Real Property - Mortgages

Front 1

Creation of a mortgage: 2 elements

Back 1

A mortgage is a conveyance of a security interest in land intended by the parties to be collateral for the repayment of a debt. Requires 2 things:

1. A debt; and

2. A voluntary lien in debtor's land to secure the debt.

Mortgage typically must be in writing to satisfy the statute of frauds: this is the legal mortgage; the writing can be called the note, the mortgage deed, a deed of trust, a sale-leaseback, or a security interest in land.

Front 2

Mortgagor

Back 2

The debtor, the person who owns the land used as collateral for the money she borrowed.

Front 3

Mortgagee

Back 3

The creditor, the person who takes a security interest in the mortgagor's land and can foreclose if the mortgagor defaults on the loan.

Front 4

Equitable mortgage

Back 4

Creditor lends O money and the parties understand Blackacre will be collateral for the debt, but instead of executing a note or mortgage deed, O gives creditor a deed to Blackacre that is absolute on its face--this is called an equitable mortgage.

Parol evidence is admitted to show the parties' true intent.

NB: if creditor sells Blackacre to bona fide purchaser X, X owns it! O's only recourse is to sue creditor for fraud and the sale damages.

Front 5

Parties rights under a mortgage

Back 5

Unless and until foreclosure:
* Debtor-mortgagor has title and the right to possess;
* Creditor-mortgagee has a lien--that's it.

Front 6

Transferability of mortgage interests

Back 6

All parties to a mortgage can transfer their interests. The mortgage automatically follows a property transferred note.

Front 7

Transferring a creditor-mortgagee's interest (2 ways)

Back 7

1. Endorsing the note and delivering it to the transferee; or

2. Executing a separate document of assignment.

Front 8

Holder in due course: 5 requirements

Back 8

If a mortgagee transfers her interest to a transferee by endorsing and delivering the note, the transferee becomes a holder in due course, which means that she takes the note free of any _personal defenses_ that could have been raised against the original mortgagee--great position to be in!

However, even a holder in due course is subject to real defenses the mortgagor might raise.

Requirements to be a holder in due course:
1. Note must be negotiable aka payable to the named mortgagee;
2. The original note must be indorsed (signed by the named mortgagee);
3. The original signed note must be delivered to the transferee--a photocopy is unacceptable;
4. The transferee must take the note in good faith, without notice of any illegality; and
5. The transferee must pay VALUE for the note, meaning some amount more than nominal.

Front 9

Personal defenses (5)

Back 9

A holder in due course takes a note free of any of these personal defenses that could have been raised against the original mortgagee:
1. Lack of consideration;
2. Fraud in the inducement (a lie about the property itself or some collateral matter--not fraud about the nature of the document signed);
3. Unconscionability;
4. Waiver; and
5. Estoppel

Front 10

Real defenses (MaD FIFI^4)

Back 10

These can be raised by the mortgagor even against a holder in due course:
* Material alteration
* Duress
* Fraud in the Factum (a lie about the instrument itself, not about the property)
* Incapacity
* Illegality
* Infancy
* Insolvency

Front 11

Transferring a mortgagor's interest

Back 11

If O, a debtor-mortgagor, sells Blackacre, which has been mortgaged, the lien remains on the land as long as the mortgage was properly recorded (a mortgage is treated just like a sale under recording system statutes, so whether this is a notice or race-notice jurisdiction, if the mortgage was properly recorded then buyer takes Blackacre subject to it).

Front 12

Liability on mortgage after mortgagor transfers her interest

Back 12

If B has "assumed the mortgage," then both O and B are personally liable on the mortgage: B is primarily liable, and O is secondarily liable.

If B takes "subject to the mortgage," then B assumes no personal liability--only O is personally liable on the mortgage. But, if recorded, the mortgage sticks to w/the land, so if O doesn't pay the mortgage may be foreclosed.

Front 13

Foreclosure

Back 13

Mortgagor defaults on the debt, leaving mortgagee with no other option but to proceed against Blackacre and be made whole. Foreclosure is done by proper judicial action: land is sold at auction and the sale proceeds go towards satisfying the debt.

If proceeds don't satisfy the debt, mortgagee can bring a deficiency action against the debtor-mortgagor.

On the other hand, if there is a surplus after sale, junior liens are paid in order of their priority, then remaining surplus goes to the debtor.

Front 14

Foreclosure priority

Back 14

1. Off the top from the foreclosure sale proceeds come attorney's fees, foreclosure expenses, and any accrued interest on foreclosing party's lien (usually all assumed to be 0 for bar purposes).

2. Then proceeds are used to pay off mortgages in order of seniority, starting with foreclosing party's lien and going down to junior liens.

3. Any surplus left over goes to the debtor.

Front 15

Effect of foreclosure on various interests

Back 15

Foreclosure will terminate interests junior to the mortgage being foreclosed, but will NOT affect _senior_ interests.

Thus, those with interests subordinate (junior) to those of the foreclosing party are necessary parties to the foreclosure action and must be joined. Failure to join one of them results in their interest NOT being extinguished--their lien remains.

The debtor-mortgagor a necessary party and must be joined too--especially if the creditor wishes to proceed against her for a personal deficiency judgment!

Buyer at the foreclosure sale takes _subject to_ any liens senior to those of the foreclosing party.

Front 16

Purchase money mortgage

Back 16

A mortgage given to secure a loan that enables the debtor to purchase already-encumbered land. Assuming the purchase money mortgagee properly records, she has FIRST priority as to the parcel she financed--it jumps in front of any prior mortgages on the land!

Front 17

After-acquired collateral clauses, aka floating liens

Back 17

These give Creditor a security interest in all of debtor's real estate holdings, "whether now owned or hereafter acquired," and they are permissible.

Front 18

Subordination agreements

Back 18

Allowed--freedom of contract! If a senior creditor wants to subordinate her priority to a junior creditor, we'll let her.

Front 19

Redemption

Back 19

Buying back your house. REMEMBER: 2 different kinds--equitable and statutory. Do not confuse them!

Front 20

Equitable redemption

Back 20

Universally recognized. At any time prior to the foreclosure sale, the debtor can try to redeem the land by paying off the missed payment(s), plus interests, plus costs (unless there's an acceleration clause, in which case you gotta pay it all).

Once a valid foreclosure sale has taken place, though, the right to _equitable_ redemption is GONE.

Front 21

Acceleration clause

Back 21

Permits the mortgagee to declare the full balance due in the event of default. If a mortgage or note contains an acceleration clause, the full balance of the debt, plus accrued interest, plus costs must be paid to exercise equitable redemption.

Front 22

Clogging the equity of redemption

Back 22

Waiver by the debtor of the right to equitable redemption in the mortgage itself. This is PROHIBITED!

Front 23

Statutory redemption (definition, amount, effect)

Back 23

Recognized in half the states (but NOT Virginia).

Gives the debtor-mortgagor a statutory right to redeem for some fixed period _after_ the foreclosure sale has occurred (typically 6 months to a year).

The amount to be paid is usually the foreclosure price, NOT the amount of the original debt.

When a mortgagor redeems, the effect is to nullify the foreclosure sale.