute of Frauds. This is the legal mortgage.

Question 6

Equitable mortgage

Answer 6

Instead of executing a note or mortgage deed, debtor hands creditor a deed to Blackacre that is absolute on its face. This is called an equitable mortgage.

Between debtor and creditor, parol evidence is admissible to show the parties’ intent to have a mortgage.

• But if creditor sells Blackacre to a BFP, the BPF owns the land. Debtor’s only recourse is to sue the creditor for fraud (but the sale proceeds).

Question 7

Who can transfer mortgage interests?

Answer 7

All parties to a mortgage can transfer their interests.

• The mortgage automatically follows a properly transferred note.

Question 8

How does a creditor-mortgagee transfer her interest?

Answer 8

1. By endorsing the note and delivering it to the transferee.
   OR
2. By executing a separate document of assignment.

Question 9

Holder in due course: result

Answer 9

If a creditor-mortgagee endorses and delivers the note, 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. (I.e., can foreclose the mortgage despite such personal defenses.)

• But still subject to any real defenses.

Question 10

Personal defenses

Answer 10

Include:

1. Lack of consideration
2. Fraud in the inducement
3. Unconscionability
4. Waiver
5. Estoppel

Question 11

Real defenses

Answer 11

1. Material alteration
2. Duress
3. Fraud in the factum
4. Incapacity
5. Illegality
6. Infancy
7. Insolvency

Question 12

Holder in due course: criteria

Answer 12

To be a holder in due course:

1. The note must be negotiable (made payable to the named mortagee).
2. The original note must be endorsed (signed by the named mortgagee).
3. The original note must be delivered to the transferee (photocopy is not ok).
4. The transferee must take the note in good faith, without notice of any illegality.
   AND
5. The transferee must pay value for the note (some amount that is more than nominal).

Question 13

Fraud in the factum

Answer 13

A lie about the instrument.

E.g., the debtor who doesn’t speak english was told he was signing a credit card application.

Question 14

Recording statutes…

Answer 14

Recording statutes apply to mortgages.

Question 15

If debtor-mortgagor sells Blackacre (which is mortgaged)…

Answer 15

The lien remains on the land, so long as the mortgage was recorded.

Question 16

“Assumed the mortgage”

Answer 16

O, the debtor-mortgagor, sells Blackacre to B.

If B has “assumed the mortgage,” BOTH O and B are personally liable.
– B is primarily liable.
– O remains secondarily liable.

Question 17

“Takes subject to the mortgage”

Answer 17

O, the debtor-mortgagor, sells Blackacre to B.

If B takes “subject to the mortgage,” B assumes NO personal liability. Only O is personally liable.

• But if recorded, the mortgage sticks with the land. Thus, if O does not pay, the mortgage may be foreclosed.

Question 18

How is a mortgage foreclosed?

Answer 18

The mortgagee must foreclose by proper judicial action.

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

Question 19

What happens if, after foreclosure, the proceeds from the sale of Blackacre are less than the amount owed?

Answer 19

The mortgagee must bring a deficiency action against the debtor.

Question 20

What happens if, after foreclosure, the proceeds from the sale of Blackacre are more than the amount owed?

Answer 20

1. Junior liens are paid off in order of priority.
2. Remaining surplus goes to debtor.

• Fees are first taken off the top (e.g., attorney’s fees, foreclosure expenses, and any accrued interest on the the primary mortgage lien).

Question 21

Effect of foreclosure on junior interests

Answer 21

Foreclosure will terminate interests junior to the mortgage being foreclosed but will not affect senior interest.

• 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 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.

Question 22

Necessary parties to foreclosure actions.

Answer 22

1. Junior lienholders: those with interests subordinate to those of the foreclosing party.
2. Debtor-mortgagor (especially if creditor wants a personal deficiency judgment).

• Failure to join 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, his mortgage remains on the land.

Question 23

Effect of foreclosure on senior interests

Answer 23

Foreclosure does not affect any interest senior to the mortgage being foreclosed.

• The buyer at a foreclosure sale takes subject to such senior interests.
  – This means that 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 on the land.
• Best for buyer to pay off the senior mortgage (bid up the the fair market value MINUS the amount of debt).

Question 24

Priority of creditors (general rules)

Answer 24

1. Creditors must properly record their mortgage to have priority.
2. Once recorded, priority is first in time, first in right.
3. Purchase money mortgages have “superpriority.”
4. Subordination agreements are permissible.

Question 25

Purchase money mortgage

Answer 25

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

E.g., C lends O $10k so that O can buy Blackacre. C takes as collateral a security interest in Blackacre.

• Purchase money mortgagees have superpriority over other liens, including “floating liens.”

Question 26

Floating liens

Answer 26

(a.k.a. “after-acquired collateral clause”)

A security interest in all of O’s real estate holdings, whether now owned or hereafter acquired.

• Used of O does not currently have enough collateral.
• They are permissible.

Question 27

Subordination agreements

Answer 27

A senior creditor may agree to subordinate its priority to a junior creditor.

• Permissible.

Question 28

Redemption in equity

Answer 28

Any time prior to the foreclosure sale, the debtor can try to redeem the land.

• Universally recognized up to the date of sale.
• Once a valid foreclosure has taken place, the right to equitable redemption is gone.

Question 29

How is the right of redemption exercised?

Answer 29

Debtor must pay:

1. the missed payment or payments
2. interest, and
3. costs.

Question 30

Equitable redemption + acceleration clause

Answer 30

For redemption in equity with acceleration clause, debtor must pay:

1. the full balance
2. accrued interest, and
3. costs.

Question 31

Acceleration clause

Answer 31

Permits the mortgagee to declare the full balance due in the event of default.

Question 32

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

Answer 32

No.

This is known as “clogging the equity of redemption.” It is prohibited.

Question 33

Statutory redemption

Answer 33

Gives the debtor-mortgagor a statutory right to redeem for some fixed period AFTER the foreclosure sale has occurred (usu. 6 months to 1 year).

1. For statutory redemption, debtor must pay the foreclosure sale price (rather than the amount of the original debt).
2. Mortgagor will have the right to possess Blackacre during the statutory period.
3. When a mortgagor redeems, the effect is to nullify the foreclosure sale—the redeeming owner is restored to title.
   * Recognized in 1/2 of the states.

Question 34

Equitable mortgage indicators

Answer 34

A landowner needing to raise money may “sell” the land to a person who pays cash and may give the lender an absolute deed rather than a mortgage. However, if a court concludes that the deed was really given for security purposes, it will treat it as an equitable mortgage and require that the creditor foreclose it by judicial action. like any other mortgage.

Factors indicating an equitable mortgage:

1. the existence of a debt or promise of payment by the deed’s grantor
2. the grantee’s promise to return the land if the debt is paid
3. the fact that the amount advanced to the grantor/debtor was much lower than the value of the property
4. the degree of the grantor’s financial distress
5. the parties’ prior negotiations.