Mortgages

MBEMax wiki article — paired with the Real Property question set on mbemax.com.

One-line summary

A mortgage is a security interest in real property that allows a lender to foreclose if the borrower defaults; the key questions on the bar are transfer (of note and mortgage), priority (between competing liens), foreclosure procedure, and the equitable interests of the borrower.

Mnemonic

N-M-T-P-F — Note + Mortgage, Transfer rules, Priority, Foreclosure.

Remember: the note follows the mortgage; the mortgage follows the note; together they finance real property.

Theory of mortgages

• Title theory (minority) — mortgage transfers title to lender; borrower has equity of redemption.
• Lien theory (majority) — borrower retains title; mortgage creates lien only. Different possession rights on default.
• Intermediate theory — lender may take possession on default.

Creation

• Written instrument satisfying SOF (Land).
• Recording is not required for validity between parties but IS required for priority against subsequent BFPs.
• May be legal (mortgage document) or equitable (agreement intending to create security).

Transfers

Transfer by borrower (alienation)

• Due-on-sale clauses — enforceable under Garn-St. Germain Act (1982), with exceptions for intra-family transfers, joint tenancy survivorship, life-estate transfers, and inter vivos trust transfers to borrower.
• Assumption — new buyer assumes primary liability; original borrower becomes surety.
• Taking subject to — new buyer pays but doesn't assume; original borrower remains primarily liable; property still subject to mortgage.

Transfer by lender

• Note + mortgage travel together — "the mortgage follows the note." Transfer of note alone carries mortgage; transfer of mortgage without note is a nullity in most jurisdictions.
• Holder in due course — under UCC Article 3, if note is negotiable and properly transferred, holder takes free of many personal defenses (but still subject to real defenses).
• MERS — Mortgage Electronic Registration Systems; serves as nominee for assignments. Courts split on its standing to foreclose.

Priority

• First in time, first in right — but subject to recording acts.
• Purchase-money mortgage (PMM) — a mortgage given to secure funds used to purchase the property enjoys priority over prior-recorded judgment liens, even without recording. Seller-PMM typically beats third-party-PMM.
• Modifications — generally don't subordinate a first mortgage; but a material increase in principal may create second-mortgage priority problems.
• Subordination agreements — lien-holders may agree to change priority.
• Future-advance mortgages — priority depends on obligatory vs. optional advances; obligatory advances retain original priority.

Foreclosure

• Judicial foreclosure — lawsuit; more protective of borrower; required or dominant in about half of states.
• Power-of-sale / non-judicial — faster; requires statutory compliance.
• Strict foreclosure — court transfers title directly to lender; rare, surviving in Connecticut, Vermont.
• Priority of proceeds. After foreclosure, proceeds pay: (1) expenses, (2) senior liens in order, (3) junior liens in order, (4) surplus to borrower.
• Junior interests wiped — foreclosure of senior mortgage eliminates junior interests (must join them in judicial foreclosure for wipe-out).
• Senior interests survive — foreclosure of junior leaves senior untouched.
• Redemption.
  • Equity of redemption — before foreclosure sale, borrower may redeem by paying full debt + costs. Cannot be waived in original mortgage ("clogging" prohibition).
  • Statutory redemption — many states allow post-sale redemption by borrower for a statutory period (6 months to 2 years).

Deficiency judgments

• If sale proceeds don't cover debt, lender may sue borrower for deficiency — subject to anti-deficiency statutes (e.g., purchase-money mortgages on homes in many states).
• Fair-value rules may limit deficiency to difference between debt and FMV (not sale price).

NCBE loves to test

• Note vs. mortgage transfer. Transferring only the mortgage is typically ineffective.
• Assumption vs. taking subject to. Assumption = new buyer primarily liable; taking subject to = new buyer not personally liable.
• PMM priority. Beats prior-recorded judgment liens even unrecorded (though recording still advisable against subsequent BFPs).
• Due-on-sale clauses. Enforceable under Garn-St. Germain, with statutory exceptions.
• Junior-interest wipeout. Must be joined in judicial foreclosure to be extinguished.
• Equity of redemption. Cannot be clogged by original mortgage terms.
• Anti-deficiency. Applies to certain types of mortgages / residences; key California, Arizona, Nevada rules.
• Installment land contracts. Functionally mortgages; courts increasingly require foreclosure-like procedures rather than automatic forfeiture.

Fast hypos

Hypo 1. Bank 1 records a mortgage in 2020. Judgment lien against borrower recorded in 2021. In 2022, Bank 2 makes a loan to finance purchase of additional property, secured by PMM. PMM beats Bank 2's possible subordination issues to the judgment lien because it's purchase-money.

Hypo 2. Borrower sells property "subject to" mortgage. New buyer defaults. Lender forecloses; proceeds short. Original borrower remains primarily liable; new buyer only to extent of property value.

Hypo 3. Senior mortgage holder forecloses judicially and fails to join a junior lien holder. Junior lien survives — still attached to property.

Hypo 4. Lender forecloses, sale brings $100,000; debt was $150,000. Home purchase mortgage in California. Anti-deficiency rule bars deficiency on purchase-money residential mortgage.

Hypo 5. Mortgage assigned to new lender without the note being indorsed. Invalid in most jurisdictions — mortgage without note is a nullity.

Case anchors

• Fleet Mortgage Corp. v. Nieves, 83 N.Y.2d 816 (1994) — importance of note transfer for standing.
• U.S. Bank v. Ibanez, 458 Mass. 637 (2011) — lender must demonstrate valid chain of note transfers.
• Wellenkamp v. Bank of America, 21 Cal. 3d 943 (1978) — pre-Garn-St. Germain case on due-on-sale; reversed by federal statute.
• Skendzel v. Marshall, 301 N.E.2d 641 (Ind. 1973) — installment land contracts as mortgages.

See also

• Recording Acts
• Landlord–Tenant
• Easements
• Future Interests

Sources

Restatement (Third) of Property: Mortgages §§ 1.1–8.1; Garn-St. Germain Depository Institutions Act, 12 U.S.C. § 1701j-3; UCC Article 3 (negotiable instruments); U.S. Bank v. Ibanez, 458 Mass. 637 (2011); Skendzel v. Marshall, 301 N.E.2d 641 (Ind. 1973); Wellenkamp v. Bank of America, 21 Cal. 3d 943 (1978).