A mortgage is a type of security interest -- a loan is given in exchange for a promise to repay, secured by an interest in a piece of real property. If the loan is not paid back, the holder of the security interest can take the land, sell it, and use the proceeds to pay the debt.
A debtor / notemaker is the mortgagor; he gives the mortgage (along with the note) to the lender, who is the mortgagee. Most states require that the lender realize on the piece of property ONLY through a foreclosure proceeding, conducted by a court (through a sheriff)
Deed of Trust defined
A deed of trust is just like a mortgage, except the "security interest" goes to a corporation affiliated with the lender -- a lawyer or someone like that. If the debtor defaults, the lender (a third party beneficiary) instructs the trustee (the corporation) to sell the property, and the money goes to the lender. This does not necessarily have to be by a judicial sale - it can be a private sale by the trustee.
Installment Land contract
This is like paying for land in installments. You pay - with interest - until you've paid in full. Then the land is yours, and at THAT time (not before) the person transfers you the legal title. Of course, if you don't pay, you get nothing AND you lose the money you paid.
Absolute Deed - Equitable Mortgage
Sometimes people end up doing a "fake sale" of property - this is where you give me the actual land and I give you some money. No "interest" or anything like that, just fee simple. Except, we have a contract where - if i pay you back - you give me the land back.
If courts get wind of this, they'll treat it like a security interest - it's called an "equitable mortgage" and it gets treated like a mortgage even though it, in fact, was not a mortgage.
1. existence of a debt or promise of payment by the deed grantor.
2. promise to return the land if the debt is paid.
3. amount advanced to grantee was way lower than the property is actually worth.
4. financial distress
5. parties negotiations prior to the transfer
sale - leaseback
If a landowner really needs cash, he can sell his land to someone else and then lease the land back from that person for a long period of time. However, courts also might treat this as a security interest (a mortgage) if it looks like it's actually meant to be one of those.
1. regular rent payments look like mortgage payments
2. existence of repurchase option
3. amount of repurchase option isn't exactly "FMV."
Transfers of mortgages in general
All parties to a mortgage can transfer their interests. The mortgagor (the one who owned the land and needs the cash from the loan) just deeds his property. The mortgagee (lender) usually transfers by indorsing the note and executing a separate assignment of the mortgage. These both must happen for the transfer to be complete.
Transfer by lender (mortgagee) - when he transfers the mortgage interest but forgets the note.
Case law is divided on this one. Some states say "hey, you do that, you automatically transfer the note also." This allows equitable relief. Other states hold that if you transfer the mortgage but forget the note, you haven't actually done ****. (It's void.)
Transfer by lender - when he transfers the note but forgets the mortgage interest.
This is okay - the note can transfer around without the mortgage interest (the separate assignment of the mortgage). When you do this, you basically transfer the mortgage.
There are two different ways to do this:
1. indorse it and deliver it to the transferee
2. make a separate document of assignment (of the NOTE)
"Holder in due course" - how do you get this, and what does it mean?
A "holder in due course" is one who takes a note free of any "personal defenses" that the maker of the note (the original debtor) might raise. You can only become a holder in due course if
1. the note is negotiable in form (payable to bearer) and contain no other promises
2. the original note must be signed by the named payee - so, signed by the guy who originally took the interest in exchange for some cash.
3. the original note must be delivered.
4. the transferee must take the note in good faith and pay value for it - that means take it assuming everything is cool (not knowing of any defenses or knowing it's overdue) and pay more than just a peppercorn.
What the hell are personal defenses?
They are defenses that could be raised by the guy who originally mortgaged his farm... things like "failure of consideration, fraud in the inducement, waiver, estoppel, and payment."
They are different from "real defenses" that the guy who originally mortgaged could make - things like "duress, incapacity, illegality, fraud in the execution, forgery, insolvency."
Don't ask me what the hell that means.
Let's say I mortgage my ****. Who do I pay?
You have to pay the person who you KNOW has the note. In common sense terms, if you know the person has assigned your note to somebody else, you have to pay the assignee, not the original mortgagee. If you don't know, then paying the original is cool.
