MORTGAGES RULES!

Question 1

Mortgage Defined

Answer 1

A Mortgage is the transfer of an interest in real property as security for the performance of an obligation typically the repayment of a loan.

Question 2

Deed of Trust

Answer 2

Mortgagor makes his conveyance to a 3rd party trustee who holds the property in trust until obligation satisfied.

Question 3

Unrecorded Mortgage

Answer 3

A valid unrecorded mortgage has no effect on 3rd parties, but still valid as to original parties.

Question 4

Mortgage Formalities

Answer 4

To be enforceable against mortgagor/third parties, mortgage must be in writing, signed, and recorded.

Question 5

Absolute Deed

Answer 5

A deed absolute on its fact cannot be reformed by the court unless grantor can show, by clear and convincing evidence, that mortgage language was omitted because of mutual ignorance, mutual mistake, fraud, or duress. Looks like mortgage if: (1) disparity in debt and value, (2) grantor in distress who received option to repurchase, (3) grantee demands repayment even after conveyance, (4) grantor exercises major acts of ownership, (5) grantor maintained possession without rent payments. NOT if payments are made because ambiguity - could be a leaseback.

Question 6

Improvements on Property

Answer 6

Mortgagee’s mortgage interest extends to later permanently affixed improvements.

Question 7

After-Acquired Property

Answer 7

If after-acquired property clause, cannot claim interest in mortgagor’s after-acquired property and have its priority date back to the original mortgage. NC requires there to be a new filing for after-acquired property.

Question 8

Future Advances

Answer 8

Future advances relate back to original filing date if (1) mortgage document allowed future advances, (2) it provided a ceiling/maximum amount of advances that could be made, and (3) states a period of time that such advances can be made, not to exceed 30 years. If made after expired time, they still attach but not relate back.

Question 9

Assuming a Mortgage

Answer 9

An assumption is an agreement where grantee of mortgaged real estate becomes personally liable on the debt. The original mortgagor remains liable unless discharged by novation which is an explicit agreement by the creditor to accept the buy as a substitute. If novation does not occur, and a new buyer and mortgagee modify the debt or release collateral, some discharge; creates pseudo-surety relationship where seller is treated as a surety.

Question 10

Release of Collateral

Answer 10

Where there is a release of collateral, the original mortgagor is discharged to the extent of the then-value.

Question 11

Taking Subject to the Mortgage

Answer 11

A grantee takes subject to the mortgage if the parties so agree or if the parties transfer the property and say nothing about the mortgage (S transfers all his rights, title, and interest). Thus, grantee is not personally liable.

Question 12

Payment in Full

Answer 12

Payment or discharge of mortgage debt automatically extinguishes it. Cannot be revived with the same priority.

Question 13

Compromise Not Enforceable

Answer 13

A compromise is enforceable if supported by consideration or if debtor relied to his detriment on settlement.

Question 14

Equity of Redemption

Answer 14

Anyone who can trace an interest in the property has the equity of redemption. Proper redemption requires that redeemer tenders to mortgagee the total debt outstanding plus expenses incurred during foreclosure. This exist until the time for upset bid expires (10 day after foreclosure sale). Thus, right ends upon foreclosure sale. Lender cannot clog it by contracting out of it UNLESS (1) agreed to after default in a separate document, AND (2) debtor has no equity in the property OR if the creditor gives debtor Fair Market Value for debtor’s equity.

Question 15

Statute of Limitations

Answer 15

Statute of limitations for foreclosure is 10 years (1) after default and debtor remains in possession, OR (2) after creditor takes possession - debtor loses equity of redemption.

Question 16

Deficiency

Answer 16

Debtor is personally liable for any deficiency of mortgage debt left after valid foreclosure sale.

Question 17

Deficiency Exception (Purchase Money Mortgage)

Answer 17

By statute, debtor not liable for deficiency in Seller-Financed Purchase Money Mortgage; thus, (1) mortgagee must have been seller, (2) mortgage secures purchase price, and (3) mortgage doc clearly states it was a purchase money transaction. However, buyer can waive this protection if seller paid separate consideration in exchange for buyer’s waiver. Should be drafted in separate do and cannot be buried in main. Courts look to whether arms-length transaction.

Question 18

Deficiency Exception (Purchasing Creditor)

Answer 18

Under purchasing creditor anti-deficiency statute, debtor may reduce his liability of deficiency if (1) it was a power of sale foreclosure, (2) mortgagee bought it at sale, (3) for less that Fair Market Value, and (4) he sues for deficiency.

Question 19

Deficiency Exception (Omitted Notice)

Answer 19

Under anti-deficiency statute, debtor not liable for deficiency if mortgagee fails to give debtor notice of pre-sale hearing before the clerk of court.

Question 20

Foreclosure

Answer 20

Generally, foreclosure is the process by which the equity of redemption of the mortgagor and the interests of all others junior to the mortgage being foreclosed terminated.

