Security Devices in Land

When should you discuss security devices in land on an essay?

Whenever land is used as collateral to secure repayment of a debt such as:

• Mortgage

• Deed of Trust

• Installment Land Contract

• Sale-Leaseback

What is a mortgage?

A mortgage is a security device in which:

• the borrower (mortgagor) pledges land as collateral,

• the lender (mortgagee) secures repayment of the debt,

• upon default, the lender may foreclose and sell the property to satisfy the debt.

What two parties are involved in a mortgage?

• Mortgagor = Borrower / Debtor

• Mortgagee = Lender / Creditor

What is a deed of trust?

Security device where:

• debtor transfers title to third party designated by the lender

• On default, beneficiary asks third party (trustee) to sell property to satisfy debt via

  • judicial or private foreclosure

Who are the three parties to a deed of trust?

• Trustor → borrower

• Trustee → third party holding title

• Beneficiary → lender

What is an installment land contract?

• The buyer makes installment payments directly to the seller.

• The seller keeps legal title until the purchase price is fully paid.

Upon default, the seller may:

• cancel the contract,

• retain prior payments, and

• retake possession.

What is a sale-leaseback arrangement?

• The owner sells the property for cash and immediately leases it back.

• Courts may treat the transaction as a disguised mortgage.

What factors suggest a sale-leaseback is actually a disguised mortgage?

Look for:

• Rent resembles mortgage payments

• Seller has an option to repurchase

• Repurchase price is substantially below market value

TRANSFERS BY THE MORTGAGOR: When should you analyze "subject to" versus "assumption" of a mortgage?

• Whenever the mortgagor transfers the property to another person.

  Determine whether the transferee:

  • took subject to the mortgage, or

  • assumed the mortgage.

TRANSFERS BY THE MORTGAGOR: What does it mean to take property "subject to" a mortgage?

The transferee:

• is not personally liable for the debt,

• but the land remains subject to foreclosure.

The original mortgagor remains personally liable.

If the deed is silent, the transfer is presumed to be subject to the mortgage.

What does it mean to "assume" a mortgage?

The transferee agrees to become personally liable for the mortgage debt.

The original mortgagor also remains liable unless there is a novation.

TRANSFERS BY THE MORTGAGOR: What is the default rule if the deed is silent regarding an existing mortgage?

The purchaser takes the property subject to the mortgage.

TRANSFERS BY THE MORTGAGOR: What happens when the mortgagee transfers the mortgage?

The transferee stands in the shoes of the original mortgagee.

All rights transfer.

DEFAULT/FORECLOSURE: Q: What rights does the mortgagee have upon default?

The mortgagee may:

• foreclose,

• sell the property, and

• satisfy the debt from the proceeds.

Many states also allow redemption.

DEFAULT/FORECLOSURE: What determines priority among competing mortgages?

Generally:

First in time = first in priority

Senior interests are paid before junior interests.

DEFAULT/FORECLOSURE: What happens to junior liens after foreclosure?

Junior interests are generally extinguished.

Senior interests survive.

The purchaser takes subject to senior interests.

DEFAULT/FORECLOSURE: How are foreclosure sale proceeds distributed?

• Sale expenses

• Senior mortgage

• Junior liens (in order)

• Remaining balance to mortgagor

DEFAULT/FORECLOSURE: What is a deficiency judgment?

• If foreclosure proceeds are insufficient, mortgagee may recover unpaid balance personally from the mortgagor

FORECLOSURE PRIORITY PROBLEMS: What happens if a junior lienholder forecloses against a senior lienholder?

A junior lienholder cannot eliminate the senior lien.

The senior lien remains intact.

FORECLOSURE PRIORITY PROBLEMS: What happens if the senior lienholder is omitted from the foreclosure?

• The foreclosure sale is ineffective against the senior lienholder.

  The senior lien remains attached to the property.

FORECLOSURE PRIORITY PROBLEMS: What happens when a senior lienholder forecloses against a junior lienholder?

If joined in the foreclosure:

Junior lien survives only if sale proceeds remain after satisfying the senior lien.

If omitted:

Junior lien is unaffected but remains subordinate.

FORECLOSURE PRIORITY PROBLEMS: What is the practical effect of omitting a junior lienholder from foreclosure?

• Junior lien remains attached, but is still subordinate to senior lien

REDEMPTION: What is the right of redemption

• The right to reclaim property by paying the mortgage debt.

• Many states permit redemption even after foreclosure for a limited period.

REDEMPTION: What rights does the foreclosure purchaser obtain?

The purchaser succeeds to the rights of all parties whose interests were foreclosed.

REDEMPTION: What happens if a junior lienholder redeems the senior mortgage?

The junior lienholder succeeds to:

• the senior lien, and

• the junior lien,

and may foreclose both.

RECORDING MORTGAGES: How do recording acts affect mortgages?

Mortgages are generally recordable interests.

Recording protects the mortgagee against later purchasers.

RECORDING MORTGAGES: What happens if a mortgage is not recorded?

• Priority is determined under the applicable recording act (notice, race, or race-notice).

• The mortgage may lose priority to a protected subsequent purchaser.

• What should your IRAC checklist be whenever a mortgage question appears on an essay? Ask the following questions in this order:

Ask, in this order:

1. What security device is involved?

2. Who are the parties?

3. Was the property transferred?

4. Was it transferred subject to or by assumption?

5. Who is personally liable?

6. Has default occurred?

7. Who has priority?

8. Which liens survive foreclosure?

9. Who receives foreclosure proceeds?

10. Is redemption available?

11. Does the recording act affect priority?