Mortgages and Security Interests Flashcards
What is a mortgage?
It’s an interest in real property that serves as security for an obligation.
Must satisfy SoF
Lien theory (majority) -> debtor/mortgagor has title and right to possession until foreclosure and credit/mortgagee has lien and right to land if there is default.
Title theory (minority) -> creditor/mortgagee has title to land and debtor/mortgagor has right to regain title if mortgage is paid off (or satisfied).
Lien stays on land if mortgage instrument properly recorded
Creditor can foreclose by judicial proceedings which terminate junior interests (subordinate interests must be joined or remain on land and B takes subject to senior interests)
Note: a junior vs. senior interest is determined either by the basic “first in time, first in right” rule but there are exxceptions that may switch the order around.
What are four different mortgage alternatives?
Deed of trust -> trustee holds title for beneficiary (lender); mortgagee-lender cannot purchase property at a non-judicial foreclosure sale, but a beneficiary-lender can (this is why a deed of trust may be preferred by the lender as they gain the ability to buy the property compared to if it was a mortgage).
Installment land contract -> seller retains title to RP until buyer makes final payment.
Absolute deed -> the mortgagor (aka borrower) transfers unrestricted title, aka the deed, of RP to mortgagee (aka lender) (mortgagor must show through clear and conving evidence that sale is a disguised mortgage -> common evidence is if there was an obligation created at the same time with the transfer).
Conditional sale and repurchase -> RP sold and then leased back to the seller; IF the lease is for a long time with option to repurchase, may be a disguised mortgage.
Does a borrower remain liable after transfer of RP towards lender?
Yes, unless lender agrees otherwise.
What are the mortgagor’s (aka borrower) liabilities?
Borrower is still liable for mortgage attached to real prpoerty, even after RP has been transferred to a transferee.
If transferee assumes mortgage, then borrower is secondarily liable (if borrower makes payments, she can seek reimbursement from transferee).
Borrower may be relieved of liability if lender impairs borrower’s right of recourse against transferee by: (i) modifying loan terms, (ii) releasing transferee of liability; or if lender releases or impairs the RP subject to the mortgage.
Due-on-sale clause -> lender can demand immediate payment of full amount of mortgage due before real property is passed onto transferee.
Due-on-encumbrance clause -> lender can accelerate mortgage upon second mortgage being placed on real property (first mortgage would be senior to second mortgage which will be more junior)
What are the pre-foreclosure rights and duties at play?
Lien theory state -> mortgagee (aka lender) cannot take possession before foreclosure;
Title theory state -> mortgage (aka lender) theoretically entitled to possession at any time (but typically cannot take possession until default by mortgage terms)
Mortgagor has duty not to commit waste
Equity of redemption -> after default but before foreclosure sale, mortgagor may regain title by paying amount of loan obligation currently owed, plus interest (can be full amount of unpaid loan if there is an acceleration clause)
What happens at a foreclosure?
Mortgagee (aka lender) takes RP when mortgagor (aka borrower) defaults.
Methods: judicially supervised sale, private sale, or strict foreclosure.
Priority -> if two+ mortgages, foreclosure terminates jr. interest and has no effect on sr. interest because the idea behind this is the “first in time, first in right”
EXCEPTIONS:
-> purchaser-money mortgage (PMM) exception - mortgage given at the time of purchase of real property, generally 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
—-> Meaning that prior mortgages or liens aren’t senior interests even if they came before the mortgage that became attached to RP at time of mortgagor’s acquisition of the RP.
-> recording-act exception - mortgages are subject to general recording act; a recorded interest may take priority over an unrecorded one
OTHER exceptions:
-> subordination agreements (where one mortgagee agrees to subordinate their interest),
-> mortgage modifications and replacements (modifications allow for change in positions of interests as long as it doesn’t prejudice the junior interests, BUT note for replacements that a new mortgage issued to to replace a prior mortgage maintains the same position as the prior mortgage),
-> future-advances which are common for construction (take priority over prior and post mortgages IF the future-advance mortgage payments are obligatory, BUT only take priority over future mortgages if the future-advance payments are optional),
-> after-acquired property (mortgagee’s interest must be recorded in deed of future property and their intrests is junior to that of a purhcase-money mortgage linked to that future property, ALSO language in mortgage agreement must be clear and specific that it applies to after-acquired property and not simply vaguely state “all future properties”)
What are the effects of a foreclosure on parties?
Mortgagor - interest eliminated
Purchaser of RP - takes properly free of junior interest, subject to senior interest
Senior interests - unaffected
Junior interests - destroyed
What is the distribution of proceeds during a foreclosure?
Order of proceeds being distributed:
- Costs associated with the sale
- Mortgage obligation being foreclosed
- Mortgage obligations owed to junior interests holders in the order of the priority of their interests
- Any remainder is paid to the debtor/mortgagor
What happens with a deficiency action after foreclosure?
Most states -> mortgagee permitted to bring a deficiency action against the mortgagor and/or any party who has assumed the mortgage (deficiency means that proceeds from foreclosure aren’t enough to pay off mortgage amount)
Some states -> no deficiency action allowed when the mortgagee forecloses via a privately supervised foreclosure sale or when the mortgage is a purchase-money mortgage;
Some states limit the total amount that may be recovered by the mortgagee in the foreclosure sale and/or deficiency action to the fair market value of the property.
