Mortgages

Security Interest in Real Property

(1) promissory note (2) security device

Remedies for Loan Default

(1) take the property (2) sell the property for proceeds

Rebuttable Presumption

1.If the grantee is in possession of the deed, it is presumed that the deed has been validly delivered. 2. If the grantor is in possession of the deed, it is presumed that there was no valid delivery. 3. If the deed has been recorded, it is presumed that it has been validly delivered

Deed of Trust

3 party arrangement •Borrower/Debtor (trustor) •Lender (beneficiary) •Third party (trustee) Borrower (trustor) gives a deed of trust to a third party (trustee) for the benefit of the lender (beneficiary).If the trustor fails to pay the loan, the trustee may sell the property and deliver the sale proceeds to the beneficiary. Trustee options if loan is not paid: 1)Obtain a court order for a foreclosure sale of the property; or 2). Sell the property by himself or herself at a public auction

Purchase Money Mortgage

A Purchase Money Mortgage arises when the buyer of real property finances his/her purchase by giving the seller a promissory note secured by a mortgage on the property purchased. Where the buyer obtains a loan from a third party (such as a bank) that is used to pay the seller of real property and the loan is secured by a mortgage on the property purchased, the mortgage is a also considered a Purchase Money Mortgage

Buyer at Foreclosure

A buyer at foreclosure sale takes subject to the senior interest that are nor foreclosed, but does NOT become personally liable for the interest

Deed Delivery

A deed is not effective to pass title unless and until it is delivered by the grantor and accepted by the grantee. •Physical delivery is not required; physical delivery alone does not establish delivery •Delivery is based solely on the intent of the grantor. •Acceptance is generally presumed For delivery to be valid, the grantor must: (1) intend to immediately transfer an interest to the grantee and (2) provide some objective manifestation of that intent

Novation

A novation occurs when a transferee (grantee) of real property and the mortgagee (bank) agree that the transferee (grantee) will assume the mortgage and that the original mortgagor will be released from all liability.

Modification Restatement

A provision in a senior mortgage that permits the parties to alter the terms of the senior mortgage without loss of priority is valid and enforceable, even if the change materially alters the security position of junior lienholders

Quitclaim Deed

A quit claim deed contains no title covenants and simply states that the grantor is conveying all title that he has "if any."

Notice

Actual notice Record notice:A subsequent purchaser is charged with record notice of a deed only if it is recorded in a chain of title Inquiry notice: If facts support a need for reasonable inquiry, the person is charged with knowledge of what such inquiry would likely reveal

Shelter Rule

Any person who takes from a BFP will prevail against any interest that the transferor-BFP would have prevailed against. That is, a BFP is allowed to transfer his/her protection to a later transferee even if the transferee had notice of the prior unrecorded interest

3 Future Covenants

Breached after conveyance- SOL at time of breach These "run with the land" and to successive grantee's There has to have been an assertion of right by the party claiming under the title defect Covenant of Quiet Enjoyment •Grantor warrants that grantee shall peaceably and quietly enjoy possession without interference from the grantor or anyone else. Covenant of General Warranty •Grantor warrants that he will defend the grantees possession from all lawful and reasonable claims by third parties. Note: Plaintiff usually brings action for violation of both covenants above. Covenant of Further Assurances •Grantor agrees to do anything necessary by way of further conveyance or execution of documents or release that will be necessary to assure the quiet enjoyment of the grantee

3 Present Covenants

Breached at time of conveyance- SOL runs Covenant of Seisin •Grantor warrants that he has both title and possession to the estate that he purportedly conveyed. Covenant of Right to Convey •Grantor warrants only that he has right to convey (not ownership or possession). It is possible for someone to have the right to convey yet not have the ownership of the estate (i.e. executor of estate). Covenant against Encumbrances •Grantor warrants that there are no encumbrances, other than those listed in the deed, on the title

Installment Land Contract

Buyer and seller enter into a contract under which the buyer pays the purchase price for the real property in installments and seller provides financing to buyer without the use of a third party lender. Title to the property does not transfer until the buyer has made the final installment payment. Until final payment is made, the buyer has equitable title. The seller retains legal title.When the final payment is made, Seller transfer legal title to the buyer via deed

