Real Property - Mortgages

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Real Property - Mortgages
2012-01-14 21:57:40
barbri VA

Real Property - Mortgages
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  1. The Model
    C, a creditor, is thinking of lending O $50,000. O offers Blackacre as collateral.
  2. Creation
    • Conveyance of a security interest in land, intended by the parties to be collateral for the repayment of a debt
    • Two Elements:
    • 1. a debt
    • 2. a voluntary lien in debtor's land to secure the debt
    • Debtor = mortgagor
    • Creditor = mortgagee
    • Typically must be in writing to satisfy the Statute of Frauds.
    • Legal mortgage examples: mortgage deed, note, deed of trust, sale leaseback, security interest in land
  3. Equitable Mortgage
    • Example: O owns Blackacre. Creditor lends O a sum of money. The parties understand that Blackacre is hte collateral for the debt. But instead of executing a note or mortgage deed, O hands Creditor a deed to Blackacre that is absolute on its face.
    • As between O and Creditor, parole evidence is admissible to show the parties' true intent.
    • If Creditor proceeds to sell Blackacre to BFP, BFP owns. O's recourse is to sue Creditor for fraud and the sale proceeds.
  4. Parties' Rights
    • Until foreclosure, debtor-mortgagor has title and right to possess.
    • Creditor-mortagagee has a lien.
  5. Transferability of Interest
    All parties to a mortgage can transfer their interest
  6. Transferability of Interest
    • Transfer by
    • 1. endorsing the note and delivering to transferee; or
    • 2. executing a separate document of assignment
    • *If the note is endorsed and delivered, the transferee is eligible to become a holder in due course, that is, he takes the note free of any personal defenses that could have been raised against the original creditor*
    • Personal defenses include lack of consideration, fraud in the inducemenet, unconscionability, waiver, estoppel
    • Despite any such personal defense, the holder in due course may foreclose the mortgage
    • But subject to following real defenses: MAD FIFI4
    • Material
    • Alteration
    • Duress
    • F
    • I
    • Fraud in the Factum (lie about instrument)
    • Incapacity
    • Illegality
    • Infancy
    • Insolvency
    • Holder in due course
    • a. note must be negotiable, made payable to the named mortgagee;
    • b. the original note must indorsed, signed by the named mortgagee;
    • c. the original note must be delivered to the transferee (photocopy is no good);
    • d. the transferee must take the note in good faith w/out notice of any illegality; and
    • e. the transferee must pay value for the note (more than nominal)
  7. Transferability of Interest
    • If O, debtor-mortgagor, sells Blackacre, the lien remains on the land so long as the mortgage was properly recorded.
    • All recording statutes apply to mortgages as well as deeds. So a later buyer takes subject to a properly recorded lien.
  8. Transferability of Interest
    Personal liability
    • Who is personally liable on the debt if O, our debtor-mortgagor, sells Blackacre to B?
    • If B has "assumed the mortgage": Both O and B are personally liable. B is primarily liable. O remains secondarily liable.
    • If B takes "subject to the mortgage": B assumes no personal liability. Only O is personally liable. But, if recorded, the mortgage sticks w/ the land. So if O does not pay, mortgage may be foreclosed.
  9. Foreclosure
    • Must foreclose by proper judicial action. Land is sold. Sale proceeds go to satisfying the debt.
    • If proceeds are less than the amount owed, mortgagee brings a deficiency action against debtor.
    • If proceeds are a surplus, junior liens are paid in order of priority remaining surplus goes back to debtor.
    • Off the top: attorneys fees, foreclosure expenses, accrued interest on first bank's mortgage
    • Proceeds then used to pay off mortgages in order of priority. Each claimant entitled to satisfaction in full before next lienholder.
  10. Effect of foreclosure on junior interests
    • Foreclosure will terminate interests junior to the mortgage being foreclosed but will not affect senior interests. Once foreclosure of a superior claim has occurred, with the proceeds distributed appropriately, junior lienholders can no longer look to Blackacre for satisfaction.
    • Those with interests subordinate to those of the foreclosing party are necessary parties to the foreclosure action.
    • Debtor-mortgagor is considered a necessary party and must be joined.
    • Failure to include a necessary party results in teh preservation of that party's claim, despite the foreclosure and sale. So if a necessary party is not joined, his mortgage remains on the land.
  11. Effect of foreclosure on senior interests
    Foreclosure does not affect any interest senior to the mortgage being foreclosed. The buyer at the sale takes subject to such interest. This means that buyer is NOT personally liable on the senior debt, but if the senior mortgage is not paid, sooner or later, the senior creditor will foreclose on the land.
  12. Priorities
    • Creditor must record, no priority until recorded.
    • Once recorded, priority is determined by the norm of first in time, first in right.
    • The purchase money mortgage: a mortgage given to secure a loan that enables the debtor to acquire the encumbered land.
    • "floating lien" is fine (applies to after-acquired real estate)
    • Subordination agreements: permissible; senior creditor may agree to subordinate to junior creditor.
  13. Redemption in equity
    • at any time prior to the foreclosure sale, debtor can try to redeem the land
    • Once valid foreclosure has taken place, the right to equitable redemption is gone
    • Exercised by paying off missed payment(s) plus interest plus costs
    • If the mortgage contains an acceleration clause (permits mortgagee to declare the full balance due in event of default) the full balance plus accrued interest plus costs must be paid.
    • A debtor/mortgagor may not waive the right to redeem in the mortgage itself b/c it "clogs the equity of redemption"
  14. Statutory Redemption
    • not recognized in VA
    • recognized in half of states
    • gives the debtor-mortgagor a statutory right to redeem for some fixed period after the foreclosure sale has occurred (typically six months to one year). Amount to be paid is usually the foreclosure sale price rather than the amount of the original debt.
    • Typically, mortgagor will have the right to possess Blackacre during the statutory period.
    • Redemption nullifies the foreclosure sale - redeeming owner is restored to title