Property: Mortgages

Mortgagor

The borrower is the mortgagor

Mortgagee

The lender is the mortgagee

Mortgage Transaction Documents

The mortgage transaction actually involves two documents: the promissory note and the mortgage

Promissory Note

The promissory note is the mortgagor’s personal obligation. This means that the mortgagee is not limited to foreclosure and seek money damages from the mortgagor for payment

Mortgage (basic)

The mortgage is the agreement that says if the mortgagor quits paying, the land can be sold to pay for the mortgage

Debtor vs Mortgagor

Usually the mortgagor is also the debtor (the one making the promissory note.) Sometimes, the debtor/notemaker can be someone else, such as a mother agreeing to place a mortgage on her house to secure a loan given to her daughter

Purchase-Money Mortgage

The purchase-money mortgage is an extension of value by a lender who takes as collateral a security interest in the very real estate that its loan enables the debtor to acquire

Non-purchase-money mortgage

The realty is collateral to a loan that enables purchase of something other than the realty

Creation of a Mortgage

A mortgage is the union of two elements: Debt, represented by the note; and a voluntary transfer of a security interest in the debtor’s land to secure the debt (the mortgage)

Creation: Writing

The mortgage must be in writing to satisfy the SoF. This is the legal mortgage. A legal mortgage is evidenced by a writing.

Other names Used for mortgages

(1) mortgage; (2) the mortgage deed; (3) the note; (4) a security interest in land; (5) a deed of trust; and (6) a sale lease-back

Transfer of Interests

While both the mortgagee or the mortgagor may transfer their interests, on the bar exam, the more common situation by far is an encounter by the mortgagor

Transfer by Mortgagee

A mortgagee may transfer their interest. The creditor-mortgagee can transfer its interest by: (1) Indorsing the note and delivering it to the transferee; or (2) executing a separate document of assignment. A mortgagee can freely transfer the note and the mortgage automatically follows a properly-transferred note

Transfer by Mortgagor: Assumption vs Subject To

When a mortgagor transfers the property, the buyer either assumes the mortgage or takes the property subject to the mortgage. If a grantee assumes the mortgage, they’re agreeing to be personally liable on the mortgage note. If they take the property subject to the mortgage, they are not agreeing to personal liability: the mortgagee’s only recourse is foreclosure

Effect of Assumption of Mortgage

If the grantee signs an assumption agreement, they become primarily liable to the lender, while the original mortgagor is secondarily liable as a surety. However, the mortgagee may opt to sue either the grantee or the original grantor on the debt. If no assumption agreement is signed, the grantee is not personally liable on the loan and the original mortgagor is primarily and personally liable

Due-on-sale Clauses

Due-on-sale clauses appear in most modern mortgages and allow the lender to demand full payment of the loan if the mortgagor transfers any interest in the property without the lender’s consent

Transfer of land with mortgage on it

When a mortgagor transfers title to the property, the grantee generally automatically takes the property subject to the mortgage. The grantee will not be personally liable on the mortgage unless they specifically assume the mortgage. The mortgage remains on the land as long as the mortgage instrument was properly recorded

Effect of Recording Acts

All recording acts apply to mortgages as well as deeds.

Proceeding with Foreclosure

The mortgagee must foreclose by proper judicial proceeding. At foreclosure, the land is sold and the sale proceeds go to satisfying the debt.

