gould real estate finance winter 2010 final outline

Real Estate Finance

I. Financing as a Toola. Seller Financing: Buyer enters into a mortgage loan or installment contract obligation with the

seller for a large part of the total purchase price. Seller treats this as an investment, since buyer will pay interest. Can also be a PPM

Restatement 1.1 – The Mortgage Concept: No Personal Liability Required

A mortgage is enforceable whether or not any person is personally liable for that performance.

a. 2 kinds of loans – a mortgage can secure either kindsi. Recourse – Personal Liability on the note

1. If you don’t repay the loan, the payee can choose to sue you on the note Or the lender can foreclose the mortgage (and if there is a deficiency, the lender might be able to sue you for that)

ii. Non-recourse – No Personal liability on the note.1. If the note is secured with a mortgage that has sufficient value to cover the loan,

the payee would foreclose the mortgage and get title to the land if the loan is not repaid

Restatement 1.2 – No Consideration Required

(a) Consideration is not necessary.

(b) A mortgage securing an obligation undertaken as a gift is enforceable in the absence of undue influence, fraud, or mistake, notwithstanding in the unenforceability of the obligation standing alone.

(c) A mortgage that secures a performance of a preexisting legal obligation is enforceable

B. Circumstances where something that constitutes a valid mortgage obligation for the purpose of mortgage enforceability is broader than in contracts.

a. One of which is a gift (enforceable assuming no fraud, duress, etc.)C. Failure of consideration: If the mortgagor executes a note or contract, secured by a mortgage, but does

not receive some or all of the value for which she or he bargained, this is a breach of contract, and the mortgage is unenforceable.

D. The lender can put many obligations in the mortgagea. Pay taxes: Real Estate Tax liens usually take priority over all other liens on the propertyb. Keep property in Good repair: This is the security for the lenderc. Covenant not to perform Waste

Restatement 1.4 – Obligation Must Be Measurable in Monetary Terms

A mortgage is enforceable only if the obligation whose performance it secures is measurable in terms of money or is readily reducible to a monetary value at the time of enforcement of the mortgage.

E. Definiteness of Obligation a. Monetary Obligation: the obligation doesn't have to state a monetary amount, but that obligation

does have to be capable of being reduced to a monetary amount.

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i. If not, it cannot be secured by a mortgage. ii. At least one court has found that were the note makes no mention of the obligation, it is

unenforceableb. Policy rationale : mortgage enforcement would break down if the law allowed mortgages to

secure performance of obligations that can’t be paid off in monetary terms because how would you ever know if the mortgage was paid off or If a junior lien-holder desired to redeem, there would be no means of determining the amount necessary to accomplish a redemption

c. Support Mortgages: When a mortgage is given both to secure a promise of financial support, and also a promise of "love, affection, and kindness" the mortgage is valid to secure the first obligation, but not the second. Why? A promise for emotional support cannot be reduced to a monetary equivalent

The Use of Mortgage Substitutes

I. The Absolute Deed, the Conditional Sale, and Related TransactionsRestatement 3.1- The Mortgagors Equity of Redemption and Agreements Limiting It

(a) From the time the full obligation secured by a mortgage becomes due and payable until the mortgage is foreclosed, a mortgagor has the right to redeem the real estate that is described in the mortgage.

(b) A agreement or separate agreement made at the same time as a mortgage that impairs the mortgages right of equity of redemption is invalid.

(c) Any agreement in or created at the same time with a mortgage that confers on the mortgagee an interest in the real estate is enforceable unless it’s effectiveness is expressly (in the mortgage document) dependent on the mortgagor default.

II. "Anti Clogging Rule"a. A mortgagor's equity of redemption cannot be clogged and he cannot, as a part of the original

mortgage transaction, cut off or surrender his right to redeem.i. Option Contract

1. Restatement: An option to obtain ownership is enforceable, unless its effectiveness is expressly dependent on the mortgagor’s default.

a. Watch out for words like “Mortgagor Violates a term in mortgage” that is unenforceable.

2. Common: The mortgagee is not allowed at the time of the loan to enter into an option or contract for the purchase of the mortgaged property

a. Option to buy at Fixed Sum cannot be taken contemporaneously by the mortgagee

b. The Deed in Escrow is a clog and Unenforceable : Sometimes the deed to the land will be put in escrow, and if the loan is not satisfied it is to be returned to the mortgagee if there is a default.

c. Subsequent Conveyances as Clogs : Anti-Clogging is generally inapplicable to transactions that are subsequent to the execution of the mortgage. (i.e. Deed in Lie) unless

i. The subsequent agreement provides for a future waiver of the mortgagor's redemption rights. For example, an agreement after a default where the mortgagee says if X is not paid within Y time, then you have to give the money back, that is not ok.

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d. Conveyance of Other Real Estate Not a Clog : Occasionally, a mortgagor will not only deliver a mortgage on the specific real estate, but will, as further consideration for the loan transaction, make an outright conveyance to mortgagee of some or all of the mortgagor's other real estate.

i. This type of conveyance does not run afoul of Subsection (b) because it does not impair the mortgagor's right to redeem the real estate described in the mortgage

ii. However, a court could conclude that the contemporaneous conveyance was, itself, intended as further security and thus susceptible to being treated a mortgage under § 3.2

Disguised Real Estate Security Transactions as Mortgages in Substance

I. Absolute Deed: This is a contract where the Buyer gives the Seller a Deed with an understanding that after the debt is paid off the Seller will re-convey the land.

a. Two Ways to do thisi. Creditor may require the debtor to grant him the land by absolute deed, under oral agreement

that he will re-convey only if the debtor repays the debt.ii. Creditor may get the deed and execute some sort of written agreement to re0convey the

property upon receiving payment of the debt. b. Here Parol evidence can be used to establish that the two writings or agreements really constituted

one transaction and intended as a security for a loan or obligation.i. If the grantor succeeds, he will be permitted to "redeem" the land by paying the obligation.

ii. This creates an “equitable mortgage” § 3.2 The Absolute Deed Intended as Security.

(a) Parol evidence is admissible to establish that a deed was intended to serve as security for a debt or obligation. The obligation may have been created prior to or contemporaneous with the conveyance and need not be the personal liability of any person.

(b) Must have Intent that the deed serve as security and can be proved by clear and convincing evidence and can be inferred from the totality of the circumstances, including the following factors:

(1) statements of the parties;

(2 substantial disparity between the value received by the grantor and the FMV of the land at the time of the conveyance; (there must a debt, and when there is a pretty big one, there is strong inference that a security device was intended)

The fact that

(3) the grantor retained possession of the real estate;

(4) the grantor continued to pay real estate taxes;

(5) grantor made post-conveyance improvements to the real estate; and

(6) the nature of the parties and their relationship prior to and after the conveyance. (The disparity between the parties

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as to their sophistication and the circumstances under which they were operating is particularly relevant. )

(c) Where, in addition to the deed referred to in Subsection (a) of this section, a separate writing exists indicating that the deed was intended to serve as security for an obligation, parol evidence is admissible to establish that the writings constitute a single security transaction.

iii. Intend to Make a Security Device 1: If the purpose of the conveyance was security, it will be treated as a mortgage, even though the parties may have agreed or understood that the debtor shall have no right to redeem.

iv. No Need for Writing : It is unnecessary to establish either the existence of a promissory note or similar written evidence of the debt or that the grantor is personally liable to repay it. (Totality of Circumstances)

v. BFP right from Grantee : A mortgagor's right to redeem the land from an absolute deed that was intended as security can be defeated by a bona fide purchaser from the Creditor.

1. For example, Buyer gives an absolute deed intended as security, the creditor records the deed, and BFP buys the land. In the mind of the BFP, it was recorded, and he had no notice, so he should win. But, Buyer would argue since there it was a mortgage he should have foreclosed.

2. In other words, a purchaser from the grantee who pays value and takes without either actual or constructive notice that the land has been conveyed as security will take free of any equity in the grantor to redeem.

a. However, even where a bona fide purchase deprives the grantor of access to the land itself, the grantor may recover from the grantee the difference between the value of the land and the amount of the obligation.

3. Yet, if the Buyer retains actual possession, the BFP be claimed to have constructive possession.

vi. Defeasance Language : Language that states when you pay me back, I will give you back the deed. Unenforceable.

II. A Conditional Sale : There is a deed and a second instrument that purports to confer on the grantor the obligation or option to repurchase the real estate described in the deed.

a. Unlike an absolute deed, the second writing states that grantor has the right to repurchase the real estate by complying with the terms.

i. Form : May take the form of an option to repurchase, lease back to the grantor with option to repurchase at or before the end of lease term, an agreement that any further sale by grantee (whose profits are more than a specified amount) will go to the grantor (lender)

1 Perry v. Queen: Facts: A guy had two mortgages on his house that were in default, he received a letter from the D stating that he could help him get his house back. D did in fact give P money to get his mortgage payments current, to pay off future mortgage payments, and some to go to plaintiff. In Exchange, the plaintiff signed a warranty deed, a residential lease, a lease and option disclosure, and a memo of understanding. Issue: Was this transaction secured by plaintiff's house? (I.e. did the house serve as a security? Held: Yes. The plaintiff here has a high school education and has worked in the printing industry most of his life. There is no evidence in the record that indicates that he has experience in dealings involving property. Additionally, at the time of his transaction with the defendants, the plaintiff faced foreclosure on his second mortgage and felt “extremely desperate” about his financial situation. Also indicating the plaintiff's intent in this case is the fact that he retained physical possession of his house after he gave the defendants the warranty deed.

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b. No Need For Writing: Same as An Absolute Deed (See Above)

c. Burden of Proof2

i. Minority : See Restatementii. Majority: Preponderance of the Evidence

d. Language of Intent Not Conclusive: grantee-lenders frequently use specific mortgage-negating language in conditional sale transactions, nevertheless, where the fair market value of the real estate at the time of the conveyance greatly exceeds the amount the grantor receives for it, evidence of the parties' intent will not normally be deemed dispositive on that issue.

i. However : some weight may be given to such language and, in close cases, it may tip the balance against a determination that the parties intended a security transaction.

1. Greater weight should be accorded such provisions in commercial conditional sale transactions involving sophisticated parties who are represented by counsel

§ 3.3 The Conditional Sale Intended as Security.

(a) Parol evidence is admissible to establish that a deed purporting to be an absolute conveyance of real estate accompanied by a written agreement conferring on the grantor a right to purchase the real estate, was intended to serve as a security for an obligation, and is a mortgage. The obligation may have been created prior to or contemporaneous with the conveyance and need not be the personal liability of any person.

(b) Intent to serve as security must be proved by clear and convincing evidence and may be inferred from the totality of the circumstances, including the following factors:

(1) and (2) same as Absolute Deed;

(3) the terms on which the grantor may purchase the real estate;

(4)-(7) same as Absolute deed.

(c) The presence of language in any of the written documents that expressly negates the intent to enter into a mortgage transaction is relevant to the issue of the parties' intent, but does not preclude a determination that the parties intended a mortgage transaction.

e. Risks with Absolute Deeds and Conditional Sales : the grantor may not be able to carry the heavy burden of clear and convincing proof, additionally if the land is sold to a bona fide purchaser they will not be able to recover it (although they could get damages form the mortgagee / grantee.)

2 Downs v. Ziegler: Plaintiff's commenced an action to foreclose a mortgage and to hold D, and three doctors, personally liable for any deficiency after the foreclosure sale. D was in the construction business, and built an apartment building on land conveyed to him by the plaintiff's in exchange for a promissory note secured by mortgage on the land, soon thereafter D ran into some financial difficulties, and three doctors decided to make sure he would not go into default. The Doctors planned to make their credit available so that the mortgage would not go into default and that they would guarantee that D's obligation to the bank. The K provided that D would convey the interest in the real estate in exchange for the Doctors agreement to bring the payments current. Issue: Can extrinsic Evidence be used to establish that something was use as a security device? Yes. The Extrinsic evidence must be clear and convincing in order to show that a deed absolute and a separate option constitute a mortgage.

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i. If the grantor remains in possession this is constructive notice and therefore they cannot be a bona fide purchaser

Installment Land Contract I. Installment Land Contract

a. Sort of like a PPM, except here there is no conveyance of legal title yet to Buyer, because they do not have the deed.

b. Under a ILC, the vendee (Buyer) normally goes into possession and agrees to make monthly installment payments of principle and interest until the principle balance is paid off (Retains equitable title). The vendor (Seller) retains legal title until the final payment is made, at which times he has a duty to execute a deed to the land.

i. Buyer: retains all of the legal rights as an owner (possession, rents, pay taxes, and all of the above), but the main difference is the forfeiture clause.

1. Possession; Pay taxes; Insure it; MaintenanceII. Remedies for Default

a. A vendor may sue for (although a lender will just rely on forfeiture clause) i. Installments which are due with interests

ii. Specific Performance iii. Damagesiv. Foreclose the vendees rightsv. Quite title or Rescind the Contract

III. Forfeiture Clause a. You forfeit out the buyer's equitable title, and the seller keeps everything that was paid. b. This is judged by contract law, because it is way to get around the equity of redemption.

i. In jurisdictions that allow both the foreclosure and forfeiture, the seller whose land is devalued will want to foreclose to get the deficiency judgment.

ii. Nearly all ILCs have a provision that declares time is of the essence and in the case of default, vendee retains property and all prior payment (vendee interest is extinguished).

c. Note: Even if the court finds the forfeiture clause unconscionable the mortgagor / vendee is still in default and the mortgagee / vendor can foreclose

d. Strict Enforcement Approach 3

i. Forfeiture enforceable unless it shocks the conscience of the court. 1. In determining whether something shocks the conscience the court should consider

a. The amount of money already paid by the buyer to the sellerb. The period of possession of the real property by the buyerc. Change in market value of the real estate at the time of default compared to the

original sales priced. and the rental potential and value of the real property

3 Russell v. Richards: Russell Filed an action against the Richards resulting from a default and forfeiture of her interest in a real estate contract. Russell was an assignee-purchaser under a standard form K with the Richards, who were the originally sellers of the real estate. Russell paid 11K and assumed the other 37K. Russell made the first payments, but there was 26K left over, and the property had double in value. Issue: Did the Forfeiture Shock the Conscious of the Court? Held: No. In this case Russell only paid 10,000 on the K, received rents during that time, had been in default several times, the main amount in the land was the increase in value.

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2. During the life of the real estate K any risk of loss or enhancement in value accrues to the purchaser

a. Upon default or forfeiture, the buyer's interest is terminated and there is no enhancement value to be recovered by the buyer

e. Relaxing Strict Enforcement: 4

i. A vendee (buyer) who has made substantial payments on a land installment sale contract or substantial improvements on the property, and whose defaults, albeit willful, consist solely of failure to pay further amounts due, has an unconditional right to a reasonable opportunity to complete the purchase by paying the entire remaining balance plus damages before the seller is allowed to quiet title.

f. Judicial Recognition of a right to redemption i. A substantial number of states afford the tardy vendee a final opportunity to tender the contract

balance before losing the land.ii. The specific performance or "equity of redemption" right is sometimes viewed as

unconditional, while other courts enforce it only if the vendee has paid a "substantial" amount of the contract price.

IV. Treating the ILC as a mortgage thus must foreclose 5 .

§ 3.4 A Contract for Deed (ILC) Creates a Mortgage.

(a) a contract for deed is a contract for the purchase and sale of real estate under which the purchaser acquires the immediate possession of the real estate and the vendor defers delivery of a deed until a later time to secure all or part of the purchase price.

a. In jurisdiction that treat it as a mortgages, Court will enforce forfeiture in two Exceptional Circumstances

i. Where the vendee has abandoned the premisesii. Where the vendee has paid only a minimal amount toward the contract price and the security

has been jeopardized1. This means that a foreclosure would not satisfy both parties.

V. Premises Liability of Vendors : A mortgagee will not be liable for unsafe conditions on the mortgaged real estate unless she is in possession or otherwise exercises dominion and control over it.

VI. Other Defenses Against Forfeiture a. Waiver: Accepting Late Payments without declaring a forfeiture

4 Petersen v. Hartwell: Plaintiff purchasers entered into a land sales contract with a seller, their grandmother and made 58 of 65 payments. When defendant, the administratrix of decedent seller's estate, refused to accept further payments, plaintiffs brought suit for specific performance of the contract. She won although her defaults were willful, court says sound policy supports this position. 5 Sebastian v. Floyd Facts: The movant, Jean Sebastian, contracted on November 8, 1974, to buy a house and lot situated in Covington, Kentucky, from Perl and Zona Floyd, respondents. Sebastian paid $3,800.00 down and was to pay the balance of the $10,900.00 purchase price, plus taxes, insurance, and interest at the rate of 8 1/2% per annum, in monthly installments of $120.00. A forfeiture clause in the contract provided that if Sebastian failed to make any monthly payment and remained in default for 60 days, the Floyds could terminate the contract and retain all payments previously made as rent and liquidated damages. During the next 21 months, Sebastian missed seven installments. Issue: Whether a clause in an ILC providing for forfeiture of the buyer's payments upon the buyer's default may be enforced by the seller. Held: No, an ILC is like a Mortgage, So if you want to realize on the security interest, you have to foreclose it.

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b. Estoppel: Stating that your waiving the Forfeiture clauseVII. Protection of Buyers

a. As a vendor, you always want to restrict the vendee's ability to further encumber the land because any mortgage will be senior and therefore if they foreclose they will wipe out your interesti. Triparty Agreement: if the bank the vendor gave the original mortgage to forecloses, they will

not disturb the land kb. If the land K preexists the mortgage by the vendor the bank will probably require a subordination

agreement. i. If it is already in place they will already be senior

1. As the vendee you have to go to the bank with the vendee and get a nondisturbance agreement (cure the default, and if there is a foreclosure they will allow me to stay in my land k, pay it off and get my deed)

Pre-Fore closure Issues

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1. Rights and Duties of the Parties prior to Foreclosure a. Mortgage Law Theories (3)

i. Title Theory – Mortgagor gets an equitable title, but the mortgagee received legal title to land, rents and profits.

1. As legal titleholder, in the absence of agreement to the contrary, the mortgagee has a right to immediate possession against the mortgagor

2. In U.S., Mortgagee holds title for security purposes3. In some states mortgagor has right of possession until default. 4. In order for lender to take possession, must get a court order. (no self help)

ii. Lien Theory (Maj.) – The mortgagee acquires only a "lien" on the mortgaged real estate and the mortgagor retains both legal and equitable title and the right to possession until foreclosure

1. You cannot deprive a person of their estate without a foreclosure in a lien theory state. 2. This means that a mortgagor, prior to foreclosure, may prevail against the mortgagee for

any interference with the mortgagor's possession of the mortgaged real estate to the same extent that any owner of land would prevail against a trespasser

§ 4.1 Mortgage Creates Security Interest Only.

(a) A mortgage creates only a security interest in real estate and confers no right to possession on the mortgagee.

(b) Any agreement, whether in a mortgage or not, that grants the mortgagee, as mortgagee, the right to possession in the future is unenforceable, except as provided in § 3.1(c).

(c) Notwithstanding (a) and (b), a mortgagee who obtains possession of the mortgaged real estate may retain it until the mortgage is redeemed or foreclosed if:

(1) the mortgagor voluntarily delivers possession to the mortgagee;

(2) It’s abandoned by the mortgagor; or

(3) the mortgagee enters after purchasing the real estate in good faith at an invalid foreclosure sale.

iii. Intermediate Theory – The mortgagor is deemed to have legal title until default occurs; after default, legal title passes to the mortgagee.

1. In other words, the mortgagee has the right to possession and collect rents and profits after mortgagor default

b. Other ways of acquiring possession outside of Foreclosure(Mortgagee in Possession Status) :i. At the consent of the mortgagor

ii. A mortgagee who makes a peaceful purchase of a foreclosed property at an invalid foreclosure sale retains possession until a valid sale is accomplished.

iii. When a mortgagor abandons the real estate, the mortgagee’s interest kicks in. 1. [Public policy supports possession]

c. Liability of a Mortgagee in possession i. Until foreclosure, mortgagee must act with regard to junior encumbrances and holders

1. Mortgagee is liable for injuries done through the property2. Mortgagee has to apply rents and profits of mortgagor to his debt. 3. Mortgagee is responsible to the mortgagor for maintenance of the property. 4. Must do what a reasonable owner would do with the property (i.e. try and rent the

property)

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d. Mortgages and possession status i. Title conveyed by a trustee deed relates back to the date when the deed was executed.6

1. Liens, leases, that are subordinate to the deed of trust, are extinguished by a foreclosure sale.

e. Senior vs. Subordinate i. Lease Prior to Mortgage7 – A lease, duly recorded before a mortgage, is superior to the

mortgage. 1. Such a lease cannot be extinguished by a foreclosure sale2. If lease contains purchase option, option must be subordinate to mortgage.8 3. A prior lease can be subordinated to a subsequent mortgage if a subordination agreement

is signed. 4. In title and intermediate states, if the mortgage defaults, the mortgagee can require leasee

to make all future rent payments to the mortgagee.9 a. Privity of Estate10 makes leasee liable to subsequent mortgagee for rents. b. Mortgagee must demand payment for it to be due.

ii. Lease Junior to the Mortgage – A lease recorded after the mortgage. 1. Lease is extinguished at foreclosure sale. 2. In title and intermediate states, mortgagee has right to evict leasee as soon as default

occurs in mortgage payments.a. Also available in lien states if clause is included in the lease. b. Mortgagee can also give leasee a choice to make payments directly to the

mortgagee or move out. 3. If mortgagee enters under his mortgage and leasee remains, a month to month lease is

created. f. Varying Priorities by Agreement 11

i. Subordination Agreement – a party having an interest in real estate consents to a reduction in priority to another holding.

1. Usually separated signed document12

ii. Nondisturbance Agreement –When a mortgagee holding a senior lien agrees that in the event of foreclosure, the foreclosure purchaser will permit the lease to continue and all the tenant to remain on the leased premises so long as the tenant continues to comply with the terms of the lease and is not in default. This is what a tenant will want if it signs a subordination agreement.

6 Dover Mobile Estates v. Fiber Form Products, Inc – D entered into lease with X.. X encumbered the property to Y. X defaulted. P bought property at the foreclosure sale, expecting D’s lease to go with it. Later D gave 30 day notice and left. P tried to sue for the lost rent on the lease. H: Because the lease was subordinate to the deed of trust it was extinguished at the foreclosure sale. Title conveyed by a trustee deed relates back to the date when the trust was executed so the purchaser at the trustee sale takes title free and clear. Additionally when a LL allows a tenant to stay after the a lease is terminated, a month to month lease is formed in the absence of a new lease. 7 When the leasee is a major player such as target they can try and get it both ways. When they make their lease they declare that although they are senior they can renegotiate or have the exit option at foreclosure. 8 If the option was not subordinate to the mortgage, it would kill part of the security interest a mortgage creates. 9 Cannot do this in a lien theory state because no title is transferred. 10 Privity --- The connection or relationship between two parties, each having a legally recognized interest in the same subject matter (such as a transaction, proceeding, or piece of property); mutuality of interest11 Different parties might want different priority preferences. A party who invests a lot of money and effort into a leased property could want further protection, where a party who is subjected to a pro LL contract could want to escape on foreclosure. 12 States something like “The Lease, and the leasehold estate created thereby, together with all rights and privileges of tenant thereunder, are hereby unconditionally subjected, and made subordinate to the lien or chare of the mortgage”

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iii. Attornment Agreement – Tenant agrees with the mortgagee that in the event of a foreclosure or transfer of interest to new owner, the tenant shall be bound to the purchaser by the terms of the lease for the balance of time remaining 13

1. Puts the tenant and the lender in direct privity of contract. Gives lender the right to demand payment.

iv. Subordination, Nondisturbance, Attornment Agreement – First, the lessee specifically subordinates the lease to the mortgage. Next, the mortgagee grants the lessee the protection of the nondisturbance clause so that any foreclosure purchaser recognizes lessee’s rights under the lease. Finally, the lessee, by attorning, agrees to be bound under the terms of the lease to any foreclosure purchaser even though, as junior party, a foreclosure would other terminate his or her leasehold obligations.

