Mortgages & Security Interests

Question 1

What is a security interest?

Answer 1

Owner of an int. may convey or retain the int. as sec. for the payment of an obligation (usually a loan)

• Obligation usually takes the form of a promissory note that sets out the terms of the transaction

Question 2

What is the effect of the obligation is not repaid when due?

Answer 2

The holder of the sec. int. can sell the prop & use the proceeds to satisfy the outstanding obligation

Question 3

What are the 2 instruments that make up a mortgage?

Answer 3

1. Mortage AND
2. Mortgage Note

Question 4

What are the types of land security devices ?

Answer 4

1. Mortgage
2. Deed of Trust
3. Absolute Deed
4. Installment Land-sale K

Question 5

What is a mortgage ?

Answer 5

Document that conveys an interest in real prop. as security for an obligation

Question 6

Who is the mortgagor?

Answer 6

Borrower of the money who issues the mortgage on the prop. to the lender

Question 7

Who is the mortgagee?

Answer 7

The lender b/c they are receiving the mortgage

Question 8

Lien Theory v. Title Theory

Answer 8

Lien Theory (Majority)

• Mortgagor (borrower) is treated as the owner of the real prop. int.
• Mortgagee (lender) is the holder of the lien on that int.

Title Theory

• Mortgagee is the owner of the real prop. int.
• Mortgagor possess the right to regain ownership upon satisfaction of the obligation

Question 9

What is a deed of trust?

Answer 9

• Borrower delivers title to a 3d party trustee (usually lenders lawyer) as sec. for payment of the note to the beneficiary (lender)
• with the condition that the trustee re-conveys the title to the borrower upon payment of the note

Question 10

Deed of Trust - What is the effect if the borrower fails to pay the note ?

Answer 10

The beneficiary instructs the trustee to sell the land to repay the note

• Upon default, the mortgagee-lender who conducts a non-judicial foreclosure sale CAN’T purchase the prop. at the sale
• BUT a beneficiary-lender can purchase the prop. at a sim. sale held by the trustee

Question 11

What is an Absolute Deed?

Answer 11

A Absolute deed is free of all liens and encumbrances

• Used to transfer unrestricted title to property
• If an obligation is created prior to or along w/ the transfer, it may actually be a disguised mortgage
  
  • If proven, ct. will treat transf. as equitable mortgage

Question 12

What is an installment land sale contract?

Answer 12

Seller retains the title to real prop. until the buyer makes final payment

• If buyer defaults - seller keeps land and all prev. payments

Question 13

What is a conditional sale and repurchase?

Answer 13

Real Property is sold and then released back to the seller

• If lease is for a long time with the option to repurchase, it may be a disguised mortgage

Question 14

Transfer of Mortgage by the Mortgagor

Answer 14

• Mortgagor (borrower) Remains pers. liab. for the loan unless lender agrees to release the borrower from liab.

Question 15

What are Due on Sale Clauses ?

Answer 15

Mortgage Note Clause

• Gives mortgagee(lender) the ability to demand the entire balance due on an attempt to transfer the prop.

Question 16

What are Due on Encumbrance clasues ?

Answer 16

Lender can accelerate the mortgage obligation if the mortgagor gets a second mortgage or otherwise encumbers the property

Question 17

Assuming a mortgage Obligation

Answer 17

If transferee assumes the mortgage obligation:

• borrower becomes secondarily liable
• transferee (purchaser) is primarily liable on the loan

Question 18

Subject to mortage obligation

Answer 18

If buyer takes title subject to an existing morgage obligation:

• Transferee is NOT pers. liab. upon default
• Land can be foreclosed on, but deficiency will only be held against original debtor

Question 19

What are the rights of the grantor against the grantee if there has been an assumption of the mortgage?

Answer 19

• Grantor is secondarily liable for the debts of the mortgage
• If grantor is sued pursuant to the mortgage, they can get the grantee to pay the debt

Question 20

What are the rights of the grantor against grantee if there has been an assumption of the mortgage and grantor makes payments following the transfer?

Answer 20

• Grantor can recover mortgage payments from the grantee

Question 21

What is subrogation?

Answer 21

The rights of the grantor against the grantee if there has been an assumption

Question 22

When is a liquidated damages clause enforceable ?

Answer 22

When it is a reas. attempt at a fair compensation in the even t of breach

• Can’t be a penalty for failure to perform