Security Interests

Question 1

If a grantor transfers a deed in exchange for cash, and the grantee promises to return the land when the cash is repaid, a court will likely treat the transaction as:

Answer 1

If a grantor transfers a deed in exchange for cash, and the grantee promises to return the land when the cash is repaid, a court will likely treat the transaction as an equitable mortgage and not as a conveyance of the land.

In determining whether the parties intended the transfer only to serve as security for an obligation, the court will consider: (i) existence of grantor’s promise to pay debt; (ii) grantee’s promise to return land if debt is paid; (iii) $ advanced to grantor was much lower than property’s value; (iv) grantor’s financial distress; and (v) parties’ prior negotiations.

If the court concludes that the deed was given as security, the grantee-creditor must foreclose it like any other mortgage. A deed of trust is a security interest in land by which the debtor transfers title to the land to a third party as trustee for the lender. In the event of default, the lender instructs the trustee to foreclose the deed of trust by selling the property.

Question 2

If a mortgagor conveys mortgaged property, when does the grantee become primarily liable to the lender?

Answer 2

When a mortgagor conveys mortgaged property, grantee becomes primarily liable to lender if grantee assumes the mortgage. A grantee who signs an assumption agreement promises to pay the mortgage loan, thus becoming personally and primarily liable to the lender. The original mortgagor becomes secondarily liable as a surety. In the absence of an assumption agreement, the grantee takes subject to the mortgage and does not become personally liable on the loan. The original mortgagor remains personally and primarily liable.

If the mortgagor defaults on the mortgage and grantee does not pay, the mortgage may be foreclosed, thus wiping out the grantee’s investment in the land.

Question 3

What is a due-on-sale clause?

Answer 3

A due-on-sale clause, found in most modern mortgages, permits the mortgagee to demand full payment of a mortgage debt if the mortgagor transfers her interest without the lender’s consent.

These clauses are designed to: (i) protect the lender from mortgagor’s sale to a poor credit risk or to a person likely to commit waste; and (ii) allow the lender to raise the interest rate or charge an assumption fee when the property is sold.

Question 4

What is an acceleration clause?

Answer 4

An acceleration clause in a mortgage permits the lender to declare the full balance of the mortgage due in the event of the mortgagor’s default.

Question 5

__________ is the right of a mortgagor to recover the land by paying the foreclosure sale price after the foreclosure sale has occurred.

Answer 5

Statutory redemption is the right of a mortgagor to recover the land by paying the foreclosure sale price after the foreclosure sale has occurred. About half the states provide a statutory right to redeem for some fixed period after the foreclosure sale has occurred, usually six months or one year. The amount to be paid is the foreclosure sale price, rather than the amount of the original debt. This right extends to mortgagors and, in some states, to junior lienors.

Question 6

What is an equitable redemption?

Answer 6

Equitable redemption is mortgagor’s right to recover land by paying the amount overdue, plus interest, at any time before foreclosure sale. If mortgagor has defaulted and the mortgage or note contained an acceleration clause, then the full balance must be paid in order to redeem in equity.

Question 7

As between two mortgages, what is the effect on the junior mortgage when the mortgagor accepts an advance of funds from the senior mortgagee?

Answer 7

When mortgagor accepts an advance of funds from senior mortgagee, the junior mortgage is given priority over the advance if the advance was optional.

Priority among mortgages on the same real estate is normally determined by chronology: The earliest (i.e., senior) mortgage is first in priority, the next (i.e., junior) mortgage is second, and so on. Generally, if the mortgage obligates the mortgagee to make further advances of funds after the mortgage is executed, such advances will have the same priority as the original mortgage. However, if a junior mortgage is placed on the property and the senior mortgagee later makes an “optional” advance (i.e., one it was not contractually bound to make) while having notice of the junior mortgage, the advance will lose priority to the junior mortgage.

Question 8

T/F: Mortgages on the property that are junior to a mortgage being foreclosed are extinguished by the foreclosure if they are made parties to the foreclosure proceeding.

