PastPaperHero | Mortgages/security devices

Learning Outcomes

This article explains how mortgages and other security devices are transferred, including:

Identifying what happens to the mortgage and personal liability when the mortgagor conveys the property, and how that transfer affects the lender’s ability to foreclose or seek a deficiency judgment.
Distinguishing precisely between a transferee taking property “subject to” an existing mortgage and “assuming” the mortgage, and predicting which parties remain or become personally liable on the note in each scenario.
Evaluating the effect and enforceability of due‑on‑sale clauses when property is sold or otherwise transferred, and determining the lender’s remedies if the clause is triggered or waived.
Applying suretyship doctrine after an assumption, including the original mortgagor’s rights of reimbursement and subrogation, and recognizing when a novation releases the original mortgagor from liability.
Explaining how mortgagees transfer the note and mortgage, how the “mortgage follows the note” rule operates, and who has the right to enforce the security interest after multiple assignments.
Analyzing how recording statutes, notice of assignment, and competing assignees affect priority and the effectiveness of payments made by the mortgagor.
Recognizing when an assignee qualifies as a holder in due course of a negotiable note, the defenses still available to the mortgagor, and the extent to which those defenses limit foreclosure.
Spotting common MBE traps involving ambiguous transfer language, silent deeds, and conflicts between property law and commercial paper principles in mortgage-transfer fact patterns.

MBE Syllabus

For the MBE, you are required to understand the rules governing the transfer of mortgages and other security devices, with a focus on the following syllabus points:

The effect of transferring property encumbered by a mortgage or other security device.
The operation and enforceability of due-on-sale clauses.
The distinction between taking property “subject to” a mortgage and “assuming” a mortgage.
The assignment of mortgage notes and the rights of assignees.
The consequences of transfer by the mortgagee (lender) or mortgagor (borrower).
The impact of recording statutes and the “mortgage follows the note” rule on transfers and priorities.
The effect of assumption on the original mortgagor’s liability, including suretyship and possible novation.

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.

If a buyer purchases land "subject to" an existing mortgage, which party is personally liable for the mortgage debt?
1. Only the buyer
2. Only the seller
3. Both buyer and seller
4. Neither party
What is the effect of a due-on-sale clause in a mortgage?
1. It prevents the mortgagor from transferring the property.
2. It allows the lender to demand full repayment if the property is transferred without consent.
3. It automatically releases the mortgagor from liability upon transfer.
4. It converts the mortgage into a deed of trust.
When a mortgagee assigns the mortgage note to a third party, what happens if the mortgagor pays the original mortgagee after receiving notice of the assignment?
1. The payment is effective and discharges the debt.
2. The payment is not effective; the mortgagor must pay the assignee.
3. The payment is effective only if the mortgagee consents.
4. The payment is effective only if the mortgage is recorded.

Introduction

Transfers of mortgages and other security devices are routine in real estate transactions. Both the borrower (mortgagor) and the lender (mortgagee) can transfer their interests. The rules governing these transfers determine:

Who is personally liable for the debt,
Who can enforce the security interest in the property, and
What defenses are available against the person enforcing the note and mortgage.

These issues are frequently tested on the MBE, often in questions that combine Real Property with Contracts and Commercial Paper concepts.

Key Term: Mortgage
A security interest in real property that secures repayment of an obligation, usually evidenced by a promissory note. The borrower is the mortgagor; the lender is the mortgagee.

Key Term: Security Device
A generic term for arrangements (such as mortgages, deeds of trust, and installment land contracts) that use real property as collateral to secure repayment of a debt or performance of an obligation.

Key Term: Mortgagor
The owner of real property who gives a mortgage or other security interest in the property to secure a debt. Typically the borrower on the note.

Key Term: Mortgagee
The lender or other creditor who receives a mortgage or security interest in property to secure repayment of a debt.

The MBE focuses on two broad categories of transfers:

Transfers by the mortgagor, usually by deeding the property to a buyer; and
Transfers by the mortgagee, usually by assigning the note and the mortgage to another lender or investor.

