X. Security Interests in Real Property Flashcards
1
Q
Security Interests Generally
A
- A “security interest” in real property is a device used to secure a loan on the property. Typically, the loan is reflected in a promissory note given by the borrower and the security interest is reflected in a separate written instrument.
2
Q
Three Types of Security Interest
A
- Mortgage
- Deed of Trust
- Land Sale Contract
3
Q
Mortgage
A
- A mortgage is given by the Debtor (mortgagor) to the Creditor (mortgagee).
- If the loan is not paid in full, the sheriff sells the land at a court-ordered foreclosure sale.
- Equitable Mortgage: Absolute Deed with Separate Promise of Reconveyance (gives lender a deed which is absolute on face; separate agreement to reconvey once debt is paid in full)
- Sale Leaseback with Option to Repurchase: A sells property to B; B then leases it to A for period of time with expectation that he will have otpino to buy back at end. Usually loan payments equivalent of lease payments
- Both situations (equitable mortgage and sale-leaseback) must be foreclosed on like mortgages—and therefore will receive all the protections of a mortgage.
4
Q
Deed of Trust
A
- A Deed of Trust is given by the debtor to a third party trustee, who holds the Deed
of Trust until the loan is paid in full. - f the loan is not paid, the trustee can do one of the following:
- 1) The trustee can obtain a court order for a foreclosure sale of the property; OR
- 2) The trustee can sell the property by himself or herself at a public auction.
5
Q
Land Sale K
A
- The installment land sale contract refers to the arrangement where the debtor signs a contract promising to make payments to the seller/lender, but the seller keeps title to the property until the loan is paid in full.
6
Q
Georgia Law
A
Georgia permits use of a deed to secure a debt (i.e., a security deed). Where a security deed is used, title passes to the grantee/lender until the debt is paid off – but only for purposes of securing the debt. This is commonly used in Georgia in lieu of a mortgage, although Georgia recognizes the mortgage as a valid form of security interest.
7
Q
M&DoT: Debtor’s Rights of Redemption or the equity of Redemption
A
- At any time—right up until the moment of the foreclosure sale— the Debtor can redeem the property by paying the amount that is due and payable— the amount in arrears—(plus interest)—unless the mortgage includes an “acceleration clause.”
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8
Q
Acceleration Clause
A
- If the mortgage includes an acceleration clause, the Debtor must pay off the entire balance of the mortgage in order to redeem the property.
9
Q
Waiver of Right of Redemption
A
- The general RULE is that the Right of Redemption cannot be waived in the original Mortgage or Deed of Trust—BUT can be waived later if there is separate consdideration for the waiver (i.e., as when borrower later loses his job and so lender agrees to extend maturity date of loan).
- An attempt to waive the right to redemption in the original mortgage or Deed of Trust is generally referred to as clogging the equity of redemption and is prohibited.
10
Q
Statutory Right of Redemption
A
- Today, approximately half the states allow the mortgagor (borrower) a statutory right to redeem the property for some fixed period of time after the foreclosure sale has occurred (typically six months to one year)
11
Q
M&DoT: Foreclosure by Public Auction Sale
A
12
Q
M&DOT: priorities on payment of multiple mortgages
A
- Where there are multiple mortgages on a single property, PRIORITY is allocated based on the common law rule of—First in time, First in right—UNLESS that order is changed by the terms of the applicable recording statute.
- Therefore, if a mortgage was not recorded—or was recorded too late—you may have to apply the terms of the applicable recording statute to determine how to allocate priorities among multiple mortgages. The recording statute is to be applied in the same way as if you were dealing with a deed.
- Priorities Changed by Contract—Voluntary Subordination: A senior mortgage may agree to subordinate to a junior mortgage—a mortgage that comes later in time.
- Purchase Money Mortgages (PMM): A “PMM” is a mortgage taken out to buy the property. A PMM receives priority over other mortgages that were executed prior to the PMM, even if the facts show that the earlier mortgage is recorded first. A PMM given by the seller usually gets priority over a PMM given by a third party lender, such as a bank.
- Changes in Senior Mortgages: If the mortgagor does anything to increase a senior mortgage (for example, borrows more money or increases interest rate), then that senior mortgage loses its priority over junior mortgages, but only to the extent of the modification.
13
Q
Foreclosure Eliminates all junior interests
A
- Foreclosure wipes out all junior interests (those interests that came later) – BUT foreclosure does not wipe out senior interests (those interests that came earlier in time). Senior interests just continue in place; the buyer will take the property subject to the senior interest. (e.g. if you foreclose on 3rd mortgage, that, the 1st & 2nd are senior; 4th & 5th are junior)
- However, if a senior mortgage is not paid, then it will sue to foreclose on its security interest.
- Therefore, generally speaking, the holders of junior interests have the right to pay off any senior mortgage being foreclosed on in order to keep their junior interests from being wiped out.
- Thus, junior interests are a necessary party to any foreclosure proceeding. If they are not made a party to any foreclosure, then their junior interests are not eliminated by the foreclosure.
14
Q
Payment of the Proceeds of a Foreclosure Sale
A
- Pay the costs of the foreclosure.
- Pay off the mortgage that was foreclosed on.
- Pay off junior interests – in order of priority.
- Pay any remaining balance to the borrower/mortgagor.
If deficient to pay off the mortgage, creditor/mortgagee may sue the mortgagor/debor personally for balance due on note
15
Q
Land Sale Contracts
A
- A forfeiture clause says that if a Debtor misses a payment, the Seller can cancel the contract, keep all the monies paid to date, and retake the property.
- For Bar Exam purposes, forfeiture clauses will be enforced, even though courts are quite hostile to such clauses.
- However, if the Seller chooses to enforce the forfeiture clause, the Seller is limited to that remedy and cannot also obtain damages or specific performance.