Recording (CL)

Common Law: The first person to acquire an interest prevails over all later claimants under the first-in-time doctrine, unless a later purchaser is protected by the state's recording act

"Acceleration Clause"

Debtor must pay off the entire mortgage balance in order to redeem the property

Foreclosure

Foreclosure extinguishes all junior liens The foreclosure process takes away the security for the debt, but it does not eliminate the personal obligations Severable interests in the property, such as the interest of a life tenant, are not affected by a foreclosure sale

Statutory/General Warranty Deed

Grantor warrants all 6 common law title covenants and he obligates himself to these title covenants in regard to the entire ownership history of the land.

Forged Deed

If a deed is forged, the grantor takes as to all subsequent purchasers, including a bona fide purchaser for value (bfp). The deed is void

Fraudulent Deed

If a deed is procured by fraud, the deed is voidable and a subsequent bfp for value will take over the grantor.

Conditional Delivery to a 3rd Party

If condition is not certain to occur: a.If condition is not certain to occur and the condition is within the control of the grantor, delivery is generally invalid and ineffective. b. If the condition is within the control of the grantee, then delivery is valid and effective. c. If the condition is beyond the control of grantor or grantee, grantor retains control and delivery is invalid and ineffective

Transfer by the Borrower

If the borrower (grantor) sells the property and conveys a deed before the loan is satisfied, the buyer (grantee) takes subject to the existing mortgage that remains tied to the property. The buyer is not personally liable for the debt. His liability is limited to the mortgage payments only. The original borrower (grantor) remains liable for the remaining loan balance on the original loan. If the original borrower (grantor) fails to pay the mortgage, the mortgagee may foreclose on the property and wipe out the buyers entire interest.

Lack of Promissory Note

If the buyer has not signed a promissory note, she cannot be held responsible for any deficiency resulting from the foreclosure sale and the lender will be forced to absorb the loss

Failure to Pay Installment Land Contract

If the contract contains a forfeiture provision, Buyer's failure to make a payment due under a land contract entitles the seller to immediately declare a default, retake the property, and keep a;; installment payments. Other states treat the land contract as the equivalent of a mortgage Seller does not have the immediate right to retake the property Seller must proceed through the foreclosure process

Covenant of Siesen and Right to Convey

In each case, if breach occurs, grantee may sue grantor. Majority:If grantee conveys the land, subsequent grantee does not have a cause of action against original grantor for breach. Minority:If grantee conveys the land, he also assigns his cause of action against original grantor to grantee

Modification

In some circumstances, a senior mortgagee may modify the loan or mortgage terms or substitute new mortgages for an existing lien without losing its priority. If there are provisions in senior lien documents conferring a right upon a senior lienholder to vary the term or the interest rate of a mortgage, those will be valid and binding only if the junior lienholders had actual or record notice of the right to modify. General rule: Changes in senior mortgage terms that are not addressed in the senior lien documents and that do not "materially prejudice" the rights of the junior mortgagee are allowed. Not prejudicial: •alterations in the payment schedule of the senior lien. No Change in Priority Prejudicial: •Alterations in the basic amount of interest payable, or amount owed. Priority only up to the original amount unless the mortgage has so provided

Foreclosure Elements

Judicial foreclosure sales must be (1) open to the public, (2) properly noticed, (3) conducted in a reasonable manner, which is usually dictated by statute, and (4) result in a "fair" sale price Necessary Parties: Mortgagor Junior interest holder The failure to include a necessary party preserves that party's interest despite the foreclosure

Equity of Redemption

Loan documents CANNOT waive the equitable right of redemption Period during which no foreclosure may be commenced The redemption period is set by statute, and the statute begins to run on the day that the mortgagor receives notice of default. The bank cannot foreclose until the period has passed without a payment from the buyer Right up until the moment of the foreclosure sale the Debtor can redeem the property by paying the amount that is due and payable the amount in arrears (plus interest) unless the mortgage includes an "acceleration clause."

