Mortgages/security devices - Types

Learning Outcomes

This article explains the primary types of security devices used in real property transactions. It details the characteristics and creation of legal mortgages, equitable mortgages (including absolute deeds intended as security and installment land contracts), and deeds of trust. After reading this article, you will be able to distinguish between these various security devices and understand their basic legal implications, enabling you to analyze MBE fact patterns involving real property financing.

MBE Syllabus

For the MBE, you are required to understand the different devices used to secure an obligation with an interest in real property. This includes identifying the nature of the device and the basic relationship it creates between the debtor and creditor. You should be prepared to:

  • Identify the basic components of a mortgage transaction (note and mortgage).
  • Distinguish between a legal mortgage and an equitable mortgage.
  • Recognize situations creating an equitable mortgage, such as an absolute deed intended as security or an installment land contract.
  • Understand the nature and function of a deed of trust.
  • Differentiate between lien theory and title theory states regarding the effect of a mortgage.

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. A borrower gives a lender a document that appears to be a deed conveying Blackacre outright to the lender. However, there is strong evidence they orally agreed the borrower could repurchase Blackacre upon repaying a specified sum. How will a court likely treat this transaction?
    1. As a valid absolute conveyance.
    2. As an equitable mortgage.
    3. As a leasehold agreement.
    4. As an invalid transfer due to the Statute of Frauds.
  2. Which theory regarding mortgages treats the lender as holding legal title to the property until the debt is satisfied?
    1. Lien theory.
    2. Title theory.
    3. Intermediate theory.
    4. Equitable conversion theory.
  3. Seller agrees to sell Buyer Blackacre for $100,000, payable in monthly installments over 10 years. The contract states Seller retains title until the final payment is made. This arrangement is best described as:
    1. A purchase money mortgage.
    2. A deed of trust.
    3. An installment land contract.
    4. A sale-leaseback.

Introduction

When real property is used as collateral to secure repayment of a debt, a security interest in the property is created. This interest gives the creditor (lender) the right to take action against the property if the debtor (borrower) defaults on the primary obligation (typically a promissory note). Various legal devices can be used to create such security interests. The most common device is the mortgage, but other arrangements can function similarly and may be treated as equitable mortgages by the courts. Understanding the different types of security devices is essential for analyzing property transactions and foreclosure issues on the MBE.

Key Term: Security Interest An interest in property created to ensure the payment of a debt or the performance of an obligation.

Types of Security Devices

Mortgage

A mortgage is a security interest in real property held by a lender as security for a debt, usually a loan of money. The borrower is the mortgagor, and the lender is the mortgagee. The mortgage instrument itself typically must be in writing to satisfy the Statute of Frauds.

Key Term: Mortgage A security interest in specific real property to secure payment of a debt.

Key Term: Mortgagor The debtor/borrower who gives the mortgage.

Key Term: Mortgagee The creditor/lender who receives the mortgage interest.

Two primary legal theories exist regarding the nature of the interest held by the mortgagee:

  1. Lien Theory (Majority View): The mortgagee holds only a security lien on the property. The mortgagor retains legal and equitable title and possession unless and until foreclosure occurs. The mortgagee cannot take possession before foreclosure is complete.
  2. Title Theory (Minority View): Under traditional common law, the mortgage conveyed legal title to the mortgagee. The mortgagee retained title until the mortgage was satisfied or foreclosed. Subject to the terms of the mortgage, the mortgagee could theoretically take possession at any time.
  3. Intermediate Theory (Minority View): A hybrid approach where legal title remains with the mortgagor until default, at which point legal title passes to the mortgagee.

Purchase Money Mortgage (PMM)

A PMM is a specific type of mortgage used to finance the acquisition of the property itself. It can be given either to the seller of the property as part of the purchase price, or to a third-party lender (like a bank) whose loan enabled the buyer to acquire the property. PMMs often have special priority rules.

Deed of Trust

Functionally similar to a mortgage, a deed of trust involves three parties: the debtor/borrower (trustor), a third-party trustee (often associated with the lender), and the lender (beneficiary). The trustor conveys title to the trustee, who holds it for the benefit of the beneficiary (lender). If the trustor defaults, the beneficiary instructs the trustee to foreclose. Many states permit non-judicial foreclosure under a "power of sale" clause commonly found in deeds of trust, making foreclosure faster and less expensive than the judicial foreclosure usually required for mortgages.

Key Term: Deed of Trust A security device where the borrower (trustor) gives a deed to a trustee who holds title for the benefit of the lender (beneficiary).

