I. Introduction to land financing and the law of mortgages
A. The mortgage transaction
1. The note evidences the buyer’s debt to the mortgagee
2. The mortgage is security for repayment of the debt (an aid in collection if the buyer should fail to repay the debt)
B. Typical repayment options
1. Single repayment of principal and interest at the end of the term
2. Balloon note—level interest-only payments for a few years, then full repayment at one time
3. Fully amortized loan—level payment throughout the entire length of the loan—usually long-term
a. Alternative 1—level payments for the entire amortization period (upon last payment, debt is satisfied and mortgage is extinguished)
b. Alternative 2—level payments for part of the amortization period, with a balloon payment of the remaining principal due after a fixed period of time)
C. Other types
1. All cash sale—buyer pays all cash to seller at closing (cash can come from a mortgage loan)
2. Assumption or taking subject to existing mortgage—buyer takes over the seller’s mortgage and pays the difference between the selling price and the principal balance of the existing loan in cash
3. Seller financing—seller satisfies existing mortgage and delivers clear title to buyer. Buyer signs a note to repay “purchase money,” i.e., the purchase price. Buyer grants seller a mortgage to secure this obligation
4. Combination of assumption/subject to existing mortgage and seller financing—buyer takes over payments on the existing mortgage and signs a note to repay “purchase money” equal to the total price minus the mortgage balance. Parties can also negotiate for buyer to pay a portion in cash
5. Wrap-around financing—structured like seller financing, but the seller has a mortgage that is not paid off. Buyer grants seller a mortgage and pays on loan to seller while seller continues to pay the original mortgage
D. The original mortgage (mortgagor conveyed to mortgagee fee simple subject to condition subsequent in return for a loan)
1. Mortgage granted legal title to the mortgagee, including legal right to possession
2. If the loan was repaid by “law day,” the mortgagor could exercise its right of entry (re-enter the land and terminate mortgagee’s interest)
3. If the loan was not repaid by “law day,” then mortgagee’s title became absolute (no longer subject to condition subsequent)
4. Mortgagee earned return, prior to law day, by collecting agreed portion of rents/crops from the land (as collection of interest on loan would have been usurious)
E. Law vs. equity: law day vs. foreclosure in equity
1. In law courts, the mortgagor had no relief from forfeiture after “law day”
2. Mortgagors began petitioning the king for relief (via the chancellor), who could exercise the royal prerogative to avoid injustice
a. Chancellor allowed “reasonable time” after law day to “redeem” land by repaying the loan
b. Over time, equity developed “foreclosure” process to provide “last chance” to mortgagor (the “equity of redemption”) and certainty to the mortgagee
F. Strict foreclosure in equity
1. After law day, if the mortgagor was in default, the mortgagee could ask the chancellor to establish the last day for payment
2. If the mortgagor failed to repay the loan by the date established by the chancellor, then the mortgagor’s title was forfeited (the foreclosure process essentially established a new law day)
3. Foreclosure was strict (by forfeiture), regardless of the value of the land (and its relationship to the balance of the mortgage debt)
G. Modern foreclosure
1. Today, foreclosure occurs by sale of mortgaged interest
a. Sale delivers to purchaser title as it existed at the time the mortgagor granted mortgage to the mortgagee. Subordinate interests (e.g., junior liens/mortgages) are extinguished
b. Sale proceeds are used to reduce debt owed to the mortgagee
(1) If sale proceeds are not sufficient to satisfy the debt, the mortgagor is liable for “deficiency” judgment
(2) If sale proceeds exceed the balance
of frauds—requires interests in land (such as mortgages) to be in writing
(1) Deed is in writing and satisfies the statute of frauds; court is simply using its equitable power to re-characterize the quitclaim deed as a mortgage
(2) “Clear and convincing” standard for extrinsic evidence serves statute’s evidentiary purpose
(3) Same reason that an implied easement wouldn’t violate the statute of frauds (it is being implied into a document that satisfies the statute)
e. Enforceability of option to repurchase
(1) Traditional rule
(a) Contemporaneous option was treated as per se clog on the equity of redemption
(b) Rationale—the mortgagee can avoid foreclosure in the event of mortgagor’s default
(c) Per se rule is superior to ad hoc, case-by-case resolution (more consistent results, fewer proof problems associated with identifying subjective understandings of the parties)
(2) Restatement of Mortgages § 3.1
(a) Mortgagor has equity of redemption
(b) Clog on equity of redemption is invalid
(c) Option is not a clog on the equity of redemption unless its effectiveness is expressly dependent on mortgagor default
(d) Rationale—traditional per se rule is an unwarranted interference with freedom of contract, could chill creative commercial deal-making
(3) Some states have softened the clogging doctrine through legislation
(a) NY law allows enforcement of options to acquire ownership interest in property granted to a mortgagee simultaneously or in connection with a mortgage so long as the power to exercise the option is not dependent on default
(b) Similar rule in CA, ULSIA, and Restatement
