The HistoricalDevelopment

of the Mortgage

The original mortgage:

MR MEdeed of fee simplesubject to condition

subsequent

A "dead pledge."

The "equity of tardy redemption":

Even though MR did not pay on law day, the equity courts would permit MR to pay late and redeem the land.

12

3

6

9

Foreclosure of the equity of redemption:

The court would set an outside date beyond which the MR could no longer redeem.

Strict foreclosure:The ME simply kept the land.

Foreclosure by sale:The land was sold and the ME received the proceeds of the sale, with the remainder going to the MR.

The rule against "clogging":

If the MR (in the mortgage) purported to waive the right to redeem in equity...

that waiver was deemed unenforceable.

Acceleration of an installment loan:After a default, the lender declares the entire balance due and payable.

(requires a clause in the note or mortgage so providing)

beforedefault & accel.

after default & accel.

default & accel. foreclosure

post-foreclosure

Period of equitable redemption

Period of statutory redemption (in about 20 states)

Equitable redemption:Available in all states.(To redeem, you pay the debt.)

Statutory redemption:Available in about 20 states. (To redeem, you pay the amount that was bid at the foreclosure sale.)

Now we’re going to consider situations in which there’s more than one mortgage on the same

property.

Mortgage 1

Mortgage 2

Multiple mortgages can be placed on the same real estate.Their priority depends on their chronological order unless:

some mortgagee fails to record, orthe parties agree to change priorities

MR

ME2

ME1

What determines the order in which the mortgages are foreclosed?■It has nothing to do with their

priority:■Either the first or the second mortgage

might foreclose first.■It depends on which lender

experiences a default and loses patience first.

What Happens in Foreclosure■The mortgage being foreclosed

is wiped off the title.■So are all mortgages and other

interests of lower priority (if they’re properly served and made parties).

■But interests with higher priority are not affected by the foreclosure.

■So we say "Foreclose down."

A mortgage can only be foreclosed “down”:

■ME1 can foreclose against ME2 and wipe out ME2's mortgage.

■But ME2 can’t foreclose against ME1 at all.

MR ME1mortgage

MR ME2mortgage

MR ME1mortgage

MR ME2mortgage

MR Tenantlease

Assume ME1 forecloses first.

MR ME1mortgage

MR ME2mortgage

MR Tenantlease

BFcl.

MR ME1mortgage

MR ME2mortgage

MR Tenantlease

Assume ME2 forecloses first.

MR ME1mortgage

MR ME2mortgage

MR Tenantlease

B

MR ME1$30,000

MR ME2$15,000

MR Tenantlease

FMV of property = $50,000

If ME1 forecloses, and the high bid is $50,000, how will the money be distributed?

ME1: $30,000ME2: $15,000T : bonus value of

lease, if any [?]MR : $ 5,000

Same facts, but the bid at the sale is only $40,000.

ME1: $30,000ME2: $15,000

ME2 has a deficiency claim against MR for $5,000.Does T have a claim against MR?

Why are junior mortgages more risky than senior mortgages?

?

MR ME1$30,000

MR ME2$15,000

MR Tenantlease

FMV of property = $50,000

Again assume $50,000 FMV.

If you bid at a foreclosure by ME1, how high would you bid?

✌

If you bid at a foreclosure by ME2, how high would you bid?

At ME2's foreclosure sale, assume the bid is $20,000.How will the funds be distributed?

At ME2's foreclosure sale, assume the bid is $20,000.How will the funds be distributed?

ME2: $15,000T : bonus value, if any [?]MR: $ 5,000

Why does ME1 receive none of the proceeds of ME2's foreclosure?

(Because the foreclosure by ME2 does not impair ME1's rights at all; ME1 may still foreclose later.)

The End