Mortgages & Miscellaneous

Question 1

mortgages - general rules (what is it, parties, what else it is called)

Answer 1

• A mortgage is a security interest in real property or fixtures that secures repayment of a debt.
»> It is a two-party transaction; the borrower/landowner is the mortgagor and the lender is the mortgagee (think “gee, i hope they pay me back!”
»> The same person or entity is usually both the mortgagor and borrower, but this is not required. In other words, a person (e.g., a parent) may grant a mortgage on her property to secure a loan to another person (e.g., a child).

– A “mortgage” is actually two different legal documents: a promissory note and a mortgage (i.e., security interest). A mortgage is a conveyance of an interest in land and, as such, is subject to the Statute of Frauds

– Mortgages are used in all states. In a majority of states, mortgages are the exclusive means (other than installment land sale contracts) of securing a loan on real property.
»> Some jurisdictions use “deeds of trust” as substitutes for mortgages. For purposes of the UBE, treat deeds of trust the same as mortgages.

Question 2

mortgages - result of default (two theories of interest in the property)

Answer 2

• B. In the event the mortgagor defaults on the mortgage, most states require a judicial foreclosure sale, but some states allow a non-judicial sale if the mortgage contract contains a “power of sale” clause or the loan was secured by a deed of trust.

• C. There are two theories regarding the mortgagee’s interest in the property that secures the loan:
– The majority follows a LIEN THEORY in which the mortgagee merely has a security interest in the property. In lien theory states, a mortgage by one joint tenant with right of survivorship does not sever the joint tenancy.
»> a lien just means that you have a right to look to that portion of the estate in the event you need to satisfy a debt – it is not an immediate granting of title in that property outright

– In TITLE THEORY states (minority), a mortgage by one joint tenant severs that tenant’s portion of the joint tenancy, b/c duh, you have immediately conveyed title to the mortgagee

Question 3

mortgages - assignability

Answer 3

• E. Both the promissory note and the mortgage are generally assignable by the mortgagee.

– If a mortgagee transfers its interest in the promissory note, the mortgage automatically follows the note.

Question 4

mortgages - transfer of the property (what exactly are you transferring; “subject to”; “assumes”; result of modification agreements)

Answer 4

• F. When a mortgagor transfers the mortgaged property, he or she is in effect transferring only the “equity of redemption” or the right to redeem the property by paying off the debt.

– If the transferee takes the property SUBJECT TO the mortgage, the transferee is not personally liable for the mortgage payments
»> upon default, the mortgagee may foreclose on the property but may not obtain a deficiency judgment against the transferee (but may obtain such a judgment against the original mortgagor because he or she is still in privity of contract with the mortgagee).
»> however, it would be a good idea for the transferee to make mortgage payments b/c otherwise the bank will likely foreclose!

– If the transferee ASSUMES the mortgage as part of the transfer (or takes the property subject to and assumes the mortgage), the transferee is personally liable to pay the mortgage. The mortgagee may sue the transferee as a third party beneficiary of the “assumption agreement.”
»> **transferor remains SECONDARILY LIABLE
»> **note: when a mortgagee and an assuming grantee subsequently modify the original obligation, the original mortgagor is completely discharged of liability as to that modification

Question 5

mortgages - due on sale clause (2 other valid restrictive clauses)

Answer 5

• G. A due-on-sale clause is a provision in a mortgage contract that requires that the mortgage be paid in full upon a sale or other conveyance of the property that secures the mortgage. Due-on-sale clauses are legal under State and Federal Law

– In addition, the following mortgage provisions are valid (absent a conflicting statute)
»> a clause prohibiting prepayment of a mortgage
»> a clause requiring the mortgagor to pay a fee as a condition to prepaying a mortgage

Question 6

mortgages - 4 mortgagee remedies on default

Answer 6

• H. Upon default, the mortgagee has the following remedies:

– Foreclosure by judicial action (all states)

– Contract action to recover on note

– Deed in lieu of foreclosure: the mortgagor conveys full title to the mortgagee and in return the mortgagee agrees not to pursue a deficiency judgment against the mortgagor

– Foreclosure by out-of-court sale under a power of sale in a deed of trust or mortgage (minority of states)

Question 7

mortgages - legal protection for mortgagors (6 concepts)

Answer 7

– Equity of Redemption & Statutory Redemption

– Notice of Foreclosure Proceedings and Sale—to mortgagor and junior lienholders

– Judicial hearing (except for non-judicial sales)

– Public notice of the foreclosure sale (to increase the number of bidders)

