Mortgages/security devices - In general

Learning Outcomes

This article explains mortgage and security device doctrine for the MBE, including:

• Identifying and differentiating the major security devices in real property—mortgages, deeds of trust, installment land contracts, and equitable mortgages—and recognizing them in disguised forms.
• Determining whether a valid security interest has been created by analyzing the underlying debt, the writing, parties, property description, and Statute of Frauds issues.
• Comparing lien, title, and intermediate theories and predicting how each theory affects possession, rents, and risk of loss before default and after.
• Applying recording and priority rules, including purchase money and future-advance mortgages, modifications, and subordination agreements, to rank competing interests in exam-style fact patterns.
• Evaluating the rights and duties of mortgagors and mortgagees before default, including waste, taxes, insurance, repairs, and protective advances by the lender.
• Analyzing foreclosure and redemption issues—necessary parties, extinguished versus surviving interests, distribution of sale proceeds, bidding strategies, and statutory versus equitable redemption.
• Assessing when a deficiency judgment is available or limited by anti-deficiency or fair-value statutes, and distinguishing recourse from nonrecourse loans.
• Explaining how transfers of mortgaged property affect personal liability and security interests, focusing on assumptions, “subject to” transactions, and due-on-sale clauses frequently tested on the MBE.

MBE Syllabus

For the MBE, you are required to understand mortgages and other security devices in real property law, with a focus on the following syllabus points:

• Nature and creation of mortgages and alternative security devices
• Rights and duties of mortgagors and mortgagees before default
• Title theory, lien theory, and intermediate theory approaches
• Recording, priority, and the impact of purchase money and future-advance mortgages
• Foreclosure procedures, necessary parties, and the effect on other interests
• Equity of redemption, statutory redemption, and limits on “clogging” redemption
• Deficiency judgments and anti-deficiency limitations
• Transfer of the mortgaged property and personal liability for the debt

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, particularly those involving priority and foreclosure.

Key Term: Mortgage
A mortgage is a security device in real property by which a borrower grants a lender an interest in land to secure repayment of a loan or performance of an obligation.

Key Term: Security Device
A security device is any arrangement under which an interest in property is given to secure repayment of a debt, including mortgages, deeds of trust, and installment land contracts.

The Basic Mortgage Relationship

Every mortgage involves two core components:

• The debt (often evidenced by a promissory note)
• The security interest in the land (created by the mortgage or similar instrument)

Key Term: Mortgagor
The mortgagor is the property owner who borrows money and gives a security interest in the property to secure repayment.

Key Term: Mortgagee
The mortgagee is the lender who receives the security interest in the property to secure repayment of the loan.

On the MBE, many questions turn on separating these two ideas: the mortgagor’s personal liability on the note, and the mortgagee’s in rem rights against the land.

• If the debt is paid in full, the mortgage automatically becomes unenforceable.
• If the debt is not paid, the mortgagee can foreclose on the property, subject to redemption rights.

The note and the mortgage can be in separate documents, and either can be transferred; as a general principle, the mortgage follows the note.

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. On default, the trustee typically has a power of sale.

Key Term: Deed of Trust
A deed of trust is a security device in which the borrower deeds title to a trustee to hold for the lender’s benefit, with the trustee empowered to sell the property if the borrower defaults.

• Installment Land Contract: The seller finances the purchase and retains legal title until the buyer completes payment under the contract. The buyer usually has immediate possession and an equitable interest.

Key Term: Installment Land Contract
An installment land contract is a security device in which the buyer pays the purchase price in installments and receives legal title only after full payment; the seller’s retained title functions as security for the debt.

Equitable Mortgages and Disguised Security Devices

Sometimes the parties use a form that looks like an outright sale rather than a mortgage, but it is in substance security for a debt (for example, a “sale” with a leaseback, or an absolute deed given to secure a loan).

Key Term: Equitable Mortgage
An equitable mortgage is an arrangement that is treated as a mortgage in equity, even though the parties used some other form (such as an absolute deed), because the transaction was intended to secure a debt.

Courts look at factors such as:

• The existence of a debt
• Whether the “seller” remains in possession
• Whether the “price” was far below fair market value
• The parties’ prior relationship as debtor and creditor

If a court finds an equitable mortgage, the borrower has an equity of redemption, and the creditor must use foreclosure procedures instead of simply keeping the property.

