JMR_RealEstate COMMON TERMS Mortgagor person who borrows $$ to buy a piece of property Vendor person or agency that sells I.

Mortgagee lender/creditor Vendee buyer

o o

Warranties of Quality A. Stambovsky v. Ackley Rule: A condition that impairs the value of property, known to the seller and left undisclosed to the buyer can constitute a basis for rescission of the contract. Where a condition which has been created by the seller materially impairs the value of the contract and is peculiarly within the knowledge of the seller or unlikely to be discovered by a prudent purchaser exercising due care with respect to the subject transaction, nondisclosure constitutes a basis for rescission as a matter of equity a) Notes o Growing trend to treat silence as fraudulent concealment if the matter not disclosed is material Additional factors that tend to increase the probability of seller liability include Property is a personal residence Defect is dangerous to health or safety Seller personally created the defect Seller gave reassurances to the buyer Purchaser did not rely on a professional inspection o New houses by builders = Implied warranty o Old houses = outright fraud claims, fraudulement concealment theory, any express warranties or contract covenants o Psychologically impacted many states have adopted statutes that preclude liability of sellers for failure to disclose a home that is psychologically impacted B. Speight v. Walters Development Co., Facts suit for breach of implied warranty of workmanlike construction against the builder. After purchase, buyers noticed water damage and mold Implied Warranty of Workmanlike Construction requires that a building be constructed in a reasonably good and workmanlike manner and be reasonably fit for the intended purpose Issue can they sue under implied warranty for a subsequent purchaser? Rule: Doctrine of Implied warrantly of workmanlike construction applies to subsequent, as well as initial purchasers Notes o Statutes of Repose Statutes of limitation specifically for construction cases. Incorporate the discovery rule into their time periods and do not begin to run until the injury was or should have been discovered. o Express disclaimer can negate the implied warranty, but it must be clear and unambiguous

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JMR_RealEstate o NOR statutes (notice and repair) 30 states have adopted which require property owners to put builders on noite of construction defect claims and give them an opportunity to fix before suit is filed C. Title Covenants in Deeds o Title Assurance - set of mechanisms which buyers of land use to (1) learn whether sellers can convey title and (2) obtain recovery if the title turns out not to be as represented. o Deed Covenant simply a statement in the deed which gives the grantee rights against the grantor if the title is not promised Crudest and least effective Few rely on it exclusively Deed may contain no covenants of title at all called a Quitclaim Deed Types of Title Covenants in Deeds Covenant of Seisin this is a promise by the grantor that he or she owns the land, although not necessarily free of encumbrances Right to Convey usually overlaps covenant of seisin, a grantor who is AIF for the owener of the land under a valid DPA would have the right to convey, but would not have seisin Against Encumbrances This is a promise that title is passing free of mortgages, liens, easements, future interests in others, covenants running with the land, etc. Warranty and Quiet Enjoyment They amount to a promise by the grantor to compensate the grantee for the loss if the title turns out to be defective or subject to an encumbrance - Covenant of warranty or quiet enjoyment is prospective in nature and is breached only when there is an actual or constructive eviction Further Assurances this is a promise by the grantor to execute such further documents as may be necessary to perfect the grantees title Special Warranty Deed The most obvious point of similarity between deed covenants and the contract covenant is that both are concerned with title Deed covenants of title are not breached by legal violations that dont themselves affect title. Thus, existing conditions which breach local zoning or other ordinances are not usually considered to violate deed covenants of title Important Differences between Contract Covenants and Deed Covenants for Title o Remedies Available Discover that title is unmarketable Contract: rescind, may also get specific performance Deed Covenant: damages Standard of Quality Contract: good + marketable (not subject to unreasonable risk of litigation) Deed Covenants: no such test, good title will suffice Differences between Present and Future Covenants o Distinction is important because of SOL Present covenants SOL starts to run when deed is delivered o Future covenants run with the land, present do not
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Future Covenants

Present Covenants

JMR_RealEstate D. Brown v. Lober o Fact: Limited warranty deed, missing further assurances, only present covenants o Issue: What constitutes constructive eviction? o Rule: Covenant of warranty or quiet enjoyment is prospective in nature and is breached only when there is an actual or constructive eviction Notes Examples of Constructive Eviction o Paramount title holder gets decree of specific performance/ejectment o Orders grantee off land or threatens litigation o Grantee buys the paramount title in order to avoid being evicted by its holder o Grantee surrenders claim and moves off the land o Sued by person with paramount title and enters a settlement Physical interference is an actual eviction o If the government is the holder of paramount title then that fact alone will comprise an eviction Recovery Limits o Cannot exceed the consideration received + interest, applies equally to all covenants o Limited to actual loss E. Title Assurance Methods Proof of Title o Most Government offices act as passive depositories for the instruments o Recording is done at the county level Hawaii and Alaska record at the state level Title Insurance has arisen to absorb and spread most the risks that the public records system presents o Recording Acts: Deed is effective even without being recording, but law incentivizes recording. F. Title Insurance Title insurance is the predominant method of assuring real estate in the United States today o It is the insurers promise that, if title is not in the condition described in the policy the insurer will indemnify the insured the resulting losses Obtain title searches and exams before issuing policies Title companies spend a great deal of time any money in loss avoidance Most losses include o Mechanics Liens o Plant search errors o Examination and opinion errors o Forgeries o Property taxes G. Settlement o Closing also known as Settlement 1. Review the prelim title report Obtain executed copies of the deed Obtain funds from buyer and the new lender
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JMR_RealEstate Arranging for completion of inspections Record docs Disburse For funds specific to foreclose damages for to quiet title or installments performance his vendee's which are due the breach rescind Lawye of the contract rights plus interest rs have a declining role in residential real estate transactions o B ut see, at least two courts have held that closing services, such as preparing documents and explaining them to buyers and sellers is unauthorized practice of law o Dual Representation of Buyer/Seller Sometimes individuals cannot consent to a conflict of interest o RESPA (REAL ESTATE SETTLEMENT PROCEDURES ACT) Giving consumers more information about settlement costs and services Prohibits referral fees and fee-splitting among providers of settlement services Such fees were widespread before RESPA controlled entities are allowed within certain circumstances, mostly, if consumers have notice. o Expansion - RESPA includes mortgages, and subordinate lien transactions and refinancing o Fee-Splitting- prohibits receipt of a division of fees or charges made for a settlement service, other than for services actually performed Mark-ups by lenders has been controversial o Yield Spread Premiums RESPEA is not implicated when lender makes profit from loan origination fees Might be implicated when Broker refers to lender and gets profitsome courts see that as possible fee splitting, undecided. o Cant require use of a specific title insurer o Alternative to RESPA It hasnt been as effective as intended in bringing down service prices and competitive levels new proposal never approved GMPA H. The Installment Land Contract o Most common substitute for the mortgage or deed of trust as a land financing device Aka Contract for Deed, Long Term Land Contract Vendee goes into possession and agrees to make monthly installment payments of principal and interest until the principal balance is paid off. Vendor keeps legal title until final payment executes deed to the land o Different from an executory contract because it governs the parties throughout the life of the debt, whereas the other doesnt govern after closing date