A critical theme is that the note (the debt) and the mortgage (the security) are conceptually distinct but closely linked. The debt can exist without the mortgage, but the mortgage cannot exist without a debt. This linkage drives many of the rules discussed below.

Transfers by the Mortgagor (Borrower)

A mortgagor is free to sell or otherwise transfer property encumbered by a mortgage, unless a specific clause (such as a due‑on‑sale clause) is triggered. The transfer of the property does not by itself extinguish the mortgage. Instead, the transferee takes the property in one of two ways:

“Subject to” the mortgage; or
By “assuming” the mortgage.

The manner in which the transferee takes determines personal liability for the mortgage debt.

Key Term: Subject to the Mortgage
When a transferee acquires property subject to a mortgage, the transferee is not personally liable for the mortgage debt. The original mortgagor remains personally liable, and the property may be foreclosed if the debt is not paid.

Key Term: Assumption of the Mortgage
When a transferee assumes a mortgage, the transferee becomes personally liable for the mortgage debt along with the original mortgagor, unless the lender releases the mortgagor. The lender can sue either party for the debt.

A mortgagor may sell or otherwise transfer property encumbered by a mortgage. The transferee takes the property either "subject to" the mortgage or by "assuming" the mortgage.

In practice:

The transfer language “assumes and agrees to pay” or similar wording creates an assumption.
If the deed or contract is silent or ambiguous as to liability, most courts presume that the buyer takes subject to the mortgage.

Effect of Taking “Subject To” the Mortgage

If the buyer takes subject to:

The buyer has no personal liability for the debt.
The original mortgagor remains personally liable on the note.
The lender can foreclose on the property if payments are not made, but cannot obtain a deficiency judgment against the buyer.
The buyer’s risk is loss of the property through foreclosure, not personal money liability.

If the facts on the MBE do not clearly say “assumes” or equivalent, you should default to the “subject to” presumption unless the question indicates otherwise.

Effect of an Assumption of the Mortgage

If the buyer assumes the mortgage:

Both the original mortgagor and the buyer are personally liable to the lender.
The lender can sue either or both for the entire debt on the note.
The buyer, as assuming transferee, is primarily responsible; the original mortgagor becomes secondarily liable.

This shift in responsibility triggers suretyship principles.

Key Term: Suretyship (Mortgage Context)
When a buyer assumes a mortgage, the assuming buyer becomes primarily liable to the lender, and the original mortgagor is treated as a surety—secondarily liable and entitled to reimbursement from the buyer if the mortgagor pays.

Thus, if the original mortgagor pays installments (or the full balance) after an assumption, the mortgagor can seek reimbursement from the assuming transferee and may be subrogated to the lender’s rights.

Worked Example 1.1

A homeowner borrows $200,000 from Bank X, giving Bank X a mortgage on the property. The mortgage contains a due-on-sale clause. Three years later, the homeowner sells the property to Buyer, who takes "subject to" the mortgage. The homeowner stops making payments, and Bank X forecloses. Who is personally liable for any deficiency after foreclosure?

Answer:
Only the original homeowner (mortgagor) is personally liable. Buyer is not personally liable because Buyer took "subject to" the mortgage. The lender may foreclose on the property but cannot collect any deficiency from Buyer.

Worked Example 1.2

Suppose in the previous example, Buyer had "assumed" the mortgage instead. The lender forecloses and there is a deficiency. Who can the lender sue?

Answer:
The lender may sue either the original homeowner or Buyer, or both, for the deficiency. Both are personally liable unless the lender releases the original homeowner.

Suretyship and Novation After an Assumption

Once a buyer assumes a mortgage:

The buyer is primarily liable on the debt.
The original mortgagor, though still liable to the lender, is treated as a surety and has rights against the buyer.

Key Term: Novation
An agreement among the lender, the original mortgagor, and the transferee under which the lender releases the mortgagor and substitutes the transferee as the sole debtor on the note.

