Security Interests Flashcards
What are types of security interests in real property?
- mortgage
- deed of trust
- installment land contract
What is a mortgage?
Given by debtor to a creditor. Sheriff sells the land in court-ordered foreclosure if mortgage isn’t paid.
In addition to traditional mortgages, what two special situations are treated as mortgages?
- absolute deed: if deed given for security purposes, can be treated as “equitable” mortgage
- Sale-leaseback with option to repurchase: landowner sells property to a buyer and then leases the property back for an extended period of time
Both of the above situations are treated like regular mortgages
Deed of trust
Debtor is trustor and he gives a deed of trust to a third-party trustee, who is closely connected to the lender (beneficiary). On default, trustee may either get the court to order a sale or sell property on trustee’s own at public auction
*Important in TX
Installment land contract
Debtor signs a contract promising to make payment and seller keeps title until loan is paid off
If default occurs, contract usually contains a forfeiture clause which allows the vendor to cancel the contract, keep all the money, and take possession of the land.
What is equity of redemption?
at any time up to the foreclosure sale, debtor can redeem the property.
Normally just need to pay the amount in arrears, but if acceleration clause exists, then need to pay off entire balance.
Can right of redemption be waived?
Not in the mortgage or deed of trust (“clogging the right to redemption”), but may be done later if separate consideration is given.
Foreclosures by Public Auction
foreclosures must be by public auction sale, regardless of how the sale occurs, whether by court order or otherwise
What is the typical foreclosure process in TX?
Because deed of trust is the preferred security interest in TX, non-judicial foreclosure is the typical sale used for foreclosures.
What is the process for non-judicial foreclosure sales in TX?
Residential property:(i) debtor must be given notice of default and at least 20 days to cure
(ii) if not cured, notice of sale must be sent to debtor and county clerk of sale within 21 days
(iii) sale can only be on first Tuesday of a month between 10 am and 4 pm
Trustee provides notice, conducts sale, and executes a trustee’s deed at conclusion of sale.
What interests are destroyed by a foreclosure?What interests are destroyed by a foreclosure?
all junior interests (those that come later in time), but do not destroy senior interests (those that came earlier)
- junior interests are only necessary parties for a judicial foreclosure sale and not a non-judicial foreclosure sale
What is the order of sale proceeds in a foreclosure sale?
- costs of the foreclosure (e.g. expenses + attorney’s fees)
- pay the mortgage that was foreclosed, including interest
- junior interests in order
- remainder goes to mortgagor
How do deficiency judgments work after a foreclosure sale?
if mortgage or deed of trust is foreclosed and there is not enough money to pay off debt, the mortgagee sues debtor for balance due.
TX: deficiency judgments limited to difference between outstanding debt and FMV of property at time of foreclosure
What are consumers rights when mortgage is signed? (can be asserted as defense)
Mortgagor must determine mortgagee’s ability to pay before extending a loan.
Terms of the loan must not be unfair, deceptive, or abusive.
What are consumers rights during foreclosure process? (can be asserted as defense)
after default, mortgagee cannot file an action to foreclose while request for modification/alternative to foreclosure is pending.
If request is made after foreclosure action is filed, it cannot proceed to foreclosure sale until the request is resolved.
How do you determine the priority of security interests?
If multiple liens, first in time, first in right applies (unless recording act applies)
priority of mortgages can also be changed by contract
What happens if mortgage holder does anything to increase the mortgage (e.g. gets more money or increases interest rate)
mortgage loses its priority over junior ones, but only to extent of the change
What is a mechanics’ and materialmen’s lien (MML)?
secure payment for all materials and labor furnished for the project
MML’s relate back to commencement of construction or delivery of materials, not the date of recording the lien
What are the requirements to perfect a MML?
- Notice filed with county clerk that includes general statement of work done and material furnished
- Copy of notice must be sent to owner within 5 days
How can validly perfected MMLs be foreclosed?
Only after obtaining a court order.
Then, they are foreclosed like any other lien.
How are installment land contracts usually foreclosed?
forefeiture clause that says if a debtor misses a payment, seller can cancel the contract keep all the money paid to date, and get the property back
In TX, what statutory protects are available to buyers under a contract for deed?
- seller must give buyer detailed notice of a prospective forfeiture
- Buyer has 30 days to cure if they have made monthly payments for 4 years or 40% of the principal has been paid
- If contract for deed has been recorded or the above doesn’t apply, then buyer has 60 days to cure.
What is the overall theme of transferring security interests?
- each party can freely transfer his/her interest in the property
How does transfer by mortgagor work?
- mortgagor can transfer title to property and mortgage just tags along, and transferee takes subject to mortgage (but mortgagor liable on note, unless transferee assumes mortgage)
- if mortgagor transfers title to one who assumes the mortgage, mortgagor is still liable on note as a surety
