CHAPTER II
REAL ESTATE MORTGAGES

Sec. 18. Nature of, and essential requirements under the early
common law. A real estate mortgage is now generally considered
a lien on land, created by contract, for the purpose of securing the
performance of an obligation, usually the payment of money. The
party who makes the mortgage is the mortgagor ; the party to whom
it is made the one who lends the money is the mortgagee. Un-
der the common law, the early form of a mortgage on land consisted
of an absolute conveyance of the title of the land by the owner to
the mortgagee, upon a condition that the title would revert to the
mortgagor when the obligation was performed or the money was re-
paid. The mortgagee secured the absolute right to the land and
could take possession and collect the rents and profits. If the mort-
gagor failed to pay the money on or before the day set, the property
was forfeited to the mortgagee.

Sec. 19. Growth of equitable theory. Under the common-law
theory, the owner often lost his land if he was unable to repay a
small loan on the due date, as required under his contract. In order
to avoid the harshness of this rule, courts of equity began to allow
the mortgagor to redeem his land after he had made a default.
This right of the mortgagor, first recognized by a court of equity, is
called his equity of redemption. Upon default, the mortgagee, by
a process called a bill to foreclose the mortgage, asked the court to
fix a date within which time the mortgagor must exercise his right
to redeem his land. On the mortgagor's failure to redeem within
the fixed time, the property became the absolute property of the
mortgagee. During the time that the land was encumbered by the
mortgage, the mortgagee had the absolute right to take possession of
the property and to secure the income from it. On account of these
unjust advantages, courts of equity have taken the view that, since
the transaction is intended by the parties only as a security trans-
action, such intention should be carried out. Under modern stat-
utes regulating mortgages, the mortgagor is now regarded as the
real owner of the land. He has the right to exercise all the powers
of an owner, subject, however, to the limitations contained in the
mortgage. The mortgagee is regarded as having merely a lien on
the land to secure his debt.

Sec. 20. Legal and equitable theories of mortgages. Many
of the states still hold to the old legal theory and regard the title and

405



406 REAL PROPERTY

the right of possession as passing to the mortgagee. This theory is
called the title theory of mortgages, since title passes to the mort-
gagee. In the states where the title theory prevails, courts of
equity permit the mortgagor to have a right of accounting against
the mortgagee for any income obtained from the property while it
is in his possession. In the law courts in the title theory states, the
mortgagor today is regarded as the real owner as to everyone except
the mortgagee.

In a majority of the states the equitable theory prevails; in these
states the title remains in the mortgagor, and the mortgagee has
only a lien against the property as a security for his loan. Such
view is called the lien theory of mortgages.

Sec. 21. Property capable of being mortgaged. In general,
any interest in land, an equitable as well as a legal interest, can be
mortgaged. The common interests subject to mortgage are fee sim-
ple estates, estates for life, estates for years, dower interests of wid-
ows, a mortgagee's interest, and a mortgagor's interest. Land may
be mortgaged separately from its improvements, or the improve-
ments may be mortgaged separately from the land, or both land and
improvements may be mortgaged. Growing crops and various other
interests in real estate may be mortgaged for the purpose of secur-
ing a loan.

Property which one does not own cannot be mortgaged, but a
mortgage may be so drawn as to cover property to be acquired in
the future. Although no mortgage exists at the time, equity will
recognize a lien against the property as soon as it is acquired. This
lien is good as to all persons who acquire rights in the property, ex-
cept bona fide purchasers for value without notice.

Sec. 22. Form of mortgage. The form of mortgage in com-
mon use still represents the title theory, and, as in a deed, states
that it conveys the property to the mortgagee, subject to the condi-
tions set forth in the mortgage. Such a conveyance of real prop-
erty must be in writing, under seal, and executed with all the for-
malities of a deed. The contract between the parties with respect
to the loan need not be included in the deed of conveyance, but may
be set forth on a separate sheet of paper. In the title theory states,
a mortgage is a very formal instrument. In the lien theory states,
short forms of mortgages are usually authorized by statute and are
not of such a technical nature.

