Mortgages and Foreclosure

Question 1

Documents in a mortgage transaction

Answer 1

Two documents
- promisory note
- mortgage

Question 2

Promisory note

Answer 2

Mortgagor’s (borrowers) personal obligation

So mortgagee is not limited to the land when seeking a remedy for default
- if mortgagor quits paying, in addition to foreclosure, the mortgagee has the option to sue the mortgagor personally for payment of the notice

Question 3

Mortgage - what it does and other names for it

Answer 3

Agreement that says if the mortgagor quits paying, the land can be sold to pay the mortgagee

Union of debt and lien in land to secure debt

Other potential names for it
- mortgage deed
- deed of trust
- sale leaseback
- security interest in land

Question 4

Purchase-money mortgage

Answer 4

Extension of value by a lender who takes as collateral a security interest in the very real estate that its loan enables the debtor to acquire

Question 5

Non-purchase money mortgage

Answer 5

Mortgage not to purchase a home, but mortgage put on ones owned home to finance something else

Question 6

Mortgage - writing

Answer 6

Typically must be in writing to satisfy the SOF

Legal mortgage

Question 7

Transfer by mortgagee

Answer 7

Mortgagee can transfer their interest by
- endorsing the note and delivering it to the transferee, or
- executing a separate document of assignment

Mortgagee can freely transfer the note and the mortgage automatically follows a properly transferred note

Question 8

Buyer assumes the mortgage

Answer 8

Agreeing to be personally liable on the mortgage note

If grantee signs an assumption agreement, they become primarily liable to the lender while the original mortgagor is secondary liable as a surety
- but mortgagee may opt to sue either the grantee or the original mortgagor

Question 9

Buyer takes property subject to the mortgage

Answer 9

Not agreeing to personal liability - the mortgagee’s only recourse is foreclosure

What happens automatically when mortgagor transfers title to the property

But mortgage remains on the land as long as the mortgage instrument was properly recorded
- so while grantee is not personally liable, if the mortgagor defaults and the mortgage was properly recorded, the mortgagee can foreclose on the land

Question 10

Buyer assumes mortgage and modification between grantee and mortgagee

Answer 10

Any modification of the obligation by the grantee and mortgagee discharges the original mortgagor

Question 11

Due on sale clauses

Answer 11

Appear 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

Question 12

Recording statutes to mortgages

Answer 12

All recording statutes apply to mortgages as well as deeds

So all subsequent buyer takes subject to a properly recorded lien, regardless of what recording statute the jurisdiction has enacted

Properly recorded mortgages stick with the land

Question 13

Buyer took land without knowledge of mortgage

Answer 13

Jan 10, got mortgage, transferred on jan 15, mortgagee didnt record until jan 20, buyer recorded jan 30, so buyer had no knowledge of the lien and recorded after

Whether buyer holds subject to the mortgage depends on which recording statute has been enacted
- race-notice: buyer loses because bank won race
- notice: buyer wins if BFP when took

Question 14

Foreclosure sale proceeds deficient

Answer 14

Proceeds from the sale are less than the amount owed, the mortgagee brings

Question 15

Foreclosure sale proceeds and surplus

Answer 15

Funds from a surplus foreclosure will be distributed
- first, attorneys’ fees and expenses of foreclosure and any accrued interest on the mortgage
- junior liens are paid off in order of their priority and each claimant is entitled to satisfaction in full before a junior lien holder may take
- any remaining surplus goes to the debtor

If any junior lien comes up short, can sue for deficiency

Question 16

Priority generally

Answer 16

Default rule is that the priority of a mortgage spends on when it was placed on the property
- first in time, first in right

Until record, no priority so creditors must record and whoever takes first has top priority

Question 17

Results of a foreclosure

Answer 17

A buyer at a foreclosure sale takes the title as it existed when the foreclosed mortgage was placed on the property

All interests senior to that one remain on the property and all interests junior to that one are extinguished

Question 18

Junior interests

Answer 18

Foreclosure terminates interests junior to the mortgage being foreclosed but does not affect senior interests

Junior lien holders will be paid in descending order with the proceeds from the sale

Once foreclosure of a superior claim has occurred, with the proceeds distributed appropriately, junior lien holders can no longer look to the land for satisfaction

Question 19

Necessary parties to foreclosure

Answer 19

Junior lien holders and debtor-mortgagor are necessary parties

Failure to include a necessary party results in the preservation of that party’s claim, despite the foreclosure and sale
- thus, if not joined, their mortgage will remain on the land

Question 20

Senior interests

Answer 20

Foreclosure does not affect any interest senior to the mortgage being foreclosed

The buyer takes subject to such interest but not personally liable
- as a practical matter, if the senior mortgage is not paid, sooner or later the senior creditor will foreclose against the land

Question 21

Buyer takes property at foreclosure sale subject to senior interest

Answer 21

Foreclosure sale buyer has a strong incentive to pay off the senior lien because otherwise, could be subject to a later foreclosure action brought by the senior bank if not paid

So if fair market value is 50k and 30k senior loan, should bid up to 20k

Question 22

Purchase-money mortgage and priority

Answer 22

A purchase-money mortgagee who records properly gets first priority

Question 23

Floating lien

Answer 23

Security interest in a generalized area of property

Grants a floating lien when loan on front end is under collateralized

Question 24

Subordination agreements

Answer 24

By private agreement, a senior creditor may agree to subordinate its priority to a junior creditor

Permissible

Question 25

Equitable redemption

Answer 25

Universally recognized up to the date of sale - any time prior to the foreclosure sale, the debtor has the right to redeem the land by freeing it of the mortgage
- once a valid foreclosure has taken place, the right to equitable redemption is cut off

In absence of acceleration clause - pay off all missed payments, interest, and costs

With an acceleration clause - pay off entire balance owed, interest, cost

Cannot clogging equity of redemption - cannot waive it

Question 26

Acceleration clause

Answer 26

Permits the mortgagee to decelerate the full balance due in the event of default

Question 27

Statutory right of redemption

Answer 27

Many states give the mortgagor a statutory right to redeem for some fixed period after the foreclosure sale has occurred - usually 6 months or one year

Amount to be paid is usually the foreclosure sale price