Property 7—Mortgages & other security interests Flashcards
What is a security interest in Real Estate?
A security interest in real estate operates to secure some other obligation, usually a promise to repay a loan. If the loan is not paid, the holder of the security interest can take title to the real estate or have it sold and use the proceeds to pay the debt.
Property> Security Interest in Real Estate> Types of Security Interests
How many different types of security interest are there, and what are they?
There are 6 types of security interest: (1)Mortgage; (2) Deed of Trust; (3) Installment Land Contract; (4) Absolute Deed-Equitable Mortgage; (5) Sale-Leaseback; (6) Equitable Vendor’s Lien
Property> Security Interest in Real Estate> Types of Security Interests
Who are the parties to a Mortgage?
The debtor/notemaker is usually the mortgagor, but the debtor and mortgagor can be different people. The lender is the mortgagee.
Property> Security Interest in Real Estate> Types of Security Interests> Mortgages
In Most states what is the only way a lender can realize on real estate to satisfy a past due debt?
Only by having a judicial (court ordered) foreclosure sale conducted by the sheriff.
Property> Security Interest in Real Estate> Types of Security Interests> Mortgages
Describe a deed of trust
The debtor/notemaker is the trustor. The trustor gives the deed of trust to a third-party trustee, who is usually closely connected with the lender (the lender’s lawyer, affiliated corporation, or officer). In the event of default, the lender (termed the beneficiary) instructs the trustee to proceed with foreclosing the deed of trust by sale. Many states allow the sale to be either judicial (as with a mortgage) or nonjudicial, under a “power of sale” clause that authorizes the trustee to advertise, give appropriate notices, and conduct the sale personally.
Property>Types of Security Interests>Deed of Trust
Describe an installment land contract
the delivery of a particular item; it cannot be satisfied by money. (EX: A bequest of “$10,000,” or even of “$10,000 to be paid out of the sale of my IBM stock” cannot be adeemed.)
Property>Conveyancing>Conveyance by will>Ademption>Not applicable to general devises
Describe an Absolute Deed - Equitable Mortgage
A landowner needing to raise money may “sell” the land to a person who will pay cash and may give the “buyer” an absolute deed rather than a mortgage. This may seem to be safer than a mortgage loan to the creditor and may seem to have tax advantages. However, if the court concludes, by clear and convincing evidence, that the deed was really given for security purposes, they will treat is as an “equitable mortgage” and require that the creditor foreclose it by judicial action, like any other mortgage. This result will be indicated by the following factors: (i) the existence of a debt or promise of payment by the deed’s grantor; (ii) the grantee’s promise to return the land if the debt is paid; (iii) the fact that the amount advanced to the grantor/debtor was much lower than the value of the property; (iv) the degree of the grantor’s financial distress; and (v) the parties’ prior negotiations.
Property>Types of Security Interests>Absolute Deed-Equitable Mortgage
Describe a Sale-Leaseback
A landowner needing to raise money may sell her land to another for cash and may then lease the land back for along period of time. As in the case of the absolute deed, the grantor/lessee may attack such a transaction later as a disguised mortgage. Factors that will lead the court to such a result are: (i) the fact that the regular rent payments on the lease are virtually identical to payments that would be due on a mortgage loan; (ii) the existence of an option to repurchase by the grantor/lessee; and (iii) the fact that the repurchase option could be exercised for much less than the probable value of the property at that time, so that the repurchase would be very likely to occur.
Property>Types of Security Interests>Sale-Leaseback
What is an equitable vendor’s lien?
A seller may finance the buyer’s purchase of the land by an equitable vendor’s lien (in addition to an installment land contract and a purchase money mortgage). The lien arises by implication of law when the seller transfers title to the buyer and the purchase price or a portion of the purchase price remains unpaid.
Property>Security Interests in Real Estate>Types of Security Interests>Equitable Vendor’s Lien
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What are transfers by a mortgagee and a mortgagor?
All parties to a mortgage or deed of trust can transfer their interests. The mortgagor transfers by deeding the property, while the mortgagee transfers by indorsing the note and executing a separate assignment of the mortgage. The note and mortgage must pass to the same person for the transfer to be complete.