Sec. 23. Recording mortgages. In order that the mortgagee
may give notice to third parties that he has an interest in the real
estate covered by the mortgage, it is necessary that the mortgage be
recorded in the recording office of the county where the real estate
is situated. This recording protects the mortgagee against subse-



REAL ESTATE MORTGAGES 407

quent bona fide purchasers of the land from taking the real estate
free from the mortgage. The statutes of the various states specify
the requirements necessary for recording mortgages.

Sec. 24. An absolute conveyance may be a mortgage. An ab-
solute deed made by a landowner to a person may be shown by parol
evidence to be a mortgage, if such evidence indicates that the in-
tention of the parties was to make the transfer a security for a loan. 1
The landowner must prove, however, by clear, precise, and positive
evidence that it was the intention of the parties to draw up the deed
for the purpose of securing a loan.

Likewise, a landowner may sell his land and give an absolute
deed, with an agreement that he retain the right to repurchase for
a certain price within a specified time. Parol evidence may be in-
troduced in such a case to establish that the deed was given for the
purpose of securing a loan. If the evidence is convincing, a court
of equity will declare such a deed to be a mortgage. For example,
a man may convey his farm worth $30,000 for a consideration of
$10,000. The so-called buyer then gives the seller an option to re-
purchase at a figure approximating $10,000 and interest. If the
evidence is clear that the parties intended to make a loan, even
though the option period has expired, it is not too late for the
grantor to redeem his property, because the court will treat the deed
as if it had been a mortgage.

Sec. 25. Deed of trust in the nature of a mortgage. A deed of
trust is often used as a substitute for a mortgage, for the purpose of
securing debts. The property is conveyed to a trustee to hold in
trust for the benefit of the creditor. If the mortgage is paid at the
time required by the contract, the trustee reconveys the property to
the grantor. If there is a default in the payment, the trustee sells
the property and applies the proceeds to the payment of the debt
secured. Deeds of trust are used where numerous notes are se-
cured by the same property and are used to secure bondholders.
For example, where it is desired to issue bonds secured by railroad
or other corporate property, a trust deed may be executed to secure
the entire bond issue. This method is necessary, because it would
be impractical to execute a separate mortgage to secure each bond.

Sec. 26. Purchase money mortgages. A purchase money
mortgage is given for a part or the whole of the purchase price of
land. For example, A wishes to purchase real estate worth $30,000.
He has $10,000 in cash. Upon securing title from the vendor, he
can complete his purchase by giving back to the vendor a mortgage
on the real estate to secure the remaining purchase price of $20,000.
This type of mortgage is normally used in the buying and selling of

1 McGill v. National Bank of Topeka, 1938, 77 Pac.(2) 944, 147 Kan. 605; p. 814.



408 REAL PROPERTY

real estate. It is not necessary that the wife join the husband in
executing such a mortgage, for the purpose of cutting off her right
of dower. The mortgage is attached to the property before it be-
comes the property of her husband and she is entitled to dower only
in what may remain to her husband after the mortgage on the prop-
erty is paid, or in his equity of redemption, which is his share of the
purchase price of the land on a foreclosure sale. There are other
types of mortgages, such as building and loan mortgages, which are
prescribed by the statutes of the various states governing and con-
trolling building and loan associations.

