PastPaperHero | Mortgages/security devices

Learning Outcomes

This article examines mortgagor transfers of encumbered property and the resulting rights and liabilities, including:

Distinguishing between transfers "subject to" a mortgage and transfers involving an "assumption" of the mortgage debt.
Analyzing the continuing personal liability of the original mortgagor after different types of transfers.
Determining when and how a transferee (grantee) becomes personally liable on the mortgage obligation.
Evaluating how loan modifications, releases, novations, and impairments of collateral affect the original mortgagor’s surety liability.
Explaining the operation and enforceability of due‑on‑sale and acceleration clauses in transfer scenarios.
Differentiating between the equity of redemption and statutory redemption, and identifying who may redeem, on what terms, and at what stage.
Applying these rules to foreclosure sales, deficiency‑judgment proceedings, and anti‑deficiency or purchase‑money limitations described in MBE‑style fact patterns.
Tracking which party is the primary obligor and which is the surety at each stage of a multi‑party transfer sequence.

MBE Syllabus

For the MBE, you are required to understand the principles governing the transfer of property subject to a mortgage or other security device by the mortgagor, with a focus on the following syllabus points:

Analyze the transfer of the mortgagor's interest, including the concept of taking "subject to" versus "assuming" the mortgage.
Determine the liability of the original mortgagor after the property has been transferred.
Assess the personal liability of the transferee (grantee) based on whether they assumed the mortgage.
Understand the operation and enforceability of "due-on-sale" clauses.
Distinguish between the equity of redemption and statutory rights of redemption.
Recognize how changes in the loan terms or releases can discharge an original mortgagor acting as a surety.
Relate these mortgage rules to foreclosure remedies, deficiency judgments, and the rights of redemption held by mortgagors, transferees, and junior lienholders.

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.

A mortgagor sells property subject to a mortgage to a grantee. The grantee makes several payments but then defaults. The lender forecloses and the sale yields less than the outstanding debt. Against whom may the lender recover the deficiency?
1. Only the grantee.
2. Only the original mortgagor.
3. Both the original mortgagor and the grantee.
4. Neither the original mortgagor nor the grantee.
A buyer purchases property from a seller and expressly agrees in the purchase contract and deed to pay the existing mortgage debt held by Lender. If the buyer defaults, which statement is most accurate regarding Lender's rights?
1. Lender can only sue the seller.
2. Lender can only sue the buyer.
3. Lender can sue either the buyer or the seller.
4. Lender must foreclose on the property before suing anyone personally.
A clause in a mortgage agreement stating that the entire loan balance becomes due if the mortgagor transfers the property without the lender's consent is known as:
1. An acceleration clause.
2. An estoppel by deed clause.
3. A due-on-sale clause.
4. A subordination clause.

Introduction

A mortgagor, the property owner who borrows money, generally retains both legal title and the right to possession of the mortgaged property in modern “lien theory” jurisdictions. The mortgagor’s interest, often called the equity or equity of redemption, is transferable just like any other interest in land. However, any transfer is made subject to the mortgage, which remains attached to the property as a lien until it is satisfied or foreclosed.

Key Term: Mortgagor
The borrower or property owner who gives a mortgage or other security interest in real property to secure repayment of a debt.

Key Term: Mortgagee
The lender or creditor whose loan is secured by the mortgaged property.

On the MBE, mortgages are often treated functionally, whether the instrument is called a "mortgage," "deed of trust," "security deed," or an installment land contract that effectively functions as a mortgage. For purposes of personal liability, foreclosure, and redemption, you can usually treat these devices the same way unless the question clearly focuses on specialized foreclosure procedures (such as nonjudicial sale under a deed of trust).

Because a mortgage "runs with the land" as a security interest, a transfer by the mortgagor does not destroy the mortgage lien. Instead:

The lien continues to encumber the property in the hands of whoever owns it; and
The personal obligation on the note may or may not follow the land, depending on how the transferee takes.

