Mortgages and Security Interests Flashcards
What is a mortgage?
A mortgage is an interest in real property that serves as security for an obligation.
Lien Theory
In a majority of the states, the mortgagor is treated as the owner of the real property interest, and the mortgagee is treated as the holder of a lien on that interest.
Title Theory
In a minority of states, the mortgagee is treated as the owner of the real property interest, and the mortgagor possesses the right to regain ownership of the real property upon satisfaction of the obligation.
Mortgagor’s liability upon transfer
Unless the mortgagee-lender agrees to release the mortgagor-borrower from liability for the loan, the mortgagor-borrower remains personally liable on the loan obligation after the transfer of the mortgaged property.
Lender’s modification or release of the transferee’s obligation
As transferor, the original mortgagor-borrower is relieved of personal liability when the mortgagee-lender impairs the original mortgagor-borrower’s right of recourse against the transferee by modifying the terms of the loan or releasing the transferee from personal liability on the obligation.
Lender’s release or impairment of property subject to mortgage
The original mortgagor-borrower is also relieved of personal liability if the mortgagee-lender releases or impairs the property subject to the mortgage.
Assuming a mortgage obligation–personal liability
If the transferee-buyer assumes the mortgage obligation, then the transferee-buyer, as well as the mortgagor-borrower, is personally liable to the lender to pay the mortgage obligation.
“Subject to” mortgage obligation–no personal liability
If the transferee-buyer takes title “subject to” an existing mortgage obligation, then upon default the transferee-buyer is not personally liable.
Proper party to pay
If the promissory note given by the mortgagor is a negotiable instrument, then the mortgagor is generally obligated to pay the holder of the note. This is true even when the mortgagor does not have notice that the original mortgagee transferred the note to a third party.
Mortgagee’s Right to Possession
In a lien theory state, the mortgagee cannot take possession prior to foreclosure because the mortgagor is considered to be the owner of the real property until foreclosure.
In a title theory state, legal title is in the mortgagee until the mortgage has been fully satisfied. Thus, the mortgagee is theoretically entitled to take possession at any time.
Under the intermediate title theory, the mortgagor retains legal title until default, and, upon the mortgagor’s default, it vests legal title in the mortgagee.
Waste
(Pre-Foreclosure Rights and Duties)
A mortgagor in possession has a duty not to commit waste at least to the extent that the waste impairs the mortgagee’s security. This duty exists even if the mortgagor is not otherwise in default.
Equity of Redemption
After default on the obligation, but prior to a foreclosure sale, the mortgagor may retain the property by paying the amount of the loan obligation currently owed.
Statutory Right of Redemption
Permits the mortgagor to reclaim the property after a foreclosure sale.
Deed in lieu of foreclosure
A mortgagor may convey all interest in the property to the mortgagee. This permits the mortgagee to take immediate possession of the property without any further legal formalities, but it requires the consent of both parties.
Clogging the equity of redemption
A mortgagor may waive his right of redemption in exchange for consideration. However, courts routinely reject attempts by the mortgagee to deny this right prior to default, such as in waiver clauses.
Notice of foreclsoure
The mortgagor must be given prior notice. In addition, if foreclosure is conducted by a judicially supervised sale, the mortgagee must give notice to the holders of any junior interest in the property.
Priority of Interests
“first in time, first in right”
(subject to various exceptions)
Purchase-money mortgage exception
A purchase-money mortgage has priority over mortgages and liens created by or that arose against the purchaser-mortgagor prior to the purchaser-mortgagor’s acquisition of the property, whether or not recorded.
Recording act exception
A subsequent mortgage that satisfies the requirements of the applicable recording act has priority over an unrecorded prior mortgage.
Subordination agreement between mortgagees
The holder of a prior mortgage can agree to subordinate his interest to the holder of a subsequent mortgage. This agreement is enforceable unless the mortgage is not sufficiently described or specified.
Mortgage modifications
A senior mortgagee, who enters into an agreement with the mortgagor to modify the mortgage or the obligation it secures, subordinates his interest to a junior mortgagee’s interest to the extent that the modification is materially prejudicial to the junior mortgagee’s interest. Otherwise, the senior interest remains superior.
Mortgage replacements
When a senior mortgagee releases a mortgage and, as part of the same transaction, replaces it with a new mortgage, the new mortgage retains the same priority as the former mortgage, except to the extent that any change in the terms of the mortgage is materially prejudicial to the holder of a junior interest.
Future advances mortgages
If advances are obligatory, the future-advances mortgage has priority with respect to amounts loaned both before and after the future-advances mortgagee has notice of a subsequent mortgage. If, however, the advances are optional, then a subsequent mortgage has priority over amounts loaned after the future-advances mortgagee has notice of the subsequent mortgage.
After-acquired property
A mortgagor may grant a mortgagee rights to property that the morgagor acquires in the future. For the mortgagor to have such rights, the mortgage must clearly state that it applies to after-acquired property.
Effect of foreclosure on Mortgagor
A foreclosure sale eliminates the mortgagor’s interest in the property.
Effect of foreclosure on Purchaser of property
The purchaser of property takes the property free and clear of any junior mortgage and subject to any senior mortgage.
“Marshalling of assets”
Under this doctrine, the holder of the senior mortgage may be compelled to first foreclose on the properties for which only that holder possesses a mortgage in order to protect the secuirty interest of the holder of the junior mortgage, so long as it does not prejudice the interest of the holder of the senior mortgage or a third party.
Distribution of proceeds
- To costs associated with the sale
- To the mortgage obligation being foreclosed
- To the mortgage obligations owed to junior interest holders in the order of priority
- Any remainder is paid to the debtor-mortgagor
Deficiency
The mortgagee is permitted to bring a deficiency action against the mortgagor and/or any party who has assumed the mortgage if the foreclosure sale proceeds are insufficient to satisfy the mortgage obligation.
Subrogation
(Payment by a Third Party)
A person who pays off another person’s mortgage obligation may become the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment.