Modernly, many courts also treat installment land contracts like mortgages once the buyer has made substantial payments. Instead of automatic forfeiture, the seller may be required to foreclose.

Creation and Essential Elements

A valid mortgage (or deed of trust) 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 instrument must clearly identify:

• The parties (mortgagor and mortgagee)
• The property being encumbered (with a legally sufficient description)
• The obligation secured (often referencing a separate note)

Key Term: After-Acquired Property Clause
An after-acquired property clause provides that the mortgage will attach not only to the mortgagor’s current interest but also to specified property the mortgagor acquires in the future.

Key Term: Future-Advance Mortgage
A future-advance mortgage secures not only a present loan but also future loans or advances the lender may make to the borrower under the same security instrument.

Key exam points:

• A mortgage only attaches to the interest the mortgagor actually has, unless an after-acquired property clause is present.
• Future-advance mortgages are common in commercial settings; their priority can depend on whether the future advances were obligatory or optional and whether the lender had notice of intervening liens.

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 usually 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 mortgage is viewed as a transfer of legal title to the mortgagee, subject to the mortgagor’s equitable title and right of redemption.

Key Term: Lien Theory
In a lien theory state, the mortgagee holds only a security interest (lien), and the mortgagor retains both legal title and the right to possession until foreclosure.

Key Term: Intermediate Theory
In an intermediate theory state, the mortgage is treated as a lien until default, at which point legal title shifts to the mortgagee.

Exam application:

• In lien theory states (the default assumption on the MBE unless told otherwise), the mortgagor keeps possession and the rents until foreclosure.
• In title theory states, the mortgagee may have rights to possession and rents upon default, even before foreclosure.
• Intermediate theory blends the two, but is rarely the focus of MBE questions.

Rights and Duties Before Default

Before foreclosure:

• The mortgagor has:

  • Right to possession (in lien theory and usually in practice even in title theory)
  • Duty not to commit waste that impairs the security
  • Duty to keep taxes and senior liens current and to maintain required insurance

• The mortgagee has:

  • Right to be paid according to the note
  • Right to take steps reasonably necessary to protect the security (such as paying taxes or senior liens and tacking those sums onto the debt)
  • In some cases, rights to an assignment of rents after default

Priority of Interests

When multiple security interests exist, priority is generally determined by the order of recording. Mortgages are “conveyances” for purposes of the recording acts.

Key Term: Senior and Junior Mortgage
A senior mortgage is one that has priority over another mortgage on the same property; a junior mortgage is any later-in-priority mortgage.

Basic priority rule:

• First in time, first in right, subject to:
  • The applicable recording statute (race, notice, or race-notice)
  • Special priority rules (especially purchase money mortgages)
  • Contractual subordination
  • Effects of modifications and future advances

Key Term: Purchase Money Mortgage
A purchase money mortgage is a mortgage given to secure a loan used to acquire the property. It typically has priority over earlier non–purchase money interests in the same property.

Key priority principles:

• A properly recorded mortgage generally has priority over later recorded or unrecorded interests.
• A purchase money mortgage given by the seller or by a third-party lender at the time of purchase usually takes priority over prior liens or claims arising through the buyer.
• If a senior mortgage is later modified to be more burdensome (e.g., higher interest rate or added debt), the modification may be subordinated to existing junior interests to the extent of the change.
• Under a future-advance mortgage, obligatory advances usually keep the senior mortgage’s priority, but optional future advances made with knowledge of intervening liens may be subordinated.

Subordination agreements:

• A senior mortgagee can contractually subordinate its priority to a junior mortgage; courts enforce clear subordination agreements according to their terms.

Key Term: Power of Sale
A power of sale is a clause, usually in a mortgage or deed of trust, authorizing the lender or trustee to sell the property upon default without a judicial proceeding.

Foreclosure and Redemption

If the borrower defaults, the lender may foreclose the mortgage to recover the debt. Foreclosure may be:

• Judicial foreclosure: A court-supervised sale of the property.
• Nonjudicial foreclosure (power-of-sale foreclosure): A sale conducted by the mortgagee or trustee under a valid power-of-sale clause, permitted in many states.

