Mortgages: borrower's liability

Question 1

Liability: mortgagor or borrower

Answer 1

The mortgagor or borrower is personally liable, unless:

(1) the lender/mortgagee agrees to a release; or
(1) the lender/mortgagee agrees to a modification of the transferee’s obligation.

Question 2

Liability: subsequent transferee

Answer 2

A subsequent transferee is:

(1) Personally liable if she “assumes” the mortgage
(2) But is not personally liable if she takes “subject to” the mortgage.

Question 3

Acceleration clauses: enforceability

Answer 3

Pursuant to federal law, a mortgagee-lender is generally entitled to enforce a clause, such as a “due on sale” clause, that accelerates the mortgagor-borrower’s loan obligation upon the transfer of the mortgaged property.

Question 4

Acceleration clauses: federal exemptions

Answer 4

Federal law exempts certain transactions of residential real property from acceleration of obligations:

• A transfer of ownership from a homeowner to her living trust;
• A transfer of property to a spouse or child;
• A transfer of property to an ex-spouse due to divorce;
• Among others.

Question 5

Acceleration clauses: types

Answer 5

There are two main types of acceleration clauses:

(1) Due-on-sale clause, which accelerate owed amounts upon transfer;
(2) Due-on-encumbrance clauses, which accelerate owed amounts upon a second mortgage or other encumbrance.

If the mortgagor-borrower fails to pay the full amount of the outstanding loan obligation upon demand by the mortgagee-lender, the mortgagee-lender may declare the loan in default and proceed to foreclose on its mortgage..

Question 6

Liability: assumption of the mortgage

Answer 6

A transferee of mortgaged property who assumes the mortgage obligation is personally liable to the mortgagor.

The mortgagor is treated as a third-party beneficiary of the agreement between the transferee and the mortgagee.

Question 7

Defenses to enforcement

Answer 7

Enforcement of a mortgage is subject to defenses that can be raised with respect to the obligation for which the mortgage serves as security.

Thus, if a owner-mortgagor has a valid defense to the enforcement of the loan obligation, she also has a valid defense to enforcement of the mortgage.

Question 8

Defenses to enforcement: donee transferees

Answer 8

A donee transferee who assumes the property subject to the mortgage is entitled to assert the original mortgagor’s defenses—e.g., duress—against the mortgagee.

By contrast, a buyer who takes subject to the mortgage cannot assert the original mortgagor’s defenses if the purchase price reflects the assumption of the mortgage. Otherwise, the buyer would be unjust enriched.

Question 9

Defenses to enforcement: transferees for value

Answer 9

A buyer who takes subject to the mortgage cannot assert the original mortgagor’s defenses if the purchase price reflects the assumption of the mortgage.

Otherwise, the buyer would be unjust enriched.

Question 10

Non-recourse loan

Answer 10

A non-recourse loan is one in which the mortgagee-lender agrees not to pursue the mortgagor-borrower personally if the loan is not paid.

That is to say, the lender can only take the collateral.

Such a loan, however, does not preclude the mortgagee-lender from enforcing its mortgage.