Mortgages Flashcards
If a grantor transfers a deed in exchange for cash, and the grantee promises to return the land when the cash is repaid, a court will likely treat the transaction as:
An equitable mortgage.
A due-on-sale clause:
permits the mortgagee to demand full payment of a mortgage debt if the mortgagor transfers her interest without the lender’s consent. These clauses are designed to: (i) protect the lender from the mortgagor’s sale to a poor credit risk or to a person likely to commit waste; and (ii) allow the lender to raise the interest rate or charge an assumption fee when the property is sold. Federal law makes due-on-sale clauses enforceable for all types of institutional mortgage lenders on all types of real estate, but this federal preemption does not apply to isolated mortgage loans made by private parties.
As between two mortgages, what is the effect on the junior mortgage when the mortgagor accepts an advance of funds from the senior mortgagee?
The junior mortgage is given priority over the advance if the advance was optional.
Priority among mortgages on the same real estate is normally determined by chronology: The earliest (i.e., senior) mortgage is first in priority, the next (i.e., junior) mortgage is second, and so on. Generally, if the mortgage obligates the mortgagee to make further advances of funds after the mortgage is executed, such advances will have the same priority as the original mortgage. However, if a junior mortgage is placed on the property and the senior mortgagee later makes an “optional” advance (i.e., one it was not contractually bound to make) while having notice of the junior mortgage, the advance will lose priority to the junior mortgage. Numerous states have reversed this rule by statute, but it remains the majority view. Thus, the junior mortgage is NOT given priority over the advance if the senior mortgagee was contractually obligated to make it. Furthermore, an advance would not jeopardize the priority of the entire senior mortgage itself; thus, the junior mortgage is NOT given priority over the entire senior mortgage, regardless of whether the advance was optional or the senior mortgagee was contractually obligated to make it
Mortgages on the property that are __________ to a mortgage being foreclosed are __________ by the foreclosure if they are made parties to the foreclosure proceeding.
Junior; extinguished
Mortgages on the property that are junior to a mortgage being foreclosed are extinguished by the foreclosure if they are made parties to the foreclosure proceeding. Foreclosure destroys interests (e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed, but does not affect any interest senior to the mortgage being foreclosed. The buyer at the sale takes subject to senior interests, which remain on the land. Note, however, that a junior mortgagee has a right to pay off (i.e., redeem) a senior mortgage to avoid being wiped out by its foreclosure and thus is a necessary party to the foreclosure action. Failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale
A __________ purchase money mortgage usually has priority over a __________ purchase money mortgage.
Vender’s; Third-Party Lender’s
A vendor’s purchase money mortgage usually has priority over a third-party lender’s purchase money mortgage. A purchase money mortgage (“PMM”) is a mortgage given to (i) the vendor of the property as a part of the purchase price, or (ii) a third party who lends funds to allow the buyer to purchase the property. As between a vendor PMM and a third-party PMM imposed as part of the same transaction, neither is treated as “subsequent” under the Restatement. Thus, the recording acts do not apply unless only one party has notice of the other. However, some jurisdictions that do not follow the Restatement allow the recording acts to determine priority between all PMMs. A subsequent third-party lender’s PMM usually does not have priority over a prior third-party lender’s PMM. As between two third-party lender PMMs, priority is determined by the chronological order in which the mortgages were placed on the property, subject to any subordination agreement. Although the recording acts also apply in this situation, they seldom will be of use, because two purchase money mortgagees will almost always know of each other’s existence and thus have notice.
May the lender who is foreclosing a mortgage bid on the land during the foreclosure sale?
YES, regardless of whether the parties contracted for this before default.
Foreclosure is a process by which the mortgagor’s interest in the property is terminated. The property generally is sold to satisfy the debt in whole or in part (foreclosure by sale). Foreclosure sales are conducted by auction, with the highest bidder taking the property. The lender may bid at the sale, and in many cases the lender is the sole bidder
Must a senior mortgagee be named as a party to a junior mortgagee’s foreclosure action?
No, because foreclosure does not destroy interests senior to the mortgage being foreclosed.
No, a senior mortgagee need not be named as a party to a junior mortgagee’s foreclosure action, because foreclosure does not affect interests senior to the mortgage being foreclosed. Foreclosure destroys interests (e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed. However, the buyer at the sale takes subject to senior interests, which remain on the land. Thus, only those with interests junior to that of the foreclosing party are necessary parties to the foreclosure action. Although failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale, senior mortgagees are not necessary parties because their interests remain on the property. Foreclosure does NOT extinguish interests senior to the mortgage being foreclosed. As explained above, senior mortgages remain on the property after the sale. Although a senior mortgagee has a right to pay off a junior mortgage, there is no reason for it to do so. The property will remain subject to the senior mortgage even if the junior mortgagee forecloses and the land is purchased by a new buyer at the foreclosure sale. In contrast, a junior mortgagee has an incentive to pay off a defaulting senior mortgage, as the foreclosure of that mortgage would wipe out the junior interest in the land.
Is the mortgagor entitled to any proceeds of a mortgage foreclosure sale?
Yes, the mortgagor is entitled to any proceeds of a mortgage foreclosure sale, but only after expenses of the sale, attorneys’ fees, court costs, the foreclosing party’s loan, and junior liens have been paid.
