Mortgages and Security Devices

Question 1

What are the different types of security devices?

Answer 1

1. Mortgages
2. Installment Land-Sale Contracts
3. Absolute Deeds

Question 2

What are the different types of mortgages?

Answer 2

1. Mortgage
2. Deed of Trust
3. Purchase-Money Mortgage
4. Future-Advance Mortgages

Question 3

What is a Mortgage?

Answer 3

A conveyance of an interest in real property made to secure performance of an obligation.

Question 4

Who is a mortgagor?

Answer 4

The Debtor.

Question 5

Who is the mortgagee?

Answer 5

Creditor.

Question 6

Must a Mortgage be in writing?

Answer 6

Yes. It is considered to be dealing in an interest in land.

The mortgage deed must:

1. ID the parties;
2. Describe the property; and
3. Show intent to create a security interest.

The mortgage note must state:

1. the loan amount;
2. the interest rate;
3. the loan term;
4. a clause permitting prepayment and penalty;
5. an acceleration clause; and
6. a “due on sale” clause.

Question 7

What makes up a mortgage?

Answer 7

A mortgage contains:

1. Mortgage deed - the document that conveys an interest in real property designed to secure performance of a debt.
2. Mortgage note (promissory note) - the document that represents the personal liability of the debtor.

The mortgage deed follows the mortgage note.

Question 8

What are the creditor’s remedies under a Mortgage?

Answer 8

A creditor can sue in personam (on the note) or in rem (through the mortgage deed).

Question 9

What is a deed of trust?

Answer 9

The Debtor is the settlor, who gives a deed of trust to a trustee who is closely connected to the lender.

Oklahoma RP Distinction - In Oklahoma, deeds of trust are less commonly used than mortgages but are permitted. A deed of trust vests title in the trustee until payment in full occurs for the underlying loan. Deeds of trust are subject to all statutory provisions and laws relating to mortgages.

The appearance of the words “trustee” or “as trustee” or “agent” following the names of the grantee in any deed of conveyance of land or other property without other language showing a trust does not give notice to any person dealing with the property that a trust exists.

Question 10

What is a Purchase Money Mortgage?

Answer 10

It is a mortgage given to secure a loan that enables the mortgagor to acquire title to the property at issue, or to make improvements.

Question 11

What are the different types of purchase-money mortgages?

Answer 11

1. Vendor-PMM - Seller conveys the land, and takes back a mortgage to secure payment.
2. Third Party-PMM - Buyer borrows money from a third party (bank) to pay off purchase price and gives the third party a mortgage.

Question 12

What is the priority of a PMM?

Answer 12

PMM receives priority over all other liens even those that were recorded earlier in time.

Question 13

What is a Future-Advance Mortgage?

Answer 13

They include line-of-credit or home-equity loans.

Question 14

What is the priority of a Future-Advance Mortgage?

Answer 14

If notice is properly given to future creditors, the mortgage interest attaches on the date that the arrangement was made, not when the funds were actually accessed.

Question 15

What is an Installment Land-Sale Contract?

Answer 15

The buyer takes possession under a contract of sale and makes payments to the seller. The seller delivers a deed and title only when the payments have been completed.

Question 16

What happens in the case of default in an installment land-sale contract?

Answer 16

The contract provides for forfeiture of all installments paid and the retaking of possession.

In many jurisdictions, a court will grant a grace period. If the Seller has accepted previously late payments, then courts will find a waiver of a time-is-of-the-essence clause.

Question 17

What is an Absolute Deed?

Answer 17

A debtor borrows money and issues a deed to the creditor that appears to be absolute on its face.

Extrinsic evidence can be used to show that the debtor and creditor have an agreement where the creditor will reconvey the property after payment. The deed is just considered a mortgage deed.

Question 18

What are the three security relationships?

Answer 18

1. Lien theory (Majority) - The mortgagee receives a lien, and the mortgagor retains legal and equitable title and possession to the mortgaged real property.
2. Title theory (common law/Minority) - The mortgagee receives legal title to the mortgaged property and has a right to take possession of and to collect rents and profits.
3. Intermediate Theory (Few) - Mortgagor retains title. After default, mortgagee receives legal title.

