Mortgages and Foreclosure Flashcards
Documents in a mortgage transaction
Two documents
- promisory note
- mortgage
Promisory note
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
Mortgage - what it does and other names for it
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
Purchase-money mortgage
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
Non-purchase money mortgage
Mortgage not to purchase a home, but mortgage put on ones owned home to finance something else
Mortgage - writing
Typically must be in writing to satisfy the SOF
Legal mortgage
Transfer by mortgagee
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
Buyer assumes the mortgage
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
Buyer takes property subject to the mortgage
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
Buyer assumes mortgage and modification between grantee and mortgagee
Any modification of the obligation by the grantee and mortgagee discharges the original mortgagor
Due on sale clauses
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
Recording statutes to mortgages
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
Buyer took land without knowledge of mortgage
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
Foreclosure sale proceeds deficient
Proceeds from the sale are less than the amount owed, the mortgagee brings
Foreclosure sale proceeds and surplus
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
Priority generally
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
Results of a foreclosure
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
Junior interests
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
Necessary parties to foreclosure
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
Senior interests
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
Buyer takes property at foreclosure sale subject to senior interest
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
Purchase-money mortgage and priority
A purchase-money mortgagee who records properly gets first priority
Floating lien
Security interest in a generalized area of property
Grants a floating lien when loan on front end is under collateralized
Subordination agreements
By private agreement, a senior creditor may agree to subordinate its priority to a junior creditor
Permissible
Equitable redemption
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
Acceleration clause
Permits the mortgagee to decelerate the full balance due in the event of default
Statutory right of redemption
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
