Real
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.