Real Property 10: Mortgages
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What is a MORTGAGE?
A mortgage is the conveyance of a seurity interest in LAND, intended by the parties to be COLLATERAL for the repayment of a debt.
How can a mortgage satisfy the statute of frauds?
The LEGAL mortgage must be in writing. This is also referred to as the "note," "mortgage deed," deed of trust," sale-leaseback," or "security interest in land."
What is an EQUITABLE MORTGAGE?
when O (owner of Blackacre) borrows money from Creditor hands a deed to the Creditor, with both parties understanding that Blackacre is to be a collateral for the debt.
As between O and creditor, PAROL EVIDENCE IS ADMISSIBLE to show the parties' true intent.
What happens if a creditor sells Blackacre, which has has obtained through an equitable mortgage?
O's only recourse is to sue creditor for fraud and to recover the sale proceeds.
What are the parties' rights once a mortgage has been created?
Debtor's Rights: Unless and until foreclosure, debtor-mortgagor has TITLE and the RIGHT TO POSSESSION.
Creditor's Rights: Creditor-mortgagee has a LIEN.
Are mortgage interests TRANSFERABLE?
Yes. All parties to a mortgage can transfer their interests. The mortgage automatically follows a properly transferred note.
How can a creditor-mortgagee TRANSFER his mortgage interest?
1. By endorsing the note and delivering it to the transferee
2. By executing a separate document of assignment
How may a transferee to a mortgage interest become a HOLDER IN DUE COURSE?
When the creditor-mortgagee (transferor) endorses and delivers the note and the following requirements are met:
1. Note must be NEGOTIABLE, made payable to the named mortgagee
2. Original note must be INDORSED, signed by the named mortgagee
3. Original note must be DELIVERED to the transferee (photocopy is UNACCEPTABLE)
4. Transferee must take the note in GOOD FAITH without notice to any illegality
5. Transferee must pay VALUE for the note (some amount more than nominal)
What rights does a HOLDER IN DUE COURSE have?
He takes the note free of any personal defenses that could have been raised against the original creator.
"Personal defenses" include lack of consideration, fraud in the inducement, unconscionability, waiver, and estopper.
Is a HOLDER IN DUE COURSE subject to any defenses?
Yes, he is subject to these REAL DEFENSES:
Fraud In the Factum (a lie about the instrument)
Do recording statutes apply to mortgages?
Yes. Recording statutes protect mortgages (lien remains on the land when debtor sells the land, so long as the mortage instrument was properly recorded).
Who is personally liable on the debt if O, the debtor-mortgagor, sells Blackacre to B?
If B takes "subject to the mortgage"
- If B "assumes the mortgage"
- Both O and B and personally liable. B is primarily liable; O remains secondarily liable.
B assumes no personal liability. Only O is personally liable.
But if recorded, the mortgage remains on the land. Thus, if O does not pay, the mortgage may be foreclosed.
What is required for a proper foreclosure?
The mortgagee must foreclose by PROPER JUDICIAL PROCEEDING.
What happens to the proceeds from the sale of Blackacre?
First to be paid: attorney's fees, expenses of the foreclosure, any accrued interest on First Bank's mortgage.
Then the remainder goes to satisfy the debt.
What happens if proceeds from the sale of Blackacre are LESS than the amount owed?
Mortgagee brings a deficiency action against the debtor.
What happens if proceeds from the sale of Blackacre results in a SURPLUS?
Junior liens are paid off in order of their priority. Any remaining surplus goes to the debtor.
What is the effect of foreclosure on other interests?
Junior interest: Foreclosure will terminate interests junior to the mortgage being foreclosed.
Senior interest: Foreclosure will not affect interests senior to the mortgage being foreclosed. The mortgage remains on the land and senior creditor might be able to recover against new buyer, depending on the language ("assumes the mortgage" vs. takes "subject to the mortgage").
What happens to JUNIOR lienholders when Blackacre is foreclosed?
If the junior debt has not been satisfied, junior lienholders should proceed for a deficiency judgment.
However, once foreclosure occurs, junior lienholders can no longer look to Blackacre for satisfaction.
What are the NECESSARY PARTIES in a foreclosure action?
1. Those with interests subordinate to those of the foreclosing party
What happens if creditor fails to include a necessary party?
It preserves that party's claim, despite the foreclosure and sale.
How does a creditor get PRIORITY in a mortgage?
He must properly RECORD the mortgage.
Once recorded, priority is determined by the norm of "first in time, first in right."
What is a PURCHASE MONEY MORTGAGE?
A mortgage given to secure a loan that enables the debtor to acquire the encumbered land.
What is the PRIORITY of a purchase money mortgage?
The Creditor in a purchase money mortgage has FIRST PRIORITY as to the parcel he financed as long as he recorded properly.
What is a FLOATING LIEN? Is it permissible?
An after-acquired collateral clause, that allows a creditor to take a security interest in items that were not acquired at the formation of the note (e.g., "all of O's real estate holdings")
Yes, it is permissible.
What is a SUBORDINATION AGREEMENT? Is it allowed?
It is a private agreement in which a senior creditor agrees to subordinate its priority to a junior creditor.
It is allowed.
What is REDEMPTION IN EQUITY?
At any time PRIOR to the foreclosure sale, debtor has the RIGHT to redeem the land and free it of the mortgage.
Until when does the debtor have the right to equitable redemption?
Equitable redemption is universally recognized up to the date of sale.
However, once a valid foreclosure has taken place, the right is gone.
How is the right of equitable redemption exercised?
By paying off the missed payment or payments plus interests plus costs.
If the mortgage note contains an ACCELERATION CLAUSE, the mortgagee must pay the FULL balance plus accrued interest plus costs.
Is the right to redeem in the motgage itself waivable?
No. This is called CLOGGING THE EQUITY OF REDEMPTION. It is prohibited.
What is STATUTORY REDEMPTION?
Recognized in one-half of the states, statutory redemption gives the debtor-mortgagee a statutory right to redeem for some fixed period AFTER the foreclosure sale has occurred (usually 6 months to 1 year). The amount to be paid is usually the foreclosure sale price, rather than the amount of the original debt. Redemption nullifies the foreclosure sale and restores title to the redeeming owner.
NY: There is NO statutory right to redemption.
In a state that recognizes statutory redemption, what are the rights of the mortgagor?
He may POSSESS Blackacre during the statutory period.
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