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JMR_RealEstate Forefeiture Clause contained in almost all installment land contracts Provides that Time is of the essence and that when there is a default they can o Terminate the contract o Retake possession o Retain all the payments as liquidated damages

1. Russell v. Richards To determine whether a forfeiture shocks the conscience of the court, this Court applied the following equitable considerations; Amount of $$ paid by the buyer to the seller The period possession of the real property by the buyer The market value of the real property at the time of default compared to original sales price Rental potential o Upon default and forfeiture, the buyer's interest is terminated and there is no enhancement value to be recovered by the buyer o Only unusual equitable circumstances create an exception to the rule that a general consequence of default is forfeiture of all interest Notes Strict Enforcement Approach When a purchaser enters into a contract for a deed w/ a seller, they run the risk of default and losing the property Relaxing Strict Enforcement Many state courts have in recent years refused to enforce a against a defaulting vendee forfeiture clauses that the courts have deemed unreasonable or inequitable. 2. Petersen v. Hartell Facts: entered agreements with three grandchildren to sell portions of land, with no down payment and monthly installments of $50 or less. Buyers given the right to pay the entire balance of the purchase of the price at any time. No provision making time of the essence or specifying remedies in the event of default o Kids missed payments o Granny decided to terminate contract Issue: Do plaintiffs have a right to conveyance of the property in exchange for full payment of the purchase price in light of their substantial part performance and the sellers notice of election to terminate the contract on account of such defaults? Rule: Vendee who has made substantial payments on a land installment contract has an unconditional right to a reasonable opportunity to complete the purchase by paying the entire remaining balance plus damages before the seller is allowed to quiet title. o Notes Judicial recognition of a right of redemption- some states allow the tardy vendee a final opportunity to pay the balance before losing the land
o

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JMR_RealEstate Sometimes this right is unconditional, while other courts enforce it only if substantial payments have been made o Many courts impose a good faith requirement Restitution as an alternative form of relief for the vendee Actual Damages: Market Value, Rental Value, Costs of Repossession, Refinancing and Resale the costs of repossession are actual damages, Miscellaneous Damages 3. Sebastian v. Floyd - Facts: P bought house and paid $3800 down, was to pay $10,9000 plus 8.5% interest in $120 monthly installments. Missed 7 installments. - Issue: Can clause in an installment land contract providing for forfeiture of the buyers payments upon the buyers default may be enforced by the seller. - Rule: Sellers remedy for breach of the contract is to obtain a judicial sale of the property o Equitable title passes to the buyer when the contract is entered No practical distinction between the land sale contract and a purchase money mortgage, both is the sellers financing using the property as collateral for the loan. o When the purchaser of property has given a mortgage and subsequently defaults on his payments, his entire interest in the property is not forefeited o The modern trent treats land sale contracts as analgogous to conventional mortgages, thus requiring a seller to seek a judicial sale of property upon the buyers default. Notes Treating the installment land contract as a mortgage o Judicial treatment in this manner is for remedy purposes o Some states recognize forefeiture can still occur in two circumstances Abandonment Only minimal payments have been made and the security has been jeopardized. o Restatement says installment land contract creates a mortgage so they will be governed procedurally and substantively by the law of mortgages. Waiver or estoppels as a defense against forfeiture o Prior acceptance of late payments will constitute waiver of the forfeiture clause Similar to Equity of remedemption II. Rights and Duties of the Parties Prior to Foreclosure A. Theories of Title: Possession, Rents, and Related Considerations

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JMR_RealEstate

Intermediate Theory

Title Theory

Lien Theory

Legal Title to the mortgaged real estate remains in the mortgagee until the mortgage is satisfied or foreclosed For practical and theoretical purposes the mortgagor = owner of the land
1. Statutes in some states give the motgagor the right to possession until default 2. Commonly used mortgage forms containing similar provisions achieve the same result

the mortgagee is regarded as owning a security interest only and both legal and equitable title remain in the mortgagor until foreclosure or deed
Substantial amount of jxns follow this theory Some States providethat the mortgagee is entitled to maintain a possessory action for the mortgaged real estate Some also state "mortgagor shall be deemed to be the owner of the land"

Legal and equitable title remain in the mortgagor until a default, at which time legal title passes to the mortgagee
Only a few states follow Mortgagee has the right to possession and to collect rents and profits after mortgagor default

if not stated, Mortgagee has a right to immediate possession against the mortgagor

Lien theory means that a mortgagor, prior to foreclosure, may prevail against the mortgagee for any interference withthe mortgagor's possession of the mortgaged real estate to the same extent that any owner of land would prevail against a trespasser

o Notes Classifications of states - 32+ Follow Lien Theory! Mortagee in possession in lien states Mortgagee may sometimes acquire possession of the mortgaged property legally by means other than foreclosure o 1) consent o 2) a mortgagee who enters into peaceable possession in good faith after purchasing at an invalid foreclosure may remain in possession until a valid foreclosure o 3) if mortgagor abandons real estate, mortgagees security interest is usually deemed sufficient to permit the mortgagee to take and retain possession until foreclosure Policy consideration we dont want vandalism and deterioration and prefer productive use Liability of a mortgagee in possession Mortgagee-in-possession status makes the mortgagee liable in tort for injuries resulting either through is actionable fault in utilizing the property or by reason of its failures to perform duties imposed by law upon the owner of the land. Under a duty to maintain and preserve the property o There is a limit on the duty low standard Avoiding Mortgagee in possession status Because of the responsibilities, mortgagees use other methods, such as receiverships to gain access to the rents and profits and control over the mortgaged real estate pending foreclosure.

