- A mortgage must be in writing and signed to be valid.
- It is effective against 3rd parties only if it is recorded.
- Fraud, a lack of consideration, or any other basic contract defect will void a mortgage transaction.
SALES OF MORTGAGED PROPERTY
- There is no general prohibition on selling mortgaged property.
- The buyer, however, takes subject to the mortgage.
o The buyer is not liable on the mortgage debt. The buyer remains liable.
- A buyer is NOT liable for the mortgage debt unless he or she specifically assumes it.
o The seller remains secondarily liable on the mortgage debt even when the buyer assumes it.
o For the original mortgagor to be discharged from the debt, there must be a novation.
PAYMENT OF THE MORTGAGE DEBT
- Any payment or discharge of the mortgage debt extinguishes the mortgage.
RIGHT OF REDEMPTION
- If, after default, the debtor or any other person with an interest in the property tenders the balance of the debt to the mortgagee, the mortgagee must take the tender and stop any pending foreclosure.
STATUTE OF LIMITATIONS
- Possession by either party for ten years following default cuts off the other party's rights.
- By statute in NC, a mortgagee may make a later advance to a debtor and have it tacked on to the original priority, even if the mortgagee knows of intervening claims.
- The statute applies where the parties' original mortgage documents:
o (1) Authorize future advances,
o (2) Place a dollar amount ceiling on future advances, AND
o (3) State the period (not to exceed 30 years) in which advances may be made.
POWER OF SALE FORECLOSURE
- The right to foreclose under a power of sale must be granted in the parties' contract.
- By statute, however, the debtor is entitled to a pre-sale hearing before the clerk of court.
- At this pre-sale hearing, four issues may be considered:
o (1) Was there sufficient notice of the hearing?
o (2) Is foreclosure authorized?
o (3) Is there a valid debt?
o (4) Has there been a default?
RIGHTS OF PURCHASERS AT FORECLOSURE
- In formal judicial foreclosure, objections to the validity of the foreclosure must be raised at the foreclosure proceeding or they will be lost.
o Objections relating to the conduct of the sale (except those alleging fraud) must be raised at the confirmation hearing.
- In a power of sale foreclosure, the traditional rule has been that an objection to the validity of the foreclosure can be raised even after the property is sold.
o This rule may no longer apply to objections that the debtor could have raised at the pre-sale hearing.
- Sale-related objections are cut off if the property comes into the hands of a BFP.
- The general rule is that if the price received for the mortgaged property at the foreclosure sale is less than the amount of the mortgage debt, the debtor is liable for the deficiency.
NC has three important anti-deficiency statutes that are exceptions to the general rule. The first:
(1) Purchase Money Exception
o The debtor is NOT liable for a deficiency if 3 conditions are present:
- (a) The mortgagee is the seller of the property.
- (b) The mortgage secures the purchase price.
- (c) The mortgage documents state on their face that they arise from a purchase-money transaction.
o A buyer can waive the protection of the Purchase Money Anti-deficiency Statute if separate consideration was given to the buyer.
NC has three important anti-deficiency statutes that are exceptions to the general rule. The second:
(2) Purchasing Creditor Exception
o Four elements must be present for this statute to come into play:
- (a) It must be true that the foreclosure sale is held under a power of sale and is not a formal judicial foreclosure.
- (b) The mortgagee must purchase the property at the foreclosure sale.
- (c) The mortgagor must buy the property for less than FMV.
- (d) The mortgagee must sue the mortgagor for a deficiency.
o If all of these elements are present, then the rule is that the debtor gets an offset against this liability. The offset is an amount equal to the difference between FMV and the amount that the mortgagee paid at the foreclosure sale.
NC has three important anti-deficiency statutes that are exceptions to the general rule. The third:
(3) Omitted Notice Exception
o A person otherwise liable on the mortgage debt is discharged if he or she is not given notice of the pre-sale hearing.
Priority between mortgages and other liens is normally determined under the rule of first-in-time-first-in-right.
Exceptions to Priority Rules (1 of 3)
o (1) Purchase Money Security Interests (Article 9)
- Property likely to become involved High-value personal property that becomes affixed to the real estate.
- An Article 9 PMSI will have priority over all pre-existing and future mortgage interests IF the creditor made a fixture filing before the goods were affixed to the real estate or within 20 days thereafter.
Exceptions to Priority Rules (2 of 3)
o (2) NC Property Tax Liens
Exceptions to Priority Rules (3 of 3)
Doctrine of Instantaneous Seisin
- There are certain instances in which pre-existing liens "follow" a buyer into the buyer's purchase of a new piece of property.
