Mortgages/security devices - Absolute deeds as security

Learning Outcomes

This article explains absolute deeds used as security devices in mortgage law, including:

• how to spot when an absolute deed that looks like an outright conveyance on its face is actually intended to secure a debt as an equitable mortgage;
• how to distinguish a genuine sale with a right of repurchase or a sale–leaseback arrangement from a disguised secured loan on typical MBE-style fact patterns;
• the key circumstantial factors courts weigh—such as adequacy of consideration, continued possession, ongoing “rent” or “interest” payments, and financial distress—when deciding whether to recharacterize a deed as a mortgage;
• how equitable recharacterization affects the parties’ rights and remedies, including the borrower’s equity of redemption, the lender’s need to foreclose, and the potential for deficiency judgments or surplus distributions;
• the interaction between absolute deeds, parol evidence, and the Statute of Frauds, and why courts routinely admit extrinsic evidence to show the parties intended a security device rather than a true sale;
• how recording, possession, and notice principles determine whether subsequent purchasers qualify as bona fide purchasers protected from, or bound by, an earlier equitable mortgage created through an absolute deed;
• practical strategies for answering mortgage questions on the MBE that involve absolute deeds, including recognizing common exam traps and selecting answers that focus on substance over formal document labels.

MBE Syllabus

For the MBE, you are required to understand the legal consequences when a property owner conveys land by absolute deed but intends the transaction as security for a debt, with a focus on the following syllabus points:

• Recognizing when an absolute deed is treated as a mortgage (equitable mortgage).
• Distinguishing between a true sale and a disguised security device.
• Understanding the rights and remedies of parties in absolute deed/equitable mortgage situations.
• Identifying MBE pitfalls and common fact patterns involving absolute deeds as security.
• Appreciating how redemption rights and foreclosure rules apply once a deed is recharacterized as a mortgage.
• Knowing how parol evidence and recording issues interact with absolute deeds used as security.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. If a property owner conveys land by absolute deed to a lender, but both parties intend the deed to serve as security for a loan, what is the likely legal effect?
   1. The deed is a true sale.
   2. The deed is void.
   3. The deed is treated as a mortgage (equitable mortgage).
   4. The lender acquires the property free of any obligation.
2. Which of the following is NOT a factor courts typically emphasize in determining whether an absolute deed is actually a security device?
   1. The relationship of the parties.
   2. The adequacy of consideration.
   3. Whether the deed was recorded.
   4. The existence of a continuing debt.
3. If a court finds that an absolute deed is an equitable mortgage, what right does the original owner retain?
   1. No rights.
   2. Only the right to repurchase at the lender’s discretion.
   3. The right to redeem the property by paying the debt.
   4. The right to rescind the transaction at any time.

Introduction

Absolute deeds as security arise when a property owner transfers title by deed to another, but the parties intend the transaction to secure a debt rather than to effect a true sale. The document on its face looks like an outright conveyance, often with no mention of a loan, interest, or security. Yet equity will look beyond form to substance and, when appropriate, treat the deed as creating a mortgage.

This area is heavily tested on the MBE because it brings together several mortgage concepts: the equity of redemption, foreclosure requirements, and the policy against letting lenders circumvent borrower protections by clever drafting.

Key Term: Absolute Deed
A deed that on its face conveys full title to the grantee, without any express mention of a security interest or right of redemption.

Key Term: Equitable Mortgage
A transaction where, despite the form of an absolute deed, the parties’ intent and surrounding circumstances show the deed was meant to secure a debt, so equity treats it as a mortgage.

The classic pattern is a financially distressed homeowner who “sells” to a lender for far less than market value, stays in possession, and makes ongoing payments labeled “rent” or “interest.” On the MBE, that almost always signals an equitable mortgage.

Key Term: Right of Redemption
Also called the equity of redemption, this is the borrower’s right to recover property that secures a debt by paying the secured obligation (plus any lawful charges) at or before foreclosure.

Key Term: Sale with Right of Repurchase
A transaction where the seller conveys property but retains only a contractual right to buy it back, rather than using the conveyance as security for a loan.

Key Term: Clog on the Equity of Redemption
Any provision or device that attempts to prevent or unduly restrict the borrower’s ability to redeem the property after default; such provisions are void as against public policy.