Sec. 27. Rights of mortgagor. The mortgagor is personally
liable for the mortgage debt, not by reason of the mortgage, but be-
cause he makes a note, a bond, or other contract which evidences
the debt secured by the mortgage. A mortgage may be made to
secure the performance of an obligation other than the payment of
money. The mortgagor under the lien theory of modern statutes
is regarded as the owner of the land. He has the same right to con-
trol the property as he had before making the mortgage, and he may
sell the land, or lease it, or make other mortgages, subject, however,
to the agreement creating the already existing mortgage. Upon
his death, interest in the real estate passes to his heirs, or, if he
leaves a will, to his devisees under the will. His interest may be
sold by a judgment creditor under an execution, subject to the prior
right of the mortgagee. The mortgagor is entitled to retain pos-
session of the property, cultivate the land, and secure the income
therefrom. Being the owner of the mortgaged property, the mort-
gagor has an insurable interest in the property and can insure it for
full value, regardless of the amount for which it is mortgaged. By
the terms of the mortgage, the mortgagor is usually required to keep
up the insurance for the benefit of the interest represented by the
mortgage for and on behalf of the mortgagee. Upon a loss the in-
surance company pays the mortgagor and the mortgagee, as their
interests may appear.

Sec. 28. Rights and liabilities of the mortgagee. In the title
theory states, the mortgagee has legal title and a right to possess
the mortgaged property during the period of the mortgage, unless
the contract grants to the mortgagor the right to remain in posses-
sion. In the lien theory states, the mortgagor is entitled to pos-
session unless a different arrangement is provided for in the mort-
gage. In both the lien and title theory states, the mortgagee is
protected against any person who commits waste or impairs the se-
curity. Even the mortgagor may not use the property in such a
manner as to reduce materially its value. Mining ore, pumping oil,
or cutting timber are operations which must be provided for in the



REAL ESTATE MORTGAGES 409

mortgage agreement. Perhaps, if they were being conducted at the
time the mortgage was created, the mortgagor might continue with-
out authorization in the mortgage. Under either title or lien the-
ory, the mortgagee who takes possession of the property is obligated
to derive a revenue from its use and to account for the amount re-
ceived.

A mortgagee has a right to pay off or to redeem from any superior
mortgage, in order to protect his security, and he can charge the
amount so paid to the mortgagor. Likewise, he may pay taxes or
special assessments which are a lien on the land, and defend suits
which threaten the title of the mortgagor and recover the sum so
expended. The mortgagor is under a duty to protect the security,
but, should he fail to do so, the mortgagee has the right to make any
reasonable expenditures necessary to protect the security for a debt.

Sec. 29. Transfer of mortgaged property. The mortgagor
may sell or will or give away the mortgaged property, subject, how-
ever, to the rights of the mortgagee. A transferee from a mort-
gagor occupies the position of a grantee; he stands in the same po-
sition as the mortgagor and has no greater rights. Such grantee of
the mortgagor's interest may redeem the land and require the mort-
gagee, if the latter is in possession, to account for rents and profits.
A grantee of mortgaged property is not personally liable for the
mortgage debt, unless he impliedly or expressly assumes and agrees
to pay the mortgage. 2 If he merely purchases "subject to" the
mortgage, he pays the mortgage debt only when he deems the real
estate to have a value greater than the amount of the mortgage, and
he is not personally liable on the obligation. If he assumes the
mortgage, he becomes personally liable for the debt, although the
land is worth less than the mortgage. For example, if A purchases
real estate worth $8,000 which is subject to a mortgage of $5,000
and assumes and agrees to pay the mortgage, he pays the former
owner $3,000 and assumes responsibility for the ultimate payment
of the mortgage. If he merely purchases the real estate subject to
the mortgage, he again pays the owner $3,000, but pays the $5,000
mortgage only if the land is worth that much when the mortgage
matures. Otherwise, he permits the land to be foreclosed without
any personal liability on his part for the deficit ; whereas, if he had
assumed the deficit, he would have been liable for it.