Understanding this split between the security interest in the land and the personal obligation on the note is central to every MBE question about transfers by the mortgagor.

Key Term: Acceleration Clause
A provision in a note or mortgage allowing the lender to declare the entire loan balance immediately due and payable upon specified events, such as default in payment or transfer of the property.

Key Term: Purchase-Money Mortgage
A mortgage given to secure a loan that enables the borrower to purchase the property, whether the lender is a third-party bank or the seller; purchase‑money mortgages often receive special priority and may be treated differently under state anti‑deficiency rules.

In addition, while this article focuses on transfers by the mortgagor, remember that the mortgagee can also transfer its interest by assigning the note (and with it, the mortgage). As between mortgagee and assignee, “the mortgage follows the note”—but that does not change the basic rules about who is personally liable on the debt.

Because MBE questions frequently combine transfer, foreclosure, and redemption issues, you must be able to track:

Who owns the land at each stage.
Who is personally liable on the note.
What rights the lender has against each person and against the property.
How those rights change if the loan terms are modified or the lender releases a party.

Transfer of Mortgagor's Interest

The mortgagor can freely transfer the mortgaged property by sale, gift, or devise. Unless the mortgage is paid off and released at or before closing, the mortgage remains on the property, and the transferee takes the property encumbered by the mortgage lien.

When the mortgagor transfers, keep two separate things straight:

The security interest (the mortgage lien) on the land, which follows the land regardless of who owns it.
The personal obligation on the note, which may or may not be taken on by the transferee.

As between the lender and the transferee, the transferee may:

Take "subject to" the mortgage, or
Assume the mortgage.

If the deed (or other transfer instrument) is silent or ambiguous about the transferee’s liability, the default rule in most jurisdictions (and on the MBE unless stated otherwise) is that the grantee takes subject to the mortgage and does not assume personal liability.

Default Rule and Effect of Deed Language

The parties can change the default rule by using clear language in the deed or in a separate written agreement:

Language such as “Grantee assumes and agrees to pay the existing mortgage to Bank” generally creates an assumption.
Language such as “Grantee takes title subject to the existing mortgage to Bank” generally means no assumption; the grantee is not personally liable to the lender.

If the purchase contract and deed conflict (e.g., the contract says “subject to,” but the deed says “assumes”), treat the deed as controlling, because the contract merges into the deed at closing. This can be a subtle tested point.

Remember also that the choice of subject to versus assumption affects only personal liability. It does not affect the existence, validity, or priority of the mortgage lien itself.

Transfer "Subject To" the Mortgage

If the deed states that the transferee takes title "subject to" the mortgage (or is silent regarding the mortgage), the transferee is not personally liable for the mortgage debt. The property itself is still subject to the mortgage lien and can be foreclosed if payments are not made. However, if the foreclosure sale does not yield enough to cover the outstanding debt, the lender cannot pursue the transferee for a deficiency judgment.

Key Term: Subject to the Mortgage
A transfer of mortgaged property where the transferee takes title subject to the existing mortgage lien but does not agree to be personally liable for the associated debt. The original mortgagor remains personally liable.

Key Term: Deficiency Judgment
A personal judgment for the unpaid balance of the mortgage debt after foreclosure sale proceeds have been applied to the debt.

The original mortgagor remains personally liable on the associated promissory note after a "subject to" transfer. If the transferee stops making payments and the foreclosure sale results in a deficiency, the lender can sue the original mortgagor for the shortfall.

Economically, the purchase price often reflects that the buyer is taking the property encumbered:

The buyer may pay the seller less in cash, because the buyer plans to make the mortgage payments for as long as it is advantageous to keep the property.
However, unless the lender later agrees otherwise, the lender’s contract is still with the original mortgagor, not with the transferee.

As between the seller and buyer, the parties might privately agree that the buyer will make the mortgage payments or indemnify the seller if the lender sues the seller. That can give the seller a contract claim against the buyer, but it does not by itself make the buyer personally liable to the lender unless it qualifies as an assumption enforceable by the lender as a third‑party beneficiary.

