Mortgages/security devices - Rights and obligations

Learning Outcomes

After reading this article, you will be able to identify the main types of security interests in real property, explain the rights and obligations of mortgagors and mortgagees, and apply the rules governing foreclosure, redemption, and priority disputes. You will also be able to answer MBE-style questions on these topics with confidence.

MBE Syllabus

For the MBE, you are required to understand the legal framework governing mortgages and security devices in real property. This includes the creation and enforcement of security interests, the respective rights and duties of debtors and creditors, and the procedures and consequences of foreclosure. For revision, focus on:

  • The nature and types of security interests in real property (mortgage, deed of trust, installment land contract, etc.).
  • The rights and obligations of mortgagors (borrowers) and mortgagees (lenders).
  • Foreclosure procedures, priorities, and the effect on junior and senior interests.
  • Redemption rights (equity of redemption and statutory redemption).
  • Deficiency judgments and anti-deficiency statutes.
  • Transfers of mortgaged property and the effect on liability.
  • The impact of due-on-sale and acceleration clauses.

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 a right held by a mortgagor before foreclosure?
    1. Equity of redemption
    2. Statutory right of redemption (in all states)
    3. Right to a deficiency judgment
    4. Right to accelerate the debt
  2. If a mortgagor sells property subject to a mortgage and the buyer assumes the mortgage, who is primarily liable to the lender after the sale?
    1. The mortgagor only
    2. The buyer only
    3. Both the mortgagor and the buyer
    4. The lender
  3. In a foreclosure sale, which of the following interests is eliminated by the foreclosure of a senior mortgage?
    1. Senior interests
    2. Junior interests
    3. The mortgagor’s equity of redemption
    4. The mortgagee’s right to a deficiency judgment

Introduction

A mortgage is the most common security device used to secure repayment of a loan with real property. Understanding the rights and obligations of both the borrower (mortgagor) and the lender (mortgagee) is essential for the MBE. This article covers the types of security interests, the parties’ duties, foreclosure procedures, and the consequences for both junior and senior interests.

Key Term: Mortgage A security interest in real property that secures the repayment of a debt, typically evidenced by a promissory note.

Types of Security Devices

Several forms of security interests are used in real property transactions:

  • Mortgage: The borrower gives the lender a security interest in land to secure a loan. The mortgagor retains title and possession.
  • Deed of Trust: Similar to a mortgage, but a third-party trustee holds title until the debt is paid.
  • Installment Land Contract: The seller retains title until the buyer completes all payments.
  • Equitable Mortgage: A transaction that is intended to serve as security for a debt, even if not labeled as a mortgage.

Key Term: Security Device Any legal arrangement that gives a creditor rights in a debtor’s property to secure repayment of a debt.

Rights and Obligations of the Mortgagor (Borrower)

Rights:

  • Possession and Use: The mortgagor remains in possession and may use the property unless and until foreclosure.
  • Equity of Redemption: The mortgagor has the right to pay off the debt and reclaim the property at any time before foreclosure.

Key Term: Equity of Redemption The right of a mortgagor to redeem the property by paying the full debt before a foreclosure sale.

Obligations:

  • Repayment: The mortgagor must pay the debt as agreed.
  • Maintenance and Taxes: The mortgagor must maintain the property and pay taxes and insurance to protect the lender’s security.
  • No Waste: The mortgagor must not commit waste that impairs the lender’s security.

Rights and Obligations of the Mortgagee (Lender)

Rights:

  • Foreclosure: If the mortgagor defaults, the mortgagee may force a sale of the property to satisfy the debt.
  • Possession (in some states): In title theory states, the mortgagee may take possession upon default.
  • Deficiency Judgment: If the foreclosure sale does not cover the debt, the mortgagee may seek a deficiency judgment (unless prohibited by statute).

Obligations:

  • Good Faith: The mortgagee must act in good faith during foreclosure and sale.
  • Accounting: If in possession, the mortgagee must account for rents and profits.

Foreclosure and Priority

Foreclosure is the process by which the mortgagee forces a sale of the property to satisfy the debt. Foreclosure affects the rights of other parties with interests in the property.

Key Term: Foreclosure The legal process by which a mortgagee sells the mortgaged property to satisfy the debt after default.

Priority of Interests:

  • First in Time, First in Right: Generally, earlier-recorded mortgages have priority over later ones.
  • Junior Interests: Foreclosure of a senior mortgage wipes out junior interests, but not senior ones.
  • Notice: Proper notice of the foreclosure sale must be given to all parties with subordinate interests.

Redemption Rights

  • Equity of Redemption: The mortgagor may redeem the property by paying the full debt before the foreclosure sale.
  • Statutory Redemption: Some states allow the mortgagor to redeem the property for a limited time after the foreclosure sale by paying the sale price.

Key Term: Statutory Redemption A right granted by statute in some states allowing the mortgagor to reclaim the property after foreclosure by paying the sale price within a set period.