Sec. 30. Liability of mortgagor after transfer. If the grantee
of the mortgaged property assumes and agrees to pay the indebted-
ness, he thereby becomes the person primarily liable for the debt;
as between himself and the mortgagor, by virtue of his promise to

2 Thomas et al. v. Home Mutual Building Loan Assn., 1910, 243 111. 550, 90 N.E.
1081; p. 815.



410 REAL PROPERTY

the mortgagor to pay the debt, he is the principal debtor and the
mortgagor is the surety. This assumption by the grantee, how-
ever, does not relieve the mortgagor of his obligation to the mort-
gagee, and such mortgagor continues liable unless he is released
from his indebtedness by the mortgagee. Such a release must com-
ply with all the requirements for a novation. In those states which
recognize the relationship of principal and surety between the mort-
gagor and his grantee, an agreement made by the mortgagee with
the grantee, to extend the time of payment, will release the mort-
gagor from liability. If the grantee takes "subject to" the mort-
gage, the original debtor is not released, since suretyship is not in-
volved directly. Many states, however, release the mortgagor of
responsibility for any loss resulting from a decline in value of the
mortgaged property during the period of extension.

Transfer of Debt and Mortgage

Sec. 31. Transfer of debt. A debt which is secured by the
mortgage is a chose in action, usually evidenced by notes or bonds.
If the notes or bonds are nonnegotiable, the assignee of such notes
or bonds takes title subject to all defenses that are available against
the assignor. If, however, the notes or bonds are negotiable in-
struments and are transferred by indorsement, as required under
the Law of Negotiable Instruments, the holder takes title free of
personal defenses which would have been available against the
transferor. The holder of the negotiable instrument secured by the
mortgage has the right, upon default, to enforce the mortgage for
the purpose of securing payment of the debt, as evidenced by the
notes or bonds. A transfer of the mortgage without the debt gives
to the transferee only a bare legal title or lien, which he holds in
trust for the owner of the mortgage debt, although as between
mortgagee and the purchaser of the mortgage, it is implied that the
debt follows the mortgage. However, if the debt is transferred to
one person and the mortgage is assigned to another, the holder of
the indebtedness is in the best position.

If an assignment of the mortgage is made, it should be recorded
in order to give notice of the rights of the assignee to all subsequent
purchasers. However, failure to record the assignment will not aid
a purchaser or later mortgagee who has notice of the assignment. 3
Actual notice should also be given to the mortgagor; otherwise pay-
ment by the mortgagor to the mortgagee may discharge the mort-
gage.

Sec. 32. Payment before default. Payment of the mortgage
debt at or before the time it is due terminates the mortgage. Upon

"Kalen v. Gelderman et al., 1938, 66 S.D. 53, 278 N.W. 165; p. 816.



REAL ESTATE MORTGAGES 411

payment by the mortgagor a release or satisfaction is secured from
the mortgagee, and this release should be recorded in order to clear
the title to the land. Otherwise, the unreleased mortgage will re-
main a cloud on the title. If the mortgagee refuses voluntarily to
give a release, he can be compelled to do so in a court of equity by a
bill to remove a cloud on the title, or by other proceeding provided
for by statute.

A tender of money by the mortgagor before the due date does not
terminate the lien evidenced by the mortgage, because the mort-
gagee cannot be forced to lose his investment before maturity.
However, a tender upon the due day terminates the lien, although
such a tender does not discharge the debt, and the mortgagee may
still enforce it personally against the mortgagor until absolute pay-
ment. Under the common-law title theory, a tender on the due
day satisfies the condition, extinguishes the lien, and reinvests the
title in the mortgagor, but a tender after the due day does not have
such an effect. The condition not having been performed, a recon-
veyance by the mortgagee is necessary. Thus, in the title theory
states, a tender after maturity does not terminate the lien, although
in the lien theory states, a tender at or after maturity terminates
the lien. The mortgagor's only remedy in title theory states is that
of placing his money in court and bringing a suit in equity for re-
demption. Such tender does, however, forestall recovery for inter-
est and court costs.