Deed in Lieu of Foreclosure

The mortgagor may tender to the mortgagee a deed in lieu of foreclosure, which permits the mortgagee to take immediate possession without a foreclosure sale. Since this is not an actual foreclosure, it does not operate to terminate any junior liens that may be present on the mortgaged real estate

Sale Proceeds Less Than Debt

If the proceeds from the sale of a mortgaged property are insufficient to pay off the debt, the mortgagee may bring a personal action against the debtor for a deficiency judgment

Sale Proceeds More than Debt

If there is a surplus after foreclosure sale, junior liens are paid off in order of their priority. Any remaining surplus goes to the debtor

Effect of Foreclosure on various interests

Priority among interests in a foreclosure is heavily tested. The default rule is that the priority of a mortgage depends on when it was placed on the property. A buyer at a foreclosure sale takes the title as it existed when the foreclosed mortgage was placed on the property. All interests senior to that one remain on the property, and all interests junior to that one are extinguished. Those interests include junior mortgages, liens, leases, easements, and all other types of interest

Foreclosure and Junior Interests

Foreclosure terminates interest junior to the mortgage being foreclosed but does not affect senior interests. Junior lienholders will be paid in descending order with the proceeds from the sale, assuming a surplus. Junior lienholders should be able to proceed for a deficiency judgment. Once foreclosure of a superior claim has occurred, with the proceeds distributed appropriately, junior lienholders can no longer look to the property for satisfaction

Necessary Parties of Foreclosure Actions

Those with interests subordinate to those of the foreclosing party are necessary parties. The debtor-mortgagor is considered a necessary party and must be joined, particularly if the creditor wishes to proceed against the debtor for a personal deficiency judgment. Failure to include a necessary party results in the preservation of that party’s claim despite foreclosure and sale. If a necessary party is not joined their mortgage will remain on the land

Foreclosure and Senior Interests

Foreclosure does not affect any interest senior to the mortgage being foreclosed. The buyer at the sale takes subject to such interest. However, the buyer is not personally liable on the senior debt. As a practical matter, if the senior mortgage is not paid, sooner or later the senior creditor will foreclose against the land

Mortgagee Priority

As a creditor, you must record. Until you record, you have no priority. Once recorded, priority is determined by the norm of first in time, first in right.

Subordination Agreements

By private agreement, a senior creditor may agree to subordinate its priority to a junior creditor. This is permissible

Purchase Money Mortgage Priority

A mortgagor of a purchase-money mortgage takes priority over non-purchase-money mortgagors

Redemption in Equity

Equitable redemption is universally recognized up to the date of sale. Any time prior to the foreclosure sale, the debtor has the right to redeem the land by freeing it of the mortgage

Mortgage Acceleration Clause

An acceleration clause permits the mortgagee to declare the full balance due in the event of a default. They may also permit acceleration for defaults in mortgage covenants such as an obligation to pay taxes, maintain insurance, or avoid the commission of waste

Acceleration Clause and Equitable Redemption

If the mortgage does not contain an acceleration clause, redemption can be achieved by paying off the missed payment due plus interest and costs.

Waivability of Redemption

A debtor/mortgagor may not waive the right to redeem in the mortgage itself. This is known as “clogging the equity of redemption” and it is prohibited

Statutory Right of Redemption

Many states give the mortgagor a statutory right to redeem for some fixed period after the foreclosure sale (usually six months to one year.) The amount to be paid is usually the full foreclosure sale price rather than the amount of the original debt

Deed of Trust

Some states call a security interest in land a deed of trust rather than a mortgage. The debtor/notemaker is the trustor. The trustor gives a deed of trust to a third-party trustee, who is usually connected to the lender (the beneficiary.) On fedault, the lender instructs the trustee to foreclose the deed of trust by sale.

Absolute Deed

An absolute deed, if given for security purposes, can be treated by the court as an “equitable” mortgage that is to be treated the same as any other mortgage.

Installment Land Contract

An installment purchaser obtains legal title only when the full contract price has been paid off. Forfeiture clauses allowing the vendor upon default to cancel the contract, retake possession, and retain all money paid, are common and generally enforceable

Equitable Vendor’s Lien

This lien does not result from an agreement but rather arises by implication of law when a seller transfers title to the buyer and the purchase price or a portion thereof remains unpaid

Sale-Leaseback

A landowner may sell her property for cash and then lease it back from the purchaser for a long period of time. Like an absolute deed, this may be treated as a disguised mortage.