Deficiency Judgments

If the foreclosure sale proceeds are insufficient to cover the debt, the mortgagee may seek a deficiency judgment against the mortgagor for the balance, unless prohibited by state law.

Transfers and Due-on-Sale Clauses

  • Transfer by Mortgagor: The mortgagor may sell the property, but the mortgage remains unless released.
  • Assumption vs. Subject To: If the buyer assumes the mortgage, both buyer and seller may be liable; if the buyer takes subject to the mortgage, only the seller remains liable.
  • Due-on-Sale Clause: Allows the lender to demand full payment if the property is transferred without consent.

Key Term: Due-on-Sale Clause A provision allowing the lender to require immediate repayment of the loan if the mortgaged property is sold or transferred.

Worked Example 1.1

A homeowner in default on her mortgage receives notice of a foreclosure sale scheduled in 30 days. She offers to pay the full amount owed, including interest and costs, before the sale. Does she have the right to stop the foreclosure?

Answer: Yes. The homeowner has the right of equity of redemption, allowing her to pay the full debt and reclaim the property at any time before the foreclosure sale.

Worked Example 1.2

A mortgagor sells property to a buyer who assumes the mortgage. The buyer later defaults, and the lender forecloses. The foreclosure sale does not cover the full debt. Who is liable for the deficiency?

Answer: Both the original mortgagor and the buyer who assumed the mortgage are liable to the lender for the deficiency, unless the lender released the seller from liability.

Exam Warning

In a foreclosure, failure to notify junior interest holders (such as second mortgagees or lienholders) may result in their interests surviving the sale. Always check that proper notice was given to all necessary parties.

Revision Tip

Remember: Foreclosure wipes out junior interests but not senior ones. The buyer at a foreclosure sale takes subject to any senior mortgages.

Key Point Checklist

This article has covered the following key knowledge points:

  • A mortgage is a security interest in real property securing a debt.
  • Mortgagors have rights to possession, equity of redemption, and statutory redemption (where available).
  • Mortgagees have rights to foreclose, seek deficiency judgments, and must act in good faith.
  • Foreclosure terminates junior interests but not senior ones.
  • Redemption rights allow the mortgagor to reclaim property before (and sometimes after) foreclosure.
  • Transfers of mortgaged property affect liability depending on whether the buyer assumes or takes subject to the mortgage.
  • Due-on-sale clauses allow lenders to accelerate the debt upon transfer.

Key Terms and Concepts

  • Mortgage
  • Security Device
  • Equity of Redemption
  • Foreclosure
  • Statutory Redemption
  • Due-on-Sale Clause
The answers, solutions, explanations, and written content provided on this page represent PastPaperHero's interpretation of academic material and potential responses to given questions. These are not guaranteed to be the only correct or definitive answers or explanations. Alternative valid responses, interpretations, or approaches may exist. If you believe any content is incorrect, outdated, or could be improved, please get in touch with us and we will review and make necessary amendments if we deem it appropriate. As per our terms and conditions, PastPaperHero shall not be held liable or responsible for any consequences arising. This includes, but is not limited to, incorrect answers in assignments, exams, or any form of testing administered by educational institutions or examination boards, as well as any misunderstandings or misapplications of concepts explained in our written content. Users are responsible for verifying that the methods, procedures, and explanations presented align with those taught in their respective educational settings and with current academic standards. While we strive to provide high-quality, accurate, and up-to-date content, PastPaperHero does not guarantee the completeness or accuracy of our written explanations, nor any specific outcomes in academic understanding or testing, whether formal or informal.
No resources available.

Job & Test Prep on a Budget

Compare PastPaperHero's subscription offering to the wider market

PastPaperHero
Monthly Plan
$10
AdaptiBar
One-time Fee
$395
Assessment Day
One-time Fee
$20-39
BarPrepHero
One-time Fee
$299
Job Test Prep
One-time Fee
$90-350
Quimbee
One-time Fee
$1,199

Note the above prices are approximate and based on prices listed on the respective websites as of May 2025. Prices may vary based on location, currency exchange rates, and other factors.

Get unlimited access to thousands of practice questions, flashcards, and detailed explanations. Save over 90% compared to one-time courses while maintaining the flexibility to learn at your own pace.

All-in-one Learning Platform

Everything you need to master your assessments and job tests in one place

  • Comprehensive Content

    Access thousands of fully explained questions and cases across multiple subjects

  • Visual Learning

    Understand complex concepts with intuitive diagrams and flowcharts

  • Focused Practice

    Prepare for assessments with targeted practice materials and expert guidance

  • Personalized Learning

    Track your progress and focus on areas where you need improvement

  • Affordable Access

    Get quality educational resources at a fraction of traditional costs

Tell Us What You Think

Help us improve our resources by sharing your experience

Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

Saptarshi Chatterjee

Saptarshi Chatterjee

Senior Associate at Trilegal