Sec. 33. Right to redeem. At any time after default, but be-
fore sale of the land on foreclosure, a mortgagor may exercise his
right to redeem from the mortgage, unless this right has been barred
by a period of time specified by the statute. Any person who has
an interest in the mortgaged land is entitled to redeem from the
mortgage ; but, in order to do so, he must pay the entire mortgage
debt, with interest, and all other sums, including costs, to which the
mortgagee may be entitled by reason of the mortgage. If the mort-
gagee is in possession of the mortgaged property and refuses to con-
sent to a redemption, the mortgagor or any party entitled to re-
deem may file a bill in equity for the purpose of redeeming the
mortgaged property. Such person, however, must be ready and
willing to pay whatever the court finds due, or tender to the court
all moneys due on said mortgage. By statute in most states, any
person interested in the premises, through or under the mortgagor,
may, within a specified period of time from the sale of said prop-
erty, redeem the real estate so sold. To do so, he must pay to the
purchaser thereof, to the sheriff, or to the court officer who sold
the property for the benefit of the purchaser, the sum of money,
with interest and costs, for which the premises were sold or bid off.



412 REAL PROPERTY

The period of time allowed for redemption varies greatly from state
to state.

Mortgage Foreclosures

Sec. 34. Right to foreclose. If the mortgagor fails to perform
his obligation that is, to pay the debt when it falls due, or to per-
form any of the covenants set forth in the mortgage, such as the
payment of principal by installment, of interest, insurance, or taxes
or if he defaults in other obligations, the mortgagee may declare
the whole debt due and payable and foreclose for the purpose of
collecting the indebtedness.

Sec. 35. Types of foreclosure. The statutes of the various
states specify the procedure by which mortgages are foreclosed.
There are four types of foreclosure proceedings for the purpose of
using the mortgaged property to pay the mortgage debt: strict fore-
closure, foreclosure by suit in equity or in law, foreclosure by exer-
cise of the power of sale, and foreclosure by entry and writ of entry.
Strict foreclosure is one by which the mortgagee gets the land free
from the right of redemption; that is, the decree provides that, if
the debt is not paid by a certain date, the mortgagor loses such right
and the mortgagee takes it free from the rights of junior mortgagees
and lienholders. This is a harsh rule and is used only where it is
clear that the mortgaged property is not worth the mortgage in-
debtedness, the mortgagor is insolvent, and the mortgagee accepts
the property in full satisfaction of the indebtedness.

The usual method of foreclosing a mortgage is a proceeding in
equity, such proceeding being provided for by statute. A bill for
foreclosure is filed in a court of equity; this bill sets up the mort-
gagee's rights, as provided for in the mortgage, and shows such
breaches of the covenants in the mortgage as will give a right of
foreclosure. The court will issue a certificate of sale authorizing
the master in chancery or some other officer of the court to sell the
land at public auction. Following the sale, he gives the purchaser
a deed to the land and accounts for the funds realized as a result of
the sale. To the extent that funds are available, they are used to
pay court costs, the mortgage indebtedness, and inferior liens in the
order of their priority. If any surplus remains, it is paid to the
former owner of the property. Foreclosure by a second mortgagee
is made subject to all superior liens. The buyer at the foreclosure
sale takes title, and the first mortgage remains a lien on the prop-
erty. All inferior liens are cut off by foreclosure except as the hold-
ers thereof have an equity in a surplus if such exists. As stated in
Section 32, the statutes in many states provide a short period of
time after the sale within which the mortgagor or other persons in



REAL ESTATE MORTGAGES 413

interest are entitled to redeem the property. Where such statutes
are in force, the purchaser is not entitled to his deed until after the
expiration of the period within which redemption may be made.