– Mortgagor (and junior lienholders) may purchase property at sale

Question 8

mortgages - distribution of foreclosure sale proceeds & effect on interests

Answer 8

• J. The foreclosure sale proceeds are distributed in the following order:

– 1. Foreclosure expenses, including attorney’s fees and court costs

– 2. Principal and accrued interest on the loan that was foreclosed

– 3. Principal and accrued interest on junior mortgages and liens in order of priority

– 4. surplus or deficiency:
»> any remaining proceeds are known as “surplus” and are paid to the mortgagor.
»> If the sale proceeds are not sufficient to pay off the loan that was foreclosed or any junior mortgages, those not paid in full may generally seek a deficiency judgment against the mortgagor (purchaser will be off the hook!)

• K. The foreclosed loan and all JUNIOR interests that were given proper NOTICE (e.g., junior mortgages, liens, easements) are eliminated by the foreclosure sale. However, SENIOR interests (e.g., mortgages, liens, etc.) are not affected by the foreclosure sale.

– In other words, the buyer at the foreclosure sale takes the property SUBJECT TO senior interests, but the buyer would not be personally liable for the payments on any senior mortgages or liens, his shit could just still get foreclosed on

– a junior mortgagee MUST be named as a party to a senior mortgagee’s foreclosure action because it has the right to pay off the senior mortgage to avoid being wiped out by foreclosure - failure to join the junior mortgagee results in the preservation of its interest despite foreclosure and sale
»> i.e. the foreclosing mortgagee will own the land if purchased at foreclosure, but he must redeem the junior mortgagee’s mortgage to avoid foreclosure

Question 9

mortgages - deficiency judgment (when it applies; 3 scenarios where you can’t get one)

Answer 9

• L. If the proceeds are deficient to cover the entire loan amount and reasonable foreclosure expenses, the mortgagee is entitled to a deficiency judgment against the mortgagor, unless:

– The statute of limitations has expired on the contract action (i.e., action to enforce the promissory note)

– The mortgagee failed to give notice of the foreclosure sale to the mortgagor

– The mortgagee purchased the property at a non-judicial sale and failed to pay reasonable value (i.e., the purchase price “shocks the conscience”)

Question 10

mortgages - mortgagee in possession

Answer 10

• N. If the mortgagee takes possession before the foreclosure sale, the mortgagee is considered a mortgagee-in-possession and, as such, is treated like an owner/occupier for purposes of tort liability and thus may be sued by business invitees, licensees, and discovered trespassers.

Question 11

mortgages - priority rules (generally, PMMs, modification agreements)

Answer 11

• A recorded mortgage is subordinate to prior perfected (recorded) buyers, mortgagees, lien claimants, and easements. A properly recorded mortgage has priority over subsequent perfected and unperfected buyers, mortgagees, lessees, and lien claimants, except:

– 1. Where the mortgagee enters into an agreement to subordinate its interest in favor of another lien.

– 2. A subsequent purchase money mortgage (PMM) has priority over an earlier judgment lien or an earlier mortgage with an after-acquired property clause. A PMM is a loan that facilitates the purchase of property.

• if the landowner/mortgagor enters into a modification agreement with the senior mortgagee, raising its interest rate or otherwise making the agreement more burdensome, the junior mortgage will be given priority over the modification (not the entire senior loan)

Question 12

mortgages - equitable mortgage (what is it; court inquiries)

Answer 12

• Q. Equitable Mortgage: (asks if a sale is really just a loan/mortgage) A deed absolute on its face cannot be varied by extrinsic evidence unless there is clear and convincing proof that a reconveyance clause was omitted because of (i) ignorance, (ii) mutual mistake, (iii) fraud by the grantee, or (iv) duress by the grantee. To determine whether there is an equitable mortgage, courts ask:

– 1. Did a relationship of debtor and creditor continue after the conveyance?

– 2. Was the grantor in distress at the time of the conveyance?

– 3. Was the grantor entitled to remain in possession without separate payments for rent?

– 4. Was the price for the conveyance significantly below the market value of the property?

Question 13

mortgages - installment land sale contract

Answer 13

• S. Installment Land Sale Contract: A contract by which the vendee purchases real property from the vendor on an installment basis.

– In an installment land sale contract, the vendor does not have to provide “marketable title” until the vendee pays off the loan

– If the vendor accepts a promissory note (but not a mortgage) in exchange for the deed, the vendor has a “vendor’s lien” on the property. If the buyer defaults on the note, the vendor may foreclose its vendor’s lien to recover the unpaid note. However, a purchase-money mortgage has priority over a simultaneous vendor’s lien.