• The policy of the law is that it's unfair to allow those liens to defeat the interest of the seller or creditor that finances the sale of the property and takes back a mortgage. It is only because of the credit extended that the property was available to be subjected to the other lien.
- Types of liens that trigger Doctrine of Instantaneous Seisin:
(a) Prior Judgment Liens judgment liens attach to the buyer's after-acquired property.
(b) Mechanics Lien someone who performs work on the property or provides materials used on it can claim a lien.
- RULE: A purchase money mortgage interest held by the seller or other financer of the property takes priority over liens that otherwise follow the property into the buyer's hands.
Collateral Evidence to Establish Mortgage: (the situation)
- The situation: X argues that it is a mortgage, even though he transferred the property in fee to Y.
o X can argue: Transfer of title was only to serve as security for the debt; payments were payment on debt so it is a mortgage.
o Y can argue: Transfer of property was in satisfaction of debt, periodic payments represented rent under an informal month-to-month lease, which is terminable;
Collateral Evidence to Establish Mortgage: (the rule)
The courts of NC state that they will convert an absolute deed to a mortgage in these cases only if two requirements are met:
o (1) The grantor must meet a very high burden of proof. The grantor must prove here facts by "clear and convincing evidence" (85% certainty); AND
o (2) The grantor must show that the mortgage language was omitted as a result of some reason, such as fraud, duress, mistake, or ignorance.
- ALWAYS LOOK TO INTENT. Consider all evidence bearing on the parties' intentions.
- A mortgagee's security extends to permanent improvements made upon the land.
- In NC, it is not possible for the mortgagee to claim an interest in the mortgagor's after-acquired property and have its priority date back to the time of the filing of the original mortgage. (can only do this under Article 9 with personal property).
o NC requires that there be a new filing as to any after-acquired property.
o As to the new property, the mortgagee's priority dates from the time of the new filing.
Payment of the mortgage debt:
- Any payment or discharge of mortgage debt extinguishes the mortgage, even if the recorded mortgage docs are not cancelled. Payment must be made directly to the mortgagee (not a trustee).
o Perfect tender is required, but mortgage can be satisfied by less than full payment in case of a compromise with all contract formalities accounted for (consideration must be present).
Cancellation by entries in the public record:
If anyone shows up with possession of the mortgage note marked "paid" and signed by the mortgagee, the Registrar of Deeds must cancel the mortgage on the public record (unless there is reason to suspect forgery).
Equity of Redemption
- If, after default, the debtor or any other person with an interest in the property tenders the balance of the debt to the m-ee, the m-ee must take the tender and stop any pending foreclosure.
- Holders of right of redemption: mortgagor, heirs, one to whom mortgagor voluntarily transferred her equity, holders of joint interest (spouse), junior lienholders, and tenants with leaseholds.
- Limits: The right to redeem arises only on default; right terminates upon the sale of property at a valid foreclosure sale.
- What must be done to redeem?
o A proper redemption requires that the redeemer tender to the mortgagee (1) the balance of the mortgage debt, PLUS (2) any expenses the creditor incurred in statutory foreclosure proceedings.
2 Methods of Foreclosure: (can always bring a simple K action) (1 of 2)
- Judicial Foreclosure:
o Lawsuit before a court of proper jurisdiction.
o The mortgagee must join in the lawsuit everyone whose interest will be terminated by the lawsuit. This includes: the mortgagor, junior mortgages, lien holders, etc...
o Judicial foreclosures are very expensive, so they're rare.
2 Methods of Foreclosure: (2 of 2)
Power of Sale Foreclosure:
o The right to foreclose under a power of sale must be granted in the parties' K.
o The debtor is entitled to a pre-sale hearing before the clerk of court. Trustee/mortgagee must give notice of the hearing. At this hearing four issues may be considered (DAN-D):
• (1) Has there been a default?
• (2) Is foreclosure authorized?
• (3) Was there sufficient notice of the hearing?
• (4) Is there a valid debt?
o Who is entitled to notice of the pre-sale hearing?
(2) Anyone else liable on the debt.
(3) Anyone else with a recorded future interest in the property.
No notice is required to other mortgagees or lien holders.
When is the sale final?
o A sale will not be final until a period of time has passed to allow for the submission of upset bids (must exceed the reported sale price by 5% or $750).
A successful upset bid opens the bidding again for another 10 days.
Deed of Trust
Most common form of property transfer in NC, m-or conveys the land to a 3rd party trustee to be held for the benefit of the creditor; the mortgage instrument gives the trustee the power of sale in case of default; trustee owes a duty of fairness to both m-or and m-ee and may not purchase the property if in default.