Answer 8

T. Mortgages on property that are junior to a mortgage being foreclosed are extinguished by foreclosure if they are made parties to the foreclosure proceeding. Foreclosure destroys interests (e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed, but does not affect any interest senior to the mortgage being foreclosed. The buyer at the sale takes subject to senior interests, which remain on the land.

Note, however, that a junior mortgagee has a right to pay off (i.e., redeem) a senior mortgage to avoid being wiped out by its foreclosure and thus is a necessary party to the foreclosure action. Failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale. Mortgages junior to a mortgage being foreclosed are not subordinated by the foreclosure. Junior mortgages are extinguished if they are joined in the foreclosure action.

Question 9

What is the order of priority for allocating mortgage foreclosure sale proceeds?

Answer 9

The order of priority for allocating mortgage foreclosure sale proceeds is:

1. Expenses of the sale, including attorneys’ fees, and court costs;
2. The principal and accrued interest on the foreclosing party’s loan;
3. Any junior lienors in the order of their priority; and then
4. The mortgagor.
   * Because a senior lien remains on the property (i.e., may itself be foreclosed in the future), a senior lienor is not entitled to any of the money from the sale, even if there is a surplus.

Question 10

What are two special situations treated as mortgages?

Answer 10

Absolute deed (equitable mortgage) + sale/leaseback (disguised mortgage)

Question 11

Grantor owed the grantee money and gave grantee a deed that is absolute on its face. Separately, grantee promised to reconvey the land to grantor when the debt is paid. There is no mention of the word ‘mortgage’ anymore and the deed is absolute.

What is this?

Answer 11

This is an absolute deed (equitable mortgage).

Question 12

What is a deed of trust?

Answer 12

A deed of trust is given by debtor to a third-party trustee who holds it until the loan is paid off.

If the loan isn’t paid, the trustee may either get the court to order a sale or the trustee may sell property.

Question 13

What is an equity of redemption?

Answer 13

At any time up to foreclosure sale, debtor can redeem the property. Typically, debtor just needs to pay the amount in arrears, but if security-instrument has an acceleration clause then the debtor has to pay off entire balance.

Question 14

J bought a house in Phoenix, and gave a mortgage to Phoenix Loan Company (PLC). The mortgage had an acceleration clause. The mortgage payments were too high and J slipped into debt. When PLC foreclosed on the house, J was $6,000 behind in his payments and the interest was $450. The balance of the unpaid principal and the accrued interest on the loan at the time was $275,000.

If J wants to use the right of equity of redemption to halt the foreclosure sale, how much does he need to pay PLC?

Answer 14

J needs to pay entire amount ($275,000 + $6,450) due to the acceleration clause to pay off the entire balance.

Without the acceleration clause, he would only need to pay the amount in arrears. The amount in arrears is the amount accrued from date first payment was due - $6,450.

Question 15

Can someone waive the right of redemption in the security interest?

Answer 15

No. An attempt to waive the right of redemption in the security interest is known as clogging the equity of redemption and is prohibited.

Question 16

What is the effect of a foreclosure?

Answer 16

A foreclosure destroys all junior interests (those that come later), but do not destroy senior interests (those that came earlier).

Question 17

What is the order of paid off in a foreclosure sale?

Answer 17

1. Pay costs of foreclosure (expenses + attorneys’ fees)
2. Pay the mortgage that was foreclosed + accrued interest
3. Pay off junior interests, in order
4. Pay off anything left to mortgagor

Question 18

What happens if a mortgage or deed of trust is foreclosed and there is not enough money to pay off the debt?

Answer 18

If a mortgage or deed of trust is foreclosed and there is not enough to pay off the debt, the mortgagee (grantee) sues the debtor for balance due.

The balance due is the difference between the outstanding debt and the foreclosure sale price.