Security Interests in RentI. Assignment of Rents

a. Lien theory : The mortgagor retains all of the incidents of possession including rents and therefore it is necessary for the mortgagee to get an "assignment" or "mortgage" of the rents if he wants them as additional security for the loan

i. In relatively rare situations, such agreements give the mortgagee immediate access to the rents. More commonly, however, the mortgagee's right of access to the rents is triggered by mortgagor default.

§ 4.2 Mortgaging Rents.

(a) "Rents" means the proceeds payable by the person in possession or use of the land.

(b) A mortgage may be given on the rents of real property and it can be in the mortgage contract or in a separate contract. The mortgage is effective as against the mortgagor and, subject to the operation of the recording act, as against third parties, upon execution and delivery.

(c) The mortgage may provide that the mortgagee may commence collection of the rents at any time or, in any event, upon mortgagor default. The mortgagee's right to actual possession of the rents arises upon:

(1) satisfaction of any conditions in the mortgage; and

(2) delivery of a demand for the rents to the mortgagor, the holder of the equity of redemption, and each person who holds a mortgage on the real property or on its rents of which the mortgagee has notice.

(d) The delivery referred to in (c) is effective upon receipt and may be accomplished by personal service, Mail, or any other means reasonably calculated to afford an addressee actual notice of the demand.

II. Three issues when dealing with assignment of rents a. When is the assignment effectiveb. When is it effective ("perfected") against third parties, i.e. people who are not the mortgagor

13 The diffenrce between an attorunemnt agreement and a non-disturbance agreement is that the attournment saying that the tenant will abide by the lease and the non-disturb is saying the owner will abide by the lease.

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c. When does the mortgagee have the right to collect the rents or the profits and exercise his or her rights.

III. When is an Assignment effective? a. In The Matter of Millette : Milletts owned a market street building , O’Neal in this case was a

judgment creditor. In Mississippi the mortgagee must record its assignment of rents and also take "additional action," like appointing a receiver, before it can get the rents. In this case the mortgagee's "additional action" was notifying the party with the garnishment of its entitlement to the rents, and this action therefore perfected its interest.

b. What is an "additional action"?i. Historically: Mailing notice; Receiver appointed; something more than just nothing.

ii. Restatement: Mailing Notice

IV. When is it Perfected a. Minority rule: The mortgagee actually has to take possession of the property before the assignment of

rents agreement is perfected.b. Majority and Restatement Rule: The recording of the assignment of rents is enough to perfect the

mortgagee's interest as between the parties

V. When can the Mortgage exercise that right: Three Approaches a. Absolute Assignment (Minority Jurisdiction): When the mortgagee obtains a present title to the rents

even though the assignment itself postpones the rights to collect until a mortgagor defaults. i. The language demonstrates an intent to transfer immediately the assignor's right and title to the

rents (This is a disfavored theory) ii. To apply the collection has to be effective immediately and the mortgagor cannot retain any

interestiii. An assignment is effective immediately and allows the mortgagee to immediately obtain the

rents):

b. Many states apply the exact opposite rule (and the one rejected in Mallete): Until a mortgagor defaults and a lender takes some "effectual step" subjecting the assigned rents toward the payment of the debt, for example, by gaining rightful possession of the property or by filing a foreclosure action, the lender has only an inchoate right to the rents.

c. Middle Ground : These jurisdictions hold that an assignment of rents is effective between the original parties upon execution, and is perfected against third parties upon recording, but the right to commence collection (enforcement) requires subsequent affirmative action, albeit often relatively nominal, by the mortgagee (such as a written demand and default)

i. However in some jurisdictions the step can be more substantial (e.g. appointing a receiver to collect the rents, taking possession of the property, commencing foreclosure proceedings, or seeking an order for sequestration of the rents)

d. See Restatement

VI. Mortgagee in Possession14

14 Coleman v. Hoffman: P had a child that was hurt on property. X owned real estate and they defaulted. The lender (L) began to collect rents. Y collected rents for L. L also hired Z to do repairs before the injury. At foreclosure proceedings Z bough the property. P is trying to sue Z,Y, and L. Held: Y is not liable because all they did was collect renst. This is not

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a. Liability to third Parties: A mortgagee who properly acquires "mortgagee in possession" status (exercise dominion and control over the property) is held accountable for that possession to third parties. (i.e. making repairs)

i. Apartment Context: leasing, making repairs, collecting rents, hiring management, paying bills, making management decisions and receiving and responding to tenant complaints.

b. No Liability If only Getting Rents: The mere collection rents pursuant to an assignment rents clause does not constitute a "mortgage in possession" status. However, couple with other things, like above, then you could get that.

c. Status and Rents: it is possible for a senior mortgage to encompass the real estate only and for a subsequent lender simply to take a mortgage on the rents. But, when such a senior mortgage is foreclosed, it will terminate any subsequent mortgage on the rents.

i. Remember: Foreclosure of a senior mortgage on real estate wipes out all junior interests in that real estate and since the rents are derived from the real estate, the junior mortgage on rents is thus destroyed.

d. Rents owed to the Mortgagee: A mortgage on the rents gives the mortgagee the right to collect only rents actually owing to the mortgagor. It does not confer on the mortgagee the right to collect a use or occupancy charge from a mortgagor in possession for the reasonable rental value of the premises.

ReceivershipsI. Definition: A judicial appointment of a third party to take possession of the mortgaged property, to repair

or preserve the property, and to collect rents. a. This is a way for the mortgagee to insulate itself from liability from stuff like waste and mortgagee in

possession status. § 4.3 Appointment of a Receiver.

(a) A mortgagee is entitled to the appointment of a receiver if:

(1) the mortgagor is in default;

(2) the value of property is less then the debt; and

(3) the mortgagor is committing waste

(b) A mortgagee is entitled to the appointment of a receiver to take possession of the real estate if the mortgagor is in default under the mortgage and the mortgage or other agreement contains either a mortgage on the rents or a provision authorizing appointment of a receiver to take possession and collect rents upon mortgagor default.

(c) A receiver has the authority to preserve the real estate, to collect rents, to pay real estate taxes and senior liens, to enter into, enforce, and terminate leases for the purpose of generating rental income, and to carry out such other functions as may be authorized by the court. A receiver is entitled to collect rent accruing after the date of appointment and, if the mortgagor has also mortgaged the rents, any unpaid rent that accrued prior to the appointment. The rents from the real estate, less amounts paid for real estate taxes, senior liens, and other reasonable expenses incurred in its management, maintenance, and repair, must be credited on the mortgage obligation.

enough to be in control or have dominion over the property. L is liable because they received the renst and they hired people to fix the property. They appear to be in control. Z also as the purchaser and caretaker of the property is liable. Note. No liable. This was a ruling against MSJ.

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(d) A receiver appointed under this section may collect imputed rent or a use or occupancy charge from a mortgagor who is in actual possession of the real estate only if:

(1) The mortgage or other agreement specifically authorizes such collection; and

(2) A specific provision of the mortgage documents bars personal liability of the mortgagor on the mortgage obligation.

II. Appointment of a Receiver Three ways a. Default, Impairment and Waste (Restatement):b. Mortgage on Rents or Language for a Receiver :

i. Restatement : You can get a receiver if the mortgage or another agreement contains language mortgaging the rents or authorizing a receivership upon mortgagor default.

1. Even if there is this language, the mortgage obligation must be default, the real estate must be inadequate to satisfy the mortgage obligation and waste must be occurring or have occurred.

2. However, where the language authorizing the appointment of a receiver to take possession and collect rents upon default, the only requirement for a receivership is that the mortgagor be in default.

ii. Not restatement : 15 Some courts hold that despite language for a receiver it will not be appointed.

1. There should be no receivership if the security is adequate and no waste is threatened which is apt to impair the security interest

2. Under the most common statement of the rule, insolvency of the mortgagor and inadequacy of the security are not enough to justify the receivership.

a. Rather, "there must be shown some additional, distinct equitable ground, such as danger of loss, waste, destruction, or serious impairment of the property, to warrant the appointment.

III. Ex-Parte Receiverships: This entails appointment of a receiver, usually pending judicial foreclosure, without providing either notice or a hearing for the mortgagor and other interested parties.

IV. Scope of Recievership: A receiver appointed under this section is authorized to collect rents, to pay real estate taxes and senior liens, to enter into and to terminate leases, and to preserve the real estate.

a. Business on Real Estate: If there is a business on the real estate, a receiver may exercise control only over those proceeds that are paid primarily for the possession, occupancy, or use of real property and are capable of being separately mortgaged pursuant to § 4.2.

i. But where this is met, the receiver may collect rents, make repairs, purchase insurance, pay real estate taxes and other senior liens, create, enforce, and terminate leases, and undertake other activities that are normally associated with being a "landlord."

b. Collecting Rents: A receiver has the authority to collect all rents that accrue after the date of appointment and the receiver may collect unpaid rent that accrued prior to the receivership appointment if there is also a mortgage on the rents

15 Dart v. Western Savings & Loan: The mortgage provided an assignment of rents clause and that "if an action for foreclosure is brought, a receiver shall be appointed." The Court held this was unenforceable, because there was not an impairment of the security.

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i. Mortgagor Personal Liable: a receiver may not collect rent or a use or occupancy charge from a mortgagor who actually occupies the premises and is personally liable on the mortgage obligation.

1. This result is not altered by the fact that the mortgagor agrees in advance to pay the receiver a reasonable rent.

2. This prohibition applies whether the mortgagor resides on the premises or uses them to conduct a commercial enterprise.

3. A receiver in such a setting is limited to ameliorating and preventing waste, if any, and to performing the landlord's role as to any space that is vacant or rented to tenants.

ii. Mortgagor Not Liable : Courts will allow a receiver to collect rent from a mortgagor in actual possession where the loan documents specifically insulate the mortgagor from personal liability on the mortgage obligation.

V. Ability of Receiver to terminate leases a. As a general rule, a receiver of rents and profits in a mortgage foreclosure action is bound by the

previous agreements between the tenant and the landlordi. However, this assumes a bona fide lease and the court has broad power to prevent frustration of

an order appointing a receiver of rents "by a collusive or fraudulent lease for an inadequate rental or advance payment of rent in anticipation of a foreclosure action.

b. Under the restatement, a receiver has generally no authority to disaffirm pre-receivership leases. i. However, a receiver may disaffirm any lease or related agreement between the mortgagor and a

tenant that contravenes a provision of a prior recorded mortgage or was made while the mortgagor is in default under the mortgage that was not commercially reasonable when it was consummated.

1. Prepayments of rent that are not authorized by the original lease will be treated as presumptively not commercially reasonable and , accordingly, not binding on the receiver, even if the default prepayment of rent had not been prohibited by the senior mortgage.

VI. Competing receivers : When the junior mortgage obtains the appointment of a receiver, that receiver has the right, until a receiver is appointed under a senior mortgage, to collect rents from the mortgaged real estate and, after first using them to pay real estate taxes and other reasonable expenses associated with the maintenance and repair of the real estate, to apply the balance to the junior obligation.

VII. Receiver cannot be held Personally Liable 16: A receiver should not be put in jeopardy personally as to his or her own financial status merely because the property is one which cannot readily be administered.

a. Trustco Bank Rule : The mortgagee, bank, and receiver are not liable for the waste, and when the receiver asked the mortgagor for money to secure the premises and he refused, the deficiency fell on the mortgagor.

16 Trustco Bank, National Association v. Eakin: Defendant mortgagors purchased two apartment buildings and executed a mortgage in favor of plaintiff mortgagee. Defendants subsequently defaulted and a foreclosure action was commenced. The trial court appointed a receiver. Defendants refused the receiver's specific requests for additional funds to secure the property, and plaintiff declined to provide any funds to assist the receiver in preserving the premises. After the foreclosure sale, plaintiff filed an application for a deficiency of judgment. Defendants argued that no judgment should be awarded based on plaintiff's refusal to advance funds to the receiver to secure the property. The court held that there was no authority cited that would impose upon plaintiff, a mortgagee not in possession, any legal obligation or duty to expend funds to preserve mortgaged premises, when the default of which could affect its entitlement to a deficiency judgment.

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i. A court appointed receiver does not acquire mortgagee in possession status. ii. Title and right to possession remain with the mortgagor until the equity of redemption is

extinguished.b. This shows how a receiver can insulate a mortgagee from the obligations of being a mortgagee in

possession. i. Mortgagee Liability : A Mortgagee, other than a mortgagee in possession, has no legal

obligation or duty to expend funds to preserve mortgaged premises, the default of which can affect its entitlement to a deficiency judgment.

Waste

I. Principles for Waste

II. Lien Jurisdictions on wastea. A mortgagee cannot recover until his security has been substantially impaired which occurs only

when waste has reduced the value of the encumbered property to less than the unpaid balance of the debt.

III. Senior mortgagee's in possession can be liable to juniors if they commit wastea. Mortgagee's have been allowed to recover the from a trespasser for waste

IV. Where the amount of waste committed on the property is greater than the amount of the debt deficiency, the extent of reduction in the value of the mortgagee's security interest will always be equal to the debt deficiency.

a. The claim is that the waste diminished the value of the collateral, and because of that the mortgagee recovered less at the foreclosure, therefore the non-assuming grantee is responsible for the difference in the amount that the mortgagee got in the foreclosure and to the debt on the property (not the full value, just what was owed to the mortgagee at the time the grantee took over the mortgage from the original mortgagor)

§ 4.6 Waste.

(a) Waste occurs when, without the mortgagee's consent, the mortgagor:

(1) physically changes the real estate (no intent required) in a manner that reduces its value;

(2) fails to maintain and repair the real estate in a reasonable manner, except for repair of casualty damage or acts of third parties not the fault of the mortgagor;

(3) fails to pay property taxes or governmental liens;

(4) materially fails to comply with covenants in the mortgage respecting the physical care, maintenance, construction, demolition, or insurance against casualty of the real estate or improvements on it; or

(5) retains possession of rents to which the mortgagee has the right of possession under § 4.2.

(b) The following remedies for waste by the mortgagor are available to the mortgagee:

(1) foreclosure if the waste has impaired the mortgagee's security;

(2) an injunction, but only to the extent that the waste has impaired or threatens to impair the mortgagee's

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security; and

(3) recovery of damages, limited by the amount of the waste, to the extent that the waste has impaired the mortgagee's security.

(c) If the mortgage relationship has ended at the time the mortgagee claims waste, an impairment of security exists if the value of the real estate is less than the debt and the obligations secured by any liens senior to the mortgage. If the mortgage relationship continues to exist at the time the mortgagee claims waste, an impairment of security exists if the ratio of the mortgage obligation to the real estate's value is above its scheduled level. In such cases, the mortgagee may restore the ratio of the debt to the real estate's value to its scheduled level by obtaining an order compelling correction of the waste or by recovery of damages, limited by the amount of the waste.

(d) Waste occurs when a person other than the mortgagor physically changes the real estate, whether negligently or intentionally, in a manner that reduces its value. Such a person may be held liable for damages and may be subjected to an injunction prohibiting future waste or requiring correction of waste already committed. If the waste was committed with the mortgagor's consent, liability exists only if the person committing it had actual knowledge of the existence of the mortgage.

(e) Persons who acquire possessory estates other than leaseholds in the real estate subject to the mortgage are liable for waste on the same basis as the mortgagor.

b. While damaging the property is waste, failing to take actions to maintain its value may not be.

V. Pre-existing Waste: The mortgagor has no duty under the law of waste to repair defects in the property that existed at the time the mortgage was given

VI. Waste of Rents: Once a mortgagee is entitled to collect rents, the mortgagor (recourse or non-recourse) or any other person who intercepts the rents and fails to deliver them to the mortgagee has committed waste.

a. Rent Skimming: A party will come in to a property with an existing mortgage (they will be nonassuming, only subject to supposedly, or in a jurisdiction with no deficiencies) and take the rents with no intention of maintaining the property or paying the mortgage. And under the waste theory may be recoverable anyway.

VII. Waste Liabilitya. Non-Owners

i. Consent of Mortgagor : If the waste was committed with the mortgagor's consent, liability exists only if the person committing it had actual knowledge of the existence of the mortgage (i.e. contractors)

1. In other words, there is no constructive notice from the fact the mortgage is recorded (contractors don’t have to do title searches)

2. Mortgagor Still Liable. ii. Without consent of Mortgagor : Persons other than the mortgagor, and without the mortgagors

consent are liable despite whether they know about the mortgage.1. Limited Remedies: No Foreclusore, or other remedies under the mortgage but,

a. Injunction : If Continuing the waste.

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b. Damages : Can get full recovery (limitation on actual harm not applicable) but, the mortgagee must credit the entire recovery to the mortgage debt, or under § 4.7 must give the mortgagor access to the funds for purposes of repair or reconstruction of the property if doing so is economically feasible and the property's value will be increased by at least the amount so expended.

2. Mortgagor Not Liable.

b. Subsequent Grantees: When the mortgaged real estate is transferred to a new owner, that person becomes liable for waste occurring during the period of his or her ownership, and is subject to the mortgagee's exercise of all of the remedies, including a personal action for damages.( Includes “Assuming” and “Subject to” Grantees) 17

i. But if subject to or Non-recourse: Mortgagor is still liable1. Because waste is a tort, one way that a bank can get the equivalent of a deficiency

judgment from a nonassuming grantee is to go after them for the wasteii. Deficiency judgments barred by the mortgaged clause or by statute: Carefully drafted

nonrecourse clauses often "carve out" liability for waste, making the mortgagor liable for waste even if there would be no general liability on the mortgage debt (the court above found it because of tort theory I believe)

VIII. Three Limitations on Recovery of Damages for Waste: Recovery may not exceed the least ofa. The actual harm caused by the waste (The amount by which the mortgagee's security interest has

been impaired)i. Commonly measured either by the cost of repair or the diminution in value of the property.18

ii. The amount of the waste itself will limit the recoveryiii. All recoveries from waste must be applied against the debt.

b. The amount of the mortgage debt or, if foreclosure has already occurred, the amount of any unpaid deficiency

i. Note if the creditor enters a "full credit bid" at foreclosure it cannot recover for the waste because its debt is considered to have been paid in full)

c. Mortgagee can never recover more then what he is owed.d. When you look at waste the point is to put the mortgagee in the position of the real estate before it

was damaged or bring it up to the at the market value when the mortgage was given. e. Exceptions

i. Damages before Foreclosure : The mortgagee may seek money damages for waste without first foreclosing the mortgage

IX. Measuring Impairment of Securitya. Loan to Value Ratio: Example : Black acre = 100 (FMV) and the loan is 80, your LTV= 80%.

i. The lender always wants a lower LTV.

17 Prudential Insurance Company v. Spencer's Kenosha, Inc. The grantee purchased property from the mortgagor. A judge granted the mortgagee's request for foreclosure of the property. Following the sale, a hearing was held in which a judge held that the grantee had committed waste upon the property and awarded damages to the mortgagee. The court held (1) the waste doctrine permitted a mortgagee to maintain an action for waste against a nonassuming grantee of a mortgagor, (2) where the amount of waste committed on the property was greater than the amount of the debt deficiency, the extent of reduction in the value of the mortgagee's security interest would always be equal to the debt deficiency.18 The mortgagee may recover only so much of the damages as are necessary to correct the impairment of security, with the amount of the waste itself forming a ceiling on the recovery.

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b. Debt equivalency rule (Think LTV): There is no damages recoverable on the waste unless the property is valued less then what is owed on the debt.

c. Reasonable margin of Security Rule: The mortgagee may claim damages if the properties valued has dropped so much that the mortgagee margin of security is “unreasonably low”.

i. Not really followed because Court do not know what is a unreasonable low

d. The Original loan to value ratio rule: Courts look at the LTV ratio when the original loan was made and will permit the mortgagee to restore the LTV based on what is now the fair market value of the property (after waste)

i. Example: David (mortgagee) makes a loan of 80,000 to Mary (mortgagor) which is secured by a mortgage on black acre (property) with a FMV of 100,000. LTV= 80%. During the next five years, Mary makes regularly scheduled amortized payments and now the loan balance is 70,000. At the same time, the FMV of black acre has increased to 120,000. The difference between the amount owed and the FMV is equity (this can occur because you either pay down the loan or the FMV increases). Mary then commits waste, and the property is worth 80,000 ($40,000 in waste). Under this Rule, David is entitled to be at a loan balance of 80%(the original LTV) of 80,000 (or 64,000) then minus the 70,000 (loan balance) and then David is entitled to 6,000.

e. The Pre-Waste Loan to value Rule: This takes the view that mortgagee is entitled to a sufficient recovery to reduce the LTV to the level it was right before waste was committed.

i. Example : Right before the waste, the Loan was 70,000 and the FMV is 120,000. the LTV in this case is 58.3% ((70/120)*100) Therefore, you do 58.3% of 80,000 (or 46,600) then you do $46,000 - 70,000 and David damages is 24,000 dollars.

f. Scheduled Loan to Value Ratio Rule (Restatement): an impairment of security exists if the value is above the scheduled level. In other words, the lender ought to recover enough in damages for the waste that, when the recovery is applied toward the mortgage balance, the resulting L/V ratio will be the same as scheduled. That is, the ratio that would have existed if all payments had been made on schedule and if the property's value had remained stable over the life of the loan. 19

i. Application to Example: David Scheduled Ratio: 70,000/100,000=0.7 . David is entitled to recover the amount enough to bring him up to 80,000 (70% of 80,000 = 56,000) So the damages would be 70,000-56,000=14,000

g. Note: If the foreclosure has already occurred when the waste action is brought, the "impairment of security" test and the schedule L/V ratio are irrelevant. Why? The land is no longer security for the loan. i.e. only the first two limitation on recovery of relevant.

Mortgagee Liability for Environmental Problems I. Liability as a Mortgagee for Environmental Problems

a. Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)i. During Pre-Foreclosure Period

19 Under this approach, the mortgagor who commits waste gets the benefit of inflation in the property's value (in the sense that, if the value rises, more waste can be committed before damages being to accrue), and is disadvantaged if the property falls in value (since less waste can be committed before damages begin to accrues)

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1. Mortgagee can only be liable (as long as not in possession) if they are involved in the "participating in management of the facility"

2. Also, they become liable if and when they take a deed in lieu of foreclosure, or by the property at the foreclosure sale

a. However, the mortgagee may be protected from liability if it can establish that even post-foreclosure ownership is held primarily to protect his security interest in the facility.

II. Asset Conservation, Lender liability, and Deposit Insurance Protection Act (1996 Statute)a. Indicia of Ownership

i. Owner does not include a person that is a lender who does not participate in the management of a facility and only holds a security interest.

b. Participation in Managementi. Includes

1. Participating in the management or operational affairs2. A lender that holds a indicia of ownership only to protect a security interest, but

a. Exercised decision making control over the environmental compliance of the facility

b. Exercises control at the level comparable to that of a manager of the facility, such that the person had assumed responsibility for

i. Overall management (day-to-day decisionmaking)ii. Does not Include

1. Merely having the capacity to influence or the unexercised right to control, facility operations.

2. function of environmental compliance;3. The term "participate in management" does not include performing an act or failing to act

prior to the time at which a security interest is created; and4. The term "participate in management" does not include

a. Holding a security interest or abandoning or releasing a security interest;b. Including in the terms of an extension of credit, or in a contract or security

agreement relating to the extension, a covenant, warranty, or other term or condition that relates to environmental compliance;

5. With respect to a contract or security device relating to environmental compliance, onlya. Monitors the terms or extension of credit under the agreementb. Monitoring or undertaking 1 or more inspections of a facilityc. (See page 417, for complete list)

III. CERCLA Liensa. CERCLA liens have no super priority, it is a standard lien whose priority is determined under

traditionally applicable rules of lien priority.i. Therefore, a CERLCA lien will be superior to liens held by unsecured creditors and those filed

subsequently to the CERCLA lien but will remain inferior to pre-existing liens. ii. However, some states have created super liens.20

20 Edwards v. First National Banks of North East.: The landowners' property was adjacent to a gasoline station upon which the bank held a mortgage. After foreclosing, the bank had the underground gasoline storage tanks removed. Earlier, the landowners had installed a well on their property. The state detected petroleum by-products in the soil and in the well. Section 4-401(i)(2)(i)(2) included as a "person not responsible for discharge" one that held ownership of a tank only as a security interest and abandoned the tank under state regulations within 180 days after acquiring it through foreclosure. The bank argued that a broad interpretation of 4-401(i)(2)(i)(2) was needed to protect commercial lenders from the fear of incurring legal responsibility upon taking possession of mortgaged property. The court found that Md. Code Ann., Envir.

