Security Interests in Real Estate Flashcards
Types of Security Interests (Mortgages)
- Mortgage:
- The debtor/notemaker is the mortagor, and lender is mortgagee.
- On default, lender can realize on the mortageged real estate only by having a judical foreclosure sale conducted by the sheriff.
- Deed of Trust
- Debtor/Notemaker is the trustor. He gives a deed of trust to a third party trustee, usually closely connected to the lender (beneficiary).
- On default, the lender instructs the trustee to foreclose the deed of trust by sale.
- Installament Land Contract
- An installment purchaser obtains legal title only when the full contract price has been paid off.
- Forfieture clauses are common, and allow the vendor upon default to cancel the contract, retake possesion, and reatin all money paid.
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Absolute Deed
* Absolute deed, if given for security purposes, can be treated by a court as an “equitable mortgage”. Foreclosure done by judical order. -
Sale-Leaseback
* Foreclosure done by judical order.
Transfers of Mortgage
Rule:
- All parties to a mortgage or deed of trust may transfer their interest.
- The note and the mortgage must pass to the same person for the transfer to be complete.
Transfer By Mortgagee
- Transfer of Mortgage Without a Note:
- Some states hold that transfer of the mortgage automatically transfers the note, unless the mortagee-transferor expressly reserves the right to the note (in which case the transferee of the mortgage can then file an equitable action and compel transfer of the note).
- Other states say a transfer of mortgage without the note is void.
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Transfer of Note Without a Mortgage:
* The note can be transferred without the mortgage, but the mortage will automatically follow the properly transferred note, unless the mortgagee-transgeror expressly reserves the right to the moretgage.
Methods of Transferring Note
Rule: The note may be transferred either by indorsing it and delivering it to the transferee, or by seperate document of assignment.
Holder in Due Course
Rule: To be the holder in due course of a note, the following requirements must be met:
- Note must be negotiable in form (payable “to bearer” or “to the order of” the named payee, with a promise to a pay a certain sum, and no other promises);** **
- Original (not photocopy) note must be indorsed and signed by the named payee.
- Original note must be delivered to the transferee; and
- The transferee must take the note in good faith and must pay value for it.
Benefits of Holder in Due Course
Rule: Holder in due course takes the note free of any personal defenses of the maker but is still subject to real defenses.
Personal Defenses: Failure of consideration; fraud in the inducement, waiver, estoppel, and payment.
Real Defenses“MAD FIFI4”:
- Material Altercation
- Duress
- Fraud In the Fact;
- Infancy
- Insolvency
- Incapacity
- Illegality
Payment to Original Mortagee After Transfer of Note
Rule:
- If original mortgagee transfers possession of a negotiable instrument, any payment by the mortagor will not count. Holder can still demand payment even if mortgage lacked notice of the transfer.
- If nonnegotiable note, the mortgagor’s payment to him is effective against the transferee until the mortgagor recieves notice of the transfer.
Liability from Transfer by Mortgagor-Grantee
Rule: A grantee of mortgaged property takes subject to the mortgage.
Assumption of mortgage:
- If the grantee signed an assumption agreement he becomes primarily liable to the lender, while the original mortgagor is secondarily liable as a surety.
**“Subject to”: **
- If third party buys mortgaged property “subject to mortgage” then third party has no personal liability.
- HOWEVER, if Bank records then they still can foreclose or sue original buyer on underlying debt.
Due-on-sale: Appear in most modern mortgages, allow the lender to demand full payment of the loan if the mortgagor transfers any interest in the property without the lendor’s consent.
Possession Before Foreclosure
Lien Theory (Majority):
- Mortgagor is deemed owner of the land until foreclosure -> Mortgagor may not take possesion before foreclosure.
Title Theory:
- Legal title is in the mortgagee until the mortgage has been satisfied or foreclosed. Mortgagee can take possession before foreclosure.
Intermediate Theory:
- Essential the same as title theory. Mortgagee may demand possession upon defualt.
Redemption By Equity
Rule: At any time prior to foreclosure sale, the mortgagor may redeem the property by paying the amount due. If there is an acceleration clause the full amount must be paid.
- Right of redemption cannot be waived in the mortgage itself (since it is equitable).
Statutory Redemption
Rule: About half the states allow the mortgagor to redeem the property for some fixed period (e.g. six months) after the foreclosue has occured.
- Usually the price is the foreclosue sale price.
Modification of Priority
Rule: Generally, priority is determined by chronological order, this priority may be changed by:
- The operation of the recording statute if a prior mortgagee fails to record;
- A subordination agreement between a senior and junior mortgagee;
- A purchase money mortgage;
- The modification of a senior mortgage (junior mortgage has priority over the modification); or
- The granting of optional future advances by a mortagee with notice of a junior lien (junior lien has priority over advances).
Purchase Money Mortgages
Defined: Mortgage given in exchange for funds used to purchase the property.
- Given to seller as part of purchase price or to third party lender.
- PMMs have priority over prior non-PMMs, even if such mortgages or liens are recored first.
- Subsequent mortgages or liens may defeat PMM priority by operation of recording acts.
Betwen Two PMMs:
- Seller’s PMM has priority over third-party PMM.
- Between two third party PMM -> First in time first in right.
Security Interest in Fixtures, Priority
Rule: A security interest in a fixture will prevail over a prior recorded mortgage interest as long as the interest is recorded within 20 days of the fixture being affixed to the land.
