Real Estate Finance (Professor Romero, 2011)
MOR = Mortgagor (the Landowner/Borrower)
MEE = Mortgagee (the lender)
KEY CONCEPTS
Mortgage
A. Mortgage = transfer of any interest in land as security
(repayment of a loan OR performance of another obligation – mortgage on rents produces by prop.)
B. Remedy for default = foreclosure
Equity of Redemption
A. Equity of Redemption = right of delinquent MOR to cure debt at any time before valid foreclosure
B. Cannot K away right–
i. Clogging Doctrine –rule that a MOR’s equity of redemption cannot be clogged (blocked) and that he cannot in the original mortgage transaction, cut off or surrender his right to redeem. Any agreement which does so is void and unenforceable as against public policy
a. Legislation modifying the clogging doctrine – some states specify that an option to acquire an equity or other ownership in property granted to a MEE simultaneously, or in connection with, a mortgage is not unenforceable so long as the power to exercise such option or right is not dependent upon the occurrence of a default in the mortgage transaction and;
b. the value of the mortgage obligation is 2.5 million or more (N.Y.) or the transaction involves a property other than residential real estate containing four or fewer units (CA, VI)
c. The deed in escrow as a clog – if the MOR delivers to the MEE or an escrow agent the deed to be filed upon default of the underlying mortgage, this will be a clog (would prevent the MOR from exercising equity of redemption)
C. This doctrine is what separates mortgages from other forms of K
Foreclosure
A. When a valid foreclosure takes place, equitable right to redemption ends
i. However, 50% states provide statutory right of redemption = extra time period for MORs to pay a certain sum of money to redeem the title to the property (their successors in interest, and in some instances junior lienors)
B. Foreclosure of a senior mortgage terminates a properly joined junior mortgage
MORTGAGE AND MORTGAGE SUBSTITUTES
Mortgage
A. Mortgage = SI in land (a loan to finance the purchase of RE), usu w/ specified payment periods and interest rates. Borrower (MOR) gives lender (MEE) a lien on the property as collateral for the loan.
Always has right to equity of redemption.
i. Falls under Statute of Frauds – a writing is required
ii. Must meet Truth in Lending Act (TILA) requirements
a. A consumer credit transaction qualifies as a mortgage under TILA if:
i. the transaction is secured by the consumer’s principle dwelling; and
ii. the annual percentage rate at the consummation of the transaction exceeds a particular amount or the points and fees payable by the consumer at or before closing exceeds the greater of:
A. 8 % of the total loan amount; or
B. $400.00
B. Remedy for default of mortgage is foreclosure
C. In order to avoid equity of redemption, lenders look for substitutions to the mortgage
Equitable Mortgages (EM)
A. If a transaction intends to grant a SI in property = in equity it is a mortgage
B. EM exists when deed purporting to convey a legal & equitable title, meant to grant only a SI – Perry
i. Perry v. Queen Test – Proof that a conveyance was intended as a SI must establish:
a. the grantor was indebted to the grantee;
b. the grantor intended his conveyance to serve as a security device
ii. Party asserting that a SI was intended must prove that fact by clear and convincing evidence
C. If party attempts to circumvent a mortgage, but court deems transaction a mortgage (a SI in land) then will be declared an EM and MOR has rights under law (equity of redemption)
D. Parole Evidence Rule and Statute of Frauds
i. Parol Evidence Rule –prevents extrinsic E. being admitted to alter contents of writing
ii. Statute of Frauds – requires the transfer of interests in land to be in writing
iii. Neither rule stops E. to show absolute deed or conditional sale intended as security transaction
Mortgage Substitutes
A. Deed to Lender (Absolute deed, Conditional Sale or Option to lender to purchase all treated as EM)
i. The Absolute Deed = to ensure lender repayment, borrower gives lender a deed to property, (usu not recorded and informal, i.e. a verbal K)
ii. A deed to lender is treated as a mortgage when:
a. The grantor owes the grantee a debt (even if no obligation to pay)