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JMR_RealEstate 1. Dover Mobile Estates v. Fiber Form Products, Inc. Facts: five year lease, subordinate to any deeds of trust or mortgages placed on the property unless mortgagee or beneficiary elected to have the lease be superior o Encumbered property with 2nd deed, defaulted, foreclosed, trustee sale Dover purchased o Fiber said foreclosure extinguished lease and was only month to month now, Fiber gave notice of Intent to Vacate, Dover sued for rent and conversion Lower court rules for Fiber Issue: Is a lease extinguished with foreclosure? Holding: Trustees sale extinguished the lease, thereby allowing 30 days notice to vacate o A lease is generally deemed subordinate to a deed of trust if the lease was created after the deed of trust was recorded o That creates the possibility that the lease could be extinguished by foreclosure Non-disturbance agreement o Notes Senior vs. subordinate leases - whether a lease is senior or subordinate to a foreclosure mortgage can have significant consequences for both the lessee and the

foreclosure sale purchaser (If recorded, is superior to the mortgage some states doesnt matter) Priority Preferences
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JMR_RealEstate Normally assume that a tenant desires protection against a foreclosure wiping out lease rights Varying priorities by agreement Subordination agreement an act by which one having an interest in particular real estate consents to a reduction in priority as against another holding an interest in the same real estate Nondisturbance agreement a mortgagee holding a senior lien agrees that in the event of foreclosure, the foreclosure purchaser will permit the lease to continue and allow the tenant to remain on the leased premises so long as the tenant continues to comply with the terms of the lease and is not in default. Attornment used to readjust the relationship of the parties. Tenant agrees if interest is transferred by deed or foreclosure, tenant is bound to the new purchaser as if it were the original landlord (kind of like assignment) o all three may be combined in a subordination, non-disturbance, attornment agreement III. Transfer and Discharge A. Transfer of the Mortgagors Interest - Many ways to finance 1 way is to have the purchaser take over an existing mortgage loan on the property o Title is transferred, mortgage stays, might get a 2nd mortgage to pay off the balance of the loan being taken over PROS: low interest rates, avoid closing costs (but beware of due on sale clauses benefits no really realized with these and almost all mortgages have them!) o Two methods to take over (1) Assuming the Mortgage (2) Taking subject to it 1. Middleton v. Hancock (Former Owner v. Subsequent Owner) I agree to take over I promise to pay o Facts: Middleton sold Midgate plaza, a strip mall to Hancock who agreed to take over the payments on the mortgage on the property. However, Hancock (D) did not execute any mortgage assumption agreement and when the property was no longer profitable stopped making mortgage payments. Bank told Middleton to pay up, he did and then sough reimbursement from Hancock and foreclosure. o Issue: (1) Does a purchaser of property assume liability on a loan secured by a mortgage where the purchaser agrees in the contract to take over payments on the loan but does not otherwise expressly assume the mortgage? (2) Does an original mortgagor have recourse through subrogation when there isnt a mortgage assumption agreement, not foreclosed yet, and mortgagor is willing to pay the entire debt? o Rule: (1) A purchaser of property does not assume liability on a loan secure by a mortgage where the purchaser agrees in the contract of sale to take over payments on the loan but does not otherwise expressly assume the mortgage. (2) They do have recourse through subrogation

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JMR_RealEstate The Suretyship Relationship - The principal surety principle governs the relationship between the mortgagor and the grantee. If grantee assumed mortgagor can subrogate, ask for reimbursement, and exonerate Options for principalsurety; o Reimbursement (Recovery from grantee); Exoneration (Court ordered payment of mortgage by grantee, Kind of specific performance) Subrogation Mortgagor can sue the grantee on the note and foreclose if the mortgage hasnt already been foreclosed by the mortgagee. Disadvantage is that it is not available for partial payments Reimbursement- (need assumption) Entitled to reimbursement from grantee if they pay, provided they assumed the obligation. Also can get incidentals, full payment isnt necessary like in subrogation. But reimbursement is insecured and if grantee is insolvent or disappears..SOL Exoneration- (need assumption) may obtain court order making grantee pay. Specific performance of the assumption agreement o ALL THREE AVAILABLE IF ASSUMPTION AGREEMENT - Notes o Mortgagor liability to government agencies FHA and VA insure or guarantee some types of mortgage loans. They assure mortgage lenders that if foreclosure, lender will not sustain a loss Procedures to approve buyers to mitigate risks through HUD Seller needs to obtain release from liability from lender, otherwise can still be liable for debt and government can sue for a deficiency! Bullhonkey! o Assuming grantees assertion of defenses Grantee is stopped to raise defenses because that would constitute unjust enrichment (even if original mortgagee defrauded the original mortgagor) o Subject-to grantees assertion of defenses Some situations allowed defenses, ex. If property was a gift o Nature of the Mortgagees Right against the Grantee Mortgagee (lender) can recover because they are a third party beneficiary Grantee must have a direct liability to the mortgagee

An assumption is a promise by the puchaser to make the payments and perform the other covenants in the note and the mortgage must be express even if original mortgage contains "promise to pay" binding "successors and assigns" of the property that covent wil not run w/ the land and become bind on a future owner in the absence of an assumption; an express promise is required Promise doesn't have to be written, but can be in the contract of sale, deed or other document Does the agreement to "take over" also establish an express promise to pay? Page 10 of 31

"Subject to"

"assume it"

