Mortgages/security devices - Security relationships

Learning Outcomes

After reading this article, you will be able to identify and explain the legal nature of mortgages and security devices, distinguish legal from equitable mortgages, understand the priority of competing security interests, and apply the rules governing transfer, discharge, and foreclosure of mortgages. You will be equipped to answer MBE questions on the rights and obligations of mortgagors, mortgagees, and third parties.

MBE Syllabus

For the MBE, you are required to understand the principles governing security relationships in real property. This includes:

• Recognizing the difference between legal and equitable mortgages.
• Understanding the creation and enforceability of mortgages and security interests.
• Applying priority rules among multiple mortgages and security devices.
• Analyzing the effects of transfer, discharge, and foreclosure.
• Identifying the rights and duties of mortgagors and mortgagees before and after default.
• Recognizing the impact of recording statutes on mortgage priorities.

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 valid method of creating a security interest in land?
   1. Legal mortgage
   2. Equitable mortgage
   3. Installment land contract
   4. Oral agreement with no delivery of deed or writing
2. If a mortgagor grants two mortgages on the same property, but the second mortgagee records first, who has priority in a notice jurisdiction?
   1. The first mortgagee
   2. The second mortgagee
   3. Whichever mortgagee forecloses first
   4. The mortgagor
3. What is the effect of a foreclosure sale by a senior mortgagee on junior interests?
   1. Junior interests are eliminated if joined in the foreclosure
   2. Junior interests automatically become senior
   3. Junior interests are unaffected
   4. The mortgagor is released from all liability

Introduction

A mortgage is a security device used to secure repayment of a debt with an interest in real property. Understanding the legal structure of mortgages and related security relationships is essential for the MBE, as questions frequently test the creation, priority, transfer, and enforcement of these interests.

Key Term: Mortgage A mortgage is a security interest in land, given by a borrower (mortgagor) to a lender (mortgagee), to secure repayment of a loan or performance of an obligation.

Types of Security Devices

There are several ways to create a security relationship in land:

• Legal mortgage: A formal conveyance of land to the lender, with a right to redeem upon repayment.
• Equitable mortgage: An arrangement that does not meet all formalities of a legal mortgage but is treated as a mortgage in equity (e.g., a deed given as security, or a written agreement to mortgage).
• Deed of trust: Title is conveyed to a third-party trustee to hold for the benefit of the lender.
• Installment land contract: The seller retains title until the buyer completes payment, but this is functionally a security device.

Key Term: Equitable Mortgage An equitable mortgage arises when the parties intend to create a security interest but fail to comply with legal formalities; equity treats the arrangement as a mortgage.

Creation and Enforceability

A valid mortgage requires:

• A debt or obligation to be secured.
• An intent to create a security interest.
• Compliance with the Statute of Frauds (a writing signed by the party to be charged).

If a deed is given as security for a loan, courts may treat it as an equitable mortgage if the facts show the parties intended a security relationship.

Priority of Security Interests

When multiple security interests exist in the same property, priority determines who gets paid first from the proceeds of a foreclosure sale.

• General rule: First in time, first in right—priority is based on the order of creation.
• Recording statutes: A subsequent mortgagee who records first and takes without notice of a prior unrecorded mortgage may have priority under a notice or race-notice statute.

Key Term: Priority The order in which competing security interests are entitled to payment from the proceeds of a foreclosure sale.

Transfer of Mortgages

Both the mortgagor and mortgagee may transfer their interests:

• Mortgagor's transfer: The buyer takes subject to the mortgage; if the buyer assumes the mortgage, they become personally liable.
• Mortgagee's transfer: The note and mortgage may be assigned to a third party; the transferee has the same rights as the original mortgagee.

Discharge and Foreclosure

A mortgage is discharged when the secured debt is paid in full. If the mortgagor defaults, the mortgagee may foreclose, selling the property to satisfy the debt.

• Foreclosure sale: Eliminates junior interests if they are joined in the action; senior interests remain.
• Right of redemption: The mortgagor may redeem the property by paying the debt before the foreclosure sale.
• Statutory redemption: Some states allow redemption for a limited time after the sale.

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

Rights and Duties Before and After Default

• Mortgagor: Has the right to possess and use the property until foreclosure; must avoid waste.
• Mortgagee: May be entitled to possession after default in some states; must account for rents and profits if in possession.

Worked Example 1.1

A homeowner borrows $200,000 from Bank A, granting a mortgage on her house. Later, she borrows$50,000 from Bank B, granting a second mortgage. Bank B records its mortgage before Bank A records. The homeowner defaults on both loans. Who has priority if the property is foreclosed in a notice jurisdiction?

Answer: Bank B has priority if it took without notice of Bank A's unrecorded mortgage and recorded first, under a notice statute. Otherwise, Bank A (the first in time) has priority.

Worked Example 1.2

A property owner gives a deed to a lender as security for a loan, but the parties orally agree that the deed is not a true sale. The owner defaults, and the lender tries to keep the property. What result?

Answer: The court will treat the deed as an equitable mortgage, allowing the owner to redeem the property by repaying the loan.

Exam Warning

Be careful: If a mortgage is not properly recorded, a subsequent bona fide purchaser or mortgagee may take priority under the relevant recording statute.

Revision Tip

Always check the facts for the type of jurisdiction (notice, race, or race-notice) and the order of recording when analyzing priority questions.

Key Point Checklist

This article has covered the following key knowledge points:

• A mortgage is a security interest in land securing repayment of a debt.
• Legal and equitable mortgages are both recognized; intent and writing are key.
• Priority among mortgages is generally determined by order of creation and recording.
• Recording statutes may alter priority if a later mortgagee records first without notice.
• Mortgages can be transferred by both mortgagor and mortgagee.
• Discharge occurs on repayment; foreclosure allows sale to satisfy the debt.
• Foreclosure eliminates junior interests if joined; senior interests remain.
• Mortgagor has a right to redeem before foreclosure; some states allow statutory redemption after sale.
• Rights and duties of parties depend on possession and default status.

Key Terms and Concepts

• Mortgage
• Equitable Mortgage
• Priority
• Foreclosure