Question 21

Judicial Foreclosure

Answer 21

Trustee/mortgagee has absolute right to bring a formal judicial action to foreclose in court that has jurisdiction over the property. Proper defendants are all who have any interest in equity of redemption; necessary include the mortgagor, junior mortgagees, lessees, easement holder, and junior mechanic-lien holders. Any party not joined is unaffected by the foreclosure, and any objection to its validity must be raised at confirmation hearing.

Question 22

Power of Sale Foreclosure

Answer 22

Process in which sale is conducted by party holding the power of sale. Objections can be raised any time after foreclosure until the property is moved to a bona fide purchaser.

Question 23

Pre-Sale Hearing Requirement - Power of Sale Foreclosure

Answer 23

Required by statute before commencing Power of Sale Foreclosure. Trustee must give notice of hearing to all persons obligated to repay the secured debt AND the recorded owners of the property. At hearing, clerk must consider, before allowing foreclosure (1) has there been default, (2) is foreclosure authorized, (3) adequate notice of hearing, and (4) is there valid debt. Primary residence: mortgagee must make good faith effort to resolve before foreclosing.

Question 24

Foreclosure Sale Itself

Answer 24

If Plaintiff’s request for foreclosure is sustained, judge may order a public or private sale conducted by trustee or other person such as sheriff. Private in court discretion, but usually if very large or unusual characteristics. Public sale requires notice of sale of court door for 20 days AND published in paper once a week for 2 weeks. The authorized conductor of sale must report results of sale within 5 days after it is held.

Question 25

Upset Bids

Answer 25

NC require that a party conducting sale allow 10 day for upset bids open to anyone. Upset bid must exceed winning bid by 5% with min increase of $750, and bid must be accompanied by bond of at least that amount.

Question 26

Purchase Money Security Interest Under Article 9

Answer 26

Article 9 Purchase Money Security Interest gets priority over a pre-recorded mortgage interests that a affixed to the real estate, and the creditor makes a UCC fixture filing before the goods were affixed to the real estate or within 20 days thereafter.

Question 27

Doctrine of Instantaneous Seisin

Answer 27

Under the doctrine of instantaneous seisin, a purchase money mortgage interest held by the seller or other financer of the property takes priority over liens that otherwise follow the property into the buyer’s hands.

Question 28

The Ten Rules of Mortgages

Answer 28

1. Formalities: a mortgage must be in writing to be valid. it is effective against third parties only if it is recorded. fraud, a lack of consideration, or any other basic contract defect will void a mortgage transaction.
2. Sales of mortgaged property: there is no general prohibition on selling mortgaged property. the buyer, however, takes the property subject to the mortgage. a buyer is not liable for the mortgage debt unless specifically assumes it.
3. Payment of the mortgage debt: any payment or discharge of mortgage debt extinguishes the mortgage.
4. Right of redemption: if, after default, the debtor or any other person with an interest in the property tenders the balance of the debt to the mortgagee the mortgagee must take the tender and stop any pending foreclosure.
5. Stature of limitations: possession by either party for ten years following default cuts off the other party’s rights.
6. Future advances: by statute in NC, a mortgagee may make a later advance to a debtor and have it tacked onto the original priority even if the mortgagee knows of intervening claims. the statute applies where the parties’ original mortgage documents (a) authorize future advances, (b) place a dollar amount ceiling on future advances, and (c) state the period (not to exceed 30 years) in which advances may be made.
7. Power of sale foreclosure: the right to foreclose under a power of sale must be granted in the parties’ contract. by statute, however, the debtor is entitled to a pre-sale hearing before the clerk of court. at this hearing four issues may be considered: (a) was there sufficient notice of the hearing, (b) is foreclosure authorized, (c) is there a valid debt, and (d) has there been a default.
8. Rights of purchasers at foreclosure: in formal judicial foreclosure, objections to the validity of the foreclosure must be raised at the foreclosure proceeding or they will be lost. objections relating to the conduct of the sale (except those alleging fraud) must be raised at the conformation hearing. in a power of sale foreclosure, the traditional rule has been that an objection to the validity of the foreclosure can be raised even after the property is sold. this rule may no longer apply to objections that the debtor could have raised at the pre-sale hearing. sale-related objections are cut off if the property comes into the hands of a BFP.
9. Anti-deficiency statutes: NC has three important anti-deficiency rules. (a) a seller of property who provides purchase money financing can only look to the property in the event of a default; (b) a mortgagee who buys property at a non-judicial foreclosure sale conducted on his behalf must account to the mortgagor in any deficiency action if the mortgagee buys the property for less than its fair market value; (c) a person otherwise liable on the mortgage debt is discharged if he or she is not given notice of the presale hearing.
10. Priority rules: priority between mortgages and other liens is normally determined under the rule of 1st in time first in right. exceptions exist for purchase money security interests (article 9) and NC property tax liens and under the doctrine of instantaneous seisin.