Transfer by mortgagor - what happens?
The grantee takes the land subject to the mortgage, which remains with the land. Unless the mortgagee/mortgagor wrote this into the contract, the mortgagee has no power to object to the transfer.
Does the grantee ever "assume" the mortgage?
Yes, usually she does. She signs an agreement promising to pay the mortgage loan. That makes her primarily liable to the lender (who is now a third party beneficiary) and the original mortgagor is now secondarily liable as a surety. If the mortgagee and grantee modify the obligation at all, that cuts out the original debtor.
What if I don't "assume" the mortgage. I don't want that ****!
That's fine, you aren't personally liable on the loan. But, the mortgage stays with the original property, so if the person defaults on their loan obligations, the property gets sold right out from under you.
This all sounds weird. What do most modern mortgages do about this?
They have "due on sale" clauses, which allow the lender to demand full payment of the loan if the debtor transfers any interest in the property. These clauses protect the lender from sale to a person with no credit AND allow the lender to raise the interest rate when the property is sold.
Defenses against a mortgage
Any defense against the underlying obligation is also a defense against the mortgage... so if you can assert a defense based on failure of consideration, fraud, duress, or mistake, that would get you out of the obligation (the debt owed), then you also get out of the mortgage.
Mortgage discharge by payment
Generally, full payment of a note discharges the mortgage. There is no automatic right to pre-payment of the note... the mortgage itself may say otherwise, but if it does not, you pay that **** off according to the terms of the note.
Mortgage discharge by merger
If the mortgagee somehow acquires the mortgagor's interest, the mortgage merges with the title, and the liability of the mortgagor is discharged up to the value of the land.
Mortgage discharge by deed in lieu of foreclosure
The mortgagor might decide "yo, i'mma just give my deed up to the bank." Usually when this happens, the parties decide amongst themselves that this includes a total discharge of the debt, but they may not. This allows the mortgagee to just step and take the property without going through a foreclosure sale.
Mortgagees can refuse this, and mortgagors don't have to accept this. This is strictly a "we have to agree on this" type of affair.
Possession prior to foreclosure
Usually this never happens, because most states follow a "lien theory" of mortgages, which keeps the Bank off your **** until after a foreclosure proceeding - they only have a "lien" on the value of your property, no right to step onto it.
However, it can happen if the mortgagor and mortgagee agree on it, or in a "title theory" jurisdiction where the mortgagee can step whenever.
What can the mortgagee do if he has possession?
He can intercept the rents, prevent waste, and make repairs. He can also lease out vacant space.
However, most mortgagees don't want to do this, because they have a very strict duty to account for all the rents, manage the property in a prudent manner, and they also assume liability in tort. So they sometimes just have "receiverships" do that sort of thing for them - a court appointed third-party who manages the property and handles all that ****.
Foreclosure: what is it?
Foreclosure is the process by which the mortgagor's interest in the property is terminated. The property is sold to whoever will buy it via auction (usually the mortgagee/lender is the only bidder) and the money that the person makes goes to paying off the debt.
Redemption in equity
At any time prior to the foreclosure sale, the mortgagor has the right to redeem the land (free it from the mortgage) by paying that **** off, plus any accrued interest.
You cannot waive the right to redeem in the mortgage itself. That's known as "clogging the equity." However, you can later waive your right of redemption for consideration, if you want to.
Redemption by statute
This is NOT the same thing as equity by redemption... this is where some states allow you about six months or one year to pay back your mortgage AFTER the date of the sale.
Mortgage Priority generally
Generally speaking, mortgages are determined by the old "first in time / first in right" principle. If you decide to take an interest in land that's already subject to a mortgage, you get a piece of land that's ... you guessed it, subject to a mortgage.
Effect of foreclosure on senior (prior) interests
A foreclosure has no effect on a senior mortgage. The buyer at the foreclosure sale buys a piece of property with a mortgage on it... and she best pay it off, otherwise the bank might foreclose on the bitch again.