Question 19

First Bank is foreclosing on the outstanding debt secured by a Deed of Trust lien on Land. The foreclosure occurs and no one bids against the bank. While the outstanding debt to First Bank is $300, the bank only bid $250 at the time of the sale because the property has been decreasing in value and the bank assesses its current fair market value at $250. No one else bids and the bank takes the title.

First Bank then sues the debtors for $50 remaining on the note. Debtor asks the court for a fair market value determination and the fair market value at the time of sale is $275 rather than $250.

What is the maximum judgment First Bank can obtain if TX statute is applied?

Answer 19

Lenders can recover but cannot profit. Because the FMV at time of foreclosure was greater than the sales price ($275 instead of $250) bid by the lender, the FMV will be used in the calculation of damages rather than the foreclosure sales price.

The maximum judgment First Bank can obtain under TX law: $300-$275 = $25.

Question 20

T/F: If there are multiple liens, the same first in time, first in right applies unless the recording act changes that.

Answer 20

True.

Question 21

T/F: If owner does anything to increase a senior mortgage, then that mortgage loses priority over junior ones but only to the extent of the change.

Answer 21

True.

Question 22

W decided to move and signed a contract to buy a house for $2.5M. P, the seller, offered to finance $1.4M of the purchase price and take a first mortgage. J, a friend of W, offered to lend $400K and take a second mortgage. W came up with the difference.

A year after closing, W needed more money. P offered to lend him another $100K secured by the existing mortgage on the house. The first mortgage now secures a loan balance of $1.5M and the second mortgage secures a loan balance of $400K.

What is the order of priority of these interests?

Answer 22

The order of priority for these interests:

1. P’s $1.4M - first mortgage
2. J’s $400K - second mortgage
3. $100 loan for existing mortgage

Question 23

What are the requirement to perfect the statutory MML (mechanics’ and materialmen’s liens)?

Answer 23

To perfect the statutory MML:

1. Affidavit filed with county clerk
2. Affidavit must list amount of claim, names + address of relevant people, general statement of work done and material used
3. Affidavit gives a legal description of the property to be charged with the lien
4. Copy of the affidavit

Question 24

T/F: Validly perfected MMLs can be foreclosed like any other lien on the property after obtaining a court order. A nonjudicial foreclosure is not available.

Answer 24

True.

Question 25

What is an installment land contract?

Answer 25

An installment land contract: a forfeiture clause states that if debtor misses a payment, seller can cancel the contract, keep all the money paid to date, and get the property back.

Question 26

T/F: Unless grantee specifically assumes the mortgage, grantee is not personally liable on it but mortgage still has to be paid or mortgagee forecloses.

Answer 26

True.

Question 27

What is the effect of a due on sale clause?

Answer 27

A due on sale clause requires a mortgagor to pay the full balance of the loan immediately if the mortgage is transferred without the mortgagee’s consent. These are enforceable.

Question 28

M mortgaged land to HN Bank. Later he sold the land to J “subject to the mortgage to HN Bank.” J also agrees to assume the mortgage.

Later, J sold the land to R and R took “subject to the mortgage to HN Bank.” R failed to pay the mortgage, the bank foreclosed, and the land was sold for less than the balance due on the mortgage.

Who is going to be liable for the deficiency?

Answer 28

J is liable for deficiency because he assumed the mortgage. M is also liable because he is the original person who signed the mortgage but he is looked at for surety.

R has no personal liability because he did not assume the note.

Question 29

Must a junior mortgagee be named as a party to a senior mortgagee’s foreclosure action?

Answer 29

Yes, a junior mortgagee must be named as a party to a senior mortgagee’s foreclosure action because it has the right to pay off the senior mortgage to avoid being wiped out by foreclosure. Foreclosure destroys interests ( e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed.

If a senior mortgage is in default, a junior mortgagee has the right to pay it off (i.e., redeem it) to avoid being wiped out by its foreclosure. Failure to join the junior mortgagee results in the preservation of its interest despite foreclosure and sale.

Question 30

Statutory redemption is the right of a mortgagor to recover the land after the foreclosure sale has occurred, usually by paying __________.

