(logo) Attorneys' Title Guaranty Fund Inc.

Real Estate and Title Insurance News

Mortgages

What Is a Mortgage?

Mortgages Defined

A mortgage is a written instrument that creates a lien on real estate, or reserves or conveys title to real estate to a mortgagee, as security for the payment of a debt or fulfillment of other obligations by the mortgagor. A mortgage is a means by which a creditor, the mortgagee, can obtain a security interest in a debtor/mortgagor's real property. 735 ILCS 5/15-1207;Harms v Sprague, 119 Ill App 3d 503, 507, 456 NE2d 976, 75 Ill Dec 155 (4th D 1983). Thus, accurate descriptions of the mortgaged land and the debt are the key elements of any mortgage.

States typically adhere to either a title or lien theory of mortgages. In states following a title theory, a mortgage is a conveyance of real estate by the mortgagor to the mortgagee. In states following a lien theory, a mortgage is not a conveyance, but is an immediate lien against the mortgaged real estate.Id.For example, Illinois, Indiana, and Wisconsin adhere to the lien theory of mortgages. 765 ILCS 5/39; IC 32-29-1-2; Wis. Stat. &§ 708.01. According to both title and lien theories, the mortgagee holds an interest in the land purely as security for the debt, and that interest must be surrendered when the debt has been repaid.

Notes Defined

In issuing a mortgage loan, it is necessary to create two documents: the mortgage and the promissory note.Evans v Berko, 408 Ill 438, 444, 97 NE2d 316 (Ill. 1951). While the mortgage grants a security interest in the mortgaged property in case of a failure to repay the debt, the promissory note is evidence of the debt, and sets forth the terms of repayment.Bedian v Cohn, 10 Ill App 2d 116, 118, 134 NE2d 532 (4th D 1956). Because the purpose of the note is to create personal liability, a description of the debt is essential to its validity. A promissory note should state the amount of the principal of the loan, the interest rate, the due date, and the number of payments.Northridge Bank v Lakeshore Comm Fin Corp, 48 Ill App 3d 82, 86, 365 NE2d 382, 8 Ill Dec 144 (1st D 1977);Robison v Moorefield, 347 Ill App 508, 527, 107 NE2d 278, (2d D 1952).

How Lenders May Enforce Mortgages and Notes

Judicial Foreclosure
The mortgagee has two means of collecting the mortgage debt: the mortgagor's personal security, which is set by the note, and the mortgagor's real estate security, which is set by the mortgage. The mortgagee has a right to foreclose on the mortgage when the mortgagor fails to fulfill one or more of the obligations contained in the mortgage, which often incorporates the note's terms by reference. 735 ILCS 5/15-1402. For example, if the mortgage defines default on the note as a default under the mortgage and the note specifies that the mortgagor is to make monthly payments on the debt, then if the mortgagor fails to make the payments, the mortgagee may bring a judicial action in mortgage foreclosure. The mortgagee may also bring a lawsuit based on violation of the terms of the note.Emerson v La Salle Nat'l Bank, 40 Ill App 3d 794, 799, 352 NE2d 45 (2d D 1976). However, the mortgagee may receive only one satisfaction on the mortgage debt, either through an action on the note or through mortgage foreclosure.Id.at 798-99. After the mortgagee initiates a judicial action to collect the debt, either by an action on the note or by mortgage foreclosure, and receives a judgment on the action, the mortgagee can execute the judgment by ordering the sheriff to seize the personal and real property of the debtor and sell it at a sheriff's sale. 735 ILCS 5/12-112. In Illinois, foreclosure is the exclusive remedy for mortgages created after July 1, 1987. 735 ILCS 5/15-1106.

Non-Judicial Power of Sale/Foreclosure by Advertisement
Many states permit non-judicial foreclosure through a power of sale clause in the mortgage instrument. See, for example, Rev. Stat. Mo. &§ 443.410. A power of sale clause provides for a non-judicial sale after advertising, serving, and posting a notice of sale as specified in the mortgage and relevant state law. Because judicial foreclosure involves the costs and time of a court proceeding, the non-judicial power of sale is often a more appealing enforcement option. Illinois prohibits the sale of real estate pursuant to a power of sale clause. 735 ILCS 5/15-1405.

Post-Foreclosure Remedies
Frequently, the sale of the mortgaged property after foreclosure does not generate sufficient funds to satisfy the mortgage debt and expenses related to foreclosure. Consequently, the mortgagee may collect the remaining debt from the mortgagor in the form of a deficiency judgment. 735 ILCS 5/15-1511. In some states, courts award personal judgment against the mortgagor at the same time as foreclosure, whereas in other states, the mortgagee must wait until after the foreclosure sale when the exact amount of the deficiency is known. In Illinois, the deficiency judgment is based on the difference between the sale price and the mortgage debt.Illini Federal Sav & Loan Ass'n v Doering, 162 Ill App 3d 768, 771, 516 NE2d 609, 114 Ill Dec 454 (5th D 1987).

Priority of Mortgages

Recording Statutes
A mortgage need not be recorded to be valid, however, an unrecorded mortgage gives rights only between the mortgagor and the mortgagee. For the mortgagee to protect itself against others' rights, and to give the mortgage priority in relation to other creditors, the mortgage must be recorded. Mortgages generally have priority over subsequently recorded and unrecorded land interests from the time they are recorded.