Question 19

What duties are applied to those in possession of mortgaged property?

Answer 19

Whoever has possession has a duty to manage property in a reasonably prudent manner.

One cannot commit waste.

Question 20

What rules govern a mortgagor’s transfers?

Answer 20

The mortgagor can make three types of sales of mortgaged property:

1. “Subject to the mortgage” - Buyer has no personal liability to pay the mortgage. Seller is primarily liable for the mortgage. Mortgage continues with the land.
2. “Assume the mortgage” - Buyer has primary, personal liability to pay the mortgage. Seller is secondarily liable on the mortgage. Mortgage continues with the land.
3. “Assume the mortgage” with novation - Buyer has primary, personal liability to pay the mortgage. Seller is not secondarily liable on the mortgage. Mortgage continues with the land.

If the conveyance is ambiguous, one must examine the facts to determine with there was a “subject to” or “assume”. If the facts are silent, default is a “subject to.”

If there is an “assume the mortgage”:

1. the Mortgagor can get an Exoneration (a court order compelling the buyer to pay the mortgage).
2. The mortgagor can make payments, and then sue for reimbursement.
3. Mortgagor can pay off the mortgage and be subrogated to mortgage and note.

Many modern mortgages contain a due-on-sale clause that makes the mortgage be paid off at the closing.

Question 21

What transfers may a mortgagee conduct?

Answer 21

Any. The mortgage follows the note.

Question 22

What rules govern the discharge of the debt or mortgage?

Answer 22

Prepayment of Mortgage:
There is no right to prepay a mortgage debt early. It must be express in the mortgage deed. If prepayment is permitted, there is accompanied prepayment fees.

Deed in lieu of Foreclosure:
A mortgagee can accept a deed to the property in lieu of foreclosure. The deed is still subject to the liens attached to the property.

Question 23

What are the remedies for default?

Answer 23

1. Judicial foreclosure - A foreclosure through judicial action. It must be public, publicly noticed, conducted in a reasonable manner, result in a fair sale price (due diligence and not so gross to shock conscious).
2. Power-of-sale - A foreclosure, without judicial action, pursuant to a power-of-sale clause in the mortgage deed.

The order of distribution of proceeds goes to cost of sale, foreclosing creditor, next junior, next junior, then to the debtor.

Oklahoma RP Distinction - Under Oklahoma’s Power of Sale Mortgage Foreclosure Act, a mortgage may be foreclosed pursuant to a power of sale only if the mortgage instrument expressly grants a power of sale to the mortgagee.

Prior to the execution of a power of sale, notice must be personally served upon the mortgagor and any other person claiming an interest in the property at least 30 days prior to the sale, setting forth the nature of the breach or default, the action required to cure, and the time period within which cures could be made.

A pending power of sale does not negate the right of redemption held by any person having an interest in the property subject to a lien prior to the sale.

At closing, the purchaser receives a mortgagee’s deed, which conveys the property free of all liens, claims, and interests.

Judgment liens on a homestead are exempt from a forced sale.

Question 24

What is a deficiency judgment?

Answer 24

If the proceeds of a foreclosure sale are not sufficient to cover the liens foreclosed, the mortgagee may obtain a deficiency judgment against the mortgagor. Many states limit deficiency judgments.

Question 25

What is the result to the other lienholders after a foreclosure?

Answer 25

Junior interests are destroyed by a foreclosure sale.

Senior liens are not affected by a foreclosure of a junior lien.

If a senior mortgage is modified, then a junior mortgage may obtain priority if the modification materially prejudices the junior, such as:

1. Increasing amount of principal,
2. increasing interest rates.

Question 26

What is an acceleration clause?

Answer 26

An acceleration clause makes the entire debt due on the happening of some event, like default or a sale.

Question 27

What is the Mortgagor’s right to redemption?

Answer 27

Equitable Right of Redemption:
This right is automatic. It cannot be waived. After default but before foreclosure, a mortgagor has the right to redeem the property by paying the debt due.

Statutory Right of Redemption:
This right must be authorized by statute. After foreclosure, a mortgagor will have the right to buy back the property at the foreclosure sale price.

Oklahoma RP Distinction - Oklahoma law does not provide for a statutory right of redemption after a foreclosure sale.