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b. This is the reason you need to be careful before deciding whether or not to foreclose a facility or to just sue on the debt, or at least not buy the damn thing at the mortgage sale

c. CERCLAi. Created strict liability for responsible parties, because if the property was a facility and it was

contaminated there was strict liability. ii. Exemption for who is an owner or operator of a security

d. Cercla Statutei. A mortgagee can take other pre loan actions and due diligence and conduct environmental

inspections ii. A mortgagee can make a loan that it knows is contaminated, as long as it does not make any

decisions with regard to the property or do anything to exacerbate the problem.iii. If the mortgagee takes reasonable steps to correct the property and such.

e. Liability of Mortgagee i. Participated in management

1. Exercise decision making control over the environmental decisions such thata. Mortgagee has taken responsibility to correct the environmentalb. The level of control is such that they have assumed actual control by person similar

to a property manager. 2. Mortgagee can go in and take care of the property, as long as they are not making

decision outside of the ordinary course of the business. ii. No liability

1. If not in control2. If they get ownership they must take reasonable step to sell the property and cannot do

anything to exacerbate the problem. iii. Under Cercla and Cera, this is an exemption for individuals that take reasonable steps to

investigate the contamination. 1. As long as the individual did not cause it2. As long as the individual did a prudent study of a reasonable person for an investigation,

then you cannot be held liable.

Insurance and Real Estate Taxes I. Overview

A. Insurable Interests i. Mortgagor: Value of the premises

ii. Mortgagee: Amount of mortgage debt. 1. Same with waste: Cannot get more then you are owed.

4-403 expressly prohibited judicial construction of the act so as to abrogate common law remedies. But this case suggests that such mortgagees, as foreclosure purchasers, remain liable to adjoining landowners for environmental contamination on a variety of Common Law theories (nuisance, trespass, etc.)

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B. Recoverable Amount : the mortgagee is limited to recovery of the amount of the debt. C. Mortgagee requiring Mortgagor to Get Insurance: Usually the clause will in essence ensure that

the lender can recover on the policy no matter what the borrower has done (i.e. even if the borrower has intentionally demolishes improvements on the land.

II. Type of Insurance ClausesA. Union Mortgage Clause (Standard Mortgage Clause): In exchange for the mortgagee obligating

itself to cure any default on the mortgagor's part in paying the premium, the insurance company will pay the mortgagee no matter what the mortgagor does (even if he destroys the property himself intentionally)i. It insulates the mortgagee from policy defenses which may be available against the mortgagor

ii. If the mortgagor fails to pay the premium, the insurer cannot cancel the policy against the mortgagee unless they notify the mortgagee of the default and make a demand that the mortgagee pay the premium instead.

iii. If the insurer pays the full mortgage debt, it is subrogated and can enforce the note and the mortgage on the mortgagor.

B. "Open Loss Payable Clause": The policy here merely identifies who is to collect the proceeds, which puts the mortgagee at risk of every act and neglect of the mortgagor which would avoid the original policy in the mortgagor's handsi. In other words, the mortgagee can only recover if the mortgagor recovers.

C. It is universally held that If the mortgagor promised the mortgagee, in the mortgage or otherwise, to purchase the insurance" the mortgagee has a right to the insurance proceeds to the extent the casualty has impaired the mortgagee's securityi. This is true (under Restatement) whether the mortgagee is named as a "loss payee" in the

policy or notii. Doesn't even matter if the loan is non-recourse

iii. Must require coverage for the type of damage that occurs (e.g. if they require fire, but the policy holder buys fire and flood, and a flood damages the premises then the mortgagee is entitled to nothing)

§ 4.8 Effect of Foreclosure on Mortgagee's Right to Insurance and Eminent Domain Proceeds.

(a) Where a mortgagee has a right to foreclose a mortgage because the mortgage obligation is fully due and payable and the mortgagee has a right to casualty insurance or eminent domain proceeds under § 4.7, the mortgagee may either:

(1) recover from the insurance proceeds or from the eminent domain award, the full amount of the mortgage obligation; or

(2) foreclose on the mortgaged real estate and, to the extent that doing so does not satisfy the mortgage obligation, recover the balance from the insurance proceeds or from the eminent domain award.

(b) When the mortgagee proceeds under Subsection (a)(1), the mortgagee may have further recourse against the mortgaged real estate or the mortgagor only to the extent that the recovery on the casualty policy or from the eminent domain award is less than the mortgage obligation. When the mortgagee proceeds under Subsection (a)(2), the mortgagee may recover from the insurance proceeds or from the eminent domain award only to the extent that the foreclosure proceeds are less than the mortgage obligation.

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III. How Must a Lender Apply the Insurance Proceeds?

§ 4.7 Mortgagee's Right to Funds Paid Under Casualty Insurance or Taking in Eminent Domain.

(a) Unless otherwise stated, the mortgagee has a right to the following funds paid to the extent that the mortgagee's security has been impaired by the loss or damage, as defined in § 4.6(c):

(1) the proceeds paid by a casualty insurer due to the occurrence of an insured loss to the real estate, if the mortgagor promised the mortgagee, in the mortgage or otherwise, to purchase the insurance; and

(2) an award resulting from a taking of all or part of the real estate under power of eminent domain, or the proceeds of a sale to a governmental body in lieu of such taking.

(b) Unless the mortgage effectively provides the contrary (or is silent), if restoration of the loss or damage described in Subsection (a) is reasonably feasible within the remaining term of the mortgage with the funds received by the mortgagee, together with any additional funds made available by the mortgagor, and if after restoration the real estate's value will equal or exceed its value at the time the mortgage was made, the mortgagee holds the funds received subject to a duty to apply them, at the mortgagor's request and upon reasonable conditions, toward restoration. The mortgagee must credit toward the obligation secured by the mortgage any such funds not so applied.

A. Minority Rule (Restatement) 21: i. If the mortgage is not impaired and the mortgagor's are not in default then they are entitled to

the proceeds to rebuild1. Restatement Comments Indicate that even with the language that the mortgagee can

decide, the court can go around that language if it would be unconscionable, not in good faith, or put the mortgagor in a terrible situation, the court can set that language aside.

ii. If a combination of the funds held by the lender and any additional funds the mortgagor wishes to contribute will permit a restoration of the property's original value at the time the mortgage was made

1. Disregard the increase in the value of the property.B. Majority Rule : If the mortgage is silent and the mortgagor promised the mortgagee to insure the

premises, the mortgagee has the option of applying the insurance proceeds to the mortgage debt or rebuilding the mortgaged premises, This right of the mortgagee is normally not dependent on a finding that rebuilding will jeopardize the mortgage security.i. Mortgagor has no right to insist that the proceeds be used as restoration.

21 Starkman v. Signmond pg. 427 Plaintiffs mortgagors executed a purchase money mortgage to defendants mortgagees. When fire destroyed the mortgaged premises, plaintiffs filed an action to determine rights to the proceeds of insurance under a policy issued by defendant insurer. Plaintiffs sought to rebuild the residence, while defendants wanted to pay off the mortgage balance. Mortgage did not address the issue, and the insurance clause said that the mortgagor should be paid regardless, but the issue in this case is who gets paid first and when? Court held for the Plaintiff. The insurer's option to repair or replace the property coupled with the covenant to repair in the mortgage, suggested that the parties did not intend to accelerate the debt in case of fire and that the insurance was to protect the mortgagees' interest if the security was impaired. Defendants were not prejudiced by the rebuilding of the residence and had not been damaged because the value of the vacant land exceeded the mortgage balance and remained as full security. The escrowed proceeds were to operate as a construction mortgage. Starkmans got the Difference between the insurance amount ($135,000) and loan amount ($60,000). This court holds that if there is no impairment to the security interest the mortgagors get the money to rebuild

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C. How Much of the Insurance Proceeds may the mortgagee capture?i. Majority: All of the insurance money up to the amount of the loan

ii. Minority (and Restatement): Can only collect insurance proceeds "to the extent that the mortgagee's security has been impaired by the loss or damage.

1. If these proceeds are insufficient to satisfy the obligation fully, the deficiency may be recovered by foreclosing on the real estate or, to the extent permitted by local law, proceeding against the mortgagor personally.

2. Measured in the same way that the Restatement measures waste cases: restore the loan to its "scheduled" loan-to-value ratio

D. Mortgagor in Default : If the mortgage debt is delinquent at the time the mortgagor requests use of the funds for restoration, the mortgagee is entitled to retain so much of the funds as necessary to cure the default. Moreover, the delinquency will ordinarily give rise to the usual mortgagee's remedies of acceleration and foreclosure; the fact that the loss or damage has occurred, or that the mortgagor wishes to restore the property, will not preclude the mortgagee's exercise of these remedies.

1. In other words,Once the mortgagee has properly accelerated the debt, it no longer has a duty to release any funds for restoration of the real estate.

IV. Some General Considerations A. If you go out and insure the property on your own and you don't name the mortgagee then they have

no right to the insurancei. So the mortgagee will require a piece of paper evidencing that they are on the insurance

V. Eminent Domain TakingA. Total Taking (No Rebuilding): The majority rule is that the mortgagee can take all of the proceeds

up to the amount of the outstanding mortgage, even if only part of the property is takeni. If the award is insufficient for this purpose, it may proceed against the mortgagor personally

ii. Emerging Rule: they can only take so much as their security is impairedB. Partial Taking: The Restatement holds that if rebuilding is feasible the proceeds need to go to this

end first

VI. Credit Bids on Insurance Policy and Domain TakingA. Full credit bid : If the mortgagor, mortgagee, or third party bids in a full credit bid (at least equal to

the mortgage obligation) at the foreclosure sale, they are no longer entitled to any insurance or Taking proceedsi. The same is true when a full credit bid is place on the property if there has been waste

committed (full credit bids are dangerous and the mortgagee will want to inspect the premises before making one)

ii. The same result will follow if the mortgagee has voluntarily accepted payment in full of the mortgaged debt.

B. Partial Credit bid : The lender is only entitled to the amount of insurance proceeds that, when added to its bid, will equal the amount of the mortgage debt.

VII. Recover from Casualty Before or After ForeclosureA. Loss Payable Policy : If a mortgagee has received the property at a foreclosure, then they cannot take

any more from an insurance policy. i. This is where it is a full credit bid.

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B. Union Mortgage i. If the damage occurred after the foreclosure, it is the mortgagee property and then it is their

policy so they can collect. ii. If it is before, then the Mortgagee cannot collect because they should not have bid that amount

in the first place.

VIII. Escrow Accounts for Taxes and Insurance. A. Generally the mortgagee will make the mortgagor's failure to pay taxes a reason to accelerate the

mortgage debti. Additionally, many mortgagees make the mortgagors pay 1/12 of the taxes (and often times

the insurance premium) into an escrow fund, out of which they will pay the taxes at the end of the year

B. Federal Preemption of state law requiring interest payment: Federally-chartered savings and loan association "may extend credit as authorized under federal law, including this part, without regard to state laws purporting to regulate or otherwise affect their credit activities. These types of state laws preempted specifically include (6) Escrow accounts, impound accounts and similar accounts."

C. Adjustment between Seller and Buyeri. Funding Escrow accounts: the mortgagor will not have a year before the taxes become due

(usually), therefore the mortgagee will require that the escrow account is funded for the amount of time that has already elapsed in that year at the closing sale. So if the taxes are due in December and the closing is in April, the mortgagor will be required to fund the escrow account 500 (assuming that the taxes are 1200 a year)

1. Cushion: what if the taxes are more than anticipated, or the buyer misses a payment? The mortgagee will usually require a "cushion" of around 2 months to be placed into the escrow account as well

2. Limitations on cushions: Maximum cushion under federal statute Real Estate Settlement Procedures Act (RESPA) is 2 months (1/6th worth)

D. Adjustment between the buyer and the seller: in the example above, because the seller has occupied the house for five months and the buyer will have to pay taxes on all 12 months at the end of the year the buyer needs to be credited, from the seller, in the amount of 500. So the seller will have to pay out 700 and be credited 500

E. In the context of an escrow, the mortgagee states that it needs to be protected that the mortgagor will pay the future taxes and insurance proceeds. (Always want to make sure that taxes are current.)i. This is an account, where the mortgagee makes the mortgagor put in a certain amount every

month of the year to make sure of the future payment. They usually take the taxes for the year and divide it by 12.

F. PITI (Principle, Interest, Taxes, and Insurances)i. Taxes and Insurance that are put in escrow or impounded for future use.

ii. The LTV is what the mortgagee looks at to determine whether or not to do this. 1. Usually if this is under 20%, you can ask the lender to waive this. 2. This is a free float of money3. Because of this, some states made lenders accountable, and some made them pay interest

to the borrowers. iii. When you go to close, you have worry not only about the taxes you owe the seller, but you

also have to have money for the escrow. iv. There is very little regulation of this

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Transfer

I. Assumption : § 5.1 Transfers with Assumption of Liability.

(a) "Assumption of liability" means an express promise to perform the obligation secured by the mortgage.

(b) When mortgaged real estate is transferred with assumption of liability:

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(1) the mortgage remains effective against the real estate; and

(2) the transferor remains personally liable for the covenants in the mortgage and for the obligation secured by the mortgage, to the extent such liability existed prior to the transfer; and

(3) in the event of a default in the performance of the obligation secured by the mortgage, the mortgagee has the right (except as limited by the parties' agreement, by statute, and by §§ 5.3, 8.2, and 8.4):

(i) to proceed against the transferor personally to the extent of the transferor's liability, and

(ii) to proceed against the transferee personally, to the extent of the transferee's liability, and

(iii) to enforce the mortgage, and thereafter to proceed against the transferor or the transferee personally for any deficiency, to the extent of their respective liabilities.

(c) The mortgagee's rights against the transferee under Subsection (b)(3) exist:

(1) whether or not the transferor is personally liable on the obligation secured by the mortgage; and

(2) whether the transferee receives the transferor's entire interest in the real estate, some portion of it, or a mortgage on it; and

(3) whether or not consideration is given by the mortgagee for the transferee's assumption agreement; and

(4) whether or not the transferor has a defense to the obligation or the mortgage, if the transfer is a sale and amount of the mortgage obligation is credited against the price paid; and

(5) even though the transferor and transferee, subsequent to the transfer, mutually rescind or modify the assumption agreement, provided that the mortgagee, prior to receiving notification of the rescission or modification, materially changes position in justifiable reliance on the assumption agreement, brings suit on it, or manifests assent to it at the request of the transferor or transferee.

(d) When mortgaged real estate is transferred with assumption of liability, the transferor is regarded as a secondary obligor, and the transferee as a principal obligor. If the transferee defaults in performance of the obligation secured by the mortgage, creates an unreasonable risk of default, or otherwise engages in conduct that impairs the transferor's expectation that the transferee will perform the obligation, the transferor is entitled to relief against the transferee and the security of the mortgaged real estate by way of exoneration and quia timet, reimbursement, restitution, and subrogation ,

a. Form: i. It must be an express promise22

1. Doesn't need to be in writing or in the mortgage2. if it is oral it must be "clear and convincing" evidence of its existence 3. Grantee doesn't have to sign the deed for it to be effective

22 Middleton v. Hancock (pg. 448) The language in the deed in favor of the grantee said he was taking subject to the mortgage. Middleton (the grantor) never obtained a release from the bank and therefore was still personally liable for the mortgage even though the grantee was not. Issue: whether an agreement to "take over" payments is the equivalent of an assumption? No. Must be an express Promise

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4. The language, "I agree to take over" is not the equivalent to "I promise to pay". 5. Word "assumption" need not be used, but it must show that the grantor "promises to pay

the mortgage payments"ii. Implied Assumption

1. If black acre is worth 100k (fmv) and it is encumbered with a loan and mortgage for 40k, and if you’re the grantee, you would pay 60K (equity).

2. Under this, since the grantee essentially took advantage of the 40K in debt, the court will imply the assumption of the debt because the grantee benefitted from the 40k in debt, since he would have otherwise had to pay 100k.

iii. Real Estate: You do not assume a mortgage, you actually assume the debt and the Real Estate is still liable.

b. Granteei. Liability: The mortgagee can recover against an assuming grantee, either for the entire debt or

for a deficiency after the foreclosure of the mortgage, whether or not the mortgagee was a party to the assumption agreement.

1. And even if the mortgagor was not personally liable, but the grantee has to intend to be liable.

ii. Rescission of the Assumption agreement : If, after the assumption, the mortgagor-surety and grantee rescind the agreement, the mortgagee cannot bring suit against the grantee, unless the mortgagee material changes his position in justifiable reliance on the assumption agreement. Restate 5.1(c)

iii. Defenses Against Mortgagee: has no claim to any defense that the mortgagor may have (or had) against the mortgagee (including fraud)

c. Grantor: i. Surety Relationship: When an owner of mortgaged real estate sells it without paying off and

retiring the mortgage, the mortgage continues to encumber the property's title in the hands of the purchasers. At the same time, the original mortgagor remains personally liable on the mortgage debt to the same extent as before. In the case of a non-recourse loan, there is no liability (but the land is still liable), but on a re-course loan the original mortgagor is still liable but as a surety.

1. The grantor (recourse, who doesn't get a release) takes a position of surety when the land is sold, the person primarily responsible is the grantee (but if they take subject to, then the land is primarily liable)

2. Mortgagee can take action against either party or the land in any orderii. Mortgagor-Surety Defenses: A surety is discharged from his duties under the mortgage, if the

mortgagee "changes the deal" with the grantee. (i.e. Surety cannot be held liable for something he did not agree to.)

1. Typesa. Releasing the grantee from personal liability,b. Releasing some or all of the real estate from the mortgage,c. Impairing the mortgagee's right to realize on the security of the mortgage,d. Modifying the interest rate or terms of payment, or e. Extending the time to maturity of the mortgage loan.

2. Mortgagor/grantee will be released from his obligation as long as the actions of the mortgagee:

a. Have made it less likely that the grantee or the land will satisfy the debt, and

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b. Have made it more difficult for the mortgagor to assert recourse (subrogation, reimbursement, exoneration) against the grantee and the land if the mortgagor is required to pay the debt.

3. Traditionally: this would release the mortgagor/surety from all liability,a. Increasingly popular view (and the one of the Restatement): only discharges the

obligation of the surety to the extent that the surety would suffer loss as a result of the impairment.

4. Surety Contracts must be in writing (Statute of frauds) iii. Mortgagor Paying Debt of Assuming Grantee that Defaults: subrogation, reimbursement, and

exoneration (Note: He can always sue on breach of the assumption agreement) 1. Subrogation: if the grantor pays the mortgage debt (even if it is non-recourse) in full he

steps into the shoes of the mortgagee and has all options against the grantee that the mortgagee had. (Ex: sue and Foreclose)

a. If the mortgagee has already foreclosed and got a deficiency from the mortgagor-surety, the latter can go after the grantee for the payment.

b. No subrogation for partial payment by the mortgagor-surety. 2. Reimbursement: Demand that the grantee pay any amount the surety mortgagor paid to

the mortgagee on the grantee's behalf a. IF the mortgagor-surety pays in whole or in part when it is due or delinquent, he is

entitled to reimbursement. b. This is only available if the mortgagor was personally liable on the debt.

3. Exoneration: If an assuming grantee does not pay the mortgage obligation when due the mortgagor-surety Can ask for a court order compelling the grantee to pay

a. The debt has to be in default and the mortgagor must be personally liable on it.

d. Chain of "assumptions ": If A (who assumes) sells to B (who assumes) sells to C (who assumes), A and B have all the rights of 1-3 against C

i. What if there is a break in the chain? If B (takes subject to) and the C purportedly assumes: C's liability may depend on precisely what C's "assumption agreement" says. If he only promises to take on B's obligations, then C will not be personally liable because B never was

1. Likewise, if the promise to pay the note "according to the terms thereof," and the note's terms exclude personal liability, the "assuming" party has assumed nothing.

a. Courts split on whether C will be liable or not when he promises to pay the obligation itself, and not merely B's (nonexistent) obligation.

ii. Every assuming persons is liable to the mortgagee until the debt is paid off. 1. In the chain of assumptions, the person before the next person assumes is the surety for

that assuming party. iii. Liability of the assuming party does not depend on if the grantor before you assumed, just on if

you assumed, so you can be held liable to the mortgagee even if the grantor has not assumed, and therefore not liable.

e. Impact of the absence of an assumption agreement : In the absence of an assumption agreement the mortgagor's rights change drastically:

i. The second and third options go away entirely because they involve a personal judgment against the grantee, and if he is not personally liable then this is impossible.

ii. Next, under the first option, the mortgagor's subrogation rights are only to the property , and not to the note or personal obligation.

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1. Therefore, if the mortgagee has foreclosed and got a deficiency judgment from the grantor/surety, and the grantee is nonrecourse, the mortgagor is SOL

f. Remember that mortgagee can always go after the mortgagor unless there has been a release (assuming it is a recourse)

g. Assumption on Liability by junior Mortgages i. Not Restatement : If a junior mortgagee enters into an assumption agreement, promising to pay a

senior mortgage debt, the first mortgagee, absent consideration for the alleged assumption of liability in the second mortgage, cannot recover from a second mortgagee.

ii. Restatement 5.1 Rejects this rule that insulates junior mortgages from liability for their assumption agreement: If the second mortgagee assumes the first mortgagees debt they are liable for it, but there should be express language for it.

1. This is how wrap-around mortgages work.

II. Subject to : no personal liabilitya. Land is still liable for the debt.

§ 5.2 Transfers Without Assumption of Liability. (“Subject to”)

When mortgaged real estate is transferred without assumption of liability:

(a) the mortgage remains effective against the real estate in the hands of the transferee; and

(b) the transferor remains personally liable for the covenants in the mortgage and for the obligation secured by the mortgage, to the extent such liability existed prior to the transfer; and

(c) in the event of a default in the performance of the obligation secured by the mortgage, the mortgagee has the right (except as limited by the parties' agreement, by statute, and by §§ 5.3, 8.2, and 8.4):

(1) to proceed against the transferor personally, to the extent of the transferor's liability, and

(2) to enforce the mortgage, and thereafter to proceed against the transferor personally, to the extent of the transferor's liability, for any deficiency.

(d) The transferee does not become personally liable, by virtue of the transfer, for the obligation secured by the mortgage.

(e) If the transfer is a sale and the amount of the mortgage obligation is credited against the price paid, the transferor is regarded as a secondary obligor, and the mortgaged real estate as a principal obligor, under the principles of Restatement Third, Suretyship and Guaranty. If the transferee defaults in performance of the obligation secured by the mortgage, the transferor is entitled to relief against the security of the mortgaged real estate by way of subrogation.

b. Mortgagor Liability to Government Agencies i. Mortgage Liability to Government Agencies (HUD / VA / FHA): if they insure the loan, even

if you get an assuming grantee, you still need to get a release, or they can still come after youii. Release: if you ever grant property to a grantee, you need to get a release, if you do so then you

don't have to worry about any of this mess. In addition you might as well get them to assume if you can.

