MORTGAGES

Question 1

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.

Question 2

A mortgage is the union of what two elements?

Answer 2

1) A debt

2) A voluntary lien in debtor’s land to secure that debt.

Question 3

By way of vocabulary, a debtor is a what?

Answer 3

A morgagor

Question 4

By way of vocabulary, a creditor is a what?

Answer 4

A mortgagee

Question 5

What is the “legal mortgage”

Answer 5

A writing.

Question 6

What in “the legal mortgage”?

Answer 6

The mortgage typically must be in writing to satisfy the Statute of Frauds

Question 7

What are some names for the legal mortgage?

Answer 7

Encumbrance in blackacre evidenced by writing, Note, mortgage deed, security interest in land, a deed of trust, a sale lease back.

Question 8

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

Answer 8

an equitable mortgage

Question 9

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.
What is admissible in an equitable mortgage to show intent?

Answer 9

Parol evidence.

Question 10

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.
What if Creditor proceeds to sell Blackacre to bona fide purchaser X?
What can O do?

Answer 10

X owns the land. O’s only recourse is suing for fraud and sale of proceeds.

Question 11

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

Answer 11

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

Question 12

What 2 ways can a creditor-mortgagee transfer his interest in the mortgage?

Answer 12

The creditor-mortgagee can transfer his interest by
1) endorsing the note and delivering it to the transferee
or
2) executing a separate document of assignment

Question 13

To become a holder in due course what must happen?

Answer 13

the note must be endorsed and delivered

Question 14

A holder in due course means?

Answer 14

He takes the note free of any personal defenses that could have been raised against the original creditor.

Question 15

What are some personal defenses for a transfer of a mortgage?

Answer 15

Lack of consideration, fraud in the inducement, waiver, estoppel, unconcionability

Question 16

The holder in due course may foreclose the mortgage despite what?

Answer 16

Any personal defense.

Question 17

A holder in due course is still subject to what defenses?

Answer 17

“real” defenses that the maker might raise

Question 18

What are the “real defenses” that a holder in due course is still subject to?

Answer 18

MAD FIF I4
Material Alteration
Duress

Fraud in the Factum

Illegality
Insolvency
infancy
incapacity

Question 19

What is Fraud in the Factum?

Answer 19

A lie about the instrument of the debt to the debtor. (the debtor was lied to)

Question 20

What 5 criteria must be met to be a holder in due course?

Answer 20

1) the note must be negotiable, made payable to the named mortgagee;
2) the original note must be endorsed, 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 notice of any illegality;
and
5) the transferee must pay value for the note, meaning some amount that is more than nominal.

Question 21

If O, the debtor-mortgagor, sells Blackacre, which is now mortgaged what happens to the mortgage?

Answer 21

the lien remains on the land. so long as the mortgage was properly recorded.

Question 22

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.
Does Buyer hold subject to First Bank’s mortgage?

Answer 22

Yes. A later buyer takes subject to a properly recorded lien

Question 23

What statutes apply to mortgages in their transferability?

Answer 23

All recording statutes apply to mortgages as well as deeds.

Question 24

Assume 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 in a race-notice state?

Answer 24

Buyer loses. because he lost the race to record

Question 25

Assume 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 in a notice state?

Answer 25

buyer wins so long as he was a bfp when he took.
In a notice state, a subsequent BFP prevails over a prior grantee or mortgagee who has not yet recorded properly at the time the BFP takes.

Question 26

Who is personally liable on the debt if O, our debtor-mortgagor, sells Blackacre to B
If B has “assumed the mortgage”?

Answer 26

Both O and B are personally liable. B is primarily liable, O remains secondarily liable.

Question 27

Who is personally liable on the debt if O, our debtor-mortgagor, sells Blackacre to B, If B takes subject to the mortgage?

Answer 27

B assumes no personal liability. Only O is personally liable. But, if recorded, the mortgage sticks with the land. Thus, if O does not pay, the mortgager may foreclose.

Question 28

Assuming that our mortgagee-creditor must look to the land for satisfaction, how must he or she proceed?

Answer 28

The mortgagee must foreclose by proper judicial action. At foreclosure, the land is sold. The sale proceeds go to satisfying the debt.

Question 29

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

Answer 29

Mortgagee brings a deficiency action against debtor, junior liens paid in order of priority.

Question 30

In a foreclosure what if the proceeds from the sale of Blackacre are more than the amount owed?

Answer 30

remaining surplus goes to debtor

Question 31

After a foreclosure what expenses are taken first?

Answer 31

Off the top: Attorney’s fees, foreclosure expenses, and any accrued interest on first bank’s mortgage. Assume 0 to make it easier.

Question 32

In a foreclosure how are the funds remaining after off the top expenses distributed?
What if there is not enough to pay off all debts with the proceeds from the foreclosure sale?

Answer 32

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.
If there is a deficiency the holder of the mortgage that is not fully paid may take personal deficiency action against the debtor

Question 33

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 33

1. Off the top: Attorney’s fees, foreclosure expenses, and any accrued interest on first bank’s mortgage. Assume 0 to make it easier.
2. First Bank takes: 30,000. Then, Second Bank takes: 15,000. The remaining balance is applied toward third bank, it takes 5,000
3. Third Bank should be able to proceed for a deficiency judgment of 5,000

Question 34

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 $60,000. How will the funds be distributed?