Parol Evidence and Intent

Majority: Any type of Parol evidence, including conduct or statements made by the grantor before or after the alleged delivery is admissible to show grantor's intent. Parol evidence is not allowed to prove a condition if there is no condition placed on the deed itself; BUT Parol evidence is admissible to show that present delivery was not intended

Covenant Against Encumbrances

Majority: If grantee knew about the encumbrance, he still has a cause of action against grantor. Minority: If grantee knew of the encumbrance, he has no cause of action against grantor because he either actually knew or had constructive notice of the encumbrance. Minority: If encumbrance actually benefits the land, whether known or unknown, grantee has no action against grantor 2 kinds: property and title

Transfer by Mortgagee (Lender)

Mortgagee (lender) transfers by endorsing the promissory note and assigning the mortgage to the transferee

Lien Theory (Majority)

Mortgagee holds a security interest in the property and mortgagor is the owner of the land until foreclosure. This allows the mortgagor to remain on the property until the foreclosure process has been complete

Title Theory (Minority) Common Law

Mortgagee retains legal title to the property at all times. This allows the mortgagee to take possession upon demand any time following a default and before foreclosure

Types of Security Devices

Mortgages Deed of Trust Installment Land Contract Equitable Mortgage (or absolute deed as security) Sale-Leaseback

Judgement Lien

Must be executed after filing If the borrower is sued in court on another claim and a third party obtains a money judgment, that party may file a judgment lien that attaches to the real property Majority rule: For a judgment lien to apply, the judgment creditor must record the judgment by filing it with the county or state.

Mortgages

Must comply with SOF Must contain a specific description A contract under which a borrower conveys an interest in property (collateral) for a loan from a lender as security for the performance of an obligation

Lien Theory & Joint Tenancy

NO severance of the joint tenancy. When a mortgage is executed, a lien attaches to the title, but title is not transferred. Unities ARE NOT disturbed when mortgage is executed

Deficiency Judgement

Not in all jurisdictions In states that permit a deficiency judgment: Some allow the lender to seek a deficiency judgment as part of the underlying foreclosure lawsuit. Some states require the mortgagee to file a separate lawsuit. Note: Once the deficiency judgment is awarded, it acts as a judgment lien on the borrowers other property for the statutory period. Limitations: Many states limit deficiency judgments to difference between the outstanding loan balance and the property's fair market value. A junior creditor is not prevented from obtaining a money judgment for the full amount due on the underlying junior debt obligation when the senior lien holder conducts a foreclosure that extinguishes the junior lien holder's security interest. After the security has been lost by the foreclosure sale of the senior lien, the junior lien or can sue the debtor directly on the promissory note, which is then considered unsecured

Wild Deed

O> A deed not recorded A > B deed recorded O > C C charged with constructive notice of B's claim? No! There is no way to find the A-B deed. It is not in O's chain of title That deed is "wild."

Bona Fide Purchaser for Value

Only bona fide purchasers for value (BFP) are protected against a prior transferee (applies only to notice and race notice statutes). To qualify as a BFP, the person/entity must: 1) be a purchaser (or a mortgagee or creditor) 2) take without notice of the prior conveyance 3) pay valuable consideration What happens if there is a recording act, but you cannot show that the person/entity qualifies as a BFP? Default to common law first in time rule A person who purchases from one of these individuals is protected if the other two conditions are met

Subordination

Parties can agree to contractually alter their relative priorities through use of a subordination agreement

Promissory Note

Places personal liability on the buyer who signs the note for repayment of the debt and any losses suffered by the lender if the property is sold for less than the value of the outstanding loan if a deficiency is permitted

Lien Priority

Purchase money mortgages take priority taxes take priority foreclosing property takes priority then junior liens General Rule: Liens have priority in the order that they are filed in the county records office. Thus, a recorded interest generally has priority over later recorded interests

Recording Act

Race: The purchaser who records first has priority-even if she actually knows about a prior interest. Notice: A subsequent bona fide purchaser has priority if he takes without notice of a prior interest. Recording is not required to gain priority. Race-notice: A subsequent bona fide purchaser who records first has priority if she both takes without notice of a prior interest and records first