Many MBE questions test whether you can separate these two different relationships:

Lender ↔ original mortgagor (always a contractual relationship unless released).
Lender ↔ transferee (contractual relationship only if there is an assumption).
Original mortgagor ↔ transferee (contractual relationship if the transferee promised the mortgagor to pay the loan, regardless of whether the lender is a party to that promise).

Worked Example 1.1

Owner mortgaged Blackacre to Bank for $100,000. Owner later sold Blackacre to Buyer for $150,000. The deed stated that Buyer took title "subject to the existing mortgage to Bank." Buyer made payments for a year but then defaulted. Bank foreclosed, and the property sold for $90,000, leaving a $10,000 deficiency (ignoring costs and interest). Can Bank recover the $10,000 deficiency from Buyer?

Answer:
No. Buyer took title “subject to” the mortgage, so she did not agree to be personally liable for the debt. Bank can foreclose on Blackacre but cannot sue Buyer personally for the deficiency. Bank’s recourse for the $10,000 shortfall is against the original mortgagor, Owner, who remains liable on the note.

Assumption of the Mortgage

A transferee "assumes" the mortgage when they expressly agree, usually in the deed or purchase agreement, to accept personal liability for the mortgage debt.

Key Term: Assumes the Mortgage
A transfer of mortgaged property where the transferee expressly agrees to accept personal liability for the existing mortgage debt. Both the original mortgagor and the assuming transferee are personally liable.

Key Term: Assumption Agreement
The agreement—often contained in the deed—by which the transferee promises the mortgagor to take over and pay the existing mortgage debt; the lender may enforce this promise as a third‑party beneficiary once it learns of it.

When a mortgage is assumed:

The transferee (assuming grantee) becomes primarily and personally liable to the lender for the mortgage debt. The lender can sue the transferee directly if payments are not made.
The original mortgagor remains liable to the lender but becomes secondarily liable as a surety. As between the two, the assuming grantee should bear the economic burden of the debt.

Key Term: Surety
A person who is secondarily liable for a debt and who, if forced to pay, is entitled to reimbursement or indemnity from the party who is primarily liable.

If the lender later sues the original mortgagor and the mortgagor is forced to pay the lender (for example, after a deficiency judgment), the mortgagor generally has a right to reimbursement from the assuming grantee under suretyship principles.

The lender does not have to be a party to the assumption agreement for it to be enforceable:

The lender is treated as a third‑party beneficiary of the assumption agreement between mortgagor and grantee.
Once the lender learns of the assumption, it may sue the grantee directly on the assumption promise.
In most jurisdictions, the assumption agreement does not need to be set out in a separate writing; clear assumption language in the deed (“assumes and agrees to pay”) is sufficient.

Worked Example 1.2

Same facts as in Worked Example 1.1, but the deed stated that Buyer "assumes and agrees to pay the existing mortgage to Bank." Buyer defaults, and the foreclosure sale yields $90,000, leaving a $10,000 deficiency. From whom can Bank recover the deficiency?

Answer:
Bank may recover the $10,000 deficiency from either Buyer or Owner. Buyer is now primarily liable because she assumed the mortgage. Owner remains liable as a surety. If Bank recovers from Owner, Owner can seek reimbursement from Buyer under the assumption agreement.

Suretyship Consequences of an Assumption

Once a transferee assumes the mortgage, the original mortgagor is in a surety position as to the lender, even though the lender did not sign the assumption agreement. That surety status has important consequences:

The lender may still sue the original mortgagor; assumption does not automatically release the original debtor.
However, because the original mortgagor is now a surety, certain actions by the lender that materially prejudice the surety may discharge the mortgagor’s liability.

