Estate Finance Notes
Today, we start asking the question: Where is the money going?
Transfers by the mortgagor
Who is obligated to pay the mortgage debt? There are two principal options: the grantee may assume the mortgage debt, in which case we refer to the grantee as an assuming grantee, or the grantee may take subject to the mortgage. The “subject to” language isn’t particularly accurate: you’re always taking the property “subject to” the mortgage in that it’s encumbered by the mortgage. But we mean something different with this “subject to” language: we mean that the grantee is a “non-assuming” grantee. The person becomes the owner of the land but has not assumed any personal obligations as to the repayment of the grantor’s debt.
Basically, the mortgagee has two remedies against the defaulting mortgagor: one is the right to sue on the contract (the promissory note). The other is that the mortgagee can sue to realize on the collateral (foreclosure). The mortgagee has the collateral sold and a fund created to pay off the debt.
Will the assumption/non-assumption decision affect who is expected to make the payments on the debt? Does it affect how much cash the grantee will pay for the real estate? The owner of the property will always pay the mortgage. Does it affect how hard the non-assuming grantee is going to try to make the mortgage payments? The assuming grantee will work harder to keep the mortgage out of default than the non-assuming grantee.
It’s possible to have a situation where the grantee doesn’t undertake the obligation to repay the mortgage, but pays the grantor the full price. This makes sense if you’re selling a very small part of a large tract of land.
If the grantee assumes, is the mortgagor still personally liable on the debt? Yes, unless the mortgagee does something to consent to releasing the mortgagor or otherwise changing the mortgagor’s obligations. There is nothing that the grantee and mortgager can do between themselves that will adversely affect the mortgagee. The mortgagee has a contract and security for that contract and the other two parties can’t take it away without his consent.
Does the assumption have to be expressed, or can you have an implied assumption? It must be expressed with one or two exceptions (just a couple of states). That doesn’t mean that the assumption must be clear. How about a parol assumption? Is consideration required? The answer is almost always yes.
The mortgagee can sue the mortgagor on the debt, sue the grantee on the debt, foreclosure the mortgage and then sue the mortgagor for deficiency, or sue the grantee for any deficiency. If the grantee is a non-assuming grantee, his only liability is to lose his equity in the real estate.
Legal effect of assumption
An assumption creates an equitable suretyship. The mortgagor is secondarily liable. The assuming grantee is primarily liable. The land is subject to foreclosure. When we say that a party is secondarily liable, we mean that there is another party that owes the first party indemnification. If the assuming grantee gets sued, he can’t sue the mortgagor for indemnification. If the mortgagor and grantee rescind their assumption agreement, the mortgagee can only sue on it if he relied on it to his detriment.
Courts say that it would be unjust enrichment to the grantee to assert fraud because he assumed the liability on the mortgage debt in lieu of paying the full purchase price.
What happens where you have the transfer from mortgagor to grantee #1 that is non-assuming, but then a transfer from grantee #1 to grantee #2, and grantee #2 assumes? What is grantee #2 assuming?
Mortgagor’s recourse against grantee
The mortgagor can seek subrogation to the debt and the mortgage (stepping into the mortgagee’s shoes) if the mortgagor pays the debt in full. The mortgagor can seek reimbursement if the grantee is personally liable, even if the mortgagor made only a partial payment. This is just a personal claim and is unsecured.
What if you have a non-assuming grantee? Subrogation is available, but only as recourse against the land. The essence of reimbursement is that it is a personal liability. If the grantee was non-assuming (“subject-to”), then there is no reimbursement and no exoneration.
Given that subrogation is all-or-nothing, what if there is a partial default? Mortgages can secure any obligation, not just the obligation to pay money, as long as the value of the obligation can be converted into money.