Mortgages

Question 1

What is a mortgage?

Answer 1

A mtg is the conveyance of a security interest in land, intended by the parties to be COLLATERAL for the repmt of a debt

• Mortgagor = one who has title and right to possession (the debtor)
• Mortgagee = has a lien (the creditor)

Question 2

What are** **2 types of mortgage?

Answer 2

Types of mortgage…

1) Legal (traditional) mortgage: in writing/signed (SOF) using property interest in land as collateral for loan
2) Equitable mortgage: physical handover of deed to creditor instead of a note to secure loan; IF creditor sells to BFP, debtor can ONLY sue creditor for damages (BFP owns land)
* NOTE: parol evidence FREELY admissible in dispute to show intent

Question 3

Once a mtg has been created, what are the parties’ rights?

Answer 3

Debtor mtg’r = UNLESS and UNTIL foreclosure, the debtor mtg’r has TITLE and RIGHT to possession

Creditor mtg’ee = has a LIEN and the right to look to blackacre if there is a default

Question 4

What are the 2 ways a creditor-mtg’ee can trnr his interest in the mtg?

Answer 4

The creditor-mtg’ee can tnfr his interest by…

1) ENDORSING the note and DELIVERING to the transferee; OR
* If the note is endorsed/delivered the transferee is eligible to become a holder in due course (REVIEW!)
2) EXECUTING a separate document of assignment

Question 5

What is a holder in due course?

Answer 5

A transferee that takes the transferred note FREE of any personal defenses that could have been asserted against the ORGINAL creditor

• Thus, a HDC may foreclose the mtg DESPITE the presence of any such personal defenses against original creditor, like…
  
  • Lack of consideration
  • Fraud in inducement
  • Unconsionability
  • Waiver
  • Estoppel
• A HDC is STILL subject to “real” defenses (M-A-D F-I-F-I⁴)
  
  1. Material Alteration
  2. Duress
  3. Fraud In the Factum
  4. Incapacity
  5. Illegality
  6. Infancy
  7. Insolvancy

Question 6

What are the 5 requirements to becoming a holder in due course?

Answer 6

1) A note must be NEGOTIABLE, made payable to the named mtg’ee;
2) The original note must be ENDORSED and SIGNED by the named mtg’ee;
3) The original note must be DELIVERED to the tnfr’ee (NO photocopies!);
4) The tnfr’ee must take in GOOD FAITH (w/o notice of any illegality); AND
5) The tnfr’ee must pay VALUE for the note (more than nominal $)

Question 7

What happens when a mtg’r sells land with a valid mtg in place?

Answer 7

The lien remains on the land SO LONG AS the mtg was properly recorded p/t rule of the recording statue (recording statutes protect both BFPs and mtg’ees)

• Apply the recording system rules p/t the operative recording statute
• BOTH buyer and seller/debtor are personally liable to the creditor/mtg’ee if buyer “assumed the mtg”
• ONLY seller/debtor (not buyer) is personally liable to the creditor/mtg’ee if buyer took “subject to the mtg” [BUT if seller/debtor doesn’t pay, creditor will foreclose on land]

Question 8

What are 3 key features of the foreclosure process?

Answer 8

1) Mtg’ee looks to land for debt satisfaction; judicial proceeding yields sale of land; proceeds go to (in order)…

1. attorney fees, costs;
2. each interest in priority;
3. surplus back to debtor

2) When sale does NOT cover amount of loan, mtg’ee can bring a deficiency action against debtor for the shortfall
3) Once mortgage is foreclosed, all jr interests to the foreclosing interest are TERMINATED (i.e. once sr creditors foreclose, land cannot be looked to again for satisfaction of junior lienholders)
* BUT if jr forecloses, senior lienholders can STILL look to the land; land sold by junior lienholder at foreclosure sale taken subject to senior lienholders (buyer not liable, but land still has lien)
* Necessary parties (creditors w/ interests below foreclosing party; the debtor/mtg’r) MUST be joined in the action OR they preserve their claim despite the foreclosure sale

Question 9

How is mtg priority determined?

Answer 9

Creditors MUST properly record interest to get priority

• Std: 1st in time, first in right

EXCEPTIONS:

• Purchase money mtg (loan for land acquisition): has superpriority against EXISTING non-PMM loans on property
  
  • NOTE: PMMs **do NOT have superpriority vs. loans made SUBSEQUENTLY **(i.e. the regular priority rules apply)
• Subordination agmts are permissible

Question 10

What is equitable redemption?

Answer 10

PRIOR to foreclosure…

1) Mtg’r/debtor can redeem land and free from mortgage (but pre-payment penalty ok)
* Once foreclosed, the right to equitable redemption is GONE
* Redemption reqs: pmt of missed pmts + interests + costs
* Acceleration cls are VALID → full balance due immediately if default
* NO WAIVER of redemption right is allowed (i.e. “clogging the equity of redemption”)
2) Junior lienholders: can step into the shoes of the primary mortgagee (i.e. buyout the interest) through “subrogation,“** **If the borrower does not redeem
* This PRESERVES their interest, which WOULD have been wiped out in a foreclosure action

Question 11

What is statutory redemption?

NOTE: NY Distinction

Answer 11

Statutory redemption allows redemption AFTER foreclosure

• NOTE: mtg’r ALWAYS retains right to possession w/in statutory period
• Mtg’r pays foreclosure sale price to redeem

NY DISTINCTION: NO statutory right of redemption in NY