Mortgage Financing

Chapter 3 Mortgage Financing § 3:1 Basic Mortgage Principles § 3:1.1 Generally § 3:1.2 Clogging the Equity of Redemption § 3:1.3 Disguised Mortgages § 3:2 New Mortgage from Third Party § 3:2.1 Generally § 3:2.2 Buyer’s Affirmative Obligation to Seek the Mortgage [A] Down Payment [B] “Reasonable Efforts” [C] Conditions [D] Mortgage Terms [E] Lenders § 3:2.3 Single or Multiple Loan Applications § 3:2.4 Waiver of Mortgage Condition § 3:2.5 Seller Financing As Substitute for Institutional Loan § 3:2.6 Commitment Fees § 3:2.7 Lender’s Revocation of Commitment § 3:3 Continuation of Existing Mortgage § 3:3.1 Planning and Drafting Considerations § 3:3.2 Distinction Between Assumption and Taking Subject to Mortgage § 3:3.3 Liabilities After Assumption § 3:3.4 Exoneration of Debt After Mortgagor’s Death § 3:4 Seller’s Purchase Money Mortgage § 3:5 Junior Mortgages § 3:5.1 Generally § 3:5.2 Equitable Subrogation Doctrine § 3:5.3 Subordination Agreements § 3:5.4 Wraparound Mortgages § 3:6 Discharge of Mortgage § 3:6.1 Discharge by Mistake or Fraud § 3:6.2 Merger § 3:6.3 Deed in Lieu of Foreclosure (Friedman on Contracts, Rel. #21, 5/16) 3–1 § 3:1 FRIEDMAN ON CONTRACTS § 3:7 Mortgage Bond or Note § 3:8 Expenses of Mortgage § 3:9 Release of Part of Mortgaged Premises § 3:9.1 Sample Forms of Release § 3:1 Basic Mortgage Principles § 3:1.1 Generally Mortgage financing is an integral part of most sales and purchases of real property. This section discusses basic principles of mortgage law, and subsequent sections in this chapter analyze how buyers and sellers may handle financing issues in their contract—as they prepare for closing and at the closing itself. The following chapter (Chapter 3A) analyzes many of the clauses often found in mortgage instruments. Twotypes of mortgages may be involved in title closings: (1) existing mortgages that affect the premises prior to the closing, and (2) purchase money mortgages; that is, those placed on the premises at the closing in part payment of the purchase price. Existing mortgages may be paid off at closing, or they may continue in existence, thus helping the buyer to finance the purchase. The buyer may obtain a new purchase money mortgage from a third party, usually, but not always, an institutional lender. Alternatively, the seller may provide financing in the form of a purchase-money mortgage or in another form. In a title theory state, mortgagors only hold an equitable interest in the mortgaged property. The mortgagor is left with an equity of redemption, but legal title revests in the mortgagor on payment of the debt. The mortgagee has title, the right to possession, and absolute ownership rights in the mortgaged property. However, the mortgagor remains in possession, even though the mortgagee has all the in- cidents of ownership.1 Deeds of trust are used in some states instead of mortgages. There is little difference between the two. A deed of trust is substantially a mortgage with a power of sale. It transfers legal title from a borrower to one or more trustees for the benefit of the lender, who is called the beneficiary.2 In states that recognize deeds of trust, the parties 1. In re Turtle Creek Ltd., 194 B.R. 267 (Bankr. N.D. Ala. 1996). Some of this is not true in the bankruptcy of the mortgagor. In re Guardian Realty Grp., 205 B.R. 1 (Bankr. D.C. 1997); In re Lyons, 193 B.R. 637 (Bankr. D. Mass. 1996). 2. Springhill Laske Invs. Ltd. P’ship v. Prince George’s Cnty., 690 A.2d 535, 539 (Md. 1997). 3–2 Mortgage Financing § 3:1.1 may use a mortgage, but enforcement of a mortgage requires a civil action, whereas a deed of trust may be enforced by a sale out of court.3 Similar rules are applied to both mortgages and deeds of trust.4 One difference is that enforcement of the deed of trust proceeds with the trustee selling the property without the protection of a judgment of foreclosure and sale, with the result that a wrongful sale may make the deed-of-trust beneficiary liable for damages.5 A mortgage must be supported by consideration to be enforceable, but the consideration need not move from the mortgagee to the mortgagor; it may consist of a loan to a third person.6 A mortgage given to a related entity, to whom the mortgagor owes no debt and for which no consideration was given, is a sham and without effect on third parties.7 A mortgage obtained by duress is usually unenforceable. When his parents mortgaged their property to a bank that threatened to send their son to jail for check kiting, the mortgage was held unenforceable.8 The nature of duress has changed over the years from the threat 3. Patton v. First Fed. Sav. & Loan Ass’n, 578 P.2d 152 (Ariz. 1978) (lender must strictly comply with deed-of-trust statutes due to fewer protections for borrowers). 