Mortgages

Question 1

Mortgage Creation

Answer 1

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

A mortgage is the union of two elements:

1. Debt
2. voluntary lien in debtors land to secure debt.

By way of vocabulary, debtor is mortgagor, and creditor is mortgagee.

Question 2

Equitable Mortgage

Answer 2

EXAMPLE: O owns Blackacre. Creditor lends O a sum of money. The parties understand that Blackacre is the collateral for the debt. However, instead of executing a note or mortgage deed, O hands Creditor a deed to Blackacre that is absolute on its face. This is called Equitable Mortgage

• Parole Evidence allowed to show parties true intent.
• IF Creditor proceeds to sell land to BFP X, (X) owns the land. O’s only recourse sue creditor for fraud and sale proceeds.

Question 3

Parties’ Rights After Creation

Answer 3

• Unless and until foreclosure, debtor-mortgagor has title and right to posess.
• Creditor-Mortgagee has a lien.

Question 4

Creditor-Mortgagee Transfer

Answer 4

• All parties to a mortgage can transfer their interests. The mortgage automatically follows a properly transfered note.

The creditor-mortgagee can transfer his interest by:

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

If the note is endorsed and delivered, 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’ve been raised against original mortgagee.

• Personal Defenses include: lack of consideration, fraud in inducement, unconsciobility, waiver, estoppel.
• Thus, the holder in due course may foreclose the mortgage despite any personal defenses

Question 5

Creditor-Mortgagee Transfer: Real Defenses MAD FIFI⁴

Answer 5

The holder in due course is still subject to “real” defenses that the maker might raise. MAD FIFI⁴ Real Defenses

M: Material A: Alteration

D: Durress

FIF: Fraud in Factum (lie about instrument)

I: Incapacity

I: Illegality

I: Infancy

I: Insolvency

Question 6

Holder in Due Course Criteria

Answer 6

To be a holder in due course of the note, the following criteria must be met:

1. the note must be negotiable, made payable to the named mortgagee
2. the original note must be indorsed, signed by the named mortgagee
3. the original note must be delivered to the transferee. A photocopy is unacceptable
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, meaning some amount that is more than nominal.

Question 7

Debtor-Mortgagor Sells Mortgaged Land

Answer 7

All recording statutes apply to mortgages as well as deeds. Thus, a later buyer takes subject to properly recorded lien.

Does it matter which recording statute this jurisdiction has enacted? NO. In a notice state, Buyer takes subject to the lien because Buyer has recorded notice. In a race-notice state, Buyer takes subject to the lien because buyer has record notice and Bank won race to record.

In a notice state, a subsequent BFP prevails over a prior grantee or mortgagee who has not yet recorded properly at the time the BFP takes.

Question 8

Debt Liability If Debtor Sells Land

Answer 8

Who is personally liable on the debt if O, our debtor-mortgagor, sells Blackacre to B?

1. If B has “assumed the mortgage”
   
   1. Both O and B are personally liable. B is primarily liable. O remains secondarily liable
2. If B takes “subject to the mortgage”
   
   1. 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 mortgage, may be foreclosed.

Question 9

Foreclosure

Answer 9

Assuming that our mortgagee-creditor must look to the land for satisfaction, how must he or she proceed?

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

If proceeds from sale of Land are less than amount owed, mortgagee brings deficieny action against debtor.

• If there is a surplus, junior liens are paid off in order of priority, remainig surplus goes to debtor.
  
  • Off the top: attorneys fees, foreclosure expenses and any accrued interest on First Banks lien.
  • Each claimant is entitled to satisfaction in full before a subordinated lienholder may take.

Question 10

Effects of Foreclosure: Junior Interests

Answer 10

1. Foreclosure will terminate interests junior to the mortgage being foreclosed but will not affect senior interests.
   
   • Junior lienholders paid in descending order.
   • Junior lienholders should be able to proceed for a deficiency judgment if not enough proceeds from sale of land. But can no longer look to land once process complete.
2. Those with interests subordinate to those of the foreclosing party are necessary parties to the foreclosure action.
   
   • The debtor-mortgagor is also considered a necessary party particularly if creditor wishes to proceed against 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, his mortgage remains on the land.

Question 11

Effects of Foreclosure: Senior Interests

Answer 11

1. Foreclosure does not affect any interest senior to the mortgage being foreclosed. The buyer at the sale takes subject to such interest. This means that buyer is NOT personally laible on senior debt but, as a practical matter, if the senior mortgage is not paid, sooner or later, the senior creditor will foreclose on land.

Question 12

Priorities

Answer 12

1. As a creditor, you must record, until mortgage properly recorded, you have not priority. Once recorded, priority is determined by the norm of first in time first in right.
2. The purchase money mortgage: A mortgage given to secure a loan that enables the debtor to acquire the encumbered land.
   
   1. PMM has priority over mortages, liens, and other claims against mortgagor that arise prior to mortgator’s acqusition of title.
   2. Subsequent mortgages or liens may defeat PMM priority by operation of the recording statutes.
3. Subordination agreements: are permissible. Senior creditor may agree to subordinate priority to Junior Creditor.

Question 13

Redemption of Land (Common Law)

Answer 13

1. Redemption in equity: Equitable redemption is universally recognized up to the date of sale. At any time prior to the foreclosure sale the debtor can try to redeem the land.
   
   • Once a valid foreclosure has taken place the right to redemption is gone.
   • Right of equitable redemption exercised by paying off missed payment or payments and interest and costs.
2. Accelaration Clause: An acceleration clause permits the mortgagee to declare the full balance due in the event of default. If the mortgage contains an acceleration clause the full balance and accrued interest and costs must be paid.
3. Debtor/mortgagor CANNOT waive the right to redeem in the mortgage itself. Cannot CLOG EQUITY OF REDEMPTION.

Question 14

Statutory Redemption

Answer 14

1. Recognized in one-half the states, statutory redemption gives the debtor-mortgagor a statutory right to redeem for some fixed period after the foreclosure sale has occurred (typically six months to one year)
   
   • Where recognized, statutory redemption applies after foreclosure.
   • The amount to be paid is usually the foreclosure sale price rather than the amount of original debt.
2. In most states, to recognize statutory redemption, the mortgagor will have the right to possess Land during statutory period.
3. When a mortgagor redeems, the effect is to nullify foreclosure sale, redeeming owner restored to title.