Mortgages

A mortgage is a transfer of an interest in property to secure a debt. Historically a mortgage was viewed as a transfer of title, so that the lender was granted a present right to possess the property, until the debt was repaid. The modern view is that a mortgage is a lien, in other words, a non-possessory property interest. However even under the lien theory, the mortgage document may grant the lender/mortgagee the right to take possession of the property, including the right to collect any rents from tenants, if the mortgagor defaults on the debt. 

Even if the mortgagor/borrower defaults on the debt, they have the right to redeem the property by paying the debt, at any time prior to a foreclosure. Foreclosure is accomplished by public sale of the property. About half of the states are judicial foreclosure states. They require the mortgagee to sue the mortgagor and obtain a court judgment in order to conduct a foreclosure sale. In nonjudicial foreclosure states, the mortgagee simply instructs a trustee to conduct a public sale of the property after notice to the mortgagor/owner and the public. 

When there is more than one mortgage on a property, priority among mortgagees is determined based on the recording acts. Generally, a later recorded mortgage without notice will have priority over a prior, unrecorded mortgage. The proceeds of a foreclosure sale after the sale costs are paid first to the foreclosing mortgagee, then to junior mortgagees and lienholders, and finally any surplus is returned to the mortgagor. If the mortgage being foreclosed is junior to one or more other mortgages on the property, the foreclosure sale does not divest the senior mortgage(s) and the foreclosure sale buyer will take the property subject to senior mortgage(s).

To be valid, a mortgage, like a deed, must describe the property, identify the mortgagee, and must be signed by all owners of the property.

An unrecorded mortgage may be lost, or may lose priority, under recording acts.

A mortgage gives the lender/mortgagee the right to foreclose and sell the property if and only if the owner/mortgagor defaults on repaying the debt.

A mortgage may also authorize the lender/mortgagee to take possession of property as soon as the owner/mortgagor falls behind in payments. States following the title theory of mortgages permit lenders to take possession after default as an implied term. In states following the lien theory of mortgages, the lender may not take possession unless authorized by the mortgage document.

The owner/mortgagor may prevent foreclosure sale (“redeem”) by paying the entire debt due before the foreclosure sale. Some states allow redemption AFTER a foreclosure sale, for up to a year, permitting the former owner essentially to buy their property back.

Any defense to repayment of the loan contract (fraud, duress, capacity, etc.) is also a defense to foreclosure.

In judicial foreclosure states, the lender must file a lawsuit and the owner may assert defenses in the foreclosure lawsuit.

In nonjudicial foreclosure states, an owner wishing to assert defenses must file a lawsuit against the lender asking the court for an injunction to stop the nonjudicial foreclosure sale, and carrying the burden to establish a defense.

Surplus and deficiency

After a foreclosure sale the net proceeds of the property sale are paid to the foreclosing lender/mortgagee. If those proceeds are not enough to repay the debt, there is a “deficiency.” States vary in allowing or restricting lenders from suing former owners for a deficiency after foreclosure. On the other hand if the foreclosure sale proceeds are more than enough to repay the entire debt and other junior liens, the difference is a “surplus”, and must be returned to the former owner in all states.

Transfers:

By mortgagee/lender – the mortgage follows the Note. The party entitled to collect the debt is also entitled to foreclose the property.  Therefore a party seeking to foreclose must be the party to whom the debt is payable at the time of foreclosure. (Ibanez case)

By owner/borrower – If property is transferred by deed before the mortgage debt is repaid, the mortgage remains a lien on the new owner’s property. If the new owner assumes the mortgage the new owner is making a contractual promise both to the lender and the former owner that the new owner will pay the debt. On the other hand if the new owner does not assume the mortgage she is said to take the property “subject to” the mortgage, and has no personal liability on the debt. However she may still lose the property if the former owner does not repay the lender.

Equitable mortgage-if an owner grants a deed to a lender, with the understanding that the property will be conveyed back to the owner when the loan is repaid, a court may treat the deed as a mortgage. Factors favoring a finding of equitable mortgage are: is there a loan? was the price paid for the property less than the fair value? Did the former owner remain in possession of the property? Has the lender promised to reconvey the property to the borrower when the debt is repaid?

Installment sale as mortgage: a purchase and sale contract in which the buyer takes possession but makes payments to the seller in installments over time resembles a deed and mortgage in a number of ways. However the seller will retain legal title until the buyer finishes paying the price in installments. In some states, courts will treat an installment sale like an equitable mortgage, giving the buyer the right to redeem the property by repaying the debt or allowing a defaulting buyer to recover a surplus on resale.