• T. Upon default of a land sale contract, courts are split on the remedies available to the vendor. As a general rule, the vendor must treat the installment land sale contract as a mortgage and thus utilize the judicial foreclosure process, unless there is an early default (i.e., before the vendee pays 10% of the purchase price), in which case the vendor may enforce a liquidated damages clause (i.e., forfeiture).

Question 14

water rights - percolating water

Answer 14

– 1. Percolating Water (underground water)

• Reasonable Use Rule (Majority): surface owner may make reasonable use of underground water for all purposes (residential, agricultural, commercial) on site; water may not be exported off site if it harms neighbors.

Question 15

water rights - surface streams & lakes

Answer 15

– 2. Surface Streams and Lakes

• a. Riparian Doctrine (Majority)

– What land is riparian? Each person (freehold or leasehold) with land that borders the water source has riparian rights.

– What rights do riparian owners have? Reasonable Use Theory (Majority): all riparian owners share the right of “reasonable use”; a riparian owner (A) can enjoin another riparian owner’s (B) use only if such use substantially interferes with A’s needs (i.e., A does not have enough water)
»> If there is not enough water for all riparian owners, natural uses (e.g., household consumption, gardening, domestic livestock) prevail over artificial uses (e.g., irrigation, industrial, commercial, large livestock operation).

Question 16

water rights - diffuse surface water (disposal; capture)

Answer 16

– 3. Diffuse Surface Water (flood water)

• a. Disposal (three theories)
– Natural Flow Theory (about half of states): a landowner cannot divert surface water on to the land of another and cannot alter the natural flow if such action would injure a neighbor

– Common Enemy Theory (about half of states): surface water is a common enemy and thus an owner may divert it onto the land of another

– Reasonable Use Theory (trend): an owner can divert surface water only if such diversion is reasonable.

• b. Capture
– a landowner has an absolute right to capture as much surface water as he or she wishes, unless such capture is malicious.

Question 17

water rights - ownership of submerged land

Answer 17

– 4. Ownership of Submerged Land

• a. Navigable waters belong to the public, so no trespass
• b. Non-navigable waters belong to adjacent landowners, so there is trespass

Question 18

lateral support rights

Answer 18

– 1. Lateral Support: support provided to a parcel of land by adjacent landowners.

• a. A landowner has an absolute right to lateral support for the land in its natural state; adjacent landowners are STRICTLY LIABLE for damage to such land.

• b. In cases where the landowner has erected structures on the land and the structures (and land underneath) subside:
– If the land subsides in whole or in part because of the weight of the structures, the adjacent landowner is liable only for NEGLIGENT excavation.
– If the land would have subsided even in its natural state, the majority of jurisdictions would hold the adjacent landowner STRICTLY LIABLE for the damage to the land and the structures.

Question 19

subajacent support rights

Answer 19

– 2. Subjacent Support: support provided to a parcel of land by subsurface owners (e.g., mineral rights).

• a. The subsurface owner is strictly liable for damage (subsidence) to the land itself and any structures existing at the time the surface and subsurface rights were severed.
• b. Absent negligence, the subsurface owner is not liable for damage to any structures added to the land after the time the surface and subsurface rights were severed.

Question 20

fair housing act

Answer 20

o The Fair Housing Act covers most housing (e.g., dwellings—not commercial property) in the United States. It prohibits discrimination in the sale, rental, or financing of real property on the basis of race, color, national origin, religion, gender, family status, or disability. Except for retirement homes, a landlord may not discriminate against persons with children. Evidence of discriminatory intent or effect is sufficient for the Act.

 Recording a deed with a racial restriction is also prohibited by the Fair Housing Act.

 EXEMPTIONS (except as they relate to discriminatory advertising):

(1) Apartments of four units or fewer are exempt from the Act if the owner lives in one of the units, and
(2) single-family homes sold or rented by an owner who owns no more than three single-family homes

Question 21

conflicts of law

Answer 21

– The title to, as well as the acquisition and disposition of, real property within the territory of a particular state are regulated and controlled solely by the laws of that state. All instruments (including mortgages, leases, and liens) affecting the title to real estate, regardless of their nature, must therefore be governed, as to their execution, construction, and legal sufficiency, exclusively by the laws of the state where the real estate is situated.