i. If junior MEE enters into an assumption agreement, promising to pay a senior mortgage debt, the first MEE, absent consideration for the alleged assumption of liability in the second mortgage, cannot recover from a second MEE
b. The deed was intended to be security for payment (factors: deed= security or mortgage)
i. Relationship between the parties, transaction circumstances
ii. Sophistication and legal representation
iii. Adequacy of consideration
iv. Possession
v. Investments in property after transaction
c. Even if the agreement says it is not a security interest – Downs v. Ziegler
i. G/R = a recital saying this is a purchase of RE and not a mortgage is not enough
IV. The Conditional Sale
A. Conditional Sale –same as above except agreement is reduced to writing and recorded
V. The Installment Land Contract (uncommon to be treated as an EM)
A. Installment Ks
i. Buyer makes installment payments towards purchase price over long term
ii. Seller retains title until buyer pays entire purchase price
iii. Only works when seller is the financer
iv. Virtually every installment K has a forfeiture clause
a. Clause will state “time is of the essence” =When buyer defaults under K, seller has option to declare K terminated, retake possession, and retain all payments under K as liquidated damages
b. Clause also purports to relieve vendor from further obligations under K
v. Seller may terminate K w/o foreclosure
a. Some courts, buyer gets relief only in unu. circumstances (unusual circumstances not defined) – Russell v. Richards
b. Most courts, require seller to return payments minus damages – Peterson v. Hartell
i. damages include rental value
ii. Seller generally must reimburse for improvements
c. A few courts require seller to foreclose – Sebastian v. Floyd
i. proceeds pay outstanding balance then buyer gets remainder
B. Remedies upon default of installment Ks (varies by jurisdiction)– Seller can get
i. The installments which are due with interest thereon;
ii. Specific performance of the K
iii. Damages for the breach
iv. Foreclose the buyer’s rights
v. To quiet title, of if seller should desire, seller may merely rescind the K
C. Buyer’s rights
i. May redeem by paying off debt
a. Majority holds the view this is available only if you have made substantial payments
ii. May be allowed to reinstate K, if buyer has made substantial payment
iii. May claim waiver of forfeiture if previous defaults were ignored by seller
a. i.e. Seller accepts one or several late payments, gets tired of it and tries to declare a forfeiture on the next late payment, seller would have waived right to declare forfeiture and buyer would be allowed to either tender purchase price (equity of redemption) or make up late payments and resume K
iv. May claim seller is estopped from forfeiture based on a single occurrence if:
a. The buyer shows the seller waived the right to forfeiture for at least a period of time
b. The buyer relied on this waiver
c. And the seller should be estopped thereby
D. Forfeiture of buyer’s rights
i. No protections beyond K unless exceptional case
ii. Restitution of payments made minus damages
iii. Court-ordered redemption within specified time
iv. Reinstatement
a. Statutes requiring notice before forfeiture, opportunity to cure
i. i.e. Minn Stat. pg 318 give buyer 60 days to cure default after notice of forfeiture
b. Foreclosure like mortgage
E. Sellers remedies in event of default by buyer
i. Seller has the right to an election of remedies – Summit House v. Gersham
a. Seller may elect forfeiture or specific performance
i. Forfeiture: seller “gets back” property, undoes sale
A. Seller cannot also recover unpaid debt
B. Some states allow recovery of money damages but not unpaid debt
ii. Specific performance: seller completes sale
b. Seller does not elect forfeiture by purchasing buyer’s rights at execution sale
F. 3d party remedies in the event of default by the buyer
i. Cascade Security Bank v. Butler
a. x sold the property to the Butlers by installment K
b. Cascade obtained a judgment against the Butlers
c. the Butlers sold their interest to Y
d. Y sold their interest to the Ringwoods
e. Cascade executed judgment lien on property
f. Issue – Is the Buyer’s interest subject to a judgment lien?