Key consequences:

If the lender and the assuming buyer later modify the loan in a way that materially increases the risk to the original mortgagor (e.g., increasing principal or extending the term at a higher rate), the original mortgagor, as surety, may be discharged from liability to the extent of the modification.
If the lender expressly agrees to release the mortgagor and rely solely on the assuming buyer, a novation occurs. The mortgagor is then no longer liable.

On the MBE, look for language that the lender “agreed to look solely to the buyer for payment” or “released the original mortgagor.” That signals a novation.

Worked Example 1.3

A man owns land and takes out a loan secured by a mortgage. He is personally liable on the note. He sells the land to a purchaser, and the deed expressly states that the purchaser “assumes and agrees to pay” the mortgage debt. The purchaser misses two monthly installments. To avoid default and foreclosure, the man pays the missed installments and then sues the purchaser for reimbursement. Is he likely to prevail?

Answer:
Yes. Because the purchaser assumed the mortgage, the purchaser is primarily liable on the debt, and the original mortgagor is in the position of a surety. Under suretyship principles, a surety who pays the debt can seek reimbursement from the principal obligor (the purchaser).

This scenario mirrors a classic MBE pattern: assumption by the buyer, payment by the original mortgagor, and a subsequent reimbursement action.

Due-on-Sale Clauses

Many mortgages contain a due-on-sale clause. This clause gives the lender the contractual right to demand immediate repayment of the full loan balance if the property is transferred without the lender's consent.

Key Term: Due-on-Sale Clause
A mortgage provision allowing the lender to require full repayment (acceleration) if the mortgaged property is transferred without the lender's written approval.

Important points for the MBE:

A due-on-sale clause does not make the transfer void; it simply gives the lender the right to accelerate the loan and foreclose if not paid.
If the lender waives the clause (for example, by knowingly accepting payments from the transferee after the transfer), it may not be able to later enforce the clause for that transfer.
Due-on-sale clauses are generally enforceable under federal law, subject to limited statutory exceptions (rarely tested on the MBE).

Liability of the Parties After Transfer

The following rules summarize who is personally liable after the mortgagor transfers the property:

If the transferee assumes the mortgage:
- Both the transferee and the original mortgagor are personally liable to the lender.
- The transferee is primarily liable; the mortgagor is secondarily liable (surety).
- The lender may sue either or both.
If the transferee takes subject to the mortgage:
- Only the original mortgagor is personally liable.
- The lender may foreclose on the property if the debt is not paid, but cannot collect from the transferee personally.
If there is a novation:
- The lender and the parties agree that the transferee replaces the mortgagor as the sole debtor.
- Only the transferee is personally liable; the mortgagor is fully released.

Worked Example 1.4

Owner borrows $300,000 from Bank and gives Bank a mortgage. Later, Owner sells the property to Buyer, who assumes the mortgage. With Bank’s consent, Buyer and Bank agree to increase the principal to $320,000 and extend the term by 15 years. Owner does not consent to the modification. Buyer then defaults. Bank sues both Buyer and Owner for the full $320,000. How much, if anything, can Bank recover from Owner?

Answer:
Bank can recover at most the original $300,000 debt (subject to any payments already made), not the increased $320,000. Once Buyer assumed the mortgage, Owner became a surety. A material modification of the obligation between the lender and the principal (Buyer) without the surety’s consent discharges the surety to the extent of the modification.

Transfers by the Mortgagee (Lender)

A mortgagee may assign the mortgage and the mortgage note to another party. The assignee steps into the shoes of the original lender and may enforce the mortgage and note.

Key Term: Assignment of Mortgage
The transfer of a mortgage and the accompanying note by the lender to a third party, who then acquires the right to collect the debt and enforce the security.

In practice, the mortgagee typically:

Endorses and delivers the note to the assignee, and
Executes a separate written assignment of mortgage, often recorded.

