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40 Cards in this Set

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  • Back
What are the MR's incentives to tranfor loans to Gs?
1) MR had a low interest rate and can sell the house for more to G because of the interest rate
2) Avoiding closing costs/transaction costs
3) Wills, intestate succession
4) Gift of property with mortgage attached
5) GR has a bad credit rating
6) Milking the real estate (G paying MR cash for a transfer and then milking real estate while awaiting foreclosure)
What are the solutions to milking?
1) Ex parte receivership (element of surprise in case they file for bankruptcy)
2) Assignment of rents
3) CA criminal statute for milking for owners of five or more parcels of residential property (applies to subject to grantees as well)
Is a MR's interest or equity normally freely transferable?
Yes, can't have a disabling restraint on alienation
Can a MR escape personal liability on the mortgage debt by transferring RE to a G?
No, the MR normally remains personally bound to pay the debt unless expressly discharged by agreement with the ME.
What do courts do when there is ambiguity as to whether a transfer is assumed or subject to (such as with the “take over” language in Middleton v. Hancock)?
1) Extrinsic evidence is allowed in by the courts. 2) One such piece of evidence is the earnest money contract/contract of sale, which proceeds the mortgage.
3) When language is ambiguous, earlier documents can be used to clarify.
4)When language contradicts, however, later language usually trumps. (Arena).
5) Residential situations are more likely to be construed as having assumptions while commercial situations are more likely to be construed as subject to transfers because of the natural presumptions of the parties.
How is an assumption transfer created?
1) In the deed (warranty or quitclaim deed)
2) Bilateral agreement between E1 and G when E1 consents to the transfer of the mortgage.
o Don’t need the third party beneficiary theory because there is a direct bilateral agreement
What is the third party beneficiary theory?
Contract between A and B. C can enforce when C is a beneficiary of the contract.

This is why E1 can enforce a contract between MR and G1 (so can enforce an assumption agreement)
A v. ST transfers: Liability
A: GR becomes personally liable on the existing debt. MR also has liability unless E1 specifically agrees to let E1 off the hook.

ST: GR is not personally liable on the existing debt. MR has liability unless E1 specifically agrees to let E1 off the hook.
A v. ST transfers: Common Language
A: “which grantee hereby assumes and agrees to pay according to its terms”

ST: “subject to a deed of trust recorded”
What are the three main rights of MR under A and ST?
1) Subrogation (both)
2) Reimbursement (A only)
3) Exoneration
If MR has the money to do so and thinks the land value will go up, this is the best option.

MR forces E1 to sell mortgage to MR for the full accelerated amount and MR can foreclose on mortgage.

Have to pay the FULL amount of the debt. No such thing as partial subrogation.
If E1 will allow it, MR will make the late payments to E1 and then sue G for reimbursement. Does not require full payment of mortgage debt.
MR can sue for specific performance on the assumption agreement and have a court order G to make payments.
What is the one-action rule?
If in one of the one-action rule states, MR can force E1 to foreclose on the real estate first before going after MR.

In effect in about 6 states.
A: G is the principal debtor. MR is the principal surety. Assuming there is no one-action rule, E1 is not bound by the labels and can go after either G or MR.

ST: There is no principal but MR is still a surety despite G’s lack of personal liability.
What is the VA-FHA Exception?
MR has to ask directly for consent to be let off the hook for transfers and government agencies may give a release

If don’t get this release, then not let off the hook for these loans
What is the implied assumption problem?
1) A few states hold that where, in a transaction with a conveyance ST the mortgage, the full value of the land is agreed on as the purchase price and the purchaser deducts the mortgage amount from it, the purchaser becomes personally liable for the mortgage debt.
2) MD, NJ, OK and SC
3) PA: finds an implied obligation on the part of the G to indemnify the MR who pays off the mortgage debt.
What is the justification for the subrogation rights?
The law confers such rights on one who makes a payment under a legal duty to pay, but where another person would be unjustly enriched by the payment in the absence of subrogation.
What is the fork in the road issue?
Always analyze a case as both an A and ST transfer.

Is extrinsic evidence sufficient to prove an A?

If A: Can get S, R, and E.

If ST: Can only get S so have to pay in full before recovery.
If the original loan was nonrecourse b/c of the law (CA home mortgage) can G1 ever be held personally liable?
No, even if E1 tried to get G1 to waive their nonrecourse stance.
What two theories support the conclusion that the ME has a right to recover personally from an assuming G?
1) Third Party Beneficiary Theory: ME is deemed to be a beneficiary of the assumption contract between the MR and the G.
2) The Subrogation or Derivative Theory: ME has a right to stand in the shoes of the MR and thus, to be subrogated to the MR's rights against an assuming G.
Can a ME hold an assuming G liable when any earlier G in the chain of ownership failed to assumed the debt?
1) S-D Theory: No, since the preceding grantee is not a grantee-debtor, there are no shoes in which the ME can stand.
2) TPB Theory: Depends on view taken by the court

Restatement 1 of contracts: a 3rd party (E1) can enforce a contract against a promisor (G) if:
o there is an intent to benefit E1 and
o the promisee (MR) is liable to E1

Restatement 2 of contracts: E1 can sue G1 so long as E1 is the intended beneficiary (prong two no longer exists)

· For Restatement 2 jurisdictions, as long as G is personally liable (and thus, there is an intent to benefit E1) it meets the test
· Under Restatement 1 jurisdictions, if the immediate promisee isn’t liable it fails the two-part test.