**even if the contract says otherwise??

Question 22

zoning generally - what it is; what it consists of (2 components); constitutional limitations

Answer 22

– Most municipalities control the use of land for the protection of the health, safety, morals, and welfare of its citizens. A municipality may exercise zoning power only if authorized by a state enabling act

– A local zoning law usually consists of two components: (1) an ordinance that divides the community into zoning districts and regulates the use of land in each district; and (2) a zoning map that shows the zoning classifications for the entire community.

– Zoning authority is limited by the Due Process Clause and the Takings Clause (not significant limitations – using taking to override zoning is nearly impossible).

Question 23

zoning (3 types)

Answer 23

• Use Zoning: limits the kinds of activities (e.g., residential or commercial) that can be performed on the land; in jurisdictions with cumulative zoning laws, higher uses (e.g., single-family residential) are permitted in lower use (e.g., commercial) districts (but not vice versa)
• Area (or Lot) Zoning: regulates the size and shape of lots
• Building (or Bulk) Regulation: regulates the size, shape, and placement of buildings on a lot

Question 24

zoning (nonconforming use)

Answer 24

– 2. Nonconforming Use: A use that exists at the time a zoning law is enacted that does not conform to the new law CANNOT be eliminated immediately. Some phase-out period is required (i.e., a period in which the nonconforming use may continue).

• During the phase-out period, the property owner is not permitted to change the use to a different nonconforming use or to extend the geographic boundaries of the nonconforming use.
• A change in ownership is NOT considered a change in use; thus, the new owner MAY continue the nonconforming use.

Question 25

zoning (variances & special use permits)

Answer 25

– 3. Variances: A variance may be granted if the zoning law imposes an unnecessary hardship on the property owner (not caused by the ppty owner) and the variance is not contrary to public policy (doesn’t decrease other ppty value in the area

– 4. Special Use Permits: Some uses (e.g., hospitals, schools, gas stations) impose significant burdens on the area where they are located. These uses require issuance of a special permit.

Question 26

zoning (vested rights & rezoning)

Answer 26

– 5. Vested Rights: A landowner obtains a vested right to the zoning classification in effect when he obtained a building permit if he expended substantial funds in reliance on it before a new zoning law was enacted.

– 6. Rezoning: If a zoning amendment benefits a single landowner, it is subject to greater judicial scrutiny. Such “spot” rezoning will be invalidated unless special circumstances justify the preferential treatment.

Question 27

condominiums & cooperatives

Answer 27

– In a condominium, there is concurrent ownership of the building and common areas but separate fee ownership of the individual units. Owners of condominiums may mortgage their individual units.

– In a cooperative, a corporation owns the building, and an individual acquires the right to occupy (i.e., lease) a unit by purchasing stock in the corporation. A cooperative is typically financed through a blanket mortgage on the entire building; individual owners may not mortgage their units.

– Ordinarily, the legal documents that create a condominium or cooperative provide for a homeowners’ association to govern the property. The association can enact and enforce rules governing most aspects of collective living, and these rules are generally treated as covenants running with the land or equitable servitudes. Courts will uphold such rules if they are “reasonable.”
»> The association may also have a right of first refusal (i.e., preemptive option) to purchase a unit (or shares in a cooperative) when the owner indicates an intent to sell; such rights of first refusal are not subject to RAP.

Question 28

adverse possession - rule & 6 conditions

Answer 28

• rule: when A occupies B’s land for long enough and meets certain conditions, A gains title without B’s consent (so if a person possesses property for the period of the statute of limitations for ejectment actions, such possession may ripen into record ownership)
• conditions: possession must be…

o actual – physically use the land in the way a reasonable owner would (i.e. summer house need only be AP’d during the summer)

o exclusive – not shared with/also used by the owner or the general public (but you can share with other adverse possessors)

o open and notorious – discoverable upon reasonable inspection (most commonly putting up signs or a fence)

o adverse and hostile – intent to occupy, control, possess, use, and exercise dominion over the property without permission
»> i.e. you can’t just claim ownership to the apartment you rented)

o continuous – as that of a reasonable owner (depends on character of the property)

o for a statutory period – as defined by that state
»> *** if no SOL given, it will NEVER be less than one year, and will typically be 10-20 years

o (All Exits Open And Close Swiftly)

**state of mind is irrelevant!

Question 29

adverse possession - importance of exclusivity

Answer 29

• exclusivity is the best way to beat someone’s AP claim – even if you use your land a little (in a lesser way than the squatter), that renders their possession not exclusive thus defeating AP

Question 30

adverse possession - adverse/hostile interpretation; hostility & the role of intent

Answer 30

• adverse and hostile just means you don’t have permission
o majority: objective view (state of mind is irrelevant - it does not matter whether the possessor believes he is on his own land or knows he is trespassing on someone else’s land)