Absolute Deeds as Security: The Equitable Mortgage Doctrine

Identifying an Equitable Mortgage

When a property owner gives an absolute deed to a lender, but the real purpose is to secure a loan, courts may find an equitable mortgage. The decisive issue is the parties’ intent, not the words written on the deed.

If the deed is intended as security, the law treats it as a mortgage. The borrower (grantor) is viewed as the equitable owner and retains the right to redeem the property by paying the debt, and the lender (grantee) has only a security interest.

Courts recognize that unsophisticated borrowers may not understand the consequences of signing an absolute deed and that lenders sometimes try to evade foreclosure statutes, redemption rights, or interest limits by disguising loans as sales. The equitable mortgage doctrine prevents that end run.

Factors Courts Consider

Courts look at the totality of the circumstances to decide whether a transaction is a true sale or an equitable mortgage. No single factor is conclusive, but exam questions usually stack several in one direction. Typical factors include:

• Existence of a debt or obligation

  • Is there a continuing obligation from grantor to grantee (e.g., promissory note, agreed “repurchase price” tracking principal plus interest)?
  • If the “repurchase” amount equals the “purchase” price plus what looks like interest, this strongly suggests a loan.

• Relationship of the parties

  • Are they in a lender–borrower relationship, or does one party regularly make loans secured by real estate?
  • Evidence that the grantor previously applied for a loan, and the grantee offered this deed arrangement instead, supports an equitable mortgage.

• Adequacy of consideration

  • Was the price grossly below fair market value?
  • A “sale” for far less than the property’s value is strong evidence of a disguised mortgage, especially where the grantor is in financial distress.

• Grantor’s continued possession and control

  • Does the grantor remain in open, notorious possession after the deed, using the property as before?
  • Does the grantor continue to pay property taxes, insurance, and maintenance? Those are ownership-like behaviors.

• Ongoing payments after the deed

  • Are there regular payments from the grantor to the grantee labeled as “rent” or “interest” that match interest on the supposed “purchase price”?
  • That pattern is typical of a mortgage, not a completed sale.

• Agreements about repurchase or reconveyance

  • Is there a side agreement that the grantee will deed the property back if a stated amount is repaid by a certain date?
  • Even if that side agreement is oral, equity may rely on it to find a mortgage.

• Grantor’s financial distress

  • Where the grantor is facing foreclosure or other urgent debts and turns to the grantee for “help,” courts are more willing to treat an apparent sale as security.

Courts often state that the more of these factors are present, the more likely the deed will be recharacterized as a mortgage.

Sale with Right of Repurchase vs. Equitable Mortgage

Not every deed coupled with a repurchase arrangement is a mortgage. Sometimes it is a true sale with a contractual option to repurchase.

In a true sale with right of repurchase:

• The buyer pays a price reasonably close to fair market value.
• The seller usually gives up possession.
• There is no ongoing “debt” and no obligation to repay; the seller merely has the option, not the duty, to buy the property back.
• The repurchase price can be explained as market appreciation, carrying costs, or profit, rather than as “principal plus interest.”

In an equitable mortgage:

• The “buyer” functions as a lender and expects repayment.
• The “seller” remains in possession and makes periodic payments.
• The repurchase price bears a closer relationship to loan principal plus interest than to genuine market value.
• The grantor is treated as the mortgagor, with a non-waivable right to redeem.

On the MBE, if the facts suggest economic reality is a secured loan rather than a completed transfer of ownership, select the equitable mortgage analysis.

Worked Example 1.1

A homeowner, facing financial trouble, transfers her house by absolute deed to a lender for $100,000. The property is worth $250,000. The homeowner stays in the house and continues to pay the lender monthly “rent” equal to the interest on the $100,000. There is no written agreement about a loan or right to redeem. The lender claims full ownership.

Answer:
A court is likely to find this is an equitable mortgage, not a true sale. The grossly inadequate consideration, the ongoing debt-like payment structure, and the homeowner’s continued possession all indicate the deed was intended as security. The homeowner retains the right to redeem by paying the $100,000 debt (plus any lawful interest and charges), and the lender must foreclose to cut off that right.