Key rules commonly tested:

Material modification without the mortgagor’s consent: If, after the assumption, the lender and the assuming grantee agree to modify the loan in a way that is materially more burdensome (for example, increasing the interest rate, extending the term in a way that increases total interest, or adding new obligations), most courts discharge the original mortgagor from liability on the modified obligation. Many jurisdictions, and most exam answers, treat significant modifications without the surety’s consent as releasing the surety entirely.
Release of the assuming grantee: If the lender releases the assuming grantee from personal liability without reserving rights against the original mortgagor, the original mortgagor is usually discharged as well. The reason is that the surety’s right of reimbursement against the principal has been destroyed.
Impairment of collateral: If the lender impairs the value of the mortgage security (for example, by releasing part of the mortgaged property without the surety’s consent), the surety may be discharged to the extent of the impairment.

Key Term: Novation
A new agreement among all involved parties (lender, original mortgagor, and transferee) that substitutes the transferee as the sole obligor on the debt and releases the original mortgagor from personal liability.

By contrast, if the lender, original mortgagor, and assuming grantee enter into a novation expressly releasing the original mortgagor and substituting the grantee as the sole debtor, the original mortgagor is completely discharged—regardless of later modifications between lender and grantee.

On the MBE, unless the facts clearly state that all three parties agreed to a novation or that the lender signed a clear release, you should assume the original mortgagor remains personally liable after an assumption.

Worked Example 1.3

Owner borrows $300,000 from Bank, giving Bank a mortgage on Blackacre. Three years later, Owner deeded Blackacre to Buyer, and in the deed Buyer “assumes and agrees to pay” the mortgage. One year after that, without consulting Owner, Bank and Buyer agree in writing to increase the interest rate on the loan from 4% to 8%. Buyer later defaults. Bank forecloses; the sale leaves a $20,000 deficiency. Bank now wants to sue Owner for the deficiency. Is Owner liable?

Answer:
In most jurisdictions, no. Once Buyer assumed the mortgage, Owner became a surety. Bank’s later agreement with Buyer to materially increase the interest rate, without Owner’s consent, increased Owner’s risk as surety. Under suretyship principles, a material, prejudicial modification between Bank and Buyer without the surety’s consent typically discharges the surety. Bank may still pursue Buyer for the deficiency but cannot hold Owner liable on the modified obligation.

Summary of Personal Liability After Transfer

It is useful to organize the liability rules in a simple comparison:

Grantee takes "subject to":
- Transferee: no personal liability to lender; risk is loss of the property on foreclosure.
- Original mortgagor: remains fully liable on the note; lender may sue for any deficiency.
Grantee "assumes" the mortgage:
- Transferee: personally liable and primarily responsible for payment; lender can sue directly.
- Original mortgagor: still liable to lender but as a surety; entitled to reimbursement from transferee if forced to pay.
Lender expressly releases original mortgagor (novation):
- Transferee: sole personal obligor on the note.
- Original mortgagor: no longer liable; requires clear agreement by lender (and typically all three parties).

On an MBE Property question involving multiple transfers, track the status at each step. A mortgagor may sell to one buyer “subject to,” then that buyer may later sell to a second buyer who “assumes.” Each transfer can change who is primary versus secondary between the obligors, but the lender’s rights depend on who is personally liable on the note and on any later releases or modifications.

Due-on-Sale Clauses

Most modern mortgages contain a "due-on-sale" clause. This clause allows the lender to demand full payment of the remaining loan balance immediately if the mortgagor transfers her interest in the property without the lender's consent.

Key Term: Due-on-Sale Clause
A provision in a mortgage agreement that permits the lender to accelerate the due date of the entire outstanding loan balance if the mortgaged property is transferred by the mortgagor without the lender's consent.

These clauses are generally enforceable. They are not considered invalid restraints on alienation for MBE purposes. Their main purposes are to:

Allow the lender to reevaluate the creditworthiness of the new owner.
Allow the lender to adjust the interest rate or collect an assumption fee when market rates have changed.
Protect the lender from transfers to buyers likely to commit waste or default.