JMR_RealEstate Circular logic, criticized b/c contract between 2 parties creates enforceable right in a third o Recission of the assumption agreement HELP? WHAT DOES THIS NOTE SAY?! o Break in the Chain Sometimes the sales include many parties, if it is found that B didnt actually assume anything then the latter parties (C,D,E) will have assumed nothing also. 2. Suretyship Defenses Transfer-Created Suretyship o Suretyship: the obligation of a person to answer for the debt of another. A surety or guarantee, in finance, is a promise by one party (the guarantor) to assume responsibility for the debt obligation of a borrower if that borrower defaults. The person or company that provides this promise, is also known as a surety or guarantor. o Upon mortgagors (Buyer) transfer of real estate mortgagor becomes a surety o Where does principal obligation lie? With grantee IF there is an assumption With real estate IF no assumption Morgagor is not released from primary liability unless expressly released by Mortgagee Surety is released from duties when the deal changes in way that impairs the suretys position o Changes include Suretyship Defenses Releasing the grantee from personal liability Mortgagor may be discharged based on Releasing some or all of the real estate from the Mortgagees actions that: mortgage Have made it less Have made it more If mortgagee releases all of the real likely Grantee or difficult for estate land will satisfy Mortgagor to assert o Minority released to extend of debt recourse against value of land released Grantee and land o Majority mortgagor is completely discharged If only a portion of real estate released Mortgagor discharged to extend security now inadequate to cover debt. Impairing the lenders right to realize on the security of the mortgage Modification of Obligation (modifying interest rate or terms of payment) Majority a total discharge if assumption o If subject to, discharge is equal to value of real estate Minority & Restatement discharge only to extent modification would otherwise damage mortgagor o what types of modifications would result in no discharge under this rule or extending the time maturity of the loan Majority completely discharges mortgagor if grantee assumed o If grantee took subject to, discharge to exent of value of land at time of extension
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JMR_RealEstate Restatement discharge only to extent time extension would otherwise cause loss 3. First Federal Savings and Loan Assn of Gary v. Arena (Mortgagee v. Mortgagor) Facts: Bank contracted with Grantee to alter the terms of the note and then sought to hold them to the modified terms Issue: Can a lender contract with purchaser of a mortgaged property to alter the terms then hold the mortgagor to the new terms? Rule: A lender/mortgagee cannot contract with a vendee of mortgaged property to alter the terms of the note and then hold the mortgagor to the new terms of the note o Mortgagor = surety Notes o Extent of the discharge After a subject to transfer, an increase in the interest rate w/out grantors consent discharges the grantor to the extent of the value of the property After an assumption totally discharged o Effect of modifications and time extensions on the mortgagor Mortgagor is entitled to any advantageous modifications, but not bound by any disadvantageous ones o How can mortgagees avoid the suretyship defense? 1) survival clause/waiver of defenses clause clause that preserves 2) obtain the mortgagors consent to the modification after the mortgage is entered into, but before the modification is made 3) obtain consent after the modification is made Restrictions on Transfer by the Mortgagor 1. The Due-on Clauses Due On Sale Clause mortgage provision that affords the mortgagee the right to accelerate the mortgage debt and foreclose if the mortgaged real estate is transferred without the mortgagees consent a) Due-on-Encumbrance Restrictions Alternative to due on sale clause. This type of clause authorizes the lender to accelerate the debt if the mortgagor further encumbers the real estate. o Used mainly to protect against impairment of mortgage security by a debtor who incurs a junior mortgage debt and thus reduced his or her economic stake in the real estate b) Increased-Interest-on-transfer-clauses Authorizes the lender to increase or adjust the mortgage interest rate in the event of a transfer by the mortgagor o Unlike due on sale clause it does not confer an absolute right to acceleate the mortgage debt upon transfer o Only if transferee fails to pay the increased payments default + acceleration can occur c) Installment Land Contract Prohibitions on Transfer Prohibits assignment by the vendee w/out permission, violation = default and might result in vendor termination of the contract o Different from due on sale b/c that would at most trigger an acceleration of the mortgage debt
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B.

JMR_RealEstate d) Events Triggering Acceleration Sale, but also broader than that, even a short-term lease or a grant of an easement or other limited interest in the land would suffice to trigger the lenders right to accelerate (1) Judicial and Legislative Response o No court held that a due-on-sale clause was per se unlawful o Clause was deemed per se reasonable unless the borrower could show that the lender had engaged in unconscionable conduct States imposed legislative limitations on due-on-sale clauses 1976 Federal legislation for due-on-sale clauses 1982 federal preemption of state laws due-on-sale clauses Make such clauses generally enforceable o Lenders covered: all federal banks, HUD, etc, doesnt apply to private banks o Loans covered: not limited to residential loans o Installment Land Contracts: doesnt specifically mention them, its preemption does apply o Transfers in Which Due-on-Sale Enforcement Is Prohibited: several types of transfers that may not be used as the basis for due-on-sale acceleration Creation of junior mortgages Transfers incident to divorce At death, inter vivos to certain relatives Leases for three years or less with no option to purchase Less than 5 dwelling units Waivers by Lenders Lenders can and frequently do waive their right to accelerate, commonly waiver is given in exchange for assumption fee Concealment of transfers no duty for borrower to disclose to the lender that a transfer is taking place. Concealment by lawyers ethical implications of concealment, breach of contract lawyer should avoid assisting or advising such a transfer C. Transfer of the Mortgagees Interest Secondary Sale (Secondary Mortgage Market)

One Lender

sells/assigns

to another Lender "Investor"

Secondary market transactions generally fall into four categories o 1. Outright sale to an investor who will hold the mortgage in its portfolio MR ME Investor Note and Mortgage Endorsement of Note Ass. Of Mort
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JMR_RealEstate May involve single large mortgage, or pool of smaller mortgages o 2. Partial Assignments (participations) sold to multiple investors MR ME Investor Inv1, Inv2, Inv3 Note and Mortgage Endorsement of note Ass. Of Mort Sale of Participations Investor retains a portion of ownership of the note and mortgage, but sells partial interests to other investors. Commercial banks and savings banks often engage in this sort of transactions as a way of diversifying their portfolios and reducing risk o 3. Sale of mortgage-backed pass-through securities MR ME Issuer Inv1, Inv2, Inv3 Guaranty Investors purchase bonds or other securities, issued by the secondary market investor, and collateralized by the mortgage or mortgagees. Payments are pass-throughs corresponding to pro rate payments on the underlying mortgages o 4. Sale of multiclass mortgage-backed securities MR ME Issuer Inv1, Inv2, Inv3 Sales of multiple classes of securities Securities are widely sold and traded in the capital markets, not usually pass-throughs but instead represent a variety of combinations of principal and interest payments which can be covered by the borrowers on the underlying loans. o Often major Wall Street Investment Banks o Low interest rates so could investments Partially led to mortgage collapse Residential mortgage industry restructured into three components: mortgage brokers, wholesale lenders/securities issuers and securities investors D. Discharge of the Debt and Mortgage o Paid off by either primarily responsible or others Typically mortgagor is primarily responsible If the real estate is sold, the grantee becomes primarily responsible Need a document discharged the mortgage Different names: release, satisfaction-piece, discharge, reconveyance Statutory penalties for lender that fails to provide such a document Usually, only a complete payoff will extinguish a mortgage Sometimes there is a partial release clause Examples of those not primarily responsible who pay off mortgages Original mortgagor who has transferred the land subject or w/ an assumption, holder of a junior mortgage or junior lien, tentant under a subordinate lease, even people holding easements o It doesnt extinguish the mortgage but instead assigns both the obligation and the mortgage to the payor

