Mortgages/ Security Devices

Question 1

Types of Security Devices: Mortgages

Answer 1

An interest in real property that is designed to secure performance of an obligation (usually repayment of a debt)

i) Mortgages must be in writing to satisfy the Statute of Frauds
ii) Instruments that make up a mortgage:
(1) Mortgage= Document that represents an interest in the land
(2) Note= Represents the personal obligation of the debtor to repay the debt
(3) Creditor’s remedies: Creditor has the choice to sue In Personam (on the note); or an In Rem (foreclosing on the land through the mortgage)

Question 2

Types of Security Devices: Deed of Trust

Answer 2

Debtor (the settlor) borrows money from the creditor and executes a deed to the property. This deed to the property is given to a third party (the trustee) who holds on to the deed and will not return the deed to the debtor until the debt is paid

Question 3

Types of Security Devices: Purchase-Money Mortgage

Answer 3

i) A mortgage that covers part, or all, of the purchase price (e.g., not a mortgage obtained to remodel a home)
ii) A PMM that is recorded has priority over other types of mortgages
iii) Vendor-Purchase Money Mortgage: The buyer borrows money from a third party (typically a bank) to pay off the purchase price and gives a mortgage

Question 4

Security Relationship Theories: Lien Theory

Answer 4

The mortgagee receives a lien on the property, the mortgagor retains the right to possess the property and the right to rents and profits from the mortgaged property

Question 5

Security Relationship Theories: Title Theory

Answer 5

The mortgagor retains possession until default, the mortgagee has the right to rents and profits produced by the mortgaged property

Question 6

Security Relationship Theories: Intermediate Theory

Answer 6

Lien theory deemed to apply until default (mortgagor has the right to possession, rents, and profits); then upon default, title theory is applied (mortgagee is entitled to possession, rents, and profits)

Question 7

Security Relationship Theories: Duties

Answer 7

A person in possession has the duty to manage the property in a reasonably prudent manner (i.e., cannot commit waste)

Question 8

Transfers by Mortgagor:

Mortgagor (borrower) can make 3 types of sales of land encumbered by mortgage

Answer 8

i) The buyer takes “subject to the mortgage”—the buyer has no responsibility to pay on it, either before or after foreclosure;
(1) This is the default rule if there is ambiguous language that does not point one way or another

ii) The buyer “assumes the mortgage”—the buyer becomes personally liable for it, along with the original borrower; or
iii) The buyer “assumes the mortgage” plus a novation with the lender— the buyer alone is personally liable for paying the mortgage
* In each case, the mortgage remains on the land and is available if the mortgagee (lender) needs to foreclose on it

Question 9

Transfers by Mortgagor: Assumption

Answer 9

If the grantee has assumed, then the grantee is primarily liable and the grantor is secondarily liable

(1) If the debt falls into default, the creditor can sue the grantor and the grantor can get a court order compelling the grantee to pay the debt paid by the grantor
(2) If the grantor makes payments following the transfer, the grantor can sue the grantee for reimbursement

Question 10

Exam tip

Answer 10

If there is ambiguous language, look to the facts to see if they point you one way or the other. If the facts are silent, default is “subject to.”

Question 11

Transfers by Mortgagor: Due on Sale Clause

Answer 11

Gives the mortgagee the option to require that the entire debt be due and payable upon any transfer (enforceable if in the mortgage)

Question 12

Transfers by Mortgagee

Answer 12

Mortgagee (lender) may transfer the note and the mortgage, which travel together

Question 13

Discharge of Debt and Mortgage:

Prepayment of Mortgage

Answer 13

Prepayment of Mortgage

i) There is no right to prepay mortgage debt unless the terms of the mortgage expressly authorize payment
ii) If prepayment is permitted, it is usually accompanied by prepayment fees, which are routinely upheld

Question 14

Discharge of Debt and Mortgage:

Deed in Lieu of Foreclosure

Answer 14

i) The mortgagor issues a deed in lieu of foreclosure, which takes subject to all mortgages on the property
(1) Junior lienholders are unaffected

Question 15

Foreclosure: Types

Answer 15

i) Judicial Foreclosure: Judicial proceeding with pleadings, service of process, etc.
ii) Private Sale/Power-Of-Sale: Occurs without judicial action, pursuant to a power-of-sale clause included in the mortgage documents

Question 16

Foreclosure

Answer 16

There is no limit to the number of mortgages on a property that one may have (“first in time, first in right” principle applies)

i) Deficiency Judgment = When the foreclosure sale raises less money than the amount of the outstanding debt
ii) Acceleration Clause= Makes the entire debt become due on the happening of an event, such as a default or sale