Modern federal law (the Garn–St. Germain Depository Institutions Act) largely preempts state attempts to restrict due‑on‑sale clauses and validates them, subject to narrow statutory exceptions (for example, some transfers between spouses or on the death of a borrower). Unless the facts specify such an exception, treat the clause as enforceable on the MBE.

If a mortgage contains a due-on-sale clause and the mortgagor transfers the property without the lender’s consent:

The lender may accelerate the loan and demand immediate payment in full; and if not paid,
The lender may foreclose on the property.

The lender may, however, choose not to enforce the clause, particularly when the transferee is creditworthy. In practice, lenders often use due‑on‑sale clauses as bargaining tools: they may agree to waive acceleration if the transferee formally assumes the loan (sometimes at a higher interest rate) or pays a fee.

Worked Example 1.4

Owner borrows $200,000 from Bank, giving Bank a mortgage on Blackacre that contains a due-on-sale clause. A year later, Owner sells Blackacre to Buyer, who takes title “subject to the existing mortgage.” Owner does not notify Bank, and Bank learns of the sale from the recording office. Buyer has excellent credit and promptly begins making the monthly payments. Bank prefers a higher interest rate and wants the loan paid off immediately. May Bank accelerate the loan solely because of the transfer?

Answer:
Yes. Because the mortgage includes a valid due‑on‑sale clause and Owner transferred Blackacre without Bank’s consent, Bank may accelerate the full loan balance. That right exists even though Buyer is current on payments and creditworthy. Whether Bank chooses to accelerate or instead negotiate an assumption at a higher rate is a business decision, but the clause is enforceable.

Note that a due‑on‑sale clause operates in addition to the rules about assumption versus subject to. Even if the transferee assumes the loan, the lender can insist that the entire debt be paid unless it voluntarily waives the clause.

Mortgagor's Right to Redeem

Even after default, the mortgagor retains the right to reclaim the property by paying the debt. There are two types of redemption rights:

Equity of redemption (a common law right before foreclosure sale); and
Statutory redemption (a post-foreclosure right created by state statute).

Key Term: Equity of Redemption
The mortgagor's common law right to prevent foreclosure by paying the full mortgage debt, plus accrued interest and costs, before the foreclosure sale.

Key Term: Statutory Redemption
A statutory right (in some states) allowing the mortgagor, and sometimes junior lienholders or transferees, to regain title after a foreclosure sale by paying a specified sum within a defined time period.

1. Equity of Redemption (Pre-Foreclosure)

The equity of redemption allows the mortgagor to prevent foreclosure by paying the full amount of the outstanding debt (including interest and reasonable costs) at any time before the foreclosure sale occurs.

If the mortgage contains an acceleration clause, making the entire balance due on default, the mortgagor must pay the full accelerated balance to redeem. If there is no acceleration, some jurisdictions allow redemption by paying only the amount then in default (arrears plus costs), but on the MBE you should generally assume that once default has occurred and foreclosure is commenced, the full balance is due.

Key Term: Clogging the Equity of Redemption
Any provision in the original mortgage or deed of trust that purports to waive, limit, or unduly burden the mortgagor’s equitable right of redemption. Such provisions are invalid and unenforceable.

Any clause in the original mortgage saying “Mortgagor waives all rights of redemption” is an attempt to "clog" the equity of redemption and is not enforceable. The right to redeem is so favored in equity that courts will strike down disguised attempts to waive it, including “absolute” deeds that are in substance mortgages.

However, after default and in a separate transaction, the mortgagor can agree to sell or deed the property to the lender—often called a deed in lieu of foreclosure—and that agreement may be valid if it is fair and free of overreaching.

Key Term: Deed in Lieu of Foreclosure
A post‑default conveyance by the mortgagor to the lender in full or partial satisfaction of the debt, intended to avoid foreclosure; valid if voluntary and not unconscionable.

There is no partial redemption. The mortgagor (or anyone redeeming through the mortgagor) must satisfy the entire obligation secured by the mortgage; a co-owner cannot redeem only his or her fractional share while leaving the rest of the mortgage outstanding.

