Suretyships & Mortgages
Spring 2012-Prof. Roach
Suretyships and Mortgages, General Overview
a. Mortgages: security for performance on an obligation
i. A property right to sell ones property without their consent. Court will order property to be sold at private auction to satisfy the debt
b. Suretyship: the law of guaranties, guarantees of others obligations
i. If the primary obligor does not perform the guarantor promises to perform the obligation. “If they won’t pay you, I will.”
c. Suretyships and Mortgages are both collateral. Collateral is something separate and to the side from the promise to pay. The nature of the obligations must be one that can be liquidated.
i. Generally, there is a primary obligation (promise to pay usually). And either a guarantee to pay money or asset being pledge. If not paid, asset can be sold. Whether a guarantee or a mortgage, the primary obligation can stand alone and be unsecured. If promisor pays, it doesn’t matter what guarantee or mortgage says the nature or the obligation must be one that can be liquidated→ reduced to a dollar figure.
d. Would you rather have a guarantee or a mortgage? It depends
i. If it’s a guarantee, look to how much $ the person has. The more they have the better. A guarantee from Joe Blow is different from a guarantee from Donald Trump.
ii. If it’s a mortgage, it depends on the real property and if there are any liens on it. If liens exceed the value of real property, it’s worthless.
2. Guaranties and Suretyship Law
a. Generally, one who guarantees to perform another’s obligations
b. Suretyships and guaranties are almost identical except that surety is used in business relationship and guaranties are used in personal relationships
i. Surety is one contract between three parties
ii. Guarantee is two separate contracts
c. Surety is a business entity generally (strong financial company who charges fee in exchange to guarantee something)
i. X owns a mortgages company and wants to sell some mortgages, buyer wants someone with a lot of $ to guarantee them
ii. Bail bondsman: if perp doesn’t show up to court, surety pays the amount
d. Guarantor (used for more personal relationships)
i. Guarantee the debt of another; you are liable
ii. The schmuck with a pen
iii. Usually we are talking about consumer transactions here, individual persons (co-sign a car loan, a check, endorse a check)
e. Must be in writing!-This will be on the exam
i. ***To satisfy the Statute of Frauds***
f. Types of Guarantees
i. Absolute→ guarantee with no obligations, unconditional undertaking by guarantor to pay obligation of obligor. “if they don’t pay it, I will.”
ii. Conditional→ requires a default AND a condition precedent
1. Depends on extraneous event beyond the control of the obligor
a. I will pay your student loans if you graduate with a 3.0
b. I will indemnify against loss
iii. Continuing Guarantee→ I will give you a credit line. Guaranteeing payment not only today, but also what will be borrowed in the future.
1. Think credit card
iv. Guarantee of payment→ guarantor is liable for debt immediately upon default of primary obligor; Can sue both obligor/guarantor immediately at the same time if there is a default
1. Primary obligor signs a note promising to pay. Then, the guarantor then signs a guaranty stating if he does not pay I will. This is one that is usually used in the forms provided by the bank. Creditor should clearly get expressly stated that this is a guarantee of payment NOT OF COLLECTION.
v. Guarantee of collection→ delayed liability. guarantor is liable when the debt is unable to be collected, when creditor sues obligor and gets judgment, sends it to sheriff and he returns it unsatisfied because he can’t find assets. At that point creditor may bring action against guarantor (its delayed liability)
1. Problem here: guarantor may get notice, this delay to creditor is bad because guarantor may get rid of assets as well or if primary obligor dies, then have to go thru estate. A guarantee of collection is not a guarantee that the primary obligor will pay the money
g. Modification on the Terms of an Obligation
i. If there is going to be a modification of the loan agreement you must get the consent of the guarantor in writing and signed by the party to be charged. This is covered by the statute of frauds.
ii. The modification does not need consideration as long as it is in writing and signed.-GBL 5-1103.
iii. If there is modification without the written consent of the guarantor, then then guarantor will be released from his obligation if the modification is to his detriment.
a. increase in interest
b. increase in payment (may default quicker!!)
c. decrease payment (because the extension of time that principle now will be paid in, law presumes primary obligor would have fulfilled his obligation before he got into trouble and defaulted, the lender has modified to guarantors detriment by extending the time
2. Not to Detriment:
a. Reduction in month payment coupled with reduction in interest rate (not taking longer to pay, not paying more)
iv. ****Note: If a mortgage holder modifies the terms of the obligation without consent of the subordinate lien holders (2nd mortgage etc) the mortgage holder will lose their priority****
v. Forbearance Agreements: simply an agreement between the lender and primary obligor where lender agrees not to enforce the rights they have.
1. Lends 100,000 and want to foreclose because they have not made payment. Borrower wants to pay 1,500/month until he catches up. If modify the existing mortgage must get consent of all lien holders and this is pain the neck. Instead, enter into an agreement with D that provided he pays 1,500/month the lender will not enforce legal rights.
