VI. Security Interests Flashcards
What are the types of contracts for security interests?
Mortgage - A mortgage conveys a security interest in land to act as collateral for a loan (creditor holds a lien and can initiate a public foreclosure)
Deed of Trust - deed conveying title given to a third party as security until price is paid in full (can foreclose and initiate private sale)
Installment Land Contract - legal title obtained once installments are paid
Equitable Mortgage - deposits title-deed with creditor (if sold to bona fide purchaser, must sue creditor to recover)
Sale-Leaseback - sells for cash, leases back from buyer (treats as mortgage)
Requirements for valid mortgage?
Writing
Parties identified
Description of land
How may a lender transfer a mortgage?
Endorsement of note & delivery to transferee
OR
Execution of separate assignment
What are the liability rules if a borrower transfers their property that is subject to a mortgage?
The buyer takes “subject to” the mortgage or “assumes” the mortgage.
“Subject to” means the seller remains personally liable, but the buyer’s property could be subject to foreclosure.
Express “assumption” means buyer becomes secondarily liable.
Implied assumption is where the purchase price reflects the FMV less the price of the mortgage - then the seller is only liable for deficiency not paid by buyer.
What are the rules regarding possession prior to foreclosure?
For a regular-way mortgage, under the “lien theory” there’s no right to possession until foreclosure is complete.
For a “title-theory” mortgage, if the mortgagee holds legal title, they can take possession by a non-judicial foreclosure (called trustee’s sale).
What is an action for deficiancy?
When a judicial foreclosure occurs, the mortgagor remains personally liable for any deficiency between the sale proceeds and the loan balance, an action for deficiency may be brought to recover.
How would a surplus of sale proceeds be applied?
Attorney/court costs –> interest –> junior lienholders, by priority (not pro rata) –> mortgagor
What is the general rule for distribution to lien-holders upon foreclosure?
Upon a foreclosure sale, how proceeds are distributed is determined by priority of creditor interests - determined by (1) whether loan was a purchase money security interest (have priority over all others) and (2) which creditor recorded their mortgage first (first in time, first in right).
Note: If two creditors lend purchase-money for one property, then look to who recorded first.
What is a purchase money mortgage?
When a buyer uses lender’s money to buy an asset and gives them a security interest immediately thereafter, CA and the UCC recognizes a priority over prior created and perfected liens.
What is equitable subrogation?
When the proceeds of one mortgage are used to satisfy an earlier mortgage, they are substituted into the earlier mortgagee’s position and afforded their priority over subsequent creditors.
