Mortgages

Question 1

Our model: C, a creditor, is thinking of lending O $50,000. O offers Blackacre as collateral. How does one create 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, and 2. A voluntary lien in debtors land to secure the debt

Question 2

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

Answer 2

Virtually all mortgages are legal mortgages -
Examiners will designate things to the mortgage
Some include -The note, the mortgage deed, a deed of trust, a sale leaseback, a security interest in land (these are legal mortgages) (Evidences encumbered by a legal writing)

Question 3

What is an equitable mortgage?

Answer 3

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. As between O and Creditor: Parole evidence is admissible to show the parties’ true intent

Question 4

What if Creditor of an equitable mortgage proceeds to sell Blackacre to bona fide purchaser X?

Answer 4

X owns the land. O’s only recourse is to sue the creditor for fraud and sale proceeds

Question 5

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

Answer 5

Unless and until foreclosure, debtor-mortgagor has title and the right to possess
Creditor-mortgagee has a lien

Question 6

Can all parties to a mortgage transfer their interests?

Answer 6

The mortgage automatically follows a properly transferred note

Question 7

How can a creditor-mortgagee transfer his interest? 2 ways

Answer 7

1. Endorsing the note Delivering it to the transferee

2. By executing a separate document of assignment

Question 8

Once a note for a mortgage is endorsed and delivered what does the buyer become?

Answer 8

A holder in due course

Question 9

What is a holder in due course?

Answer 9

The buyer takes the note free from any personal defenses that could have been raised against the original mortgagee/creditor

Question 10

What are personal defenses to the original mortgagee/creditor?

Answer 10

Lack of consideration, fraud in the inducement, unconscionability, waiver, estoppel
-Routinely available in Breach of K defenses

Question 11

Can a holder in due course foreclose the mortgage despite any personal defense?

Answer 11

Yes

Question 12

What are “real” defenses that may still be made a against a holder in due course? MAD FIFI4

Answer 12

MA = Material Alteration 
D = Duress 
FIF = Fraud in Factum 
I4 
I = Incapacity 
I = Illegality 
I = Infancy 
I = Insolvency

Question 13

What criteria must be met to be a holder in due course?

Answer 13

1. The note must be negotiable, named 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 any notice of illegality; and
5. The transferee must pay value for the note, meaning some amount that is more than nominal
   * Recording statutes protect mortgagee’s

Question 14

If O, our debtor-mortgagor, sells Blackacre, which is now mortgaged then what?

Answer 14

The lien remains on the land so long as the mortgage was recorded - Recording statutes will protect mortgagee’s

Question 15

HYPO: Mortgage - On January 10, Madge took out a $50,000 mortgage on Blackacre with First Bank. First Bank promptly and properly recorded its interest on January 10. Thereafter, on January 15, Madge sold Blackacre to Buyer. Buyer had no actual knowledge of the lien. Buyer promptly and properly recorded its deed.

1. Does Buyer hold subject to First Bank’s mortgage?
2. Does it matter which recording statute this jurisdiction has enacted?

Answer 15

1. Yes, All recording statutes apply to mortgages as well as deeds. Thus, a later buyer takes subject to a properly recorded lien
2. No, In a notice state, Buyer takes subject to the lien because Buyer has record notice. In a race-notice state, Buyer takes subject to the lien because Buyer has record notice and first bank won the race to record

Question 16

HYPO: Mortgages: Assume now that on January 10, Madge took out a $50,000 mortgage on Blackacre with First Bank. On January 15, Madge sold Blackacre to Buyer. Buyer had no knowledge of the lien. On January 20, First Bank recorded its mortgage in Blackacre. On January 30, Buyer recorded his deed to Blackacre. Does Buyer hold subject to First Bank’s mortgage?

Answer 16

This time, it depends on which recording statute has been enacted.

1. In a race-notice jurisdiction Buyer loses, lost race to record - Because First bank recorded first
2. In a Notice jurisdiction Buyer wins - so long as he was a BFP when he took

Question 17

How can a mortgagee foreclose on a mortgage?

Answer 17

By proper judicial action - At foreclosure, the land is sold. The sale proceeds go to satisfying the debt.

Question 18

What if the proceeds of a foreclosure from the sale of Blackacre are less than the amount owed?

Answer 18

Mortgagee brings a deificieny action against debtor - Hoping to make up the shortfall

Question 19

By contrast, what if there is a surplus of proceeds from the sale on a foreclosure?

Answer 19

Junior liens are paid off in order of priority, remaining surplus goes to debtor

Question 20

HYPO - Foreclosure: Assume that Blackacre has a fair market value of $50,000 and is subject to three mortgages executed by its owner, Madge. First Bank, with first priority, is owed $30,000. Second Bank, with second priority, is owed $15,000, and Third Bank, with third priority, is owed $10,000. Assume that First Bank’s mortgage is foreclosed, and that Blackacre is sold for $50,000. How will the funds be distributed?

Answer 20

Off the top: Attorney’s fees, forclosure expenses, and any accrued interest off First Banks Lien
The sale proceeds are then used to pay off the mortgages in the order of their priority. Each claimant is entitled to satisfaction in full before a subordinated lienholder may take. Thus,
1. First Bank takes $30,000
2. Second bank takes $15,000
3. The remaining balance is applied toward Third Bank’s $10,000, which in the hypo is $5,000, Third Bank should be able to proceed for a deficiency judgment.