Mortgages

Question 1

What are the six types of security interest in real estate?

Answer 1

(1) mortgage
(2) deed of trust
(3) installment land contract
(4) absolute deed
(5) sale-leaseback
(6) equitable vendor’s lien

Question 2

What is a mortgage?

Answer 2

Mortgagor = debtor
Mortgagee = lender
If mortgagor defaults on the loan, the lender can realize the mortgaged real estate by judicial foreclosure sale.

Question 3

What is a deed of trust?

Answer 3

Debtor = trustor. Lender = beneficiary
Trustor gives a deed of trust to a third party trustee. On default, the lender instructs the trustee to foreclose the deed of trust by sale

Question 4

What is an installment land contract?

Answer 4

Installment purchaser obtains legal title only when the full contract price has been paid. A forfeiture clause allows the seller to cancel the contract and retake possession on default, keeping all money paid

Question 5

What is an absolute deed?

Answer 5

Treated as an equitable mortgage and creditor must foreclose by judicial action

Question 6

What is a sale-leaseback?

Answer 6

Owner sells for cash and leases back from purchaser. May be treated as disguised mortgage

Question 7

What is an equitable vendor’s lien?

Answer 7

Arises by implication of law when a seller transfers title and a portion of the purchase price remains unpaid

Question 8

Can a mortgagee transfer the mortgage without the note?

Answer 8

In some states a transfer of a mortgage automatically transfers a note, unless the mortgagee-transferor expressly reserves rights (in which case the transferee can judicially compel transfer of the note).

In others, a transfer of the mortgage without the note is void.

Question 9

Can the mortgagee transfer the note without the mortgage?

Answer 9

A note can be transferred without the mortgage, but the mortgage will automatically follow unless the mortgagee expressly reserves the right

Question 10

What are the methods of transferring the note?

Answer 10

Endorse and deliver or a separate document of assignment or by a separate document

Question 11

What is a holder in due course?

Answer 11

A transferee becomes a holder in due course of a note when:

(1) note must be negotiable in form (payable either “to bearer” or “to the order of X” with a promise to pay a sum certain and no other promise)
(2) note must be endorsed and signed by named payee
(3) note must be delivered to transferee
(4) transferee must take note in good faith and pay value for it

A holder in due course takes the note free of personal defenses of the maker (failure of consideration, fraud in the inducement, waiver, estoppel, and payment) but not of real defenses (incapacity, duress, illegality, fraud in the execution, forgery, discharge in insolvency or other insolvency)

Question 12

What is the effect of an assumption agreement?

Answer 12

If a grantee signs an assumption agreement, they become primarily liable on the mortgage and mortgagor is secondarily liable as a surety. The mortgagee is able to sue either.

If no assumption agreement, grantee has no personal liability but if they do not pay, the loan may be foreclosed

Question 13

What are due-on-sale clauses?

Answer 13

Most modern mortgages allow a lender to demand full payment if the mortgagor transfers any interest in th property without the lender’s consent

Question 14

What are defenses to an action on the mortgage?

Answer 14

Same as defenses in an action on the underlying note – like duress, consideration, fraud, mistake.

Question 15

What do consumer protection laws require of mortgagees?

Answer 15

UDAAP protects residential mortgagors from unfair, deceptive, and abusive lending practices
Cannot give a residential mortgagor a loan beyond the mortgagor’s ability to repay at the time
After default, a mortgagee must in good faith evaluate an application for an alternative to foreclosure
Violations here are defenses to foreclosure

Question 16

What is the effect of discharge of the mortgage on a mortgagee’s right to foreclose?

Answer 16

Precludes the mortgagee’s right to foreclose

Question 17

What are the three theories of title?

Answer 17

(1) lien theory (most states follow) – mortgagee is holder of security interest and the mortgagor is deemed the owner until foreclosure. mortgagee has no possession right prior to foreclosure
(2) title theory – legal title is in the mortgagee until satisfaction or foreclosure and mortgagee entitled to possession on demand
(3) intermediate theory. – legal title in the mortgagor until default, when it transfers to the mortgagee. May demand possession upon default

Question 18

What is redemption in equity?

Answer 18

At any time prior to the foreclosure sale, the mortgagor may redeem the property by paying the amount due. As a result of an acceleration clause, this may be the entire balance of the mortgage. This right can’t be waived in the mortgage.

Question 19

What is statutory redemption?

Answer 19

Half of states allow the mortgagor to redeem for a fixed period after the foreclosure sale has occurred

Question 20

What is a foreclosure’s effect on other interests in the property?

Answer 20

Foreclosure has no effect on the interests senior to the foreclosing interest, but destroys all junior interest. A junior interest will be preserved if the foreclosing interest holder fails to join the junior interest holder in the action.

Question 21

What determines the priority of mortgages on a property?

Answer 21

Priority generally determined by chronology but may be changed by (1) operation of a recording statute where a mortgagee fails to record, (2) express terms of a subordination agreement between interest holders, (3) existence of a purchase money mortgage, (4) modification of a senior mortgage (pushes it down the line), (5) granting of optional future advances by mortgagee with notice of a junior lien (will have seniority over the advances), or (6) subrogation (senior mortgage refinanced with a junior one)

Question 22

What is a purchase money mortgage?

Answer 22

Mortgage issued in exchange for a loan used to purchase the property, either to the seller as part of the purchase price or a third party lender. They have priority over senior interests but subsequent interests may defeat their seniority by operation of a recording statute. A seller’s PMM has priority over a lender’s, if both are lenders, chronology dictates priority.

Question 23

How are the proceeds of a foreclosure sale applied?

Answer 23

Proceeds are applied to (1) the expenses of the sale, then (2) the principal and interest of the foreclosed loan, (3) the junior interests in order of priority, (4) the mortgagor

Question 24

What happens if the proceeds of foreclosure are insufficient to satisfy the mortgage debt?

Answer 24

mortgagee retains a personal cause of action against the mortgagor for the deficiency

Question 25

What theories may a court use to avoid the harsh result of forfeiture on default of an installment land contract?

Answer 25

• • equity of redemption (grace period for paying balance)
• • restitution (refund the excess over damages)
• • treat the contract as a mortgage
• • waiver if the vendor has a pattern of accepting late payments
• • election of remedies (vendor must choose either damages or specific performance)

Question 26

What’s the distinction between the note and mortgage?

Answer 26

Note = promise to make periodic payments to repay the amount borrowed with interest
Mortgage = gives the lender a property interest allowing them to seek foreclosure on default on the note

Question 27

What happens when a grantee assumes a mortgage and negotiates a modification with the mortgagee?

Answer 27

The original mortgagor’s liability is fully discharged

Question 28

What is the effect of a payment to the original mortgagee after transfer of a note?

Answer 28

If a negotiable instrument ha been transferred by the mortgagee, any payment to the mortgagee will not count. The new holder can demand payment even if th mortgagor has not had notice of the transfer.

If it is a nonnegotiable note, the mortgagor’s payment is effective against the transferee until the mortgagor receives notice of the transfer

Question 29

What law applies in a foreclosure action?

Answer 29

the law of the state in which the property is located. a choice of law clause aimed at picking a state with weaker consumer protection laws is usually void

Question 30

What risks does a mortgagee assume when they take possession?

Answer 30

duties like accounting for rents, prudent management of the property and tort liability

Question 31

How do mortgagees use receivership?

Answer 31

Often to intercept rents before foreclosure by appointing a receiver to manage the property. Courts generally appoint receivers for rental property if:

(1) waste is occurring
(2) value of property is inadequate to satisfy the debt
(3) the mortgagor is insolvent