Mortgages & Foreclosure
A note (the debt) plus a mortgage (the lien securing it). The exam lives in what happens when the property or the paper changes hands—and in the payout order at the foreclosure sale.
The basics
The mortgagee holds a lien; the mortgagor keeps title and possession (title-theory states nominally give the lender title). Substance beats labels: an “absolute deed” given as security, a sale-leaseback with buyback option—courts treat disguised security devices as mortgages, and parol evidence is allowed to prove it.
Broke Liv “sells” her lot to Noodle for half its value with a handshake right to buy it back after repaying—an equitable mortgage. Noodle must foreclose like any lender; he can't just keep the land.
The mortgagor sells: assuming vs. subject-to
- Buyer takes the land with the lien on it but owes nothing personally
- Original mortgagor stays personally liable on the note
- If nobody pays, the lender's only move against the buyer is foreclosure
- Buyer promises to pay—personally liable as the primary obligor
- Original mortgagor remains secondarily liable (a surety) unless the lender releases them
- Lender can sue either—no novation, no escape
Rosa sells the mortgaged café to Lana “subject to” the loan and everyone stops paying. The bank forecloses and can chase Rosa for any deficiency—but not Lana. Had Lana assumed, the bank could pick either pocket.
Due-on-sale clauses let the lender accelerate on transfer—enforceable. And the mortgage follows the land regardless: no deed language can shake off a valid recorded lien.
The lender sells the paper
Transferring the note automatically carries the mortgage with it; a mortgage assigned without its note is a nullity. The note's holder is the one entitled to enforce, and payment to the original lender after notice of transfer doesn't count.
Foreclosure: who gets paid, who gets wiped
The sale, in order
Foreclosure sale proceeds arrive
Priority = first in time, first in right (recording acts can reorder).
Costs, then the foreclosing lender—paid in full?
Deficiency judgment against whoever is personally liable on the note.
Anything left for JUNIOR lienholders (in order)?
Juniors take from the surplus—their liens on the land are wiped either way.
Surplus to the mortgagor · seniors untouched
The buyer takes subject to any SENIOR mortgage—it stays on the land.
| Party at the sale | Effect of a junior lender's foreclosure |
|---|---|
| Senior mortgage | Unaffected—the buyer takes subject to it (price the bid accordingly) |
| Foreclosing (junior) lender | Paid from proceeds after costs |
| Even-more-junior liens | Wiped from the land if joined as parties; paid from surplus in order |
| Mortgagor | Loses the land, keeps any surplus, owes any deficiency |
The café lot carries Bank One ($200k, first) and Bank Two ($50k, second). Bank Two forecloses; the lot fetches $80k. Costs first, Bank Two takes its $50k, surplus to Rosa—and the buyer owns a lot still saddled with Bank One's $200k mortgage. Necessary lesson: a junior sale never touches the senior.
Omitted junior: a junior lienholder not joined in the foreclosure keeps its lien—redo it or pay them off. Purchase-money mortgages (financing the acquisition itself) beat earlier judgment liens and after-acquired-property clauses against the buyer. Equitable redemption: the mortgagor may pay off the debt any time before the sale—a right that can't be waived in the mortgage (“no clogging the equity of redemption”); about half the states add a statutory window after the sale.
Exam rhythm: identify every lien and its date → apply the recording act if someone claims BFP status → run the sale (costs → foreclosing lender → juniors → mortgagor) → seniors survive, joined juniors die → chase the deficiency against whoever holds personal liability (assuming grantee, original mortgagor as surety).
Where the points are
The traps examiners actually set.
- Most tested
- Assuming vs. subject-to liability; junior foreclosure leaving the senior in place; the payout order; purchase-money priority.
- Classic traps
- A deficiency judgment against a subject-to buyer (never); thinking foreclosure wipes senior liens (only juniors, and only if joined); the original mortgagor escaping after the buyer assumes (still a surety); a mortgage clause waiving redemption (void); the “absolute deed” that's really security.
Keep going: Mortgages MEE guide Real Property Attack Sequences Recording Acts deep dive