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JMR_RealEstate Why would someone want to payoff? gain control of the foreclosure process Tender: needs to be cash or good funds, promissory note wont be good enough, tender must also be unconditional o Payoff Letters Statement w/ the amount owing, current interest rate, etc. Request must be made for good cause Mortgagee who fails to disclose w/in certain time after such a request is liable for damages o Prepayment mortgagee has a common law right to refuse an early tender or prepayment of principal or interest Unanticipated prepayment can result in greatly increased tax liability Sometimes include lock-out mortgage provisions that prohibit prepayment for a fixed period of time Perfect Tender in Time Rule lock-out clause is unnecessary, since no lender ever has a duty to accept a prepayment unless mortgage/note allows prepayment Many charge a prepayment penalty (interest penalty?) 1. Westmark Commercial Mortgage Fund v. Teenform Associates

Notes o Language permitting prepayment Boilerplate phrases can allow prepayment if payment of x dollars or more o Types of Prepayment Clauses

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JMR_RealEstate Most allow prepayment but with a penalty, not as common in residential, but more widely used in loans on commercial property Many types of formulas including fixed %s, yield maintenance Attacking prepayment fees Court will refuse to enforce only if it shocks the conscience Occasionally a borrower will try to convince a state court that a prepayment fee is a form of excessive interest argument almost always fails Prepayment caused by the mortgagees acceleration Sometimes prepayment occurs because lender accelerates the debt Acceleration upon default When the mortgage clause clearly applies the fee to prepayments resulting from acceleration for default the courts will enforce it. Acceleration by virtue of payment of casualty insurance or eminent domain proceeds Acceleration under a due on sale clause Prepayment fees in bankruptcy is the fee collectible in bankruptcy? There has been a lot of Judicial scrutiny of yield maintenance clauses Statutory Limitations on residential prepayment fees FHA/VA loans can be prepaid at anytime Statutes vary Theories of Attack Both late fees and default interest are subject to attack as they represent attempts to liquidate damages Might violate usury statutes Unconscionability as a standard UCC 2-302 Rationales for late fees and default interest Administrative costs What default rate is excessive? 3-4% are okay, much larger will be struck down. All over the board What amount of late charge is excessive? 5-6% as in Westmark upheld, fees based on outstanding principal of the loan may be struck down Effect of acceleration on late fees Statutory limitations on late fees Required that fee is calculated on amount of late installment not on principal Federal regulatory limitations on late fees Prohibited late payment penalties on home loans in excess of 5% of the amount of the late installment Late fees and bankruptcy Secured claim or not? 2. Devlin v. Weiner

o o o

o o o o o o o o

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JMR_RealEstate

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JMR_RealEstate

Devlins convey land to Weiners in exchange for the payoff of a mortgage and three building options, all valued at $84,000. This is a valid form of consideration. Notes o Definiteness of obligation Needs to be definte enough to put anyone interested in the inquiry upon a track to leading to discovery o Non-monetary obligations If it cannot be reduced to money equivalent it cannot be secured by a mortgage o Support Mortgages Mortgages with financial support and promise of love, affection, kindess or other emotional stuff will only be enforced as to the former and not the latter.

IV.

Misc. Foreclosure Methods

o Two methods of foreclosure, primary is judicial foreclosure accompanied by judicial sale. Available in every state and only type available in some Half use power of sale Strict foreclosure foreclosure is in court, but no judicial sale, mortgagor is given a period of time by the court to pay the debt. Failure to do so will result in the property besting in the mortgagee w/out sale Constitutionality of strict foreclosure? Other (new England based)
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JMR_RealEstate o Entry w/out Process o Actions at Law for a Writ of Entry o Scire Facias

A.

Judicial Foreclosure

o Judicial foreclosure required where there is a serious lien priority dispute o Needed if there is an absolute deed because those dont contain a power of sale Notes o Necessary-Proper Party Distinction Foreclosure should terminate the rights of all interested parties who are subject to the mortgage Give the foreclosure sale purchaser essentially the title to the land as it stood at the time of the execution of the mortgage The reason judicial foreclosure does not terminate unjoined junior interests is constitutional o Impact of Foreclosure on Senior Interests Senior liener is not a necessary party because he or she is not subject to or subordinate to the mortgage being foreclosed Senior lienors interest will not be terminated or otherwise prejudiced by the junior foreclosure Is a senior a proper party? A senior lienor may be brought in involuntarily for certain limited purposes. Sometimes they are made a party just to ascertain the amount and terms of the senior lien o The Junior Lessee as a necessary party Where a lease is senior to a mortgage, the lessee and lease are unaffected by a foreclosure. The purchaser at the sale obtains the mortgagors interest and becomes the lessees landlord. Since the lessee is unaffected by the foreclosure, the lessee is not a necessary party in a judicial foreclosure proceeding pick and choose states re which leases live or die
1. Real Estate Finance Law

General rule is that lack of knowledge or notice of the subordinate interest of another person in the mortgaged land does not excuse a mortgagee from making such person a party in the suit o If excluded not subject to the decree Limitations on this Rule Bona Fide Purchaser will take free of interest if it is equitable only if there is an outstanding unrecorded interest, buyer at a foreclosure sale who doesnt know about it takes free and clear
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JMR_RealEstate o Policy: protect both the forclosing mortgagee and purchaser Lis Pendens Doctrine protects BFP, foreclosing mortgagee
a) The Omitted Party Problem