The critical requirement is that the note and the mortgage ultimately end up in the same hands, because the mortgage is only effective as security for the debt evidenced by the note.

The “Mortgage Follows the Note” Rule

Key Term: Mortgage Follows the Note
The general rule that a properly transferred note automatically carries the mortgage with it, even if the mortgage is not mentioned in the transfer.

Two special situations illustrate this rule:

If the lender transfers the note but not the mortgage:
The mortgage automatically follows the note. The transferee of the note can enforce the mortgage even if the mortgage was not separately assigned.
If the lender transfers the mortgage but not the note:
Many courts treat this as either:
- Ineffective (a nullity), because the mortgage cannot exist without the debt; or
- An effective transfer of both note and mortgage, treating them as a single unit so that the note follows the mortgage.

On the MBE, focus on the idea that the note and mortgage are inseparable, and that whoever holds the note is usually the party entitled to enforce the mortgage.

Effect of Assignment

The mortgagor must pay the assignee after receiving notice of the assignment. Payment to the original mortgagee after notice does not discharge the debt.
If the mortgagor has not received notice of the assignment and in good faith pays the original mortgagee, that payment does discharge the obligation to the extent of the payment.
The assignee generally takes subject to all defenses that could be raised against the original mortgagee, unless the assignee qualifies as a holder in due course of the note.

Worked Example 1.5

Bank X assigns a negotiable mortgage note and the accompanying mortgage to Bank Y. The homeowner receives written notice from Bank Y of the assignment. The next month, the homeowner mistakenly mails the payment to Bank X, which cashes the check and refuses to forward funds to Bank Y. Is the homeowner’s payment effective to discharge the installment?

Answer:
No. Once the homeowner receives notice of the assignment, she must pay the assignee, Bank Y. Payment to Bank X after notice does not discharge the debt; the homeowner still owes that installment to Bank Y.

Holder in Due Course of the Note

Key Term: Holder in Due Course
A transferee of a negotiable note who takes the original note for value, in good faith, and without notice of defenses or that the note is overdue, and who therefore takes free of most personal defenses.

If the note is negotiable (payable to order or bearer, for a fixed amount of money, with no additional promises beyond standard clauses), and the assignee becomes a holder in due course:

The assignee can enforce the note free of most personal defenses (e.g., failure of consideration, fraud in the inducement) that the mortgagor might have had against the original mortgagee.
The mortgage, as an accessory to the note, is enforceable to the same extent.

The mortgagor may still assert real defenses (e.g., infancy, duress, fraud in the factum, illegality that renders the obligation void) even against a holder in due course.

On the MBE, if the facts emphasize:

A negotiable note,
Proper indorsement and delivery of the original note, and
The transferee’s good faith and lack of notice of problems,

the question is likely testing holder-in-due-course rules and the limited defenses available to the mortgagor.

Recording and Priority

Recording statutes apply to transfers of interests in real property, including mortgages and assignments of mortgages.

Key recording points:

A mortgage is valid between the mortgagor and mortgagee even if it is not recorded, but an unrecorded mortgage may lose priority to:
- A subsequent bona fide purchaser of the land, or
- A subsequent mortgagee who takes without notice and records first, depending on the jurisdiction’s recording statute.
Assignments of mortgages can also be recorded. Recording an assignment primarily protects the assignee against later claimants to the same mortgage.

When the mortgage is assigned more than once:

As a matter of debt law, the person who first receives a valid transfer of the note generally has the superior claim, because the mortgage follows the note.
Some questions may ask about priority between assignees where one has recorded and one has not; reading the specific statute in the question is important.

Exam Warning

A common MBE trap is confusing "subject to" and "assumption" of a mortgage. Only assumption creates personal liability for the transferee. Always check the language of the transfer and any agreements with the lender. If the deed is silent, presume a “subject to” transfer.