Sec. 36. Foreclosure by exercise of power of sale. The mort-
gage often provides that, upon default by the mortgagor, the mort-
gagee may sell the land without judicial process. This method of
foreclosure can only be made in strict conformity with the terms
of the mortgage, and there is no redemption from such sale unless
given by statute. The power of sale makes the mortgagee the
agent of the mortgagor to sell the land. In some states, however,
a power of sale in the mortgage is expressly forbidden by statute
and foreclosures must be effected by judicial proceeding. A power
of sale granted in a mortgage or a deed of trust is not revocable,
since the agency is coupled with an interest ; therefore, the death or
insanity of the mortgagor will not revoke the power. In those
states where the exercise of power is regulated by statute, the sale
must be public after the prescribed notice is given. In the absence
of statute or mortgage agreement, however, the sale may be private.
Since a mortgagee, in selling the land under a power of sale, is act-
ing as an agent for the mortgagor, he is not allowed to purchase at
the sale, because an agent cannot himself purchase that which he
has been given authority by his principal to sell. The purchaser at
such a sale secures only such title as the mortgagor had when he
made the mortgage.

When a deed of trust, in which the trustee is empowered to sell
the land and to apply the proceeds to the mortgage debt, is given to
secure the payment of a debt, the same rules apply as are set forth
above.

Sec. 37. Foreclosure by entry and by writ of entry. In some
states, the mortgagee may foreclose by entry upon the land, after
default, after publication of notice and advertisement, and in the
presence of witnesses ; or by the possession of the premises for a pe-
riod of time. If, after a limited period, the mortgagor does not re-
deem, the foreclosure is said to be completed and the title to rest in
the mortgagee.

Sec. 38. Deficiency decree. Since the mortgage debt is usu-
ally represented by a bond or a note, the mortgagor is personally
liable for such debt, and the mortgagee may sue the mortgagor for
it. If the land which is the security for the debt does not sell for a
sum sufficient to pay the mortgage indebtedness, by statute in most
states the court may enter a deficiency decree for that part of the
unsatisfied debt. This decree will stand as a judgment against the
mortgagor, and his other property may be levied on to satisfy such
judgment. For example : A. the mortgagee, owns a mortgage which



414 REAL PROPERTY

is security for an indebtedness of $10,000 against B's land. If, on
foreclosure and sale of the land, the sum of only $7,000 is secured, A
may obtain a deficiency judgment against B for $3,000, which will
be a lien against any other property that B may own. Such other
property may then be levied on and sold to satisfy the $3,000 de-
ficiency judgment.

Review Questions and Problems

1. How have courts of equity altered the early common law of mort-
gages?

2. A mortgages to B certain land which A now owns and certain land
which he shall acquire later. The latter land is subsequently purchased,
but is sold to C, who has no knowledge of the mortgage. Determine the
rights of B and C.

3. What is the purpose of recording mortgages? Where should they
be recorded?

4. A, desiring to borrow $15,000, gives B an absolute deed as security
for a loan of this amount. B executes an agreement to reconvey the
property upon the payment of the debt and interest three years later. Is
this a sale or a mortgage?

5. How does a trust deed differ from a mortgage? What is its pur-
pose? What is a purchase money mortgage? When does such a mort-
gage attach to the property?

6. A sells B property which has a $10,000 mortgage on it in favor of
C. B purchases the property subject to the mortgage. The property
declines in value and, at the maturity of the mortgage debt, is foreclosed
and sells for $8,000. May C recover the deficit from B? May he re-
cover from A y assuming that ^4 is the mortgagor?

7. In the previous case, how would the result differ if B had assumed
the mortgage debt?

8. B, the holder of a note secured by a mortgage, assigns the mort-
gage to A and negotiates the note to C. Whose claim is superior?
Should an assignment of a mortgage be recorded? Docs the assignee^ of
the mortgage ever obtain a better right than the original mortgagee?

9. What is meant by strict foreclosure? When is it used? What is
the usual method of foreclosure?

10. Has the mortgagor any right to redeem the land after foreclosure
sale?

11. What is the legal effect of tender before and after maturity? At
common law? In lien theory states?

12. A holds a first mortgage on land of $15,000 and B has a second
mortgage of $6,000. A forecloses, and the land sells for $18,000. What
are the rights of the parties?