Chapter 20-21 (Themis)

Mortgage

A security device used to secure payments of a debt

What are the two component parts of the mortgage?

• the note: borrower’s promise to repay the loan/debt

• The mortgage: instrument that provides security for the note

What can the lender do, if the borrow defaults on the loan?

The lender can force a foreclosure sale to satisfy the outstanding debt

What is the mortgagor and the mortgagee?

Mortgagor: the borrower

Mortgagee: the lender

What are the two types of mortgages

• Purchase Money mortgage: a person takes out a loan for the purpose of purchasing property

• Future advance mortgage: a line of credit used for home, equity, construction, business, and commercial loans (often referred to as a “second mortgage”)

Lien State v. Title States

Lien State: treats a mortgage as a lien that does not sever a joint tenancy

Title State: a mortgage does sever a joint tenancy and converts it into a tenancy in common

Deed of Trust

Operates like a mortgage but uses a trustee to hold title for the benefit of the lender (i.e., the beneficiary of the trust receiving the payments)

Installment Land Contract

The seller finances the purchase; the seller retains title until the buyer makes the final payment on an installment plan

Absolute Deed

The mortgagor (borrower) transfers the deed to the property instead of conveying a security interest in exchange for the loan

Mortgagor may transfer the property by deed (sale), by will, or by intestate succession but who remains liable after transfer?

Mortgagor remains personally liable after the transfer unless:

• lender/mortgagee releases mortgagor; or

• Lender modifies the transferee’s (buyer/new owner) obligations

Due-on-sale Clause

Lender has the option to demand immediate full payment upon transfer. An acceleration clause that allows the lender to speed up the payment when the property is transferred

Due-on-encumbrance clause

An acceleration clause when the mortgagor obtains a second mortgage or otherwise encumbers the property

Upon default, if the buyer/transferee assumes the mortgage, then who is liable?

The transferee is personally liable for the mortgage. Both the original mortgagor and the transferee are liable upon default

• In most places, the assumption agreement does not need to be in writing

What about a takes “subject to” mortgage, who is liable upon default?

Transferee is not personally liable upon default

• if the deed is silent or ambiguous as to liability, the transferee/buyer is considered to have taken title subject to the mortgage

When can the mortgagee/lender take possession in a lien theory state

The mortgagee/lender cannot take possession prior to foreclosure because lender has a lien until foreclosure is complete

• the mortgagor is the owner up until foreclosure

When can the mortgagee/lender take possession in a title theory state?

The lender technically has the right, as the holder of title, to possess the property at any time

When can the mortgagee/lender take possession in intermediate title theory state?

A minority or jurisdiction modifies the title theory. The mortgagor retains title until default, at which point the lender can take possession

Equity of Redemption

A common law right held by the mortgagor to reclaim title and prevent foreclosure upon the full payment of the debt. This right must be exercise before the foreclosure sale

Deed in lieu of foreclosure

Rather than facing foreclosure, the mortgagor can convey the property to the lender in exchange for releasing her from any outstanding debt

What does mortgagee need to do before foreclosing?

Provide notice

Who is responsible if the foreclosure sale produces less than the mortgagor owes

The mortgagor is then responsible and courts can issue a deficiency judgment for the remaining balance