Mortgages and Security Interests

Question 1

Mortgages

Answer 1

Document that conveys an interest in RP as security for an obligation.

• Must be in writing
• Debtor/mortgagor has title and right to possession until foreclosure and creditor/mortgagee has lien and right to land if there is default (“lien theory”)
• 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)

Question 2

Mortgage alternatives

Answer 2

1. 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.
2. Installment land contract—seller retains title to RP until buyer makes final payment
3. Absolute deed—transfers unrestricted title to RP (may actually be a disguised mortgage if an obligation is created contemporaneously with the transfer)
4. 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

Question 3

Mortgages: effect of transfer

Answer 3

Unless lender agrees to release, borrower remains liable after transfer of RP

1. Mortgagor’s liability
   • Borrower may be released if lender modifies obligation, releases borrower from liability, or releases/impairs RP
   • Due-on-sale clause or “acceleration clause”—lender can demand immediate payment of full amount due (but see “residential property exception”)
   • Due-on-encumbrance clause—lender can accelerate mortgage upon second mortgage
2. Transferee’s liability
   • If transferee assumes mortgage, borrower is secondarily liable
   • If transferee takes RP “subject to” mortgage, transferee is not personally liable upon default

Question 4

Pre-foreclosure rights and duties

Answer 4

1. Lien theory state—mortgagee cannot take possession before foreclosure; title theory state—mortgagee entitled to possession at any time
2. Mortgagor has duty not to commit waste
3. Equity of redemption—after default but before foreclosure sale, mortgagor may regain title by paying full amount of outstanding debt plus interest

Question 5

Foreclosure

Answer 5

Mortgagee takes RP when mortgagor defaults (i.e., no payment)

Methods—judicially supervised sale, private sale, or strict foreclosure

Priority—if two+ mortgages, foreclosure terminates jr. interest and has no effect on sr., but need notice
• “First-in-time, first-in-right”
• Purchase-money mortgage (PMM) exception—mortgage used to purchase RP generally has priority over others
• Recording-act exception—mortgages subject to general recording act, so a recorded interest may take priority over an unrecorded one
• Other exceptions—subordination agreements, mortgage modifications, futureadvances, after-acquired property

Effects on parties
• Mortgagor—interest eliminated
• Purchaser of RP—takes property free of junior interest, subject to senior
• Senior interests—unaffected
• Junior interests—destroyed