Answer 30

Statutory redemption is the right of a mortgagor to recover the land after the foreclosure sale has occurred, usually by paying the foreclosure sale price. About half the states provide a statutory right to redeem for some fixed period after the foreclosure sale has occurred, usually six months or one year. This right extends to mortgagors and, in some states, to junior lienors.

Question 31

When can a mortgagor exercise her statutory right of redemption?

Answer 31

A mortgagor can exercise her statutory right of redemption after the foreclosure sale. The amount to be paid is the foreclosure sale price, rather than the amount of the original debt. This right extends to mortgagors and, in some states, to junior lienors.

Question 32

Describe the order of priority for allocating mortgage foreclosure sale proceeds.

Answer 32

The order of priority for allocating mortgage foreclosure sale proceeds is as follows:

1. Expenses of the sale, including attorneys’ fees, and court costs;
2. The principal and accrued interest on the foreclosing party’s loan;
3. Any junior lienors in the order of their priority; and then
4. The mortgagor.

Sometimes no surplus remains after the principal debt is paid off. Senior lienors receive none of the proceeds. Because a senior lien remains on the property (i.e., may itself be foreclosed in the future), a senior lienor is not entitled to any of the money from the sale, even if there is a surplus.

Question 33

landowner in fee simple signed a promissory note for $10,000 to a bank, and secured the note by a mortgage of her land to the bank. The mortgage was duly recorded. The landowner then sold the property to an attorney, who assumed and agreed to pay the mortgage to the bank on the land. The attorney did not make payments on the mortgage note to the bank. The bank, following appropriate statutory procedures, foreclosed the mortgage and gave notice to both the landowner and the attorney that it intended to sue for any deficiency. At the foreclosure sale, the property sold for $6,000. The bank now sues both the landowner and the attorney for $5,000, which is the remaining amount of the unpaid principal and interest on the note plus costs of foreclosure.

Against which party will the bank be successful in obtaining a judgment?

Answer 33

The bank will be successful in obtaining a judgment against both the landowner and the attorney, although it may only collect once. When a grantee assumes the mortgage, the grantee expressly promises the grantor-mortgagor that he will pay the mortgage obligation as it becomes due. The mortgagee then becomes a third-party beneficiary of the grantee’s promise to pay and can sue the grantee directly if the grantee fails to pay. After the assumption, the grantor-mortgagor becomes a surety who is secondarily liable to the mortgagee on the note if the grantee fails to pay. The landowner and the attorney are jointly liable, even though the attorney is primarily liable and the landowner is secondarily liable as a surety.

Question 34

To buy a house, an investor secured a $10,000 mortgage from a bank. The bank promptly and properly recorded its mortgage. Subsequently, the investor financed certain improvements to the house with a $2,000 mortgage on the land from a finance company. The finance company promptly and properly recorded its mortgage. Before the investor made a payment on either mortgage, the federal government announced that it would begin storing nuclear waste products in the area. The value of property, including the investor’s house, plummeted. The investor did not pay either the bank or the finance company, and the bank brought a proper action to foreclose, notifying both the investor and the finance company. A buyer bought the house at the foreclosure sale for $6,000, which was its fair market value. There are no special statutes in the jurisdiction regarding deficiency judgments.

What does the investor owe?

Answer 34

Absent any anti-deficiency statutes, the investor remains personally liable to pay for any shortfall arising from the foreclosure sale. Proceeds from the sale are used to satisfy the loan that was foreclosed first.

All of the proceeds ($6,000) went to the bank so the investor must pay the balance still due the bank ($4,000) and the entire amount of the finance company’s mortgage ($2,000), which is terminated by the foreclosure of the senior mortgage.