Who May Exercise the Equity of Redemption

The right of equitable redemption can be exercised by:

The original mortgagor.
Any transferee of the mortgagor’s interest (whether taking subject to or by assumption).
Junior lienholders who wish to protect their interests by paying off the senior lien.

When the mortgaged property has been transferred:

A subject‑to transferee can redeem by paying the debt; if he does, he preserves his ownership and prevents foreclosure.
An assuming transferee likewise can redeem; if he fails to redeem and a deficiency results, he remains personally liable on the note.

Redemption by any of these parties extinguishes the mortgage and prevents the foreclosure sale.

Worked Example 1.5

Owner has a mortgage to Bank with an acceleration clause. Owner misses three monthly payments, and Bank properly accelerates the loan and schedules a foreclosure sale for June 1. On May 25, Owner shows up at Bank with enough money to pay the three missed payments plus late fees, but not the entire remaining principal. Can Owner force Bank to stop the foreclosure?

Answer:
No. Because the mortgage contains an acceleration clause that Bank has properly invoked, the entire loan balance is now due. To exercise the equity of redemption and stop foreclosure, Owner must pay the full accelerated amount, including interest and costs. Paying only the arrears is not sufficient once acceleration has occurred.

2. Statutory Redemption (Post-Foreclosure)

About half the states provide a statutory right to redeem after the foreclosure sale has occurred. This right:

Exists only if a statute grants it.
Lasts for a fixed period (commonly six months to one year) after the foreclosure sale.
Usually requires payment of the foreclosure sale price (not the full original mortgage debt), plus some additional costs or interest specified by statute.

Statutory redemption serves as a safety net: if the mortgagor can gather funds shortly after the sale, they can effectively buy back the property from the foreclosure purchaser.

In many jurisdictions:

During the statutory redemption period, the mortgagor may retain possession of the property.
If the mortgagor successfully redeems, title revests in the mortgagor, and the foreclosure purchaser must surrender possession.
The foreclosure purchaser is reimbursed the sale price plus allowable interest and costs.

Junior lienholders and sometimes transferees (depending on the statute) may also have statutory redemption rights, allowing them to protect their interests by redeeming and stepping into the purchaser’s position.

Worked Example 1.6

Mortgagor defaults on a mortgage to Bank. Bank forecloses, and Investor buys the property at a properly conducted foreclosure sale for $150,000. The jurisdiction has a statute granting the mortgagor a six‑month right to redeem after sale by paying the foreclosure sale price plus interest. Four months later, Mortgagor inherits money and wants the property back. What must Mortgagor do to regain title?

Answer:
Mortgagor must exercise statutory redemption by paying Investor the foreclosure sale price ($150,000) plus any statutory interest and allowable costs within the six‑month period. Mortgagor need not pay the full original mortgage debt; the amount required is keyed to the sale price. Upon redemption, title revests in Mortgagor and Investor must relinquish possession.

Partial Redemption and Multiple Owners

Because the mortgage is on the whole property, redemption must likewise be of the whole obligation:

A co-owner (for example, a joint tenant) cannot redeem only his fractional share by paying half the mortgage; the entire debt must be satisfied.
If one co-owner does redeem by paying the full amount, that owner typically acquires a right of contribution from the others.

The MBE often tests this point using co‑tenants or joint tenants where one pays the whole mortgage to prevent foreclosure and then seeks reimbursement.

Worked Example 1.7

Siblings A and B own Whiteacre as joint tenants. They give Bank a mortgage on Whiteacre to secure a $200,000 loan. A later pays Bank $100,000, representing “her half” of the loan, but B pays nothing. Bank forecloses anyway, and A argues that her half of the property should be protected from the sale. Is A correct?

Answer:
No. There is no partial redemption. The mortgage encumbers the whole property, and A cannot redeem only her fractional interest by paying half the debt. Unless the entire $200,000 is paid, Bank may foreclose on the entire property. A’s payment may give her a contribution claim against B, but it does not prevent foreclosure on her interest.