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c. Mortgagor Paying the Debt of Non-assuming Grantee: If the Mortgagor pays the debt of the grantee, he is subrogated to the rights of the mortgagee, can foreclose on the land to get paid back.

i. This is even true if the mortgagor is of non-recourse. ii. But the Mortgagor must make a full payment, partial payment will not suffice

iii. Also, the grantee might claim (in a jurisdiction other then the restatement) that there was a merger that resulted since the debt was dischared, and the mortgage should be destroyed.

III. Defenses of the Grantee against the Mortgageea. Subject to : None

i. Exceptions : if the property was a gift, or if the grantee paid the full purchase price in cash, and the grantor promised to discharge the original debt.

1. Under these circumstances they can challenge the validity of the mortgagE§ 5.4 Transfer of Mortgages and Obligations Secured by Mortgages.

(a) A transfer of an obligation secured by a mortgage also transfers the mortgage unless the parties to the transfer agree otherwise.

(b) Except as otherwise required by the Uniform Commercial Code, a transfer of a mortgage also transfers the obligation the mortgage secures unless the parties to the transfer agree otherwise.

(c) A mortgage may be enforced only by, or in behalf of, a person who is entitled to enforce the obligation the mortgage secures.

IV. Transfer In General

a. Transfer of the mortgage also transfers the obligation: When ownership of a mortgage is assigned to another, the mortgage is likewise transferred unless the parties agree that the obligation be retained by the transferor. In effect, the obligation will "follow" the mortgage even if not expressly mentioned in any document of transfer.

b. Mortgage Can only be enforced by person having that right or on their behalf: In general a mortgage is unenforceable if it is held by one who has no right to enforce the secured obligation. 23

V. Restrictions on the Mortgagor to Transfera. Due on Sale Clauses: A mortgage provision that affords the mortgagee the right to accelerate the

mortgage debt and to foreclose if the mortgaged real estate is transferred without the mortgagee's consent

b. Due-On-Encumbrance Restrictions: Authorizes mortgagee to accelerate the debt if the mortgagor "further encumbers" the mortgaged real estate.

23 For example, assume that the original mortgagee transfers the mortgage alone to A and the promissory note that it secures to B. Since the obligation is not enforceable by A, A can never suffer a default and hence cannot foreclose the mortgage. B, as holder of the note, can suffer a default. However, in the absence of some additional facts creating authority in A to enforce the mortgage for B, B cannot cause the mortgage to be foreclosed since B does not own the mortgage. This result is changed if A has authority from B to enforce the mortgage on B's behalf. For example, A may be a trustee or agent of B with responsibility to enforce the mortgage at B's direction. A's enforcement of the mortgage in these circumstances is proper.

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c. Increased-Interest-on-transfer Clauses : Authorizes the mortgagee to increase interest in the event of a transfer

d. Installment Land Contract prohibitions on transfer: ILC's frequently include a provision that prohibits assignment by the vendee without the vendor's permission. Violation of such a provision constitutes a default and might result in vendor termination of the K and loss of the purchaser's equity.

VI. Federal Preemption: Garn-St. Germaine Depository Institutions Act of 1982. a. It holds that all due-on-sale options are valid, with the following exception:

i. Residential real property of 5 dwellings or less, a lender may not exercise its option pursuant to a due-on-sale clause upon

1. The creation of alien or other encumbrance subordinate to the lender's security instrument which does not relate to a transfer of rights of occupancy in the property (they can get further junior mortgages)

2. The creation of a purchase money security interest for household appliances3. A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by

the entirety;4. The granting of a leasehold interest of three years or less not containing an option to

purchase (allows lenders to accelerate still if they put it in the mortgage for ILC's)5. A transfer to a relative resulting from the death of a borrower;6. A transfer where the spouse or children of the borrower become an owner of the property;7. A transfer resulting from a decree of a dissolution of marriage, legal separation agreement,

or from an incidental property settlement agreement, by which the spouse of the borrower becomes an owner of the property;

8. A transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property; or

9. Any other transfer or disposition described in regulations prescribed by the Federal Home Loan Bank Board

ii. Note: Act does not apply to private banksb. Waivers by lender: lenders frequently waive their due-on-sale clauses in return for the payment to the

lender of an "assumption fee," and increase in the interest rate or bothc. Concealment of Transfer : Most due on sale clauses contain no convenant on the part of the borrower

to disclose to the lender that a transfer is taking place, thus the transferor and transferee can always just try to hide the transfer.

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Discharge of the Debt and Mortgage: By Payment or otherwise

§ 6.4 Redemption From Mortgage by Performance or Tender

(a) Except as provided in Subsection (d), a performance in full of the obligation secured by a mortgage, or a performance that is accepted by the mortgagee in lieu of performance in full, by one who is primarily responsible for

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performance of the obligation, redeems the real estate from the mortgage, terminates the accrual of interest on the obligation, and extinguishes the mortgage. Performance may be made prior to the time the obligation is due (except as restricted by agreement of the parties subject to §§ 6.1 and 6.2), or may be made at or after the time the obligation is due but prior to foreclosure.

(b) Upon receipt of performance as provided in Subsection (a), the mortgagee has a duty to provide to the person performing, within a reasonable time, an appropriate document in recordable form showing that the mortgage is discharged (Pay Off Letter). If the mortgagee fails to do so upon reasonable request, the person performing may obtain judicial relief ordering the mortgage discharged and, unless the mortgagee acted in good faith in rejecting the request, awarding against the mortgagee any damages resulting from the delay.

(c) An unconditional tender of performance in full by one who is primarily responsible for the obligation, even if rejected by the mortgagee, if kept good, has the effect of performance under Subsections (a) and (b) above.

(d) Performance under Subsection (a) does not extinguish a mortgage or require the issuance of a document under Subsection (b) if the person performing and mortgagee agree that the mortgage is to remain in existence.

(e) A performance in full of the obligation secured by a mortgage, or a performance that is accepted by the mortgagee in lieu of payment in full, by one who holds an interest in the real estate subordinate to the mortgage but is not primarily responsible for performance, does not extinguish the mortgage, but redeems the interest of the person performing from the mortgage and entitles the person performing to subrogation to the mortgage under the principles of § 7.6. Such performance may not be made until the obligation secured by the mortgage is due, but may be made at or after the time the obligation is due but prior to foreclosure.

(f) Upon receipt of performance as provided in Subsection (e), the mortgagee has a duty to provide to the person performing, within a reasonable time, an appropriate assignment of the mortgage in recordable form. If the mortgagee fails to do so upon reasonable request, the person performing may obtain judicial relief ordering the mortgage assigned and, unless the mortgagee acted in good faith in rejecting the request, awarding against the mortgagee any damages resulting from the delay.

(g) An unconditional tender of performance in full by a person described in Subsection (e), even if rejected by the mortgagee, if kept good has the effect of performance under Subsections (e) and (f) above.

I. Mortgage being paid Off: By Two Classes of PersonA. Primarily Responsible Party: (holder of the equity of redemption) The owner of the real estate or

anyone who has an interest in the real estate to the extent that nobody has a duty to reimburse them for any payment they might make24

i. Complete Payment: Extinguishes the mortgage and the debt.1. In other words, it is a “redemption” of land by the mortgagor.

ii. Partial Release : When a lender has a blanket mortgage on a subdivision of lots, the mortgagee may allow the borrower to sell lots "out from under" the blanket mortgage, thereby discharging the mortgage of those specific lots, and partially discharging the mortgage as a whole

24 Primary responsibility does not necessarily imply personal liability. For example, a nonassuming grantee of the mortgaged real estate has no personal liability on the debt but is nonetheless primarily responsible for payment, unless the grantor and grantee have agreed otherwise. The same result follows if a mortgagor whose debt is "nonrecourse" makes a full payment of the mortgage obligation.

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B. People not primarily responsible: Grantor who has transferred the land subject to or with an assumption (without a novation), holder of a junior mortgage or lien, a tenant under a subordinate lease:

i. Payment: Does not extinguish the mortgage, but instead assigns both the obligation (the note or other evidence of the debt) and the mortgage to the payor. Payor effectively steps into the shoes of the mortgagee.

1. Based on the principle of subrogation25

2. Rationale: Foreclosure will destroy their interests if they are properly joined as partiesii. Prohibited

1. No Prepayment: those who have no primary responsibility may not prepay the debt, but must wait until it is due before tendering payment

a. Rationale: if the debt is not due then foreclosure is not imminent and the holders of junior interests are not yet at risk; hence, they have no need to redeem.

C. Paymenti. Must Be in Full : The mortgagee is not obligated to discharge the mortgage, or to give it up by

subrogation, unless it has received payment in full. This includes not only the principal debt, but all legally enforceable additional charges. Such charges may include future advances, accrued interest, late fees, prepayment fees, and attorneys' fees and costs if collection or foreclosure proceedings have commenced. Except: For partial Release (Above)

ii. Must conform to the requirements of the Secured Obligation : the payment must conform to the requirements of the secured obligation. It must be in cash or its equivalent unless the obligation itself calls for some different form of payment or the mortgagee agrees to it.26

II. Tender: An offer to pay off the mortgage debt by a person primarily responsible entitles the payor to a release or an assignment of the mortgage

A. For a tender to be effective it must be i. In cash or “good funds” (i.e. Cannot be a note to pay off the balance)

ii. “Kept good” (The Party who tenders must be ready, willing, and able to pay)iii. Unconditional

B. If you tender and the mortgagee refuses, you have the right to put the money in an escrow, and the interest will stop on the loan and the Mortgagee has no right against the mortgagor.

III.Mortgagee Disclosures (Restatement)A. Pay off letters Varies but usually Must say: (1) A statement of the pay off amount on the mortgage

(2) The current interest rate and the basis of adjustment if it is adjustable (3) Any additional fees and charge the lender claims(4) Whether the loan is in default or has been accelerated (4) The balance in any escrow account (5)Any parties they know of that have gained an interest in the property

B. Request must be made for good cause by: (1) The mortgagor (2) Someone else who performance is secured by the mortgage (3)The holder of any interest in real estate, Or (4) a prospective bidder at a foreclosure sales

i. Failure to disclose may result in damages

25 Primary Example: a second mortgage learns of the default on a senior mortgage and decides to pay off the senior obligation to protect their security interest, thereby becoming the primary mortgagee26 For example, the mortgagor has no right to pay by tendering a deed of the real estate or by executing a new promissory note for the balance due on the existing obligation.

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PrepaymentI. Can it be Done?

A. Majority i. Perfect Tender in Time : The mortgagee has the right to refuse an early tender or "prepayment"

of principle or interest unless the mortgage says you can pre-pay. B. Minority :

i. Restatement 6 .1: The mortgagee must accept prepayment unless that contract says otherwise. C. Lock In Clause: You are not allowed to pre-pay period and this is enforceable under Restatement.

§ 6.2 Enforceability of Prohibitions and Restrictions on Prepayment.

(a) Subject to the general requirement of good faith and fair dealing , the power of courts to refuse enforcement of unconscionable contract terms and other applicable law,

(i) an agreement that prohibits pre-payment is enforceable; and

(ii) except as provided in § 6.3, an agreement requiring the mortgagor to pay a fee or charge as a condition of such payment is enforceable.

(b) (Right of substitution) Notwithstanding an agreement of the type described in (a), the mortgagor has a right to the release of the mortgage, provided that the mortgagor gives substitute security, equal in value to the debt and any, that is substantially the equivalent of cash. The mortgagor must pay all costs associated with the substitution. The parties may agree that security other than the substantial equivalent of cash may be substituted, but may not agree to deny to the mortgagor the right of substitution.

§ 6.3 Limitation on Enforcement of Prepayment Fees in Connection with Casualty Insurance or Taking in Eminent Domain.

An agreement that requires the mortgagor to pay an additional fee or charge when payment of the secured obligation is made with the proceeds of casualty insurance or a taking in eminent domain is not enforceable if the mortgagor requests

that the proceeds be used for restoration of the real estate and would be entitled to such use under § 4.7(b).

II. Restriction on Prepayment: An absolute prohibition on prepayment or a prohibition for a specific time period is generally enforceable, except as provided in § 6.2(b).

III.Prepayment Premiums :27 A. Generally Permitted: A mortgagee can impose a prepayment premium on a borrower.

i. Rationale: Prepayment premiums are designed to protect a lender against potential loses it may incur if a loan is paid earlier than contracted for such as (1) Favorable interest yield (2)Administrative and legal costs of making a new loan (3) Additional tax liability

B. Exceptions: No Prepayment Penalty if

27 Westmark Commercial Mortgage v. Teenform Associates, LP (pg. 548) of 81

i. Unconscionable, not in good faith or fair dealing, “Shocks the conscience”of the Court : Such fee’s rarely do, in one case a 50% fee was still not held unconscionable In short, if the borrower fully understood and had the opportunity to bargain over the clause, either with the assistance of counsel or by virtue of the borrower's own experience and expertise, the clause will ordinarily be enforced.

ii. Property by taken because of eminent domain iii. Destruction of property by casualty such a fire and insurance proceeds iv. Substitution of Collateral § 6.2(b) : This rule of equivalency is satisfied only by assets that are

the substantial equivalent of cash, readily marketable, have a readily ascertainable value, and are not subject to any significant risk of loss of value. Only short-term instruments may be considered cash equivalents, because they are not subject to significant fluctuation in capital value as a result of market changes in interest rates.28

IV. Acceleration: Four typical reasons for Acceleration and how courts treat prepayment fees :A. Acceleration upon default : Courts will uphold the prepayment penalty, unless the clause applying the

prepayment is ambiguous, in which case the courts will probably refuse to enforce it

B. Acceleration by virtue of payment of casualty insurance or eminent domain proceedings : the Restatement (as long as the mortgagee doesn't have to give the mortgagor the funds to restore the property) have held that prepayment fees under these circumstances are allowable so long as the mortgage says they are (See payment of casualty insurance in the above sections)

C. Acceleration under a due-on-sale clause : If the loan in question is secured by a one-to-four-family home the answer is given by federal reg.

i. If not 1-4 person home (so not covered by fed. Reg.): Most states treat the prepayment as "involuntary" and refuse to impose the fee (this disparate treatment of this type of acceleration + prepayment penalty might be because of restraint on alienability concerns, but why then are lock-in clauses fine?, maybe because you can still sell in the face of a lock-in as long as you don't try to get rid of the mortgage)

D. Lender Acceleration (Restatement): A lender may impose a prepayment premium if the lender accelerates the debt.

V. Incentives to pay payments on time: late fees and default interestA. Westmark #2 (pg. 561)

i. Liquidated damages clauses ( Late fees and default interest rates) in a commercial context between sophisticated parties are presumptively reasonable.

1. Unless they are more about punishment than compensationii. Burden is on the challenging party to show that they are unreasonable

1. No one factor is determinative, the court must look at the totality of the circumstances

B. Default Interest Rate Increasei. Reasonable: 3% or 4% percent is almost certain to be upheld

ii. Unreasonable: 16% increase, 15%, but then again some courts have approved such high increases

28 Examples include short-term debt obligations of the United States government or its agencies; short-term debt instruments issued by other parties but fully guaranteed by the full faith and credit of the United States; short-term certificates of deposit issued by financial institutions and fully covered by federal deposit insurance; and short-term commercial paper issued by large firms and highly rated by national rating agencies.

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C. What amount of Late Charges is Excessive?: 5 or 6% routinely upheld; i. However, if the fee is applied not to the late payment, but to the whole amount (like a default

interest increase, but even worse because it is applied all at once), the courts are not likely to uphold it

ii. The same applies if the charge is in regard to a late balloon payment

VI. Validity of Mortgages : Must be Enough to give Third Parties Notice29

A. The dispositive question in examining the validity of a mortgage is whether it provides reasonable notice to third parties of the obligation that is secured.

i. Reasonable Notice : notice of the nature and amount of the encumbrance which the mortgagor intends to place upon the land

ii. "Nature": fundamental characteristics as:1. Whether the debt is absolute or contingent,2. Liquidated or un-liquidated,3. Or whether it is given to secure an existing liability or future advances

iii. "Amount" of the debt : dollar value of the obligation secured, to the extent that it can be ascertained at the time the mortgage is executed

1. If it cannot be definitively ascertained at that time, such data must be set out with respect to that debt as will put anyone interested in the inquiry upon a track leading to discovery

iv. Finally, if a party is able by common prudence and by the exercise of ordinary diligence, to ascertain the extent of the encumbrance from information set out in the land records, then the mortgage is valid

v. Obligation does not always have to be stated in direct monetary terms. (See Above Rest.§ 1.4)

Merger

§ 8.5 The Merger Doctrine Inapplicable to Mortgages.

The doctrine of merger does not apply to mortgages or affect the enforceability of a mortgage obligation.

I. Merger: When one person obtains both a greater and a lesser interest in the same property, and no intermediate interest exists in another person, a merger occurs and the lesser interest is extinguished

A. Thus, the mortgagee interest and the fee title are owned by the same person. i. Whether a merger has occurred depends on the intent of the parties, especially the one in whom

the interests uniteB. The merger doctrine can be utilized either as a defense to the mortgage debt or as an argument that

the mortgage no longer exists

II. Arises in Five Situations A. The mortgagee may acquire the title (equity of redemption) from the mortgagorB. The mortgagee may acquire title from a grantee of the mortgagorC. The holder of more than one mortgage may acquire title by purchasing at a foreclosure sale of one of

those mortgagesD. The mortgagee may transfer the debt and mortgage to the mortgagor

29 Devlin v. Wiener (pg. 568): Issue: whether a mortgage deed and the underlying obligation that the deed purports to secure are sufficiently definite to sustain the plaintiff's foreclosure action? Court held that it was.

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E. The mortgagee may transfer the debt and mortgage to a grantee of the mortgagor

III. Exceptions to the Merger Doctrine A. This is not a clog to the equity of redemption because it happens after the fact

i. A mortgagee will usually have to release the mortgagor as consideration.B. When the mortgagee accepts a deed in lie the mortgagee is concerned about merger and because

there is no foreclosure, no intervening liens have been discharged or extinguished. i. If you a mortgagee your best bet is to put langauge into the deed that "there is no merger"

because if you don’t, you will not have anything foreclose. C. If the mortgage merges into the fee, You have to separate the mortgage and the underlying

obligation, because generally the merger does not effect the debt

D. The mortgagee's purchase of the property at the foreclosure of the senior mortgage will not extinguish the debt secured by a junior mortgage.30

i. However, if one holding both junior and senior mortgages forecloses the junior and purchases the property at the foreclosure sale, the long standing rule is that, absent a contrary agreement, the mortgagor's personal liability for the debt secured by the first mortgage is extinguished.

IV. The Basis of the merger of rights doctrine is that the purchaser at a foreclosure sale of a junior lien takes subject to all senior liens.

A. As the purchase does not become personally liable on the senior debt (as does an assuming grantee), the purchaser must pay it to avoid the risk of losing his newly acquired land to foreclosure by the senior lien holder. Therefore, the land becomes the primary fund for the senior debt and the purchaser is presumed to have deducted the amount of the senior liens from the amount he bids for the land.

B. A senior lien is merged into, or extinguished, by the title acquired by the lien holder when he acquires the mortgagor’s equity of redemption under a sale of the junior lien.i. This rule comes into play ONLY when the equity of redemption is extinguished.

V. Over All Principle: A. The mortgagor (although still technically personally liable) has an equitable right to have the land

pay the mortgage before his personal liability is called upon and the purchaser will not be permitted to retain the land and enforce the same against the mortgagor

B. Two things: i. First, the mortgagee cannot put in a bid deducting the price from the first mortgage and then

still collect personally from the mortgagee because he would be getting unjustly enriched (and this would allow him a huge advantage over other potential buyers because he could bid over the fair market value of the property minus the loan because he would know that he is going to get it back from the mortgagor anyway)

ii. Second, because of this the mortgagee needs to be aware and not make a bid that includes the first mortgage otherwise he is out of luck, but not actually because either way he is paying himself with his own money

30 Mid Kansas Federal Savings and Loan v. Dynamic (pg. 575) Facts: A construction lender held notes secured by the first and second deeds of trust on a residential property, the lend acquired title to the property at a trustee’s sale (foreclosure) on the second deed and thereafter brought suit agains the developer on the balance due on the first note. Issue: Whether the lender may recover the balance owing on the first notes after it has acquired title to the property at the foreclosure sale of its second deed of trust. (the same lender has a first and second mortgage on the property)When the construction lender acquired title on the foreclosure of the second lien, its right under that lien merged in the title. Issue: Did its rights under the first lien get affected when it acquired title by foreclosure on its second lien.

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1. Some courts have held that where a mortgagee bids in the amount of the debt on both properties in good faith he will be able to recover from the mortgagor personally for the senior debt

2. If a mortgagee overbids at a foreclosure sale on a second mortgage (and it owns the first as well) then the overage will be applied to other junior obligations and then to the mortgagor (if they could sue on the underlying senior debt then they would get a windfall: the property + the money)

iii. Although I don’t think it is right or fair (because they are essentially allowed to outbid other parties at the expense of the mortgagor. In example, if the property is worth 200,000 and the first lien is 100,000 and the second is 100,000. And say the mortgagee bids in 125,000, which no other buyer would be able to do, then it can still collect from the mortgagor 75,000.

iv. Another way of looking at this whole merger business is that the mortgagee will not be allowed to personally recover from the mortgagor more than the note: So if the property is worth 500 and they bid in 150 on a 100 second mortgage note, and the senior mortgage is for 400 then they can only recover 50 personally from the mortgagor

v. This recovery is only of worry if they foreclose on a second mortgage and own the senior one as well

1. If they foreclose on the senior then the junior will be extinguished, so the mortgagor will be personally liable for whatever deficiency there is anyway

Deed in Lieu

I. Operation: When a foreclosure is impending, the borrower may offer simply to deed the property to the lender as a substitute or partial satisfaction of the loan obligation.

II. Benefits :A. Mortgagee: may avoid the delay and expense associated with foreclosure, avoid statutory redemption,

and if the mortgagor is insolvent (or the state has anti-deficiency legislation) the mortgagor will not be able to get a deficiency in anyway

B. Mortgagor: Escapes personal liability, also may be able to persuade the lender not to impair their credit rating, in any event a deed in lieu is less damaging than a notation of an actual foreclosure

III. Not A clog : Not entered into at the time of the execution of the mortgageA. However, If the deed in lieu is given and the mortgagor is given another chance to perform, the court

may treat it as a mortgage (“additional security for the loan”) even though it was not given simultaneously with the mortgage and therefore force foreclosure because the deed was not given as an immediate and final conveyance of the land.

IV. Inequitable deeds in lieu: A. If the consideration paid is disproportionately less than the value of the equity (value of property above

loan amount) or if none is paid where the equity has value, courts may find this transaction unfair or unconscionable and permit the mortgagor to redeem or restore the original mortgagor mortgagee relationship.

V. Merger Problems A. Deed in lieu will not cut off junior liens, because there was no foreclosures, so mortgagees who accept

them need to be especially careful

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i. If the 1st mortgagee does take a deed in lieu the second mortgagee could argue that because of the merger doctrine (title and equity of redemption in one party) the 1st is extinguished and the second is now the senior mortgagee

1. This argument hardly works, courts usually allow the first mortgagee to foreclose on their mortgage

a. This is largely because if the party did not intend this result merger will not happenb. But the argument works just often enough that I should be aware of itc. If you take a deed in lieu you had better have done thorough title search

ii. Restatement approach1. States that a conveyance of the equity of redemption by a mortgagor or subsequent grantee

to a mortgage will not, except in extremely rare circumstances, terminate the latters mortgage interest that prior to the conveyance were junior to it.

