Mortgages Flashcards
Model for mortgages
Our model: C, a creditor, is thinking of lending O $50k. O offers Blackacre as collotaeral
How to create a mortgage
a. conveyance of a security interest in the land, intendent by the parties as collateral for the repayment of debt.
i. union of 2 elements 1) debt and 2) a voluntary transfer of a security interest or lien in debtor’s land to secure or back up the debt.
b. Debtor = mortgagor and creditor = mortgagee. “gee will he pay me back”
c. There are purchase money and non purchase money mortgages.
i. purchase money mortgage: mortgage given to secure a loan that enables the debtor to acquire the now encumbered lan.
1. extension of loan who takes back as collateral the very parcel the loan allowed the debtor to acquire in first place
ii. non purchase money mortgage. home equity loan. lien in home, for 200k to start a biz. special rules
d. typically must be in writing to satisfy the SOF. legal mortgage is evidenced by writing.
i. AKA note/ mortgage deed/ deed of trust/ sale leaseback/security interest in land.
ii. mortgage – security interest in property
iii. note—evidence of underlying debt.
The equitable mortgage
a. 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 AN EQUITABLE MORTGAGE
b. bw o and creditor, parole evidence is admissible to show intent whether or not O was actually transferring the deed and only wanted to use it as security.
c. What if creditor proceeds to sell blackacre to another BFP?
i. X owns the land. Os only recourse is to sue creditor for fraud and sale proceeds
d. But if the borrower fails to make good on his loans, then the mortgagee has the right to sell, but MUST GO THROUGH foreclosure.Court will consider
i. eixtence of a debt or promise of payment by the deed’s grantor
ii. grantee’s promise t return the land if debt is paid
iii. fact that the amount advanced to the grantor/debtor was much lower than the value of the property
iv. degree of grantor’s financial distress,
v. parties’ prior negotiations
Once mortgage is created, what are the parties’ rights
a. Unless and until foreclosure, debtor-mortgageor has title and right to possess
b. Creditor-mortgagee has lien, right to seize upon default.
c. Title theory jdxn—title is under the mortgagee until mortgage has been paid off or foreclosed. mortgagee is entitled to possession on demand at any time.
d. Lien theory jdxn—title remains in the mortgagor and mortgagee only holds security interest. mortgagee may not have possession prior to foreclosure.
Who can transfer their interests to their mortgage
All parties to a mortgage can transfer their interests. Mortgage automatically follows a properly transferred note
How does a creditor-mortgagee transfer interest in mortgage. What defenses can be raised against the holder in due course??
either 1) endorsing and delivering OR 2) assignment
if actually endorsed and delivered, transferee is holder in due course.
iv. Takes free of personal defenses. Personal defenses include:
1. lack of consideration, fraud in the inducement, unconscionability, waiver, estoppel,
v. Thus the holder in due course/ transferee may forclose the mortgage despite any such personal defense.
vi. By contrast the holder in due course is still subject to real defenses that the original debtor-mortgagor may raise. MAD FIFI^4
1. Material Alteration—a change in the instrument fraudulently made.
2. Duress
3. Fraud in the Factum – a lie about the instrument. For ex, debtor speaks little English and lied to about the facts in the instrument.
4. Incapacity– underage
5. Illegality
6. Infancy
7. Insolvency—debtor insolvent at time of making
Criteria for having mortgage transfered to you/ become holder in ue course
1) note is payable to named mortgagee 2) note is signed 3) original is delviered 4) transferee takes in good faith, without notice of illegality 5) transferee pays something of value (not nominal)
- the note must be negotiable, made payable to the named mortgagee
- the original note must be indorsed (i.e. signed)
- the origininal must be delivered to transferee. NOT a photocopy.
- the transferee must take the note in good faith without notice of any illegality AND
- the transferee must pay value for the note, meaning something more than nomina
Foreclosure
Mortgagee-creditor is forced to look to land bc the mortgagor has defaulted
a. Mortgagee must foreclose by proper judicial action. At forclosure, land is sold. sale proceeds go to satisfying debt
b. If proceeds from the sale of Blackacre are less than the amt owed→ mortgagee brings deficiency action against debtor.
c. IF there’s a surplus→ junior liens are paid in order of priority. remaining surplus goes back to debtor.
a. Foreclosure terminates interest junior to the mortgage being foreclosed, but wont affect senior interests.
f. Foreclosure doesn’t affect any interest senior to the mortgage being foreclosed. Buyer at the sale takes subject to such interest. This means that buyer is NOT personally liable on the senior debt but as a practical matter, if the senor mortgage is not paid, sooner or later, senior creditor will foreclose on the land.
iv. How should you bid in a foreclosure proceeding?
