Mortgages

Question 1

For real property on the MBE, what are the 3 types of security interests?

Answer 1

1. Deeds of trust
2. Mortgages
3. Land sale contract

Note: The MEE tests an entirely different set of security interests - these are just for real property on the MBE.

Question 2

Define

Deed of Trust

Answer 2

Alternative to a mortgage. Debtor borrows money from a lender and then deeds the property to a third party as collateral. Once debtor repays debt, third party releases deed back to debtor.

Question 3

Define

Mortgage

Answer 3

A security interest in real property between a borrower and lender that secures the performance of an obligation (typically repayment of a loan).

Question 4

What is the difference between a deed of trust and a mortgage?

Answer 4

Deed of trust: 3 parties involved: borrower/debtor, lender, and trustee

Mortgage: 2 parties involved: borrower/debtor and lender

Question 5

Define

equitable mortgage

Answer 5

Lender secures the mortgage by taking possession of all the original title documents of the property.

Lender has the right to sell the property, foreclose, and appoint a receiver if the borrower doesn’t pay.

Question 6

Define

mortgagor

Answer 6

Borrower/debtor

Question 7

Define

mortgagee

Answer 7

Lender/creditor

Question 8

What is the difference between a mortgage and a note?

Answer 8

Mortgage: represents the interest in the land.

Note: represents the debt of mortgagor.

⭐️ Remember: The mortgage follows the note. If you have the note, then it is presumed you have the mortgage.

Question 9

Who has the title and right to the property interest in a:

1. Lien theory jurisdiction (majority)
2. Title theory jurisdiction (minority)

Answer 9

1. Lien: Mortgagor-borrower has title and right to possession. Mortgagee-lender has a lien on the interest.
2. Title: Mortgagee-lender has title and right to possession.

Question 10

Define

absolute deed of sale

Answer 10

Transfers unrestricted title to the property, free of all liens and encumberances.

Question 11

Define

installment land sale contract

Answer 11

The seller retains the deed until all of the installment payments are made by the buyer. If the buyer defaults, then the seller keeps land and all previous payments.

Question 12

If a mortgagor transfers the property, who is liable upon default if the buyer:

1. Assumes the mortgage?
2. Takes subject to the mortgage?

Answer 12

If the buyer/transferee “assumes” the mortgage:

• Buyer/transferee is primarily liable for the loan
• Mortgagor is secondarily liable unless released by transferee

If buyer/transferee takes “subject to” the mortgage:

• Mortgagor is primarily liable
• Buyer/transferee incurs no liability to repay the loan

Question 13

If a mortgagor transfers her interest, what is the default liability if the deed is silent?

Answer 13

Buyer takes the property “subject to” the mortgage (i.e. no personal liability)

Question 14

What are due-on-sale clauses?

Answer 14

Gives lender the ability to demand the entire balance if the deed is transferred, unless the lender has given permission for the transfer

⚠️ Note: Due-on-sale clauses cannot be enforced for transfers to spouses, children, living trusts, or automatic transfers upon the death of the borrower

Question 15

What are due-on-encumberance clauses?

Answer 15

If mortgagor obtains a second mortgage or another encumberance on the property, the lender can demand immediate, full payment

Question 16

When does a mortgagor commit impermissible waste?

Answer 16

When the waste reduces the value of the mortgagee’s security interest

Question 17

Define

right of redemption

Answer 17

After default, at any time prior to the foreclosure sale, a debtor can redeem title to the property by paying the full debt amount

More info: Right of Redemption

Question 18

Can you waive your equitable right of redemption in a contract?

Answer 18

No, this is considered a “clog” on the borrower’s right to equitable redemption and disfavored by courts. However, you may be able to waive the right in exchange for consideration after the execution of the mortgage.

Question 19

What is a deed in lieu of foreclosure?

Answer 19

If mortgagor (borrower) goes into default, the mortgagor can give the deed to mortgagee (lender) to satisfy the mortgage debt.

Mortgagee has immediate possession, and takes it subject to all junior liens attached.

Question 20

What is foreclosure?

Answer 20

When the borrower fails to make timely payments, the lender can foreclose on the property and use the proceeds to satisfy the debt owed

Question 21

What is an acceleration clause?

Answer 21

Requires the borrower to pay the full amount owed upon default

More info: Acceleration Clause

Question 22

What are the 3 types of foreclosure?

Answer 22

Judical

• ​​Sale is supervised by the court

Nonjudicial (“power of sale”)

• Property is sold without court supervision
• ​​Common in deed of trust states
• Mortgage/deed of trust must contain a “power-of-sale” clause

Strict

• Lender seeks court order for borrower to pay within a specified time frame. If borrower cannot pay, lender takes title to the property
• Minority method

Question 23

In a foreclosure sale, who gets priority for the proceeds?

Answer 23

1. Debts incurred by the foreclosure (attorney’s fees, etc); then
2. Mortgage being foreclosed;
3. Junior mortgages (first, second, third, etc)

⚠️ Note: Senior liens will stay attached to the property.

Question 24

How do you determine what interests take priority (i.e. which is senior and junior) in a foreclosure sale?

Answer 24

Generally, follow the “first in time, first in right” rule, unless an exception applies

Question 25

What are the exceptions to the “first in time, first in right” rule?

Answer 25

1. Purchase money mortgage: Priority over all liens, regardless of when they were recorded
2. Recorded mortgages have priority over unrecorded mortgages;
3. Non-guaranteed advances from future-advance mortgages;
4. Subordination by senior mortgagee to subsequent interest;
5. Modification; and
6. After-acquired property

Question 26

How are interests affected by a foreclosure sale?

Answer 26

• Junior interests are extinguished
• Buyer buys the property subject to the senior interests

Question 27

In what type of foreclosure does the junior interest holder need to be given notice?

Answer 27

Judicial foreclosure. Holder must be given notice and made a party, or else her interest will not be extinguished.

Question 28

What is the Doctrine of Marshaling Assets?

Answer 28

Holder of a senior security interest must proceed:

1. First, against property without junior security interests;
2. Second, against property that has whichever junior interest was more recently created; and
3. Lastly, against property that has whichever junior interest was more remotely created

Question 29

What is a deficiency judgment?

Answer 29

If the foreclosure sale does not cover the full amount owed, the borrower/mortgagor may be responsible for the full debt owed (the lender and other holders may seek a deficiency judgment against the borrower to satisfy the full debt owed)

⚠️ Exception: Borrower is not liable for deficiency if they are the holder of a nonrecourse loan

Question 30

What is subrogation?

Answer 30

When a third party (“payor”) pays for the entire mortgage debt. The payor is then “subrogated” (substituted) and is entitled to all the rights of the original mortgagee.

Question 31

In a foreclosure sale, is a mortgagee entitled to proceeds from improvements to the property?

Answer 31

Yes. However, if improvements were funded by a second mortgage, the second mortgagee may have superior rights to the property