2. Unjust enrichment doctrine

Foreclosure

AccelerationI. Strict Approach 31

A. A mortgagor will not be relieved from the enforcement of an acceleration clause for a default occurring because of his negligence, inadvertence, mistake or accident unless the mortgagee is guilty of fraud, bad faith, or Unconscionability. i. If, from the mere negligence of the mortgagor in performing his contract, he suffers the whole

debt to become due and payable, according to the terms of the mortgage, no court will interfere to relieve him from the payment thereof according to the conditions of his own agreement.

ii. The dissent states it is a balancing act of all the factors

II. Relaxing the Strict Approach 32

A. The obligation of a mortgagor to pay and the right of a mortgagee to foreclosure in accordance with the terms of the note and mortgage are absolute, and are not contingent on the mortgagor's health, good fortune, ill fortune, or other personal circumstances affecting his ability to pay.i. However, a court may refused to foreclose a mortgage when an acceleration of the debt would

be inequitable or an unjust result and the circumstance would render it unconscionable. B. Mortgagor will be protected from defaults that are made by mistake or accident while acting in good

faith or in unusual circumstances beyond MR’s control.

III. Can the court reinstate the mortgage after a valid acceleration? A. Majority / Restatement view : Only if the mortgagee has engaged in fraud, bad faith, or other conduct

making acceleration unconscionable or waived it’s right to Accerlerate

31 Graf v. Hope BLDG Corp. (pg. 586) MR had a quarterly installment payment mortgage with ME. ME would make regular payments and had no missed. MR went to Europe on a trip and left his secretary to pay the installment on the mortgage. She miscalculated by appx. $400. the bookkeeper discovered the mistake and told ME that MR would pay when he returned. ME refused and accelerated. Held: Ok. 32 Federal Home Loan Mortg v. Taylor. (Pg. 591) Facts: the court held that where D who had missed a payment but was stationed in the air force overseas, had a child that was hospitalized, was in financial difficulty, and was usually late on payment because of a screw up in the mail going back and forth had made “good faith efforts” to make the debt right. The court reinstated the mortgage.

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B. Minority : Equity has the power to relieve a mortgagor for an inadvertent default in the payment of principal or interest where acceleration would work extreme hardship upon him

IV. Waiver and Estoppel A. Waiver : Acceleration may be defeated by mortgagee waiver, as in, if they continuously accept late

paymentsi. Anti-waiver language (Restatement): Such provisions may, in close cases may tip the scales in

favor of no waiver, it is not dispositiveB. Estoppel : If the mortgagee gave the mortgagor a prior oral assurance that the debt will not be

accelerated and foreclosure will be postponed while the mortgage attempts to sell the property they will be estopped from doing soi. Absent withdrawal of the extension by the mortgagee by reasonable notice, the mortgagee will

be estopped if the mortgagor relies on the assurance to his detriment.

V. When does acceleration take place? A. Some States : Need both notice of intent and accelerationB. Majority : Notice is not mandatory, but need some affirmative, overt act evidencing an intention to

accelerate the debt, and this must be made before the debtor tenders what is due or the creditor losses his right to treat the entire debt as due. IN some states an affirmative step is notice, in othera it is foreclosure.

C. Restatement : An acceleration is effective on the date specified in a written notice deliver by the mortgagee to mortgagor after the mortgagor’s default.i. The notice may provide that the acceleration is effective immediately or at some further

specified date.

VI. Tender of Debt before or after acceleration A. Before : If the mortgagor tenders arrearages (past due installments) prior to a valid acceleration, the

mortgage is reinstated.B. After: After acceleration only the full tender of the full accelerated mortgage debt will suffice

(unless a local statue says otherwise) i. Post acceleration acceptance will not defeat acceleration.

VII. Defaults other than Failure to pay Installments A. Restatement: Only tender of the accelerated obligation will defeat acceleration in the non debt

related default context.

VIII. Absence of acceleration clause A. When there is no acceleration clause in the note or the mortgage and the mortgagor defaults on one

or more payments the courts will sometimes allow acceleration on the concept of anticipatory repudiation

B. Normally however, the mortgagee must foreclose only for the installment in default.

Marshalling§ 8.6 Marshaling: Order of Foreclosure on Multiple Parcels.

(a) Except as provided in Subsection (b), when foreclosing a mortgage covering more than one parcel of real estate,

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upon the motion or application by the junior, the mortgagee must proceed against the parcels in the following order:

(1) parcels on which no subordinate interests exist are foreclosed upon first; and

(2) as among parcels on which subordinate interests exist, those with subordinate interests created more recently are foreclosed upon before those with subordinate interests created at a more remote time.

(b) The order of foreclosure specified in Subsection (a) does not apply to the extent that

(1) doing so would provide no benefit to a person protected by Subsection (a); or

(2) a person whose interest would be protected by Subsection (a) has relinquished that protection by a term of the mortgage or other conveyance granted to that person, by a term of the mortgage being foreclosed, or by other agreement; or

(3) that order of foreclosure would materially prejudice the foreclosing mortgagee.

I. Operation : When a creditor is entitled to resort to each of several funds for the satisfaction of his claim and another person has an interest in, or is entitled as a creditor to resort to, some but not all of them, the latter may require the former to seek satisfaction from those funds to which the latter has no such claim so far as it can be done without impairing the right of the former to complete satisfaction and without doing injustice to third persons. 33

A. Junior lien holder usually raises it because marshalling protects against their lien against not receiving the adequate compensation.

B. Note: Court will not do this on it’s own, Generally you have to ask for it. II. Applicability:

A. Marshaling not ordered if it would provide no benefit to Junior: Marshaling will not be ordered if it will not benefit the junior interest, for example, if it will only serve to delay the completion of the senior mortgagee's foreclosure because the prior mortgage debt equals or exceeds the combined value of all of the parcels that secure it, so that resort to all of them will be necessary.

B. Marshaling not ordered if foreclosing mortgagee would be materially prejudiced: Marshaling will be denied if it would result in a substantial and undue delay to the senior mortgagee. The burden is on the foreclosing mortgagee.

i. However, no material prejudice will ordinarily be found merely because the mortgagee prefers a different order of foreclosure, or because of the slight delay that is inherent in foreclosing one parcel before another. On the other hand,

III.Two Forms of MarshallingA. Two Funds Rule : A mortgagee must exhaust its security in parcels unencumbered by junior interests

before resorting to parcels that are so encumbered. The objective of this rule is to avoid destroying junior interests unless it is necessary to do so.

B. Inverse order of Alienation : When a portion of the land subject to a lien has been alienated, the grantees may insist that the land retained by the grantor or original owner be sold first to satisfy the

33 Matter of Estate of Hansen (pg. 578) Owner Had one mortgage on the land and another mortgage on the resources under the land, she defaulted, and the parties wanted to foreclose. Issue: Whose right to the land are sold first, second or last?

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lien and that where the original owner has alienated all of the land subject to lien in separate parcels successively, the parcels alienated or encumbered be sold in the reverse order of alienation.

i. Example: When A has a mortgage on property and then sells part of that property to B and C and then retains a part for herself (B and C pay full value so they intend A to pay the mortgage)(this is extremely risky)

ii. If foreclosed upon they have to foreclose on A first and then on the B, and finally on C. C. Restatement: Endorse Both Forms and it essentially allows for a person to put a provision for inverse

order of alienation.

Strict ForeclosureI. Strict foreclosure (hardly used at all): the mortgagor is given a time to pay the debt, if he doesn't within that

time then the mortgagee get the property without a saleA. If the property is worth more than the debt, to bad so sadB. If the property is worth less than the debt the mortgagor is still liable for the deficiencyC. If a junior mortgagee makes a strong showing that the land is worth more than the debt then a judicial

sale may be required

Judicial ForeclosureI. Overview

A. Judicial (available in Every State) i. Benefits: If there is a serious dispute about the priority of obligations the court will decide them,

because of this and other reasons a better deed is obtained at a judicial foreclosure, in some jurisdictions there is no deficiency possibility under a power of sale and there is under judicial foreclosure

ii. Cost of Judicial: (1) Costs money (2) Slower to do it

§ 7.1 Effect of Mortgage Priority on Foreclosure.

A valid foreclosure of a mortgage terminates all interests in the foreclosed real estate that are junior to the mortgage being foreclosed and whose holders are properly joined or notified under applicable law. Foreclosure does not terminate interests in the foreclosed real estate that are senior to the mortgage being foreclosed.

II. Cardinal Rule (Restatement): The purpose of foreclosure is to put the Foreclosure Sale Purchaser (FSP) into the shoes of the mortgagor at the time the mortgage being foreclosed was executed.

A. A valid foreclosure terminates an equity of redemption and all other junior interests.

III. Necessary - Proper distinction : A. Necessary: party that needs to be joined in order to give the FSP the same title as the mortgagor had

at the time he obtained the mortgage. (Cardinal Rule) i. Remember, where the holder of a junior interest is not made a party, "that interest is neither

terminated nor otherwise prejudiced by the foreclosureii. As a general rule, all persons who hold interests in the mortgaged real estate junior to the

mortgage being foreclosed are “necessary” parties.1. Junior lessess, Junior Lien Holders, and etc... Why? Because these parties were not there at

the time the mortgage was originally executed.

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B. Proper: Generally Seniors will not be proper (because foreclosure will do nothing to them), but maybe if there is a priority disputei. The senior may be joined to determine the amount and extent of the senior obligation (I.e.

proper) IV. Recording Statutes 34 (Control and govern who will win in a priority dispute)

A. Common law: First in time, first in right. i. Whoever has it first, has the priority.

B. Noticei. States that protect grantees who are BFP

ii. Protects subsequent purchasers for value who takes without notice of an earlier conveyance. iii. Order of recording is irrelevant, a BFP will win always.

C. Pure Race (Race = Record) i. Notice is irrelevant.

ii. Whoever records first wins, period. iii. So even if a purchaser knows about the other interest, and records first, they win. iv. If neither record, then first in time first in right prevails.

D. Race Noticei. Must have a BFP without notice and is the first to record.

V. The Junior Lessees:A. If they are junior to the foreclosed premises (even if there is an attornment agreement because this is

held to be a new interest)they are necessary (minority holding is that they are foreclosed even if not joined)i. Majority Rule: A junior lessee is a necessary party, so if omitted, they are not affected by the

foreclosure and are still bound by the lease. If a Junior lessee is joined, then there lease is extinguished, because at the time the mortgage was entered into, it was non-existent.

ii. Minority: the lease can either stay out of the foreclosure, or they can intervene into it in order to get their lease terminated

B. Picking and choosing leases to keep: in some states because of the majority rule, if there is a desirable lease, the mortgagee can intentionally exclude it from the action and thereby leave it in tact

C. This does not apply if there is a subordination, non-disturbance, and/or attornment agreements to adjust their rights already

VI. Joinder: Murphy v. Farewell pg. 619A. Lack of knowledge or notice of the subordinate interest of another party in the mortgaged land does

not excuse a foreclosing mortgagee from making such a person a party to his suit, therefore, ff a senior interest holder doesn’t add a junior to his action to foreclose the junior interest will remain unaffected by the result. i. Exceptions:

1. If the FSP is a BFP (pays value without notice of the enjoined interest), the FSP will take title free and clear.

34 Example: O grants an unrecorded mortgage to A. O grants a mortgage to B (unrecorded). B is a BFP because it was for value and without notice of A's mortgage because it was unrecorded. A records before B. O defaults. Who has the senior priority? (1) Under Common Law: A always wins (First in Time; First in Right) (2) Notice: B wins, because no notice (A's was unrecorded). (3) Pure Race: A Wins. (4) Race Notice: A Wins again, because she recorded first.

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B. Lis Pendens Doctrine: This is a notice that is recorded against the property that litigation is pending that could affect property.i. If the property is specifically described and within the court jurisdiction, it is taken subject to the

final determination in the action and it Does not matter if (1) You’re not a party (2) You have no actual knowledge of the suit or claim

ii. Therefore, if there is a lis pendis placed on the property, the BFP can never claim he did not have notice.

VII. Rights of Omitted Owners A. If the owner of the equity of redemption is omitted then he is unaffected by the foreclosure sale,

however, the foreclosure sale purchaser has been assigned the rights of the mortgagee and therefore can reforeclose.i. However, Omitted Owner has the right to avoid foreclosure by paying the debt to the FSP,

because the FSP is the mortgagee, the Omitted Owner as the mortgagor, always had that right to begin with.

VIII. Rights of Omitted Lienor: Junior Lienor Right are the same as an Omitted Owner, foreclosure does nothing.

A. Two remedies to Junior Lienors i. Foreclosure : However, such a sale will be subject to the first mortgage, which is then

“revived.”1. Therefore, the FSP at the first foreclosure will have the rights of both the original

mortgagor and the now "revived" first mortgagee. So, if there is a foreclosure by the junior, the second purchasers will now hold the original mortgagor’s interest but they will be subject to the First purchaser (holding the original mortgagee’s interest) as the senior lienor.

2. The "revived" first lien is the amount originally owing at the first foreclosure sale, the first Purchasers may have paid more or less than that amount. This is the correct result since the FSP is not the original mortgagee and the original mortgagee cannot get paid more then he was owed.

a. If it is more: the original purchaser obtains a windfall (which is ok here because if the property is worth more he could have resold it for more anyway)

b. If the purchaser at the original foreclosure sale paid more than the amount of the senior lien, the second foreclosure sale will deprive him of title to the property and replace it with a lien for a smaller amount than the purchasers original investment

ii. Redemption : They can tender the amount owed on the senior lien at the time of the foreclosure to the FSP and thereby acquire that senior Lienors interest.

1. An omitted junior lienor does not have the right of conveyance of the property, but rather the right to an assignment of the security interest of the senior lienor, thus, he must foreclose to get the value of his security, unless the FSP choose to pay him off, which he can do because he holds the mortgagors equity of redemption. 35

2. Here the junior lienor holds his interest and that of the senior and can foreclose on either.

35 Portland v. Creditors pg. 633The FSP paid off the junior lienor (not mortgagee, but judgment creditor), but the junior was given the opportunity to redeem at strict foreclosure and wanted his full time. The court rightly said to bad, if the senior pays you off you have no interest left and therefore you cannot redeem. He wants statutory redemption, but he cannot have it because he was never foreclosed upon because he wasn't joined

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IX. Rights of Foreclosure Purchaser :36 A. Redemption: He can always just pay off the junior lien holder (whether or not the junior forecloses

or redeems the seniors interest) i. Rationale: This is because the senior foreclosure purchaser succeeds not only to the rights of the

foreclosing mortgagee, but to the rights of the foreclosed mortgagor as well. Since the mortgagor would have had the right to satisfy the junior obligation, the senior foreclosure purchaser has the same right. More important, even if the junior lienor asserts the right to redeem the senior obligation, the redemption by the senior foreclosure purchaser will have priority simply because he or she stands in the shoes of the foreclosed mortgagor. Consequently, redemption by an omitted junior is always an act that the senior sale purchaser has the power to nullify

B. Re-foreclose : Purchaser takes this action while standing in the shoes of the original mortgagee but this time make the junior a party defendant.i. Junior will have full opportunity to participate in the sale and the proceeds of the sale will be

used to pay off both liens in order of priority, with any additional surplus going to the re-foreclosing party.

ii. If he paid more than the amount of the original senior mortgage at the first sale, and the amount tendered at the second is less, he stands to lose money in the process

a. But He may be able to go after the first mortgagor for that money

C. Strict Foreclosure : the omitted junior may be compelled to redeem the senior mortgage obligation from the senior foreclosure purchaser or be barred from any further claim against the foreclosed real estate.i. Restatement : Strict foreclosure should be available only where the senior purchaser can

establish that the omission was the result of inadvertence or mistake and that the fair market value of the mortgaged real estate does not exceed the amount of encumbrances senior to the junior lien

ii. Majority: To get a strict-foreclosure on omitted junior lien holders the FSP must show two things:37

1. First, that he bought in good faith without knowledge of the outstanding interest, and2. That its holder knew of the sale and permitted the plaintiff to buy without disclosing his

own interest.a. Moreover, if it is clear that the junior mortgagee was intentionally omitted then strict

foreclosure is unavailableiii. Not in all jurisdictions, and some have statutes for it.

X. Equitable Redemption v. Statutory Redemption A. Equitable Redemption

i. Until a foreclosure, the Mortgagor has an equitable right to redeem. ii. The Foreclosure sales cuts off equity of redemption.

36 Example: There is mortgage, MEE1 and MEE2, and it is foreclosed. MEE2 is omitted, and is a necessary party. MEE2 has two options(1) Foreclosure on junior mortgage (But he is doing so subject to the first mortgage) or (2) Redeem by paying the Senior debt. However, If both the omitted lienor and the FSP choose to redeem, the FSP will trump. He can pay off the junior lienor. 37 Citicorp v. Pessin pg.627

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1. Debt extinguished2. Mortgage gone

B. Statutory Redemptioni. If a junior redeems under statutory redemption he might get fee title instead of just an

assignment of the senior lien1. Usually to redeem under statutory redemption, one must pay the amount paid at the

foreclosure sale and not the amount of the original mortgage2. Statutes usually give the mortgagor the right to redeem first before other parties

ii. In statutory redemption period, there is a period of time where the mortgagor, or perhaps other classes of people (other junior Lienors) can get another bit.

1. Before Foreclosure, redemption is debt, after foreclosure, it is the sale amount. 2. If the non assuming grantee was not named, the foreclosure was invalid as to him so

therefore he would have to pay the full amount of the debt.38

iii. Bankruptcy 1. Majority Position : Once foreclosure has occurred, post foreclosure sale, if the debtor files a

bankruptcy it will not toll or stop the running of the statutory redemption period. 2. Minority : It will stay it.

Power of Sale Foreclosure

I. Some General ConsiderationsA. Three reasons why the title may be less stable than a judicial foreclosure title (even though PoS is

more efficient and less costly): i. The court supervision involved in judicial foreclosure will prevent many defects from arising.

ii. Second, because judicial foreclosure is an adversary proceeding, the presence of other parties who will bring possible defects to the court's attention constitutes added protection against a faulty end product.

iii. Finally, the concept of judicial finality provides substantial insulation against subsequent collateral attack even on technically defective judicial foreclosure proceedings.

II. State Court Remedies to attack power of Sale A. Remedies

i. An injunction ii. A suit in equity to set aside a sale

iii. An action for damages against the foreclosing mortgagee or trustee (difference between what you should have gotten and what you got)

38 Because as a non assuming grantee, you’re a primarily responsible, own the equity of redemption and thus, you are a necessary party!

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1. These remedies are available to the mortgagor and to anyone with a junior interest2. If it's a junior lienor, the ceiling is the amount that they are owed.

B. The availability of a particular remedy will depend on several factors, including i. Whether the defect is discovered before or after the sale

ii. The nature of the defect1. No Effect: Minor typos (not name, or property description)

iii. And importantly, if the sale has already been completediv. Whether the sale purchaser or any subsequent grantee is a bona fide purchaser

III.Void v. Voidable distinction A. Void : Situations where there is a substantial defect

i. This makes the FSP and all subsequent grantees end up with nothing. ii. No title has passed to anyone, even a BFP, except maybe an adverse possessor.

iii. Examples1. Forged mortgage2. Debt has been invalidly accelerated or is otherwise not yet due Loan 3. Not really in default (and you can prove it)

B. Voidable: Bare legal title passes to the sale purchaser, subject to the rights of redemption of those injured by the defective exercise of the power of sale (Sometimes when the mortgagee purchases at his or her own sale)i. Here if the land falls into the hands of a BFP the rights of redemption may be cut off

1. Purchaser must be unrelated to the mortgagee 2. No actual knowledge of defects3. Not placed on notice on what was recorded4. Defects not such that a person exercising reasonable care would not have noticed it.

ii. If the sale is only voidable and the title has passed to a BFP, then the mortgagor's only course of action is against the mortgagee or trustee for damages.

IV. Defects in the POSA. Inadequate foreclosure sale price :

§ 8.3 Adequacy of Foreclosure Sale Price.

(a) A foreclosure sale price obtained pursuant to a foreclosure proceeding that is otherwise regularly conducted in compliance with applicable law does not render the foreclosure defective unless the price is grossly inadequate.

(b) Subsection (a) applies to both power of sale and judicial foreclosure proceedings.

i. Mere Inadequacy Not Enough : Generally, mere inadequacy of price is not sufficient by itself to require setting aside a foreclosure sale, unless:

1. It is so gross as to shock the conscience and raise a presumption of fraud or unfairness, or

2. It is coupled with other irregularities in the sale procedures, then invalidation of the sale may be justified.

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a. Several lots sold in bulk when should have been sold separately or sold in a manner where the full value could not be realized.

b. Sale conducted for the benefit of the purchaserc. In this case the irregularity was that the trustee sold the two properties in bulk

instead of one at a time, and either one of the properties would have satisfied the debt

d. Foreclosure is defective under State Law (Restatement)ii. Gross inadequacy is Enough : The difference between the fair market value of the property at

the time of the sale and the price paid for the property at the sale1. FMV : The price which would result from negotiation and mutual agreement, after ample

time to find a purchaser, between a vendor who is willing, but not compelled to sell, and a purchaser who is willing to buy, but not compelled to take a particular piece of real estate. Where the foreclosure is subject to senior liens, the amount of those liens must be subtracted from the unencumbered fair market value of the real estate in determining the fair market value of the title being transferred by the foreclosure sale.

2. Restatement: Usually the price paid is ok unless it is 20% or less of the fair market value of the property

B. Improper Time or place of sale (VOIDABLE): If you hold the sale at a different place or time than advertised then it will be voidable (or if you set it at a very bizzare time 4 a.m.)i. POS must take place in the county where the land is located.

ii. Greater degree of misconduct, more likely sale will be put aside. C. Defective notice of sale 39 (VOIDABLE)

D. Trustee as Fiduciary i. Trust may not purchase at his without mortgagors consent. (Voidable)

ii. Widely accepted that he may not (without the consent of the mortgagor) purchase at the sale the he conducts

iii. If the trustee has a close relationship with the mortgagee the sale will be looked at more closely

1. In some states the courts will set aside a sale like this (as voidable)

E. Sales by parcel or in bulk ( VOIDABLE ) : Many states require that the party executing the sale adopt the mode of sale that will be most beneficial to the mortgagor and Normally this favors selling in parcels because a sale in parcels or lots open a field to a greater number of bidders, which is conducive to a better price.