Key Term: Foreclosure
Foreclosure is the process by which the mortgagee (or trustee in a deed of trust) forces the sale of the mortgaged property to satisfy the unpaid debt.

Necessary Parties and Effect on Other Interests

All parties whose interests are junior to the mortgage being foreclosed must be joined (or at least properly notified) in the foreclosure action; otherwise, their interests are not cut off.

• Effect on junior interests: Foreclosure of a mortgage generally eliminates all junior interests, provided they were properly joined or notified.
• Effect on senior interests: Foreclosure does not affect senior interests. The buyer at the foreclosure sale takes the property subject to any senior mortgages.

Order of distribution of sale proceeds:

1. Costs of the sale (attorney’s fees, trustee’s fees, court costs)
2. The foreclosing mortgage (up to the amount owed)
3. Junior lienholders in order of priority
4. Any surplus to the mortgagor

If the sale price does not cover the debt of the foreclosing lender, a deficiency may remain.

Key Term: Equity of Redemption
The equity of redemption is the mortgagor’s right to stop the foreclosure by paying off the mortgage debt (plus allowable costs and interest) at any time before the foreclosure sale.

Key Term: Statutory Redemption
Statutory redemption is a state-created right allowing the mortgagor, in some jurisdictions, to redeem the property after a foreclosure sale by paying the sale price (or a specified sum) within a statutory period.

Key redemption rules:

• The equity of redemption exists in every mortgage and cannot be waived in the mortgage instrument itself; clauses purporting to “clog” the equity of redemption are invalid.
• Statutory redemption exists only if provided by state law, and the details (length of time, amount required) vary by jurisdiction.
• In states with statutory redemption, the buyer at foreclosure takes subject to the mortgagor’s statutory redemption rights during the redemption period.

Key Term: Deficiency Judgment
A deficiency judgment is a personal judgment against the mortgagor (and any other liable party) for the unpaid balance of the debt remaining after foreclosure sale proceeds are applied.

Some states limit or prohibit deficiency judgments, especially for purchase money mortgages on residential property or where the sale price is grossly inadequate (fair value statutes).

Deficiency Judgments

If the foreclosure sale does not bring in enough to cover the full debt:

• The lender may seek a deficiency judgment against any party personally liable on the note (usually the original mortgagor, and any assuming grantee).
• Anti-deficiency or “one-action” statutes in some states bar or limit such judgments, particularly for purchase money residential loans.
• Fair-value statutes may limit the deficiency to the difference between the debt and the property’s fair market value, not the possibly depressed foreclosure price.

If the mortgage is nonrecourse by agreement, the lender’s sole remedy is in rem against the property; no deficiency judgment is available.

Transfer of the Mortgaged Property and Personal Liability

Mortgaged property is freely alienable. A mortgagor can sell or otherwise transfer the property, but the mortgage remains on the land as long as it is properly recorded.

Two common patterns appear on the MBE:

Key Term: Assumption and "Subject To" Mortgage
A grantee who takes property “subject to” a mortgage is not personally liable for the debt; a grantee who “assumes” the mortgage agrees to be personally liable along with (or instead of) the original mortgagor.

• Grantee “assumes” the mortgage:

  • Grantee becomes personally liable on the note.
  • Original mortgagor remains liable unless released in a novation.
  • The lender can sue either the original mortgagor or the assuming grantee (and can foreclose on the land).

• Grantee takes “subject to” the mortgage:

  • Grantee is not personally liable on the note.
  • Original mortgagor remains personally liable.
  • The lender can foreclose on the land but cannot sue the grantee personally for any deficiency.

If the deed is silent, the majority rule treats the grantee as taking subject to the mortgage.

Key Term: Acceleration Clause
An acceleration clause permits the lender, upon default (or other specified event), to declare the entire unpaid balance of the debt immediately due and payable.

Key Term: Due-on-Sale Clause
A due-on-sale clause allows the lender to accelerate the debt if the mortgagor transfers the property without the lender’s consent.

Due-on-sale clauses are generally enforceable and are often tested when property is transferred without lender consent.

Worked Example 1.1

A homeowner in a lien theory state borrows $200,000 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 (if permitted by state law).

