Estate Finance Notes
There was a land price boom and land price crash at the same time as the big stock market crash 75 years ago today in 1929. There were a tremendous amount of foreclosures, which hurt both mortgagors and mortgagees. Farm real estate went down by an amount comparable to the fall of the stock market. People felt at the time that it was temporary, that is, that the pre-1929 levels of real estate prices represented their “real” market value, and that the stock market crash was just a temporary downturn from which there would be a quick recovery. A lot of the regulation that we study in this course is a result of the bank failures and decline of the real estate market in 1929. There was also a move towards title insurance, which was a precursor of the secondary mortgage market.
The Restatement of Mortgages says that the doctrine of merger doesn’t apply to mortgages. If the same lender has two mortgages, you have two choices. If you want to preserve your right to a deficiency judgment in the even that there is a deficiency, either (1) you foreclose on the first mortgage first, or (2) if the local rules of civil procedure allow it, you foreclose on both simultaneously. But what you don’t do is foreclose on the second mortgage first, because that would extinguish both the first mortgage and the first mortgage debt.
Deed in lieu of foreclosure
This is fast and cheap. If the mortgagor can’t go forward, the mortgagor might say: “Let’s get it over with. I’ll just give you the property back.” The lender might want to avoid the publicity of a foreclosure. Also, the lender might get a windfall. For the borrower, it doesn’t look as bad for your credit to have negotiated a settlement instead of being foreclosed upon. The lender will also usually waive any deficiency judgment. There are lots of problems with these, though.