Mortgages

Question 1

DEFINITION OF MORTGAGE

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

A mortgage is the union of two elements:

1) A Debt
2) A voluntary transfer of a security interest in debtor’s land to secure debt

MORTGAGOR = one who has title and right to possession (the debtor)

MORTGAGEE = has a lien (the creditor)

Question 2

2 Types of Mrtgage

What are2 types of mortgage?

Answer 2

Types of mortgage…

1) The LEGAL MORTGAGE (traditional):
This mortgage must be in a signed writing to satisfy the SoF and it uses the property interest in land as collateral for the loan

Legal Mortgage a.k.a:

i) Mortgage Deed
ii) The Note
iii) The Deed of Trust
iv) The Sale Leaseback

2) The EQUITABLE MORTGAGE:
This mortgage is a physical handover of the deed to a creditor instead of a note to secure the loan

IF the creditor sells to a BFP, the debtor can ONLY sue the creditor for damages for the fraud and sale proceeds BUT the BFP OWNS the land

NOTE: parol evidence FREELY admissible in dispute to show intent

Question 3

PARTY’S RIGHTS AFTER MORTGAGE CREATED

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

Answer 3

UNLESS and UNTIL foreclosure, the debtor mortgagor has TITLE and RIGHT to possession

The Creditor mortaggee has a LIEN and the right to look to blackacre if there is a default

NOTE: ALL PARTIES to a mortgage CAN TRANSFER their INTERESTS

Question 4

METHODS FOR CREDITOR MORTGAGEE TO TRANSFER INTEREST

What are the 2 ways a creditor mortgagee can transfer his interest in the mortage?

Answer 4

The creditor-mortgagee can transfer his interest by…

1) ENDORSING the note and DELIVERING to the transferee
→ If the note is endorsed/delivered then the transferee is eligible to become a holder in due course (REVIEW!)

OR

2) EXECUTING a separate document of assignment

Question 5

HOLDER IN DUE COURSE

What is a holder in due course?

Answer 5

A Holder in Due Course = 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 mortgage DESPITE the presence of any such personal defenses against original creditor, like…

i) Lack of consideration
ii) Fraud in inducement
iii) Unconsionability
iv) Waiver
v) Estoppel

BUT….A HDC is STILL subject to “real” defenses that could have been raised against the original creditor. These defenes are known by: M-A-D F-I-F-I4 (MA) Material Alteration
(D) Duress
(FIF) Fraud In the Factum (a lie in the instrument)
(I) Incapacity
(I) Illegality
(I) Infancy
(I) Insolvancy

Question 6

REQUIREMENTS TO BECOMING HOLDER IN DUE COURSE

What are the 5 requirements to becoming aholder in due course?

Answer 6

1) A note must be NEGOTIABLE, made payable to the named mortgagee;
2) The ORIGINAL note must be ENDORSED and SIGNED by the named mortgagee;
3) The ORIGINAL note must be DELIVERED to the transferee (NO photocopies!);
4) The transferee must take in GOOD FAITH(w/o notice of any illegality); AND

5) The transferee must pay VALUE for the note
→ Value = some amount that is more than nominal $ but DOES NOT have to be FMV)

Question 7

TRANSFER BY DEBTOR - MORTGAGOR

What happens when a mortgagor sells land with a valid mortgage in place?

Answer 7

When a debtor-mortgagor sells land with a valid mortgage in place, the lien remains on the land SO LONG AS the mortgage was properly recorded according to the rules of the recording statue

→ Recording statutes protect both BFPs and mortgagees

→ Apply the recording system rules p/t the operative recording statute

IF BUYER “ASSUMED” the MORTGAGE→BOTH BUYER and SELLER/DEBTOR are personally liable to the creditor/mortgagee

IF BUYER takes the property “SUBJECT” to the MORTGAGE
ONLY the SELLER/DEBTOR and not the buyer will be personally liable to the creditor/mortgagee

→ BUT… if seller/debtor doesn’t pay, the creditor may foreclose on the land

Question 8

FORECLOSURE

What are 4 key features of the foreclosure process?

Answer 8

1) PROPER JUDICIAL ACTION:
Mortgagee looks to the land for debt satisfaction through a proper judicial action which yields sale of the land. The proceeds then go to (in order)…
i) attorney fees, costs;
ii) each interest PAID IN FULL in priority;
iii) surplus back to debtor

2) DEFICIENCY CLAIMS:
When sale does NOT cover amount of loan, mortgagee can bring a deficiency action against debtor for the shortfall

3) TERMINATION OF INTERESTS:
Once mortgage is properly foreclosed by SENIOR lienholders, 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 a JUNIOR lienholder forecloses, senior lienholders can STILL look to the land; land sold by junior lienholder at foreclosure sale would have been taken subject to senior lienholders

Note: BUYER NOT personally liable, BUT land still has lien

4) Necessary parties → any creditors with interests that are below the foreclosing party AND the DEBTOR-MORTGAGOR MUST be joined in the action OR they preserve their claim despite the foreclosure sale

Question 9

DETERMINING MORTGAGE PRIORITY

How is mortgage priority determined?

Answer 9

Creditors MUST properly record interest to get priority

Std: ONCE RECORDED, priority is determined by the normal first in time, first in right

EXCEPTION:
1) Purchase money mortgage = A mortgage given to secure a loan that enables the debtor to acquire the encumbered land: has super-priority against EXISTING non-PMM loanson the property NOTE: PMMs do NOT have superpriority vs. loans made SUBSEQUENTLY(i.e. the regular priority rules apply)

Subordination agmts are permissible

Question 10

REDEMPTION IN EQUITY (EQUITABLE REDEMPTION)

What is equitable redemption?

NOTE: NY Distinction

Answer 10

Equitable redemption is universally recognized up to the date of sale. At any time PRIOR to the foreclosure…

1) Mortgagor-debtor can redeem land and free it from the mortgage (but having a pre-payment penalty is ok)

NOTE: Once a valid foreclosure has occurred, the right to equitable redemption is GONE

REDEMPTION REQUIRES:
Payment of any missed payments+ interests+ costs

Acceleration clauses in mortgages are VALID→full balance due immediately if default

BUT NO “CLOGGING THE EQUITY OF REDEMPTION” → NO WAIVER of redemption right by mortgagor is allowed

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

STATUTORY REDEMPTION

What is statutory redemption?

NOTE: NY Distinction

Answer 11

Statutory redemption allows redemption AFTER foreclosure

NOTE: mortgagor ALWAYS retains the right to possession w/in the statutory period

Mortgagor will have to PAY the foreclosure sale price to redeem

**NOTE: No statutory right to redemption in NY