i. Judgment lien statue may somehow answer
ii. Equitable conversion doctrine suggest it is title to land
iii. Court may decide “based upon a realistic examination of the nature of the interest in the particular context
G. Cases
i. Russell v. Richards – New Mexico (strict enforcement of forfeiture clause)
a. Forfeiture provision in installment K valid, unless unfairness that “shocks the conscious”
b. To determine whether forfeiture “shocks the conscious” look at:
i. The amount buyer has already paid the seller
ii. The period of possession of the property by the buyer
iii. The FMV of property at time of default compared w/purchase price
iv. The rental potential and value of the RE
c. During the life of the RE K any risk of loss or enhancement in value accrues to purchaser
i. Upon default and forfeiture, the buyer’s interest is terminated and there is no enhancement value to be recovered by the buyer
ii. Peterson v. Hartell – California
a. Recognizes two remedies:
i. Right of redemption
A. A seller of land using an inst
equity requires
c. Others will enforce clauses
d. Some will enforce clause if there is a default
D. Equitable grounds for appointment of receivers – Dart v. Western Savings and Loan Association
i. Waste is threatened
a. Is there a danger of physical waste
i. Not paying mortgage may be waste
ii. Not paying taxes may be waste
b. If waste not threatened, no reason to think receiver needed to protect party’s SI
ii. And Security is inadequate
a. FMV of property is insufficient to assure repayment
b. If security is adequate to satisfy debt, lender’s interest in repayment is not endangered
E. Receiver’s duties
i. Receiver is agent of the court, not the MEE – Trustco Bank, National Asst. v. Eakin
a. MEE has no duty to fund receiver’s activities
b. Receiver not liable to MOR for damages for failing to expend own funds to protect property and property is damaged
ii. Receiver no duty to expend own funds to maintain prop. – Trustco Bank, National Asst. v. Eakin
a. If income from property is inadequate to maintain, MOR can fund maintenance
SIs in Rents
A. Creation of SI in rents
i. Right to rents Comes with mortgage automatically in title and intermediate theory states
ii. In lien theory states, all you have is a SI and if K doesn’t address rents you don’t get them
iii. Otherwise MOR must expressly (in K) assign them to MEE
B. Assignment Clause for Rents in Mortgage
i. Rent assignments are valid and enforceable
ii. Steps to determine creation and enforcement of a rents assignment
a. Ask when assignment becomes effective btwn MOR & MEE- when is a valid lien created?
b. Determine when lien becomes effective (perfected) against others who acquire an interest in rents
c. Identify when the MEE has the right to collect (to realize on or foreclose upon) the rents
C. Perfection of SI in rents
i. Recording in real property records will perfect SI in rents
a. UCC does not apply (don’t have to file a financing statement)
b. You give notice of SI in rents by recording the interest in the real property records in county the property is in
ii. Majority do not require additional action (Modern rule)
a. Otherwise, the judgment creditor always prevails over assignee when judgment precedes mortgage default
iii. Some courts require additional action to perfect (common law rule: “Additional Action Rule”)
a. Obtaining possession of the property
b. Appointing a receiver
c. Filing foreclosure action
d. Some say even just giving notice to assignor (minority of courts)
e. However, to escape the harshness of this rule (allowing later lien holders to perfect prior to the MEE) some courts find the “additional action” required to be nominal
D. Collecting Rents
i. MEE can collect rents generally only after default by assignor
ii. MEE must take action to start collecting rents
a. Mortgage may specify; law may dictate actions
b. Written demand may be sufficient (and required)
c. Some jurisdictions require more:
i. Obtaining possession
ii. Having receiver appointed
iii. Judicial order
iv. Filing foreclosure action
E. Collecting rents and taking possession
i. Being a possessor is exercising dominion and control – Coleman v. Hoffman p. 388
a. A MEE who properly acquires “MEE in possession” status is held accountable for that possession … to 3d parties
ii. Acts of Possession
a. Hiring a manager
b. Making repairs
c. Paying bills
iii. Just collecting rents does not constitute possession
a. MEE collecting rents is not enough to rise to a “MEE in possession” status and expose them to liability to 3d parties for torts, the MEE must perform an act of possession