Question 35

A buyer purchased a parcel of land from a seller for $500,000. The buyer financed the purchase by obtaining a loan from the seller for $300,000 in exchange for a mortgage on the land. The seller promptly and properly recorded his mortgage. Shortly thereafter, the buyer gave a mortgage on the land to a creditor to satisfy a preexisting debt of $100,000 owed to the creditor. The creditor also promptly and properly recorded its mortgage. Within a year, the buyer stopped making payments on both mortgages, and the seller brought an action to foreclose on his mortgage. The creditor was not included as a party to the foreclosure action. The seller purchased the property at a public foreclosure sale in satisfaction of the loan. The creditor subsequently discovered the sale and informed the seller that it was not valid.

Who has title to the land?

Answer 35

The seller has title to the land, but he must redeem the creditor’s mortgage to avoid foreclosure.

Generally, the priority of a mortgage is determined by the time it was placed on the property. When a mortgage is foreclosed, the purchaser at the sale will take title as it existed when the mortgage was placed on the property. Foreclosure will terminate interests junior to the mortgage being foreclosed but will not affect senior interests. But if a lien senior to that of a mortgagee is in default, the junior mortgagee has the right to pay it off to avoid being wiped out by its foreclosure. So those persons with interests subordinate to those of the foreclosing party are necessary parties to the foreclosure action. Failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale.

So the seller’s failure to include the creditor as a party to the foreclosure action preserved the creditor’s mortgage on the property. To avoid the creditor’s foreclosing (because the buyer was in default of the creditor’s mortgage as well), the seller will need to pay off the creditor’s mortgage.

Question 36

An owner obtained a loan of $60,000 from a bank in exchange for a promissory note secured by a mortgage on his land, which the bank promptly and properly recorded. A few months later, the owner obtained another loan of $60,000 from a lender, in exchange for a promissory note secured by a mortgage on the land, which the lender promptly and properly recorded. Subsequently, the owner sold the land to a buyer for $150,000 and conveyed a warranty deed. The buyer expressly agreed with the owner to assume both mortgages, with the consent of the bank and the lender. A few years later, the bank loaned the buyer an additional $50,000 in exchange for an increase in the interest rate and principal amount of its mortgage on the land. At that time, the balance on the original loan from the bank was $50,000. Shortly thereafter, the buyer stopped making payments on both mortgages and disappeared. After proper notice to all appropriate parties, the bank instituted a foreclosure action on its mortgage, and purchased the property at the foreclosure sale. At that time the principal balance on the lender’s mortgage loan was $50,000. After fees and expenses, the proceeds from the foreclosure sale totaled $80,000.

Assuming that the jurisdiction permits deficiency judgments, which of the following statements is most accurate?

Answer 36

The bank keeps $50,000, the lender is entitled to $30,000, and only the lender can proceed personally against the owner for its deficiency.

Bank: original mortgage has priority then the lender’s mortgage.

Here, the bank and the buyer modified the original mortgage by increasing the principal amount and the interest rate. This modification is not given priority over the lender’s mortgage, and foreclosure proceeds will not be applied against it because the senior lender’s mortgage was not fully satisfied from the proceeds.

With regard to the deficiency, the owner is liable to the lender because when a grantee signs an assumption agreement, becoming primarily liable to the lender, the original mortgagor remains secondarily liable on the promissory note as a surety. Here, the buyer assumed the lender’s mortgage and became primarily liable; the owner remained secondarily liable as surety and can be required to pay off the rest of the lender’s mortgage loan. But the owner had nothing to do with the modification agreed to by the bank and the buyer that increased the amount of the mortgage debt, and will not be even secondarily liable for that amount.

Question 37

For which type of security interest in land does the debtor transfer title to a third party acting on behalf of the lender?

Answer 37

A deed of trust is a security interest in land by which the debtor transfers title to the land to a 3rd party, such as the lender’s lawyer or a title insurance company, acting on behalf of the lender.

Question 38

Must a senior mortgagee be named as a party to a junior mortgagee’s foreclosure action?

Answer 38

No, a senior mortgagee need not be named as a party to a junior mortgagee’s foreclosure action, because foreclosure does not affect interests senior to the mortgage being foreclosed. Foreclosure destroys interests (e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed. However, the buyer at the sale takes subject to senior interests, which remain on the land. Thus, only those with interests junior to that of the foreclosing party are necessary parties to the foreclosure action. Although failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale, senior mortgagees are not necessary parties because their interests remain on the property. Foreclosure does NOT extinguish interests senior to the mortgage being foreclosed.

