Property: Mortgages:

Mortgage:

Security for some other obligation that typically places an encumbrance on real property.

-A mortgage provides that, if the borrower defaults, the mortgagee may sell the mortgaged property and use the proceeds of the sale to satisfy the debt.

Mortgagor:

Person taking the mortgage (i.e., the borrower).

Mortgagee:

Entity providing the mortgage (i.e., the lender)

Obligation:

The borrower's duty to repay a loan evidenced by a written promissory note

Promissory Note:

A specialized type of contract between the borrower and lender by which the borrower agrees to repay the loan on certain terms and conditions

To borrow money from a lender, the mortgagor must give the lender both a promissory note and a mortgage

Down Payment:

A down payment is the money a home buyer pays at closing toward the cost of the home. It's the difference between the mortgage amount and the purchase price.

Equity:

Mortgagor's current interest in the property—home value minus amount owed on mortgage (mortgagor's want this to get bigger over time).

Principal:

The amount of debt, excluding interest, left on the loan (mortgagor's want this to get smaller over time)

Two Main Types of Mortgages:

(1) Adjustable-Rate Mortgage (ARM):

-A home loan in which the interest rate changes periodically based on a standard financial index.

(2) Fixed-Rate Mortgage:

-A home loan in which the interest rate will remain the same throughout the life of the loan, most often 15 or 30 years

Purchase-Money Mortgage:

The buyer borrows money for the purchase price of a home from the seller and pays the entire purchase price in a lump sum.

Title is typically transferred to buyer and the seller/lender holds a mortgage on the property.

Also known a seller or owner financing, this is usually done in situations where the buyer cannot qualify for a mortgage through traditional lending channels

Note that purchase money mortgages usually have priority over both prior and subsequent liens on the property

Loan-to-Value Ratio:

Ratio of amount borrowed to the appraised value of the house

Prepayment Penalty:

Fee charged to borrowers who pay a loan off faster than the prescribed payment schedule

Acceleration Clause:

Allows the lender to demand payment of the entire loan if the borrowers miss even one monthly payment. This is valid in all states.

Due-on-Sale Clause:

This gives the lender the option to demand payment of the entire loan if the borrowers sell the property or any part of it

Courts of equity recognized and protected the Equity of Redemption:

The borrower's right to repay the debt, even after the payment due date

It is a fundamental principle that courts will not allow clogging of the equity of redemption by allowing lenders to obtain title without foreclosure.

The modern foreclosure sale ends the borrower's equity of redemption

If the parties disguise a mortgage transaction as a sale, the court will construe it as an equitable mortgage and provide the "seller" with the rights of a borrower

Liability of Successor Owners:

Suppose Borrowers obtain a mortgage and buy a house. Borrowers then sell the house to Bob Buyer five years after they obtained their mortgage.

Usually, an existing loan is paid off when the property is resold. But assume that the parties choose to keep the loan in place. Further assume that Lender knows about the sale and chooses not to enforce the due-on-sale clause.

Who is obligated to pay the loan?

-The Borrowers are still personally liable by contract to pay, simply because they signed the promissory note and Lender has not released them from the obligation.

But is the Buyer also personally liable for the debt?

-Assuming:

--If the agreement provides that Buyer will assume the loan, then he is personally liable to repay it, together with the borrowers.

-Taking subject to:

--If the agreement provides that Buyer will take title subject to the loan, then he is not personally liable.

Borrower's Rights Before the Foreclosure Sale:

Reinstatement:

-As a general rule, a borrower can avoid foreclosure by paying the missed payments before the lender accelerates the loan. Some states also allow the borrower to reinstate for a limited period after acceleration occurs.

Equitable Redemption:

-All states allow the borrower to avoid foreclosure by paying the loan in full (plus any incurred costs) after default but before the sale occurs.

Foreclosure:

The legal process by which a homeowner in default on a mortgage is deprived of interest in the property. There are two types:

(1) Judicial Foreclosure:

-A specialized form of litigation in which the lender brings a complaint against the necessary parties including:

--the borrower,

--any junior lienors, and

--anyone else holding interest in the property that are junior in priority to the mortgage

(2) Nonjudicial Foreclosure (also called power of sale foreclosure):

-Similar to a judicial foreclosure except it takes place with no court involvement.

-This is the dominant method for collecting on a secured loan after the borrower's default.

-The mortgage has to expressly provide for this type of foreclosure and if it does, it is called a mortgage with power of sale

Results of the Foreclosure Sale: Principle 1:

Foreclosure eliminates or "wipes out" the mortgage being foreclosed and all junior interests, but does not affect senior interests

Suppose that O's home is encumbered by three mortgages: 1) a first mortgage held by L1 securing a $270,000 loan; 2) a second mortgage held by L2 securing a $30,000 loan; and 3) a third mortgage held by L3 securing a $20,000 loan.

-If L1 forecloses, it eliminates its mortgage and all junior mortgages (L2 and L3). The buyer takes title free and clear of all mortgages.

Suppose instead the L2 forecloses.

-The sale eliminates L2's mortgage and L3's mortgage, but does not affect L1's mortgage. The buyer takes title subject to L1's mortgage

Results of the Foreclosure Sale: Principle 2:

Foreclosure sales proceeds are distributed first to the foreclosing lender, and then to junior interests in order of priority; any surplus proceeds go to the borrower

Note that a state's Recording Act can establish the priority of multiple mortgages

Suppose that O's home is encumbered by three mortgages: 1) a first mortgage held by L1 securing a $270,000 loan; 2) a second mortgage held by L2 securing a $30,000 loan; and 3) a third mortgage held by L3 securing a $20,000 loan.

Suppose again that L1 forecloses; the high bidder at the sale pays $305,000. The first $270,000 pays off L1's loan; the next $30,000 pays off L2's loan; and the remaining $5,000 pays (part of) L3's loan.

-Again, the buyer takes title free and clear of all mortgages.

Suppose instead that L2 forecloses, and the buyer pays $305,000. The first $30,000 pays off L2's loan; the next $20,000 pays off L3's loan; and the $255,000 surplus goes to O.

-L1 does not receive any of the proceeds because the sale has no effect on its senior mortgage. The buyer takes title subject to L1's mortgage

Deficiency Judgment:

If the foreclosure sale proceeds do not fully repay the loan, the lender can usually sue the borrower for breach of contract and obtain a deficiency judgment for the remaining balance.

Note that legislation in some states prohibits deficiency judgments altogether in certain situations, most commonly after nonjudicial foreclosure or foreclosure on a purchase money mortgage.

Note also that a number of courts have invalidated deficiency judgments based on inadequacy of the sales price or unfairness in the foreclosure process

Borrower Rights After the Foreclosure Sale:

Statutory right of redemption:

-In about half the states, a borrower may regain title by redeeming the property from the successful bidder—i.e., paying the sales price plus interests and costs—within a set period of time (ranging from 3 months to 2 years)

Setting aside the sale:

-The borrower may be able to set aside the foreclosure sale. In most jurisdictions, a foreclosure sale will be set aside if the sales price is so inadequate as to "shock the conscience" of the court or is "grossly inadequate."