Learning Outcomes
After reading this article, you will be able to explain the rights and powers of a mortgagee (lender) in relation to mortgages and other security devices. You will understand how a mortgagee may transfer its interest, enforce the mortgage through foreclosure, determine priority among multiple interests, and recognize the key legal consequences for the mortgagor and third parties. This will prepare you to answer MBE questions on mortgagee actions and remedies.
MBE Syllabus
For MBE, you are required to understand the powers and remedies available to a mortgagee (lender) under mortgages and security devices. This article focuses your revision on:
- The ability of a mortgagee to transfer its interest (assignment of mortgage and note)
- The rights of a mortgagee to enforce the security interest (foreclosure, possession, receivership)
- The effect of foreclosure on junior and senior interests
- The priority of multiple mortgages and the impact of recording acts
- The right to a deficiency judgment and the limits on mortgagee remedies
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.
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Which of the following is required for a mortgagee to transfer its interest to another party?
- Only the mortgage must be assigned.
- Only the promissory note must be transferred.
- Both the mortgage and the note must be transferred together.
- Either the mortgage or the note may be transferred alone.
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When a mortgagee forecloses on a property, which interests are eliminated by the foreclosure sale?
- All interests, including senior mortgages.
- Only junior interests to the foreclosed mortgage.
- Only the mortgagor’s interest.
- All liens, regardless of priority.
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If a mortgagee sells its interest but fails to notify the mortgagor, which party is entitled to payment if the mortgagor pays the original mortgagee in good faith?
- The original mortgagee.
- The transferee mortgagee.
- Both parties equally.
- The mortgagor is discharged from liability.
Introduction
A mortgagee, also known as the lender or secured party, holds significant rights and remedies under a mortgage or other security device. Understanding what the mortgagee can do—such as transferring the mortgage, foreclosing on the property, and determining priority among multiple interests—is essential for the MBE. This article explains the key powers of the mortgagee and the consequences for the mortgagor and third parties.
Transfer of the Mortgagee’s Interest
A mortgagee may transfer its interest in the mortgage and the secured debt to another party. The transfer is usually accomplished by assigning the promissory note (the evidence of the debt) and the mortgage (the security interest in the property).
Key Term: Assignment of Mortgage
The transfer by the mortgagee of its rights under the mortgage and the secured debt to another party, typically by endorsement of the note and execution of a written assignment of the mortgage.Key Term: Holder in Due Course
A party who acquires a negotiable promissory note in good faith, for value, and without notice of defenses, and who may have special rights against the mortgagor.
If the mortgagee transfers only the mortgage but not the note, most courts treat the transfer as a nullity, since the mortgage is only security for the debt. If the note is transferred but not the mortgage, the mortgage follows the note automatically.
Enforcement Rights: Foreclosure and Possession
When the mortgagor defaults, the mortgagee has several remedies:
Foreclosure
The primary remedy is foreclosure, which allows the mortgagee to force a sale of the property to satisfy the debt. Foreclosure may be judicial (court-supervised) or nonjudicial (under a power of sale clause, if state law permits).
Key Term: Foreclosure
The process by which a mortgagee forces the sale of the mortgaged property to recover the unpaid debt after default.
Possession and Receivership
Depending on the jurisdiction’s theory of title (lien, title, or intermediate), a mortgagee may have the right to take possession of the property before foreclosure, especially if the mortgagor abandons the property or consents. Alternatively, the mortgagee may seek appointment of a receiver to collect rents and profits from the property during foreclosure proceedings.
Effect of Foreclosure on Other Interests
Foreclosure affects the interests of other parties with claims against the property:
- Foreclosure eliminates all junior interests (those recorded after the foreclosing mortgage), provided they are joined in the foreclosure action.
- Senior interests (those recorded before the foreclosing mortgage) are not affected; the buyer at foreclosure takes subject to these interests.
Key Term: Junior Interest
An interest in the property (such as a mortgage or lien) that is subordinate in priority to the foreclosing mortgage.Key Term: Senior Interest
An interest in the property that has priority over the foreclosing mortgage, usually because it was recorded earlier.
Priority Among Multiple Mortgages
The priority of mortgages is generally determined by the order in which they were recorded. The “first in time, first in right” rule applies unless altered by:
- The operation of a recording act (notice, race-notice, or race statute)
- Subordination agreements between mortgagees
- The special priority of purchase money mortgages
Key Term: Purchase Money Mortgage
A mortgage given to secure a loan used to acquire title to the property, which often has priority over earlier non-purchase money mortgages.
Deficiency Judgments and Limits on Remedies
If the foreclosure sale does not produce enough to satisfy the debt, the mortgagee may seek a deficiency judgment against the mortgagor for the remaining balance, unless prohibited by state law or limited by the fair market value of the property.
Some states restrict or prohibit deficiency judgments, especially for purchase money mortgages or nonjudicial foreclosures.
Worked Example 1.1
A bank lends $200,000 to a homeowner and takes a mortgage on the property. The bank later assigns the note and mortgage to another lender but fails to notify the homeowner. The homeowner continues to pay the original bank. Who is entitled to the payments?
Answer: The homeowner is discharged from liability by paying the original bank until notified of the assignment. The transferee lender’s remedy is against the original bank, not the homeowner.
Worked Example 1.2
A property is subject to three mortgages: Mortgage 1 (recorded first), Mortgage 2 (recorded second), and Mortgage 3 (recorded third). Mortgage 2 forecloses and sells the property. Which interests are wiped out by the foreclosure?
Answer: The foreclosure sale eliminates Mortgage 3 (the junior interest) but does not affect Mortgage 1 (the senior interest). The buyer takes subject to Mortgage 1.
Exam Warning
On the MBE, pay close attention to whether the mortgagee has transferred both the note and the mortgage. If only the mortgage is transferred, the assignment may be ineffective. If only the note is transferred, the mortgage follows automatically.
Revision Tip
Always determine the priority of mortgages by the order of recording, unless a purchase money mortgage or subordination agreement changes the result.
Key Point Checklist
This article has covered the following key knowledge points:
- A mortgagee may transfer its interest by assigning both the note and the mortgage.
- Foreclosure is the main remedy for default and eliminates junior but not senior interests.
- Priority among mortgages is set by recording order, subject to exceptions.
- The mortgagee may seek a deficiency judgment if the foreclosure sale does not cover the debt, unless state law limits this remedy.
- The mortgagee’s rights include foreclosure, possession (in some jurisdictions), and appointment of a receiver.
Key Terms and Concepts
- Assignment of Mortgage
- Holder in Due Course
- Foreclosure
- Junior Interest
- Senior Interest
- Purchase Money Mortgage