If a party is omitted, there interests are not terminated by that foreclosure o The foreclosure is void and their redemption rights are the same as before o Succeeds to the rights of the lender and to the rights of the owners Rights of omitted owner: if omitted party is owner of the entire redemption interest the foreclosure sale is entirely void but the foreclosure purchaser stands as assignee When the omitted owner redeems any further interests in the land are cut off Rights of omitted lienor: junior lienor still has an equitable redemption right Foreclosure forecloses his or her own lien, with a resulting judicial sale Redemption juniors power to compel an assignment to him or her of the senior lien. Basically Junior tenders payment owing on the senior lien subrogated to the senior mortgagees rights Rights of Foreclosure Purchaser Redemption Re-Foreclosure Strict Foreclosure
2. Citicorp v. Pessin

Holder of First Mortgage (P) v. Junior Lienholder (D) Facts: P held a 1st mortgage on property, filed to join junior lienholder D in a foreclosure. P filed a strict foreclosure action to extinguish the lien. Issue: When a junior lienholder is omitted from a foreclosure action, may a subsequent strict foreclosure action terminate the lien Rule: When a junior lienholder is omitted from a foreclosure action, a subsequent strict foreclosure action may terminate the lien Holding: Purchaser who purchases in good faith is entitled to file a complaint to force the junior lienor to redeem the first mortgage or lose its rights, it puts the junior lienor in no worse position and so is not prejudicial. o Sale under a first mortgage will terminate all junior interests, notably junior mortgages. Consequently, a junior lienholder to save his interest must either buy at the sale or redeem. Strict foreclosure exists to allow the purchaser to extinguish after-the-fact the lien of an omitted party. Court may, but doesnt have to allow a right of redemption

Note o Strict Foreclosure Most jxns only provide strict foreclosure if P establishes that he bough in good faith w/out knowledge of the outstanding interest and that its holder knew of the sale and permitted the P to buy without disclosing his or her own interest
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JMR_RealEstate Citicorp follows a flexible equitable approach

Equitable Redemption v. Statutory Redemption Redeeming under statutory right = fee title to the property Pays price at original foreclosure sale Fixed time period Statutory redemption only begins after the interest is foreclosure last chance for creditors to regain the property
3.

Equitable right = assignment of a revived first lien Pays balance owed on the first lien No specific time period, doctrine of laches Equitable redemption only exists until the interest is foreclosured

Portland Mortgage Co. v. Creditors Protective Assn

Facts: Creditors Protective Assn (D) held a junior lien on the property on which Portland Mortgage Co. (P) help a mortgage, but it was not made a party to the action to foreclosure the mortgage. Issue: Can a junior lienors redemption rights be extinguished by the party who purchases the property at foreclosure sale by paying off the debt for which the junior lien is security? Rule: One who purchases property at a foreclosure sale may extinguish a junior lienors right to redeem it by simply paying the debt for which the junior lien is security o Junior lienor has right to redemption, not absolute o D would acquire the senior mortgage as a protection of its interest
Land Associates v. Becker

4.

Facts: P brought a foreclosure action concerning real property, went forward without lienholders being joined. They assigned their interests to P who tried to redeem land, lower court held she had no statutory right of redemption Issue: does an assignee of lienholders have a statutory right of redemption if the assignors were not lienholders of record when the foreclosure commenced? Rule: An assignee of lienholders has a statutory right of redemption if the assignors were not lienholders of record when the foreclosure action was commenced Holding foreclosure triggered lis pendens, binding all lienholders to the foreclosure, thus allowed their redemption rights o Main difference in this case and Portland interests in this case arose after foreclosure and thus lienholders bound by the foreclosure. In Portland they were not bound by the foreclosure and thus had no statutory right of redemption, only equitable.

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JMR_RealEstate

B.
-

Power of Sale Foreclosure

1. Generally

Power of Sale Foreclosure: allowed in 60% of jxns o Notice property is sold at public sale by public official, third party, or mortgagee o Not usually judicially supervised Policy: Motgagee accomplishes the same purposes achieved by judicial foreclosure without the substantial additional burdens that entails Purposes: terminate junior interests, prove sale purchaser with good title, cheaper than judicial foreclosure o Title has been somewhat less reliable than that from judicial foreclosure
2. Defects in the Exercise of Power of Sale Foreclosure

Baskurt v. Beal (Trustee v. Debtor)

Facts: Mortgagor sought to set aside a foreclosure sale on her property after it was sold at less than 15% of the fair market value and the trustee failed to properly protect her interests by selling only as much of the property as necessary to pay off debt Issue: Can a foreclosure be set aside if the price was extremely disproportionate to the fair market value of the property? Rule: A foreclosure sale must be set aside if the price paid was grossly inadequate when compared to the fair market value of the property on the date of foreclosure and the proceedings of the sale were defective. o Foreclosure was voidable (void usually only when criminal activity/fraud) Notes o State court remedies to attack power of sale foreclosure Three remedies available to challenge the validity of a power of sale foreclosure 1) injunction suit against a pending 2) suit in equity to set aside a sale 3) action for damages against the foreclosing mortgagee or trustee o Can be used by the mortgagor but also by those w/ junior interests Availability of remedy depends on several factors When defect is discovered, nature of the defect, completion of the sale, existence of a BFP o Tender requirement some jxns want mortgagor seeking injunctive relief to pay amount due on mortgage o One who seeks equity must do equity o Common Foreclosure Defects
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JMR_RealEstate Challenge the right of the mortgagee to foreclose Due process challenges Intentional and negligent chilled bidding, improper place or time of sale, defective notice of sale, selling either too much or too little of the mortgage security Void-Voidable Distinction Void no title is passed (ex., foregery, invalid acceleration) Voidable (most fall under this category) Bare legal title passes to the sale purchaser, subject to the rights of redemption of those injured by the defective exercise of the power of sale Neither void nor voidable Minor typographical errors, errors that dont prejudice the parties Who is a BFP? Sale purchaser is unrelated to the mortgagee, should still take title if 1) had no actual notice of the defects 2) Not on reasonable notice from recorded documents 3) defects are not such that a person attending the sale exercising reasonable care would have been aware of the defect Mortgagee cannot be a BFP Trustee as fiduciary Represents the interests of both mortgagor and mortgagee Described as a common agent of both parties Trustee obligation to verify default No affirmative duty to investigate and verify debt Trustee as Foreclosure Purchaser May not purchase for the sale they conduct, unless express consent Trustee Closely related to mortgagee-purchaser Wont by itself invalidate a sale, but might result in closer scrutiny Inadequate foreclosure price Most commonly raised, least effective Conscience shocking test Must be evidence of irregularity, misconduct, fraud or unfairness to set it aside Grossly inadequate standard may invalidate when less than 20% of fair market value Sales by parcel or in bulk need to adopt mode of sale most beneficial to the mortgagor, generally favors selling in parcels Most statues have handled this by statute

o o o o

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JMR_RealEstate o Chilled bidding: Irregular conduct by a mortgagee or trustee that suppresses bidding is often characterized as chilled bidding
In Re Edry