Effect of foreclosure on junior (post-mortgage-that-is-being-foreclosed) interests
A foreclosure destroys all the interests junior to the mortgage. It's harsh - liens, leases, easements, all other interests... gone. If a lien senior to the mortgage is in default, the junior mortgagee has a right to pay it off (i.e. "redeem it") in order to avoid being wiped out. So, you HAVE to join junior interests in your foreclosure action, and if you don't ... it stays with the land.
How do priorities get changed?
1. Failure to record according to the recording act in the jx.
2. a specific agreement to subordinate the mortgage to another one.
3. a Purchase Money Mortgage
What is a Purchase Money Mortgage?
A PMM is a mortgage given to the vendor of the property as part of the purchase price, or
a mortgage given to a third party lender, who is lending the funds to allow buyer to purchase the property.
These take priority over NON-PMMs on the property, even if those liens are recorded first. PMM priority is defeated by operation of the recording statute, if it gets that far.
Modification of senior mortgage: effect on priority
If the senior mortgage is modified to get more burdensome, the junior mortgages are only "junior" with respect to the original agreement, not the modification itself, which goes to the back of the line.
Future advances from the lender
In general, if these are contemplated by the original mortgage, then they're fine. If they're NOT... in other words, if it's just an "optional" advance of money, that advance itself goes to the back of the line.
Proceeds of a judicial sale
First: attorneys fees, sale costs, court costs
Second: the foreclosed loan.
Third: anybody junior to the foreclosed loan.
Deficiency judgments: what are they?
Let's say the mortgage proceeds aren't enough to pay off the mortgagee... or let's say the mortgage proceeds pay off mortgage 1, but junior mortgage came up short. A deficiency judgment is a personal action - mortgagee v. debtor - that makes the debtor personally liable.
Some states limit the deficiency you can recover to "debt - FMV of property" instead of "debt - foreclosure price" by statute. And sometimes you can't get a deficiency judgment at all through a "private deed of trust" sale or a PMM.
Practice time: Imagine a landowner mortgaged his property three times to three banks. One for 30K, one for 15K, and one for 10K. Now imagine Bank One comes for his ass through foreclosure sale.
The property is auctioned and comes up with $50K.
Where that money go?
First, attorneys, the court, and the auctioners are paid off. Then, the interest on Mortgage 1 gets paid off. Assuming those items are zero...
All 30K to Mortgage 1.
Mortgage 2 is wiped out, so he gets the 15K.
There's 5K left over... that goes to Mortgage 3 (Bank Three). Now, Bank Three is still owed 5K, so Bank Three can come after landowner PERSONALLY for that money.
Practice time: imagine the same facts, except the property comes up with 60K in auction. Now what happens?
Now instead of 5K left over after the first two mortgages ... there's 15K left over. Therefore, Bank Three gets all its money, and there's 5,000 left.
That money goes back to Mortgagor. Thanks for playing.
Practice time (one more): assume same facts, except mortgage TWO is foreclosed. Bank Two is entitled to foreclose, so they do... What happens? (in other words, how much will they sell the land for, assuming its worth 50K?)
Probably 20K. Why?
Well, whoever buys the land in the foreclosure sale organized by Bank Two is buying a piece of property that has been mortgaged for 30K, and that mortgage is going to stick with the property. So if the land is worth 50K free-and-clear, you can only afford to pay up to 20K for it, because that other 30K needs to pay off Mortgage 1.
Incidentally, Mortgage 2 is totally paid off, and Bank Three gets the remaining 5K and can proceed against Mortgagor for the 5K they still owe... personally.
Installment Land Contract foreclosures
What's supposed to happen in a defaulted "installment land contract" is that the buyer (the guy who took the land) is totally screwed. He loses the property and his money. But, since this is really harsh, courts allow the purchaser a grace period within which to pay off the full balance and keep the land.
Other equitable or statutory protections for defaulted installment contract buyers.
Restitution - some states require the vendor to take the land, but then to repay the purchaser any amount that exceeds the vendor's damages... (for example, drop in value, or rental value while purchaser had the property)
Treat it like a Mortgage - means what it says. Vendor has to have a judicial sale and get its money that way.
Waiver - You can't accept late payments habitually and then all of a sudden insist on a strict deadline and then take the land.