For ex, FMV is 50k, first priority owed 30k, second priority owed 15k, third priority owed 10k.
second priority is the one foreclosing. meaning the buyer will take subject to the 30k. so the 30k should be subtracted from the bid price.
k. Buyer should bid up to $20k, which represents the FMV of 50k- 30k owed to first bank.
Necessary parties
anyone junior to your interest. Also debtor-mortgagor.
Priorities and the purchase money mortgagee
a. Only recorded mortgages have priority.
b. Once recorded, priority is determined by the norm of “first in time first in right”
c. The purchase money mortgagee: gets to defy that norm. This is a loan given which allows debtor to acquire the land
has first priority AKA super priority
d. Subordination agreements. → permissible. A senior creditor can subordinate its priority to a junior creditor.
i. we allow creditors to switch around. quid pro quo in industry
Redemption
a. Redemption in equity: equitable redemption is recognized up to date of sale. At any time prior to the foreclosure sale, the debtor can try to redeem the land
i. Once valid foreclosure has taken place, right to equitable redemption is gone
ii. If no accelaration clause– to redeem must pay off MISSED payments + interest + costs by paying off the missed payments + interest + costs.
iii. If the mortgage or note contains an acceleration clause, which allows mortgagee to delclare the full balance due in the event of default, redeemer must pay off FULL balance + accrued interest + cost
Right to redeem is nonwaivable.
iv. debtor/ mortgagor cannot waive the right to redeem in the mortgage. This is called clogging the equity of redemption and is prohibited.
1. bc on the front end of the deal spirits are high. few mortgagors think they’ll default and may waive too many rights thinking he’ll never default.
Statutory Redemption
Recognized in ½ the states. Gives debtor-mortgagor statutory right to redeem for some fixed period AFTER the foreclosure (6 mos to year) . (equitable redemption by contrast only applies until foreclosure)
i. to recognize statutory redemption, mortgagor will have the right to possess blackacre during the statutory period.
2. The amount to be paid is usually foreclosure sale price
iii. When mortgagor redeems, the effect is to nullify the foreclosure sale. redeeming owner is restored to title.
Consumer protection defenses to foreclosure
regs designed to protect consumers
i. Dodd frank: Requires residential mortgage lenders to determine a mortgagor’s ability to repay before making the loan. The terms of the loan must be understandable and not unfair, deceptive or abusive. Violation of the act can be a defense by the mortgagor as a defense in the foreclosure action.
ii. Consumer rights during foreclosure process: after mortgagor has defaulted, mortgagee must in good faith consider a request made by the mortgagor for a loan modification or another alternative to foreclosure. The mortgagee cannot file a foreclosure action in court while such a request is pending.
1. if request made after foreclosure act is filed, mortgagee cannot proceed to foreclosure sale until the request is resolved
Transfer by debtor-mortgagor
Grantor takes subject to mortgage
i. Assumption: If the grantee signs an assumption agreement, he becomes primarily liable to the lender, while the original mortgagor is secondarily liable as a surety.
ii. Mortgageee may sue either the grantee OR the original mortgagor.
iii. If no assumption agreement is signed, the grantee is not personaly liable on the loan!! only the original mortgagor is primarily liable.
iv. However, if the grantee doesn’t pay, the loan may be foreclosed, wiping out the grantee’s investment.
v. BUT!! if the grantee modifies the obligation with the mortgagee, then this discharges the original mortgagor of all liability.
vi. Due on sale clauses—present in most modern mortgages, allow the lender to demand full payment of the loan if the mortgagor transfers any interest in the property without the lender’s consent.
Modification of priority
i. Priority may be changed by
1. Operation of the recording statute if a prior mortgagee fails to record
2. Subordination agreement
3. Purchase money mortgage
4. Modification of a senior mortgage
5. Granting of optional future advances by a mortgagee with notice
6. Subrogation—senior mortgage is refinanced with junior one (mortgagor promises he’ll pay off the senior one with the junior one)
Who’s personally liable if debtor-mortgagor sells blackacre to B
- IF b has assumed the mortgage:
a. both O and B are personally liable.
b. B is primarily liable, O secondarily - If B takes “subject to the mortgage”
a. B has no personal liability
b. only o is personaly liable. B still has incentive to pay bc if he doesn’t he can be foreclosed upon
c. If recorded, mortgage stays with the land.
d. If o cant pay, mortgage can be foreclosed
note: if there is a modification on the mortgage by a party that has assumed it, the original mortgagor is no longer liable
due on sale clauses: the note may include an enforceable due on sale clause
if the mortgagor transfer without mortgagee’s consent, the entire amount becomes immediately due on payment
