Security Interests (Mortgages) Flashcards
6 Types of Security Interests
(1) Mortgage = on default, lender/mortgagee can realize on the mortgaged real estate only by having a judicial foreclosure sale conducted by the sheriff
(2) Deed of Trust = debtor/trustor gives deed of trust to TP trustee; on default, lender instructs trustee to foreclose by sale
(3) Installment Land K = installment purchaser obtains legal title only when the full K price has been paid off; forfeiture clauses allow vendor upon default to cancel K, retake possession, and retain all $ paid
(4) Absolute Deed = if given for security purposes, can be treated as “equitable” mortgage to be treated as any other mortgage
(5) Sale-Leaseback = may be treated as disguised mortgage (court looks at regular rent payments akin to mortgage, if option to repurchase exists, if option could be exercised for much lower amount than property’s worth)
(6) Equitable Vendor’s Lien = arises by implication of law when seller transfers title to buyer and purchase price or portion thereof remains unpaid
Mortgages and Deeds of Trust: Equity of Redemption
- At any time up to foreclosure sale, debtor can deem the property
- Normally debtor pays amount in arrears
BUT if security instrument has an ACCELERATION CLAUSE, debtor has to pay off the entire balance - CANNOT be waived in the mortgage or deed of trust, but MAY be done alter if separate consideration exists
- Attempt to waive in security interest is known as “clogging” the equity of redemption = prohibited
- Different from statutory right of redemption in some states (letting mortgagor get the property back AFTER the foreclosure sale)
Mortgages and Deeds of Trust: Foreclosure by Public Auction
TX Rules for Residential Property
- debtor must get notice of default with minimum 20 days to cure
- if not cured, debtor must get notice of sale (must contain date/time, must be posted at courthouse and filed with clerk) at least 21 days before sale
- both notices (default and sale) must be sent to all debtors on the note by CMRRR
- valid sale can only take place on 1st Tues. of the month b/t 10AM and 4PM
- court is NOT involved
- trustee provides notices, conducts sale, executes trustee’s deed
Foreclosures destroy all JUNIOR interests (those that come later in time) but do not destroy SENIOR interests (those that came earlier)
- Junior interests will be paid off if there is enough $ from foreclosure sale
- Junior interests are necessary parties to any foreclosure sale; if not made a party, then their interests are not destroyed by it
- TX = junior interest are only necessary parties to a JUDICIAL foreclosure sale; notice isn’t required under power of sale foreclosure (UOA)
Foreclosure: Proceeds of Sale
(1) Pay the cost of foreclosure, including expenses and attorney’s fees
(2) Pay mortgage that was foreclosed, including accrued interest
(3) Pay off junior interest, in order (pay 1st one fully before paying off any 2nd)
(4) Anything left goes to mortgagor
- Senior interests do NOT get paid off when a later mortgage is foreclosed! Buyer at foreclosure sale takes property subject to those interests
Deficiency Judgments
- If there’s not enough $ to pay off debt, mortgagee can due debtor for the balance due
- Balance due = difference b/t outstanding debt and the foreclosure sale price (amount still owed on mortgage)
- TX = if proper process, deficiency judgments are limited to difference b/t outstanding debt and the FMV of property at the time of foreclosure
Priorities of Security Interests
General rule for multiple liens = first in time, first in right UNLESS recording act changes that
- Mortgage priorities MAY be changed by K
Purchase money mortgage (PMM) = mortgage taken out to buy the property
- Given priority over other mortgages execute at about the same time, EVEN if other mortgages get recorded first
- PMM given by seller gets priority over PMM given by a TP lender (i.e., seller wins over banks)
- PMM priority can be defeated by subsequent liens (via recording act or agreement)
- B/t 2 PMMs, seller’s mortgage has priority over a TP’s (if multiple TPs, chronological order)
- If owner does anything to INCREASE a senior mortgage, then that mortgage loses its priority over junior ones but only to the extent of the change
TX = a validly perfected STATUTORY MECHANIC’S AND MATERIALMEN’S LIEN (MML) can protect workers and suppliers to workers on real property
- It has priority over mortgages or other liens
Installment Land Ks
Many provide for forfeiture (seller cancels K, keeps all $ paid to date and gets property back) rather than foreclosure as the vendor’s remedy for default… but courts use theories to avoid harsh result
- Equity of Redemption = gives K purchaser a grace period to pay accelerated full balance of K and keep land after default
- Restitution = require vendor to refund to the purchaser any amount by which his payments exceed the vendor’s damages
- Treat as a Mortgage = requires judicial foreclosure sale
- Waiver = vendor’s pattern of accepting late payments constitutes waiver of right of strict performance
- Election of Remedies = vendor must choose only 1 remedy (damages or specific performance)
TX = 2 important provisions
- Sellers have to give buyers detailed notice of a prospective forfeiture
- Buyers have a statutory 20-day period to cure the default if they have not yet paid 48 monthly payments or 40% of the principal due on the K
- If either 48 monthly payments or 40% of principal has been paid, buyers have 60-day period to cure default and there’s no forfeiture rescission allowed
- Seller has to proceed with non-judicial foreclosure sale
Transfer by Mortgagee
Transfer of Mortgage Without the Note
- Some states hold transfer or mortgage automatically transfers the note, unless the mortgagee-transferor expressly reserves the right to the note
- TX + others hold transfer of mortgage without the note is void
Transfer of Note Without Mortgage
- Note CAN be transferred without mortgage, but mortgage will automatically follow the properly transferred note unless mortgagee-transferor expressly reserves rights
Transfer by Mortgagor (Debtor)
Mortgagor can transfer title to property and mortgage just tags along, and transferee takes subject to the mortgage
Unless grantee specifically assumes mortgage, grantee will not be personally liable on it, but mortgage still has to be paid or else mortgagee will foreclose
Mortgagor continues to be be personally liable on the note as a surety
Any modification of the obligation by mortgagee and the grantee discharges the original mortgagor of all laibility
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 clauses are enforceable!)
Possession Before Foreclosure: Title Theory v. Lien Theory
Title Theory = legal title is in the mortgagee until the mortgage has been satisfied or foreclosed, and the mortgagee is entitled to possession upon demand at any time
Lien Theory = mortgagee is considered the holder of a security interest only and the , mortgagor is deemed the owner of the land until foreclosure; mortgagee may NOT have possession before foreclosure
Intermediate Theory = legal title is in the mortgagor until default, and upon default, legal title is in the mortgagee; mortgagee may demand possession when a default occurs (little practical difference b/t this and title theory)
