VII. SECURITY INTERESTS Flashcards
C. PRIORITIES OF SECURITY INTERESTS
If there are multiple liens, the same first in time, first in right, applies unless the recording act changes that.
a) Mortgage priorities may be changed by
contract
e.g., a senior mortgagee may subordinate that mortgage to a junior one.
purchase money mortgages (PMMs)
are mortgages taken out to buy the property)
are given priority over other mortgages executed at about the same time, even if other mortgages get recorded first.
Note: A PMM given by the seller gets priority over a PMM given by a third-party lender, i.e., sellers win over banks.
PMM priority can be defeated by subsequent mortgage or lien by operation of the recording acts or through an agreement.
Between two PMMs, a seller’s mortgage generally has priority over a third party’s. If there are two third party PMMs, then priority is determined by looking at the timing of the PMMs.
c) If owner does anything to increase a senior mortgage (e.g., gets more money or increases interest rate)
then that mortgage loses its priority over junior ones but only to the extent of the change.
statutory mechanics’ and materialmen’s lien (MML)
Requirements to perfect the statutory MML:
foreclose? timing of the lien? notice to asset the claim?
TEXAS Only: A validly perfected statutory mechanics’ and materialmen’s lien (MML) can protect workers and suppliers to workers on real property and it has priority over mortgages or other liens.
Requirements to perfect the statutory MML:
- Affidavit must be filed with county clerk where property is located no later than the 15th day of the 4th if commercial/ 3rd if residential calendar month after the day the indebtedness accrues.
- Affidavit must list the amount of the claim, the names and address of all relevant persons, a general statement of the work done and material furnished.
- Affidavit must give a legal description of the property sought to be charged with the lien.
- Copy of the affidavit must be sent by certified or registered mail to the owner within 5 days of its filing.
Validly perfected MMLs can be foreclosed like any other lien on the property after obtaining a court order.
For purposes of lien priority, MMLs relate back to the commencement of construction of improvements or delivery of materials to the land on which the improvement is to be located, and a validly perfected lien is effective as of that date, not the date of recording the affidavit of lien.
personal knowledge of improvements being made on the property at or shortly before the time the purchaser took possession of the property provides sufficient notice of the contractor’s right to assert a lien claim
D. CONSEQUENCES OF INSTALLMENT LAND CONTRACTS
forfeiture clause
Look for a forfeiture clause; says if debtor misses a payment, seller can cancel the contract, keep all the money paid to date, and get the property back.
These clauses can be enforced.
A. TYPES OF SECURITY INTERESTS
Two special situations treated as mortgages:
- mortgage – Given by a debtor (mortgagor) to a creditor (mortgagee). Sheriff sells the land at a court-ordered foreclosure sale if mortgage isn’t paid.
Two special situations treated as mortgages:
a) absolute deed-with-separate- promise-of-reconveyance situation (equitable mortgage).
HYPO: Grantor owed 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’s no mention of the word “mortgage” anywhere, and the deed is absolute.
b. sale/lease back with option to purchase
Landowner sells property to a buyer and then lease back for an extended period of time.
Like an equitable mortgage, this transaction can be attacked as a disguised mortgage
1. Regular rent payment are about equal to what would be due on a mortgage.
2. If an option to repurchase exists
3. If the repurchase option could be exercised much lower amount than the property’s worth at the time.
2, deed of trust –Given by debtor to a third-party trustee who holds it until the loan is paid off.
TEXAS Only: Deeds of Trust are the security instrument most often used in Texas. The debtor is referred to as the Grantor in this instrument and the lender the Grantee. The third party Trustee is also named. This is not an actual Trust.
3, installment land contract –Debtor signs a contract promising to make payment and seller keeps title until loan is paid off.
If default occurs, the contract usually contains a forfeiture clause which allows the vendor to cancel the contract, keep all the money that has been paid, and take possession of the land
TX: this is contract for deed
B. CONSEQUENCES OF A MORTGAGE OR DEED OF TRUST
1. Equity of redemption
At any time up to the foreclosure sale, debtor can redeem the property. Normally all debtor need pay is the amount in arrears; but if security instrument has an acceleration clause, debtor has to pay off entire balance.
TEXAS only: There is no schedule for redemption. The time allowed for curing depends on the percentage of the purchase price that has already been paid at the time of default.
Right of redemption cannot be waived in the mortgage or deed of trust, but may be done later if separate consideration is given.
An attempt to waive the right of redemption in the security interest is known as clogging the equity of redemption, and is prohibited.
B. CONSEQUENCES OF A MORTGAGE OR DEED OF TRUST
2. Foreclosure must be by
- Foreclosure must be by public auction sale, regardless of how the sale occurs, whether by court order or otherwise.
TEXAS Only: Because the Deed of Trust is the preferred security interest the non-judicial foreclosure is the typical sale used for foreclosures. There are specific statutory criteria for conducting a valid non-judicial sale.
If residential property, the debtor must be given notice of default with time to cure. By statute the minimum time to cure is 20 days. If not cured, the debtor must also be given a notice of sale at least 21 days before the sale. The notice of sale must give the date and time of the sale, the notice must be posted at the court house, filed with county clerk and if the clerk’s office maintains a website, available on the website
Both the notice of sale and notice of default must be sent to all debtors on the note by certified mail return receipt requested. A valid sale can only take place on first Tuesdays of the month between the hours of 10 am and 4 pm. The court is not involved in the process. the trustee provides the notices, conduct the sale, and executes a trustee’s deed at the conclusion of the sale.
B. CONSEQUENCES OF A MORTGAGE OR DEED OF TRUST
3. Foreclosures destroy all ________________________ interests (those that come later in time), but do not destroy________________ interests (those that came earlier).
junior; senior
holder of a junior mortgage interest is a necessary party that must be included in a foreclosure sale by the holder of a senior interest