Remedies and Rights Once an Equitable Mortgage Is Found

If a court finds an equitable mortgage:

• The lender is treated as a mortgagee, not as the outright owner.
• The borrower retains the right of redemption (equity of redemption).
• The lender must use proper foreclosure procedures to terminate that right.
• Any clause that attempts to waive or unduly restrict redemption is a prohibited clog on the equity of redemption.

Key Term: Deed in Lieu of Foreclosure
A deed by which a defaulting borrower voluntarily conveys title to the lender to satisfy the mortgage debt, instead of going through foreclosure.

A deed in lieu of foreclosure can be a valid workout device when given after default to settle an existing mortgage. But if a deed in lieu is set up at the outset of the loan with the understanding that the lender simply “keeps the deed” upon default, courts are inclined to treat the deed as an equitable mortgage and insist on foreclosure procedures.

Redemption Rights in Equitable Mortgage Cases

The borrower’s equity of redemption allows her to recover the property by paying the secured debt any time up to the foreclosure sale.

• If the borrower tenders the full remaining balance plus interest and costs before the sale, the lender must accept and reinstate full title in the borrower.
• This is true even if foreclosure proceedings have already been initiated. For example, a borrower who defaults but later comes into funds before the foreclosure sale can exercise her equitable right of redemption by paying off the loan.

Some states also provide a statutory right of redemption after foreclosure, allowing the borrower to redeem for a limited period after the sale, usually by paying the sale price plus costs.

Key Term: Statutory Right of Redemption
A state-created right that allows the mortgagor (and sometimes other parties) to redeem the property for a specified period after foreclosure by paying the foreclosure sale price (and certain additional costs).

On the MBE, if the borrower pays before the foreclosure sale, you are almost always dealing with the equitable right of redemption, not the statutory one.

Key Term: Deficiency Judgment
A personal judgment against a borrower for the difference between the outstanding mortgage debt and the foreclosure sale price if the sale proceeds are insufficient to pay the debt in full.

Once a deed is treated as a mortgage, normal foreclosure rules apply:

• If foreclosure sale proceeds exceed the debt, the surplus goes to the borrower (or junior lienholders).
• If the sale proceeds are insufficient, the lender may seek a deficiency judgment (unless barred or limited by state law).

Worked Example 1.2

A property owner deeds land to a creditor as “absolute owner.” The deed is recorded. The owner remains in possession and continues to pay the creditor monthly amounts labeled as “interest.” The creditor later tries to sell the property to a third party.

Answer:
If the original transaction was intended as security, a court will treat it as an equitable mortgage. The owner has an equity of redemption that cannot be cut off except by foreclosure. Because the owner remains in open possession, any purchaser is on inquiry notice of her interest and takes subject to the equitable mortgage. The owner may bring an action to redeem the property by paying the debt, and the creditor (or any successor with notice) must foreclose properly to cut off this right.

Additional Illustrations: Options and Sale–Leaseback Devices

Transactions involving options and sale–leasebacks are fertile ground for disguised mortgages.

Worked Example 1.3

Owner conveys Blackacre to Investor by absolute deed for $190,000, close to the property’s $200,000 fair market value. Simultaneously, Owner receives a written option to repurchase Blackacre for $205,000 within six months. Owner does not stay in possession; Investor takes possession and rents the property to third parties. There are no ongoing payments between Owner and Investor. Owner fails to exercise the option and later sues, claiming the transaction was a loan secured by an equitable mortgage.

Answer:
A court is likely to treat this as a true sale with a right of repurchase, not an equitable mortgage. The price approximated fair market value, the buyer took possession, and there was no continuing debt or ongoing payments from Owner to Investor. The repurchase option appears to be a straightforward option contract (giving Investor modest profit), not a repayment term for a loan. Owner’s failure to exercise the option means Investor keeps the property.

Worked Example 1.4

A business owner owns a warehouse worth $500,000 but is in default on several loans. A lender offers “help” by “buying” the warehouse for $300,000, taking title by absolute deed. At closing, the parties execute a lease under which the business owner rents the warehouse back for $3,000 per month—an amount equal to interest on $300,000 plus property taxes and insurance—and a separate agreement allowing the owner to repurchase the warehouse for $315,000 at the end of three years. The owner stays in possession and operates the business as before.