Answer 34

1. Off the top: Attorney’s fees, foreclosure expenses, and any accrued interest on first bank’s mortgage. Assume 0 to make it easier.
2. First Bank takes: 30,000. Then, Second Bank takes: 15,000. Third bank takes 10,000
3. The debtor gets the surplus of 5,000

Question 35

What is the effect of a foreclosure on junior mortgage interests?

Answer 35

Foreclosure will terminate interests junior to the mortgage being foreclosed. Junior lienholders should be able to proceed for a deficiency judgment. Once foreclosure of a superior claim has occurred, with the proceeds distributed appropriately, junior lienholders can no longer look to Blackacre for satisfaction.

Question 36

What is the effect of a foreclosure on senior mortgage interests to the party that foreclosed?

What is the effect on the buyer at foreclosure?

Answer 36

None, their mortgage stays on the land.

The new buyer takes the land subject to the mortgage. They are not personally liable for the mortgage but the mortgage holder can foreclose on the land.

Question 37

Who are necessary parties to the foreclosure action and must be joined in the action?

Answer 37

Those with interests subordinate to those of the foreclosing party and the debtor-mortgagor.

Question 38

What if the foreclosing party fails to include a necessary party?

Answer 38

Failure to include a necessary party results in the preservation of that party’s claim, despite the foreclosure and sale. Thus, if a necessary party is not joined his mortgage remains on the land.

Question 39

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. Suppose that it is Second Bank’s mortgage that is being foreclosed.
What happens to first bank’s mortgage?
How much will the buyer at foreclosure be willing to pay?

Answer 39

First Bank’s mortgage will continue on blackacre in the hands of the foreclosure buyer.

The buyer at foreclosure will be willing to pay 20,000. This represents the fair market value of 50,000 - 30,000 buyer needs to pay off first bank’s mortgage.

Question 40

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. Suppose that it is Second Bank’s mortgage that is being foreclosed. The buyer at foreclosure pays $20,000
How will the proceeds from the sale be distributed?

Answer 40

15 K to 2nd, 5 k to third but could try for a deficient judgment against debtor. the 30K mortgage to first bank will stay on blackacre.

Question 41

How is priority determined for mortgages?

Answer 41

first in time first in right. The first to record properly takes first priority.

Question 42

What happens if a bank does not properly record?

Answer 42

The bank has no priority.

Question 43

What is a purchase money mortgage?

Answer 43

A mortgage given to secure a loan that enables the debtor to acquire the encumbered land.

Question 44

C lends O $100,000 so that O can purchase Blackacre. C takes as collateral a security interest in Blackacre, the very parcel that C’s extension of value enabled O to acquire.
C is what?

Answer 44

C is a purchase money mortgagee

Question 45

C lends O $100,000 so that O can purchase Blackacre. C takes as collateral a security interest in Blackacre, the very parcel that C’s extension of value enabled O to acquire.
Assuming that C records properly, he has what?

Answer 45

first priority in the parcel he financed

Question 46

What kind of mortgage is a mortgage given to secure a loan that enables the debtor to acquire the encumbered land.

Answer 46

A purchase money mortgage

Question 47

C1 lends $200,000 to O, taking a security interest in all of O’s real estate holdings, “whether now owned or hereafter acquired.”
(called a floating lien or a after-aquired collateral mortgage)
C1 records the mortgage note. Six months later, C2 lends O $50,000 to enable O to acquire a parcel known as Blueacre, taking back a security interest in Blueacre and recording that interest. Subsequently, O defaults on all outstanding obligations. All that he has left is Blueacre. Who has first priority in Blueacre, C1 or C2?

Answer 47

C2 the purchase money mortgagee has first priority in blueacre. The parcel it financed.

Question 48

What if a junior creditor wants to be more senior in priority?

Answer 48

They can get a subordination agreement in which a senior creditor agrees to subordinate its priority to a junior creditor.

Question 49

What is a redemption in equity?

Answer 49

Equitable redemption is universally recognized up to the date of sale. At any time prior to the foreclosure sale the debtor can try to redeem the land.

Question 50

What happens to the right of equitable redemption once a foreclosure sale has taken place?

Answer 50

the right to equitable redemption is gone.

Question 51

How is the right of equitable redemption exercised?

Answer 51

by paying off the missed payments or payments plus interest plus costs.

Question 52

What is an acceleration clause?

Answer 52

An acceleration clause permits the mortgagee to declare the full balance due in the event of default

Question 53

What if the mortgage or note contained an acceleration clause?

Answer 53

If the mortgage contains an acceleration clause the full balance plus accrued interests plus costs must be paid.

Question 54

May a debtor/mortgagor waive the right to redeem in the mortgage itself?
What is this known as?

Answer 54

No. This is known as Clogging the equity of redemption, it is prohibited.

Question 55

What is a statutory redemption?

Answer 55

statutory redemption gives the debtor-mortgagor a statutory right to redeem for some fixed period after the foreclosure sale has occurred.

Question 56

Where the statutory redemption recognized?

Answer 56

One half of the states

Question 57

Typically, how long after a foreclosure sale does a a debtor mortgagor have exercise a statutory redemption?

Answer 57

Typically six months to one year

Question 58

What is the amount to be paid in a statutory redemption?

Answer 58

The amount to be paid is usually the foreclosure price rather than the amount of the original debt

Question 59

What is the effect of a debtor-motgagor exercising the statutory redemption?

Answer 59

It nullifies the foreclosure sale, debtor is restored to tittle.