Mortgages and Security Interests

Question 1

What is a mortgage?

Answer 1

A mortgage is an interest in real property that serves as security for an obligation.

Question 2

Lien Theory

Answer 2

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.

Question 3

Title Theory

Answer 3

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.

Question 4

Mortgagor’s liability upon transfer

Answer 4

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.

Question 5

Lender’s modification or release of the transferee’s obligation

Answer 5

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.

Question 6

Lender’s release or impairment of property subject to mortgage

Answer 6

The original mortgagor-borrower is also relieved of personal liability if the mortgagee-lender releases or impairs the property subject to the mortgage.

Question 7

Assuming a mortgage obligation–personal liability

Answer 7

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.

Question 8

“Subject to” mortgage obligation–no personal liability

Answer 8

If the transferee-buyer takes title “subject to” an existing mortgage obligation, then upon default the transferee-buyer is not personally liable.

Question 9

Proper party to pay

Answer 9

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.

Question 10

Mortgagee’s Right to Possession

Answer 10

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.

Question 11

Waste

(Pre-Foreclosure Rights and Duties)

Answer 11

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.

Question 12

Equity of Redemption

Answer 12

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.

Question 13

Statutory Right of Redemption

Answer 13

Permits the mortgagor to reclaim the property after a foreclosure sale.

Question 14

Deed in lieu of foreclosure

Answer 14

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.

Question 15

Clogging the equity of redemption

Answer 15

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.

Question 16

Notice of foreclsoure

Answer 16

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.

Question 17

Priority of Interests

Answer 17

“first in time, first in right”

(subject to various exceptions)

Question 18

Purchase-money mortgage exception

Answer 18

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.

Question 19

Recording act exception

Answer 19

A subsequent mortgage that satisfies the requirements of the applicable recording act has priority over an unrecorded prior mortgage.

Question 20

Subordination agreement between mortgagees

Answer 20

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.

Question 21

Mortgage modifications

Answer 21

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.

Question 22

Mortgage replacements

Answer 22

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.

Question 23

Future advances mortgages

Answer 23

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.

Question 24

After-acquired property

Answer 24

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.

Question 25

Effect of foreclosure on Mortgagor

Answer 25

A foreclosure sale eliminates the mortgagor’s interest in the property.

Question 26

Effect of foreclosure on Purchaser of property

Answer 26

The purchaser of property takes the property free and clear of any junior mortgage and subject to any senior mortgage.

Question 27

“Marshalling of assets”

Answer 27

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.

Question 28

Distribution of proceeds

Answer 28

1. To costs associated with the sale
2. To the mortgage obligation being foreclosed
3. To the mortgage obligations owed to junior interest holders in the order of priority
4. Any remainder is paid to the debtor-mortgagor

Question 29

Deficiency

Answer 29

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.

Question 30

Subrogation

(Payment by a Third Party)

Answer 30

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.