Mortgages/security devices - In general

Learning Outcomes

After reading this article, you will be able to identify and explain the key features of mortgages and security devices tested on the MBE. You will understand the creation, types, and characteristics of mortgages, the distinction between title and lien theories, the rules of priority, and the main principles of foreclosure. You will also be able to apply these concepts to MBE-style questions.

MBE Syllabus

For MBE, you are required to understand the basic principles governing mortgages and security devices in real property law. This includes the creation, types, and enforcement of mortgages, as well as the rights and priorities of parties involved. You should be prepared to:

  • Recognize the definition and essential elements of a mortgage.
  • Distinguish between mortgages, deeds of trust, and other security devices.
  • Identify the difference between lien theory and title theory states.
  • Understand the rules of priority among multiple security interests.
  • Explain the process and consequences of foreclosure.
  • Apply the doctrine of redemption and deficiency judgments.

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 is NOT a recognized security device in real property law?
    1. Mortgage
    2. Deed of trust
    3. Installment land contract
    4. Fee simple absolute
  2. In a lien theory state, who holds legal title to the mortgaged property before foreclosure?
    1. The mortgagee
    2. The mortgagor
    3. The trustee
    4. The state
  3. What is the effect of a foreclosure sale on junior interests in the property?
    1. They are preserved
    2. They are eliminated
    3. They become senior interests
    4. They are transferred to the buyer
  4. Which right allows a mortgagor to reclaim property by paying the debt before foreclosure?
    1. Statutory redemption
    2. Equity of redemption
    3. Right of reentry
    4. Possibility of reverter

Introduction

Mortgages and security devices are central to real property law and frequently tested on the MBE. A mortgage is a security interest in real property that secures the repayment of a debt. Security devices ensure that a lender can recover the value of a loan if the borrower defaults. Understanding the types, creation, and enforcement of mortgages is essential for answering MBE questions accurately.

Key Term: Mortgage A mortgage is a security interest in real property given to secure the repayment of a loan or the performance of an obligation.

Types of Security Devices

The most common security devices in real property are the mortgage, deed of trust, and installment land contract. Each device creates a security interest in land, but the structure and parties involved may differ.

  • Mortgage: The borrower (mortgagor) gives the lender (mortgagee) a security interest in land to secure a loan.
  • Deed of Trust: The borrower transfers title to a third-party trustee, who holds it for the benefit of the lender until the debt is paid.
  • Installment Land Contract: The seller retains title until the buyer completes payment under the contract.

Key Term: Deed of Trust A deed of trust is a security device where the borrower conveys title to a trustee, who holds it for the lender's benefit until the debt is satisfied.

Key Term: Installment Land Contract An installment land contract is a security device where the buyer makes payments over time and receives title only after full payment.

Creation and Essential Elements

A valid mortgage requires:

  1. A debt or obligation to be secured.
  2. A security interest in specific real property.
  3. A writing that satisfies the Statute of Frauds.

The mortgage must clearly identify the parties, the property, and the secured obligation.

Title Theory vs. Lien Theory

States differ in how they treat the interest created by a mortgage:

  • Title Theory: The lender holds legal title to the property until the debt is paid. The borrower retains equitable title and the right to possession unless there is a default.
  • Lien Theory: The borrower retains legal and equitable title. The lender has only a lien on the property as security for the debt.

Key Term: Title Theory In a title theory state, the mortgagee holds legal title to the property until the debt is repaid.

Key Term: Lien Theory In a lien theory state, the mortgagor retains legal title and possession, and the mortgagee has only a security interest (lien).

Priority of Interests

When multiple security interests exist, priority is generally determined by the order of recording. The first to record has priority, subject to exceptions such as purchase money mortgages, subordination agreements, and the effect of recording statutes.

Key Term: Purchase Money Mortgage A purchase money mortgage is a mortgage given to secure a loan used to acquire the property, which usually has priority over earlier non-purchase money interests.

Foreclosure and Redemption

If the borrower defaults, the lender may foreclose the mortgage to recover the debt. Foreclosure is typically by judicial sale or, in some states, by nonjudicial sale under a power of sale clause.

  • Effect on Junior Interests: Foreclosure generally eliminates all junior interests, but senior interests remain.
  • Redemption: The borrower may redeem the property by paying the debt before foreclosure (equity of redemption). Some states allow statutory redemption after foreclosure.

Key Term: Foreclosure Foreclosure is the process by which a lender forces the sale of mortgaged property to satisfy an unpaid debt.

Key Term: Equity of Redemption The equity of redemption is the right of the mortgagor to pay the debt and reclaim the property before foreclosure.

Key Term: Statutory Redemption Statutory redemption is the right, in some states, for the mortgagor to redeem the property after foreclosure by paying the sale price.

Deficiency Judgments

If the foreclosure sale does not cover the full debt, the lender may seek a deficiency judgment against the borrower for the remaining balance, unless prohibited by state law.

Worked Example 1.1

A homeowner in a lien theory state borrows 200,000fromabankandgivesamortgageonherhome.Shelatertakesoutasecondmortgagefor200,000 from a bank and gives a mortgage on her home. She later takes out a second mortgage for 50,000 from a credit union. The homeowner defaults on both loans. The bank forecloses and the property is sold at auction. What happens to the credit union's interest?

Answer: The foreclosure by the bank (the senior mortgagee) eliminates the credit union's (junior mortgagee's) interest, provided the credit union was properly notified and joined in the foreclosure. The credit union may seek payment from any surplus proceeds, but if the sale price is insufficient, it may pursue a deficiency judgment against the borrower.

Worked Example 1.2

A buyer enters an installment land contract to purchase a house. After paying half the purchase price, the buyer defaults. What remedies are available to the seller?

Answer: The seller may retain the payments made as liquidated damages and reclaim possession of the property, unless state law provides for restitution or limits forfeiture. Some states treat installment contracts like mortgages, requiring foreclosure and sale.

Exam Warning

In a title theory state, the lender may have the right to possession upon default, but in a lien theory state, the borrower retains possession until foreclosure. Always check the jurisdiction's approach.

Revision Tip

Remember: Foreclosure eliminates junior interests but does not affect senior interests. Always determine the order of priority by recording.

Key Point Checklist

This article has covered the following key knowledge points:

  • A mortgage is a security interest in real property securing a debt.
  • Deeds of trust and installment land contracts are alternative security devices.
  • Title theory and lien theory states differ in who holds legal title before foreclosure.
  • Priority among multiple security devices is generally determined by order of recording.
  • Foreclosure eliminates junior interests and may result in a deficiency judgment.
  • The mortgagor has a right of redemption before foreclosure; some states allow statutory redemption after foreclosure.

Key Terms and Concepts

  • Mortgage
  • Deed of Trust
  • Installment Land Contract
  • Title Theory
  • Lien Theory
  • Purchase Money Mortgage
  • Foreclosure
  • Equity of Redemption
  • Statutory Redemption
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