Can also just write a new contract-->bilateral contract. So, TPB theory is not needed.
Can the assuming or ST G utilize the defenses the MR may have against the ME?
No: The G has subtracted the amount of the mortgage from the purchase price and if were permitted to raise defenses to the mortgage, the G would be unjustly enriched.

Some states, however, are unwilling to construe their usury statutes to bar the G's raising of the defense.
When the MR be released upon a transfer of the real estate?
1) Express release by the Me
2) Duty to provide release under federal regulations: If the mortgage contains a DOS clause, the ME is required to release the original MR if the G and the ME agree in writing that the G will assume the loan, and agree as to the interest rate the G will pay.
3) Discharge of Liability under FHA-insured home loans: If the FHA/VA finds that the G qualifies under the standards, the MR will be released.
Who can ME sue after a transfer to a G?
Either MR or G. Will usually choose the deeper pocket.
What are some common modifications in the agreement between ME and G and how do they affect MR?
1) agreement releasing G from liability: this is applicable only to assumption transfers and will release MR from liability automatically as well
2) extension of the due date: Under an A transfer this is supposedly prejudicial to MR, who loses the rights of subrogation, etc., so MR is released from liability. Under a ST transfer, MR is released from liability to the extent of the FMV of Blackacre on the date of the extension agreement. Thus, MR could be fully released if the FMV is high enough. Restatement: MR is discharged only to the extent that the time extension would otherwise cause loss to the MR.
3) changed interest rate: If the interest rate is lowered, MR is still liable because this is non-prejudicial, but if the interest rate is raised, MR is released from liability.
4) change in principal: If the principal amount is cut, MR is still liable because this is non-prejudicial, but if the principal amount is raised, MR is released from liability.
Majority rule for release of MR when modifications between ME and G
Releasing MR from liability is a complete release

This only applies to A transfers b/c in ST transfers, the MR's only recourse is against the property.
Minority/Restatement rule for release of MR when modifications between ME and G
It is only a partial release so MR is only liable up to the diminished value of the property.

Anything paid at a foreclosure sale further reduces the MR's liability.
Can mortgage consent to modifications by ME and G by signing an advanced authorization?
Yes, ex ante agreements are okay but have to be very specific about what such agreements cover.

Advance consent language is interpreted strictly against the drafter (First Federal Savings and Loan v. Arena).
How can the ME get the consent of the MR for modifications with a G?
1) In the original mortgage itself
2) Before the ME's granting of the release, modification or extension
3) At time of the granting, by the MR's joining in it
4) After the release
Due on Sale Clause
This says that upon transfer, a MR must get ME’s consent or else ME has the right to accelerate the debt.
Garn Act of 1982
Applies to every lender (except private banks) in the US and validates the use of due on sale and due on encumbrance clauses.

There are certain exceptions when lenders cannot enforce due on sale clauses, all of which apply to non-sale transfers of residential property containing less than five dwelling units:
§ Junior mortgages
§ Joint tenancies
§ Three year or less rental
§ Transfer to relative upon death
§ Intervivos transfer (through sale or gift) to spouse or child
§ Divorce settlement
§ Intervivos trust, under certain circumstances
§ OTS prescribed

State law is still the default when the Garn Act does not apply.
Due on Encumbrance Clause
This clause says that if MR encumbers land without E’s consent, E can accelerate the debt.

These are generally enforced because they are clearly meant to protect the security.

Increases the likelihood of MR being overcommitted.
Have FM/FM included a provision requiring the MR to give the lender affirmative notice of transfer?
No, encourages concealment
Schemes for concealment
1) not recording the deed, 2) having MR write the checks 3) keeping casualty insurance under MR’s name.
Remedies for concealment
1) acceleration, 2) asking for the difference in interest rate between mortgage interest rate and market interest rate for that period (no punitives b/c it is just a breach of contract).
What is the purpose of the DOS clause?
This helps lenders protect against Gs who are not creditworthy and also allows them to manipulate for higher interest rates.
What was the pre-Garn act situation?
Up until the Garn Act, states like CA believed that the only valid reason for having a due on sale clause was protecting the security. (Wellington). Other states found either reason acceptable.
Is the transfer by installment land contract considered a junior interest and thus, prohibited from DOS enforcement under the Garn Act?
On what grounds is the MR/Surety discharged from liablity b/c of the actions of the ME?
1) Make it less likely that the G or the land will satisfy the debt
2) Make it more difficult for the MR to assert recourse against the G and the land if the MR is required to pay the debt