Property>Security Interests in Real Estate>Transfers by Mortgagee and Mortgagor
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What is a transfer of a mortgage without notice?
Case law is divided - some states hold that the transfer of the mortgage automatically transfers the note as well, unless the mortgagee-transferor expressly reserves the rights to the note (which there would rarely be any reason for the mortgagee to do). In these states, the transferee of the mortgage can then file an equitable action and compel a transfer of the note as well. The states hold that, because the note is the principal evidence of the debt, a transfer of the mortgage without the note is a nullity and is void.
Property>Security Interests in Real Estate>Transfers by Mortgagee
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What is a transfer of a note without notice?
A note can be transferred without the mortgage, but the mortgage will automatically follow the properly transferred note, unless the mortgagee-transferor expressly reserves the rights to the mortgage. No separate written assignment of the mortgage is necessary, although it is customary for the transferee to obtain and record an assignment of the mortgage.
Property>Security Interests in Real Estate>Transfers by Mortgagee
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How can the note be transferred?
The note may be transferred either by indorsing it and delivering it to the transferee, or by a separate document of assignment. Only if the former method is used can the transferee become a holder in due course under UCC Article 3.
Property>Security Interests in Real Estate>Transfers by Mortgagee and Mortgagor>Transfer of Note Without Mortgage>Methods of Transfering the Note
What requirements are needed to be a holder in due course?
To be a holder in due course of the note, the following requirements must be met:
(1) The note must be negotiable in form, which means that it must be payable “to bearer” or “to the order of” the named payee. It must contain a promise to pay a fixed amount of money (although an adjustable interest rate is permitted), and no other promises, except that it may contain an acceleration clause and an attorneys’ fee clause.
(2) The original note must be indorsed (i.e. signed) by the named payee. Indorsement on a photocopy or some other document is not acceptable.
(3) The original note must be delivered to the transferee. Delivery of a photocopy is not acceptable.
(4) The transferee must take the note in good faith and must pay value for it. (“Value” implies an amount that is more than nominal, although it need not be as great as the note’s fair market value.) The transferee must not have any notice that the note is overdue or has been dishonored, or that the maker has any defense to the duty to pay it.
Property>Security Interests in Real Estate>Transfers by Mortgagee and Mortgagor>Transfer of Note Without Mortgage>Methods of Transfering Note>Holder in Due Course Status
What are the benefits of being a holder in due course?
A holder in due course will take the note free of any personal defenses that the maker might raise. “Personal defenses” include failure of consideration, fraud in the inducement, waiver, estoppel, and payment. The holder in due course is, however, still subject to “real” defenses that the maker might raise. These include infancy, other incapacity, duress, illegality, fraud in the execution, forgery, discharge in insolvency, and any other insolvency.
Property>Security Interests in Real Estate>Transfers by Mortgagee and Mortgagor>Transfer of Note Without Mortgage>Methods of Transfering Note>Benefits of Holder in Due Course Status
What is the effect of payment to the original mortgagee after the note transfer?
Under the version of the UCC engaged in a large majority of states, if the original payee transfers possession of a negotiable instrument, a payment to the original payee will not count, and the holder of the instrument can still demand payment. [See UCC §3-602] However, many notes secured by mortgages on real property are not negotiable in form (e.g. because their promise to pay is conditional or they are not payable to “bearer” or “order”). If the original mortgagee transfers possession of a nonnegotiable note, the mortgagor’s payment to the original mortgagee is effective against the transferee until the mortgagor receives notice of the transfer.
Ex. A borrows $50,000 from B and gives B a nonnegotiable note for that amount, secured by a mortgage on Blackacre. One year later, B assigns the note and mortgage to C, transferring actual possession of the note to C. Two years thereafter, A, who does not realize that B no longer holds the note, pays $50,000 plus interest to B. This payment is effective against C. C’s recourse is against B.
Property>Security Interests in Real Estate>Transfers by Mortgagee and Mortgagor>Transfer of Note Without Mortgage>Effect of Payment to Original Mortgagee After Transfer of Note
