Mortgages/security devices - Discharge of the mortgage

Learning Outcomes

After reading this article, you will be able to identify when a mortgage is discharged, distinguish between payment, merger, and deed in lieu of foreclosure, and recognize the legal consequences of discharge for both mortgagor and mortgagee. You will also be able to apply these principles to MBE-style questions and avoid common exam pitfalls.

MBE Syllabus

For the MBE, you are required to understand the rules governing the discharge of mortgages and security devices. This includes the circumstances under which a mortgage is satisfied or extinguished, the impact of payment, merger, and deed in lieu, and the effect of discharge on the parties’ rights. You should be prepared to:

• Identify when a mortgage is discharged by payment of the secured debt.
• Recognize the effect of merger when the same party acquires both the mortgagor and mortgagee interests.
• Analyze the legal consequences of a deed in lieu of foreclosure.
• Distinguish between discharge by payment, merger, and deed in lieu.
• Determine the effect of discharge on junior interests and subsequent purchasers.

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. Which of the following will discharge a mortgage?
   1. Payment in full of the secured debt
   2. Assignment of the mortgage to a third party
   3. Execution of a new mortgage on the same property
   4. Foreclosure by a junior lienholder
2. If a mortgagor tenders a deed in lieu of foreclosure and the mortgagee accepts, what is the effect?
   1. The mortgage remains in effect
   2. The mortgage is discharged and the mortgagee takes title
   3. The mortgagor retains a right of redemption
   4. The mortgagee must still foreclose judicially
3. When does merger operate to discharge a mortgage?
   1. When the mortgagor pays off the debt
   2. When the mortgagee assigns the mortgage
   3. When the same person acquires both the mortgage and the equity of redemption
   4. When the mortgagor sells the property

Introduction

A mortgage is a security device that gives the lender an interest in real property to secure repayment of a debt. Discharge of the mortgage means that the mortgage is extinguished and no longer encumbers the property. Understanding when and how a mortgage is discharged is essential for the MBE, as it affects the rights of both mortgagor and mortgagee, as well as third parties.

Discharge by Payment

The most common way a mortgage is discharged is by full payment of the secured debt. Once the mortgagor pays the entire amount due, including principal and any accrued interest, the mortgagee must release the mortgage. This is sometimes called satisfaction of the mortgage.

Key Term: Discharge of the Mortgage The extinguishment of a mortgage so that the security interest no longer encumbers the property, typically occurring by payment, merger, or deed in lieu.

Effect of Discharge by Payment

When the mortgage is discharged by payment, the mortgagee loses all rights in the property. The mortgagor is entitled to a release or satisfaction piece, which should be recorded to give notice to third parties that the mortgage is no longer a valid encumbrance.

Key Term: Satisfaction Piece A document issued by the mortgagee acknowledging that the mortgage has been paid in full and is discharged.

Discharge by Merger

A mortgage may also be discharged by merger. This occurs when the same person or entity acquires both the mortgagor’s equity of redemption and the mortgagee’s interest, resulting in the interests merging into a single title and extinguishing the mortgage.

Key Term: Merger (in Mortgages) The extinguishment of a mortgage when one party acquires both the mortgagor and mortgagee interests, combining legal and equitable title.

Key Term: Equity of Redemption The mortgagor’s right to reclaim the property by paying the debt in full before foreclosure.

When Merger Occurs

Merger will only occur if it is the clear intent of the parties or if the result is consistent with the circumstances. If the party acquiring both interests wishes to keep the mortgage alive (for example, to protect against junior liens), merger will not occur.

Discharge by Deed in Lieu of Foreclosure

A mortgagor facing default may offer a deed in lieu of foreclosure to the mortgagee. If the mortgagee accepts, the mortgagor conveys title to the mortgagee, and the mortgage is discharged without the need for a foreclosure sale.

Key Term: Deed in Lieu of Foreclosure A voluntary conveyance of the mortgaged property by the mortgagor to the mortgagee in full satisfaction of the debt, extinguishing the mortgage.

Effect of Deed in Lieu

Acceptance of a deed in lieu of foreclosure extinguishes the mortgage and the debt, unless the parties agree otherwise. The mortgagee takes title subject to any junior interests, unless those parties consent or are released.

Other Methods of Discharge

A mortgage may also be discharged by:

• Foreclosure sale (the mortgage is extinguished as to the foreclosed property).
• Expiration of the statute of limitations on the debt.
• Express release by the mortgagee.

Worked Example 1.1

A homeowner borrows $200,000 from Bank, secured by a mortgage on her house. She pays off the entire loan, and Bank issues a satisfaction piece, which is recorded. Later, Bank mistakenly tries to foreclose the mortgage. Is the foreclosure valid?

Answer: No. Once the mortgage is discharged by payment and a satisfaction piece is recorded, the mortgage is extinguished. Bank has no further rights to foreclose.

Worked Example 1.2

A developer owns land subject to a mortgage held by Lender. The developer defaults. Instead of foreclosing, Lender agrees to accept a deed in lieu of foreclosure. Unknown to Lender, there is a junior lien on the property. What is the effect of the deed in lieu?

Answer: The deed in lieu extinguishes the mortgage between the developer and Lender, but does not automatically extinguish junior liens. Lender takes title subject to the junior lien unless the junior lienholder consents to release.

Worked Example 1.3

A real estate investor acquires both the mortgage on a property and the mortgagor’s equity of redemption. The investor wants to keep the mortgage alive to protect against a junior lien. Will merger occur?

Answer: No. Merger will not occur if the party acquiring both interests intends to keep the mortgage alive. Intent controls, and the mortgage can be preserved to protect the investor’s interests.

Exam Warning

Be careful: Acceptance of a deed in lieu of foreclosure does not automatically wipe out junior interests. The mortgagee takes title subject to any junior liens unless those parties are also released.

Revision Tip

Always check whether the discharge of the mortgage has been properly recorded. Failure to record a satisfaction piece can cause title problems for future purchasers.

Key Point Checklist

This article has covered the following key knowledge points:

• A mortgage is discharged by payment, merger, deed in lieu, foreclosure, or expiration of limitations.
• Payment in full of the debt extinguishes the mortgage; the mortgagor is entitled to a satisfaction piece.
• Merger occurs when one party acquires both the mortgage and the equity of redemption, unless intent or circumstances indicate otherwise.
• A deed in lieu of foreclosure extinguishes the mortgage but does not automatically release junior liens.
• Recording the discharge is essential to protect the mortgagor and future purchasers.

Key Terms and Concepts

• Discharge of the Mortgage
• Satisfaction Piece
• Merger (in Mortgages)
• Equity of Redemption
• Deed in Lieu of Foreclosure