A mortgage is a means of securing a debt with real estate. The mortgagor, or borrower, gives the mortgage. The lender is the mortgagee, who holds the mortgage. On default, the mortgagee may foreclose the mortgage, convening the security interest into title. In many states, the mortgagor has a statutory right of redemption after foreclosure.
Various statutes regulate the mortgage business, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, and the Home Mortgage Disclosure Act, which together prescribe a code of fair practices and require various disclosures to be made before the mortgage is created.
The mortgagor signs both a note and the mortgage at the closing. Without the note, the mortgage would secure nothing. Most notes and mortgages contain an acceleration clause, which calls for the entire principal and interest to be due, at the mortgagee’s option, if the debtor defaults on any payment.
In most states, mortgages must be recorded for the mortgagee to be entitled to priority over third parties who might also claim an interest in the land. The general rule is “First in time, first in right,” although there are exceptions for fixture filings and nonobligatory future advances. Mortgages are terminated by repayment, novation, or foreclosure, either through judicial sale or under a power-of-sale clause.
Real estate may also be used as security under a deed of trust, which permits a trustee to sell the land automatically on default, without recourse to a court of law.
Nonconsensual liens are security interests created by law. These include court-decreed liens, such as attachment liens and judgment liens. Other liens are mechanic’s liens (for labor, services, or materials furnished in connection with someone’s real property), possessory liens (for artisans working with someone else’s personal properly), and tax liens.
- Able bought a duplex from Carr, who had borrowed from First Bank for its purchase. Able took title subject to Carr’s mortgage. Able did not make mortgage payments to First Bank; the bank foreclosed and sold the property, leaving a deficiency. Which is correct?
- Carr alone is liable for the deficiency.
- Able alone is liable for the deficiency because he assumed the mortgage.
- First Bank may pursue either Able or Carr.
- Only if Carr fails to pay will Able be liable.
- Harry borrowed $175,000 from Judith, giving her a note for that amount and a mortgage on his condo. Judith did not record the mortgage. After Harry defaulted on his payments, Judith began foreclosure proceedings. Harry argued that the mortgage was invalid because Judith had failed to record it. Judith counterargues that because a mortgage is not an interest in real estate, recording is not necessary. Who is correct? Explain.
- Assume in Exercise 2 that the documents did not contain an acceleration clause and that Harry missed three consecutive payments. Could Judith foreclose? Explain.
- Rupert, an automobile mechanic, does carpentry work on weekends. He built a detached garage for Clyde for $20,000. While he was constructing the garage, he agreed to tune up Clyde’s car for an additional $200. When the work was completed, Clyde failed to pay him the $20,200, and Rupert claimed a mechanic’s lien on the garage and car. What problems, if any, might Rupert encounter in enforcing his lien? Explain.
- In Exercise 4, assume that Clyde had borrowed $50,000 from First Bank and had given the bank a mortgage on the property two weeks after Rupert commenced work on the garage but several weeks before he filed the lien. Assuming that the bank immediately recorded its mortgage and that Rupert’s lien is valid, does the mortgage take priority over the lien? Why?
- Defendant purchased a house from Seller and assumed the mortgage indebtedness to Plaintiff. All monthly payments were made on time until March 25, 1948, when no more were made. On October 8, 1948, Plaintiff sued to foreclose and accelerate the note. In February of 1948, Plaintiff asked to obtain a loan elsewhere and pay him off; he offered a discount if she would do so, three times, increasing the amount offered each time. Plaintiff understood that Defendant was getting a loan from the Federal Housing Administration (FHA), but she was confronted with a number of requirements, including significant property improvements, which—because they were neighbors—Plaintiff knew were ongoing. While the improvements were being made, in June or July, he said to her, “Just let the payments go and we’ll settle everything up at the same time,” meaning she need not make monthly payments until the FHA was consummated, and he’d be paid from the proceeds. But then “he changed his tune” and sought foreclosure. Should the court order it?
SELF CHECK QUESTIONS
- The person or institution holding a mortgage is called
- the mortgagor
- the mortgagee
- the debtor
- none of the above
- Mortgages are regulated by
- the Truth in Lending Act
- the Equal Credit Opportunity Act
- the Real Estate Settlement Procedures Act
- all of the above
- At the closing, a mortgagor signs
- only a mortgage
- only a note
- either a note or the mortgage
- both a note and the mortgage
- Mortgages are terminated by
- any of the above
- A lien ordered against a person’s property to prevent its disposal during a lawsuit is called
- a judgment lien
- an attachment lien
- a possessory lien
- none of the above