REAL ESTATE TRANSACTIONS AND FINANCE
Fall Semester 2015
Transfers of the Mortgaged Property (Without Payoff of the Mortgage)
Reading Assignment: NBWF pages 477-500. Discussion Questions:
1.
Wells wants to buy a home from Litton for a total price of $400,000. The home is subject to
a mortgage granted by Litton in favor of Bank, and the mortgage has an unpaid balance of $200,000.
This mortgage (which is properly recorded) contains a due-on-sale clause, but Wells and Litton have
agreed that Wells will pay $200,000 in cash at closing, and that Wells will take over making
payments on the current mortgage loan.
(a)
If Litton seeks Bank’s consent to allow the transfer, is there any reason for the Bank
to grant that consent? [Think of as many reasons as you think might be plausible.]
(b)
Assuming the Bank is willing to grant consent, is there any reason that the Bank
should not also require Wells to “assume” the existing mortgage (rather than taking
“subject to” that mortgage)? Under what circumstances would you expect to a
“subject to” transfer to arise, rather than an “assumption” transfer?
2.
In 2009, Crouch bought a home from Lee for a price of $250,000. He paid Lee $20,000 in
cash at closing, and Lee took back a promissory note from Crouch in the amount of $230,000 and
a purchase money mortgage to secure repayment of that note.
In January 2015, Crouch transferred the home to Strong for a price of $175,000 (the lower price
reflected a decline in market values due to the recession). In this transaction, no cash actually
changed hands; Strong agreed to assume the existing mortgage payments (which had a then-existing
balance of exactly $175,000).
Strong made the monthly payments due on the note to Lee for 8 months; Lee accepted all of these
payments without objection. During September 2015, however, Strong discovered that Lee’s
predecessor had dumped toxic soil in the backyard and that it would cost nearly $200,000 to
remediate the contamination. Strong also learned that Crouch knew about the presence of the soil,
but had failed to disclose it to her at the time of the sale. At that point, Strong stopped making any
further payments on the note to Lee, asserting that the nondisclosure of the contaminated soil was
a defense to her obligation to pay. Lee declares a default and filed suit against Strong for a judgment
on the unpaid debt. [Lee does not want to foreclose the mortgage while the property is still
contaminated.] Can he recover a judgment against Strong, or can Strong raise the condition of the
property and Crouch’s nondisclosure as a valid defense to payment of the mortgage debt? Why or
why not?
3.
Questions about the First Federal v. Arena case (page 493):
(a)
Were the Arenas harmed when Richardson and First Federal agreed to extend the
maturity of the mortgage debt from 15 years to 20 years? Why or why not?
(b)
Were the Arenas harmed when Richardson and First Federal agreed to increase the
interest rate from 6% to 7.25%? Why or why not?
(c)
The Arenas’s mortgage provided as follows [pp. 494-495]: “The Mortgagor
covenants that in the event ownership of said property or any part thereof becomes
vested in a person other than the Mortgagor, the Mortgagee may, without notice to
the Mortgagor, deal with such successor or successors in interest with reference to
this mortgage and the debt hereby secured in the same manner as with Mortgagor,
and may forbear to sue or may extend time for payment of the debt, secured hereby,
without discharging or in any way affecting the liability of the Mortgagor hereunder
or upon the debt hereby secured.” Based on this language, should the case have been
decided in favor of First Federal? Why or why not?