• hostility and the role of intent
o if all other elements of AP are met, hostility will be implied regardless of state of mind because the AP has set his roots, and that is what matters

Question 31

adverse possession - tacking

Answer 31

• tacking: the AP periods of two or more successive occupants may be added together to meet the SOL if the rights are voluntarily transferred (i.e. conveyance, devise, descent - not just one moves in when one moves out) from one to the other AND all other AP elements are met for both

Question 32

adverse possession - effect of title holder’s disability:

• what counts as a disability
• 7 limitations

Answer 32

The statute of limitations for adverse possession commences upon possession by A, unless at the time A’s possession commenced, the then-true owner (B) was under a disability, such as:
• Infancy
• Insanity
• Imprisonment

 death ends all disabilities

 disabilities cannot be tacked

 disabilities cannot shorten the SOL period

 disabilities must exist at the date of adverse possessor’s entry

 some juris also protect landowners away on military service and out-of-state landowners

 majority: 1-5 years after disability ends, they must claim their interests or others can claim AP

 If there is a statutory disability period (e.g., 10 years from attaining competence) that is shorter than the SOL, the record owner gets the benefit of whichever period is longer.

Question 33

adverse possession - color of title & constructive possession

Answer 33

– In some jurisdictions, there is a shorter statute of limitations for adverse possessors who have “color of title.” Color of title means the claimant’s possession is based on a written instrument which purports to transfer title but is ineffective because of a defect in the means of conveyance (e.g., forged grantor signature) or because the grantor did not own all or part of the property conveyed.

– Constructive Possession: In most jurisdictions, a claimant who possesses under color of title is entitled to the entire parcel that is described in the defective instrument if the claimant physically possesses a significant proportion thereof.

Question 34

adverse possession - ancillary rules:

• AP of future interests
• SOL and future interest in the grantor
• rental of property of another
• govt property
• 2+ APs
• AP and real covenants

Answer 34

• E. As a general rule, a party may not obtain title to a future interest by adverse possession until that interest vests in possession.
»> i.e. if you AP land held by a life tenant (w a remainder in a 3p), you only get that life estate

• F. For possibilities of reverter, the SOL for the grantor to reacquire the property begins to run on the breach; for rights of entry, the SOL does not begin until the grantor makes a demand for re-entry (but such interests are subject to laches).
• G. The rental of property owned by another (without permission) constitutes “possession” for purposes of adverse possession.
• H. In most jurisdictions, government property may not be acquired by adverse possession.
• I. If two (or more) possessors jointly satisfy the requirements for adverse possession, they will acquire title as tenants in common.

• J. If an adverse possessor uses the land in violation of a real covenant, she takes title free of the covenant EVEN IF she had knowledge of it
»> however, if she complies with the covenant for the statutory period, she takes title subject to the real covenant.

Question 35

mortgage priority rules - general rule; PMM

Answer 35

• general rule: mortgages operate within the recording statutes the same way deeds do
• A PMM is a mortgage typically given to a third-party lender, who is lending the funds to allow the buyer to purchase the property.

> > > A PMM, whether recorded or not, has priority over mortgages, liens, and other claims against the mortgagor that arise prior to the mortgagor’s acquisition of title.

> > > **HOWEVER, PMM priority is subject to being defeated by subsequent mortgages or liens by operation of the recording acts (i.e subsequent BFPs)

Question 36

mortgages - legal protection for mortgagors (equity of redemption; statutory redemption)

Answer 36

– Equity of Redemption: Permits mortgagor to end foreclosure proceedings by paying off ENTIRE LOAN AMOUNT (assuming there is an acceleration clause) plus foreclosure expenses at any time BEFORE the foreclosure sale
»> the equity of redemption may NOT be waived in the mortgage contract, but may be waived after default.
»> if there is no acceleration clause, the failure of a debtor to pay one or more installments is a breach only as to those installments and the mortgagor can redeem the property by paying those installments (plus foreclosure expenses).
»> acceleration clauses are terms found in nearly all mortgages that require the borrower to immediately pay the entire loan balance (plus any interest accumulated prior to acceleration) if the borrower defaults (e.g., misses too many payments). Upon default, the lender must give notice of acceleration to the borrower.

– Statutory Redemption: Approximately 50% of states recognize statutory redemption. In Tennessee, for example, the mortgagor may redeem the property for two years AFTER the foreclosure sale by paying the FORECLOSURE SALE PRICE (plus interest), UNLESS the mortgagor waived such right in the mortgage contract.