Mortgages and Security Interests

Question 1

When can a mortgagee take possession of the property?

Answer 1

Lien Theory: cannot take prior to foreclosure

Title Theory: After default

Question 2

Does a borrower have a duty to not commit waste?

Answer 2

Yes

Question 3

How can a borrower regain the property?

Answer 3

Equity of Redemption

• After default, but prior to foreclosure, pays obligations due.
• Clogging not looked at favorably.

Question 4

What is the effect of a due on sale clause or a due on encumbrance clause?

Answer 4

Due of Sale: Lender can demand the full amount of outstanding obligation when property is due.

Due on Encumbrance: Lender can demand the full amount when an encumbrance is placed on property. (second mortgage)

Question 5

Can a donee of a mortgaged property assert defenses of donor?

Answer 5

Yes

Question 6

Can a purchaser of a mortgaged property assert defenses of seller?

Answer 6

No. If purchase price reflects mortgage. Buyer would be unjustly enriched because assumed mortgage and can now avoid liability.

Question 7

When is a mortgage obligation discharged?

Answer 7

Payment

Merger - deed in leu of foreclosure

Question 8

What are the different foreclosure methods?

Answer 8

Acceleration Clause
Note: notice must be given to borrower. If judicial sale: notice given to junior interests.

Judicially Supervised Sale

Privately Supervised Sale

Strict Foreclosure: Court action in equity.

Question 9

What is the difference when a transferee takes a property “subject to” vs. “assuming” a mortgage?

Answer 9

Assuming mortgage = personally liable

Subject to = not personally liable. But upon default, property may be sold at foreclosure sale.

Question 10

What is a statutory right of redemption?

Answer 10

Right or redemption protected by statute.

Question 11

What happens with an omitted party in a foreclosure sale?

Answer 11

If judicial foreclosure: junior must be given notice. If not made a party, junior interest not affected.

If power of sale: no notice needed, but junior can challenge is sale does not meet statutory procedures.

Question 12

What is a “marshaling of assets”?

Answer 12

Holder of a senior mortgage may be compelled to sell property with mortgage.
- Creator has mortgage on multiple properties.

Question 13

How are foreclosure sale proceeds distributed?

Answer 13

Costs of sale
Mortgage obligations to senior
Junior interests

Question 14

What happens if foreclosure sale proceeds are insufficient?

Answer 14

Can bring deficiency action.

Question 15

How does a subrogation work in a foreclosure sale?

Answer 15

Someone who pays another’s obligation may become owner of mortgage to prevent unjust enrichment when full amount is not discharged.

Question 16

What is the difference between a lien theory and a title theory?

Answer 16

Majority: Lien theory: borrower is treated as owner. Lender has a lien.. Does not sever a joint tenancy.

Minority: Title theory: lender owns property. Severs a joint tenancy.

Question 17

What is the mortgagor’s liability when the mortgagor transfers?

Answer 17

Remains personally liable unless lender agrees to release.

If transferee assumes the mortgage obligations, both mortgagor and transferee liable.

Mortgagor relieved of liability when lender impairs the mortgagor’s right of recourse against transferee. I.e. Bank grants release to-transferee since mortgagor has no recourse, he is no longer liable.

Mortgagor also relieved if lender releases of impairs property. Some state: completely discharged. Others: discharged only to extent of value of property.

Question 18

How do the priority of interests work in a foreclosure?

Answer 18

Valid foreclosure terminates junior intrest.

“First in time, first in right”.

Exception: purchase money mortgage. Loan money used to acquire property or make improvements. Seller priority over second party.

ExceptionL Recording Act
- Subsequent mortgage that satisfies recording act has priority over unrecorded mortgage.

Note: Future-advance mortgage: mortgage given in exchange for money in future. If advances are obligatory, priority. If option, priority if notice. Split if actual or constructive.

Question 19

What are the four mortgage alternatives?

Answer 19

1. Deed of Trust
   - ender cannot purchase at resale
2. Installment Land Contract
   - Seller retains title until buyer makes final payment under installment plan
   - Traditionally seller could keep all payments- retake possession if a single payment missed.
3. Absolute deed
   - Free of all liens and encumbrances
4. Conditional Sale and Repurchase

Question 20

What are the issues that arise when the lender transfers a mortgage?

Answer 20

Proper party to pay
- When promissory note is negotiable instrument, borrower must pay holder, even if no notice of transfer. Unless missing words of negotiability, then pay original lender until notice.

Transfer of mortgage without notice: split jurisdictions. Some :Void. Others: auto transfer.

Transfer of note without mortgage: auto transfer.