Installment Land Contract

Also known as a contract for deed, this is an agreement where the buyer (vendee) agrees to make regular installment payments to the seller (vendor) over a period of time. The vendor retains legal title until the final payment is made, at which point the vendor delivers the deed. Traditionally, if the buyer defaulted, the vendor could cancel the contract, retain all payments made as liquidated damages, and retake possession. Modern courts and statutes often provide protections for defaulting buyers, sometimes treating the installment contract as functionally equivalent to a mortgage, requiring foreclosure procedures or allowing the buyer restitution for payments exceeding the seller's damages.

Key Term: Installment Land Contract A contract where the buyer makes installment payments to the seller, and the seller retains legal title until the full price is paid.

Equitable Mortgages

Courts will sometimes treat a transaction as a mortgage, despite its form, if it was intended as security for an obligation. This is an equitable mortgage. Common examples include:

  1. Absolute Deed Intended as Security: If a landowner borrows money and gives the lender a deed to the land that appears absolute on its face, courts may treat this as an equitable mortgage if clear and convincing evidence shows it was intended merely as security. Factors considered include the existence of a debt, the grantee's promise to return the land upon repayment, the inadequacy of the "purchase price" compared to the property's value, the grantor's financial distress, and prior negotiations. Parol evidence is admissible to show this intent.
  2. Sale-Leaseback: A landowner sells property for cash and then leases it back from the buyer for a long term. Courts may find an equitable mortgage if the transaction seems intended as a disguised loan, considering factors like rental payments approximating mortgage payments, the existence of a repurchase option for the original seller/lessee, and whether the repurchase price is significantly below expected future value.

Key Term: Equitable Mortgage A transaction that, despite its form (e.g., an absolute deed), a court determines was intended as security for an obligation and treats as a mortgage.

Worked Example 1.1

Debtor, facing financial hardship, approached Creditor for a loan. Debtor owned Blackacre, worth 200,000.CreditorloanedDebtor200,000. Creditor loaned Debtor 50,000. Debtor signed a document stating, "I hereby convey Blackacre to Creditor." Simultaneously, they orally agreed that if Debtor repaid the $50,000 plus 10% interest within one year, Creditor would reconvey Blackacre to Debtor. Debtor failed to repay within the year. Creditor claims absolute ownership of Blackacre. Debtor argues the transaction was merely security. How should a court likely rule?

Answer: The court will likely rule that the transaction created an equitable mortgage. Despite the form of an absolute deed, the circumstances strongly suggest a security arrangement: the "purchase price" (50,000)wassignificantlylessthantheproperty′svalue(50,000) was significantly less than the property's value (200,000), Debtor was in financial distress, and there was an oral agreement for reconveyance upon repayment. Courts look beyond the form to the substance and intent of the parties. Parol evidence of the oral agreement is admissible to show the deed was intended as security.

Worked Example 1.2

Developer sells lots in a new subdivision. Buyer purchases Lot 1 using an installment land contract, paying 10,000downandagreeingtopay10,000 down and agreeing to pay 1,000 per month for 10 years, after which Developer will deliver the deed. After 5 years of payments ($70,000 total paid), Buyer misses a payment. The contract contains a forfeiture clause. What are Developer's traditional rights, and how might modern law differ?

Answer: Traditionally, Developer could declare forfeiture, cancel the contract, retain all payments made ($70,000), and retake possession of Lot 1. Modern courts, however, often view such forfeiture as harsh. They might treat the contract as an equitable mortgage, requiring Developer to initiate foreclosure proceedings, or allow Buyer a grace period to cure the default (equity of redemption), or require Developer to refund payments exceeding actual damages (restitution).

Key Point Checklist

This article has covered the following key knowledge points:

  • Security interests are used to secure debt with real property.
  • The most common device is a mortgage (Mortgagor = Borrower, Mortgagee = Lender).
  • Lien theory (majority) vs. Title theory (minority) affects mortgagee's right to possession before foreclosure.
  • A Purchase Money Mortgage (PMM) finances the property purchase itself.
  • A Deed of Trust involves a borrower (Trustor), lender (Beneficiary), and a Trustee holding title.
  • An Installment Land Contract involves the seller retaining title until the buyer completes payments; traditional forfeiture clauses are often modified by modern law.
  • Courts may find an Equitable Mortgage where a transaction (like an absolute deed or sale-leaseback) was intended as security.

Key Terms and Concepts

  • Security Interest
  • Mortgage
  • Mortgagor
  • Mortgagee
  • Deed of Trust
  • Installment Land Contract
  • Equitable Mortgage
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