Real Property - Mortgages

Question 1

What is a mortgage?

Answer 1

A mortgage is a security device used to secure repayment of a debt.

Question 2

What are the two components of a mortgage?

Answer 2

1. The Note. The note is the borrower’s promise to repay the debt or loan.
2. The Mortgage. The mortgage is the device that provides security to the note by allowing the lender to force a foreclosure sale to recover the outstanding debt if the borrower defaults on the loan.

Question 3

Purchase-Money Mortgage.

Answer 3

A purchase-money mortgage is a mortgage where the borrower takes out a loan for the purpose of purchasing property.

Question 4

Future-Advance Mortgage.

Answer 4

A future-advance mortgage is a line of credit used for home equity, construction, business, and commercial loans (often called a “second mortgage”).

Question 5

What are the three main alternatives to mortgages as security devices?

Answer 5

Deed of trust.

Installment land contract.

Absolute deed.

Question 6

What is a deed of trust?

Answer 6

Deed of Trust. A deed of trust operates like a mortgage, but involves three parties:

1. The borrower;
2. The lender;

AND

3. A third-party trustee who holds title of the property until the loan is paid off.

Question 7

What is an Installment Land Contract.

Answer 7

The seller finances the purchase in an installment land contract retaining title until the buyer makes the final payment on the installment plan.

Question 8

What is an Absolute Deed.

Answer 8

An absolute deed is an instrument used by the borrower to transfer the deed to the property instead of conveying a security interest in exchange for a loan.

Question 9

How may a borrower transfer real property?

Answer 9

The borrower may transfer the property by deed (i.e., selling), will, or intestate succession.

Question 10

Who is liable for the security instrument after a borrower transfers the property?

Answer 10

The borrower remains personally liable after the transfer unless:

1. The lender releases the borrower from his obligation;

OR

2. The lender modifies the transferee’s obligation.

Question 11

What if the transferee assumes the mortgage?

Answer 11

If the transferee assumes the mortgage, the transferee is primarily liable upon default while the original borrower is secondarily liable.

Question 12

What If the transferee takes title subject to the mortgage?

Answer 12

Then the transferee is NOT personally liable upon default while the original borrower remains liable (this is the default/presumed option).

Question 13

What is a due on sale clause?

Answer 13

An acceleration clause that allows the lender to demand immediate full payment from the borrower upon transfer

Question 14

What is a due-on-encumbrance clause?

Answer 14

An acceleration clause that allows the lender to demand accelerated payments from the borrower when the borrower obtains a second mortgage or otherwise encumbers the property.

Question 15

What is a foreclosure?

Answer 15

A foreclosure is a forced sale of an asset where the proceeds of the sale are used to pay off the debt.

Question 16

What is a statutory right of redemption?

Answer 16

allows an individual to repurchase property sold at a foreclosure sale for a limited amount of time after the sale. This right is not available in all jurisdictions

Question 17

What is a equitable right of redemption?

Answer 17

allows a landowner to prevent a foreclosure sale by paying the amount due on the mortgage

can only be exercised prior to the foreclosure sale.

Question 18

What is a deficiency judgment?

Answer 18

If the foreclosure proceeds are not enough to cover the debt, the lender may seek a deficiency judgment against the borrower. If there are excess proceeds, the money will be used to satisfy other creditors in the following order of priority.

Question 19

Senior v junior interests at a FC sale

Answer 19

Generally, interests acquired before the interest that is being foreclosed (senior interests) survive the foreclosure while interests acquired after the interest that is being foreclosed (junior interests) are extinguished by the foreclosure.

Question 20

What is the First in Time rule?

Answer 20

All surviving debts MUST be satisfied in chronological order starting with the oldest and moving down, unless any of the following exceptions apply:

Purchase-Money Mortgages. A purchase-money mortgage has priority over all other mortgages, even those earlier in time, that arose prior to the borrower’s acquisition of the property.

Unrecorded Senior Mortgages. A junior mortgage that is properly recorded may take priority over an unrecorded senior mortgage.

Subordination Agreements. A senior lender can agree to subordinate its interest to a junior interest.

Mortgage Modifications. A senior lender and borrower can agree to modify the mortgage. If the modification is more burdensome on the borrower, the senior lender subordinates its interest. However, only the modification subordinates (the original mortgage remains senior).

Question 21

As to the priority of purchase money mortgages…

Answer 21

Purchase-Money Mortgages. A purchase-money mortgage has priority over all other mortgages, even those earlier in time, that arose prior to the borrower’s acquisition of the property.

Question 22

As to the priority of Unrecorded Senior Mortgages…

Answer 22

A junior mortgage that is properly recorded may take priority over an unrecorded senior mortgage.

Question 23

As to the priority of subordination agreements…

Answer 23

Subordination Agreements. A senior lender can agree to subordinate its interest to a junior interest.

Question 24

As to the priority of mortgage modifications…

Answer 24

Mortgage Modifications. A senior lender and borrower can agree to modify the mortgage. If the modification is more burdensome on the borrower, the senior lender subordinates its interest. However, only the modification subordinates (the original mortgage remains senior).