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:
Traditionally, the seller could declare a forfeiture, retain the payments made as liquidated damages, and reclaim possession. However, many modern courts treat installment land contracts like mortgages once the buyer has made substantial payments. In those jurisdictions, the seller must use foreclosure (judicial or power-of-sale) and the buyer may have redemption and surplus rights similar to a mortgagor.

Worked Example 1.3

Owner buys Blackacre for $300,000, paying $50,000 down and giving Seller a $250,000 purchase money mortgage, which Seller immediately records. Later, Owner borrows $50,000 from Bank, giving Bank a mortgage on Blackacre, which Bank records. Still later, a judgment creditor records a judgment lien against Owner. Owner defaults on both mortgages. Who has priority?

Answer:
Seller’s purchase money mortgage has priority over other interests arising through the buyer, even if those other interests were recorded first (subject to state variations). Next in priority is Bank’s mortgage, then the judgment lien. If Seller forecloses, the foreclosure will wipe out Bank’s and the judgment creditor’s interests, with sale proceeds applied in this priority order.

Worked Example 1.4

Mortgagor owns Blackacre subject to a recorded mortgage to Bank. Mortgagor then conveys Blackacre to Buyer by deed stating that Buyer “assumes and agrees to pay” the Bank mortgage. Mortgagor later defaults and both Mortgagor and Buyer refuse to pay. The sale price at foreclosure does not cover the full debt. From whom can Bank recover the deficiency?

Answer:
Because Buyer assumed the mortgage, Buyer is personally liable on the note. Mortgagor remains liable as well, absent a novation. Bank may sue either Buyer or Mortgagor (or both) for the deficiency, in addition to foreclosing on the property, subject to any applicable anti-deficiency statutes.

Exam Warning

In a title theory state, the lender may have the right to possession (and possibly rents) upon default, but in a lien theory state, the borrower retains possession until foreclosure. Assume lien theory on the MBE unless the question specifies otherwise.
Also remember: any attempt in the original mortgage instrument to waive the equity of redemption is ineffective; redemption rights cannot be “clogged.”

Revision Tip

Foreclosure eliminates properly joined junior interests but does not affect senior interests. Always:

1. Identify all interests and classify them as senior or junior to the foreclosing mortgage,
2. Apply the recording statute and special rules (especially purchase money mortgages), and
3. Determine who is personally liable (assumption vs. subject to) before deciding about deficiency judgments.

Key Point Checklist

This article has covered the following key knowledge points:

• A mortgage is a security device in real property securing a debt; the debt (note) and the security interest (mortgage) are conceptually distinct.
• Deeds of trust, installment land contracts, and equitable mortgages are alternative security devices that are generally treated like mortgages on the MBE.
• Mortgagors are borrowers; mortgagees are lenders. Mortgages are subject to Statute of Frauds requirements and may include after-acquired property and future-advance clauses.
• Title theory, lien theory, and intermediate theory states differ in who holds legal title and who has rights to possession and rents before foreclosure.
• Priority among multiple security devices is governed by first in time/recording rules, modified by purchase money mortgage priority, subordination agreements, and rules on future advances and modifications.
• Foreclosure terminates properly joined junior interests but leaves senior interests intact; sale proceeds are distributed in order of priority, and deficiencies may lead to deficiency judgments where allowed.
• The mortgagor always has an equity of redemption before the foreclosure sale; some states also provide statutory redemption after the sale. Attempts to waive the equity of redemption in the mortgage instrument are void.
• When mortgaged property is transferred, a grantee who assumes the mortgage becomes personally liable; a grantee who takes subject to the mortgage does not. Due-on-sale and acceleration clauses can significantly affect these transfers.

Key Terms and Concepts

• Mortgage
• Security Device
• Mortgagor
• Mortgagee
• Deed of Trust
• Installment Land Contract
• Equitable Mortgage
• Title Theory
• Lien Theory
• Intermediate Theory
• After-Acquired Property Clause
• Future-Advance Mortgage
• Purchase Money Mortgage
• Power of Sale
• Acceleration Clause
• Due-on-Sale Clause
• Senior and Junior Mortgage
• Foreclosure
• Equity of Redemption
• Statutory Redemption
• Deficiency Judgment
• Assumption and "Subject To" Mortgage