F. Chilled Bidding (VOID) : Irregular conduct by a mortgagee or trustee that suppresses bidding

39 In Re Edry pg. 655: Bank's law firm told the power of sale trustee not to advertise through "display" advertisements as is the custom in this area (these ads are in the real estate pages). They did comply with the statutorily prescribed notice of the sale in the legal section of the newspaper once a week for three successive weeks. Requirement of "Good Faith" and the use "reasonable diligence" to protect the rights and interests of the mortgagor. Here that means following the customs of the area, even though they are in excess of the statutory requirements. Here the 45% sale price, coupled with the lax advertising that complied with statute but not practice, was enough to invalidate the sale (voidable) The high bidder here claimed to be a BFP (the court thinks he was in cahoots with the bank). Courts says no soup for two reasons: (1) He is an experienced purchaser at foreclosure sales who knew of the usual practice of advertising through display ads. (2) More basically, never having completed the sales transaction, he is not a purchaser, (LOL) they say that he merely contracted to purchase and is entitled to his 5000 dollar deposit back (they really don't like this guy)

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i. Occurs where there is collusion involving the mortgagee or trustee and potential purchasers to hold down the bidding or where the mortgagee or trustee by other actions seek to accomplish the same result. (Void)

1. Ex. Getting 3rd parties to agree not to bid; paying 3rd parties off, intentionally misrepresenting the state of title or physical condition of the premises.

ii. Encompasses inadvertent and unintentional acts by the trustee or mortgagee that suppress bidding

1. E.g. Inadvertent or "innocent" erroneous statements by the mortgagee or trustee at the foreclosure sale or in the foreclosure notice

G. Mortgagee Conducting Sale (Voidable)

H. Junior Federal Tax Liens : Power of sale is ineffective against them unless written notice is sent to United States at least 25 days before the sale

II. Trustee or mortgagee liability to the FSP for Defects in Title A. Caveat Emptor is the general rule: Trustee makes no warranty of title and is subject to no duty to

investigate or describe outstanding liens or encumbrances. i. However, when the trustee of mortgagee has actual knowledge of a title problem, or a physical

defect, the court may allow recission or damagesii. Absent unusual circumstances he has no obligation to confirm default

III. Constitutional Problems: To have a Valid POS by a Government Entity a person must haveA. Notice: Can be by publication, but this is not enough if the name and address of the person is known

And must be enough to alert the person to what will happen if they do not respond. 40

B. Opportunity to be heard: A person can Waive their right, but the waiver must be, "voluntary, knowingly, and intelligently made"

C. Fourteenth Amendment i. Not applicable, unless State Action.

ii. Warren v. Government Mortgagee Association (pg. 687): Court found that a mortgage, originally purchased from the government, then transformed into a private corporation, did not have the requisite government involvement to be held to violate anyone 5th amendment rights.

Foreclosure Sale Proceeds§ 7.4 Effect of Priority on the Disposition of Foreclosure Surplus.

When the foreclosure sale price exceeds the amount of the mortgage obligation, the surplus is applied to liens and other interests terminated by the foreclosure in order of their priority and the remaining balance, if any, is distributed to the holder of the equity of redemption.

I. Disbursement of Foreclosure Sale Proceeds : Surplus stands in the place of the foreclosed real estate and the liens and interests that previously attached to that real estate now attach to the surplus.

40 Example: Mortgagee's property foreclosed because non-payment of Real Estate taxes, and court held notice by publication inadequate. "When a mortgagee is identified in the mortgage that is publically recorded, constructive notice by publication must be supplemented by notice mailed to the mortgagee's last known address or by personal service.

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A. Priority: Interests get paid out of that surplus in the order of priority they enjoyed before the foreclosure (only those that get wiped out, or junior interests) 41

B. Things to Keep in Mind i. If there is a second mortgagee, and you foreclose on the first, the junior lienor will have priority

to the surplus.42 ii. Foreclosed junior lienors are entitled to surplus even though their liens are not in default at the

time of foreclosureiii. The holder of the foreclosed equity of redemption is subordinate to the claims of all other holders

of liens and interests terminated by the foreclosure. 1. Marshalling does apply to Surplus.

C. Only those who interests being foreclosed can share in the surplus: For Instance, Senior Lien have no claim to a surplus produced by the foreclosure of junior mortgages because Senior Lienors interests are not affected by junior lienor foreclosure.

D. Cannot change where surplus goes by language in the first mortgage instrument: The parties to a senior mortgage may not use mortgage terms or any other agreement to vary the foregoing principles governing the disposition of a surplus.43

i. However, this Comment does not affect the validity of language in a junior mortgage or any other agreement executed contemporaneously with it or thereafter by which the parties to the junior mortgage agree to the disposition of a senior foreclosure surplus.

E. Payment of Surplus to holders of non-possessory junior interest : Easement holders are entitled to the fair market value of the interest they lost as of the date of the foreclosure in order of their priority.

F. Accepting Foreclosure Check as Waiver : Mortgagor who accepts a surplus check has implicitly endorsed the foreclosure and therefore waives any right to later attack the validity of the foreclosure proceedings

G. Marshaling the Surplus: if the surplus is not enough to satisfy the second and third mortgagee's interest, but the third mortgagee can show that the second mortgagee's interest is more than secured by other property of the mortgagor's, there is good authority that the surplus can go to the third in this case

H. Non-possessory Junior Interests (easement) or Separately owned parcels securing one obligation : A writes a note for White acre and B a note for Blackacre and the bank gives them a check. If there is a

41 Bank of America, NA, (pg. 701) Facts: Assignee of the mortgagor's equity of redemption and surplus tried to persuade the court that because a junior mortgagee had not obtained a judgment it was entitled to no surplus, court said FU. Issue: Whether a junior mortgagee or the debtor’s assignee of her rights of redemption and surplus is entitle to the surplus? In this case, the junior mortgagee has records its lien before assignee obtained it’s assignment, therefore, junior mortgagee has a higher priority claim to the surplus because of Rest. 7.4.42 M grants mortgage to MEE1, M default, MEE forecloses, during the Statutory redemption period, M redeems. What happens to the liens that existed prior to foreclosure? Including the lien of the Mortgage that was foreclosed. MEE1 lien will be revived for to the extent of the deficiency. 43 For example, where mortgage language directs that surplus be paid to the "mortgagor" or to the "mortgagor, heirs, successors and assigns," the mortgagor's claim to surplus will not be enhanced. Rather, foreclosed junior lienholders and other junior interests simply will be treated as "successors" or "assigns" of the mortgagor for surplus disposition purposes. See Illustration 7. Even where the senior mortgage states unambiguously that the mortgagor's claim to surplus supersedes those of junior lienors and other foreclosed interests the latter will not lose the benefits conferred on them by this section

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surplus then it will be distributed on a percentage basis of how much their respective estates contributed to the surplus

1. You look at FMV in the same way as if it were condemned.

II. Revival of LiensA. Reacquisition by Mortgagor 44: If there is a foreclosure and parties with interests are not satisfied,

those liens will "revive" if the mortgagor purchases or later reacquires the propertyi. Even if the mortgagor's personal liability on the debt is extinguished by bankruptcy, the property

will still be liable if he ever reacquires it

B. Reacquisition by Non-recourse mortgagor : Even if the mortgagor was completely non-recourse, if he reacquires the land the lien will revive

C. Reacquisition by a subsequent grantee i. Assuming Grantee : Lien will be revived

ii. Subject to Grantee : Same, because of unjust enrichment.

D. Acquisition of title by junior interest holders: When a junior lienor or any other holder of a junior interest purchases at a senior foreclosure sale, there is no revival of other junior interests.

i. Purchase by this lienor at a senior cuts off the rights of the holder of the equity of redemption and other junior interests.

E. BFP: Good reasons to allow mortgagor to get from BFP

Statutory RedemptionI. Overview

A. Price: The redemption price is tied to the foreclosure sale price instead of the actual debtB. Possession: During the period of the statutory redemption the mortgagor will usually have the right to

possession

II. Two types of statutes governing the ability to redeem during statutory redemption A. Strict Priority(Most Common): In this system the mortgagor has a period of time (for example, 6

months) to redeem by paying the foreclose price, plus interest , after that time (atleast under the Minnesota statute), the junior lienors in order of their priority has a certain time that they can redeem (i.e. 5 days for MEE2, then after that, 5 days for MEE3 and so on)

i. The mortgagor right to redeem is preemptive, if the mortgagor redeems, no one else can redeem.1. However, if the mortgagor fails to redeem during that period, then junior lienor each, for

example, has a certain amount of period to redeem in the same priority in which they stood before the foreclosure, they would have to pay the sale price

ii. Example1. FMV: 55,0002. Foreclosure Sale Price: $30,000

a. MEE2 has a balance of $10,000, MEE3 has balance of $12,000, and J had a $5,000 judgment lien that was junior to all.

b. If MEE2 wants to redeem, he would have to pay 30,000 to FSP.

44 Old Republic v. Currie pg. 707: A couple has their home foreclosed on and then years later get it back, there was a lien that was not satisfied by the foreclosure and it was "revived" as a matter of law

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c. If MEE3 wanted to redeem from MEE2, MEE3 would have to pay the $30,000 plus MEE2’s owed obligation (so 30+10= 40,000)

d. If J wants to redeem, it has to pay MEE3 $52,000 (30+10+12(MEE3’s owed obligation)= $50,000)

e. But if any of these parties fail to pay in time, they are out of the picture, and you subtract their amount out. In this example, if MEE2 did not redeem in time, MEE3 would only have to pay 30,000 and J would now pay $42,000.

B. Scramble Method : here again once the mortgagor redeems nobody else can, but the Mortgagor has no priority to redeem above the other juniors. So everyone can redeem irrespective of their order.

i. Among the junior Lienors, they can get it irrespective of order. But priority matters. 1. If in the above example, MEE3 redeems first he will only pay $30,000, but if MEE2 wants

to redeem, he will only have to pay the $30,000 also because he had priority over MEE3, and if MEE3 wants to redeem from MEE2 he would have to pay $40,000 (like before). If Mortgagor wants to redeem from MEE3, he will have to pay all the MEE3 has paid ($40,000)

III. Federal Government A. Statutory Redemption : There is no statutory redemption when dealing with federal secured or insured

mortgages.B. Federal Government as Junior Lien holder : if the government is a junior lien holder it will allow a

statutory redemption period

C. States that allow the foreclosure sale purchaser to take possession: i. If there is a redemption they are not allowed to recover for improvements they made on the

property because this would make it more difficult for the mortgagor to redeem

IV. Strict Priority Approach45 A. Assignee : An assignee of the mortgagor who redeems within the statutory period, extinguishes the

right of the junior lien holder to redeem on the property. However, a redemption by the debtor or assignee during the exclusive period does not allow either party to take the property free and clear of liens on the property. (An Assignee steps into the shoes of the Mortgagor)

B. Redemption by an Assignee and Lien Revival : Once a mortgagor or their assignee redeem during their statutory redemption period, a junior lien holder can no longer redeem, but any unsatisfied junior liens reattach and are “revived.

i. If a third person buys the property the lien will not "revive" 1. Junior lien holders' rights are extinguished with the expiration of their period of

redemption

C. Assignee of mortgagor as redeeming party : In most jurisdictions the mortgagor's statutory redemption rights are assignable

D. Junior lien holders and redemption : Under most statutes when the junior mortgagee redeems any junior interests do not revive

45 Farmers Production Credit Association v. McFarland pg. 721 In this case the court says that the loans were not extinguished yet because they never got their chance to redeem because the assignee redeemed first and since the assignee redeemed during the exclusive statutory period, the lien holder’s period of redemption never existed.

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Remedies for DefaultI. Remedies : Once the mortgage goes into default and the obligation is accelerated, the mortgagee has two

optionsA. Foreclose on the MortgageB. Sue on the Note

§ 8.2 Mortgagee's Remedies on the Obligation and the Mortgage.

When an obligation secured by a mortgage becomes due, the mortgagee may either:

(a) obtain a judgment against any person who is personally liable on the obligation and, to the extent that the judgment is not satisfied, foreclose the mortgage on the real estate for the balance; or

(b) foreclose the mortgage and, to the extent that the proceeds of the foreclosure sale do not satisfy the obligation, obtain a judgment for the deficiency against any person who is personally liable on the obligation in accordance with § 8.4.

i. It says you can do either one but you cannot do them at the same time or one after the other, you just have to do one wait for it to be over, and then do the other.

ii. Reject One Action Rule (below) 1. Note : if the mortgage obligation is "non-recourse," the mortgagee's only remedy is

foreclosure and the mortgagee is barred from obtaining a personal judgment prior to foreclosure or a deficiency judgment following foreclosure

C. “One action” Rule (i.e. Collateral First Rule): In the event of default, the mortgagee’s sole remedy is a foreclosure, and any deficiency claim must be sought in that proceeding.

i. In other words, You combine all of your actions on a single debt into one proceeding, and the mortgagee must go after the security first.

1. You have ask for the deficiency (the court will not raise it for you) in the same action and then wait until after foreclosure to seek it.

2. If you do not foreclose here, the other party has an affirmative defense, if you try to sue first.

Anti-Deficiency Legislation and Related Problems§ 8.4 Foreclosure: Action for a Deficiency.

(a) If the foreclosure sale price is less than the unpaid balance of the mortgage obligation (deficiency), an action may be brought to recover a deficiency judgment against any person who is personally liable on the debt.

(b) Subject to (c) and (d), Deficiency is calculated by subtracting the foreclosure sale price from the mortgage obligation.

(c) Any debtor (mortgagor) may request in the proceeding for a determination of the FMV of the real estate as of the date of the foreclosure sale.

(d) If it is determined that the fair market value is greater than the foreclosure sale price, the persons against whom recovery of the deficiency is sought are entitled to an offset against the deficiency in the amount by which the fair market

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value, less the amount of any liens on the real estate that were not extinguished by the foreclosure, exceeds the sale price.

I. Recall : You can only get the amount that you are owed.

II. Restatement and the Fair Value Legislation: Deficiency is defined as the difference between the mortgage debt and the FAIR MARKET value of the foreclosed land, rather than as the difference between the mortgage debt and the foreclosure sale price of the land

A. The mortgagor can choose to put the foreclosure price or the FMV to be subtracted from the debt to be the deficiency judgment.

B. Rationale : This approach enables the mortgagee to be made whole where the mortgaged real estate is insufficient to satisfy the mortgage obligation, but at the same time protects against the mortgagee purchasing the property at a deflated price, obtaining a deficiency judgment and, by reselling the real estate at a profit, achieving a recovery that exceeds the obligation.

C. Note : (1) Unless the deficiency defendant affirmatively requests such a determination, the foreclosure sale price, rather than the property's fair market value, will be used to compute the deficiency (2) If the mortgagee puts in a full credit bid, it cannot go after deficiency.

III. Traditional approach : You typically will determined the deficiency amount by subtracting the foreclosure sale price from the mortgage debt.

A. With the POS, the mortgagee has to file a lawsuit post foreclosure sale. B. But in a judicial action it is usually sought at the same time since you already have an action pending.

C. Deberard Properties v. LIM pg. 736: P purported to waive her statutory protection from a deficiency judgment for a forbearance agreement (an agreement from the mortgagee saying that they will stay any legal action they have against the mortgagor). Agreement halved the monthly payments and interest. The legislation only applies to purchase money mortgages apparently (so it wouldn't apply to equity money mortgage). They said that if there was a subordination agreement that signaled a pronounced change in the use to which the property is devoted it is no longer considered a purchase money mortgage. So the only time this court says that a party can waive its protection is in some circumstances when they are asking for a subordination agreement to obtain a construction loan that dwarfs the original loan and substantially changes the properties use

i. Class Notes

D. Talbott v. Hustwitt (Pg. 743)i. Section 580a Does not apply to Guarantor: A guarantor is one who promises to answer for the

debt or perform the obligation of another when the person ultimately liable falls to pay or perform.

1. A contract of guaranty gives rise to a separate and independent obligation from that which binds the principle debtor..

ii. Section 580a only applies to True Guarantors: Where the principle obligor purports to take on additional liability as a guarantor, nothing is added to the primary obligation.

E. Mid Kansas Federal Savings and Loan Association v. Dynamic pg. 762. Issue: whether an anti deficiency state applied to a residential developer and whether a lender may recover the balance owing on the first notes after it has acquired title to the property at the foreclosure sales of its second deed of trust.

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i. Court held that anti deficiency statute can be on commercial properties, but they had to be used as residences.

IV. Forbearance agreement : Mortgagee lenders agree to forebear from invoking it's rights to foreclose or other rights for a period of time to allow the defaulted borrower additional time, maybe at a lower interest or better terms, in an attempt to try to come out of the problem. Lenders who agree to this don’t do this because they are nice, but because they have determined from a business perspective that it makes more sense to let the borrower get out of this.

A. The borrower is usually required to give the lender additional protections. i. Cosigners

ii. Personal GuaranteesB. Borrowers must agree to state they are in default and they must waive any claims against the lender.

Cannot have borrower waive equity of redemption even though it was not made at time of mortgage. States are split on whether a lender can clog a borrower right to a statutory redemption.

Mortgage Crisis (HARP, HAMP, HAFA)I. HARP (Home Affordable Refinance Program): Disappointing Program

A. Intent: The goal was to allow homeowner who were current with their monthly payments to have the ability to refinance at a lower Rate

B. Downfall: Most borrowers do not qualify.C. Eligibility

i. Only available for loans that are securitized by Fanny Mae or Freddy Mac, and a lot of loans are not (if you were more than 30 days late in the last 12 months than you don't qualify)

ii. Property must be Owner Occupiediii. You have to have sufficient income to support the new mortgage debt and evidence to support

that fact1. This does not reduce the principle balance.

iv. The first mortgage that you are trying to get may not exceed 105% of the current market value1. Many people are further underwater than that

v. Rates are based on the market rate at the time of the refinancevi. Cannot have prepayment penalties or balloon clause

D. Effect of HARPi. Will not reduce the principle balance (but the lender is taking a cut on the interest)

ii. It will not allow borrowers to take cash out of the home. iii. Transaction fees can be included in the amount

II. HAMP (Home Affordable Modification Program) A. The primary loan modification.B. Requirements

i. Lender 1. Must be a Fannie Mae or Freddie Mac2. Must Sign up For Program.

ii. Borrower 1. Must be an owner occupied property with 1 to 4 units (Not an apartment project)2. Must have an unpaid principle balance equal to or less than $729,750 for a 1 unit.3. Loan must have originated before January 1, 2009.

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4. Mortgage Payment (including taxes, insurances, and homeowners association dues) is more than 31% of gross (pre-tax) income

a. First thing they do is look at the total amount of debt, and they look at the arrearage, and add it back to the principle amount.

b. In order to get to 31% they can i. Amortize it out

ii. Extend the time to payiii. Take some of the principle, like 15%, and put it on the back end of the loan,

not accruing interest, and make it a forbearance, and they will agree not to pursue it, but it is due and owing.

5. Mortgage payment must be unaffordable, perhaps because of a significant change in income or expenses (i.e. You must have a hardship.)

6. Lenders are trying to avoid people who are trying to just get over on paying.

C. Financial Incentives Under HAMPi. Borrower : Makes all on time payments, can get up to $1000

ii. Lender : Lender is able to get a couple of thousand for their participation

D. Trial modification Program i. If they go through the formula, and everyone agrees, then the borrower has to make the

payment for three consecutive months in order to stay in the loan, but if they don’t make it, then they are out of the program and can never get back into it.

ii. If you do this, the lender will look at you and then see if they will allow them to give them a permanent stay in the program, but lenders' aren't doing this.

1. If they do well during that time then it is extended for 5 years under a fixed rate, after that the interest rate will increase 1% per year (and there is a cap)

2. Interest can go as low as 2%, but If 2% is not low enough to get the amount down to 31% percent

a. The Lender Cani. Extend Payment Term (up to 40 years)

ii. Forgive some of the debt (optional)ii. Defer some of the debt until a balloon at the end

III. HAFA (Home Affordable Foreclosure Alternatives Program)A. Supposed to begin April 5B. Overview

i. Financial Incentives to move outii. Short Sale (need permission from the lender)

C. Requirementsi. Lenders : Cannot be a loan owned or guaranteed by Fannie mae or Freddie Mac

ii. Homeowners : 1. Must be principle residence2. Must be first mortgage (deed of trust) that originated prior to Jan.1 20093. The Mortgage is delinquent or a default is reasonably foreesable. 4. Current Loan balance is less than $729,7505. Borrower’s total monthly mortgage Payment Exceeds 31% of Gross Income.

D. Benefits

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i. This allow borrowers to have pre-approved prices for short sale on their homes. 1. Short Sale: Where the lender agrees to release its lien by taking less then what is owed

on the debt, therefore, they are short selling it. They are not saying they are not going to go after you on deficiency, they are just transferring it to someone else. Only time they will do so is if it is uncollectible. There may be income tax consequences for this.

ii. Borrower must provide the lender with a Short Sale agreement and a hardship affidavit. iii. Lender has 30 days to review the price on house, and all other stuff necessary to put the short

sale.E. The Short Sale

i. Requires borrower to list the home with a Real Estate Brokerii. Borrower has 120 days to sell home, the lender can extend but not shorten the time frame.

iii. The lender has to postpone any pending foreclosure during this period. iv. Borrower must maintain the property in good conditionv. A new mortgage payment is set and cannot exceed 31% of the borrower monthly income

vi. Once sold, borrower must leave and leave the property in good conditionvii. Borrower cannot sell the property to a family member, a friend, or associate.

viii. Buyer has to agree not to sell for 90 days after acquiring the property. ix. When you go to your lender, they have 10 days to approve the price of the short sale.x. The Borrower will receive a waiver of loan deficiency and $1,500 for relocation.

xi. Lenders cannot require realtors to reduce the commission to meet the price.

IV. Mediation Programs A. Michigan: States that before you can foreclose on a residential home by POS you have to first give a

pre-notice to the borrower, and the borrower has 15 days to elect to have a meeting between a representative of the lender, a counselor for the state housing office, and the borrower, to see if there is a way to modify the loan.i. If the lender does wrong, then the Borrower has the right to file a motion in the circuit court,

requesting the judge to enjoin the lender from using the POS, and that they must use a judicial foreclosure.

B. Nevada: Requires mediation whenever the lender files a notice of default, the borrower has 30 days to elect to go into mediation. i. In order to get a foreclosure, you must get a foreclosure certificate from the mediator.

ii. If the mediator determines that the lender is not acting in good faith or does not have the documentation that is required then they cannot move forward with the foreclosure.

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Wrap Around Mortgages

I. Wrap Around Mortgages: A wrap-around mortgage is a loan transaction where there is a pre-existing mortgage (usually of first priority) already in place, while a new mortgage of second priority, generally for a higher amount, is placed on it. The mortgagor makes payments only on the wraparound mortgage, whose mortgagee in turn makes payments on the pre-existing or “underlying mortgage” .46

a. Not as risk for Banks, because they have a early warning system in place. b. Contrast with The alternative type of home-seller financing is a second mortgage. Using the

alternative, B obtains a first mortgage from an institution for, say, $70,000, and a second mortgage from S for the additional $25,000 that B needs. The major difference between the two approaches is that with second mortgage financing, the old mortgage is repaid, whereas with a wrap-around it isn’t.

II. Duty of Foreclosing Mortgagee on Foreclosure Proceeds 47

a. Summers Case : Absent an express agreement between the purchaser (the wrap borrower) and the wrap note holder, the law should imply a convent into the parties agreement requiring the foreclosure to apply the proceeds first to the satisfaction of the pre-existing debt before making any distributions to the mortgagor.

b. Restatement Approach : The foreclosing wraparound lender may recover only the "net" debt: That is, the excess of the wraparound mortgage balance over the underlying mortgage balance (plus the usual costs and attorneys' fees as provided in the mortgage and approved under local law).

1. Any remaining funds must be treated as surplus and applied toward subordinate liens or placed in the mortgagor's hands under the principles of § 7.4

ii. This is all subject to variation by the terms of the wraparound mortgage or other agreement. § 7.8 Foreclosure of Wraparound Mortgages.

If a mortgagee has a contractual duty to the mortgagor to perform an obligation secured by another mortgage of higher priority on the same real estate, the mortgagee may seek to recover in foreclosure only the amount by which the

46 For example, S, who has a $70,000 mortgage on his home, sells his home to B for $100,000. B pays $5,000 down and borrows $95,000 on a new mortgage. This mortgage "wraps around" the existing $70,000 mortgage because the new lender will make the payments on the old mortgage from the payments of the borrower.47 Schrader v. Benton: Bentons (Sellers and Defendants) owners a condo that was subject to a mortgage owned by the Bank.When they went to sell the house, there was 31K remaining with a 7% interest, they entered into a purchase K with Schrader (the plaintiff) The Price was 44,500 with 7,000 to go to the Bentons. The Current market interest rate was 15%. The Schraders' asked the benton's to finance the 37,500 with an installment contract with 9% after three years. The scharder's paid $302 a month to the Bentons, who then paid 226 to the Bank on their mortgage. Bank's Mortgage would be first, and the benton mortgage would be second. The difference between this note and most notes is that the second mortgage

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balance owing on the obligation secured by the mortgage being foreclosed exceeds the balance owing on the mortgage obligation that the mortgagee has a duty to pay(i.e. the underlying mortgage). Any surplus remaining after application of this sum is distributed under the principles of § 7.4. (junior lien holders or the mortgagor)

c. General Considerations: Since the wraparound mortgage is subordinate to the underlying mortgage, a foreclosure of the wraparound mortgage will place title to the real estate in the hands of the foreclosure purchaser subject to the underlying mortgage, unless the latter is discharged

d. Class Notesi. Section 453: States if you qualify for this you can elect to take installment land treatment and

you do not have to recognize the income until it is received , and that is big because you have to claim the income in the year of the sale before you ever receive payment without this.

