Intro
What is a promissory note?
specialized K in which borrower agrees to repay the loan on certain terms and conditions
Name the 4 common types of mortgages.
(1) Recourse
(2) Non-recourse
(3) Equitable
(4) Deed of Trust
Generally, who can transfer their interest in the mortgage? Mortgagor? Mortgagee?
BOTH unless restricted by the mortgage itself
Bonus: T or F: Mortgages almost ALWAYS restrict the mortgagor from transferring their interest without consent
What are the five ways to terminate a mortgage?
1. Merger
2. Full Payment on Promissory Note
3. Deed in Lieu of Foreclosure
4. Statute of Limitations
5. Foreclosure
Bonus: When does the statute of limitations begin to run? What is the general statute of limitations in terms of years?
What are the three steps to foreclosure?
(1) Notice of requirements
(2) Joinder of all junior lienholders
(3) Property sold at auction
The two steps of financing real property are (1) creating and obligation and (2) providing security.
(1) How does the buyer create an obligation?
(2) How does does the buyer provide security?
(1) Promissory Note
(2) Mortgage, deed of trust, or similar encumbrance on the property
What terms are laid out in a recourse mortgage for liability for default?
Mortgagor is personally liable for any deficiency in the event foreclosure does not generate enough $ to cover entire loan
(1) How does a mortgagee transfer?
(2) How does a mortgagor transfer?
(1) By assigning the note to a 3rd party
(2) By selling the property (without paying off the mortgage first)
What is the order for the distribution of proceeds from a foreclosure sale? (5)
1. Pay attorney's fees/court costs/expenses from sale
2. Pay off SENIOR loans that have ELECTED to join
3. Pay principal and accrued interest on loan
4. Pay off JUNIOR liens in order of their priority
5. Remaining funds (if any) go to the mortgagor
(1) Do senior lienholders have to be joined in the foreclosure suit?
(2) Do junior lienholders have to be joined in the foreclosure suit?
(1) Senior lienholders can ELECT to join
(2) Junior lienholders MUST be joined
Bonus: What happens to junior lienholders if they are omitted from the suit?
Who is a mortgagor? What rights do they have? (3)
(1) Right to possession and legal title
(2) Right to lease the land and gain rents and profits
(3) If default...mortgagee first seeks recovery from property before suing mortgagor personally
What terms are laid out in a non-recourse mortgage for loan deficiency liability?
(1) Mortgagor NOT liable for any deficiency
(2) Mortgagee may only recover what they can get from the sale of the property during foreclosure
If the mortgagor transfers their interest, what can the transferee do? (2 options)
(1) Buyer can take the property subject to the mortgage
(2) Buyer can assume the mortgage
What happens if the foreclosure proceeds are not enough to pay off the JUNIOR lienholders? Is their security interest gone?
Their security interest in the property is GONE
BUT
can still sue the borrower to get the money (garnish wages, sell car, etc.)
T or F: the security interest of senior lienholders is affected if they decided not to join in on the foreclosure suit
FALSE
Can still foreclose on the property
Who is a mortgagee? What rights do they have? (3)
Mortgagee = bank
(1) Holds a security interest in property
(2) Right to assign rights to 3rd parties
(3) Right to priority of payment in foreclosure against ALL subsequent liens as long as the mortgage document is recorded
What are the terms of an equitable mortgage?
Property owner transfers a deed to a creditor with the understanding that the property will be conveyed back upon FULL payment
If the buyer/transferee takes the property subject to the mortgage, what happens if the mortgagor defaults? Is the buyer personally liable?
NO!
Property remains a security interest for the NOTE that the BUYER has NOT signed = mortgagee has to foreclose + seek deficiency from PRIOR owner
What are the three ways of "redemption" for a buyer who is close to foreclosure?
Hint: one before process, one after process but before sale, and one after the sale
(1) Loan Reinstatement = before process (prior to service of the complaint), may catch up on ALL payments and fees
(2) Equitable Redemption = After foreclosure process but BEFORE sale, mortgagor may put the FULL amount of the loan to avoid sale
(3) Statutory Redemption = After the sale, can buy the property back for sale price + interest and costs
What is a purchase money mortgage? What effect does it have on foreclosure sale distribution?
Loan that is taken out to actually pay the AMOUNT of the house
Comes FIRST before prior loans that were taken out that are NOT for the payment of the loan (Ex: Credit Cards)
How does a mortgagor get payment if a mortgagor defaults?
Foreclosure = selling the home for the loan balance
Bonus:
(1) What happens if the value of the home exceeds the loan?
(2) What happens if the value of the home is less than the loan?
What is a deed of trust? What are the terms of liability for deficiency?
Alternative to a mortgage document
Borrower --> Trustee (holds it for the benefit of the lender)
(1) If the borrower does not pay, the trustee has the obligation to sell the property to repay the loan
(1) How does the buyer/transferee assume the mortgage on the property?
(2) Is the original mortgagor still liable for default?
(1) New owner signs a NEW note and is now personally liable if foreclosure does not cover THIER loan
(2) Yes...UNLESS:
(a) Written release
(b) Novation (mortgagee substitutes new owner for prior owner)
(c) If new owner and mortgagee make a MATERIAL ALTERATION to the terms of the loan WITHOUT prior owner's consent
In 2018, Olivia purchased Blackacre for $300,000. To finance the purchase, she took out a $200,000 purchase money mortgage from First Bank, which was properly recorded.
In 2020, Olivia borrowed $50,000 from Pool Finance Co. to install a swimming pool and granted Pool Finance a mortgage on Blackacre. Pool Finance properly recorded its mortgage.
In 2022, Olivia incurred $20,000 in credit card debt with Credit Corp., which obtained a judgment lien against Blackacre and recorded it.
In 2024, Olivia defaulted on the Pool Finance loan. Pool Finance initiated a judicial foreclosure but failed to join Credit Corp. in the foreclosure action. First Bank elected to join the action.
At the foreclosure auction, Pool Finance bid $50,000 (the amount of its debt) and no higher bids were made. Pool Finance took title to the property.
After the sale, the property is discovered to have a fair market value of $280,000.
(1) How should the foreclosure sale proceeds be distributed among the parties?
(2) What is the effect of Pool Finance failing to join Credit Corp.?
(3) What rights, if any, does First Bank retain after the foreclosure sale?
(4) Can Pool Finance seek additional recovery if the sale proceeds are insufficient to cover the loan balance?
(1) Order of proceeds: First Bank --> Pool Finance
(2) Juinor lienholders MUST be joined in the foreclosure action, since Credit Corp. was omitted, their security interest survives the foreclosure. Since their security interest survives, Pool Finance takes the property SUBJECT to Credit Corp.'s lien.
(3) They retain their security interest/mortgage on the property since the proceeds were NOT enough to cover the loan. They can still foreclose on Blackacre.
(4) Yes! While they cannot file for foreclosure, because their security interest is now gone, they can still seek a deficiency judgement against the borrower. They may sue Olivia PERSONALLY for the remaining unpaid balance.
This is actually a question about types of theory about who holds title to a property/when....not foreclosure...sorry!
What are the three prevailing theories on holding title? Define them.
(1) Title theory = mortgagee holds title to the property until the loan is repaid
(2) Intermediate theory = lender does not have right to possession UNITL default
(3) Lien theory = lender does not have right to possession UNTIL foreclosure occurs