Foreclosure, Deficiency, and Liability of the Parties

To understand the consequences of a mortgagor’s transfer, you must see how foreclosure and any deficiency judgment play out against:

The original mortgagor.
A transferee who took subject to.
A transferee who assumed.

Foreclosure and Deficiency Basics

When a borrower defaults and the lender forecloses:

The sale proceeds are applied to the mortgage debt and foreclosure costs.
If the proceeds are less than the indebtedness, there is a deficiency.
If the proceeds are more than the indebtedness, the surplus goes to junior lienholders and then to the mortgagor (or her transferee).

The lender’s ability to obtain a deficiency judgment is a matter of state law. Some states (especially for residential purchase‑money mortgages) have anti‑deficiency statutes limiting or prohibiting deficiency judgments.

Key Term: Anti-Deficiency Statute
A state law that restricts or prohibits a lender from obtaining a personal judgment for a deficiency after foreclosure, often for purchase‑money or owner‑occupied residential mortgages.

On the MBE, if an anti‑deficiency rule is relevant, the fact pattern will clearly state it. Otherwise, assume that the lender may seek a deficiency judgment against any person who is personally liable on the note.

Effect of Transfer on Deficiency Liability

Combine the rules on transfer with general foreclosure principles:

If the grantee took subject to:
- The grantee is not personally liable; the lender may foreclose but cannot sue the grantee for any deficiency.
- The original mortgagor remains personally liable; the lender may pursue a deficiency judgment against the mortgagor (subject to any stated anti‑deficiency rules).
If the grantee assumed:
- The grantee is personally liable; the lender may sue the grantee directly for the deficiency.
- The original mortgagor is still liable unless released, but in a surety position. If forced to pay, the mortgagor may seek reimbursement from the assuming grantee.
If the lender entered into a novation releasing the original mortgagor:
- Only the assuming transferee is personally liable for any deficiency; the original mortgagor is completely discharged.

Worked Example 1.8

Owner borrowed $400,000 from Bank, giving a purchase-money mortgage on her home. The jurisdiction allows deficiency judgments on purchase‑money mortgages. Owner later sold the home to Buyer, who assumed the mortgage. Buyer defaulted, and Bank foreclosed. The sale brought $350,000, leaving a $50,000 deficiency. Bank first sues Buyer and recovers a judgment for $50,000, but Buyer is insolvent. Bank now sues Owner for the unpaid balance. Can Bank recover from Owner?

Answer:
Yes, unless the facts show a novation or release. Buyer’s assumption made Buyer primarily liable but did not release Owner. Owner is still personally liable as a surety, and Bank may obtain a deficiency judgment against her. Owner would then have a reimbursement claim against Buyer, but that is worthless if Buyer is insolvent.

Additional Examples Involving Transfers and Loan Changes

Worked Example 1.9

Owner mortgaged Greenacre to Bank. Later, Owner sold Greenacre to Buyer. The deed stated that Buyer took title “subject to” the Bank mortgage. After the sale, Bank and Owner agreed in writing to increase the principal balance and extend the repayment term. Buyer did not sign the modification. Buyer later defaults, Bank forecloses, and there is a deficiency. Can Bank recover the increased amount of the debt from Buyer?

Answer:
No. Buyer never assumed personal liability to Bank. Taking “subject to” meant Buyer risked losing Greenacre in foreclosure but did not become personally liable on the note. Bank’s later modification with Owner may affect Owner’s liability, but it cannot create personal liability in Buyer absent an assumption agreement directly binding Buyer to Bank.

Worked Example 1.10

Owner owes Bank $250,000 secured by a mortgage on Blueacre. Owner then sells Blueacre to Buyer, who assumes the mortgage. Later, with Owner’s consent, Bank enters into a written agreement with Buyer releasing Owner from all personal liability and expressly agreeing that Buyer will be solely liable on the note. Buyer later defaults; foreclosure yields only $200,000. Bank sues Owner for the $50,000 deficiency. What result?