Revision Tip

If the facts are silent about whether the buyer "assumed" or took "subject to" the mortgage, most courts presume the buyer took "subject to" and is not personally liable. Focus on whether the question explicitly uses “assumes,” “agrees to pay,” or similar language.

Other Security Devices and Transfers

Although the MBE emphasizes mortgages, similar transfer principles apply to other security devices.

Key Term: Deed of Trust
A security device in which the borrower (trustor) gives a deed to a neutral third-party trustee, who holds title for the lender’s benefit and may sell the property upon default under a power of sale.

Key Term: Installment Land Contract
A financing arrangement where the seller retains legal title and the buyer takes possession, making installment payments. Legal title is conveyed only when the full contract price is paid.

Key Term: Equitable Mortgage
A transaction that is structured as an absolute deed or sale-leaseback but is in substance intended as security for a loan. Courts treat it as a mortgage, requiring foreclosure rather than allowing the creditor simply to keep the property.

The note/security relationship and many transfer rules (especially the “mortgage follows the note” concept) apply by analogy to these devices.

Worked Example 1.6

Local Bank holds a properly recorded mortgage on Blackacre securing a negotiable note. Local Bank endorses and delivers the original note to Investor but forgets to execute or record an assignment of the mortgage. A year later, thinking it still owns the mortgage, Local Bank executes and records an assignment of the mortgage to Finance Co., but does not transfer the note. Who has the right to foreclose on Blackacre?

Answer:
Investor. The note was validly transferred to Investor by indorsement and delivery, and under the “mortgage follows the note” rule, the mortgage automatically followed. Local Bank’s later assignment of just the mortgage to Finance Co. is either a nullity or ineffective to sever the mortgage from the note. Investor holds both the debt and the security and is the proper party to foreclose.

Worked Example 1.7

Seller borrows against her home from Bank and gives Bank a mortgage securing a note. Seller later deeds the property to Buyer. The deed is silent regarding the mortgage. Buyer knows about the mortgage but does not expressly agree to pay it. After the sale, Bank accepts monthly payments sent by Buyer for six months. Then Buyer stops paying, and Bank forecloses. Who is personally liable for any deficiency?

Answer:
Seller is personally liable; Buyer is not. Because the deed was silent regarding liability, Buyer took the property “subject to” the mortgage and did not assume the debt. Bank’s acceptance of payments from Buyer does not, by itself, create an assumption or release Seller from liability. Seller remains personally liable on the note, and Buyer’s risk is limited to loss of the property in foreclosure.

Key Point Checklist

This article has covered the following key knowledge points:

A mortgagor may transfer property encumbered by a mortgage; the transferee takes "subject to" or "assumes" the mortgage.
"Assumption" of a mortgage makes the transferee personally liable for the debt and makes the original mortgagor a surety; "subject to" does not impose personal liability on the transferee.
A due-on-sale clause allows the lender to accelerate and demand full repayment if the property is transferred without consent but does not automatically void the transfer.
The original mortgagor remains liable on the note unless released by the lender, typically through a novation.
A mortgagee may assign the mortgage and note; the assignee acquires the rights of the original lender and must receive payments after the mortgagor has notice.
Under the “mortgage follows the note” rule, a proper transfer of the note generally carries the mortgage with it.
A holder in due course of a negotiable note takes free of most personal defenses that the mortgagor might have against the original mortgagee.
After notice of assignment, payment must be made to the assignee; payment to the original mortgagee is ineffective.
Recording statutes affect priority between mortgages and can affect priority among multiple assignees of the same mortgage.
Similar principles apply to other security devices, such as deeds of trust, installment land contracts, and equitable mortgages.

Key Terms and Concepts

Mortgage
Security Device
Mortgagor
Mortgagee
Subject to the Mortgage
Assumption of the Mortgage
Due-on-Sale Clause
Suretyship (Mortgage Context)
Novation
Assignment of Mortgage
Mortgage Follows the Note
Holder in Due Course
Deed of Trust
Installment Land Contract
Equitable Mortgage

Mortgages/security devices - Transfers