Real Property Flashcards
Types of Security Instruments
- Mortgages
- Deeds of Trust
- Installment Land Contracts
- Absolute Deeds as Security
- Conditional Sale and Repurchase
**2-5 are “equitable mortgages” / alternatives to mortgages **
Definition
Mortgage
an interest in real property that serves as security for an obligation
indicates the existence of a debt
Mortgagor vs. Mortgagee
- Mortgagor = debtor/borrower
- Mortgagee = lender
As mortgage alternative
Deed of Trust
borrower delivers note to third-party trustee as security for payment to lender
TLDR; operates like a mortgage but uses a trustee
NOTE: mortgagee-lender cannot purchase property at a non-judicial forclosure sale, but beneficiary-lender can
As mortgage alternative
Installment Land Contract
Debtor agrees to buy land through installment payments & gets immediate possession, but seller retains title until the buyer makes the final payment
RULES RE BUYER’S FAILURE TO PAY:
* traditional rule: if buyer misses a single payment –> treated as default and the seller may keep all prior installment payments made AND take back the property
* modern approach: states try to assist defaulting buyers –> 3 approaches
1. allow seller to retain ownership of property but require some restitution for prior payments
2. buyer given equitable right of redemption (buyer may keep property by paying full balance of K any time prior to foreclosure sale)
3. treat installment K as a mortgage, so the seller must foreclose to gain title to the property; AND buyer has equitable right of redemption and other protections
consider: what theory on mortgages does the state follow?
Absolute Deed
Borrower transfers the deed to creditor (instead of conveying a security interest) with intent to secure loan
* usually enforceable as an equitable mortgage unless competiting equities (e.g., good-faith purchase) take precedence
Conditional Sale and Repurchase
(Sale-Leaseback)
Seller leases property from buyer immediately after sale, & seller’s rental payments function as repayments on the loan
if the lease is for a long time with option to repurchase, may be a disguised mortgage
Types of Mortgages
- Purchase Money Mortgages
- Future Advance Mortgages
Definition
Purchase Money Mortgage
loan taken out for the purpose of PURCHASING property
[granted to (i) seller of RP or (2) a third-party lender to the extent the loan is used to acquire title to RP]
Future Advance Mortgage
a line of credit used for home equity, construction, business, and commercial loans
often referred to as a “second mortgage”
Theories of Title
Lien Theory v. Title Theory
-
Lien Theory [MAJORITY]
~ debtor/mortgage has TITLE and right to possession until foreclosure
~ creditor/mortgagee has lien (security interest) and cannot take possession prior to foreclosure
~ treats mortgage as a lien that does NOT sever a JT -
Title Theory
~ creditor/mortgagee has LEGAL TITLE until mortgage has been satisfied and is entitled to possession at any time (but mortgage terms typically don’t allow this until default)
~ mortgage DOES sever a JT and converts it into TIC
But see Intermediate Lien Theory [minority rule]
title is is in mortgagor until default; mortgagee may demand possession when default occrus
Pre-foreclosure rights and duties
- right to possession
- mortgagor has duty not to commit waste
- equity of redemption - at any time prior to the foreclosure sale, mortgagor has right to redeem the land/free it of mortgage by paying off the amount currently owed, plus interest (if mortgage has acceleration clause - must pay full amoun of unpaid loan to redeem)
equity of redemption CANNOT be waived in mortgage; can be waived later for consideration
Rights of Mortgagor/Debtor
Equity of Redemption v. Statutory Redemption
Equity of Redemption = universally recognized; may only be exercised up to the date of the foreclosure sale
Statutory Redemption = only recognized by ~half of the states; applied only after foreclosure has occurred
* amount to be paid usually = foreclosure sale price rather than the amount of the original debt
Common Mortgage Provision
Acceleration Clause
gives Lender the right to demand immediate payment of full amount of the outstanding loan obligation, including interest
Due-on-Sale Clause
gives Lender the right to accelerate a mortgage obligation when the Borrower transfers the property
COMMON EXCEPTIONS TO ENFORCEABILITY OF CLAUSE:
1. Devise, descent, or transfer to joint tenant upon death
2. Transfer to spouse or child
3. Transfer to ex-spouse in divorce
4. Transfer to borrower’s living trust
5. Creation of subordinate lien without occupancy rights
6. Granting leasehold interest of less than 3 years without option to purchas
Common Mortgage Provision
Due-on-Encumberance Clause
gives Lender the right to accelerate a mortgage obligation when the Borrower obtains a second mortgage or otherwise encumbers the property
Can a mortgage be transferred?