Deed Reformation

Reformation of a deed is an equitable action whereby the court rewrites the deed to make it conform to the intention of the parties. This can be utilized where the error / omission / ambiguity results from: •Mutual mistake •Scriveners (drafter's error) error •For unilateral mistakes, this can only be used if one induced the other party to make the mistake through misrepresentation or some other inequitable conduct

Gifts of Land

Require: (1) donative intent (2) delivery, and (3) acceptance

Statutory Right of Redemption

Some, but not all states permit this. In those states that utilize this approach, the state permits borrowers and/or junior lien holders to redeem for a set period AFTER the foreclosure sale. Redemption payment is typically the foreclosure sale price plus fees, but not the amount of original debt Revives pre-foreclosure liens not paid in foreclosure

The Closing

The contract will specify the date for closing. If one of the parties to the contract fails to perform on the date specified in the contract, an extension can be granted so as long as performance is rendered within a reasonable time (1-2 months is generally accepted Upon closing, the original sales contract merges into the deed and all contract provisions are extinguished UNLESS: 1. The sales contract specifies that the provisions survive closing; OR 2. The provisions are included on the face of the de

Deed Legal Description

The description is ambiguous or too indefinite, title remains in the grantor subject to the possibility for a suit for reformation of the deed. Parol evidence is usually admissible to clear up confusion. A street address is not sufficient to serve as an adequate legal description of the real estate. An incomplete legal description may render the deed void for vagueness and nothing gets transferred

Special Warranty Deed

The grantor warrants only that he/she has done nothing that would be inconsistent with or in violation of the 6 title covenants

Priority of Interest

The priority of an interest is determined at the time it attaches to a property. A buyer at a foreclosure sale generally takes title as it existed when the mortgage was placed on the property. Priority impacts who gets paid following a foreclosure

Title Insurance

The recording system is not perfect, and errors occur. Thus, even a proper search may fail to uncover a legally enforceable property right held by another party. Title insurance seeks to protect purchasers of undiscovered claims. But, the provisions often leave individuals liable for such claims

Title Theory & Joint Tenancy

There is a severance of the joint tenancy. When the mortgage is executed, title passes from mortgagor to mortgagee, even though title goes back to the mortgagor when the mortgage is satisfied

"Due on Sale Clause"

These typically require full satisfaction of the mortgage prior to transfer

The Closing-Time

Time is general not of the essence in land sale contracts unless: 1. the contract specifies otherwise or 2. the facts show that the parties intend that time is of the essence. Note: Where time is of the essence, a party who fails to perform on time has breached the contract and cannot enforce the contract

Promissory Note & Statute of Frauds

To meet the Statute of Frauds the note must contain the (1) subject matter, (2) the terms, (3) the parties, and (4) it must be signed by the party against whom enforcement is sought

Deed and SOF

To satisfy the Statute of Frauds, a deed must: (a) be in writing (b) state the essential terms of the conveyance, which includes: (i) the identity of the grantor and grantee (ii) the legal description of the property (iii) words of conveyance indicating a transfer of the interest from the grantor to the grantee (iv.) the signature of the grantor

Assumption Agreement

When a buyer (grantee) assumes a mortgage, he assumes both the mortgage payment and personal liability for the promissory note (together with the borrowers) To assume the mortgage, the grantee signs an assumption agreement. The original mortgagor becomes secondarily liable as a surety absent a novation

Changes in Senior Mortgage Amounts

Where there is a mortgage modification that increases a senior mortgage, a junior mortgage holder prevails over the modification if the modification materially prejudices the holder of the junior mortgage

Insufficient Sales Price

is "so grossly inadequate as to shock the conscience of the Court." 20% or less of the market value may be insufficient

Promissory Note Elements

•Promise to pay the debt •Contains terms of debt obligation •Establishes events of default •Determines fees and terms for late payment If the underlying promise is unenforceable due to: •lack of consideration •duress •mistake •fraud •infancy the mortgage is also unenforceable