Purchase Money Mortgages I. Overview

A. A PPM is a mortgage that the mortgagor grants to enable the mortgagor to acquire ownership of the mortgaged land.

i. Vendor PPM : This is when the seller of land agrees to extend credit to the buyer for some portion of the land's purchase price, and the buyer grants a mortgage on the land to secure the buyer's obligation to pay the remaining purchase price.

1. Note : The Vender has to a take a mortgage for it to have this status. ii. Third Party PPM : When the buyer of land obtains a loan from a third party (usually a bank),

then uses the loan proceeds to pay the purchase price of the land, and grants the third party a mortgage to secure the buyer's repayment of the loan.

II. General Considerations A. A PPM once you characterize it as such, it means that the PPM mortgagee will have priority over all

pre-existing liens on the property that attach to the purchaser’s acquiring the property, no matter when they were made. 48

i. This does not mean that if there is an original encumbrance on the property that was there from when the Seller had the property that the PPM mortgagee will have priority over that mortgagee. The Seller has to discharge the original mortgage before it can convey good and marketable title to the Buyer.

ii. A PPM does not have to be recorded. § 7.2 Purchase Money Mortgage Priority.

(a) A "purchase money mortgage" is a mortgage given to a vendor of the real estate or to a third party lender to the extent that the proceeds of the loan are used to:

(1) acquire title to the real estate; or

(2) construct improvements on the real estate if the mortgage is given as part of the same transaction in which title is acquired.

48 Policy Rationales: (1) Restricts alienation on the property (2) the creditor would not have anything attach unless the third party would have given the loan.

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(b) A purchase money mortgage, whether or not recorded, has priority over any mortgage, lien, or other claim that attaches to the real estate but is created by or arises against the purchaser-mortgagor prior to the purchaser-mortgagor's acquisition of title to the real estate.

(c) A purchase money mortgage given to a vendor of real estate, in the absence of a contrary intent of the parties to it and subject to the operation of the recording acts, has priority over a purchase money mortgage on that real estate given to a person who is not its vendor.

III.Priority IssuesA. The vendor's purchase money mortgage is senior to any previous judgment liens that arise against the

purchaser-mortgagor. i. This is true even though a judgment attaches as a lien to the judgment debtor's after-acquired

real estate and the vendor takes the mortgage with actual knowledge of the judgment.49 ii. This rule applies even if the mortgage is not executed simultaneously with the deed to the

mortgagor, so long as the mortgage and the conveyance of title are intended to be part of one transaction.

IV. Construction Loans as a PPMA. Restatement Section 7.2 treats the entire amount of the loan as purchase money, no matter if it is used

to build the land and acquire it. B. How do You Know: This is clearly the case where the loan proceeds are used in part to acquire title

to the mortgaged real estate and in part to construct improvements on it. In such a situation, the entire amount of the loan will be classified as a purchase money mortgage.

C. Construction Loan solely for the Purpose of Building? i. Restatement: Even where the proceeds of the loan are used exclusively for improving the

mortgaged real estate, the mortgage will receive purchase money treatment so long as it is given as part of the same transaction in which the title to the real estate is acquired.

1. Note: Construction mortgage's are part of the acquisition transaction only if the mortgagor commences "negotiations with the construction lender prior to the mortgagor's acquisition of title, and the actual loan is made incident to the mortgagor's acquisition of title or within a reasonable time thereafter.

a. Note: This only works if the loan is actually used for construction. ii. Construction lending wants to make sure that each advancement has the same priority on the

prior ones. 1. This would be a future advance mortgage and is enforceable.

V. Impact of Recording Acts: Although the purchase money mortgage must be recorded in order to protect the mortgagee against subsequent interests that arise through the purchaser-mortgagor, such recording is unnecessary to protect against claims against mortgagor that antedate the purchase money mortgage such as mortgages, liens, or other claims attaching to the real estate that arise against the purchaser-mortgagor prior to the latter's acquisition of title.

49 The vendor-mortgagee should prevail because the lien creditor has not extended credit or perfected the lien in reliance on the right to be repaid out of any specific property, much less out of the real estate previously owned by the vendor and they nevertheless part with money with the expectation that they will have security in that real estate. Third parties who lend money used to purchase real estate in exchange for a mortgage hold special priority over all other recorded liens and judgments except where agreed otherwise by the parties or specified by statute

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A. Vender PPM's v. 3rd Party PPMs: Generally, when there is a priority dispute between a vendor PPM and a Third Party PPM, the vendor's mortgage has priority over the third party, unless the dispute can be resolved by the recording acts or some other means (such as a subordination agreement).

i. Note: The Vendor has to have a mortgage, if not, the third party will win over the vendorsii. Notice and the Implications

1. Both Have notice : Vendor Wins2. Neither has Notice : Vendor Wins

a. Why the recording act only applies to people with subsequent notice . 3. One has notice and the Other does not : Recording acts Govern and the party lacking

notice should prevail. 4. Notice : The lender who takes its mortgage without notice of the other's mortgage

prevails.5. Race Notice : The lender who takes without notice must also record first in order to

prevail. B. 3 rd Party v . 3rd Party: Probably use first in time, first in right, since both should have had notice of the

other.

The After Acquired Property Clause

I. Overview: You can basically give a mortgage that states that not only the house, but any subsequent purchases of real property or, sometimes, personal property, will be included as collateral for the mortgage obligation.

A. Not Restatement Approach: i. Hickson Lumber Co. v. Gay Lumber Co (pg. 850)

1. When a mortgage is intended to cover subsequently acquired property, either express terms should be used to that end or else it must clearly appear from the language of the deed that such was the manifest intention of the parties.

2. Therefore an after-acquired property clause will not be enforced against subsequent purchasers for value and without notice.

a. Basically states that if there was a BFP (mortgagee), then they would not have enforced it, but since it was not, then it would allow it.

ii. This case held that the recording of the AAP was effectual notice against the world, so if another mortgagee comes in thinking it is superior, it will be wrong.

II. General Validity of an After Acquired property Provision as to after acquired land: The Restatement recognizes the validity of the provision as between the mortgagor and the mortgagee.

A. This is effective regardless of where the future real estate is purchases.

III. Relationship to accession and the law of fixturesA. You buy the land without an AAP provision, does the mortgage cover the house even though it was

only for the land?i. Yes; the doctrine of accession or the law of fixtures, an AAP is not necessary for a mortgage on

the land to attach to fixtures. IV. Recording Act and "Chain of title" problems.

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A. Restatement: Treats an AAP provision as unrecorded as against those who later purchase interest in the after acquired real estate. Section 7.5.

i. Under this approach, if a state has either a "notice" or "race-notice" recording act, and Z takes its mortgage on white acre without actual knowledge of X's mortgage, Z's mortgage will have priority. The opposite will be the case if Z takes with actual knowledge.

ii. But, the restatement allows the mortgagee to protect itself if mortgagee records a notice that 1. Describes the real estate2. Refers to the mortgage3. Is in a form that provides record notice under local law

V. After Acquired Property Provision v. PPM : PPM trumps AAP provision regardless of the fact that the PPM mortgagee took notice of the AAP.

Future Advances

I. "Future advances”: This refers to all situations in which a mortgagor's obligation or the amount or value of a mortgagor's secured performance arises or is enlarged after the mortgage becomes effective.

A. Agreements to secure future advances, as between the parties. Where the parties to a mortgage intend it to secure future advances, they will commonly include their agreement to that effect in the mortgage itself. However, their agreement may instead be found in a separate document executed either simultaneously with the mortgage or later, or it may arise from an oral conversation.

i. Usually found in Construction Mortgage Financingii. “This collateral stands for this loan and all other loans”

§ 2.1 Future Advances.

(a) A mortgage secures "future advances" if it secures performance of an obligation that comes into existence or is enlarged after the mortgage becomes effective.

(b) As between the parties to a mortgage, repayment of future advances will be secured by the mortgage if the parties have so agreed. The agreement need not be in the mortgage and need not be written. If a separate agreement for future advances is made at the time the mortgage becomes effective, but is unwritten, it will be enforceable only to the extent permitted by the Parol Evidence Rule.

(c) As against a person acquiring an interest in the mortgaged property subsequent to the mortgage, repayment of future advances will be secured only if an agreement of the kind described in Subsection (b) exists and

(1) the mortgage states that repayment of future advances is secured; or

(2) the person has other notice of the parties' agreement concerning future advances at the time the interest is acquired; or

(3) the mortgage states a monetary amount to be secured.

(d) If the mortgage states a monetary amount to be secured and makes no provision for future advances in excess of that amount, the total amount of the principal obligation secured by the mortgage may never exceed the stated amount, except as provided in Subsection (e) of this section.

(e) If the parties to the mortgage have agreed, in the mortgage (or otherwise, to the extent recognized under the Parol Evidence Rule) that the secured obligation includes the following items, the mortgage will secure their payment to the

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extent permitted by local law, notwithstanding that when added to the principal obligation they cause the total balance to exceed the stated amount:

(1) interest (including interest on amounts accruing as interest during previous periods and added to principal);

(2) costs of collection or foreclosure;

(3) attorneys' fees;

(f) A mortgage to secure repayment of future advances is valid whether or not any advances are made at the time the mortgage becomes effective.

§ 2.4 Mortgages Securing Future Advances Not Specifically Described. (Dragnet Clauses)

A mortgage may secure future advances that are not made in connection with the transaction in which the mortgage is given, and that are not specifically described in the mortgage or other documents executed as part of that transaction, subject to the following limitations:

(a) The parties must have agreed that such future advances will be secured. Whether this agreement must be written and contained in the mortgage is governed by the principles of § 2.1(b) and (c).

(b) The advances must be made in a transaction similar in character to the mortgage transaction, unless

(1) the mortgage describes with reasonable specificity the additional type or types of transactions in which advances will be secured; or

(2) the parties specifically agree, at the time of the making of the advances, that the mortgage will secure them.

(c) If mortgaged real property is transferred, the mortgage will secure only advances made prior to the mortgagee's gaining actual knowledge of the transfer.

II. Definition: Dragnet clauses usually states that the real estate covered by the mortgage will stand as security not only for the loan now being made, but also for any other debt for which the borrower is already liable to the lender or for which the borrower may become liable to the lender in future, until the mortgage is satisfied

A. Necessity of mortgage : A mortgage will have a "dragnet" effect only if a specific agreement between the mortgagor and mortgagee so provides. Absent such an agreement, the mortgage will secure only advances made as part of the same transaction in which the mortgage is taken, or advances that have been made

B. Character of advances secured : Where a dragnet clause describes the other advances to be secured only in general terms (i.e., "all future debts Mortgagor may owe to Mortgagee"), The mortgage will generally secure only advances made in transactions of a character similar to that in which the mortgage was taken previously and are specifically identified in the mortgage unless

i. The mortgage describes with reasonable specificity the additional type or types of transactions in which advances will be secured or

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ii. The parties specifically agree, at the time of making the advances, that the mortgage will secure them.

iii. Note: For example, if the original loan is for home repairs, it will cover more repairs, but not car repairs.

C. Inapplicability to preexisting debt : A dragnet clause can have only a prospective effect. Even if the clause refers in general terms to preexisting indebtedness, the mortgage will not secure that indebtedness.

III.Statutory Limitations on Dragnet Clause CoverageA. Restatement 2.1 : The Statutes typically require that a maximum amount be stated in the mortgage,

and withdraw priority for any advances over that amounti. Under such a statute, the "other" indebtness secured under the dragnet clause could not, when

added to the outstanding balance still due under the mortgage note, exceed the original face amount of the note and mortgage.

IV. Transfer of the PropertyA. Transfer to an Assuming Grantee who incurs a debt unrelated to the mortgage: Restatement does not

recognize such advances as being secured by the Dragnet Clausei. "If mortgaged real property is transferred, the mortgage will secure only advances made prior

to the mortgagee's gaining actual knowledge of the transfer"1. This also eliminates coverage of advances made to the original mortgagor after the lender

knows that the real estate has been transferred. B. Advances to the Transferee: Advances made to or indebtedness incurred by the transferee of the

real estate, rather than to or by the original mortgagor, will not ordinarily unless there is (1) an assumption agreement , but in the absence of that, the transferee is not covered.

i. Advances do not extend to the advances made to the grantee.

§ 2.3 Priority of Future Advances.

(a) If a mortgage secures repayment of future advances, all advances have the priority of the original mortgage. Whether or not the mortgage secures repayment of future advances, if the parties have agreed that the mortgage secures payment of interest, costs of collection, foreclosure,or attorneys' fees, these items have the priority of the original mortgage.

(b) Except as provided in Subsection (c), the mortgagor may at any time issue a notice to the mortgagee

(1) terminating the validity of the mortgage with respect to further advances; or

(2) subordinating the priority of the mortgage, as against intervening interests, with respect to further advances.

Such a notice is effective even if the termination or subordination with respect to further advances violates a contractual obligation of the mortgagor to draw further advances, but the mortgagor may be liable in damages for breach of such an obligation. Upon receipt of the notice, the mortgagee must provide the mortgagor with a certificate in recordable form stating that the notice has been received. If the notice provides for subordination of the mortgage with respect to further advances, the mortgagee may elect to treat it as terminating the validity of the mortgage with respect to such advances.

(c) The mortgagor may not issue the notice described in Subsection (b) above and any notice issued by the mortgagor

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is ineffective, if:

(1) a termination or subordination of further advances would unreasonably jeopardize the mortgagee's security for advances already made; or

(2) the further advances will benefit persons other than the mortgagor, and the mortgagee has a contractual duty to provide such benefit.

(d) Even if the mortgagor issues a notice under Subsection (b), the mortgage continues to secure, with its original priority, the items listed in Subsection (a) and any expenditures reasonably necessary for protection of the security (§ 2.2).

C. Priority of Future Advancesi. Restatement : all future advances take the priority of the original mortgage and relate back to the

original mortgage. 1. There is no distinction between advances that the mortgagee is contractually obligated to

make and those that are optional.ii. Optional v. Obligatory Advances

1. Optional: Mortgagee has no contractual duty, but may elect to make advances.a. If mortgagee has notice of another lienor, the priority will be lost.

2. Obligatory : If it is obligatory, it takes priority and subsequent Lienors are junior. Then they have priority. And do relate back.

D. Cutoff Notice provision i. Contained in Some Statutes : Allows the debtor to record or serve on the lender a notice that he

no longer wishes the future advances to be effective. ii. Restatement : Allows this to either subordinate a future advance clause or terminate it, but if the

mortgagee does not want to be subordinated, it can treat this as a termination. 1. But a cut office notice will not operate in two situations

a. If it will jeopardize unreasonably the lender’s security for advances already made (i.e. a partially finished construction project because a half finished construction project is not worth half the money)

i. But a borrower may be able to overcome this by showing it has an alternative source of funding.

b. If the lender has a duty to makes advances to other person, the borrower cannot cut off this right.

E. Protective Advances :i. Even in the absence of any agreement, a mortgagee can make advances that are reasonably

necessary to protect the security of it’s property and may add those sums to the amount owing on the debt. These are usually given to protect the property against liens that might to priority over the mortgage or to protect the property

1. For example, for delinquent property taxes, senior mortgages, repairs to correct waste.ii. This advances will be treated as having the priority of the original mortgage.

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Replacement and Modification of Senior Mortgages: Impact on Junior Lienors

§ 7.3 Replacement and Modification of Senior Mortgages: Effect on Intervening Interests

(a) If a senior mortgage is released of record and, as part of the same transaction, is replaced with a new mortgage, the latter mortgage retains the same priority as its predecessor, except

(1) to the extent that any change in the terms of the mortgage or the obligation it secures is materially prejudicial to the holder of a junior interest, or

(2) to the extent that one who is protected by the recording act acquires an interest in the real estate at a time that the senior mortgage is not of record. (this is meant to protect BFP’s)

(b) If a senior mortgage or the obligation it secures is modified by the parties, the mortgage as modified retains priority as against junior interests in the real estate, except to the extent that the modification is materially prejudicial to the holders of such interests and is not within the scope of a reservation of right to modify as provided in Subsection (c).

(c) If the mortgagor and mortgagee reserve the right in a mortgage to modify the mortgage or the obligation it secures, the mortgage as modified retains priority even if the modification is materially prejudicial to the holders of junior interests in the real estate, except as provided in Subsection (d).

(d) If a mortgage contains a reservation of the right to modify the mortgage or the obligation as described in Subsection (c), the mortgagor may issue a notice to the mortgagee terminating that right. Upon receipt of the notice by the mortgagee, the right to modify with retention of priority under Subsection (c) becomes ineffective against persons taking any subsequent interests in the mortgaged real estate, and any subsequent modifications are governed by Subsection (b). Upon receipt of the notice, the mortgagee must provide the mortgagor with a certificate in recordable form stating that the notice has been received.

I. Replacement of Senior Mortgages: A. Impact on Junior Interests: A Senior mortgagee who discharges its mortgage of record and takes and

records a replacement mortgage retains the priority of the original mortgage unless it is materially prejudicial to the holder of the junior interest. 50

i. (Not all States follow this!) ii. I.e. Mechanic’s lien will not junior

B. Modification: Where will priority be lost? i. Material Prejudice: For example, Where the First Bank releases its construction mortgage

before recording its permanent mortgage, and during the interim the borrower grants another mortgage to second bank, which does not know that the First Bank has not been fully repaid. IN this instance the Second Bank will win because of the operation of the recording acts.

50 Houston Lumber Co v. Skaggs (pg. 863): MEE1 gave M a construction mortgage, then M had a second mortgage taken out, subsequently MEE1 replaced the construction mortgage with a regular mortgage and the Junior Lienors claimed she lost her senior status when she released the construction mortgage, and the court held that she did not.

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ii. Extension of Time for payment of the Senior Debt: No Loss: Where the replacement mortgage extends the due date for repayment of the indebtness, the extension is not deemed to create a material prejudice and therefore no loss of priority occurs. Rest. Section 7.3.

1. However, it may be, in the rare situation where the time extension can be said to place the junior interest in a substantially weaker position.

iii. Increase in Interest rate or Principle balance of Senior Debt: Loss: Where the replacement mortgage secures an increased principle amount or increases in the interest rate, there often will be a loss of priority to the junior interests.

1. Note: An Increase in the principle amount will not be prejudicial if mortgage secures future advances.

iv. No Maximum Amount Stated: No Loss: Where the original mortgage clearly states that it secures future advances and specifies no maximum monetary amount, the intervening lienor is not materially prejudiced.51

v. Intend to Subrogate by Senior Mortgagee: Loss: However, such an intent to subordinate will not be inferred in the absence of a clear statement or other proof to that effect. This will be the case even where the senior mortgagee has actual knowledge of an intervening lien at the time the replacement is recorded

II. Senior Language Reserving the Right to ModifyA. Even if Material Prejudice No Loss if Language : Even when material prejudice exists, however, no

loss of priority will occur if the mortgage contains a clause reserving the right to modify, the modification is within the scope of the clause, and the clause's operation has not been terminated by notice from the mortgagor

i. However, the restatement allows the debtor to issue to the mortgagee a "cutoff notice" that terminates the mortgagee's right to modify conferred by that provision.52

1. Once the notice becomes effective, any future modifications will be governed by the "material prejudice" standard.

III.Equitable Subrogation53

§ 7.6 Subrogation.

(a) One who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment. Even though the performance would otherwise discharge the obligation and the mortgage, they are preserved and the mortgage retains its priority in the hands of the subrogee.

51 Since the intervenor takes its lien on notice that future advances are possible, it cannot validly claim injury based on the fact that the replacement mortgage exceeds the pre-release balance of its predecessor52 The Reason is because the mortgagor's ability to obtain further financing from other lenders may be jeopardized. Third parties will often be unwilling to advance credit when the amount secured by the senior mortgage is uncertain due to its potential for modification53 Houston v. BOA Federal Saving Bank (pg. 869) MEE1 gave a loan to M1 (husband and wife) and there was another couple Houston’s, who was defrauded against M1, and they get a judgment against M1, which was greater then the amount of the loan. M1 get divorced and the wife gets the house. MEE2 Refinanced, and they give equitable subrogation.

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(4) upon a request from the obligor or the obligor's successor to do so, if the person performing was promised repayment and reasonably expected to receive a security interest in the real estate with the priority of the mortgage being discharged, and if subrogation will not materially prejudice the holders of intervening interests in the real estate.

A. Overview: Equitable subrogation permits a person who pays off an encumbrance to assume the same priority position as the holder of the previous encumbrance. If the person pays off the debt, that person gets both the debt and the mortgage, and can enforce both against the person who should have paid it.

B. When to apply equitable subrogation where a third party held a lien on the property at the time the second lender paid off the former encumbrance.

i. Majority Position : Actual knowledge of an existing lien precludes the application of equitable subrogation, but constructive knowledge does not.

1. Under this approach, if a prospective mortgagee performs a title search and discovers a junior lien holder, it will be barred from being subrogated.

a. However, if a prospective mortgagee forgoes conducting a search, which would have uncovered a junior lien holder, and puts on blinders, it nevertheless will be subrogated.

ii. Restatement Position 7.6(a)(4) : Disregards actual or constructive notice of a junior lien holder's rights if the junior lien holder is not prejudiced.

1. Under this approach, a mortgagee will be subrogated when it pays the entire loan of another as long as the mortgagee was promised repayment and reasonably expected to receive a security interest in the real estate with the priority of the mortgage being discharged, and if subrogation will not materially prejudice the holders of intervening interests in the real estate.

2. A party can be subrogated even if the party possessed actual knowledge of the other lien holder.

a. The question in such cases is whether the payor reasonably expected to get security with a priority equal to the mortgage being paid. Further, a refinancing mortgagee should be found to lack such an expectation only where there is affirmative proof that the mortgagee intended to subordinate its mortgage to the intervening interest.

C. Strict Notice Jurisdiction Case (Opposite of Restatement) 54 : A subsequent purchaser is deemed to have constructive notice of any burden upon title from the date of recordation.

i. Equitable subrogation simply has no application where a financial institution extends a loan for the purpose of enabling a mortgagor to pay off an existing mortgage, knowing that a subordinate

54 Country Wide Home Loans, Inc. v. First Nat'l Bank of Steam Boat Springs (pg. 873) IN 1997 Mortgagors had a mortgage secured by B1 on their land. In 2002, They granted another mortgage to B2 to secure a business loan. In 2003, they got a refinancing loan from B3. B3 was on notice of the two prior liens, and took another mortgage from the mortgagors. In 2003, mortgagors defaulted on their loan from B2 who sought foreclosure. B3 claimed priority upon equitable subrogation from B1 loans, and B2 claimed priority because of the state's recording statute. B2 wins. Reasoning: Here, the AWL mortgage was recorded in 1997, the First National Bank mortgage was recorded in 2002 and Countrywide's mortgage was recorded in 2003. Countrywide knew of the existence of First National Bank's lien before it extended the loan to the Ketchams. Thus, Countrywide knew First National Bank had a prior recorded lien on the property when it executed the 2003 mortgage. Countrywide was charged with knowing Wyoming is a "first in time" jurisdiction. In this case, the Court Rejected the Restatement Approach, and instead applied the statute, which stated, a mortgage properly recorded in the clerk’s office provides notice to subsequent purchasers and takes precedence over later conveyances.