4. Cornelison v. Kornbluth, 116 Cal. Rptr. 902, 904–05 n.1 (Ct. App. 2d Dist. 1974), vacated on other grounds, 542 P.2d 981 (Cal. 1975); Rustad Heating & Plumbing Co. v. Waldt, 588 P.2d 1153 (Wash. 1979). A deed of trust is a security device. It transfers legal title from a property owner to one or more trustees to be held for the benefit of a beneficiary. [T]he deed of trust secures repayment of the loan. If the loan is not repaid, it is through the deed of trust that the beneficiary has recourse against the property—e.g., by selling the borrower’s property and applying the funds received against the borrower’s indebtedness. Springhill Laske Invs. Ltd. P’ship v. Prince George’s Cnty., 690 A.2d 535, 539 (Md. 1997). 5. Diaby v. Bierman, 795 F. Supp. 2d 108 (D.D.C. 2011) (lender failed to provide accurate amount to be paid to cure default); Owens v. Grimes, 539 S.W.2d 387, 390 (Tex. Civ. App.–Tyler 1976) (lender’s wrong “resembles . a conversion of personal property”). 6. Auburn Cordage, Inc. v. Revocable Trust Agreement of Treadwell, 848 N.E.2d 738 (Ind. Ct. App. 2006) (landlord mortgaged its property to secure loan to tenant to finance tenant’s improvements); First Nat’l Bank & Trust Co. v. Brakken, 468 N.W.2d 633 (N.D. 1991) (mortgage given to secure loans made to mortgagor’s sons, which were past due and renegotiated). 7. United States v. Klimeek, 952 F. Supp. 1100, 1114 (E.D. Pa. 1997) (given to avoid federal taxes). 8. Osage Corp. v. Simon, 613 N.E.2d 770 (Ill. App. Ct. 1993); Triad Distribs., Inc. v. Conde, 391 N.Y.S.2d 897 (App. Div. 2d Dep’t 1977). In In re Rochkind, 128 B.R. 520 (Bankr. E.D. Mich. 1991), a co-owner, a wife, signed a mortgage because of a threat that her husband would be (Friedman on Contracts, Rel. #21, 5/16) 3–3 § 3:1.1 FRIEDMAN ON CONTRACTS of an unlawful act, for example, a tort or a crime, to include business compulsion that leaves the victim no reasonable alternative.9 In a Florida case in which a mortgage was given by a husband and wife to the defendant, to avoid prosecution of the wife for admitted embezzle- ment, the mortgage was held enforceable. The court noted the fine distinctions in other Florida cases in which the result would be otherwise.10 Assignment of a mortgage by a mortgagee, as collateral security, creates a pledge, not a sale, of the mortgage, vesting a defeasible title to the mortgage in the assignee, which ends on payment of the debt.11 A mortgage given as security for tenant’s liability under a lease is not modified by modification of the lease or other changes so long as rent remains unpaid under the original lease.12 Generally, there is no fiduciary relation between mortgagor and mortgagee, although one may occur where one party to the relation relies heavily on the judgment of the other. A slightly dominant business position is not enough for this.13 When property is held in a tenancy by the entirety, a mortgage granted by one spouse is problematic. In some states, the mortgage is invalid,14 but in New York the mortgage passes the interest of the signing spouse. On foreclosure by the mortgagee, the purchaser becomes a tenant in common with the non-signing spouse, with the right of survivorship. After the divorce of the spouses, following the making of the mortgage, a foreclosing mortgagee becomes a tenant in common of the non-signing spouse, with no right of driven from his law practice if the husband’s debt was not paid. The mortgage was held unenforceable to her. A dictum in Rochkind is to the effect that where husband and wife execute a mortgage, a separate consideration to the wife is unnecessary. 9. See In re Rochkind, 128 B.R. 520 (Bankr. E.D. Mich. 1991); RESTATEMENT (SECOND) OF CONTRACTS § 175(1) (1981); 13 S. WILLISTON,CONTRACTS ch. 47, particularly § 1606 (1981). 10. Franklin v. Wallack, 576 So. 2d 1371 (Fla. Dist. Ct. App. 1991). A dissenting opinion in Franklin discusses the “modern law,” with autho- rities that are against the use of criminal law to collect private debts. 11. Desser v. Schatz, 581 N.Y.S.2d 796 (App. Div. 1st Dep’t 1992), relying on In re Gilbert, 10 N.E.

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