Question 17

Foreclosure: Debtor’s Remedy= Redemption

Answer 17

i) Redemption will stop the foreclosure if the debtor pays off all of the debt (all payments due and fees paid)
ii) Equitable Right of Redemption: Exists any time up until there has been a foreclosure sale.
Until that time, the debtor can redeem by paying off the debt or brining current, if allowed
iii) Statutory Right of Redemption: The debtor will have a limited time (6-12 months) following the foreclosure sale to go to the buyer and force them to sell the property at the foreclosure price

Question 18

Adverse Possession

3 Major Components

Answer 18

• Physical
• Mental, and
• Time

Question 19

Adverse Possession

Physical

Answer 19

Rule: Adverse possessor actually, openly, notoriously, and exclusively occupies the land in a manner sufficient to put the true owner on reasonable notice of a cause of action (trespass) against the adverse possessor

(a) Minority Rule: Requires adverse possessor to also pay taxes on the property

Question 20

Adverse Possession

Mental

Answer 20

(1) Rule: Adverse possessor has to occupy the land with a sufficiently hostile intent
(a) Hostile = Claiming the land as your own

(2) Two ways to satisfy this requirement:
(a) Claim of right (claiming the land as your own); or
(b) Color of title (adverse possessor believes he or she has good title to the property under a deed but does not)

(3) Permission to be on the land destroys hostile intent. Mere knowledge of the adverse possessor by the true owner does not imply permission

(4) Split of authority on whether encroachment is hostile intent:
(a) Majority Rule: A mistaken encroachment is sufficient hostile intent
(b) Minority Rule: Hostile intent exists only if the person who was doing the encroaching intended to encroach

Question 21

Adverse Possession

Time

Answer 21

(1) Rule: An adverse possessor has to be on the land continuously for the statutory period (common law: 20 years; otherwise, it is determined by statute within the jurisdiction)
(a) “Continuously” is a question of fact based on the nature of the land and the use to which it is being put

(2) Tacking
(a) Combines adverse possessors’ periods of possession in order to meet the statutory requirement; must be a transfer from one adverse possessor to another

Question 22

Scope of what the adverse possessor obtains

Answer 22

i) Generally, once claim has ripened, can only claim the portion of the land actually occupied
(1) Exception: When an adverse possessor enters under color of title and occupies a significant portion of the parcel described in the flawed deed. When the adverse possessor completes the statutory period, he or she can claim the entire parcel described in the flawed deed

ii) An adverse possessor typically gets whatever the true owner has (e.g., if the true owner sold sub-surface rights before the period of adverse possession began, then the adverse possessor will only obtain the surface rights)

Question 23

Adverse Possession: Disability

Answer 23

A disability (infancy, incompetence, imprisonment) can suspend or toll the running of the statute of limitations if the disability exists at the time the adverse possession starts
    (1)	The adverse possession period begins to run once the disability ends (e.g., the true owner gets out of jail or turns 18)

Question 24

Adverse Possession: Rights of the Adverse Possessor and True Owner

Answer 24

i) True owners:
(1) Can eject the adverse possessor and collect damages up to the point the statutory period has run
ii) Adverse possessor
(1) When the adverse possession begins, the adverse possessor is considered to be the owner against the entire world except the true owner
(2) Once the statute of limitations runs, the adverse possessor is the true owner as of the date he or she entered the land

Question 25

Titles: Transfer by Deed

3 Requirements for valid conveyance

Answer 25

• donative intent
• delivery
• acceptance

Question 26

Titles: Transfer by Deed

Donative Intent

Answer 26

The grantor must intend to transfer an interest immediately to the grantee, if the grantor intends the deed to take effect only on the death of the grantor, will formalities must be observed

Question 27

Titles: Transfer by Deed

Delivery of the Deed

Answer 27

(1) Delivery exists if the grantor has the mental intent to transfer the property to the grantee

(2) Ways to Deliver the Deed:
(a) Grantor Gives Deed to Grantee: Rebuttable presumption of delivery
(b) Grantor Retains the Deed: Rebuttable presumption of no delivery
(c) Grantor Gives Deed to a Third Party to Give to Grantee (escrow):
(i) Doctrine of Relation Back (or relation-back doctrine): Conveyance to the grantee relates back to the date the grantor gave the deed to a third party
(ii) If the grantor expressly retains the right to reclaim the deed from the third party, there is no transfer of title

Question 28

Titles: Transfer by Deed

Acceptance of the Deed by the Buyer

Answer 28

(1) Acceptance is presumed if the transfer is beneficial to the grantee
(2) If the grantee refuses to accept, there is no transfer of property

Question 29

Titles: Transfer by Deed

Deed Sufficient to Satisfy the SOF 4 requirements

Answer 29

Four written requirements of a valid deed:

(a) Sufficient identification of the parties;
(b) Words indicating an intent to make a present transfer of the property;
(c) Sufficient description of the property; and
(d) The grantor’s signature (the grantee does not need to sign the deed)