Notes o Bankruptcy court and state law Bankruptcy court is used by debtors to attack foreclosure proceedings under the hope that the court will be sympathetic to the debtor. o Power of sale in mortgagee Many states hold that if a mortgagee forecloses on a mortgage and purchases the property at the sale, the sale is voidable. Thus, the DoT is often used in the US. States allowing mortgagee to foreclose require they act in good faith and must use reasonable diligence to protect the interests of the mortgagor
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JMR_RealEstate o Damages for wrongful foreclosure If foreclosure has defect but property was purchased by BFP, mortgagor may commence an action against mortgagee for damages: The difference between the market value of the property and the aggregate amount of liens thereon as the date of sale; or The value of the mortgagors equity in the property at the time of the sale. Mortgagor may commence an action to recover the property and for damages resulting from the wrongful behavior of the mortgagee. o Action for damages v. suit to set aside Generally mortgagor may chose to recover the property or bring an action for full damages if mortgagee incorrectly forecloses. o Damages for attempted wrongful disclosure Some states allow an action for attempted wrongful foreclosure but many are reluctant to extent liability in an area where damages are speculative and subject to abuse. o Suits for damages by others Third party may bring action for deceit but may not bring action if there was conspiracy
between mortgagee and trustee to ensure mortgagee would be purchaser of property.

o Trustee or mortgage liability to foreclosure purchaser Generally foreclose purchaser takes a property subject to prior liens and interests accrued prior to the sale. o Need a valid underlying obligation, if note is a forgery no valid underlying obligation Makes it void Need to always first look at if VALID UNDERLYING OBLIGATION
Defects Making Sales Void Mortgage was a forgery Debt never existed Mortgagee did not hold debt Defects Making Sales voidable Minor errors in publication of notice Chilled bidding Reduces bidders Bidding by trustee (in some states) Breach of Fiduciary Duty of Good Faith Self-dealing Improper time or place Might not provide proper notice Gross Inadequacy of Price Not enough in and of itself

Debt was not yet due

Debt has been paid

Problem - 1st Mortgage $10,000 - 2nd Mortgage $5,000 - 3rd Mortgage $3,000 - FMV = $20,000
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JMR_RealEstate o 2nd Mortgage is foreclosed o Mortgagee 2 purchases property for $4000 3. Glidden v. Municipal Authority of Tacoma Facts: D appealed grant of Old Stone Banks motion for summary judgment quiting title of land to Glidden and sold without realizing that junior lienholders ahd not been given proper notice of sale upon the debtors default on debts securied by the property Issue: Is the degreed to which a purported BFP must inquire into foreclosure process a question of fact? Rule: yes, the degree to which a purported BFP must inquire into flaws in the foreclosure process is a question of fact which must be determined from an analysis of the circumstance s in each particular case Holding:

Notes

1. Presumption Statutes Like WA several states have presumption statutes, trying to enhance the finality of power of sale foreclosure and the marketability of titles they produce o Three general categories Rebuttable presumptions: contains neither conclusive presumption language nor any specific protection for BFPs, af few of these statutes deal only with notice requirements and not other aspects that might be carried out improperly Conclusive presumption for BFPs Notices Only incluse of appropriate recitals creates a conclusive presumption in favor of BFPs but this presumption extends only to notice requirements for sale Conclusive presumption for BFPs all aspects of foreclosure WA statute is good example of this Trys to protect BFP from notice and other procedural defects in the foreclosure process o WA statute was amended after Glidden 2. Intentional omission of junior parties in a power of sale foreclosure Can a junior lease by kept alive in the power of sale context by intentionally not giving them statutory required notice? C. Reacquisition of Title by Mortgagor and Related Issues Redemption is used to allow the defaulting mortgagor a final opportunity to regain his property. It holds up the alienation of the property after foreclosure and is thus disfavored by mortgagees. The government insists upon redemption rights when it is a junior lienholder. 1. Old Republic Insurance Co. v Currie
(Mortgagee v. Mortgagor)

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JMR_RealEstate Facts: D, who had filed for bankruptcy and thereby lost his home through foreclosure, later reacquired the same property, preempting the lenders assignee Old Republic to claim that the mortgage had been revived. Issue: if the mortgagor is the purchaser at a foreclosure sale or subsequently reacquires the property, are the junior mortgages revived as liens on the property? Rule: If the mortgagor is the purchaser at a foreclosure sale or subsequently reacquires the property, the junior mortgages are revived as liens on the property o Three theories holding reacquisition revives mortgage 1) payment theory: when the mortgagor purchases the property at the sale, the mortgagor is in effect paying the first mortgage and the second mortgage moves into first position Mortgagor could profit by its own wrong in failing to pay when $$ due 2) Covenant defend title theory second mortgage that is revived usually contains a warranty that the mortgagor agrees that he will defend the title against all lawful claims Permitting 1st foreclosure of 1st mortgage is a breach of warranty to defend the title 3) warranty of title theory based upon warranty of title contained in the 2nd mortgage. Mortgagor has warranted that the mortgaged premises shall be security for the debt and that the mortgagor will produce the property if the debt is not paid after-acquired title doctrine/equitable remedy o Inures to the benefit of the mortgagee o Even if personal liability is extinguished, warranty obligation still exists to produce the property

Notes o Moral Issues Intuitive notion of fairness this person should not be able to profit by his or her violation of an obligation o Reacquisition by non-recourse mortgagor or subsequent grantee

