Bar Exam-Mortgages

Priority of Creditors

Creditors must record their interests recorded interests take priority in the order recorded Creditors can agree to subordinate priority to a junior creditor

Necessary Parties

Junior interests are necessary parties and must be included in a senior foreclosure action Otherwise the junior mortgage will remain on the land

Mortgagee Possession

Lien Theory-no right to possess prior to foreclosure Title Theory-right to possess at any time upon demand Mortgagee can always take possession with mortgagor's consent or abandonment Mortgagee in possession assumes risk of accounting for rents, managing property, and tort liability to third parties

Purchase Money Mortgages

Superior to all interests Mortgage given in exchange for funds used to buy the property; PMM is given either to the seller as part of the purchase price or to a third party lender (if both, seller's PMM is senior to the third-party lender)

Junior Interests

Terminated by Foreclosure of a superior claim Can seek a deficiency judgment against debtor, ensuring the debtor remains liable for the balance on the junior mortgage

Acceleration Clauses

Terms in loan agreements that require mortgagor to pay off full loan immediately if certain conditions are met, e.g., if mortgagor misses too many payments

Requirements for Holder in Due Course

1. Note must be negotiable, made payable to named mortgagee 2. Note must be endorsed or signed by named mortgagee 3. note must be delivered to the transferee, and 4. transferee must take the note in good faith and pay value

How a Mortgagee (Creditor) Can Transfer Interest

1. endorsing the mortgage note and delivering it to transferee 2. executing a separate assignment of the mortgage interest

Mortgage

A mortgage is a security interest in land that serves as collateral for the repayment of a loan

Holder in Due Course

a holder in due course takes a mortgage note free of any personal defenses mortgagor could have raised against original mortgagee (e.g., lack of consideration, fraudulent inducement) He still remains subject to real defenses (e.g., material alteration, duress, fraud, incapacity, infancy, illegality, insolvency)

Redemption in Equity

at any time prior to the foreclosure sale, mortgagor can redeem the property by paying the amount due This right cannot be waived by agreement Some jurisdictions allow mortgagor, for a certain period, to buy back the property after foreclosure sale

Equitable Mortgage

debtor gives creditor a deed to his land as collateral for the debt (instead of executing a mortgage)

Deficiency Judgment

if the debt exceeds sale proceeds, mortgagee can file suit against mortgagor for debt balance

Title Theory (Minority)

mortgagee has title to the property during the loan term, not mortgagor-borrower

Lien Theory (Majority)

mortgagor has title and the right to possession absent foreclosure Mortgagee has a lien, conferring a right to take action for ownership of the land if the mortgagor defaults on the loan

Mortgage Writing Required

must be in writing to satisfy the SoF Mortgagor=debtor Mortgagee=creditor

Senior Interests

unaffected by junior interest foreclosures Buyer of foreclosed property takes it subject to senior interests Buyer is not liable for senior debt, but senior mortgage remains on land

Foreclosure

upon default, mortgagee can satisfy debt through foreclosure by judicial action property is sold to satisfy the debt in whole or in part If proceeds exceed the debt balance, junior liens are paid in order of priority