Question 39

If the proceeds from a foreclosure sale are insufficient to satisfy the debt of a mortgage junior to the one being foreclosed, the result is:

Answer 39

If the proceeds from a foreclosure sale are insufficient to satisfy the debt of a mortgage junior to the one being foreclosed, the most likely result is the junior mortgagee may sue the mortgagor for the deficiency.

Question 40

May a vendor who has accepted late payments for six months on an installment land contract declare a forfeiture if payment is late the seventh month?

Answer 40

No, a vendor who has accepted late payments for 6 months on an installment land contract may not declare a forfeiture if payment is late the 7th month, because the vendor has waived strict performance of the contract. In an installment land contract, the debtor (i.e., the purchaser) contracts with the vendor to pay for the land in regular installments until the full contract price has been paid, plus interest. Only then will the vendor transfer legal title to the purchaser. The contract may contain a forfeiture clause providing that the vendor may cancel the contract upon default, retain all money paid, and retake possession of the land (instead of foreclosing). Forfeiture clauses are NOT void in all jurisdictions, but because forfeiture is such a harsh remedy, courts have tended to resist enforcing them. One way courts have done so is by finding a waiver of strict performance when a vendor has established a pattern of accepting late payments from the purchaser. To reinstate strict performance, the vendor must notify the purchaser of her intent to do so and must allow the purchaser a reasonable time to make up any late payments. Even if the contract provides for forfeiture in the event of default, the vendor may not reclaim the land because she has waived strict performance, as explained above. If the vendor pursues forfeiture, the purchaser would not be liable for damages. It is commonly held that the vendor who elects to pursue a forfeiture cannot also bring an action for damages or for specific performance. If the vendor chooses the forfeiture remedy, she must forgo all others.

Question 41

T/F: Mortgages junior to the one being foreclosed are extinguished by foreclosure, and thus a junior mortgagee is a necessary party to the foreclosure action.

Answer 41

True.

Question 42

What is title insurance policy?

Answer 42

Title insurance can be taken out by the owner of the property or the mortgage lender, ensuring good record title as of the policy’s date and defending that title in the event of litigation. An owner’s policy protects only the person who owns the policy (i.e., the property owner or the mortgage lender) and does not run with the land to subsequent purchasers.

In contrast, a lender’s policy follows any assignment of the mortgage loan. In either case, the seller and the buyer would not be protected by a policy owned by the mortgagee.

Question 43

When will a real estate broker be considered the buyer’s agent?

Answer 43

only if this is specifically agreed to.

In the absence of an agreement to the contrary, the broker is the seller’s agent. As the seller’s agent, a broker owes a fiduciary duty to the seller. However, he also has a duty to the buyer to disclose material information about the property if he has actual knowledge of it.

Question 44

T/F: A seller who has not conveyed title will be considered in breach of her land sale contract if buyer tenders the purchase price on closing day.

Answer 44

True. A seller who has not conveyed title will be considered in breach of her land sale contract if the buyer tenders the purchase price on the closing date. The closing is when the parties are to exchange the purchase price and the deed.

*If time is of the essence in a real estate transaction, a party who fails to tender performance by the closing date is in total breach. But courts assume that time is not of the essence in land sale contracts typically. Thus, a party’s failure to perform is not considered a breach until the other party tenders performance—even if the closing date has passed.

Question 45

Must a senior mortgagee be named as a party to a junior mortgagee’s foreclosure action?

Answer 45

No, a senior mortgagee need not be named as a party to a junior mortgagee’s foreclosure action, because foreclosure does not affect interests senior to the mortgage being foreclosed.