The priority of the proceeds from a foreclosure sale is as follows: 1. Expenses of the sale, attorneys’ fees, and court costs;2. The principal and accrued interest on the foreclosing party’s loan;3. Any junior lienors or other junior interests in the order of their priority; and then 4. The mortgagor.
Senior lienors receive none of the proceeds. Because a senior lien remains on the property (i.e., may itself be foreclosed in the future), a senior lienor is not entitled to any of the money from the sale, even if there is a surplus. Although the mortgagor is the defaulting party, he is entitled to any surplus proceeds remaining after the junior lienors are paid. In many cases, however, no surplus remains after the principal debt is paid. The mortgagor’s right to redeem the property in equity before foreclosure does not affect his right to the surplus proceeds. Equitable redemption is the right of a mortgagor to recover the land by paying the amount overdue, plus interest, at any time before the foreclosure sale. However, if foreclosure occurs, then the mortgagor is entitled to the surplus—if any—as explained above.
May a vendor who has accepted late payments for six months on an installment land contract declare a forfeiture if payment is late the seventh month?
No, because the vender has waived strict performance of the contract.
In an installment land contract, the debtor (i.e., the purchaser) contracts with the vendor to pay for the land in regular installments until the full contract price has been paid, plus interest. Only then will the vendor transfer legal title to the purchaser. The contract may contain a forfeiture clause providing that the vendor may cancel the contract upon default, retain all money paid, and retake possession of the land (instead of foreclosing). Forfeiture clauses are NOT void in all jurisdictions, but because forfeiture is such a harsh remedy, courts have tended to resist enforcing them. One way courts have done so is by finding a waiver of strict performance when a vendor has established a pattern of accepting late payments from the purchaser. To reinstate strict performance, the vendor must notify the purchaser of her intent to do so and must allow the purchaser a reasonable time to make up any late payments. Even if the contract provides for forfeiture in the event of default, the vendor may not reclaim the land because she has waived strict performance, as explained above. If the vendor pursues forfeiture, the purchaser would not be liable for damages. It is commonly held that the vendor who elects to pursue a forfeiture cannot also bring an action for damages or for specific performance. If the vendor chooses the forfeiture remedy, she must forgo all others.
May a mortgagee validly transfer its mortgage interest?
YES, if the right to enforce the promissory note passes to the transferee.
Mortgagees usually transfer their interests by indorsing and delivering the promissory note and executing a separate assignment of the mortgage. The note and mortgage must pass to the same person for a mortgagee’s transfer to be complete, but under CL, a transfer of the note will automatically transfer the mortgage along with it, so a separate assignment of the mortgage is not technically necessary. If the mortgage is transferred without the note, some states hold that the note automatically will follow it, and other states hold that the transfer is void. Whether the mortgagee gives the mortgagor proper notice of the transfer does not affect the validity of the transfer, but it may dictate whom the mortgagor is obligated to pay. If the original mortgagee transfers possession of a nonnegotiable note (many notes secured by mortgages are not negotiable), the mortgagor’s payment to the original mortgagee is effective against the transferee if made before the mortgagor receives notice of the transfer. NOT only the mortgagor’s interest is transferable. Both mortgagees and mortgagors have the right to transfer their interests. Mortgagees may transfer their interests as described above. Mortgagors ordinarily do so by deeding the property; the grantee takes subject to the mortgage, which remains on the land. Thus, both parties’ interests in the mortgage ARE transferable.
May a mortgagee validly transfer the note without the mortgage?
YES, but the mortgage will automatically follow the note.
Statutory redemption is the right of a mortgagor to recover the land after the foreclosure sale has occurred, usually by paying __________.
The foreclosure sale price.
About half the states provide a statutory right to redeem for some fixed period after the foreclosure sale has occurred, usually six months or one year. The amount to be paid is generally the foreclosure sale price, rather than the amount of the original debt. This right extends to mortgagors and, in some states, to junior lienors. In contrast, equitable redemption is the right of a mortgagor to recover the land by paying the amount overdue on the mortgage, plus interest, at any time before the foreclosure sale. If the mortgagor has defaulted and the mortgage or note contained an acceleration clause, then the full balance of the mortgage must be paid in order to redeem in equity.
As between two mortgages, what is the effect on the junior mortgage when the mortgagor agrees to an increased interest rate on the senior mortgage?
The junior mortgage is given priority over any increase in the senior mortgage debt.
Priority among mortgages on the same real estate is normally determined by chronology: The earliest (i.e., senior) mortgage is first in priority, the next (i.e., junior) mortgage is second, and so on.
However, priority may be modified in several ways, such as by agreement between a mortgagor and a mortgagee. If a mortgagor enters into a modification agreement with the senior mortgagee making its mortgage more burdensome, the junior mortgage will be given priority over the additional debt balance resulting from the modification. When a mortgagor and mortgagee agree to modify the mortgage, the mortgagee loses its priority as to the modification but maintains its priority as to the original debt. Thus, the junior mortgage is NOT given priority over the entire senior mortgage
When may a mortgagee take possession of the mortgaged property?
On default, in a title theory state.