State recording statutes vary in terms of the priority rights given to instruments recorded and unrecorded. Illinois, Indiana, and Wisconsin have race-notice statutes, which provide that interests in real estate receive their priority of right based solely on the time of recording, except when the person who is claiming priority of interest had actual notice of a prior unrecorded interest. 765 ILCS 5/30; IC 32-21-3-3; Wis Stat &§ 706.08. Race-notice statutes grant no priority of right to the owner of a subsequent interest who had actual knowledge of the prior interest, regardless of which party records first. 765 ILCS 5/30; IC 32-21-3-3; Wis Stat &§ 706.08. Race-notice statutes protect subsequent bona fide purchasers without notice who record their instrument of conveyance before the prior unrecorded deed is recorded. 765 ILCS 5/30; IC 32-21-3-3; Wis Stat &§ 706.08.

Priority of Purchase Money Mortgages
Under a purchase money mortgage, the mortgagor borrows funds to finance the purchase of a property and pledges the property as security for the loan. Most residential home purchases involve purchase money mortgages. The lender obtains a purchase money mortgage, and the buyer borrows the funds to purchase the residence.

In general, purchase money mortgages take priority over any other prior or subsequent claims or liens attaching to the property through the mortgagor. Purchase money mortgages are recognized as senior to claims of earlier judgments and mortgages on after-acquired property.United States v New Orleans RR, 79 US 362, 365, 20 L E 434, 12 Wall 362 (1871) (mortgages with after-acquired property clauses);Wermes v McCowan, 286 Ill App 381, 386, 3 NE2d 720 (2d D 1936) (prior judgments). Further, purchase money mortgages are superior to homestead rights. 735 ILCS 5/12-903. However, real estate taxes take priority over purchase money mortgages. 35 ILCS 200/21-75.

Priority of Later Advances of the Loan
Later advances of the loan proceeds may be incorporated into the mortgage. 735 ILCS 5/15-1302(b)(1). For example, many construction loans are paid out in installments as construction progresses. However, during the construction period, other liens may arise, bringing up the issue of preserving the priority of the construction mortgage and its future advances. If other liens took priority over the future advances, mortgagees would lack incentives to continue the disbursements.

To preserve lien priority, mortgagees must commit to making the future advances. 735 ILCS 5/15-1302(b)(1). When a mortgagee makes the advances pursuant to a commitment that is part of the construction loan mortgage, the future advances have priority from the date of recordation of the mortgage. 735 ILCS 5/15-1302(b)(1). The commitment must specify the amounts of the future advances.Farm Credit Bank v Biethman, 262 Ill App 3d 614, 623-24, 634 NE2d 1312, 199 Ill Dec 958 (5th D 1994). When a mortgagee makes the advances without a commitment, the advances constitute a lien from the time that the advance was made. 735 ILCS 5/15-1302(a). Any event that relieves the lender's legal obligation to advance funds severs the obligatory nature of the advanced funding, and allows intervening liens to take priority over future advance payments.

How Mortgage Extensions Affect Priority
When a lender agrees to extend the loan repayment period, the extension may be a change to the original document or a substitution of a new mortgage for the old mortgage. The general rule for extensions is that the holder of a senior mortgage with first priority, who simultaneously discharges the old mortgage and takes on a new mortgage, does not lose priority to intervening liens unless the circumstances of the transaction indicate that the parties' intent was to modify priority.Roberts v Doan, 180 Ill 187, 189-90, 54 NE 207 (1899). First priority remains even when the original mortgage is cancelled, released, marked as paid, or satisfied of record.State Life Ins Co v Freeman, 308 Ill App 127, 143, 31 NE2d 375 (1st D 1941). The underlying rationale for this rule is that the transaction is merely a substitution of security instruments.Roberts, 180 Ill at 189. Thus, almost all courts hold that a mere extension of time of payment does not impair the priority of the extended mortgage.State Life Ins Co, 308 Ill App at 143.

How Mortgage Modifications Affect Priority
Unlike mere time extensions, modifications to the terms of a mortgage may result in some loss of priority if the modification will cause harm to junior lienors. For example, modifications such as increases to the interest rate or principal amount may negatively affect other lienors. If a modification to a senior mortgage "prejudices the rights of the junior lienors or impairs the security," the borrower must get consent from the junior lienors.Marriott Family Restaurants v Lunan Family Restaurants, 194 BR 429, 444 (Bankr N D Ill 1996) (citingShultis v Woodstock Land Dev Assoc, 188 AD2d 234, 236-37, 594 NYS2d 890 (NY Sup Ct 1993)). Without consent, the senior mortgage may lose priority with respect to the modified terms. In some cases, a court may decide that a total loss of priority is necessary to preserve a junior lienor's position.

Conclusion

Mortgage loans involve two documents: the mortgage and the promissory note. A mortgagee may enforce the debt through an action on the note or through mortgage foreclosure. If the proceeds of the foreclosure sale are not sufficient, the mortgagee may seek a deficiency judgment against the mortgagor. Recording statutes, the type of mortgage, and modifications to a mortgage may affect the priority of the mortgage.

© ATG|Casenotes/Bulletin 0905_v2n5

[Last update: 5-12-09]