Answer:
Owner is not liable. Bank, Owner, and Buyer entered into a novation under which Owner was released and Buyer became the sole obligor. Once released by novation, Owner has no further personal liability for the mortgage debt, including any deficiency after foreclosure. Bank must look solely to Buyer (and the property) for payment.

Revision Tip

Carefully distinguish:

The security interest (which always follows the land absent payoff or release).
The personal obligation on the note (which may or may not follow the land).
The equity of redemption (pre‑foreclosure right to stop the sale) versus statutory redemption (post‑sale right, where provided).

And for any fact pattern, ask systematically:

Who owns the property at each stage?
Who is personally liable on the note at each stage?
Is there a due‑on‑sale or acceleration clause?
Has there been any modification, release, or novation that alters suretyship relationships?
Who, if anyone, can redeem, and on what terms?

Key Point Checklist

This article has covered the following key knowledge points:

A mortgagor can transfer mortgaged property by sale, gift, or devise, but the mortgage lien remains on the land.
The mortgage “runs with the land” as a lien, while the personal obligation on the note may or may not be taken on by the transferee.
If the deed is silent or ambiguous, the transferee is presumed to take subject to the mortgage and is not personally liable to the lender.
A transferee taking "subject to" a mortgage is never personally liable for the debt to the lender; the original mortgagor remains fully liable on the note.
A transferee who "assumes" a mortgage becomes personally liable, usually as the primary obligor, while the original mortgagor becomes a surety.
The lender may treat the assumption agreement as a third‑party beneficiary contract and sue the assuming transferee directly.
The lender may sue any person who is personally liable (original mortgagor and/or assuming grantee) for a deficiency after foreclosure, subject to any anti‑deficiency statutes supplied in the facts.
After an assumption, the original mortgagor is in a surety position; material modifications of the loan between lender and assuming grantee without the mortgagor’s consent typically discharge the mortgagor to the extent of prejudice and may discharge her entirely.
A novation—an express agreement by the lender to release the original mortgagor and look solely to the transferee—is required to completely extinguish the original mortgagor’s personal liability.
Due-on-sale clauses permit lenders to demand full payment upon transfer without consent and are generally enforceable; they are not considered invalid restraints on alienation for MBE purposes.
An acceleration clause allows the lender, on default or specified events, to declare the entire balance immediately due; once accelerated, the mortgagor must pay the full balance to redeem.
The equity of redemption allows the mortgagor or her successors or junior lienholders to prevent foreclosure by paying the full debt (often the accelerated balance) before the sale.
Clauses in the original mortgage that purport to waive or surrender the mortgagor’s equity of redemption are invalid as attempts to clog the equity of redemption.
Statutory redemption (where available) allows the mortgagor, and often junior lienholders or transferees, to repurchase the property after the foreclosure sale by paying the sale price (plus statutory charges) within the statutory period.
There is no partial redemption; the entire mortgage obligation must be satisfied to redeem, even if there are multiple co‑owners.
A deed in lieu of foreclosure is a post‑default consensual conveyance from mortgagor to lender in satisfaction of the debt and, if fair, is valid and does not constitute clogging.
Purchase‑money mortgages may have special priority and may be treated differently by anti‑deficiency statutes, but unless such rules are explicitly provided in the facts, assume ordinary deficiency rules apply.
When analyzing any question, separately track: the current owner of the land, the parties personally liable on the note, and the availability of redemption rights at each stage.

Key Terms and Concepts

Mortgagor
Mortgagee
Subject to the Mortgage
Assumes the Mortgage
Assumption Agreement
Surety
Novation
Due-on-Sale Clause
Deficiency Judgment
Equity of Redemption
Statutory Redemption
Clogging the Equity of Redemption
Acceleration Clause
Deed in Lieu of Foreclosure
Purchase-Money Mortgage
Anti-Deficiency Statute

Mortgages/security devices - By mortgagor