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lien exists on the real estate. Other mechanisms are available for a refinancing lender to obtain first priority without invoking equity to achieve that result.

Alternative Mortgages InstrumentsI. Adjustable Rate Mortgage : Most important out there and most likely to see

A. People would be offered rate below the fixed rate loans.B. You have look at certain things

i. Have to look at the frequency of the rate changes1. Usually annually.

ii. How will the rate increases be paid (Three Ways)1. Increase the monthly payment2. Lengthen the term (or amortization period)3. Capitalize the interest rate increase (i.e. add to the principle balance)

a. Negative Amortizationi. Never paying enough to cover the principel and the new interest so the

difference is just being paid onto it.ii. “Balloon”- More to pay then have the ability to.

iii. Which index is the interest rate tied to?iv. Look at the relationship of the index to the actual rate

1. Usually these will provide that the interest rate will follow the index rate (point for point) but sometime this will not happen because of teaser rates (keeping the interest rate artificially low and then it would jump crazy)

a. Is there a cap on these increases? And if so, what it is?v. Common Types of ARM

1. No pre-payment penalties 2. 2 to 3% interests rates

II. Reverse Annuity Mortgage (Most likely to see )A. What it was designed for, was when people had money in their homes,

i. It was designed to allow elderly people who had a lot of money in the homes to borrow from that equity to pay for their living expenses.

ii. Allowed people to stay in the home, and reverse money out.iii. The Bank makes monthly dispursments to the borrower and then the principle and interest rises

with the payments, but once it reached pre-determined maximum, you had to sell it, but now (with the government back loans) they will wait till you die or you sell.

III. PLAM: Price Level Adjusted Mortgage: A lender charges interest, but the principel is adjusted periodically to the overall price levels (inflation) in the nation.

A. Not very popular in U.S., but in Europe

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IV. GPM:Graduated payment Mortgage : Payments rise annually based on a pre-arranged schedule, even if there are not interest rate increases (tied to the concept that you will make more money mortgage)

Lending DiscriminationI. Four Federal Statutes

A. Fair Housing Act : Cant discriminate on the basis of most of Title VII including sex, handicap, familial statute, or national origin.

B. National Housing Act : Any federally related mortgage (and basically any mortgage loan you would see)

C. Civil Rights Act of 1866 : Every person has the right to buy, sell, or own property just like as white citizens.

i. In Jones v. Alfred Mayer Co. the Supreme Court applied this to Private Actions, and allows Black people to do the same.

D. The Equal Credit Opportunity Act : It shall be unlawful for any creditor to discriminate on Personal looks and shit, and then also because some gets money from public assistance.

II. How blatant does Discrimination have to be? A. Intentional Discrimination or B. Effects Test (Griggs)

i. IF the plaintiffs could show that the company’s test and procedures of screening out disproportionate amount of minorities then the burden shifts to the company to show that is was required by business neccisity or by general business need.

C. Redlining 55: Redlining is the practice of denying the extension of credit to specific geographic areas due to the income, race or ethnicity of its residents.

i. The term redlining is derived from the actual practice of drawing a red line around designated areas in which credit is to be denied.

D. Reverse redlining : practice of targeting those same communities and extending credit on unfair terms to those same communities.

i. Reverse redlining violates the Fair Housing Act, and the Civil Rights Act, ii. This is example of Predatory Lending.

1. Loan Flipping2. Home refinancing Scams3. Loan Modification Scams

Predatory LendingA. Not Much Said on this except above.

Title to Be Conveyed

55 Assocaiates Home Equity Services , Inc. v Troup (pg. 933): The borrowers, African Americans, obtained a mortgage loan to pay for repairs on their home made by third-party defendants. The mortgage and note were assigned to the finance company. The appellate court held that the trial court was premature in dismissing the borrowers' claim that the finance company engaged in predatory lending activities. The borrowers claimed reverse redlining, in which credit was extended on unfair terms based on income, race, or ethnicity. The borrowers laid the foundation for a reverse redlining case by establishing that they were African Americans living in a predominately African-American neighborhood. Their expert stated that the 11.65 percent interest rate and other terms of the loan were unjustified from an objective viewpoint, given the borrowers' credit history and favorable debt-to-income ratio. The appellate court affirmed the dismissal of claims for recission under the Truth in Lending Act (TILA), 15 U.S.C.S. § 1635(a).

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I. Haisfield v. Lape (pg.74) The parties' contract provided that the purchasers would be entitled to the return of their earnest money if the sellers could not deliver marketable title. A "view" easement existed on the property preventing the construction of a building visible from its main residence for 30 years. The supreme court held this easement was clearly an encumbrance on the property restricting its use in such a manner as to render title unmarketable.

A. A marketable title is one which is free from liens or encumbrances; one which discloses no serious defects and is dependent for its validity upon no doubtful questions of law or fact; one which will not expose the purchaser to the hazard of litigation or embarrass him in the peaceable enjoyment of the land; one which a reasonably well-informed and prudent person, acting upon business principles and with full knowledge of the facts and their legal significance, would be willing to accept, with the assurance that he, in turn, could sell or mortgage the property at its fair value.

B. Third Type of Deed: Convenant Deed: What you warranting to your buyer, is that you are responsible for anything that you caused, but you are not liable for things that happened before you.

C. If you have a contract you want to cover both situations. II. What type of contract will have the Title: Purchase Agreement.

III. What is a marketable title: A title that is free of all reasonable risk of attack. A. This does not mean free of All defects, but just all unreasonable risks of title

IV. Implied Convenant of Marketable Title (when the contract is silent) : In the absence of an express statement, every K for the sale of real estate, has an implied covenant that the title will be “marketable” unless the parties agree otherwise.

V. Defects making Title UnmarketableA. Encumbrances: If the K does not expressly provide that the purchaser will take subject to them, they

violate the implied convenant of marketable title1. Leases, restrictive covenants, mineral reservations, mortgages, easements, and liens.

a. If it runs with the land, it is usually a restrictive convenant. ii. Satisfying Liens at Closing : If the property is subject to a mortgage or other lien that the vendor

must satisfy to give marketable title, the purchaser cannot object to the mortgage or lien since it will be gone when the purchaser obtains title.

B. Access: A complete lack of access to public road may make title unmarketable

C. Encroachments: An encroachment (a building by a neighboring property which overlaps on the land) is usually considered to affect marketability.

D. Title by adverse possession: If Title is based exclusively on adverse possession the title is usually thought not to be marketable, although the title is good.

E. Hazardous Waste: NOT though to affect marketability since physical conditions have no title implications.

F. Existing Adverse Possessors : i. No marketable if an existing adverse possessor has completed acquisition of title.

G. Flaw in the Chain of Title Not Recorded: i. “Muniments of Title” (Docs that compromise the links in the chain)

1. Need not be of record, unless the contracts providesii. Actual Break of Chain (Break in title and deed is missing)

1. Considered Unmarketable

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H. Violation of Zoning Ordinances

I. Housing Code violations

J. Litigation: If there is a risk of litigation that a reasonable buyer would find unacceptable, title is unmarketable.

K. Forged Deeds L. Fraud, Duress, Incapacity, i.e. General Flaws in Contracts M.Dower: Any woman gets a dower right in the land acquired by the woman during the marriage. Wife

has to sign to release.

VI. Notice of the Vendor Title Defects: Vendor is expected to examine the title before closing and delivery of the deed, if there is basis to object, she must do so and give the seller a fair opportunity to cure, if capable of cure.

A. She must do so within a reasonable time (more then a day or two before closing) or else the seller will be given a reasonable time to cure the defect.

VII. Time of Title Marketability : Closing.

VIII. Merger of Title Covenants Doctrine: If the purchaser has some objection to the title on the basis of the implied covenant (or express covenant) she must raise it prior to accepting delivery of the deed.

A. Unless the contract says otherwise, if the purchasers accepts the deed she is deemed to be satisfied that she is getting the title contracted for, and any future objection she makes must be based on the covenants of title in the deed itself, if any.

IX. Marketable Title Acts A. No interest created prior to some point in time, will not affect title, but there are specific requirements

within the statute, and they are very narrow. B. Many times this is the only things you can rely on, but then you must make a judgment. C. But just because it falls within the act, does not mean it is marketable.

Equitable ConversionI. Doctrine of Equitable Conversion: “Equitable” title passes to the purchaser as soon as an enforceable

contract to sell land is formed, even though it is clear that the “legal” title will remain with the seller until the closing and delivery of the deed.

A. This deals with how you characterize the interest of the purchaser and the SellerB. This theory states that we are going to treat the seller’s interest as personal property and we are going to treat

the buyer’s interest as real property. i. Who bears the risk of loss during this period?

C. Well drafted purchase agreement can state that the seller assumes risk of loss until the thing is delivered. i. Fulton v. Duro (pg. 86)

1. Buyer becomes equitable/beneficial owner upon signature of executory K for sale of land. Seller retains legal title as security for the price.

2. Purpose : Basis for courts to order specific enforcement of executory K and force Seller to deliver corresponding legal title.

a. Equity does that which should have been done.

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II. Necessity of Contract: Conversion only occurs if there is a contract that an equity court would enforceA. There is no conversion, for example, if at the relevant time, there is only an unaccepted offer or an

unexercised option. B. No conversion if the vendor title is unmarketable as of the date of that conversion.

III.Judgment Liens: The Purchasers equitable interest is “Real property” and hence subject to judgment liens.

IV. Risk of Loss: When does it pass?A. Old Rule: If the property is damaged during the executory period of the contract, the loss is on the

purchaser.B. Minority View: Risk remains on the vendor

i. The risk is on the seller until legal title or possession is transferred and permits the buyer to rescind in the event of the loss or (at the purchaser’s option) get specific performance with an abatement of the price to account for the land’s reduced value.

C. Types of Losses: Zoning Change; Building Code change, Eminent Domain action.

D. Uniform Act i. 11 States

ii. Seller bears risk until transfer of possession and Buyer cannot force seller to reduce/abate price1. Exception: Where a material part of subject property is destroyed w/o fault of either party

& neither title nor possession has passed to purchaser, vendor's performance is excused and purchaser is entitled to the return of any consideration paid

i. Unfair to require either party to accept less than bargain.iii. This denies the Seller the right to enforce the contract if a material loss occurs.

E. What happens if the judgment is given at the time of the sale?

Conditions in ContractsA. Must look at to whose benefit the condition exists.B. Minority Position: The financing condition only benefits who the financing is for.

a. Barber v. Jones (pg. 119): Plaintiff buyers sued defendant homeowners to recover their substantial down payment after they failed to obtain a mortgage because of a wetlands issue with the subject property. The trial court ruled in favor of plaintiffs, finding that the purchase agreement never came into existence because it was subject to an unfulfilled condition precedent. D arged that P did not make reasonable efforts to secure a mortgage and breached their implied contractual covenant of good faith and fair dealing.

i. Mortgage contingency clauses in contracts imply a promise by the borrower that he or she will make reasonable efforts to secure a suitable mortgage.

C. Majority Position: Buyer only has to in “good faith” make “Reasonable efforts” to obtain financing.

Real Estate BrokersA. Authority: Show, advertise, and market the property

a. Cannot force the sale to take place if the seller refuses to go forward, unless there is a power of attorney, and in that case, it must be clearly stated.

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B. Type of Listingsa. Listing Agreementsb. SOF requires listing agreements to be in writing. c. Open Listing: Seller agrees to pay the broker a commission if the broker sells, but the seller retains

the right sell the property himself or get the services of another broker.d. Exclusive Agency Listing: For a certain time period, this authorizes only one broker to sell the

property but permits the Seller to sell the property without having to pay a commission.e. Exclusive Right listing: If the Property is sold, no matter by whom, the broker is paid a commission.

i. For some period of time you will not list the property with anyone else. ii. If someone else bring the buyer, the broker is still owed the commission.

iii. Most residential properties.

C. Fee for Service Brokers: Instead of supplying all of the services of a broker, a seller can pick and choose which services they wants from the broker.

D. Multiple Listing Service (MLS): Increases market exposure for property.a. Placing offer on MLS may create implied oral agency agreement b/w listing broker and subagent.

E. Broker Commissiona. Drake v. Hosley (pg.12): The broker produced a ready, willing, and able buyer. The closing on the

sale of the property was to occur 10 days after the title work was completed. Before the 10 days had expired, the seller sold the property to another group because he changed the deal since he had an agreement with his ex-wife. The broker sued for his commission.i. A broker is entitled to a commission if improper or frustrating conduct by the owner prevents

title from passing.b. Majority Rule : Broker earns commission when he produces a buyer who is ready, willing and able

under the terms of the listing or if seller accepts buyer's different conditionsi. Default Rule Only : Broker and client are free to alter these rules contractually.

c. Minority Rule : Commission is not earned until performance of contract and is paid out of the sale proceeds unless it is the seller fault.i. Generally means close of escrow.

ii. Rationale 1. More realistic b/c people pay commission from funds in escrow.2. Public Policy : if deal does not close, buyer was not ready, willing & able. Forces brokers

to facilitate actual closing.3. Where seller wrongfully prevents closing, courts following this rule will grant specific

performance to make seller pay commission anyhow.d. Liens: In some states broker’s commission is able to be liened, but not in all instances.

F. Conflicts of Interest: Unless agreed after full disclosure, conflicts of interest by brokers can give rise to private liability.

a. If the broker causes a loss to his principle (buyer or seller) he may loose his commission and be sued for damages.

G. Disclosure of Material Facts: A broker has a duty to disclose to the buyer material defects known to the broker but unknown to and unobservable by the buyer (even true if the broker is for the seller)

a. Not only Physical Defects i. Any conflict of interest (Family, adverse financial condition of the buyer, etc...)

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Deeds

A. Deeds: a. Chase Federal Savings and Loan v. Schreiber: Lady conveyed her house to guy by quit claim deed

and the consideration was for “love and affection.” Guy sold his house to Couple, who took out a mortgage on it to mortgagee. After the conveyance to the couple, Lady brought an action to rescind and cancel her deed to the guy claiming that because she was unrelated to the guy and the only consideration was for “love and affection” the deed was invalid. This court held that the deed was valid and effective to pass legal title although there was no valuable consideration paid and the grantor and grantee were not related.i. English Rule: A deed, in order to pass title, must be supported by either valuable or a good

consideration. ii. Modern Rule: A Deed is not a contract, and that no consideration is necessary for the validity

of the title.iii. Majority

1. No need for consideration as long as you have delivery and intent, but it is still customary for it to recite consideration.

B. Oral Leases: Oral contracts for less then one year can be made by mouth. C. Tenant by Entirety: Survivorship, cannot mortgage your part of your property, D. Ambiguous Deeds: They will try to get the parties intent was through extrinsic (parol) evidence. E. Part Performance: Some states hold that an oral gift of land is effective if the donee takes possession and

detrimentally relies on that oral gift. F. Elements of a Deed

a. Writingb. Grantors Name and Signaturec. Grantees name and indication of the manner in which the title they are takingd. The recitation of consideration (although payment or recitation are not actually needed)e. Description of the Land

i. Two or three ways property is described: 1. Metes and Bounds: 2. Platted Subdivision: Each one has different tax id numbers.

f. A statement of Exclusions (matter to which the fee simple will be subject, and g. Language evincing an intent to make a sale (absent that, the deed is ineffective)h. The Datei. Witnesses (in some states)

G. Defectsa. You need to determine if it is from a formalityb. Undue influence

H. Mistakea. Court of equity can do a reform, but both have to agreeb. Other inquietable contractc. Reformation may not be available if it is going to a BFP

I. If it is one of formalitya. It can void or voidable

i. Both are cancellable by a court against the granteeii. Void: BFP cannot get it

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iii. Voidable: BFP will winb. Void

i. Forgeryii. No Delivery of Deed

iii. Fraud in the execution (where the grantor was not aware that they were signing a deed)c. Voidable

i. Fraud in the inducement (Grantor knows he is signing a deed but he was induced through some fraudulent inducement)

ii. Insanityiii. Lack of legal capacityiv. Duressv. Undue Influence

d. Example: Mary owns blackacre who is mentally incapacitated, delivers a deed to ralph, it is voidable, it is still cancellable to mary, but if Ralph get is he will get clear title.

J. Condominium: Actually means a subdivision. When your actually getting when you say your getting a “condo” is your actually getting a “unit”. What it does is it takes airspace and divides it into parts.

a. Unit- Which you own in fee simple (this is all you’re a buying/equivalent to owning a lot) b. Common Elements- Any portion of the condo that is not a unit.

i. Limited: An area that is restricted for less than all (i.e ii. General: An area that is for everyone (i.e. swimming pool)

c. A Declaration: what you need to create a condominium.

K. What does a Deed Convey: Unless a contrary intent is expressed, a deed is presumed to convey fee simple absolute.

L. Exceptions and Reservationsa. Exception: Holding back of some previously existing interest in or portion of the land (i.e. except

the south fifty feet)b. Reservation: Creates and leaves with the grantor a newly formed interest in land. (i.e. reserve a life

estate) i. Commonly seen in subsurface

c. Common law and 3rd Parties: A deed cannot create an interest in a third party by way of a exception or reservation, they can only be in favor of the grantor.

M. Existing Grantee: A deed that conveys a present (opposed to future) interest must have an ascertainable grantee.

Title Covenants in DeedsA. Title Covenants in Deed56

1. Deed Convenant: A statement in the deed which gives the grantee rights against the grantor if the title is not as promised.

56 Both can convey marketable title ( Buzz words “good and marketable title”), in other words you do not need a warranty deed to convey marketable title.

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i. Quit Claim Deed: Contains no covenants of title at all (“whatever my interest in the land is, if any, that is what your getting”)

1. Note, a quit claim deed and a warranty deed are just as effective as transferring whatever title the grantor has. The only difference is the available remedies.

ii. Warranty Deed (Six Title Covenants)

1. Present Covenants: Breached at the moment the deed is delivered. This is not a good one to have because you may fall out of the SOL, since a breach occurs at the time of delivery. (i.e. if you don’t sue with SOL, you loose the right to sue)

a. Seisin: A promise by the grantor that he or she owns the land, although not necessarily free of encumbrances.

i. Minority: Only a promise that the grantor possesses the land, and not own. b. Right to convey: Similar to Seisin, however, for instance, a power of attorney has a

right to convey, but not Seisin.c. Against encumbrances: Promise that title is passing free of encumbrances

(mortgages, liens, easements, future interest) running with the land.

2. Future Covenants: Breached only when an eviction of the grantee occurs or somehow that grantee possession is somehow disturbed. This runs with the Land, No SOL.57

a. Warranty and Quiet Enjoyment: A promise by the grantor to compensate the grantee for the loss of title if the title turns out ot be defective or subject to an encumbrance, and the grantee suffers an eviction.

b. Further Assurances: A promise by the grantor to execute such further documents as may be necessary to perfect the grantee’s title.

i. Example: if the grantor did not have title at the time he made the original deed to the grantee, but later obtained title, he could be compelled to execute a further deed to the grantee.

1. Note (Breach): Covenants of title are not breach by legal violations that don’t themselves affect title, thus, existing conditions which breach a local zoning ordinances do not violate deed convenants.

3. Eviction for Future Covenants? (Note: the Eviction must be by a paramount title holder “PTH”)

a. PTH obtains gets specific performance, Ejectment, or some other order giving him possession or confirming his title to the land.

b. PTH orders the grantee off the land and threatens litigation.c. The Grantee buy the paramount title to avoid being evicted by the PTH.d. The grantee surrenders her claim to the PTH and moves off the land (assuming the

grantee has no interest in the land in fact. e. The grantee is sued by the PTH and enters into a reasonable settlement where the

grantee is only left with part of the land. f. Physical interference by the PTH (Actual Eviction)

i. PTH already in possessionii. PTH comes on the land to try and take possession, uses his easement.

iii. If the Gov’t is the PTH, then it is automatically an eviction.

57 So if there is a defect in the title from A to B, and it only contains present covenants, only B can sue, but if it contains future covenants, and B sells to C, C can recover from A.

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2. After Acquired Title: If you gave title to someone, but it turns out that you did not have the title you purported to give, but then later you get that title, you have to give to the person. (Estoppel)

i. This does not work with a quit claim deed because there is nothing to relate back. ii. Example: F gives land to S for by full warranty deed, but he gets nothing, later F gets title from

a true owner, and under this doctrine, title will instantly pass. iii. THIS APPLIES TO MORTGAGES!!!!!!!

1. If the mortgage has covenants of title that states he is the

3. Title Company: If a person does not have title, and then you sue the title company, the title company will subrogate under your insurance policy, and sue your grantor.

4. Grantor for breach of Warranty has two paths (if they have title insurance)i. Can sue the grantor

ii. Tell Title insurance to pay you and take company goes after the grantor.

B. Title Insurance: A title insurance policy is the insurer’s promise that, if the title is not in the condition described by the policy on its effective date, the insurer will indemnify the insured for the resulting losses. Note: Just because a title company, insures your title, does not make it marketable.

1. Two Types: Lenders (Strongest) and Ownersi. Owners: Insures the estate that the purchaser is acquiring (saying that you are the fee simple

owner after it is acquiredii. Lender: A Loan Policy that insures you have a valid mortgage or a first lien on the property

2. Title Searches: Done by whom and Paymenti. Attorney: Title company is only paid a risk premium since it did not perform the work and

attorney is paid for his work. ii. Title Company: “All inclusive Premium” covers both the search and the risk assumption

aspects.

3. Must the Insured Clear Title Defects: A majority states that the insurer must actually attempt to clear the title if feasible.

4. What sorts of Claims are Coveredi. Mechanics lien that is filed after the sale occurs.

ii. Restrictive convenant limiting the use of the property to single family dwelling. iii. A reservation of oil and gas rightsiv. Lack of delivery of deed in chain of titlev. A dower right or marital property claim by the wife.

vi. A claim against the insured owner, made by a grantee of a deed from that owner based on a warranty in the deed.

vii. A Zoning ordinance

5. Non Coverable Issuesi. Exception from Coverage: Construction Liens, Survey’s and Encroachments, Parties in

Possession but no on record (Adverse possessor)

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ii. Exclusions from Coverage: If you have knowledge about a problem, the title company does not have to cover you.

6. ALTA: Endorsements, additional things that will insure, but you have to aski. Comprehensive endorsement: Assume risk and insure you that they are no unrecorded

restrictions. 7. There is a difference between Insured title and marketable title, the later is only insurance.

C. Closing (a.k.a “Settlement”): When the title has been examined, financing arranged, and all other conditions satisfied, the buyer and seller will exchange title purchase price in a process called “Closing”

1. RESPA: Real Estate Settlement Procedures Acti. Section 5: Lenders must give borrowers a special info booklet and a “good faith” estimate of

closing costs.ii. Section 8: Prohibits referral fees and fee splitting (payment for something other then actual

services performed) among providers of closing services (attorney’s, lenders, title companies) except to the extent that the fee is for a reasonable value of services.

1. Referral of business to a controlled business58 ifa. Timely disclosure is made of the relationship to the borrowerb. An estimate is given of the charges generally made by the controlled businessc. The borrower is not required to use itd. The referring entity reciver nothing of value for the referral except a return on it’s

own ownership interest. iii. Section 9: Prohibits sellers of land from requiring a buyer to purchase title insurance from a

particular company. 2. Closing Statement

i. Basically says how the money is coming in and how one is going out.

58 “Controlled Business”: This is when an attorney or broker who is part owner of a title agency refer’s it customer’s to it and recovers the profits in the form of dividends or distribution rather than referral fees.

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gould real estate finance winter 2010 final outline

Documents

eminent domain

bona fide

mortgaged

gaining actual

eminent domain

fair housing

acquired real

recordable