2. If you do not modify existing rights, but instead agree not to enforce them then you will not lose priority and none of the guarantors will be released.
i. Is debtor off the hook when the guarantor is called to pay it? No, the debt is subrogated. Subrogation is when guarantor steps in shoes of creditor as if he purchased the creditor’s rights. Thus, the debtor has same obligation now to guarantor as he did to the creditor and surety has all the creditor’s rights associated with the debt once he pays lender: he can foreclose.
ii. What type of clientele in subrogation field?
1. Insurance companies. They always pay obligation of the insured
a. Overview→ Mortgages are security for the performance of an obligation, payment of a loan. The lender gives the borrower money and in exchange the borrower gives the lender certain rights in the borrower’s property, a lien. A lien is a property right, the right to sell the property without consent of the owner if the owner defaults. A mortgage is valued based upon the amount of equity in the property. Equity is the difference between the fair market value and the amount of the lien.
b. There is only one type of mortgage, no matter what it’s called. It doesn’t matter what type of obligation/loan it is. The property will be sold in a public auction and the proceeds will be used to pay the debt .A borrower can only mortgage when you has to sell something to collect money to pay a debt
c. Mortgage is a conveyance of real property. Like a deed, a mortgage must be recorded and the property must be described.
d. In the context of class, we are usually talking about banks and lenders; however, a mortgage can secure any obligation that can be liquidated to pay a type of debt. For example, Prof. says, “I will give you an A in this class and if I don’t you can mortgage my house.” Is this a mortgage? No, can’t sell my house to pay for an “A.” The remedy of a mortgage is foreclosure, selling property at public auction, to pay debt, thus must be a debt to satisfy to qualify as a mortgage. For example, I will wash your car or pay you $10 to have your car washed, I give you mortgage on my house. If I don’t wash the car, and I don’t give you $10, you can mortgage house and secure the payment of $10 you were supposed to get
e. RPL § 320→ “Substance over form” rule was created because lenders tried to use different forms to go around foreclosures because of the long process of foreclosures. Courts now look at substance to see if a transaction is transfer of deed, etc. or a lien/mortgage. For example, if a borrower gives the lender a deed of property for money and lender gives borrower money and a lease/option where borrower rents property and has option to buy property back later, the deed is considered a lien/mortgage and not a true deed. Lender does not own the property; borrower still does because of the lease/option. The “form” is a lease/option but the sub
); 2. 1st mortgage; 3. 2nd mortgage; 4. Federal & state income liens (government liens treated like normal liens except for R/E taxes); 5. etc.
h. There are two types of liens: Consensual liens and liens by operation of law.
i. Consensual Lien is when the lender gives money for a lien, which the borrower agrees to. Mortgages are a consensual lien.
ii. A Lien by Operation of law is a lien given by the law of the state. Here, the owner does not give consent. Usually, a judgment creates a lien on an owner’s asset. Creditor’s priority exists the day he gives in the judgment. Thus it’s riskier than consensual lien. When plaintiff files the judgment in the count clerk’s office, the plaintiff obtains a lien on any and all property of the debtor in that county only.
i. How can you transfer a lien?
i. Spreader Agreement→ Then consolidation agreement and modification agreement. For example, instead of borrowing the money from new bank, tell lender to buy old mortgage, and lend 150k. now two mortgages 250 and 150. Consolidate and extend and modify the terms of the two mortgages- consolidations and modification agreement.
j. Difference between modification of a loan and forbearance agreement?
i. Forbearance agreement is very popular with lender, you don’t have to be involved with title insurance.
ii. Modification changes the deal. Forbearance doesn’t, but it’s an agreement you will not enforce legal rights that you have as a result of the other party’s default
k. Order of Priority-Mortgages
i. Think of mortgage priorities as stand by. There’s a finite dollar value that they are going to pay for the house. If they take the property and sell it for a finite dollar value, you go to the first mortgage holder, and pay the money. Then go to second mortgage holder and pay them and so on.
ii. Real estate taxes have priority over all other liens.
iii. 1st mortgage gets paid first in the event of any problems
1. 2nd mortgages gets paid next and so on
a. No money by the time they get to you? Too bad
1. Junior mortgage: anything that is not the first mortgage
2. Subordination : cant effect the rights of the prior mortgage but can distinguish the rights of the subordinate mortgage
a. 3rd is subordinate to the 2nd
b. 4th is subordinate to the 3rd
v. Ways to avoid losing Priority:
1. Subordination agreement: lender can get the permission of the subordinate lien holders to change the terms of the mortgage. A prior lien agrees to let new lien get priority.
a. Circumstances arise in which the prior lender wants to induce the new lender to make the loan so they make this agreement. This must be recorded.
2. Forbearance Agreement: lender agrees not to enforce legal rights provided the borrower fulfills certain other obligations. If lender does not modify existing rights, but instead agrees not to enforce them, then he will not lose priority and none of the guarantors will be released.
l. Mortgage Tax
i. There is a state and city mortgage tax. Tax is based upon the amount of money being loaned and the type of mortgage being created to make that loan. Taxes calculated only on newly create liens, thus mortgages that are transferred and assigned are not taxed. Buyer assuming the mortgage of seller does not have to pay a mortgage tax on the transferred lien. There is no mortgage tax on consolidated liens, i.e. 2 mortgages combined into 1, 2 assigned mortgages are used to created 1 new one.