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JMR_RealEstate Even where the mortgage obligation is completely non-recourse, the mortgagor agrees to the satisfaction of that obligation Assuming grantee is still in the position to be reacquired against, as for subject to grantee there is strong policy that they are also still subject to the liens otherwise there might be unjust enrichment o Mortgagor reacquisition from a BFP There are good reasons to allow the mortgagor to reacquire title from a BFP free and clear of foreclosed interests o Acquisition of title by junior interest holders Generally, when the holder of a junior interest purchases at a senior foreclosure sale there is no revival of other junior interests Valid purchase cuts off rights both the holder of the equity of redemption and other junior interests D. Statutory Redemption Under statutory redemption, the redemption amount is normally tied to the foreclosure sale price rather than to the mortgage debt, as is the case with respect to equitable redemption. o Mortgagor will usually have the right to possession Some states only available after power of sale foreclosure, others only after judicial foreclosure Three approaches o Strict Priority or Ordered Redemption o Scramble Method No priority order in which redemptions may be made from the purchaser, each pays the one before it and then they have no further redemption rights 1. United States v. Stadium Apartments, Inc. Facts: Some housing gets built in Idaho, with funds from the feds (post WWII). Mortgages contract to waive redemption rights. The housing complex defaults. The foreclosure happens, but the district judge applies Idaho law, which grants a 1-year period of redemption. The feds appeal. Issue: Do state redemption statutes apply when the Federal Housing Authority forecloses on a mortgage that it guaranteed? Rule: The court held that FHA-insured mortgages are foreclosed under federal law, preempting any state redemption provisions.

Notes o No statutory redemption under Federal Foreclosure Acts Federal government views statutory redemption as contrary to its interest as a mortgagee no rights of redemption under several federal acts Policy = gov doesnt want to hold onto properties/mortgages for long periods of time o Federal government as junior lienor US, by statute, gets 1 year from date of sale within which to redeem If state law isnt as generous, federal law preempts
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JMR_RealEstate o Improvements by purchaser during the redemption period Generally, not going to get reimbursed for improvements, goes against policy of redemption statute 2. Farmers Production Credit Association v. McFarland Facts: junior lienholder FPC, attempted to redeem property already redeemed by the mortgagors assignee Issue: may a junior lienholder redeem property, foreclosed upon by the senior lienholder during the period giving the mortgagor sole redemption rights? Rule: a junior lienholder may not redeem property foreclosed upon by the senior lienholder, during the period giving the mortgagor sole redemption rights

Notes o 1. Lien revival after statutory redemption Courts take a variety of approachs to lien revival Many allow for revival when the mortgagor or her successor Redeems, some states, like CA, do not allow for revival of junior lienors o 2. Assignee of mortgagor as redeeming party Generally the Mortgagors Statutory right of redemption is assignable. Jurisdictions vary as to whether junior liens revive against the redeeming assignee. o 3. Redemption by junior lienor Other junior liens generally do not survive if another junior lienor redeems. E. Anti-Deficiency Legislation and Related Problems o If Mortgage goes into default and the obligation is accelerated there are only two options (1) obtain a judgment on the personal obligation and enforce it by levying upon any of the mortgagors property and, if deficiency remains force on the real estate for the balance (2) forceclose on the property first and if the proceeds are insufficient to satisfy the mortgage obligations obtain a deficiency judgment Some states make you elect which option, some states leave both available

Limitations of Deficiency Judgments o Many states impose strict notice requirements and time limits on the mortgagee o One Action rules Mortgagees only remedy on default is foreclosure and must obtain any deficiency judgment incident to the foreclosure proceeding. o Power of Sale Foreclosures security first principle Power of sale is a condition precedent to a subsequent action at law for a deficiency o Fair Value legislation Designed to deal with depression conditions WA does have these applies only to judicial foreclosures o Appraisal Statutes
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JMR_RealEstate Requires the court or the person conducting the foreclosure sale to appoint an appraiser who determines the value of the property

California Anti-Deficiency Regulatory Scheme o more complex and pervasive than any other jxn In states with anti-deficiency laws, e.g., California, borrower not subject to a deficiency judgment after foreclosure has effective nonrecourse loan. Proponents argue anti-deficiency rules allow borrowers to get a clean start after foreclosure; and Anti-deficiency rules create meaningful incentive for lender to accept reasonable modification terms. Opponents argue because mortgagor can walk away from mortgage without personal liability, the mortgagor may have incentive to overpay (or buy more house than mortgagor can afford, hoping to refinance if prices go up), thus creating too much leverage for the borrower. 1. Deberard Properties, LTD v. LIM

(purchase money creditor v. purchase money debtor)

Facts: Lims defaulted on obligations secured by a deed of trust held by a bank and be a deed of trust held by Deberard from whom they had purchased a shopping center and paid a large down payment. They renogitated and executed a forebearance agreement. As part of the agreement, the Lims waived the protection of 580b against deficiency judgments. Defaulted again and P filed suit on the obligations it was owed. Issue: Rule: A purchaser, after defaulting in a purchase-money secured land transaction, cannot waive the protections provided in Californias Code of Civil Procedure 580b against deficiency judgments. - Notes o Waivers of 580b virtually all post-default waivers of 580b are unenforceable o Refinancing purchase money home mortgages 580b not only bars deficiency judgments in favor of vendor-mortgagees but also as to a a deed of trust, etc. basically virtually all California homeowners are protected against deficiency judgments Loans are non-recouse, mortgagors are not personally liable Many lose this protection when they refinance 2. Talbott v. Hustwit Rule: The protection of anti-deficiency statutes applies only to actions for recovery of deficiency judgments on the principal obligation, and not to guarantors of that obligation. o 580a applies only to actions for recovery of deficiency judgments and not actions against a guarantor o Guarantor = removed from status and obligations of debtors/ trust arrangement Notes o Section 580a Fair Value Limitation
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JMR_RealEstate If a junior lienor does not participate in the foreclosure process by bidding on the property, they are not allowed to bring a deficiency judgment against the debtor. o Impact of 580a on Power of Sale Foreclosures on Multiple parcels If a mortgagee forecloses on multiple parcels of land, guarantors cannot argue that the foreclosing party must give fair value for each parcel, since it would derogate the goal of providing a quick , inexpensive, and efficient remedy. o Actions for fraud and anti-deficiency legislation
Most courts are reluctant to allow anti-deficiency statutes to be a shield for fraud.

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