Answer:
These facts strongly support an equitable mortgage, not a true sale–leaseback. The price is significantly below market value; the owner remains in possession and pays “rent” that closely tracks interest plus carrying costs; and the repurchase price resembles principal plus interest. In substance, the lender advanced $300,000 as a loan secured by the warehouse. The owner has a right of redemption, and the lender must foreclose to cut it off.

Evidentiary Issues and the Statute of Frauds

A common exam question is whether parol evidence can be used to show that an absolute deed was intended as security.

Courts generally allow extrinsic (parol) evidence—including oral statements, prior negotiations, and side agreements—to establish that a deed, absolute on its face, is in truth a mortgage. The rationale:

• The evidence is not being used to vary the terms of the deed.
• Instead, it is used to determine the true character of the transaction—sale vs. security.

This is an important exam point:

• The Statute of Frauds ordinarily requires mortgages to be in writing.
• However, the absolute deed itself is a writing, and equity will treat it as satisfying the writing requirement when combined with evidence that it was intended as security.

So when you see an absolute deed and an oral promise to reconvey after repayment, do not conclude the borrower is out of luck because of the Statute of Frauds. On the MBE, courts routinely admit such evidence to find an equitable mortgage.

Third Parties, Recording, and Notice

The recharacterization of an absolute deed as a mortgage primarily affects the original parties and those with notice.

Key Term: Bona Fide Purchaser (BFP)
A purchaser who gives value and acquires an interest in property without actual, record, or inquiry notice of prior interests, and is protected by the applicable recording statute.

Key points for exam purposes:

• If the grantor (borrower) remains in open, visible possession, a later purchaser from the grantee (lender) is on inquiry notice that the possessor may have rights inconsistent with record title. That undermines BFP status.
• A purchaser who has actual knowledge of the loan-like nature of the prior deed is also not a BFP and takes subject to the equitable mortgage.
• Recording the absolute deed by the lender does not, by itself, eliminate the borrower’s equitable rights as against parties with notice.

The MBE usually structures fact patterns so that the subsequent purchaser either knows about the arrangement or sees facts (like the previous owner in possession) that put him on inquiry notice. In that event, the equitable mortgage is effective against that purchaser.

Exam Warning

On the MBE, do not let the form of the document (an absolute deed) control your analysis. Look for facts that show a loan secured by property: grossly inadequate consideration, the grantor’s continued possession, ongoing payments that resemble interest, and repurchase options matching loan terms. These almost always point to an equitable mortgage, with a right of redemption that cannot be waived in advance.

Revision Tip

If you see a fact pattern where a borrower deeds property to a lender and remains in possession, always consider whether an equitable mortgage exists—especially if the “sale” price is far below market value or there are ongoing payments. Ask yourself: If this were really a sale, would the parties be behaving this way?

Key Point Checklist

This article has covered the following key knowledge points:

• An absolute deed may be recharacterized as a mortgage if it was intended as security for a debt.
• Courts look at intent and the totality of the circumstances, not just the form of the deed.
• Important factors include: existence of a continuing debt, borrower’s continued possession, adequacy of consideration, ongoing “interest” or “rent” payments, and any repurchase arrangements.
• A true sale with right of repurchase typically involves fair price, transfer of possession, and no continuing debt.
• If an equitable mortgage is found, the borrower retains the right of redemption (equity of redemption).
• The lender must foreclose to cut off the borrower’s equity of redemption and cannot simply rely on the absolute deed.
• Clauses that waive or unduly restrict redemption are invalid as clogs on the equity of redemption.
• Parol evidence is admissible to show that an absolute deed was intended as security, despite the deed’s facial terms.
• In equitable mortgage situations, normal foreclosure consequences apply: possible surplus for the borrower and potential deficiency judgments, subject to state law.
• Third parties with actual or inquiry notice (e.g., because the borrower remains in possession) take subject to the equitable mortgage and the borrower’s right to redeem.

Key Terms and Concepts

• Absolute Deed
• Equitable Mortgage
• Right of Redemption
• Sale with Right of Repurchase
• Clog on the Equity of Redemption
• Deed in Lieu of Foreclosure
• Statutory Right of Redemption
• Deficiency Judgment
• Bona Fide Purchaser