Yes, all parties to a mortgage/deed of trust may transfer their interests (unless the mortgage states otherwise)
Transfers by Mortgagors
(Effect on Liability of Parties)
Effect on Liability of ORIGINAL MORTGAGOR / BORROWER:
- if Transferee takes SUBJECT TO mortgage, Original Mortgagor remains primarily and personally liable to debt
—> upon default, Lender can collect unpaid from Original Mortgagor ONLY - if Transferee ASSUMES loan, Original Mortgagor becomes secondarily liable as a surety (UNLESS Lender (a) expressly releases Original Mortgator; or (b) modifies Transferee’s loan obligaton)
—> upon default, Lender can collect unpaid debt from both Original Mortgagor AND Transferee
Effect on Liability of TRANSFEREE / GRANTEE:
- if Transferee takes SUBJECT TO mortgage –> Transferee is NOT liable
—> upon default, Lender can only collect from Original Mortgagor (note: property can still be foreclosed on, thus wiping out Transferee’s investment in the land) - if Transferree ASSUMES mortgage –> Transferee is PRIMARILY LIABLE (Original-Mortgagor remains secondarily liable)
—> upon default, Lender can collect unpaid debt from both Original Mortgagor AND Transferee
ALWAYS CONSIDER: “IS THERE A DUE-ON-SALES CLAUSE?”
IF IT’S A NO-RECOURSE LOAN, debtor is not personally liable, but Lender may still foreclose. Just can’t go after that person for a deficiency.
Defintion
Foreclosure
forced sale of property after material default by mortgator; mortgagor must give notice before foreclosing
terminates mortagor’s interest in property!
Methods of Foreclosure
- judicially supervised sale (sale under supervision of the court)
- private sale (sale held by the mortgagee/lender)
Priority of Liens on Real Property
IF NO RECORDING ACT: [first-in time, first-in-right, with PMM exception]
1. Purchase-Money Mortgages (super priority)
2. First-Recorded Liens (senior priority)
3. All other recorded liens (junior priority)
4. Unrecorded liens (lowest priority)
other exceptions = subordination agmts, mortgage modifications and replacements, future-advances, after-acquired proerty
First in time rule = surviving debts are satisfied chronologically
Also consider, if future-advance mortgages present –> must identify whether obligatory or optional.
Foreclosure Sale’s Effect on Security Interests
ELIMINATED BY SALE:
1. mortgagor’s interest in the property
2. the mortgage interest being foreclosed upon
3. any junior interests attached to the property
UNAFFECTED BY SALE:
1. senior interests (first in time)
CREATED BY SALE:
1. purchaser of RP takes property subject to senior interests (but free of junior interests)
TIP: CLASSIFY THE INTEREST AS EITHER SENIOR OR JUNIOR, THEN APPLY THE RULE TO DETERMINE WHETHER INTEREST SURVIVES FORECLOSURE.
Who is protected by a Recording Act?
A bona fide purchaser (BFP).
i.e., a subsequent purchaser for value who takes without notice (actual, constructive or inquiry)
What kinds of notice are sufficient to satisfy the notice requirement of a Recording Act?
“
- Actual Notice: subsequent grantee has real, personal knowedge of a prior interest
-
Constructive Notice: a prior interest is recorded
~ exception: wild deeds (i.e., recorded outside grantor’s chain of title) -
Inquiry Notice: a reasonable investigation would have disclosed the existence of prior claims
~ 2 common situaitons:
(i) dude on the land & subsequent grantee would have discovered that person’s possesison if they investigated;
(i) interest mentioned in deed to some other transaction & subsequent grantee would have discovered this if they had inquired)