Foreclosure destroys interests (e.g., liens, mortgages, leases, easements) junior to the mortgage being foreclosed. However, the buyer at the sale takes subject to senior interests, which remain on the land. Thus, only those with interests junior to that of the foreclosing party are necessary parties to the foreclosure action. Although failure to include a necessary party results in the preservation of that party’s interest despite foreclosure and sale, senior mortgagees are not necessary parties because their interests remain on the property.

Question 46

T/F: The debtor is usually the mortgagor and the lender is the mortgagee.

Answer 46

True. On default, lender can realize on the mortgaged real estate only by having a judicial foreclosure sale conducted by sheriff.

Question 47

T/F: The debtor is the trustor, and he gives a deed of trust to a third-party trustee who is usually connected to the lender/beneficiary.

Answer 47

True. On default, lender instructs the trustee to foreclose the deed of trust by sale.

Question 48

T/F: An installment purchaser obtains legal title only when the full contract price has been paid off.

Answer 48

True. Forfeiture clauses, allowing vendor upon default to cancel the contract, retake possession and retain all money paid.

Question 49

T/F: If the grantee signs an assumption agreement, he becomes primarily liable to the lender.

Answer 49

True. The original mortgagor is secondarily liable as a surety.

Question 50

To avoid the harsh remedy of forfeiture, installment land contracts may be subject to:

Answer 50

• equity of redemption: contract purchaser a grace period to pay the accelerated full balance and keep the land after default
• restitution
• treat as mortgage (require a judicial foreclosure sale)
• vendor’s pattern of accepting late payments is a waiver to strict performance
• vendor must choose only one remedy (damages or specific performance)

Question 51

When a mortgagor transfer title to another and the transferee takes “subject to” the mortgage, can the transferee be liable to the mortgagee?

Answer 51

No. If transferee takes “subject to” then the transferee has not assumed the mortgage and cannot be sued for it.

Question 52

To secure a loan of $100,000 from a bank, the owner in fee simple of a parcel of land conveyed a deed of trust for the land to the bank. The deed of trust contained a “power of sale” clause, permitted by the jurisdiction, which allowed the bank to sell the property in the event of default without the necessity of a judicial foreclosure action. After several years, the owner defaulted on his loan payments to the bank. The bank informed the owner that it was exercising its power of sale. After appropriate notices, the bank conducted a public sale of the land. The bank was the sole bidder and obtained the property for $80,000, which was $10,000 less than the outstanding balance on the loan plus the expenses of the sale. One month later, the owner notified the bank that he wanted to pay off the loan and extinguish the deed of trust, and was prepared to tender $80,000 to do so. The bank insisted that the owner must tender $90,000 to pay off the loan.

If a court in the jurisdiction will require the bank to accept only $80,000 under the circumstances above, what is the likely reason?

A - The owner had the power to revoke the trust as long as he was alive.

B - The bank did not have the authority to bid on the property at other than a judicial foreclosure sale.

C - The owner was exercising a statutory power rather than an equitable power.

D - The bank does not have the power to clog the equity of redemption.

Answer 52

(C) If the owner can compel the bank to accept his offer, it will be because he has a statutory power to redeem the property after the foreclosure sale has occurred. In all states, the equity of redemption provides the borrower with an equitable right, at any time prior to the foreclosure sale, to redeem the land or free it of the mortgage or lien by paying off the amount due or, if an acceleration clause applies, the full balance due. Only about half the states, however, give the borrower a statutory right to redeem for some fixed period after the foreclosure sale has occurred; the amount to be paid is generally the foreclosure sale price, rather than the amount of the original debt. Thus, if the owner can redeem the land for $80,000, it will be based on the jurisdiction’s statutory power of redemption.

(D) is wrong because the prohibition against “clogging the equity of redemption” refers to the rule that a borrower’s right to redeem his own mortgage cannot be waived in the instrument itself. Here, there is nothing to indicate that the owner’s deed of trust prohibited him from redeeming the property prior to foreclosure. However, it is only through a statutory right of redemption that the owner would be able to redeem the property for $80,000 after the foreclosure sale had occurred.