Question 30

Titles: Drafting, Review, and Negotiation of Closing Documents

Answer 30

The contract between the parties to a real estate transaction sets out the important points of agreement of the sale of the land, including time of closing, time of possession, transfer of keys, responsibility for payment of utilities owing and property taxes owing, what items remain with the property, and in what condition the seller will leave the property. These are in addition to the parties, the property description, the price, and the payment terms, if any, which are essential terms

Question 31

Titles: Drafting, Review, and Negotiation of Closing Documents

Answer 31

After the contract has been executed by both parties, and the down payment, if any, has been deposited in escrow, the contract is delivered to the entity that will handle the closing

 (1) In some jurisdictions, this entity is an attorney, in others it is a title company
 (2) Begins process of performing the title search and writing an Abstract of Title. The title company also prepares the title insurance that the buyer will purchase
 (3) Reviews liens filed against the property and obtains an accurate pay-off sum from each lender. Each lender must agree to file a Release of Lien after being paid
 (4) Drafts the deed that will transfer title from grantor to grantee

Question 32

Titles: Persons Authorized to Execute Documents

Answer 32

a) Ordinarily at a real estate closing involving individuals, the buyer and the buyer’s spouse, if any, execute all documents requiring the buyer’s signature. As a practical matter, photo identification is usually requested
b) In the same way, at a real estate closing, the seller and the seller’s spouse, if any, execute all documents requiring the seller’s signature. Again, photo identification is usually requested
c) In corporate transactions, the person executing the documents must have corporate authority to engage in the transaction, with documentation to reflect this authority
d) If a party cannot attend a real estate closing in person, a Power of Attorney may be granted to a third party to act in their place

Question 33

Title: Transfer by Operation of Law and Will

When Seller Dies Before Closing

Answer 33

If the seller dies after executing a sales contract, but before closing, decedent’s personal representative must complete the transaction

The money received goes to the beneficiary who inherits personal property, not real estate, because money is personal property

Question 34

Title: Transfer by Operation of Law and Will

Ademption

Answer 34

i) If a gift of real estate described specifically in a will is not in the testator’s estate at the time of death, the gift is adeemed by extinction, and the beneficiary takes nothing
ii) If a gift of real estate was made during the testator’s lifetime, but the specific property is still mentioned in the will, the gift is adeemed by satisfaction because the beneficiary has already received it

iii) If a gift of property was made during testator’s lifetime, but a general devise is in the will (e.g., “one-third of my estate”), then the real estate already received will not be adeemed by satisfaction unless:
(1) Will provides for deducting the gift;
(2) Testator, in writing, declared that the gift was part of the general devise; or
(3) Devisee, in writing, acknowledged that the gift was part of the general devise

Question 35

Title: Transfer by Operation of Law and Will

Exoneration

Answer 35

Majority Rule: Inherited property is taken subject to all outstanding liens and mortgages (estate does not pay them off)

Question 36

Title: Transfer by Operation of Law and Will

Lapse

Answer 36

i) Common Law: If a beneficiary predeceases a decedent, any gift to the beneficiary fails
ii) Modern Law: Many states now have anti-lapse statutes (e.g., beneficiary’s heirs “stand in his shoes” and get the bequest)

Question 37

Title: Recording Acts

Answer 37

i) Race Statute
(1) Rule: The person who records first prevails

ii) Notice Statute
(1) Rule: A purchaser for value who takes without notice of any other claim (a bona fide
purchaser) prevails
(a) Pays Value = Paying more than a nominal amount (i.e., purchase price or reasonable amount)
(b) Types of Notice: Actual, Constructive, or Inquiry

iii) Race-Notice Statute
(1) Rule: An unrecorded conveyance is invalid against a subsequent bona fide purchaser who takes without notice and records first

Question 38

Title: Indexes

Answer 38

i) Tract Index (Minority)
(1) A legal description of the tract of land followed by a chronological listing of all conveyances involving that piece of land
(2) You would immediately see any recorded conveyance and will always have constructive notice of a claim to property

ii) Grantor-Grantee Index (Majority)
(1) Two sets of books where the conveyance is recorded: one arranged by name of the grantor, the other by name of the grantee

Question 39

Title: Estoppel by Deed

Answer 39

i) Applies to a situation where someone transfers title to property that he or she does not have but then later acquires title to that property
(1) Majority Rule: If the grantor transfers title to the property before the grantor has title to the property (but later acquires it), the first grantee may go to court and estop the grantor from denying title to him or her
(2) Minority Rule: Title automatically passes by operation of law to the grantee (operation- of-law theory)

Question 40

Title Insurance

Answer 40

Title insurance can be purchased at the time of closing by the buyer, so that if there is a defect in the chain of title, an unexpected encumbrance, or other similar problem, the buyer can make a claim under the insurance policy