Mortgages/security devices - Types of security devices

Learning Outcomes

After reading this article, you will be able to identify and distinguish the main types of security devices used in real property law, including mortgages, deeds of trust, installment land contracts, and related alternatives. You will understand their legal characteristics, how they secure obligations, and the implications for MBE-style questions.

MBE Syllabus

For MBE, you are required to understand the different forms of security devices used to secure obligations involving real property. This includes their legal nature, how they are created, and their consequences for both creditors and debtors. You should be able to:

  • Distinguish between a mortgage, deed of trust, and installment land contract.
  • Recognize the legal effect of an absolute deed as security (equitable mortgage).
  • Identify the features of sale-leaseback arrangements and vendor’s liens.
  • Understand the implications of each device for foreclosure and debtor/creditor rights.

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 real property security device?
    1. Mortgage
    2. Deed of trust
    3. Installment land contract
    4. Fee simple determinable
  2. In a deed of trust, who typically holds legal title to the property?
    1. The borrower (trustor)
    2. The lender (beneficiary)
    3. A neutral third-party trustee
    4. The state
  3. An absolute deed given as security for a loan is most likely to be treated by a court as:
    1. A valid conveyance
    2. An equitable mortgage
    3. A quitclaim deed
    4. A lease
  4. Which security device allows the seller to retain title until the purchase price is fully paid?
    1. Mortgage
    2. Installment land contract
    3. Deed of trust
    4. Vendor’s lien

Introduction

Security devices in real property law are legal instruments that secure the performance of an obligation, usually the repayment of a loan. Understanding the main types of security devices is essential for the MBE, as questions often test your ability to distinguish their features and legal consequences.

Types of Security Devices

1. Mortgage

A mortgage is the most common real property security device. The borrower (mortgagor) gives the lender (mortgagee) an interest in the property as security for a loan. The mortgagor retains title and possession, but the mortgagee can foreclose if the borrower defaults.

Key Term: Mortgage A security interest in real property given by a borrower to a lender to secure repayment of a debt, allowing foreclosure if the debt is not paid.

2. Deed of Trust

A deed of trust involves three parties: the borrower (trustor), the lender (beneficiary), and a neutral third-party trustee. The trustor conveys title to the trustee, who holds it as security for the lender. If the borrower defaults, the trustee may sell the property, often without court involvement.

Key Term: Deed of Trust A security device where a borrower conveys title to a trustee, who holds it for the benefit of the lender, with power of sale if the borrower defaults.

3. Installment Land Contract

An installment land contract (or contract for deed) is a security device where the seller retains legal title until the buyer completes all required payments. The buyer takes possession and makes installment payments. If the buyer defaults, the seller may reclaim the property, often keeping prior payments.

Key Term: Installment Land Contract A contract where the buyer takes possession and pays in installments, but the seller retains title until full payment is made.

4. Absolute Deed as Security (Equitable Mortgage)

Sometimes, a borrower gives the lender a deed that appears absolute but is intended as security for a loan. Courts may treat this as an equitable mortgage if clear and convincing evidence shows the parties intended a security arrangement, not a true sale.

Key Term: Equitable Mortgage A transaction where a deed, though absolute on its face, is treated as a mortgage because it was intended as security for a debt.

Key Term: Absolute Deed A deed that conveys full title to property, but may be recharacterized as a mortgage if intended as security for a loan.

5. Sale-Leaseback

A sale-leaseback occurs when a property owner sells real estate and immediately leases it back from the buyer. If the arrangement is intended to secure a loan, courts may treat it as a disguised mortgage.

Key Term: Sale-Leaseback A transaction where property is sold and then leased back to the seller, sometimes treated as a security device if intended to secure a debt.

6. Vendor’s Lien

A vendor’s lien is an equitable lien that arises when a seller transfers title to a buyer but is not paid the full purchase price. The seller may enforce the lien to recover the unpaid amount.

Key Term: Vendor’s Lien An equitable lien in favor of a seller who has transferred title but not received full payment.

Worked Example 1.1

A homeowner borrows $200,000 from a bank to buy a house and signs a mortgage. The homeowner defaults. What remedy does the bank have?

Answer: The bank may foreclose on the mortgage, selling the property to satisfy the debt.

Worked Example 1.2

A buyer enters into an installment land contract to purchase a home. After paying for three years, the buyer defaults. What can the seller do?

Answer: The seller may reclaim the property, often keeping prior payments, unless state law provides otherwise.

Worked Example 1.3

A property owner conveys a deed to a lender as security for a loan, but the deed looks absolute. The owner continues to live in the house and pays the lender monthly. If the owner defaults, what is the likely result?

Answer: A court may treat the deed as an equitable mortgage, requiring foreclosure procedures rather than treating it as a true sale.

Exam Warning

MBE questions may disguise an equitable mortgage as an absolute deed. Always consider the parties’ intent and the surrounding facts to determine if a deed is security for a loan.

Revision Tip

Remember: In a deed of trust, the trustee holds title for the lender’s benefit. In an installment land contract, the seller keeps title until all payments are made.

Key Point Checklist

This article has covered the following key knowledge points:

  • Security devices secure repayment of a debt or obligation using real property.
  • Main types: mortgage, deed of trust, installment land contract, absolute deed as security (equitable mortgage), sale-leaseback, vendor’s lien.
  • Mortgages and deeds of trust both secure loans but differ in foreclosure procedures and parties involved.
  • Installment land contracts let the seller retain title until full payment.
  • Absolute deeds intended as security may be treated as equitable mortgages.
  • Sale-leasebacks and vendor’s liens can also function as security devices.
  • Courts look to intent and substance, not just form, to classify security devices.

Key Terms and Concepts

  • Mortgage
  • Deed of Trust
  • Installment Land Contract
  • Equitable Mortgage
  • Absolute Deed
  • Sale-Leaseback
  • Vendor’s Lien
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